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  • Economic State Of The Union -- 2008

    The Economic State Of The Union -- 2008

    by Charles McMillion, President and chief economist of MBG Information Services in Washington, D.C.

    As we head into another recession and hear politicians tell us how recession can be avoided with stimulus packages that further expand household and government debt, remember that between 2001 and the end of 2007 each new job created by these same methods cost $1.8 million per job in new debt liabilities.

    In just the past seven years, U.S. household debt almost doubled and federal debt soared by near two-thirds, rocketing by a combined $10.5 trillion. The total combined debt of households ($14.4 trillion) and the federal government ($9.2 trillion) is now 168 percent of GDP, far higher even than in the brief spike during World War II. All other levels and ratios of debt also have soared far beyond any past precedent.

    Yet, this record-shattering explosion of debt stimulus created the weakest seven-year job growth (4.4 percent) and one of the weakest periods of real GDP growth (18.1 percent) since the Depression: less than 6 million new jobs ($1.8 million of debt per job) and a mere $4 trillion increase in GDP.

    This period began with the collapse of Wall Street's stock market bubble from the late 1990s and ends now with the collapse of Wall Street's housing and other debt bubbles. That such massive mortgage and consumer borrowing, tax cuts and war spending produced such remarkably weak real economic results suggests the months and years ahead could be quite difficult.

    Yet, along with the Fed rate cuts for cheaper debt, the only policies seriously considered by this year's crop of Wall Street-funded political candidates is more short-term household and federal debt "stimulus." Locked into a failed, 30-year-old ideology of deregulation and debt, there is still no option to compete with the remarkably effective industrial and trade policies pursued by China and others.

    2008 will be the ninth consecutive year the U.S. economy grows slower than the world's growth while China grows more than three times faster. In the past seven years of sluggish growth, the United States accumulated manufacturing trade deficits (production shortfalls) of over $3 trillion with full current account trade losses of $4.3 trillion; more than the entire nominal growth of GDP.

    At the same time, now in the third year of their remarkable eleventh Five-Year Development Plan, China's accumulated Current Account surplus soared by nearly $1 trillion since 2001, near 13 percent of GDP in 2007. These surpluses are funding China's now $1.5-trillion war chest of foreign currency reserves.

    Record trade losses have accelerated the hollowing-out of the once dynamic U.S. economy. For the first time on record, in 2002 the United States lost its historic global trade surplus in advanced technology products (ATP). Worsening sharply, since 2004 the ATP deficit became larger than the U.S. trade surplus for intellectual property services, royalties and fees. That is, for the past four years the United States has a worsening combined deficit in technology goods and services. Technology no longer pays any part of the U.S. import bills for oil, cars, electronics and clothing, etc. China now accounts for half the U.S. manufacturing trade deficit and more than the entire deficit in technology.

    Reflecting the production shortfall from the trade deficits, BLS data show output growth since 2001 is among the weakest since the Depression and the gain in total hours worked (just 0.5 percent) is, by far, the weakest. This is why productivity growth has appeared misleadingly healthy; productivity is a measure of output per hour of labor.

    Another powerful measure of the hollowing out in the economy is the radical shift in the job market. Of the 5.92 million total new jobs in the last seven years, only 4.32 million were in the private sector while 1.66 million were in state/local governments, mostly for public education, health and prisons. The federal government cut jobs in the Postal Service.

    More than all of the new jobs added by the private sector since 2001 are in private education and health care bureaucracies (3.34 million new jobs) and in bars and restaurants (1.53 million new jobs.) Uniquely, all net new jobs added fall in the non-supervisory/ production category -- half a million supervisory jobs were lost. Manufacturing lost 3.28 million jobs (19.1 percent) and now provides fewer jobs than in July 1942 -- seven months after the attack on Pearl Harbor.

    Despite concerns about illegal immigration, since 2001 the labor force has grown more slowly (7.4 percent) than during any seven-year period since 1955 and participation rate of those in the labor force -- those working or looking for work -- also fell sharply -- from 67 percent to 66 percent. This is the reason that the unemployment rate, now 5.0 percent, is not much higher.



    The average weekly wage for non-supervisory jobs buys 2.0 percent more now than seven years ago and the average real salary and benefits for all workers is up by 9.0 percent. These real increases are down from the bubble period of the late 1990s but they are far better than the declines of the previous 20 years. Unfortunately, these recent increases in "average" wages appear to be a product of the latest financial bubbles: the widening use of stock options and very large bonuses in compensation, particularly on Wall Street.

    Median real wages have continued to decline, including by 1.4 percent over the past year. Median household real incomes fell 2.0 percent from 2000 to 2006 (latest data available) and even the average income fell 0.5 percent with inequality now the worst on records back to the 1960s. The total current savings of ALL households over the past three years is virtually nothing; by far the worst since 1933.

    The foolishness of powerful, self-interested claims of a "new paradigm" is again exposed. The fantasy is that soaring debt and the loss of production through trade deficits are good things and the lack of current savings irrelevant. As a long forgotten advertisement once proclaimed: "If you don't have yourself an oil well, get one!" We can all live well from royalties and asset appreciation.

    Soaring debt and debt schemes did drive up many asset prices, creating a borrowed illusion of general prosperity along with enormous actual wealth and power for a few. But now, unprecedented debt and soaring inventories of unsold homes are driving down the inflated prices for homes and other assets. For at least the next several years, most households will now be forced to cut spending and earn, not borrow, their living standard.

    Another short-term debt stimulus may take the edge off the difficult economic conditions of the next few months. But trading away our once unique economic strengths while borrowing against the future has failed. Making even minimum interest payments on these massive, soaring debts will be increasingly difficult as the success of thoughtful industrial and trade policies in China and elsewhere continues.

