Spain Pressured by Letter from Trichet; More on Agricultural Trade Wars; Which Comes First, Harmony or Workable Currency Unions?

Not only was Italy pressured by ECB president Jean-Claude Trichet, so was Spain. Courtesy of Google Translate, El Pais reports Trichet Pressures Spain in Letter.
The ECB makes recommendations to Spain in a less hard than Italy, in return for the purchase of debt.



The announcement of the budget measures made on Sunday by Finance Minister, Elena Salgado, was preceded by increased pressure on Spain by the European Central Bank (ECB). Its president, Jean-Claude Trichet, last week sent a letter to the Spanish government to ask him not to stop the reforms and measures to contain the deficit. The letter, whose contents are discussed in the meeting of the ECB governing council meeting on Thursday, August 4, left Frankfurt at the same time as the letter that led to the Italian Prime Minister Silvio Berlusconi to step on the accelerator of its fiscal reforms.
Does anyone think these were "recommendations" and not demands?



For a discussion on the letter to Italy, please see my previous post Trichet's Secret "Dragon Transfer" Letter to Italy PM; Watch France CDS Rates as France is "New Italy"; Trichet Illegally Usurps Judge-and-Jury Power



Agricultural Trade Wars Part Two



As a followup to Border Attacks: Spanish Farmers Threaten to Block Border with France; Global Trade Wars Yet Another Sign of Deflation here are more articles and images of the escalating agricultural trade wars between France and Spain.



Angry French Farmers Dump Spanish Peaches, Burn Tires



Via French to English translation, please consider The anger of farmers

Big day mobilization fruit and vegetable department. Objective of the mobilization: to maintain pressure on the government Tuesday after an action in the Gard region, where several trucks carrying merchandise Spanish saw their cargo spilled on the road.



Angry farmers are then directed to the St. Charles market, where they dumped tons of peaches and then burned tires at the roundabout at the entrance of the platform.







"This is a Spanish enclave on French soil. They betrayed us under the pretext of winning even more. After the intervention of firefighters to put out different fires, farmers are directed to the toll of Perpignan Sud to control several trucks coming out of St. Charles. One of them took the road to Germany was emptied on the floor by young farmers, especially put together. "We're not bandits and we have nothing against Spanish producers, but the merchandise that was found in the truck does not respect the rules especially for fisheries that are surcalibrées. Since the state does not respect the rules, they did their job."
Should we nationalize supermarkets?



You know trade wars are intense when you see questions like this in French headline news: Should we nationalize supermarkets?

Yesterday, at the toll Lancon, motorists could not believe their eyes. Fifty people brutally emptied the cargo trucks to foreign registrations. These people, it is the farmers of Vaucluse, Bouches-du-Rhône and Gard that have exploded in anger.



Low price for sale result of distortion of competition in their view by large retailers, more and more taxes to pay, and especially a flood of imported fruits and vegetables too important. These are the arguments of those farmers to explain the "unprecedented crisis" that they live this year.



"All agricultural sectors are affected, including fruits and vegetables. The retail products brought in from Spain and Italy among others. The labor is cheaper in these countries with low prices.



French farmers have to lower their prices by at least 20, 30 and even 40% to sell. Currently, the loss of gross turnover rises 25 to 50 according to the operation, "said Andre Bernard, president of the Departmental Federation of Farmers' Unions of the Vaucluse.



Thus, to fight against the importation, the farmers of Vaucluse, Bouches-du-Rhône and Gard, framed by the police, conducted a blitz by immobilizing all foreign trucks trying to cross the toll of Lancon, creating a cap of more than 5 km.



Manuel, a Spanish driver, despite his resistance, has seen its 24 tons of crushed nectarines on the tar. "It's incomprehensible, Manuel gets mad, I understand that the French production has problems, but why attack me? I do my job."







Within 45 minutes, farmers have drained three-truck trailers full of peaches, oranges, figs and pears. "The loading of these trucks is one year of work for one local farmer. And it's not for us we buy the products, carried away the chair 84 of the FNSEA. Now, that's enough. We ask to meet with government to develop a structure plan to save the profession. "
Which Comes First, Harmony or Workable Currency Unions?



While pondering the meaning of escalating trade wars between France and Spain, please consider this excerpt from When money brought us together
The dream that a common currency can foster harmony has a long history. But if the past is any guide, proponents of the euro may have it backward: Where money is concerned, harmony has to come first. You can’t create a currency to unite people; you must unite people in order to have a currency. Given the growing tensions between the members of the eurozone, that unity, like de Parieu’s dream of “pacific federations of the future,” seems more distant by the day.
Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

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Swiss Government and Swiss National Bank in "Intense" Talks on Currency Target for Swiss Franc; Talk is Cheap

Bloomberg reports Franc Weakens Against Dollar, Euro After Report Currency Target Discussed
The franc weakened after SonntagsZeitung reported over the weekend that the Swiss government and the central bank are in “intense” talks over setting a possible target for the currency, citing unidentified people close to the situation.
Talk is Cheap



OK, once you decide a target, how do you get it there? I addressed that question previously in Swiss Central Bank Ponders "Temporary" Peg to Euro; Franc Trades Sharply Lower; This a Bluff? What Does it Take to Maintain a Peg?

Is the Threat a Bluff?



Just because someone discusses something does not mean the discussion was serious. We cannot tell.



However, we do know what a currency peg requires: To maintain a currency peg, one must buy (or sell) virtually unlimited quantities of a foreign currency, as much as the market supplies, to maintain the desired conversion rate.



Interest rate policy works the same way. To maintain an interest rate target, the Fed (or any central bank in general) must supply or subtract unlimited amounts of currency to maintain its target interest rate. This happens continually.



If the rate is targeted lower than what the market thinks, the Fed or Central Bank must print enough money to keep the target. Likewise, if the Fed sets a rate higher than the market dictates, it must drain as much money as necessary to keep rates to the peg.



Does anyone really think this continual micro-manipulation of currency to maintain an arbitrary interest rate (set by central planners who do not know what they are doing) is a good idea?



Currency Peg Risks



Back to the Swiss Franc: A currency peg is much riskier, because the defense is not in relation to its own currency as it is with interest rates. Moreover, one might expect wild swings and an immediate snap-back once the peg is removed. Thus "temporary" might mean for as long as the Euro crisis continues, and that might be a very long "temporary".



Finally, note the relative size of Switzerland vs. all the Eurozone countries. Buying "unlimited" Euros could rapidly get out of hand.



China goes through the same setup to maintain its "widening" peg to the US dollar. However, China does not allow much external trade of the Yuan.



The above discussion does not answer the bluff question, but it does state what the parameters of the defense must be. All things considered, I do believe it is a bluff.

Let's return to the question: Is it a Bluff? I still don't know but now I think it's more likely than I previously thought.



Bear in mind, setting a target and hoping the market reacts to it, and officially setting a peg are different things. However, once bureaucrats start marching down a certain path it is hard to get them to stop, no matter how futile the march.



I have never seen currency intervention work. It's hard enough if you are a large country, but the size difference in economies and forex trading says the idea cannot work unless the target just happens to be at or near where the market thinks it should be.



Mike "Mish" Shedlock

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Growing Gloom for States and Cities; Who is to Blame? What About Solutions?

A New York Times article accurately describes a set of fiscal realities in Sunday's editorial A Growing Gloom for States and Cities. The New York Times wildly misses the mark as to who is to blame for this crisis.



NYT: Washington should have been trying to find a way to help states avoid the layoffs and cutbacks that have contributed heavily to the high unemployment rate. Instead, it seems to be doing everything possible to make the situation worse in state capitals around the country.



Mish: That is essentially correct (except the implied tone). I proposed three items that would most assuredly help cities and states. Once again, here they are.



