"New Orleans milk cart"
Stoneleigh and Ilargi: Dear TAE readers,
The DVD version of Stoneleigh’s acclaimed lecture "A Century of Challenges" is now available by clicking the top button in our right hand side column. Production, handling and shipping is handled by CG Publishing in Burlington, Ontario, Canada. The sales of the DVD will go a long way towards funding The Automatic Earth in 2011.
We have had incredibly generous amounts of donations over the past year, and we truly are deeply and humbly grateful to all of our donors and supporters, but if we are to go where we want to be, we’ll need both more revenue and a more steady and reliable source of it.
Or look at it this way: in 2010 we're not doing a Christmas Fund Drive as such, but we offer you the DVD instead as a bonus for your donations.
So put lots of those DVD's under all of your families’ and friends’ Christmas trees, and give every single one of your dearest not some trinket or gadget, but something of real value!!
Kindly and humbly yours,
Stoneleigh and Ilargi
Ilargi: Thought it might be wise to insert a little warning: if you think it wise to disagree with Stoneleigh on the following essay, and we do encourage discussion, do make sure that you do come prepared. She's an expert on this issue too. It's very close to her heart, and will undoubtedly prove to be highly controversial. But do your homework before chiming in!
Stoneleigh: We often write, at least in the TAE comments section (link at the bottom of the page for those who have yet to find it), about elements of preparedness. One of the topics that has often sparked heated discussion is food. Since people need to be thinking about what they can grow and store, and what nutrients they need, I thought I would address the issue in an intro.
There are very many misconceptions about food, as about many other aspects of life where the received wisdom is fundamentally wrong (including our usual topic, finance). As in other cases, this institutionalized misinformation harms real people every day, yet it is almost impossible to mount a challenge from within the system because the system protects its entrenched doctrines from scrutiny.
Research is funded by vested interests (for whom the status quo is highly profitable), which shapes the questions asked and the answers obtained. Fundamental contradictions and inconvenient data are ignored. We here at TAE are contrarians in the habit of shining light in dark places, so this seems a natural place to challenge received wisdom on a new front.
I was once a biologist, hence reading through the scientific literature on nutrition was not a problem. Also, I have personally lived this particular story. I know first-hand the harm (both physical and psychological) that misinformation in this field has caused to so many people.
For those who would like vastly more detail than I intend to provide, I strongly suggest that they read Good Calories, Bad Calories by Gary Taubes. It is the most exhaustive, and simply the best nutritional review out there. The CBC Radio documentary The Heart of the Matter and the CBC TV documentary My Big Fat Diet are also very much worth your time. As it happens, the latter production highlights the important health research of a TAE reader who I have met on my travels.
In the developed world, we have seen an explosion in the incidence of the 'diseases of civilization' - heart disease, cancer, hypertension, chronic inflammation, diabetes and obesity. The incidence of all of these is vanishingly small in populations eating a traditional diet (or paleo-diet), but once such people arrive here, and begin consuming the same industrial food-like-substances that developed world populations eat, their incidence of morbidity of all kinds increases dramatically.
There are clearly common factors at work, which affect newcomers, and a large percentage of the population born in the developed world, but not the whole population. This is an important point to note, because our metabolisms are not all the same, as the received wisdom would have us believe. Some of us possess tolerances that others do not, and it is all too common for those who possess such tolerances to be highly critical of those who do not, and who therefore suffer the consequences of a modern lifestyle.
We are told that diet-related health problems are the result of eating too much fat and too little fibre, while doing too little exercise. We are told to limit the consumption of fat, especially saturated fat, substitute more carbohydrate and eat more fibre. If we are carrying stored mass that we are not comfortable with, we are told that we should restrict calories, especially fat, and burn off excess through exercise.
If we fail to burn off the excess in this way, we are told that we must be either greedy, or lazy, or both. Moral judgements are very common in the field of nutrition, yet these are uninformed and highly unfair.
The clearest factor showing a huge increase in consumption paralleling the increase in the incidence of the 'diseases of civilization' is not fat, of which paleo-diets contain substantial percentages, but sugar and other refined carbohydrates. In the developed world we commonly pump vast quantities of these cheap substances into everything we eat, especially the prepared foods that we eat so much of. Virtually all prepared foods contain large quantities of high-fructose corn syrup for instance, which is cheap thanks to financial subsidies to corn production.
We need to understand why the consumption of these substances has the dramatic effect that it does in so many people. To start with, sugar is highly addictive. Since sweet foods are so rarely poisonous in the wild, we evolved a taste for them. Since they were rare, we had no need to evolve an off-switch for them either.
Now we are surrounded by sugar in a myriad forms. Adding it to so many foods makes them more palatable, and hence more profitable. Sugar, especially fructose, disables our satiety mechanism, so that if we are eating something sweet, we tend to eat more of it without realizing that we have consumed enough.
The food industry cashes in selling us addictive foods, and then cashes in again by feeding on our insecurities about the resulting health effects, especially weight gain. As over-consumption of carbohydrates promotes a state of chronic inflammation, to which the body responds by producing cholesterol, the pharmaceutical industry can also profit by promoting cholesterol-controlling drugs. These attack the symptom, not the disease, leaving us just as prone to heart disease as before, but poorer. The status quo is highly profitable in all ways. No wonder it has been so difficult to challenge.