    ___

    Editor's Note: This article recently appeared in Manufacturing and Technology News and we thank Dr. McMillion for giving iTulip permission to publish his important article here. Dr. McMillion details the true costs the average US taxpayer incurs as the US government attempts to preserve the now struggling de-industrialized and financialized US economy for the Finance, Insurance, and Real Estate (FIRE) sector industries maintained by FIRE industry sector subsidies. The FIRE sector supports our government through lobbies, campaign contributions, capital gains tax revenues made possible by asset price inflation monetary policies, and other tax revenues enabled by FIRE sector friendly tax policies.

    Many professional economists work for the FIRE sector, such as for the real estate industry where in the interests of their employers they obfuscated clear economic data to deny the existence of the housing bubble 2002 - 2006, dutifully reported and repeated ad nauseum in the business media at a time when warnings by voices of authority could have helped prevent much of the excess that has led to the hardship that many home owners are experiencing today. Other economists, such as Dr. McMillion, continue to fight for and represent what remains of our nation's once globally dominant industrial economy, including its technology industries. We applaud their efforts. As the US faces its debt deflation deflation crisis, the result of 30 years of FIRE Economy excesses, we hope their time has come and that a new administration in government will seek their guidance on policies to grow the productive sectors of our economy -- including nanotechology, biotechnology, and alternative energy technology -- to re-industrialize the US economy to make it sustainable with minimal dependency on debt and finance for GDP growth, a high national savings rate, more equitable distribution of income and wealth, opportunities for higher education and high wage jobs, and continued open access to capital and markets by US entrepreneurs.


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    Last edited by FRED; 02-10-08, 07:57 PM.
    Ed.

  • #2
    Re: Economic State Of The Union -- 2008

    Originally posted by mcmillion
    Median real wages have continued to decline, including by 1.4 percent over the past year. Median household real incomes fell 2.0 percent from 2000 to 2006 (latest data available)
    this points to what i think is the greatest weakness in ka-poom theory. for poom to "work," in the sense of inflating away much of the burden of accumulated debt, it requires that the predicted inflation find its way into incomes, not just costs. but the mechanisms for this transmission are not, as yet, elucidated.

    in the '70's inflation was novel, and strong unions demanded - and got - cola's, cost of living adjustments, written into their contracts. this played an important role in both the recursive amplification of inflation and the transmission of inflationary expectations. the relative novelty of inflation was important in the acceptance of such contract provisions by employers, and in the weak anti-inflationary actions of both monetary and fiscal authorities.

    in the current environment we can expect both monetary and fiscal authorities to be pro-inflationary, albeit that they will never acknowledge this bent. but employers are trapped by rising input costs on the one hand, and weakening consumption and price resistance on the other. walmart is gaining sales mostly by selling cheap groceries to lure people into its stores. they have noted that christmas gift cards are not being used now for electronic toys, but for groceries.

    let us posit an infrastructure and alt energy bubble. i can see wage improvements in that part of the construction industry which will participate in the infrastructure construction and repair effort. many trades involved in commercial real estate, in particular, should have skills which transfer -- heavy machinery operation and steel work come to mind. but i don't see where the carpentry framer who's been knocking together 2x4's in suburban developments is going to find work other than using a shovel to spread asphalt. even many skilled workers in commercial real estate, hvac workers for example, don't have skills transferable to the new bubble unless we believe that alt energy will include lots of new green construction of commercial buildings and/or lots of complicated retrofitted systems.

    alt energy may provide some relatively highly compensated labor, aside from the highest level scientific and technical employment at the r&d level. maybe joe carpenter can learn to install rooftop solar units of some kind, but such opportunities are to my eye fewer in number than the jobs lost in construction trades.

    getting back to the main question however: what is going to raise median incomes?

    Comment


    • #3
      Re: Economic State Of The Union -- 2008

      Originally posted by FRED View Post
      ...between 2001 and the end of 2007 each new job created by these same methods cost $1.8 million per job in new debt liabilities.
      At that rate, it would have been cheaper to simply give each applicant for one of the new jobs a lump sum payment of $1.5 million or so.;)

      Originally posted by FRED View Post
      Soaring debt and debt schemes did drive up many asset prices, creating a borrowed illusion of general prosperity along with enormous actual wealth and power for a few. But now, unprecedented debt and soaring inventories of unsold homes are driving down the inflated prices for homes and other assets. For at least the next several years, most households will now be forced to cut spending and earn, not borrow, their living standard.
      This is the ugly underside of the Debt Paradigm. Otherwise fiscally responsible homeowners came to believe that their financial situation, inflated by false housing values, was such that they could take on additional debt -- because it appeared to be a manageable amount, given their net worth.

      Comment


      • #4
        Re: Economic State Of The Union -- 2008

        Originally posted by jk View Post
        this points to what i think is the greatest weakness in ka-poom theory. for poom to "work," in the sense of inflating away much of the burden of accumulated debt, it requires that the predicted inflation find its way into incomes, not just costs. but the mechanisms for this transmission are not, as yet, elucidated.

        in the '70's inflation was novel, and strong unions demanded - and got - cola's, cost of living adjustments, written into their contracts. this played an important role in both the recursive amplification of inflation and the transmission of inflationary expectations. the relative novelty of inflation was important in the acceptance of such contract provisions by employers, and in the weak anti-inflationary actions of both monetary and fiscal authorities.

        in the current environment we can expect both monetary and fiscal authorities to be pro-inflationary, albeit that they will never acknowledge this bent. but employers are trapped by rising input costs on the one hand, and weakening consumption and price resistance on the other. walmart is gaining sales mostly by selling cheap groceries to lure people into its stores. they have noted that christmas gift cards are not being used now for electronic toys, but for groceries.