  1. Scrap Davis-Bacon and all prevailing wages laws that force up costs of construction and other projects at the city, county, state and federal level.


  2. End Collective Bargaining of public unions. Governor Scott Walker in Wisconsin shows the dramatic results that can happen if this is done. School districts that had budget deficits hugely in the read, saw them immediately go into the green, and not even for reasons that one might think. I wrote about it in Union-Busting is a "Godsend"; Elimination of Collective Bargaining is the Single Best Thing one Can do for School Kids


  3. Pass national right-to-work laws. Again this will help cash-strapped cities, counties, and states that have to deal with union-mandated pricing instead of competitive pricing. The goal of government should be to provide the most benefit for the least cost. The goal of unions is to provide as little work as possible for the most cost. It's time we end that model.
We can easily avoid the layoffs the NYT mentions if public unions accepted lower wages. They won't. Instead, unions cannibalize younger workers for the sake of maintaining preposterous wages and benefits at the top vs. wages and benefits in the private sector.



Point blank, the public is fed up with higher taxes to support public unions who get vastly superior wages, benefits, and guarantees than they do.



NYT: A recent report from the Center on Budget and Policy Priorities showed that nearly all states will spend less on vital services in 2012 than they did in 2008, after inflation, even though there are more children in public schools and more poor people on the Medicaid rolls.



Mish: Sounds like a good idea to me. We have overpaid for services delivered. My proposals above will help address that issue.



NYT: And now comes the Budget Control Act of 2011, the deal reached in Congress to cut $2.4 trillion over the next decade in exchange for raising the debt ceiling. Although the deal could have been worse and was structured by White House negotiators to reduce the impact on safety-net programs like Medicare and Medicaid, it will do real damage at the state and local level.



Mish: The budget deal could hardly have been worse. There were no spending cuts, tax hikes, or reforms in the measure. The only agreement was to cut a lousy $2.4 trillion ($240 billion a year), all back loaded, not Congressionally binding, when the budget deficit is $1.4 to $1.6 trillion a year. How could it possibly have been worse?



NYT: The credit downgrade that resulted from the debt crisis has yet to directly affect state and city bonds, many of which are now absurdly rated higher than Treasury bonds, but credit scrutiny will only get stricter for already weakened states and cities.



Mish: I certainly agree it is absurd for city and state bonds to be rated higher than US treasuries. However, the S&P downgrade of the US was fully warranted, even if the S&P went about it in a horrendously sloppy manner. Moreover, increased scrutiny of city and state bonds is a fabulous thing. They are living beyond their means and accurate bond ratings can only help.



NYT: If investors start to get nervous about the public sector, borrowing costs could go up. Stock volatility is also taking a toll on state pension funds, which are often heavily invested in the market. Last Monday, when the Dow Jones fell by more than 600 points, the California retirement system lost $6 billion. Declines in the market also lower income tax revenues for state coffers.



Mish: It is the height of absurdity to manage interest rates, bond ratings,etc. for the benefit of the stock market. The fact of the matter is stocks are priced for perfection and they should fall because perfection is not on the way. Thus, the NYT is openly encouraging bubbles to bail out pension plans.



I have a better idea: Let's start tackling the idea that promises to public union workers and government workers are untenable and need to be reduced.



Come to think of it I need to add point 4 to my list. Here it is.



4. Immediately kill defined benefit plans for government workers and accept the idea that promised benefits will be reduced voluntarily or via bankruptcy.



NYT: The Republicans who produced this artificial crisis, and are responsible for its effects, say they would like nothing more than to see a reduction in state as well as federal spending. That is where government hits closest to home, affecting the size of classrooms, the bulbs in streetlights, the asphalt in potholes, and the lines in emergency rooms.



They are well on their way to achieving their goal, making life more difficult in every city and town.



Mish: That is one of the biggest pieces of nonsense in the entire article, chock full of complete nonsense.



It certainly is not Republicans who support Davis-Bacon, Collective Bargaining for public unions, or forced union employment against the free-will of employees. Indeed forced union employment is tantamount to forced slavery.



I discussed the slavery aspect of forced union membership many times. Here are a pair of articles to consider:







Thus, not only does ridding the US of collective bargaining for public unions and instituting national right-to-work laws make economic-sense, it also makes moral-sense.



However, there is plenty of blame for Republicans too. They failed to put these issues on the table. Republicans and Democrats alike refuse to do anything about bloated defense budget that could easily be cut in half at no expense to the security of the US. Indeed, if the US stopped trying to be the world's policeman, our security concerns and enemy list would plunge.



Cutting the defense budget by a mere 25% would save at least $2 trillion over 10 years. Sadly, both parties support unsustainable US war-mongering policies.



So, yes, I blame Republicans too, but 180 degrees removed from what the Times suggests. Finally, it is primarily Democrat support for unions and untenable union pensions that is at the heart of the crisis in city, state, and municipal governments.



There is plenty of blame to go around, let's recognize all of it, and for the right reasons.



Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

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Stanford Offers Free Robotics and Artificial Intelligence Courses; 10,000 Already Sign Up

In the realm of good (as well as deflationary) news You (YOU!) Can Take Stanford's 'Intro to AI' Course Next Quarter, For Free

Stanford has been offering portions of its robotics coursework online for a few years now, but professors Sebastian Thrun and Peter Norvig are kicking things up a notch (okay, lots of notches) with next semester's CS221: Introduction to Artificial Intelligence. For the first time, you can take this course, along with several hundred Stanford undergrads, without having to fill out an application, pay tuition, or live in a dorm.







This is more than just downloading materials and following along with a live stream; you're actually going to have to do all the same work as the Stanford students. There's a book you'll need to get. There will be at least 10 hours per week of studying, along with weekly graded homework assignments. The professors will be available to answer your questions. You can look forward to a midterm exam and final exam. If you survive, you'll get a certificate of completion from the instructors, along with a final grade that you can compare to the grades of all those supersmart kids at Stanford.



You won't technically earn credits for the course unless you're a Stanford student, but for all practical purposes, you'll be getting the exact same knowledge and experience -- transmitted directly to you by none other than two living Jedis of modern AI. Thrun, director of the Stanford AI Lab, led the team that won the 2005 DARPA Grand Challenge, and, more recently, he helped develop the Google self-driving car. Norvig, a former scientist at Sun and NASA, is now director of research at Google and co-author of the leading textbook on AI.
10,000 have already signed up, and there is no limit.



Parents, if you have kids in high school, I encourage you to have them take this course. It may change their career plans for the better. For signup information and more details, please see the opening link.



I applaud the professors for offering these courses for free. Since the materials will be graded, college credits should apply but they don't. It's a start.



Addendum:



10,000 had signed up according to the article. The number is currently 56,000 and counting in various free courses. Here is a list of Free Stanford Courses



Some objected to the $58 (discounted) cost of the required book.



Here's the deal. Paying $58 for a book is peanuts compared to cost of 3 semester hours. Of course (and as I have pointed out) credits are not given for the free course. They will. Eventually, some college will get accredited and will accept these courses. It is inevitable.



This is a far better development than the failed policy "no child left behind" or raising taxes to throw at teachers' unions. Indeed, this is the future of education and it is very deflationary.



Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

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Spain Cannot Pay €26 Billion Defense Budget, Effectively Issues IOUs to Keep Within Stated Austerity Measures

If you need proof that Spain cannot possibly stay within austerity limits mandated by the ECB, please consider the following Google Translation (modified by me for readability) of an article on El Pais: Defense Department Renegotiating a 26 Billion Debt it Cannot Afford to Pay

If the homeowner stops paying the mortgage, the bank will not hesitate in foreclosure. But if the Ministry of Defence does not pay the installments of a battleship, a tank or a fighter, who will dare to seize?



The situation may seem surreal, but it is real.