Our bodies exist in a life-sustaining state of homeostasis, meaning that they must maintain physical and chemical parameters within certain boundaries. One of these factors is our blood-sugar level. If our diets chronically interfere with this factor, our bodies must constantly act to bring it back under control. This means producing high levels of insulin, especially in response to a rapid spike in blood-sugar. A high level of insulin causes blood-sugar to crash and packs away the excess as fat in adipose tissue.
For many people, chronic consumption of sugar leads to chronic over-production of insulin - hyperinsulinemia, or metabolic syndrome. At this point, a carbohydrate intolerance has been developed. The person will likely gain weight, while being hungry most of the time (specifically craving sugars) and lacking in energy. Essentially, the body cells are being deprived of nutrition as the excess insulin packages away what is consumed before it can be used. The body then lowers its activity level in response to what it perceives as state of starvation.
Continuing to eat carbohydrates will have different effects depending on the person. Either the adipose tissue will develop insulin resistance (cease to be sensitive to insulin), in which case the person will eventually develop type II diabetes, or the adipose tissue remains sensitive to insulin, in which case the person continues to gain weight. Rather than being over-weight because they do little exercise, they do little exercise because the vicious circle of their diet deprives them of the energy to exercise, as well as making movement uncomfortable in extreme cases.
Some populations are much more susceptible to developing metabolic syndrome than others, with First Nations people being among the most sensitive of all. In contrast, many people from northern Europe are much less sensitive than most, and can therefore get away with consuming a modern diet without paying the same price. This is luck, not a justification for moral superiority over those with different metabolisms, but all too often the prevailing approach is unjustifiably judgmental. A modern diet simply poisons a large number of people.
Getting out of the vicious circle necessarily involves no longer eating the substances which cause insulin spikes, in other words eliminating the vast majority of carbohydrates from the diet, especially the simple sugars and refined carbohydrates. It means no bread, pasta, cereals, rice, potatoes, desserts and not too much fruit (especially very sweet fruits like apples and grapes). Since these foods are addictive, the withdrawal process will be uncomfortable, but it does not last forever. Eventually the taste for sugar disappears.
The sweetness receptors are reset, so that many things taste pleasantly sweet which did not before, and truly sweet things taste revoltingly sweet. Taking this step, and sticking to it permanently, breaks the cycle of morbidity. It keeps insulin levels under control, thereby stabilizing appetite at a much lower level. As body cells are now adequately nourished, there is energy available for exercise, and likely to be a desire to exercise as well.
Excess weight falls off in the absence of high insulin levels. In normal people, stored fat typically cycles in and out of adipose tissue. In people with metabolic syndrome, the high insulin levels make that a one-way trip in, but drastically lowering insulin levels makes it a one-way trip out, almost independent of calories consumed.
One can eat bacon and eggs, cheese, cream, vegetables and many other very satisfying foods - losing pounds without being hungry. This is a diet that is much easier to stick to than most because people who eat like this are not hungry. As it is a necessary lifetime lifestyle shift for them, this is just as well.
It is important to note that treating metabolic syndrome cannot be done on a vegan diet, as difficult as that will be for some to hear. A vegan diet is necessarily far too high in carbohydrates for those who cannot tolerate them. Vegetarianism may be possible, but would be more difficult than being an omnivore (see the book The Vegetarian Myth by Lierre Keith).
We will all need to be physically tougher than we are now in order to cope with a future that will entail much more physical activity than we are used to, hence we need to exercise and develop the necessary musculature and fitness. Those with metabolic syndrome, which is a large percentage of the population, cannot do this if they do not address the diet issues that constantly undermine their efforts. Exercise is not a major component of weight loss, but it is nevertheless essential for a healthy life.
We all need to think about what foods we have available near where we live, what we might be able to grow and what we can store. Dried carbohydrates are easy to store, so there is a temptation to concentrate on them for food storage options. Food preservation can also rely very heavily on sugar or vinegar as preserving agents.
For people with metabolic syndrome, these would be a terrible choice to make, as relying on such supplies would leave them chronically hungry and tired. We need to think about storing nutrition in traditional forms, as our ancestors would once have done (pemmican for instance), and about producing or acquiring food with the nutrients we genuinely need.
We do not need carbohydrates, but we do need proteins and fats. Proteins will be an issue for many, specially those who try to live a vegetarian or vegan lifestyle in an area with a short growing season. The further north one lives, the greater the traditional reliance on animal products. Many ecosystems require grazing animals, and these are areas that cannot easily produce food that humans could eat directly. The use of animals does not in these cases increase the human energy footprint.
What does increase the footprint in this way is feeding animals grains, which they did not evolve to eat and which therefore make them ill. We currently cope with this by feeding them large quantities of antibiotics, and destroying the effectiveness of these medicines in the process. If we are going to rely on animals for food, we must do so in a way that works with the animals' own metabolism and with natural ecosystems. If we grass-feed cattle, for instance, we produce animals which are themselves healthier, and which are much healthier for us to consume.