        let us posit an infrastructure and alt energy bubble. i can see wage improvements in that part of the construction industry which will participate in the infrastructure construction and repair effort. many trades involved in commercial real estate, in particular, should have skills which transfer -- heavy machinery operation and steel work come to mind. but i don't see where the carpentry framer who's been knocking together 2x4's in suburban developments is going to find work other than using a shovel to spread asphalt. even many skilled workers in commercial real estate, hvac workers for example, don't have skills transferable to the new bubble unless we believe that alt energy will include lots of new green construction of commercial buildings and/or lots of complicated retrofitted systems.

        alt energy may provide some relatively highly compensated labor, aside from the highest level scientific and technical employment at the r&d level. maybe joe carpenter can learn to install rooftop solar units of some kind, but such opportunities are to my eye fewer in number than the jobs lost in construction trades.

        getting back to the main question however: what is going to raise median incomes?
        When assessing the dynamics of wage inflation, it's important to account for the change in the structure of the US economy since the 1970s. Then the majority of Americans were employed by large corporations. That is no longer true. As a result, wages are now a factor of inflation along with prices.
        Does Wage Inflation Cause Price Inflation? (pdf)
        FEDERAL RESERVE BANK OF CLEVELAND

        Conclusion: There is little systematic evidence that wages (either conventionally measured by compensation or adjusted through productivity and converted to unit labor costs) are helpful for predicting inflation. In fact, there is more evidence that inflation helps predict wages. The current emphasis on using changes in wage rates to forecast short-term inflation pressure would therefore appear to be unwarranted. The policy conclusion to be drawn is that inflation can appear regardless of recent wage trends.
        If inflation predicts wages as the Cleveland Fed's research asserts then nominal wages can be expected to rise.
        Ed.

        Comment


        • #5
          Re: Economic State Of The Union -- 2008

          Posit the creation of the FIRE economy in the 1970s as part of the answer to America's labor having got what was felt was too big a slice of the pie since the early '50s. American labor was simply too well organized, not only within a union structure, but in the excepted beliefs within the non-unionized labor sectors. Things like a wage that reflected union levels, albeit a bit less. Health care benefits. A pension plan. An always brighter future for the next generation. Assured white collar living standards. A guarantee of lifelong employment with the larger corporations. These were formidable mindsets to overcome head on, with too steep an ideological price to pay. Much more effective was simply making the jobs disappear. I'm not arguing this was the only driver behind the FIRE phenomenon. Re-built foreign manufacturing competition, the crippling costs of empire, the fall from creditor nation to debtor, the fiat currency decision, maintaining and enjoying absolute military dominance, etc. all played a role. But now, 30 years later, with much of the American affluent work force mortally wounded, it's difficult to see the victors raising wages and salaries voluntarily, in practically any scenario short of civil unrest. I agree the inflating their way out is the first choice option but inflating the labor income side seems implausible. Perhaps indirect federal wage inflation- higher minimum wage levels, added health care assistance, debt relief, etc- would be a step in that direction, avoiding direct employer wage/salary increases. Otherwise it doesn't seem to work.

          Comment


          • #6
            Re: Economic State Of The Union -- 2008

            Originally posted by jk View Post
            this points to what i think is the greatest weakness in ka-poom theory. for poom to "work," in the sense of inflating away much of the burden of accumulated debt, it requires that the predicted inflation find its way into incomes, not just costs. but the mechanisms for this transmission are not, as yet, elucidated.

            ...

            getting back to the main question however: what is going to raise median incomes?
            Originally posted by FRED View Post
            When assessing the dynamics of wage inflation, it's important to account for the change in the structure of the US economy since the 1970s. Then the majority of Americans were employed by large corporations. That is no longer true. As a result, wages are now a factor of inflation along with prices.
            Does Wage Inflation Cause Price Inflation? (pdf)
            FEDERAL RESERVE BANK OF CLEVELAND

            Conclusion: There is little systematic evidence that wages (either conventionally measured by compensation or adjusted through productivity and converted to unit labor costs) are helpful for predicting inflation. In fact, there is more evidence that inflation helps predict wages. The current emphasis on using changes in wage rates to forecast short-term inflation pressure would therefore appear to be unwarranted. The policy conclusion to be drawn is that inflation can appear regardless of recent wage trends.
            If inflation predicts wages as the Cleveland Fed's research asserts then nominal wages can be expected to rise.
            Yeah but will they rise enough?

            jk, you've touched on this in another thread too, and I'm with you. I have wondered aloud about this issue elsewhere as well...

            Originally posted by zoog View Post
            I keep coming back to your list of requirements for a bubble (can't find a link offhand), and in particular that the public has to (eventually) get involved. In case you haven't noticed (:rolleyes, we're broke. The only way I think we're going to have any money to invest in this new thing is if wage inflation fires up the nitro's and puts the pedal to the metal.
            Is iTulip saying we no longer need Joe Sixpack to invest in the next asset bubble? Was the housing bubble the end of the line for the American middle class? We will be permanent debt slaves without major wage inflation. People can certainly live more frugally, but that only goes so far. It will take more money to get out of debt (as the credit bubble is unwinding, it's unlikely people can continue to roll old debts into new ones), more money to buy even the essentials as those prices go up, and even more money were the middle class to actually put something in savings or investments.

            To quote one of my favorite movies: "Where's the money Lebowski?"

            Comment


            • #7
              Re: Economic State Of The Union -- 2008

              Originally posted by zoog
              Is iTulip saying we no longer need Joe Sixpack to invest in the next asset bubble?
              I don't know iTulip's position on this question but if the next major asset investment class in infrastructure and alt.energy does come about I can see how it does occur without Joe Sixpack's direct investment in it.

              When it comes to major infrastructure investments (highways, the internet, etc.) Joe Sixpack's investment is made via taxes or user payments. Admittedly, JS's ability to pay future taxes, user bills, and end-product supportive investments is looking grim, but should we stop wasting and flushing as much money as we do in Iraq and elsewhere (250+ military bases around the globe), it is conceivable that a lot of this JS money could be redirected where it might actually do some good here at home.