Principle Programs







The overall bill called special programs of weapons - 19 weapons systems that mostly incorporate new technologies - totals 30 billion, around 3% of Spanish GDP, of which Defence has so far paid just under 5 billion.



Companies should be paid the remaining 26 billion in installments through 2025, but defense officials themselves acknowledge that this is impossible without a drastic increase in the budget, which is unthinkable that Spain has set a priority to reduce the deficit 6% at the end of this year and 3% in 2013 (with 2010 data, the deficit of all government is 9.2% of GDP).



Already in 2011 the Ministry of Defence has been in serious trouble to meet their obligations.



It's a cyclical problem but the situation is worse in the future. Defence sources said they would not have enough money even if there were no additional expenditures through 2025.



In his appearance before Congress last October to present the budget this year, Secretary of State for Defence, Constantino Mendez , already referred to in the starkest terms the policy has led to this situation. "We should not have purchased weapons we are not going to use for scenarios of confrontation that do not exist and, more seriously, with money that we did have then and do not have now."

Is US Really Any Different?



Look at those Spanish tanks, ships, planes, and submarines. Is Spain preparing for an invasion from France? Portugal? Italy via the Mediterranean Sea?



The US military budget situation is similar but the amounts are orders of magnitude greater.



Is the US threatened by Canada or Mexico? Cuba via the Gulf of Mexico?



If not, "We should not have purchased weapons we are not going to use for scenarios of confrontation that do not exist and, more seriously, with money that we did have then and do not have now."



Stupid Wars and US Sponsored Torture



In a stupid war that should never have been fought, US citizens were tortured in Iraq with tactics approved by Donald Rumsfeld.



For an explanation as to how that happened please consider U.S. Circuit Judge Upholds Right of Two US Citizens, Tortured in Iraq, to Sue Former Defense Secretary Rumsfeld for Torture.



Is WWII Coming Again?



What pray tell are countries doing with all these needless weapons? Preparing for another WWII?



Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

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Border Attacks: Spanish Farmers Threaten to Block Border with France; Global Trade Wars Yet Another Sign of Deflation

In an "eye for eye, tooth for tooth" retaliation to French farmers throwing Spanish produce in the streets, Spanish farmers have threatened to "look for French interests and cause the most damage possible."



Courtesy of Google Translate and my friend "Bran" who emails nearly every day from Spain, please consider Spanish farmers threaten to block border with France





Agrarian Association of Young Farmers in Catalonia announced Friday that blocked the return of French tourists to their country by cutting the road to La Jonquera response to the boycott of Gallic producers and recent attacks on trucks from transporting fruit Peninsula and vegetables.



Asaja coordinator in Catalonia, Albert Castelló, has said that already run out of patience, "eye for eye, tooth for tooth," and said it is absurd to continue with good words and wait for action by governments.



It has also warned that if they attack at the border now and the end of the month "automatically go looking French interests and cause the most damage possible." He called on the Catalan police to be "gatekeepers" and to defend the interests of Catalan and Spanish when these attacks occur, as has ensured that the security forces do Gauls.



Asaja has hit back against the Government for its "immobility" when taking concrete steps to defend the interests of local producers, which this week have been suffering more attacks on the border.



The European Commission has indicated it has not been formally informed of the latest attacks of French farmers against trucks carrying fruits and vegetables from Spain, but has made ​​clear that it condemns "all sorts of illegal and destructive action" and has reminded France that European Union countries should take steps to ensure the free movement of goods.
Hallmarks of Deflationary Times



Trade wars are hallmarks of deflationary times. Disputes between farmers in Spain and farmers in France are a case in point. When there are ample jobs, everyone is happy. When not, people blame their neighbors.



Bear in mind more austerity is coming to Spain, France, Italy, and Greece. A massive European recession is on the way, complete with rising unemployment and civil unrest, and ECB president Jean-Claude Trichet wants to hike rates. It is economic madness.



To be fair, the market should set interest rates not Central Banks.



Where would the market set rates for Europe?



I do not know, nor does anyone else, especially central bankers. However, I do know "one size does not fit all" when it comes to interest rates when countries have widely varying fiscal conditions and problems.



As one of the founding fathers of the Euro, Trichet is in a mess of his own making.



For more on the mess in Spain, please see Numerous Spanish Towns Face Bankruptcy.



Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

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Numerous Spanish Towns Face Bankruptcy

I inadvertently deleted this post from earlier today. Here it is again.



The Spanish economic implosion continues. Various austerity measure in Europe and rate hikes by ECB president Jean-Claude Trichet will make matters worse. Some town mayors readily admit bankruptcy. Others will follow.



Please consider Spanish towns face funding crisis, rack up debts
In this hillside town, topped by a medieval castle and surrounded by olive groves, the 120 municipal workers haven't been paid since May. Police have new orders not to use their patrol cars unless they get word of a traffic accident or a crime in progress.



The town pool is closed for the summer despite temperatures over 104 (40 Celsius) in the shade. Fees for the public day-care center have doubled. Water bills will soon go up 33 percent and local business owners are seething over €9 million ($12.7 million) in unpaid bills owed by the town hall, much of it to them.



Spain's 8,115 municipalities are being hit by a crushing revenue hangover from a nearly two-decade building boom that went bust in 2008. Officials in Moratalla believe they are the first in Spain to publicly declare their town is on the verge of going broke — and that the only way out is an unprecedented program of drastically reducing services while boosting local taxes and fees in an austerity drive that could last eight years.



Moratalla and its mammoth debt "are the mirror image of a lot of towns" that have not yet fully admitted the extent of their dire financial circumstances, said Deputy Mayor Juan Soria. "These are hard measures, but they're necessary and I think we have to reinvent ourselves because we've lived beyond our means and we have to lower expectations."



Many towns are struggling to meet payroll, can't fire workers because of public service employment rules, are frequently making late payments to the health care system and are trying to delay or restructure debt they took on for costly infrastructure projects.



The nation could be next in line for a bailout after Greece, Ireland and Portugal — and some in Moratalla say the example of their town shows Spain will need help from the European Union, despite pledges by federal officials that Spain won't need a bailout.



In Moratalla, population 8,500, Soria cringed at the idea of merging with a neighboring town, but said his community is functioning in constant crisis mode. Two weeks ago, Moratalla's two gas stations stopped filling the tanks of municipal vehicles when the owners lost all faith the town would ever pay €120,000 ($170,000) in outstanding fuel bills.



"They have told us that they don't know when, how or even if they are going to be able to pay us," said Jose Antonio Martin, who owns one of the gas stations. He is convinced the town needs a bailout from the regional government of Murcia, though it has debt problems of its own.
Mike "Mish" Shedlock

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U.S. Circuit Judge Upholds Right of Two US Citizens, Tortured in Iraq, to Sue Former Defense Secretary Rumsfeld for Torture

Thankfully, a US circuit court has upheld the rights of Donald Vance (a US Navy veteran) and Nathan Ertel, both US citizens, to sue former Defense Secretary Donald Rumsfeld for torture.



The "crime" for which they were tortured: The pair accused an Iraqi firm of bribery and corruption.



The punishment: The whistle-blowers were arrested, detained, tortured for months, with no access to a judge or lawyers, then ultimately dumped at the Baghdad airport without charge.



Please consider Two American men CAN sue Donald Rumsfeld after 'being tortured by U.S. army in Iraq when they worked for security firm'
Two American men will be allowed to sue former Defence Secretary Donald Rumsfeld over claims that they were unfairly tortured by U.S. troops in Iraq.



The pair argue that their rights of 'habeas corpus' - the legal term for unlawful detention - were violated, and are seeking damages from 79-year-old Rumsfeld, who was succeeded by Robert Gates in December 2007, and unnamed others.



Vance and Ertel had been hired by Shield Group Security, an Iraqi firm who the duo believed were involved in some questionable dealings, including illegal bribery and other corruption activities.