Dietary fats will be a major issue going forward. We require a balance of omega 3 and omega 6 essential fatty acids, but most of us eat a diet far too high in omega 6. Consuming too much omega 6 is an additional risk factor for chronic inflammation and therefore heart disease. Animals fed on an appropriate diet for them will have the right balance of omega 3 and omega 6 fatty acids in their tissues, whereas grain-fed animals (whether beef or chickens or farmed fish) will have far too high a level of omega 6. We should also consider nut crops, although woody agriculture has its own challenges.
Providing for our own nutritional needs is going to be a major undertaking in a period where we are vastly over carrying capacity as a species. As a start, we need to stop thinking of all calories as equal, because a body is not a simple calorimeter. We are creatures with complex metabolisms, and we are not all created equal. Trying to work with own own bodies and with the ecosystems in which we live are incredibly important factors.
Mounting Debts by States Stoke Fears of Crisis
by Michael Cooper and Mary Williams Walsh - New York Times
The State of Illinois is still paying off billions in bills that it got from schools and social service providers last year. Arizona recently stopped paying for certain organ transplants for people in its Medicaid program. States are releasing prisoners early, more to cut expenses than to reward good behavior. And in Newark, the city laid off 13 percent of its police officers last week.
While next year could be even worse, there are bigger, longer-term risks, financial analysts say. Their fear is that even when the economy recovers, the shortfalls will not disappear, because many state and local governments have so much debt — several trillion dollars’ worth, with much of it off the books and largely hidden from view — that it could overwhelm them in the next few years.
"It seems to me that crying wolf is probably a good thing to do at this point," said Felix Rohatyn, the financier who helped save New York City from bankruptcy in the 1970s. Some of the same people who warned of the looming subprime crisis two years ago are ringing alarm bells again. Their message: Not just small towns or dying Rust Belt cities, but also large states like Illinois and California are increasingly at risk.
Municipal bankruptcies or defaults have been extremely rare — no state has defaulted since the Great Depression, and only a handful of cities have declared bankruptcy or are considering doing so. But the finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe.
Analysts fear that at some point — no one knows when — investors could balk at lending to the weakest states, setting off a crisis that could spread to the stronger ones, much as the turmoil in Europe has spread from country to country.
Mr. Rohatyn warned that while municipal bankruptcies were rare, they appeared increasingly possible. And the imbalances are so large in some places that the federal government will probably have to step in at some point, he said, even if that seems unlikely in the current political climate. "I don’t like to play the scared rabbit, but I just don’t see where the end of this is," he added.
Resorting to Fiscal Tricks
As the downturn has ground on, some of the worst-hit cities and states have resorted to fiscal sleight of hand to stay afloat, helping them close yawning budget gaps each year, but often at great future cost. Few workers with neglected 401(k) retirement accounts would risk taking out second mortgages to invest in stocks, gambling that the investment gains would be enough to build bigger nest eggs and repay the loans.
But that is just what Illinois, which has been failing to make the required annual payments to its pension funds for years, is doing. It borrowed $10 billion in 2003 and used the money to invest in its pension funds. The recession sent their investment returns below their target, but the state must repay the bonds, with interest. The solution? Illinois sold an additional $3.5 billion worth of pension bonds this year and is planning to borrow $3.7 billion more for its pension funds.
It is the long-term problems of a handful of states, including California, Illinois, New Jersey and New York, that financial analysts worry about most, fearing that their problems might precipitate a crisis that could hurt other states by driving up their borrowing costs. But it is the short-term budget woes that nearly all states are facing that are preoccupying elected officials.
Illinois is not the only state behind on its bills. Many states, including New York, have delayed payments to vendors and local governments because they had too little cash on hand to make them. California paid vendors with i.o.u.’s last year. A handful of other states, worried about their cash flow, delayed paying tax refunds last spring. Now, just as the downturn has driven up demand for state assistance, many states are cutting back.
The demand for food stamps has been rising significantly in Idaho, but tight budgets led the state to close nearly a third of the field offices of the state’s Department of Health and Welfare, which take applications for them. As states have cut aid to cities, many have resorted to previously unthinkable cuts, laying off police officers and closing firehouses.
Those cuts in aid to cities and counties, which are expected to continue, are one reason some analysts say cities are at greater risk of bankruptcy or are being placed under outside oversight. Next year is unlikely to bring better news. States and cities typically face their biggest deficits after recessions officially end, as rainy-day funds are depleted and easy measures are exhausted.
This time is expected to be no different. The federal stimulus money increased the federal share of state budgets to over a third last year, from just over a quarter in 2008, according to a report issued last week by the National Governors Association and the National Association of State Budget Officers. That money is set to run out next summer. Tax collections, meanwhile, are not expected to return to their pre-recession levels for another year or two, given that the housing market and broader economy remain weak and that unemployment remains high.
Scott D. Pattison, the budget association’s director, said that for states, next year could be "the worst year of this four- or five-year downturn period." And few expect the federal government to offer more direct aid to states, at least in the short term. Many members of the new Republican majority in the House campaigned against the stimulus, and Washington is debating the recommendations of a debt-reduction commission.