              As to alternative energy Joe Sixpack's *investments* will follow the same model, with the pay-off returned, if not always in lower energy bills, money (and work) retained and recycled here instead of continually being sent to the FF exporting countries. There is also the less easily calculated return on such alt. energy investments but nonetheless sure to be touted and seemingly ready to be accepted one of mitigating greenhouse gas induced climate changes.

              None of this will be easy to accomplish and to the extent that other countries are offering competitive alternative energy wares that we don't make here will hinder us, but a lot of alt. energy projects are already underway here without JS's direct investment involvement. Indirectly so, yes, and there is more to come.

              Of course, this still leaves undetermined how median wages might actually rise, which very well may not in the process of transforming ourselves from the false riches paper peddling FIRE economy to a productive economy of real goods and products necessary to survive in this tumultuous 21st century.

              Let us hope we get the leadership necessary to guide us away from flase hope paper over investments, more industrial-militarism, and instead invest in the infrastructure and alt. energy products and services as can be generated here for the benefit of our home economy and people.

              Comment


              • #8
                Re: Economic State Of The Union -- 2008

                Regarding how much belt tightening Joe SixPack can do... we need look no further than those strategies adopted by Russians and Cubans when their economies collapsed.

                My wife's medical school classmate's parents still live in their cramped two room apartment. Each spring they load flats of vegetable plants into their shiny new Mercedes, and haul them to their Dacha. There they plant them in their large garden. Each Autumn, they and their daughters collect and process the harvest, before storing same in the cellars of their buildings.

                Ditto for Cuba.

                The Russian couple is a banker(him) and an accountant(her). Both highly paid professionals. Russia is filled with such people.

                Ditto for Cuba.

                Oil Drum and Mother Earth News cater to such people in the USA.

                A nasty consequence of such individual activity, is none is reported or reportable in the cash economy, and their shift to subsistence means a collapse in their cash consumption of domestic goods and services.

                Carried out by a very large minority, or even a majority of the population, this alone would shrink the economy.

                If wages cannot or will not rise to restore individual purchasing power, look for more of this activity, and concomitant drop in retail sales.

                This thing can become self-feeding very fast.

                INDY

                Comment


                • #9
                  Re: Economic State Of The Union -- 2008

                  I cannot agree enough that Republican policies since WWII have been directed again and again to a complete reversal of the New Deal gains.
                  Forgotten is the fact during the sixties that the highest paid employee of companies earned ~ 36 times that of the lowest, that the Gini coefficient of the US was at its lowest, and the general level of prosperity was maxed.

                  I also agree that the victors will not reverse course, except under threat of mass civil unrest. I also note the recent changes in legislation directed explicitly to enabling Martial Law... against whom???

                  History has shown... again and again... that as regimes become ever more extreme and embrittled... the only recourse available to the population remains voting with their feet... ie emigration... or revolution...

                  Mish and I agree that, given global wage arbitrage, there is no inherent given in the average or median US income remaining near its current level. It is entirely possible for median income to drop sharply to half or less the current value. In this event, housing prices must adjust accordingly.
                  This explicitly means that there is not necessarily a floor under housing prices at ~$150,000 median price, and prices, which normally overshoot, under the additional pressure of baby boomer retirement sales, could drop below $100,000 before finding a bottom between 2012-2018.

                  Oft forgotten, those LBO deals, Commercial Realestate deals, and others, are going to implode under the weight of the debt burden, with employees sacrificed in the vain hope to save them.

                  Re the conditions of the 60's with people feeling secure in their jobs.. what's so wrong with that? It was quite a productive period for the country, giving rise to art, literature, and innovation. It is a state enjoyed by most of the world outside the US.

                  The real solution to this dilemma is a single payer health system ala France, a negative income tax regime which gives $20,000 / household - yr and is progressive, and a VAT to replace all business taxes.

                  A gross income tax at a base rate of 15% progressing to %49 of incomes > 1,000,000, a VAT of 5% progressing to 30% for multinationals, an annual health tax of $2700/ capita-yr, and fuel and carbon taxes at $20/mt of CO2 would more than fund all this. Were the Clean Air Act modified to tax emissions. rather than prohibit them, we'd see lots more effort in that regard.

                  And finally, many studies of the US strategy of perpetual wartime expenditure have shown the benefits evaporated long ago, and the whole system is hobbling the economy. 36,000 nukes costing 5.8 trillion have been built. What could we have constructively done with that money?

                  Unfortunately, history has shown that once a system gets embrittled and entrenched, things proceed to collapse and revolution. I am not hopeful in this regard. I believe that one day Kent State will recur, only to find the Guardsmen turning their weapons on their officers, and marching with the students.

                  We live in interesting times....

                  INDY

                  Comment


                  • #10
                    Re: Economic State Of The Union -- 2008

                    Originally posted by goprisko View Post
                    I cannot agree enough that Republican policies since WWII have been directed again and again to a complete reversal of the New Deal gains.
                    Forgotten is the fact during the sixties that the highest paid employee of companies earned ~ 36 times that of the lowest, that the Gini coefficient of the US was at its lowest, and the general level of prosperity was maxed.
                    sure, but look what was happening to the real value of stocks...



                    from the end of the war until 1965 they were up but fell until the volcker revolution. then we got the fire economy and it's been lop-sided fire growth since.
                    I also agree that the victors will not reverse course, except under threat of mass civil unrest. I also note the recent changes in legislation directed explicitly to enabling Martial Law... against whom???