They flagged up their concerns to the U.S. authorities and began co-operating with the Federal Bureau of Investigation - and in early 2006 they were taken into custody and slung into Camp Cropper, the notorious holding facility for security detainees near Baghdad International Airport.



The whistle-blowers claim that they were forced to undergo harsh and prolonged interrogations at the same place Sadam Hussain lived his last years, and they were subjected to physical and emotional abuse.



Among the methods of torture used against them during several weeks in military camps was sleep deprivation and a practice known as 'walling', in which subjects are blindfolded and walked into walls, according to the lawsuit.



The lawsuit alleges Mr Rumsfeld personally participated in approving the methods for use by the U.S. military in Iraq, making him responsible, it argues, for what happened to Mr Vance and Mr Ertel.



In 2003, Mr Rumsfeld instituted a policy that 'encouraged physical coercion and sexual humiliation of Iraqi prisoners in an effort to generate more intelligence about the growing insurgency in Iraq'.



And yesterday a panel of three judges at the U.S. Court of Appeals for the Seventh Circuit in Chicago upheld the decision made by a federal judge in Illinois, voting 2-1.



The verdict paves the way for the lawsuit to proceed, in spite of the best efforts of the U.S. government to have the case thrown out.



U.S. Circuit Judge David Hamilton wrote yesterday: 'There can be no doubt that the deliberate infliction of such treatment on U.S. citizens, even in a war zone, is unconstitutional.'
Countdown-The torture of Don Vance-08-05-2011







Link if the above video does not play: http://www.youtube.com/watch?feature=player_embedded&v=Gd40g1IGma4#at=120



I an sick of war, the US war machine, the trillions of dollars we have wasted on war because idiots like Rumsfeld thought "Iraq had rich targets". I sincerely hope Rumsfeld is tried, convicted, sentenced to prison for life, then buried with Saddam Hussein, someone of like mind.



I commend Donald Vance for refusing to accept bribe money from the US government to not proceed with the lawsuit. It is high time the United States of America prosecutes people for war crimes and torture. Donald Rumsfeld is the perfect place to start.



Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

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Numerous Spanish Towns Face Bankruptcy

The Spanish economic implosion continues. Various austerity measure in Europe and rate hikes by ECB president Jean-Claude Trichet will make matters worse. Some town mayors readily admit bankruptcy. Others will follow.



Please consider Spanish towns face funding crisis, rack up debts
In this hillside town, topped by a medieval castle and surrounded by olive groves, the 120 municipal workers haven't been paid since May. Police have new orders not to use their patrol cars unless they get word of a traffic accident or a crime in progress.



The town pool is closed for the summer despite temperatures over 104 (40 Celsius) in the shade. Fees for the public day-care center have doubled. Water bills will soon go up 33 percent and local business owners are seething over €9 million ($12.7 million) in unpaid bills owed by the town hall, much of it to them.



Spain's 8,115 municipalities are being hit by a crushing revenue hangover from a nearly two-decade building boom that went bust in 2008. Officials in Moratalla believe they are the first in Spain to publicly declare their town is on the verge of going broke — and that the only way out is an unprecedented program of drastically reducing services while boosting local taxes and fees in an austerity drive that could last eight years.



Moratalla and its mammoth debt "are the mirror image of a lot of towns" that have not yet fully admitted the extent of their dire financial circumstances, said Deputy Mayor Juan Soria. "These are hard measures, but they're necessary and I think we have to reinvent ourselves because we've lived beyond our means and we have to lower expectations."



Many towns are struggling to meet payroll, can't fire workers because of public service employment rules, are frequently making late payments to the health care system and are trying to delay or restructure debt they took on for costly infrastructure projects.



The nation could be next in line for a bailout after Greece, Ireland and Portugal — and some in Moratalla say the example of their town shows Spain will need help from the European Union, despite pledges by federal officials that Spain won't need a bailout.



In Moratalla, population 8,500, Soria cringed at the idea of merging with a neighboring town, but said his community is functioning in constant crisis mode. Two weeks ago, Moratalla's two gas stations stopped filling the tanks of municipal vehicles when the owners lost all faith the town would ever pay €120,000 ($170,000) in outstanding fuel bills.



"They have told us that they don't know when, how or even if they are going to be able to pay us," said Jose Antonio Martin, who owns one of the gas stations. He is convinced the town needs a bailout from the regional government of Murcia, though it has debt problems of its own.
Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

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UK Chancellor, Italy Economy Minister Propose "Outright Fiscal Union" and Common Bonds

Clamoring for a complete Eurozone fiscal union reached a new high this week as UK Chancellor of the Exchequer George Osborne agrees with Italian Economy Minister Giulio Tremonti on the need for a fiscal union and common bonds to save the Euro.



Please consider Italy calls for euro bonds as UK backs fiscal union
Italian Economy Minister Giulio Tremonti stepped up calls for a more coordinated response to the euro zone debt crisis on Saturday ahead of a potentially vital summit between the leaders of France and Germany next week.



Tremonti returned to proposals -- rejected in the past by Berlin and Paris -- for the creation of common euro zone bonds that would effectively make individual governments debt a common burden.



His British counterpart George Osborne, long a supporter from outside the euro zone of more fiscal integration within the currency bloc, went as far as to say that some form of outright fiscal union was now needed.



The austerity package unveiled on Friday, which contained a painful mix of spending cuts and tax increases, was demanded by the ECB in exchange for a commitment to protect Italian bonds but Tremonti said the problem risked spreading unless Europe ended its piecemeal approach to the crisis.



"We would not have arrived where we are if we had had the euro bond," he said.



Osborne said deeper integration had been the inevitable conclusion from the start of the single currency project.



Asked if the only answer for the euro zone was some kind of fiscal union, he told BBC radio: "The short answer is yes."



A new poll for the Bild am Sonntag newspaper on Saturday showed 31 percent of Germans believe the euro will be gone by 2021.
Common Bond Madness



The idea there would not be mess if "only we had common bonds" is madness. Had there been "common bonds" Germany and France would have undertaken all the fiscal problems of Greece, Portugal, Spain, Italy, and Ireland.



Note that French banks are directly under attack. That would have happened sooner if France and Germany bankrolled the rest of Europe.



Then France would have quickly fallen and the result would be where we are today, with Germany essentially bankrolling the problems of the rest of Europe.



Nothing much would have changed except the progression and timing of various countries. Shock waves might have hit Italy and France first (or every European country at once instead of starting with Greece) as the pool of savings in Germany and France was wiped out over time to keep the other European economies afloat.



Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

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White House Press Secretary Claims "Unemployment Benefits Could Create Up To 1 Million Jobs"

Real Clear Politics notes Unemployment Benefits Could Create Up To 1 Million Jobs
"I understand why extending unemployment insurance provides relief to people who need it, but how does that create jobs," Wall Street Journal's Laura Meckler asked Jay Carney at Wednesday's WH briefing.



Carney responded: "Oh, uh, it is by, uh, I would expect a reporter from the Wall Street Journal would know this as part of the entrance exam."



"There are few other ways that can directly put money into the economy than applying unemployment insurance," Carney said.



Carney answers the question: "It is one of the most direct ways to infuse money directly into the economy because people who are unemployed and obviously aren't running a paycheck are going to spend the money that they get. They're not going to save it, they're going to spend it. And with unemployment insurance, that way, the money goes directly back into the economy, dollar for dollar virtually."



"Every place that, that money is spent has added business and that creates growth and income for businesses that leads them to decisions about jobs, more hiring. So, there are few other ways that can directly put money into the economy than applying unemployment insurance, Carney said.
So there you have it. The unemployed create jobs. If only we had millions more unemployed, we could create millions more jobs, simply by giving the unemployed more money.