So some states are essentially borrowing to pay their operating costs, adding new debts that are not always clearly disclosed. Arizona, hobbled by the bursting housing bubble, turned to a real estate deal for relief, essentially selling off several state buildings — including the tower where the governor has her office — for a $735 million upfront payment. But leasing back the buildings over the next 20 years will ultimately cost taxpayers an extra $400 million in interest.
Many governments are delaying payments to their pension funds, which will eventually need to be made, along with the high interest — usually around 8 percent — that the funds are expected to earn each year. New York balanced its budget this year by shortchanging its pension fund. And in New Jersey, Gov. Chris Christie deferred paying the $3.1 billion that was due to the pension funds this year.
It is these growing hidden debts that make many analysts nervous. States and municipalities currently have around $2.8 trillion worth of outstanding bonds, but that number is dwarfed by the debts that many are carrying off their books. State and local pensions — another form of promised debt, guaranteed in some states by their constitutions — face hidden shortfalls of as much as $3.5 trillion by some calculations. And the health benefits that state and large local governments have promised their retirees going forward could cost more than $530 billion, according to the Government Accountability Office.
"Most financial crises happen in unpredictable ways, and they hit you when you’re not looking," said Jerome H. Powell, a visiting scholar at the Bipartisan Policy Center who was an under secretary of the Treasury for finance during the bailout of the savings and loan industry in the early 1990s. "This one isn’t like that. You can see it coming. It would be sinful not to do something about this while there’s a chance."
So far, investors have bought states’ bonds eagerly, on the widespread understanding that states and cities almost never default. But in recent weeks the demand has diminished sharply. Last month, mutual funds that invest in municipal bonds reported a big sell-off — a bigger one-week sell-off, in fact, than they had when the financial markets melted down in 2008. And hedge funds are already seeking out ways to place bets against the debts of some states, with the help of their investment banks.
Of course, not all states are in as dire straits as Illinois or California. And the credit-rating agencies say that the risk of default is small. States and cities typically make a priority of repaying their bond holders, even before paying for essential services. Standard & Poor’s issued a report this month saying that the crises that states and municipalities were facing were "more about tough decisions than potential defaults."
Change in Ratings
The credit ratings of a number of local governments have improved this year, not because their finances have strengthened somewhat, but because the ratings agencies have changed the way they analyze governments. The new higher ratings, which lower the cost of borrowing, emphasize the fact that municipal defaults have been much rarer than corporate defaults.
This October, Moody’s issued a report explaining why it now rates all 50 states, even Illinois, as better credit risks than a vast majority of American non-financial companies.
One reason: the belief that the federal government is more likely to bail out a teetering state than a bankrupt company. "The federal government has broadly channeled cash to all state governments during recent recessions and provided support to individual states following natural disasters," Moody’s explained, adding that there was no way of being sure how Washington would respond to a bond default by a state, since it had not happened since the 1930s.
But some analysts fear the ratings are too sanguine, recalling that the ratings agencies also dismissed the possibility that a subprime crisis was brewing. While most agree that defaults are unlikely, they fear that as states struggle with their growing debts, investors could decide not to buy the debt of the weakest state or local governments. That would force a crisis, since states cannot operate if they cannot borrow. Such a crisis could then spread to healthier states, making it more expensive for them to borrow, if Europe is an example.
Meredith Whitney, a bank analyst who was among the first to warn of the impact the subprime mortgage meltdown would have on banks, is warning that she sees similar problems with state and local government finances. "The state situation reminded me so much of the banks, pre-crisis," she said this fall on CNBC.
There are eerie similarities between the subprime debt crisis and the looming municipal debt woes. Among them:
- Just as housing was once considered a sure bet — prices would never fall all across the country at the same time, conventional wisdom suggested — municipal bonds have long been considered an investment safe enough for grandmothers, because states could always raise taxes to pay their bondholders. Now that proposition is being tested. Harrisburg, the capital of Pennsylvania, considered bankruptcy this year because it faced $68 million in debt payments related to a failed incinerator, which is more than the city’s entire annual budget. But officials there have resisted raising taxes.
- Much of the debt of states and cities is hidden, since it is off the books, just as the amount of mortgage-related debt turned out to be underestimated. States and municipalities often understate their pension liabilities, in part by using accounting methods that would not be allowed in the private sector. Joshua D. Rauh, an associate professor of finance at Northwestern University, and Robert Novy-Marx, an assistant professor of finance at the University of Rochester, calculated that the true unfunded liability for state and local pension plans is roughly $3.5 trillion.
- The states and many cities still carry good ratings, and those issuing warnings are dismissed as alarmists, reminding some analysts of the lead up to the subprime crisis. Now states are bracing for more painful cuts, more layoffs, more tax increases, more battles with public employee unions, more requests to bail out cities. And in the long term, as cities and states try to keep up on their debts, the very nature of government could change as they have less money left over to pay for the services they have long provided.