                    History has shown... again and again... that as regimes become ever more extreme and embrittled... the only recourse available to the population remains voting with their feet... ie emigration... or revolution...
                    tin foil hat stuff. the usa system still works. as ej mentioned in a recent post, the real estate lobbies are out of juice now that their industry is screwed. obama will slap them so hard they'll land in the 1960s. tax rate on economic rent will go up, on production down.
                    Mish and I agree that, given global wage arbitrage, there is no inherent given in the average or median US income remaining near its current level. It is entirely possible for median income to drop sharply to half or less the current value. In this event, housing prices must adjust accordingly.
                    sigh. see, this is why mishmash's forecasts are always wrong. he still hasn't figured out that rre price declines are a factor of asset price inflation first and of incomes second.

                    This explicitly means that there is not necessarily a floor under housing prices at ~$150,000 median price, and prices, which normally overshoot, under the additional pressure of baby boomer retirement sales, could drop below $100,000 before finding a bottom between 2012-2018.
                    old news here, dude. google "housing bubble correction" to find the answers.
                    Oft forgotten, those LBO deals, Commercial Realestate deals, and others, are going to implode under the weight of the debt burden, with employees sacrificed in the vain hope to save them.
                    yessir. crashes in progress...

                    Re the conditions of the 60's with people feeling secure in their jobs.. what's so wrong with that? It was quite a productive period for the country, giving rise to art, literature, and innovation. It is a state enjoyed by most of the world outside the US.

                    The real solution to this dilemma is a single payer health system ala France, a negative income tax regime which gives $20,000 / household - yr and is progressive, and a VAT to replace all business taxes.
                    i think the usa is going to grow up and be more like europe in some ways but it'd better keep its innovation and risk taking heritage or we're screwed. this internet thingy we're talking on was invented in usa... so were the big apps on top of it... google, ebay, youtube, amazon, etc.

                    A gross income tax at a base rate of 15% progressing to %49 of incomes > 1,000,000, a VAT of 5% progressing to 30% for multinationals, an annual health tax of $2700/ capita-yr, and fuel and carbon taxes at $20/mt of CO2 would more than fund all this. Were the Clean Air Act modified to tax emissions. rather than prohibit them, we'd see lots more effort in that regard.
                    how about 0% tax rate on private equity invested in start-ups?

                    And finally, many studies of the US strategy of perpetual wartime expenditure have shown the benefits evaporated long ago, and the whole system is hobbling the economy. 36,000 nukes costing 5.8 trillion have been built. What could we have constructively done with that money?
                    hear, hear! dismantle the whole damn mil industrial complex.
                    Unfortunately, history has shown that once a system gets embrittled and entrenched, things proceed to collapse and revolution. I am not hopeful in this regard. I believe that one day Kent State will recur, only to find the Guardsmen turning their weapons on their officers, and marching with the students.
                    naw. it'll be a rich/poor war. that's also breaks down into young vs old, black vs white, etc. couple years of high unemployment and rising inflation will do it.

                    Comment


                    • #11
                      Re: Economic State Of The Union -- 2008

                      Originally posted by metalman View Post
                      sure, but look what was happening to the real value of stocks...



                      from the end of the war until 1965 they were up but fell until the volcker revolution. then we got the fire economy and it's been lop-sided fire growth since.

                      CPI-U does not accurately reflect actual inflation, and the gap has been growing since LBJ.
                      http://www.NowAndTheFuture.com

                      Comment


                      • #12
                        Re: Economic State Of The Union -- 2008

                        I note with interest your chart which shows unequivocally that the 60's
                        economy peaked with the onset of the vietnam War.

                        Also, in 1970 we had peaking of US oil production.

                        From that point forward, we had Jimmy Carter's meddling in Central Asia, which resulted in the Grain Embargo, which led to a farm depression lasting 10 years.

                        A minor thing that, which killed the likes of International Harvester, and many other agribusinesses.

                        Somewhere during the 75-76 and 80-83 recessions, with wholesale family breakups, which filled the halls of PWP, women went to work and competed with their former spouses for jobs, and the Helen Gurley Brown girls were born.

                        I note your disagreement with Mish... you are welcome to it. But I heard that crap in 2000, 2001, and finally in 2002, at the panic bottom it stopped.

                        You can go on and on about your not being willing to support your government. But most of what you pay for isn't SS, or medical care.. it is militarism... well hidden into many cubbies.. and crannies.. but militarism..

                        Unless your lasse faire plans actually do increase domestic income.. and unless you can really inflate yourselves out of a solvency crisis, looks like you and GM will have lots of company, like the 2200 announced store closings... Union wages halving.... teachers being laid off in droves... firemen next... then cops....

                        Please comment... I need the laughs..