I suppose we could triple unemployment benefits and create three times as many jobs on the theory that the unemployed would still spend every penny of three times as much money.



We could be even more creative and extend unemployment benefits to infinity thereby creating an infinite number of jobs. However, creation of an infinite number of jobs would sound unrealistic as a news headline, even for a liberal media, if only barely. So let's just do this for three more years at three times the benefits.



I have the headline ready: "Obama to create 9 million jobs by giving the unemployed three times as much money if they agree to spend it."



Addendum:



A couple of people argued spending will create jobs but asked "how many?" Certainly 1 million seems ridiculous.



More to the heart of the matter, to paraphrase a response from "Fedwatcher", such activities will create jobs but not efficiently or permanently.



Therein is the crux of the matter. Certainly if the government gave $20,000 to everyone who was unemployed we would see a burst of activity, followed by another crash. Throwing money around does not create lasting jobs, only another heroin high.



Worse yet, in response to stimulus, businesses may invest more in productive capacity only to find out as the stimulus wore off, they really didn't need it. Heaven help any business that borrows money on such false signals.



Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

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Eurozone in Recession, Industrial Production "Unexpectedly" Drops .7%; France in Recession, Germany on the Way; Is the US in Recession?

Recession loom everywhere you look. Let's look at France: French growth sputters to a halt in 2nd quarter

The French government was put under further pressure to cut deeper into spending after figures Friday showed growth in Europe's second biggest economy ground to a halt in the spring, in another sign that the global economy is facing rising recessionary threats.



With the worse-than-expected French growth figures suggesting a possible budget shortfall this year, government ministers may have to find additional savings ahead of a key meeting with President Nicolas Sarkozy on Aug. 24.



The flat growth reported in the second quarter of the year was attributable to a slump in consumer spending and exports, and came as policymakers scramble to soothe investor concerns that the country could be the next major economy to lose its coveted triple-A credit rating.
Eurozone Industrial Production "Unexpectedly" Drops .7%



RTT News reports Eurozone Industrial Output Declines Unexpectedly In June




Eurozone industrial production declined unexpectedly in June on widespread decreases in sub-sectors, indicating a sharp slowdown in economic activity in the currency bloc at the end of the second quarter.



Industrial output fell 0.7 percent month-on-month, offsetting the 0.2 percent increase seen in May, data released by Eurostat showed Friday. Economists had expected production to remain flat in June.



Among the sub-sectors, durable consumer goods output and capital goods production logged the biggest falls of 2.5 percent and 1.5 percent, respectively. At the same time, non-durable consumer goods output dropped 0.5 percent. Decreases in intermediate goods and energy output came in at 0.6 percent and 0.4 percent, respectively.
Germany Industrial Production Unexpectedly Drops 1.1%



Forex Crunch reports More Evidence of Core Slowdown in Germany’s Industrial Production
German industrial production dropped by 1.1% in June. Early expectations stood on a rise of 0.1%. The rise of 1.2% that was reported for May was revised to only 0.9%. Altogether, the locomotive of the euro-zone cannot drive the train in high speed anymore.
US Consumer Sentiment Unexpectedly Declines to Three Decade Low



Bloomberg reports U.S. Consumer Confidence Drops to Three-Decade Low Amid Economic Headwinds

Confidence among U.S. consumers plunged in August to the lowest level since May 1980, adding to concern that weak employment gains and volatility in the stock market will prompt households to retrench.



The Thomson Reuters/University of Michigan preliminary index of consumer sentiment slumped to 54.9 from 63.7 the prior month. The gauge was projected to decline to 62, according to the median forecast in a Bloomberg News survey.



Estimates of 69 economists for the confidence measure ranged from 59 to 66.5, according to the Bloomberg survey. The index averaged 89 in the five years leading up to the recession that began in December 2007.
Barry Ritholtz at the Big Picture asks Are We Already in Recession?

Bloomberg reported today that “Consumer Sentiment Plunged to Three-Decade Low.”



That sent me scurrying to find some charts, and I ended up liking the two from UBS strategist Andy Lees, at bottom.



The first one is an overlay the University of Michigan consumer confidence index vs the Conference Board’s data. The second chart shows the long term history of the Conference Board data. At an implied level of 43.37 we would be in recession now; not only that but a deep recession.



As the charts show, the ABC index has diverged from the Conference Board data for some time now.



The correlation between consumer confidence and recession might not hold this time — although that would be the first split for 40 plus years.



There is also an implication from this data series that we are already in recession. Given yesterday’s data showing both imports and exports falling, we may have an implied Q2 GDP revised lower by 0.8% to 0.5% annualized growth — putting Q2 into the negative category.



Hence, it is not unfeasible that we could be the verge of recession.
Forget "verge of recession" the US is in one. Whether or not it gets reported as such depends on further data. If new data continues to be weak, the NBER is very likely to backdate a recession to June or July.



Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

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Nonsense Regarding Reverse Repos, Excess Reserves, and Liquidity

Today the Fed announced a series of meaningless small reverse-repo (monetary drain actions) to test the exit-policy soaking-up ability of the Fed down the road.



I suggest the Fed's Statement Regarding Reverse Repurchase Agreements is meaningless given the amounts involved, the timing, and the reasons the Fed stated.

As noted in the October 19, 2009, Statement Regarding Reverse Repurchase Agreements, the Federal Reserve Bank of New York has been working internally and with market participants on operational aspects of triparty reverse repurchase agreements to ensure that this tool will be ready if the Federal Open Market Committee decides it should be used. Beginning Monday, August 15, the New York Fed intends to conduct another series of small-scale reverse repurchase (repo) transactions using all eligible collateral types. The first operation will be conducted using only the expanded reverse repo counterparties announced on July 27, 2011. Subsequent operations in this series will be open to all eligible reverse repo counterparties.



Going forward, the Federal Reserve plans to conduct a series of small-scale reverse repurchase transactions about every two months, which will bring the frequency of these operational exercises in line with that of the Term Deposit Facility exercises.



Like the earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve. The operations have been designed to have no material impact on the availability of reserves or on market rates. Specifically, the aggregate amount of outstanding reverse repo transactions will be very small relative to the level of excess reserves, and the transactions will be conducted at current market rates. These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future.

ZeroHedge sarcastically comments
With liquidity already being very scarce courtesy of the FDIC assessment, of Europe wreaking havoc with money markets, of repos pulling out of the market at a record pace, of O/N General Collateral trading with the same volatility as the S&P, this will surely have no impact at all on anything, just like all other centrally planned, and carefully thought through actions.
After reading the announcement, it should be crystal clear the Fed did nothing and said nothing of importance.



Ironically, I agree with this short clip of Tyler's statement "surely have no impact at all on anything", except that is clearly not what Tyler meant.



I suggest it is time to stop hyping-up every play and every statement by Fed officials as if it means anything.



Moreover, excess reserves are so high the Fed could mop up $1 trillion of them right now without having an impact on anything except for interest paid on reserves to banks. Tyler missed this completely, and the key to understanding the issue is realization that excess-reserve theory of inflation and lending is fallacious.



I have covered the reasons numerous occasions. Here is the pertinent snip from Yes Virginia, U.S. Back in Deflation; Inflation Scare Ends; Hyperinflationists Wrong Twice Over

Excess Reserve Money-Multiplier Theory is Fatally Flawed



Some have written these "excess reserves" are waiting in the wings to cause massive inflation.



It did not happen nor will it. Simply put, the excess-reserve money-multiplier theory is potty.



Banks do not lend just because they have reserves. Indeed reserves do not enter the equation at all. Rather, banks lend as long as they are not capital impaired and as long as they have good credit risks willing to borrow.



In this case, banks are capital impaired, and there are too few credit-worthy clients who want to borrow. The result is banks do not lend and money sits as excess reserves.

What Would Draining $1 Trillion Excess Reserves Do?