Richard Ravitch, the lieutenant governor of New York, is among those warning that states are on an unsustainable path, and that their disclosures of pension and health care obligations are often misleading. And he worries how long it can last. "They didn’t do it with bad motives," he said. "Ninety-five percent of them didn’t understand what they were doing. They did it because it was easier than taxing people or cutting benefits. We’re getting closer and closer to the point where we can’t do that anymore. I don’t know where that is, but I know we’re close."
U.S. Investment Fraud Crackdown Nets 343 Criminal Defendants
by Justin Blum - Bloomberg
A crackdown on financial frauds including Ponzi schemes and stock market manipulation has resulted in U.S. enforcement actions against 343 criminal defendants and 189 civil defendants since August, the Justice Department said. The cases involved more than $8.3 billion in estimated losses in the criminal cases and $2.1 billion in the civil cases, Attorney General Eric Holder said at a news conference in Washington today.
Default, delusion and deceit (and other ways to spring the debt trap)
by Roger Bootle - Telegraph
Another month, another crisis. A cottage industry has sprung up in the City comparing the financing needs of the most vulnerable eurozone members with the bail-out funds already, or potentially, available. This is a delusionary diversion.
The finances of the state can no longer be divorced from the finances of the banking system. The cost of supporting its banks has been a major factor behind Ireland's government debt surging from 25pc of GDP in 2007 to around 100pc of GDP this year. And in Greece, Portugal, Spain and Italy, bank liabilities amount to between 260pc and 350pc of GDP.
Moreover, there is the little matter of how lenders are to get their money back. As most of us recognise only too well, there are two kinds of financial problem.
The first is when you face a temporary shortage of the readies, even though your financial position is fundamentally sound. If you cannot access your assets in an effective way to bridge the gap, there is a short-term financing need. This is a problem of liquidity.
The second is when your expenditure exceeds your income for a sustained period. If this persists, then eventually your liabilities will exceed your assets. This is a solvency problem. The two can sometimes be difficult to distinguish. Liquidity problems can readily morph into solvency problems, and solvency problems usually manifest themselves as liquidity problems also. But you cannot deal with a solvency problem by dealing with liquidity alone.
The difficulties faced by Mr Micawber were decidedly of the solvency type. So also are the problems of the European governments that have found themselves in trouble. Lenders to them may pretend that their money is safe but in practice it is not. To get it back the borrowers will have to so improve their fiscal position that by the time the loans are due, the money is available as a surplus over ordinary requirements, or other lenders will have to be prepared to step into the breach. But that will require that fiscal prospects will by that stage seem reasonable.
Many eurozone governments have spent and borrowed freely for years to finance current expenditure. They have few, if any, productive assets to show for it. Their debts are now so large that lenders require higher interest rates to lend to them. But these higher rates make the financial position worse – which causes lenders to be still more reluctant, and so on. This situation is known as the debt trap. In this regard the near 6pc interest rate required by the participants in Ireland's bail-out package imposes a very heavy burden.
There are five ways of escape.
First, try to muddle through and hope that years of sustained economic growth will cause the weight of these debts to fall and for the burden to go unnoticed amidst increasing prosperity, so that it is unclear who has picked up the tab. This is far and away the best solution – if you can manage it. But in the vulnerable countries GDP is struggling – or even contracting.
Second, engineer a bout of inflation to reduce the real value of the liabilities. In this way just about everyone in society will pay – but hopefully no one will notice. (Being able to devalue your currency potentially helps you achieve both the first and the second routes.) The trouble is that even if this solution were available for the eurozone as a whole, for each embattled member country it is not, as they do not have their own money.
Third, force those who caused the problems and gained from the years of extravagance to cough up. That would mean the bankers, property developers and politicians. This seems the fairest solution, but it is also the least likely. And, believe it or not, even they do not have enough dosh.
Fourth, slash government spending and make current and future taxpayers pick up the tab. This is the way that Ireland and Greece are trying to go. The trouble is that the situation may be so far gone that attempting a solution this way is impossible. It may even be so deflationary that it proves to be counter-productive.
The fifth way is to default. Perhaps you can make someone not involved in the process by which the government gets elected take a good part of the hit. This is where Johnny Foreigner comes in. You say: "Sorry old chaps, but that money that you thought we owed you is now 'restructured'. In the words of Monty Python, it is an ex-loan."
This is what is going to happen. Huge amounts of money are going to be lost. At the moment, the prospective losers can afford it. But coming up in the lift are Portugal, Belgium and Spain. And then Italy. This looks eerily like the build-up to the financial crisis of two years ago. Perhaps the bail-out of Ireland is the Bear Stearns moment. Spain, or Italy, could be the Lehman moment.
Ilargi: Even though we could see this coming from miles away, it is still sickening: people on the verge of utter despair are being used as bait to get the richest 1% of Americans their tax cuts.
Obama Confident Of Landing Tax, Jobless Benefits Deal In Coming Days
by Jared A. Favole - Dow Jones Newswires
President Barack Obama is confident that he can settle an ongoing scuffle with Republican leaders in the coming days over taxes that were enacted under former President George W. Bush, Deputy White House Press Secretary Bill Burton said Monday. Burton, speaking aboard Air Force One while Obama was en route to North Carolina, wouldn't provide details about what shape the deal would take but said it would include other proposals to lift the shaky economy.