                        INDY

                        Comment


                        • #13
                          Re: Economic State Of The Union -- 2008

                          Guest Commentary, by Satyajit Das

                          The Credit Crunch – In 2008 The Worst May Keep Getting Worse

                          February 15, 2008
                          Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).
                          2007 may come to associated with the start of the "big" credit crunch. 2008 has begun with a number of "unresolved" items. Hope of an early resolution seems to be fading. In the words of Lily Tomlin, the American comedian: "Things are going to get a lot worse before they are going to get worse."
                          The total level of sub-prime losses is still far from clear. Based on current trading levels of ABS indices, estimates of losses range between US$ 150 and 400 billion, not all of which has been written off to date.
                          Interest rates on large volumes of sub-prime mortgages – estimated at around US$ 900 billion are due to reset by end 2008. Interest rates and repayments will rise significantly. The impact on delinquencies and losses are unknown. The rate reset freeze plan (which has not been in the news since being announced) and its impact are also still unclear.
                          As America’s mortgage markets began unravelling, economists initially pointed to sub-prime mortgages issued to low-income, minority and urban borrowers. Closer analysis reveals risky mortgages in nearly every corner of the USA. Analysis by The Wall Street Journal indicates that from 2004 to 2006, when home prices peaked in many parts of the country, more than 2,500 banks, thrifts, credit unions and mortgage companies made a combined US$1.5 trillion in high-interest-rate, high risk loans. The potential losses on these loans are unknown.
                          There are also emerging concerns in the US$915 billion credit card debt markets. Credit card providers are all boosting loan loss provisions. There is anecdotal evidence that cash strapped mortgagors are using credit cards to make mortgage payments. Analysts expect credit card delinquencies to increase if consumers unable to use home-equity lines of credit to pay off their credit card debt start running up higher card debt. A number of banks have begun to boost reserves against anticipated losses.
                          Financial institutions have already incurred losses of over US$100 billion. A substantial volume of assets is likely to return onto bank balance sheets as off-balance sheet structures and hedge funds are forced to sell. The total amount to be re-intermediated by banks may be in the range of US$1 to 2 trillion. This will make substantial depends on bank liquidity and capital.
                          There are already signs that the major banks are hoarding liquidity in anticipation of the return of assets. They will also inevitably have to raise substantial amounts of capital. In the second half of 2007 commercial and investment banks raised US$83 billion in equity. This was an increase of more than 20% on the corresponding period in 2006.
                          Asset backed conduit vehicles and SIVs ("Structured Investment Vehicles") may need to sell assets as they breach their rules. Hedge funds face substantial redemption requests in the coming months. This will exacerbate the demands on bank capital and liquidity.
                          The credit issues have widened beyond banks, investors and hedge funds active in structured credit.
                          In the conventional mortgage market, Fannie Mae (Federal National Mortgage Association) and Ginnie Mae (Government National Mortgage Association) have recorded losses and been forced to raise capital. This suggests that the problems in the housing market are deep seated.
                          Mortgage insurers and monoline insurers have suffered serious collateral damage. A significant downgrade in the rating of insurers will be particularly damaging. It will affect around US$ 2.5 trillion of municipal bonds guaranteed by the insurers. It will also affect other bonds wrapped by the insurers. This may trigger further selling pressure and contribute to decline in prices as well as absorbing increasingly scarce liquidity.
                          There is already talk of a plan to re-capitalise the insurers. The sum being talked about is between US$15 and US$200 billion. It is not clear where the substantial amount of capital needed to recapitalise the banks and financial guarantors is going to come from.
                          The US$ 2 trillion of European pfandbrief or covered bond markets have also experienced liquidity problems.
                          The sub-prime model is also used for leveraged funding in private equity, infrastructure and commercial property financing.
                          US$300 billion of leveraged finance loans made by banks is still effectively "orphaned" - they can’t be sold off. In late 2007, there were signs that the loan logjam was easing. Underwriters pointed to some sales of risky assets.
                          Caution is needed in interpreting these developments. Firstly, the sales only related to the less risky tranches and loans. The more risky exposures remain with underwriters for the moment. There are also concerns that some of the sales were not "genuine". The banks had provided the buyers with a variety of favourable terms including the ability to sell the loans back to them at a future date at a guaranteed price. Alternatively, MFN ("most favoured nation") clauses mean that the selling bank will need to compensate buyers if loans are sold at lower prices during an agreed time from the initial sale. Current prices indicate steep discounts will be needed to shift the paper to investors.
                          The crisis shows signs of spilling over into other markets. In Great Britain, Ireland, Spain, Australia and other markets strong house price appreciation similar to the US led to similar growth in mortgage and real estate lending. If economic growth slows and housing prices fall then similar problem may emerge in those economies as well.
                          There are already signs that there will be significant litigation against the banks. There may also be regulatory investigations and potentially prosecutions. State Street recently provided over US$250 million against future litigation claims. The total cost of all this is still unknown.
                          The financial elements of the credit crunch are becoming clearer - higher credit costs; lower availability of debt; forced de-leveraging of hedge funds and conduits/ SIVs; significant capital losses for financial institutions. The real economy effects will be slower to emerge. Higher credit costs and tighter credit standards will affect all business.
                          The US housing industry is badly affected with no immediate prospect of a quick recovery. The outlook for US house prices is poor. Growth forecasts for the US have already been lowered. The dreaded "R" word – recession – is now being talked about.
                          The fall in asset prices has "wealth" effects. Then there are employment and income effects. Wall Street has already issued "pink slips" by the thousands as banks and mortgage lenders shed staff. More will be issued in 2008 as the slowdown in the financial services business continues.
                          A slowdown in economic activity will affect many financial transactions. Corporations with significant debt face refinancing challenges. The shares of an Australian real estate firm – Centro – fell over 80 % as a result of difficulties in refinancing its short-term debt secured over commercial property, some of it in the US. Commercial property financing has slowed, the cost has risen significantly and terms have tightened affecting commercial property prices.
                          Private equity deals in recent years were predicated on a combination of a growing economy, cheap debt and a buoyant stock market allowing the quick resale of the company. Weaker earnings and more expensive debt could lead to losses and distressed sales over time. Recent private equity deals also face re-financing risk. Some US$ 150 billion of leveraged loans come due in 2008. Financial engineering techniques – toggles, pay-in-kind securities and covenant-lite (lack of maintenance covenants) structures – will delay the problem but probably cannot forestall the inevitable rise in defaults.
                          Non-investment grade bond issuance over the last few years was concentrated in the weaker credit categories and is vulnerable to deterioration in economic conditions. Since 2003, 42% of bonds of high yield bonds issues were rated B- or below. In the first 6 months of the year that percentage rose to around 50%. Some commentators believe that the losses of corporate bonds will peak between 10% and 20% leading to significant losses.
                          Warren Buffet once observed that: "it’s the weak link that snaps you…in financial markets, the weak link is borrowed money." In the present credit crisis, all companies and business models reliant on debt – especially cheap and abundant debt - look vulnerable.
                          The real economy effects will feedback into the financial markets. A weaker economy are likely to see higher levels of actual defaults. This may set off new phases of the crisis.
                          CDS contracts used to hedge credit risk have significant documentation and operational problems. If actual defaults in markets increase and the contracts do not function as intended then there would be additional complexity. A significant volume of CDS contracts is with hedge funds and other investors secured by collateral agreements. The counterparty and performance risk of enforcing the contracts may be challenging. It is important to note that the structured credit market in its current form is substantially untested. If defaults rise and the CDS contracts prove to be difficult to enforce then bank exposures to losses may well much higher than anticipated.
                          Credit markets remain gloomy. Unlike their equity and emerging market cousins, they are waiting anxiously for "the shoes to fall", except it seems that the shoes are from Imelda Marcos’ collection.
                          At the time of publication the author or his firm did not own any direct investments in securities mentioned in this article although he may be an owner indirectly as an investor in a fund.