The effect of draining $1 trillion in excess reserves would be .25% (max) of $1 trillion in interest to banks paid on excess reserves, thus $2.5 billion a year total (max) to banks, free money that banks have no business collecting.



I say max because the rate floats from zero to .25% max although in theory the Fed can pay anything it wants for excess reserves.



There are no liquidity issues in regards to draining $1 trillion in reserves, if done slowly over time.



Excess Reserves







Given the state of excess reserves, there is no liquidity issue in any real sense at all, and the Fed should indeed implement an exit strategy while it is easy to do so, instead of later when it may not be so easy.



The Fed does not do so because



  1. The Fed fails to understand monetary easing policy is now economically useless
  2. The Fed wants to slowly recapitalize banks over time with taxpayer money from the treasury via paying interest to banks on excess reserves



I suspect both.



Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Yes Virginia, U.S. Back in Deflation; Inflation Scare Ends; Hyperinflationists Wrong Twice Over

Hyperinflationits have now blown it twice. First, they insisted hyperinflation would happen before deflation. They were wrong. Then, during the QE2 inspired equities and commodities ramp, they said the same thing. They were wrong again.



Prior to the Great Financial Crisis I had a bet with "Heli-Ben", a staunch hyperinflationist who insisted we would hyperinflation before deflation. I won the bet but have not yet received my prize, a "crying towel" from "Heli-Ben".



By any rational measure, and certainly by my definition, the US went into a period of deflation lasting at least a year. Deflation ended in March of 2009.



In the wake of QE II hyperinflationists again started preaching about hyperinflationary crashes. Once again, and with increasing intensity, we heard things like ...



  • The US is Zimbabwe
  • No food available at any price
  • Oil is going to $200, then $400
  • Excess reserves will pour into the economy causing massive inflation
  • No one will be willing to hold US dollars
  • Treasury rates are going to the moon
  • The US dollar is going to zero



I could assign names to the above list, but I won't.



Two well-known hyperinflationists confidently predicted hyperinflation would start this year. A third said 2011 or 2012 giving himself extra time to be proven wrong.



My position all along was that the US would go in and out of deflation over a period of years, just like Japan.



I am claiming my "crying towel" prize for the second time. The US is now undeniably back in deflation. If "Heli-Ben" does not submit a "crying towel" his word is as good as his economic theories, which is to say worthless.



Definition of Terms



Before discussing terms one must define them. I have on numerous occasions defined mine, and my definition was the basis for the bet.



Inflation



Inflation is a net increase in money supply and credit, with credit marked-to-market.



Deflation



Deflation is a net decrease in money supply and credit, with credit marked-to-market.



Hyperinflation



Complete loss of faith in currency.



The first two definitions have nothing to do with prices per se, the third does (by implication of currency becoming worthless).



Price Myopia



Many if not most economists, especially Keynesians, think of inflation in terms of prices.



In contrast, Austrian-minded economists generally have definitions similar to mine except most of them fail to properly include credit in their analysis. Austrians in general look at money supply alone, and that is a huge mistake.



Role of Credit in Inflation



Failure to include credit in the definition of inflation and the analysis of economic activity causes many problems. Credit influences consumer prices, jobs creation, and asset prices. The mark-to-market value of credit influences the ability and willingness of banks to lend.



People tell me all the time, "all I care about is prices". If they really mean it, they are fools. Without credit expansion there is little hiring. Without hiring and money to pay for things, consumers cannot pay back loans and asset prices in general, crash.



Trillions of dollars in debt-inflated (thus imaginary) wealth have been wiped out in housing and the stock market because of falling credit, loss of jobs, and inability to service debt. Many homes fell in price from $500,000 to $200,000 (or equivalent percentages).



This is far more important than the price of gasoline hitting $4 or the price of carrots rising 50% to $2 a bunch. Yet, inflationists constantly fret about prices, ignoring far more important credit conditions.



Price myopia has other problems. Both Greenspan and Bernanke ignored an explosion of credit that fueled housing. Thus, a focus on prices induced errors on the way up and on the way down.



Fed Ignorance



The massive bubbles in credit and housing, were a direct consequence of Fed ignorance. Bernanke failed to see a recession and a housing bubble that would have been obvious to anyone using a proper definition of inflation.



I cannot tell someone what their definition should be, I can only point out the complete foolishness of concern over prices vs. rapid expansion or contraction of credit and credit marked-to market.



Humpty Dumpty on Inflation



Please consider this paragraph from my post Humpty Dumpty On Inflation written December 2008.

Humpty Dumpty Defines Inflation



Unfortunately there are many definitions of inflation and deflation strewn about. Some play the role of Humpty Dumpty changing meanings at whim, switching from commodity prices, to consumer prices, to expansion of base money or M3 or whatever measure of money seems to be expanding at the fastest rate.



Some do the inflationista two-step to avoid admitting that we are indeed in deflation, choosing instead to call it "disinflation"



In short: "We are going to have a period of deflation that we will instead call disinflation."



'When I use a word,' Humpty Dumpty said, in a rather scornful tone,' it means just what I choose it to mean, neither more nor less.'



'The question is,' said Alice, 'whether you can make words mean so many different things.'



'The question is,' said Humpty Dumpty, 'which is to be master - that's all.'



It appears that the deflationista camp is incapable of comprehending a model, and the events that it forecasts, that lays out a two step process. For some reason they cannot grasp the fact governments will respond to disinflation with inflation, that the impact of those interventions is not instantaneous, and that markets historically are not very good at foreseeing the change in inflationary conditions in either direction.



Not quite. Rather it appears that some who suggested there would never be deflation are gracefully attempting to back into it, and indeed going out of their way with a two-step to pretend it is something else.



Every deflationist on the planet understands inflation will be back at some point and the Fed will attempt to do everything it can to avoid it.

When I wrote "Humpty Dumpty on Inflation", the U.S. was unquestionably in a period of deflation. However, I also clearly pointed out "Every deflationist on the planet understands inflation will be back at some point and the Fed will attempt to do everything it can to avoid it."



In retrospect, the word "every" in the above sentence is too strong.



Regardless, I explicitly pointed out deflation was not permanent while also stating on numerous occasions that the US would be back in deflation, and indeed we are.



In "Humpty Dumpty" I listed conditions (symptoms) one would expect to see in deflation, as follows.



Symptoms of Deflation



  1. Falling Credit Marked-to-Market
  2. Falling Treasury Yields
  3. Falling Home Prices
  4. Rising Corporate Bond Yields
  5. Rising Dollar
  6. Falling Commodity Prices
  7. Falling Consumer Prices
  8. Rising Unemployment
  9. Negative GDP
  10. Falling Stock Market
  11. Spiking Base Money Supply
  12. Banks Hoarding Cash
  13. Rising Savings Rate
  14. Purchasing Power of Gold Rises
  15. Rising Number of Bank Failures


Scorecard



When you go to a doctor for diagnosis of an illness, the first thing the doctor inquires about is symptoms. So let's do just that for the second time.



Let's take those 15 conditions one would expect to see in deflation and see how many apply.



1- Falling Credit Marked-to-Market



The mark-to-market value of credit on the balance sheets of banks and financial institutions is the hardest of the 15 items to measure. Indeed, the mark-to-market value of credit cannot be directly measured at all.



The reason is banks do not mark-to-market assets unless those assets are worth more than they paid for them. The Fed, FDIC, and FASB (Financial Accounting Standards Board) lets banks get away with just that. Mark-to-Market rule enforcement has been postponed twice. Moreover, banks hide non-performing loans off the balance sheet in SIVs and by other tactics.



However, one can easily impute the direction of of the value of credit on the balance sheets of banks and financial institutions by watching prices of bank shares.



In 2008 shares of financial corporations plunged. In March 2009, financial assets valuations soared. That action kept up for longer than I expected.