Though details remain unknown, reports suggest a final package would likely include temporarily extending tax cuts across the board, including for top earners, and jobless benefits for the unemployed. A deal could also include an array of Obama's proposals to lift the economy, including tax breaks for businesses that hire unemployed workers and a refundable credit for low-income Americans. The stakes are high for the negotiations, as the tax cuts enacted under Bush are set to expire at year's end. Not having a deal in hand by then would result in an increase in taxes for the country and could threaten the nation's recovery.
Obama will renew his pitch to extend tax cuts for the middle class in a speech at a community college in North Carolina. He is expected to stress that tax breaks for top earners must be coupled with an extension of jobless benefits, which expired last week, for the unemployed.
Republican leaders have long said they want any extension of the tax cuts to include top earners amid concerns raising taxes on anyone would imperil the U.S. economic recovery. In addition to talking about taxes, Obama will press Congress and the private sector to help the U.S. achieve a "Sputnik" moment that would unleash investments in research, education and infrastructure. Burton said Obama won't lay out any new proposals in the speech, but will in the coming weeks and months. Burton declined to detail any of the potential new proposals.
Obama to Push Unemployment Benefits as Condition of Extending Tax Rates
by FOX News
Visiting a technical college in North Carolina, President Obama is set to speak Monday on the need for private-public cooperation to make the U.S. more competitive while also laying down conditions on expiring tax rates, even as a deal between the White House and Congress is said to be in the works. Tax rates approved 10 years ago are set to expire on Jan. 1 unless Congress takes action during the lame-duck session.
While the president is expected to emphasize the need for more unemployment benefits as a condition of any deal to extend current rates, a White House official said Obama will also demand a renewal in other tax breaks included in the 2009 stimulus bill. "Without them, taxes would still rise for 95 percent of Americans. He will discuss the need to accelerate our recovery and make the tough choices necessary to reduce our deficit in the long run. Over the coming weeks and months, the President will continue to visit companies," the official said.
The president is also expected to emphasize the need to make workers more competitive in a global economy. He will call for a "Sputnik" moment that demonstrates -- the way the Soviet Union did with its 1957 earth-orbiting satellite -- a major advancement in innovation and technology that led to the space race "The most important contest we face as a nation is not between Democrats and Republicans but between America and our economic competitors around the world," the official said.
The other expiring provisions include a tax credit for lower- and middle-class wage earners, even if they don't make enough to pay federal income taxes, breaks to offset college tuition and breaks for companies that hire the unemployed.
On Sunday, lawmakers across the morning news shows emphasized compromise. Senate Republican leader Mitch McConnell said it's clear to him taxes will not be raised for anyone next year -- and that unemployment compensation for those jobless beyond 99 weeks could be extended. McConnell did not say how long tax rates would be extended though unemployment compensation could last another year.
Sen. Jon Kyl, R-Ariz., speaking on CBS' "Face the Nation," suggested a deal would be for tax rates to last considerably longer than one year. "I think that most folks believe that the recipe would include at least an extension of unemployment benefits for those who are unemployed, and an extension of all of the tax rates for all Americans for some period of time," Kyl said. "It could happen. I'm not going to rule it out," added Sen. Dick Durbin, D-Ill., who appeared with Kyl.
But some liberal lawmakers, like Sen. John Kerry, D-Mass., said the GOP is "absolutely prepared to deny unemployment insurance" to people." "They've said no, we're willing to hold that hostage so that we can give the wealthiest people in the country a bonus tax cut," Kerry said on NBC's "Meet the Press."
Sources told Fox News on Sunday that Obama is trying to "sell" liberals in the House on his potential acceptance of tax rates across the board and for the wealthy, potentially marrying the cuts to jobless benefits, and he wants a deal done this week. A senior House aide told Fox News to expect things "to accelerate quickly on Monday."
The news of a potential breakthrough came after the Senate on Saturday voted down efforts to limit any extension of the Bush-era tax cuts for the top-earning Americans. But as lawmakers fret over a growing deficit, even the purported tight-fisted among them acknowledge they need to come up with $265 billion next year to pay for the jobless aid as well as the gap in budget estimates based on current rates and a hike in taxes next year.
Extending all the current rates would add $115 billion to deficit spending next year while extending jobless benefits for another year would cost $150 billion in unbudgeted spending. That number could grow to $800 billion over two years. Sen. Kent Conrad, D-N.D., a member of Obama's deficit commission, told "Fox News Sunday" that short- and long-term priorities are different.
"In the short term, I think it's imperative that we extend the tax cuts, at least for the middle class, because the economic consequences of a failure to extend the tax cuts are severe," he said. "But that doesn't take away from the fact we then have to pivot and have a longer term plan to control the debt and bring it down. Rep. Jeb Hensarling, R-Texas, who is also a member of the commission said he doesn't want rates to increase for anybody, but spending must come down
"We don't want no tax increases on nobody. Now, that may be poor grammar, but it's great economics," he said. "The cost of government has averaged 20 percent of the economy in the post-war era, and over the course of the next generation it's due to double." Durbin added that any talk about extending tax rates should be coupled with discussions on raising the debt ceiling.