                          Sounds Like Mish is a bloomin optimist


                          INDY

                          Comment


                          • #14
                            Re: Economic State Of The Union -- 2008

                            Originally posted by goprisko View Post
                            Guest Commentary, by Satyajit Das

                            The Credit Crunch – In 2008 The Worst May Keep Getting Worse

                            February 15, 2008
                            Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).
                            2007 may come to associated with the start of the "big" credit crunch. 2008 has begun with a number of "unresolved" items. Hope of an early resolution seems to be fading. In the words of Lily Tomlin, the American comedian: "Things are going to get a lot worse before they are going to get worse."
                            The total level of sub-prime losses is still far from clear. Based on current trading levels of ABS indices, estimates of losses range between US$ 150 and 400 billion, not all of which has been written off to date.
                            Interest rates on large volumes of sub-prime mortgages – estimated at around US$ 900 billion are due to reset by end 2008. Interest rates and repayments will rise significantly. The impact on delinquencies and losses are unknown. The rate reset freeze plan (which has not been in the news since being announced) and its impact are also still unclear.
                            As America’s mortgage markets began unravelling, economists initially pointed to sub-prime mortgages issued to low-income, minority and urban borrowers. Closer analysis reveals risky mortgages in nearly every corner of the USA. Analysis by The Wall Street Journal indicates that from 2004 to 2006, when home prices peaked in many parts of the country, more than 2,500 banks, thrifts, credit unions and mortgage companies made a combined US$1.5 trillion in high-interest-rate, high risk loans. The potential losses on these loans are unknown.
                            There are also emerging concerns in the US$915 billion credit card debt markets. Credit card providers are all boosting loan loss provisions. There is anecdotal evidence that cash strapped mortgagors are using credit cards to make mortgage payments. Analysts expect credit card delinquencies to increase if consumers unable to use home-equity lines of credit to pay off their credit card debt start running up higher card debt. A number of banks have begun to boost reserves against anticipated losses.
                            Financial institutions have already incurred losses of over US$100 billion. A substantial volume of assets is likely to return onto bank balance sheets as off-balance sheet structures and hedge funds are forced to sell. The total amount to be re-intermediated by banks may be in the range of US$1 to 2 trillion. This will make substantial depends on bank liquidity and capital.
                            There are already signs that the major banks are hoarding liquidity in anticipation of the return of assets. They will also inevitably have to raise substantial amounts of capital. In the second half of 2007 commercial and investment banks raised US$83 billion in equity. This was an increase of more than 20% on the corresponding period in 2006.
                            Asset backed conduit vehicles and SIVs ("Structured Investment Vehicles") may need to sell assets as they breach their rules. Hedge funds face substantial redemption requests in the coming months. This will exacerbate the demands on bank capital and liquidity.
                            The credit issues have widened beyond banks, investors and hedge funds active in structured credit.
                            In the conventional mortgage market, Fannie Mae (Federal National Mortgage Association) and Ginnie Mae (Government National Mortgage Association) have recorded losses and been forced to raise capital. This suggests that the problems in the housing market are deep seated.
                            Mortgage insurers and monoline insurers have suffered serious collateral damage. A significant downgrade in the rating of insurers will be particularly damaging. It will affect around US$ 2.5 trillion of municipal bonds guaranteed by the insurers. It will also affect other bonds wrapped by the insurers. This may trigger further selling pressure and contribute to decline in prices as well as absorbing increasingly scarce liquidity.
                            There is already talk of a plan to re-capitalise the insurers. The sum being talked about is between US$15 and US$200 billion. It is not clear where the substantial amount of capital needed to recapitalise the banks and financial guarantors is going to come from.
                            The US$ 2 trillion of European pfandbrief or covered bond markets have also experienced liquidity problems.
                            The sub-prime model is also used for leveraged funding in private equity, infrastructure and commercial property financing.
                            US$300 billion of leveraged finance loans made by banks is still effectively "orphaned" - they can’t be sold off. In late 2007, there were signs that the loan logjam was easing. Underwriters pointed to some sales of risky assets.
                            Caution is needed in interpreting these developments. Firstly, the sales only related to the less risky tranches and loans. The more risky exposures remain with underwriters for the moment. There are also concerns that some of the sales were not "genuine". The banks had provided the buyers with a variety of favourable terms including the ability to sell the loans back to them at a future date at a guaranteed price. Alternatively, MFN ("most favoured nation") clauses mean that the selling bank will need to compensate buyers if loans are sold at lower prices during an agreed time from the initial sale. Current prices indicate steep discounts will be needed to shift the paper to investors.
                            The crisis shows signs of spilling over into other markets. In Great Britain, Ireland, Spain, Australia and other markets strong house price appreciation similar to the US led to similar growth in mortgage and real estate lending. If economic growth slows and housing prices fall then similar problem may emerge in those economies as well.
                            There are already signs that there will be significant litigation against the banks. There may also be regulatory investigations and potentially prosecutions. State Street recently provided over US$250 million against future litigation claims. The total cost of all this is still unknown.
                            The financial elements of the credit crunch are becoming clearer - higher credit costs; lower availability of debt; forced de-leveraging of hedge funds and conduits/ SIVs; significant capital losses for financial institutions. The real economy effects will be slower to emerge. Higher credit costs and tighter credit standards will affect all business.
                            The US housing industry is badly affected with no immediate prospect of a quick recovery. The outlook for US house prices is poor. Growth forecasts for the US have already been lowered. The dreaded "R" word – recession – is now being talked about.
                            The fall in asset prices has "wealth" effects. Then there are employment and income effects. Wall Street has already issued "pink slips" by the thousands as banks and mortgage lenders shed staff. More will be issued in 2008 as the slowdown in the financial services business continues.
                            A slowdown in economic activity will affect many financial transactions. Corporations with significant debt face refinancing challenges. The shares of an Australian real estate firm – Centro – fell over 80 % as a result of difficulties in refinancing its short-term debt secured over commercial property, some of it in the US. Commercial property financing has slowed, the cost has risen significantly and terms have tightened affecting commercial property prices.
                            Private equity deals in recent years were predicated on a combination of a growing economy, cheap debt and a buoyant stock market allowing the quick resale of the company. Weaker earnings and more expensive debt could lead to losses and distressed sales over time. Recent private equity deals also face re-financing risk. Some US$ 150 billion of leveraged loans come due in 2008. Financial engineering techniques – toggles, pay-in-kind securities and covenant-lite (lack of maintenance covenants) structures – will delay the problem but probably cannot forestall the inevitable rise in defaults.
                            Non-investment grade bond issuance over the last few years was concentrated in the weaker credit categories and is vulnerable to deterioration in economic conditions. Since 2003, 42% of bonds of high yield bonds issues were rated B- or below. In the first 6 months of the year that percentage rose to around 50%. Some commentators believe that the losses of corporate bonds will peak between 10% and 20% leading to significant losses.
                            Warren Buffet once observed that: "it’s the weak link that snaps you…in financial markets, the weak link is borrowed money." In the present credit crisis, all companies and business models reliant on debt – especially cheap and abundant debt - look vulnerable.
                            The real economy effects will feedback into the financial markets. A weaker economy are likely to see higher levels of actual defaults. This may set off new phases of the crisis.
                            CDS contracts used to hedge credit risk have significant documentation and operational problems. If actual defaults in markets increase and the contracts do not function as intended then there would be additional complexity. A significant volume of CDS contracts is with hedge funds and other investors secured by collateral agreements. The counterparty and performance risk of enforcing the contracts may be challenging. It is important to note that the structured credit market in its current form is substantially untested. If defaults rise and the CDS contracts prove to be difficult to enforce then bank exposures to losses may well much higher than anticipated.
                            Credit markets remain gloomy. Unlike their equity and emerging market cousins, they are waiting anxiously for "the shoes to fall", except it seems that the shoes are from Imelda Marcos’ collection.
                            At the time of publication the author or his firm did not own any direct investments in securities mentioned in this article although he may be an owner indirectly as an investor in a fund.