However, early this year, bank stocks started showing weakness (long before the rest of the market), then crashed in the last couple weeks.



$BKX Banking Index







The $BKX banking index is down a whopping 35% since February. Clearly the market has re-evaluated the mark-to-market value of credit on the balance sheets of banks. In a plunge like this, far greater than the overall market, there is no room for any other interpretation.



Pater Tenebrarum presents a superb analysis of the situation of U.S. and European banks in Welcome Back To The GFC, written August 11, 2011.

Bank of America (BAC) find itself increasingly under suspicion from investors, as it continues to choke on its acquisitions made during GFC, Phase 1. Readers may recall our comments on the take-over of Countrywide by BAC – at the time we noted that in our view, the takeover was done because Countrywide was one of the biggest counterparties of BAC. By taking it over, the losses that would have come due on occasion of Countrywide's bankruptcy could be swept under the rug. Moreover, BAC had invested a lot of money in Countrywide and strove to make it appear as though these investment had been wise. That the then management of BAC paid such a high price in the takeover was clearly a dereliction of its fiduciary duties. It could have gotten the carcass a few weeks later for next to nothing. Instead it decided to pay a high price for what has likely turned into a sheer bottom-less well of losses. This was then topped off with the acquisition of Merrill Lynch, likely at the behest of the administration – again in order to avert what would likely have become a major bankruptcy otherwise. If this reminds you of the story of Creditanstalt in the early 1930's, we say it should. BAC appears to be on the brink again. Its new management keeps saying that no new capital will have to be raised and that the bank's 'fundamentals are strong', but since it continues to sell 'non-core assets' at a fast clip, it evidently does need more capital. The market's verdict is rather worrisome.
That is one small clip in a lengthy but very worthwhile discussion that also includes credit default swap analysis of numerous US and foreign banks.



Nothing Fundamental Ever Changed



It is important to point out that nothing fundamental ever changed in regards to the health of US and European banks. They were and still are bankrupt. However, what did change (temporarily), is the market's mark-to-market valuation of bank assets.



Alternatively, the market was willing to overlook suspect assets, perhaps in belief that rising earnings would eventually cover the losses and more capital would not have to be raised.



The recent plunge in bank shares globally, shows without a doubt the market once again questions the value of debt on the balance sheets of banks. Once that happened everything fell apart, quite rapidly.



Those not paying attention to mark-to-market issues never saw this coming. The debt-deflationists did.



2 - Falling Treasury Yields



Yield Curve as of 2011-08-10







click on chart for sharper image



Shades of Japan



03-Mo = .01%

06-Mo = .06%

12-Mo = .09%

02-Yr = .18%

03-Yr = .33%

05-Yr = .92%

07-Yr = 1.50%

10-Yr = 2.15%

30-Yr = 3.51%



2-year, 5-year, and 10-year treasury yields hit all-time lows on 2011-08-10. This happened in spite of a downgrade of US debt by the S&P.



3 - Falling Home Prices



The Case-Shiller home price index briefly turned positive in 2010 but is now down 4% year-over-year. 10 years of price gains have been wiped out in many cities.







4- Rising Corporate Bond Yields



My proxy for corporate bonds is JNK, the Lehman High-Yield Junk Bond Index. When risk appetite drops, prices fall, and yields rise.The rapid decline in price represents a rise in yields and a reduced demand for disk.







So far we are four for four.



5 - Rising Dollar







Clearly that is not much of a rally. However, equally clearly the US dollar bottomed in May. That makes five for five.



6 - Falling Commodity Prices



Producer Price Index Finished Goods







Producer Price Index Intermediate Goods







Producer Price Index Raw Goods







The above charts from the BLS PPI Release.



$CRB - Commodities Index







Commodities peak in May, the same time the PPI went negative.



This makes six for six.



7 - Falling Consumer Prices







The above chart from the BLS CPI Release



This data point is the weakest of the lot so far given that it is a month-over-month comparison rather than year-over-year. However, in the wake of plunging crude prices, gasoline prices will drop as well. More CPI weakness will follow.



This makes seven for seven.



8 - Rising Unemployment



Let's consider both Employment and Unemployment.



Employment







There was never a rebound in employment from the last recession.



Unemployment Rate







The unemployment rate remains higher than the peak high of all previous recessions. Moreover, the unemployment report would be above 11% were it not for people dropping out of the labor force.



Let's wrap up with a look at numbers from the latest jobs report.



Household Data







The number of people employed fell by 38,000!



The only reason the unemployment rate dropped is 193,000 people dropped out of the labor force. Why? Because most of them became so discouraged they stopped looking for work. And if you stop looking for work, even if you want a job and need a job you are not considered unemployed.



The preponderance of evidence is clear.



This makes eight for eight.



9 - Negative GDP



The BEA Gross Domestic Product: Second Quarter 2011 release states "Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent."



This is exceptionally weak. Indeed I think GDP is below the stall rate and the US is headed for recession. I wish I had worded the condition a bit more thoughtfully. In a period of deflation GDP will be weak, not necessarily continually falling.



However, let's call this a near miss.

This makes eight for nine.



10 - Falling Stock Market



I could produce hundreds of charts for this category but let's go with the S&P 500 Index.



$SPX Daily







That makes 9 for 10.



11 - Spiking Base Money Supply



That spiking money supply would spike in deflation is counterintuitive. Yet, if one concentrates on expectations of what the Fed would do to combat deflation, that expectation is crystal clear.



However, like a drug addict on heroin, the medicine has worn off. The money sits as excess reserves at the central bank.



Base Money Supply







The Fed is clearly fighting (and now losing) the battle against deflation.



That makes ten of eleven.



12 - Banks Hoarding Cash



I wrote about banks hoarding cash and paying negative interest rates on deposits on August 4, 2011 in Bank of New York Mellon to Slap Fees on Big Deposits Following "Global Dash For Cash"; When was Hyperinflation Supposed to Start?



Excess reserves is another measure of willingness to lend.



Excess Reserves







Excess Reserve Money-Multiplier Theory is Fatally Flawed



Some have written these "excess reserves" are waiting in the wings to cause massive inflation.



It did not happen nor will it. Simply put, the excess-reserve money-multiplier theory is potty.



Banks do not lend just because they have reserves. Indeed reserves do not enter the equation at all. Rather, banks lend as long as they are not capital impaired and as long as they have good credit risks willing to borrow.



In this case, banks are capital impaired, and there are too few credit-worthy clients who want to borrow. The result is banks do not lend and money sits as excess reserves.



That makes eleven of twelve.



13 - Rising Savings Rate







The savings rate bottomed in 2007 and has generally been rising since. The rate is below the spike highs mid-recession, but the latest tick is up and the uptrend line is intact.



That makes twelve of thirteen.



14 - Purchasing Power of Gold Rises



Many deflationists thought gold would drop in deflation. However, my theory, explained years ago is as follows:



  1. Gold is money
  2. Gold is in the senior currency rises in value in deflation.
  3. Gold, as money, would would benefit (rise) in response to Fed actions to defeat deflation by printing fiat money.


It happened in the great depression and it is happening again.

That makes thirteen of fourteen.



15 - Rising Number of Bank Failures



Bank closings remain elevated. We have had 106 bank failures so far in 2011.

That makes fourteen of fifteen



Doctor, Doctor Gimme The News



If you went into a doctor and had 14 of 15 symptoms of a disease and the 15th was close, you can be sure the doctor would know what was happening.



In this case, the diagnosis is crystal clear: The US is back in deflation.



Who Called This?