"I'm troubled. I know that in a few months we're going to have a debt ceiling vote ... and many of the people who are going to vote for this tax cut for the wealthiest people in America, adding to our deficit, lamenting that deficit, will refuse to vote on the debt ceiling out of principle," he said.
Let’s Not Make a Deal
by Paul Krugman - New York Times
Back in 2001, former President George W. Bush pulled a fast one. He wanted to enact an irresponsible tax cut, largely for the benefit of the wealthiest Americans. But there were Senate rules in place designed to prevent that kind of irresponsibility. So Mr. Bush evaded the rules by making the tax cut temporary, with the whole thing scheduled to expire on the last day of 2010.
The plan, of course, was to come back later and make the thing permanent, never mind the impact on the deficit. But that never happened. And so here we are, with 2010 almost over and nothing resolved.
Democrats have tried to push a compromise: let tax cuts for the wealthy expire, but extend tax cuts for the middle class. Republicans, however, are having none of it. They have been filibustering Democratic attempts to separate tax cuts that mainly benefit a tiny group of wealthy Americans from those that mainly help the middle class. It’s all or nothing, they say: all the Bush tax cuts must be extended. What should Democrats do?
The answer is that they should just say no. If G.O.P. intransigence means that taxes rise at the end of this month, so be it. Think about the logic of the situation. Right now, the Republicans see themselves as successful blackmailers, holding a clear upper hand. President Obama, they believe, wouldn’t dare preside over a broad tax increase while the economy is depressed. And they therefore believe that he will give in to their demands.
But while raising taxes when unemployment is high is a bad thing, there are worse things. And a cold, hard look at the consequences of giving in to the G.O.P. now suggests that saying no, and letting the Bush tax cuts expire on schedule, is the lesser of two evils.
Bear in mind that Republicans want to make those tax cuts permanent. They might agree to a two- or three-year extension — but only because they believe that this would set up the conditions for a permanent extension later. And they may well be right: if tax-cut blackmail works now, why shouldn’t it work again later?
America, however, cannot afford to make those cuts permanent. We’re talking about almost $4 trillion in lost revenue just over the next decade; over the next 75 years, the revenue loss would be more than three times the entire projected Social Security shortfall. So giving in to Republican demands would mean risking a major fiscal crisis — a crisis that could be resolved only by making savage cuts in federal spending.
And we’re not talking about government programs nobody cares about: the only way to cut spending enough to pay for the Bush tax cuts in the long run would be to dismantle large parts of Social Security and Medicare. So the potential cost of giving in to Republican demands is high. What about the costs of letting the tax cuts expire? To be sure, letting taxes rise in a depressed economy would do damage — but not as much as many people seem to think.
A few months ago, the Congressional Budget Office released a report on the impact of various tax options. A two-year extension of the Bush tax cuts, it estimated, would lower the unemployment rate next year by between 0.1 and 0.3 percentage points compared with what it would be if the tax cuts were allowed to expire; the effect would be about twice as large in 2012. Those are significant numbers, but not huge — certainly not enough to justify the apocalyptic rhetoric one often hears about what will happen if the tax cuts are allowed to end on schedule.
Oh, and what about confidence? I’ve been skeptical about claims that budget deficits hurt the economy even in the short run, because they undermine confidence in the government’s long-run solvency. Advanced countries, I’ve argued, have a lot of fiscal leeway. But anything that makes permanent extension of obviously irresponsible tax cuts more likely also sends a strong signal to investors: it says, “Hey, we aren’t really an advanced country; we’re a banana republic!” And that can’t be good for the economy.
Last but not least: if Democrats give in to the blackmailers now, they’ll just face more demands in the future. As long as Republicans believe that Mr. Obama will do anything to avoid short-term pain, they’ll have every incentive to keep taking hostages. If the president will endanger America’s fiscal future to avoid a tax increase, what will he give to avoid a government shutdown?
So Mr. Obama should draw a line in the sand, right here, right now. If Republicans hold out, and taxes go up, he should tell the nation the truth, and denounce the blackmail attempt for what it is. Yes, letting taxes go up would be politically risky. But giving in would be risky, too — especially for a president whom voters are starting to write off as a man too timid to take a stand. Now is the time for him to prove them wrong.
Tax Fear May Move Bonuses Earlier
by Louise Story and Gretchen Morgenson - New York Times
Congress is debating tax rates, and that has Wall Street nervously eyeing the calendar.
Worried that lawmakers will allow taxes to rise for the wealthiest Americans beginning next year, financial firms are discussing whether to move up their bonus payouts from next year to this month.
At stake is a portion of the hefty annual payouts that are a familiar part of the compensation culture on Wall Street, as well as a juicy target of popular anger. If Congress does not extend the Bush-era tax cuts for the highest income levels, a typical worker who earns a $1 million bonus would pay $40,000 to $50,000 more in taxes next year than this year, depending on base salary.
Goldman Sachs is one of the companies discussing how to time bonus season, according to three people who have been briefed on the discussions. Pay consultants who work with major Wall Street companies say that just about every other large bank has also considered such a move in recent weeks.