                            Sounds Like Mish is a bloomin optimist


                            INDY
                            Mish is in agreement with the iTulip forecast for the economy except with respect to the impact on the general price level. Mish agrees with our forecast for a rapidly declining economy (see Myth of the Slow Crash). However, he believes this will ultimately result in a deflationary spiral ala 1930s. I believe the result will be further dollar depreciation and rising inflation as the debt deflation and asset price deflation (FIRE Economy collapse) drags on.

                            I recommend readers check out Steve Keen's site. Steve is a professional economist based in Australia who runs the Debt Deflation blog. He intriguingly brings up the prospect of a possible all-goods and wages price deflation. I will see if I can rope him into an interview to see if he can explain how a country with a rapidly depreciating reserve currency can experience all-goods price deflation. Keen is, as I am, a Schumpeter fan.
                            On the ills of monetary inflation Contrarian, I have sympathy for parts of the Austrian view, but I think it misunderstands the process by which credit is created. The only Austrian-influenced economist who comes close to getting this right is Schumpeter, not Mises or Hayek: see Chapter 4 of his Theory of Economic Development.

                            In a nutshell, Schumpeter argues that money is endogenously created by the credit system. The state creation of fiat money is an embellishment to this, not the core causal component of monetary inflation without which the system would be hunky dory, to caricature to some extent Hayek/Mises/Rothbard on this point.

                            A purely private credit system would in other words be prone to exactly the same form of monetary inflation bubble that we have experienced recently, and more prone to collapse when it burst than our state augmented system.

                            The real problem with the state system is that its bailouts have encouraged this endogenous credit expansion to go on for much longer, and to much greater heights, than would otherwise have occurred without “lender of last resort” interventions. In other words, the moral hazard aspect of the Greenspan Put has made the ultimate accumulation of debt much greater than it would have been in a purely private system.

                            A shakeout like the one you to some extent welcome will doubtless get rid of the problem, but it might take fifteen-twenty years–as has been the case in Japan. Avoiding this sort of position in the first place should be the aim of policy, but a cure should also be found if we find ourselves suffering the debt deflation disease. Deliberate consumer price inflation is such a potential cure; but it should only be attempted in concert with genuine structural reform.

                            Of course, I expect neither to happen in the real world: we’ll suffer asset price deflation, maybe consumer price deflation as well, and policies which prolong the agony rather than alleviating it.

                            Comment


                            • #15
                              Re: Economic State Of The Union -- 2008

                              Here is apparently the same article dated 2/3/2008. So the date shown above is a tad misleading and making the article not as timely as it appears.

                              http://www.eurointelligence.com/arti...c9aafdf.0.html
                              Jim 69 y/o

                              "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

                              Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

                              Good judgement comes from experience; experience comes from bad judgement. Unknown.

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