Robert Murphy, in End This Agony on the Ludwig von Mises Institute says no one saw this coming.
To my knowledge, no school of economic thought predicted all of the major trends back in, say, January 2008. The conventional Keynesians employed at the White House and in major forecasting firms were completely wrong about the Obama stimulus package. The "crowding out" Chicago School types were completely wrong about the deficit's impact on interest rates. People like Peter Schiff (and yours truly) were completely wrong about consumer price inflation in 2009 and 2010. The "quasimonetarists" (who blamed Bernanke for his allegedly tight money policies) and Paul Krugman were completely wrong about gold and silver prices, and arguably about the fragility of the "recovery" in the stock market.

I take strong exception to Murphy's analysis. I offer as proof, Murphy's November 22, 2010 in Has Mish Deflated the "Inflationistas"?
Over the last two years, I have gotten perhaps dozens of requests to "deal with" the deflationist approach of Mike "Mish" Shedlock.



Mish's Framework: Credit, Deflation, and Gold



A good summary of Mish's views comes from a September 2010 blog post — it was this one that spurred me to write the current article, egged on by a reader who enjoys both Mish and my own work. Mish writes,

Day in and day out I hear it from readers who insist that we are not in deflation and will not be in deflation because prices are rising and continue to rise. …

Such comments come from those who are not thinking clearly about what's important. Here's why:

  • In a fiat credit-based financial system, when credit is plunging businesses are not hiring. There are currently 14.9 million unemployed who want a job but do not have a job because businesses are not hiring. … This is all related to the ongoing credit contraction.

  • When credit is plunging so do yields on treasuries and in turn yields on savings accounts. …

  • When business earnings are under pressure or when business owners face uncertainty over consumer spending trends, businesses cut back on benefits, especially health care. Those with health care benefits are asked to chip in more of the costs. This too is a function of deflation.

  • When profits are weak and business uncertainty high, stock prices do not act well (at least in the long run). Those with 401Ks or personal investments are affected.

  • With credit falling and wages stagnant or falling, anyone in debt is likely to have a harder time paying back that debt. Foreclosures rise so do bankruptcies and divorces. Entire families have gone homeless. …

Expanding credit (inflation) created an enormous housing bubble, a commercial real estate boom, a rising stock market, and an enormous number of jobs.

Contracting credit (deflation), burst the housing bubble, burst the commercial real estate bubble, burst the stock market bubble, resulting in millions of foreclosures and bankruptcies, millions of broken homes, millions on food stamps, 26.2 million unemployed or partially employed, and countless additional millions who are underemployed.

People notice food and energy prices because they tend to be somewhat sticky. Everyone has to eat, heat their homes, and take some form of transportation at times, but is that what's important?

No!

In the grand scheme of things, nominal increases in food and energy prices are but a few grains of salt in the world's largest salt-shaker compared to the massive effects of rising or falling credit conditions.

So we see that Mish takes great exception to those Austrians (especially Peter Schiff) who have been warning of inflation. Rather than focusing on statistics such as the monetary base (which has exploded since the crisis in the fall of 2008), Mish defines "inflation as a net expansion of money supply and credit, with credit marked-to-market. Deflation is a net contraction of money supply and credit, with credit marked-to-market." ....

So Robert Murphy who got it right?



Murphy goes on-and-on about some of my short-term predictions that I missed. However, none of his rebuttal dealt with my theories a reader asked him to rebut!



I discussed Murphy's inability to address deflation theory in my response Failure to Consider Constraints



By the way, before anyone tells me ways the Fed can and will cause inflation, my rebuttal in advance is in the above link on constraints.



Also, and for the record, please note Bernanke's Deflation Preventing Scorecard.



Bernanke has failed to prevent deflation twice!



Murphy, Gary North, Peter Schiff and many other Austrian-economists missed constraints on the Fed and the importance of debt-deflation. That is two very bad misses.



Let me ask again, if Bernanke wants 2% inflation, home prices to go up, and asset prices to go up, why aren't they? And why are those excess reserves that North and Murphy said would come surging into the market still sitting there?



There are others who got this right as well, namely Australian economist Steve Keen and a few of my credit-minded long-wave friends.



I have learned a lot from Steve Keen and I thank him greatly. Most Austrians have refused to consider (or simply fail to understand) debt-deflation analysis and how it would impede the Fed's ability to spawn the inflation Bernanke wants, let alone the massive inflation Murphy, Schiff, and North all saw coming.



In his latest article, Murphy attacked the credibility of Krugman on inflation when Krugman got inflation (in relation to prices and treasury yields) more correct than Murphy.



To be fair, I vehemently attack Krugman all the time myself, but I pick my battles carefully. Just because someone is nearly always wrong on solutions, does not make that person wrong on everything.



Krugman made a short post the other day called That Was The Inflation Scare That Was



Point blank, Krugman is correct. Yes, it was an inflation scare. Bear in mind, Krugman has a definition of inflation I do not agree with. By Krugman's PCE measure, we are still in inflation. Regardless, I still laugh at all the inflationists and hyperinflationists who predicted massive inflation starting in 2011.



That said, I disagree with Krugman and side with Murphy on nearly every solution to every problem. Krugman's cures are fiscal madness.



In general Keynesians propose throwing more money at the problem, a setup that will inevitably lead to 200 percent debt-to-GDP problems like Japan, then a spectacular blowup as we saw in Greece.



Who got inflation picture right?



  1. Debt deflationists like Steve Keen
  2. Austrians who incorporated debt-deflation into their theories.
  3. Arguably Paul Krugman, in accordance with his definition



It pains me to defend Krugman, especially at the expense of Murphy, but those are the facts. Since those are the facts, let's not make self-serving claims that no one got the call correct.



Indeed, some select few of us (primarily in group 2 above) got, gold, treasuries, and deflation all correct, and more importantly, for the right reasons: careful analysis of debt-deflation and the impact debt-deflation would have on gold and US treasuries.



Krugman may have failed to include debt-deflation in his analysis but that is better than being wrong after being warned numerous times about the impact of debt-deleveraging and the fallacious idea that excess reserves were going to cause a massive sudden spike in inflation.



The debt-deflationists trounced the Austrians on that point.



Special Mention



I have had many feuds with Eric Janszen at iTulip regarding deflation. He makes a distinction between deflation and debt-deflation. From a practical standpoint, in a fiat credit-based economy, debt-deflation is deflation.



Janszen does not see it that way, preferring to call the effect "disinflation". However, a rose by any other name is still a rose and some of my arguments with Janszen are best described as "violent agreement" about what is happening but disagreement about what to call it.



Moreover, I have nothing but praise for Janszen's call back in 2002 "buy gold and hold on to it". He explicitly said gold, not miners, not CALLs, not other equities. The long-term trendline of gold is intact. The only other intact long-term trendline is US treasuries.



Janszen got the gold portion of his macro-call correct. Janszen also managed to include some "debt-deflation" analysis in his thinking, something most of the Austrians failed to do altogether.



I do not know Janszen's record on treasuries. I do know mine. When the price of crude was $140 I called for record low treasury yields across the entire yield curve and most people thought I was crazy. I certainly missed the strength of the rebound in equities in 2010, but that chapter is still not closed as should now be readily apparent.



Finally, Janszen's definition of inflation pertains to the purchasing power of the dollar and prices of goods and services. By that definition, Janszen has been generally correct. Prices, have generally gone up except for very short periods of time.



However, and as I have pointed out, prices of goods and services is not what has mattered most. Trillions of dollars wiped out in housing and the debt-deleveraging that continues is still is far more important to the economy than prices of food and energy.



Practically Speaking



From a practical standpoint of economic analysis of the economy, debt-deflation (deflation) and consumer deleveraging is of paramount importance and is likely to remain of paramount importance for some time, no matter what definition one assigns to the process.



Austrian economists, as well as hyperinflationists with myopic eyes focused solely on money supply instead of debt, and everyone with ill-conceived notions of the power of the Fed, better figure that out in a hurry or they risk more horribly blown macro calls.



Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

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