With tax politics in Washington unpredictable, bank executives have spent months sketching out several options for their bonus plans, including the possibility of an earlier payout. Lawmakers have been trading accusations across a partisan divide, but after this weekend, it appears likely that a compromise will extend the tax cuts for all income levels.
Even so, the banks’ discussions about bonus timing underscore how focused the industry is on protecting every dollar of pay. A spokesman for Goldman declined to comment. Bonus payouts are traditionally shrouded in secrecy; companies are required to disclose their top executives’ pay, but they do not disclose the size of their total bonus pools in their public filings or internally.
Goldman, not surprisingly, is the canary in the coal mine. It often announces its top executives’ bonuses before other firms, and the richness of its payouts sets the tone across the industry. This year the tax debate has imposed a new wrinkle, and executives at two large banks said their companies tentatively decided not to speed payouts, unless Goldman did. Then, these two executives said, they would consider paying early as a competitive measure, so that their workers were not upset.
These executives and the people briefed on the Goldman discussions spoke only on the condition of anonymity. Bonus timing is also being discussed at scores of public companies, beyond banks, for top executives who receive multimillion-dollar payouts around the turn of the year. At most companies outside the financial sector, an early bonus would help only a handful of executives, while on Wall Street, the benefit would apply to many more workers.
"This has been a topic of conversation among those of us who are involved in designing and administrating compensation plans," said Brian Foley, a pay consultant in White Plains, N.Y. "But I really would be surprised if anyone went down this path. This is a bounce-back year in terms of bonuses going up and probably not the time to draw attention to yourself."
Wall Street firms pay out billions of dollars in bonuses each year. In good years top executives can receive bonuses worth tens of millions of dollars. Even midlevel financial workers often earn above $250,000 a year, and they receive most of their compensation as bonuses paid early in the new year. Extending the tax cuts for all Americans with taxable income over $250,000 for joint filers ($200,000 for single filers) would cost the country about $40 billion next year, according to the Joint Committee on Taxation, and it would cost $700 billion over the next decade.
Currently the highest rate for taxable income is 35 percent; that would increase to 39.6 percent if the Bush tax cuts expire this year. The top five Wall Street firms have put aside nearly $90 billion for total pay this year, and they are expected to raise that amount using their end of year earnings. That would make this year one of the best ever for bank pay.
As Mr. Foley said, much of the focus within banks is on the appearance of the payouts. Several senior banking executives received either no bonuses or modest ones in recent years, and with the taxpayer-financed bailouts receding, top executives are pushing to be paid well again. Some compensation consultants have been helping their clients devise new labels for the pay that are less likely to inflame the public. For instance, some banks are considering reducing the amount of their payouts that are labeled as bonuses, and instead shifting some to other categories like "long-term incentives."
Depending on how banks structure this part of the payout package, it might not represent much of a change for bankers, since it has long been standard practice to tie up some pay for a few years for retention purposes. But, some bankers said, the goal was to make the dollar amounts appear less offensive. Bankers are also discussing speeding up the way they award company stock. Many banks pay a substantial portion of bonuses in stock, rather than cash, and companies often have a multiyear delay between when those shares are awarded and when the employees can sell them. The tax bill does not come due until employees sell the shares, or own them outright.
Robert J. Jackson Jr., a professor at Columbia Law School who helped oversee the Treasury Department’s rules on compensation at bailed-out companies, said he would look carefully at footnotes in company filings to see if they accelerated executives’ stock awards. "Even companies who pay in stock instead of cash can structure it to be taxed at this year’s rates," Mr. Jackson said. "If it does happen, it may be a little tricky to see."
It is not uncommon for Wall Street to consider the tax consequences of its pay practices. Private firms like hedge funds often let workers choose when they’re paid. And until about a decade ago, Goldman allowed its partners to decide whether they received their bonuses in December or January. Back then, Goldman was an investment bank, and like other former investment banks, it closed its books at the end of November, making it easier to pay earlier.
One of the challenges for the banks in paying bonuses early would be coming out with exact amounts before the year is over and before they determine their final earnings — a lengthy process. Banks have in the past found ways to get around rules, or make their workers’ pay look lower than it actually was.
For instance, a year ago Goldman capped the pay of all of its London workers at £1 million each. But last summer, Goldman made it up to its partners in Britain, albeit quietly. The bank made dozens of multimillion-dollar stock grants to its partners there, according to a person briefed on their pay. Credit Suisse, in similar form, paid its British bankers summer cash bonuses to make up for their lower pay last year.
Jobless Recovery?: 25 Unemployment Statistics That Are Almost Too Depressing To Read
by MIchael Snyder - Economic Collapse
uess what? Unemployment is up again! That's right - even though Wall Street is swimming in cash and the Obama administration is declaring that "the recession is over", the U.S. unemployment rate has gone even higher. So are you enjoying the jobless recovery? The truth is that there should not be any talk of a "recovery" as long as the "official" unemployment rate remains at around 10 percent and the "real" unemployment continues to hover around 17 percent.
There are millions and millions of American families that are living every day in deep pain because of the lack of jobs. Meanwhile, there are all of these economic pundits that are declaring that we are just going to have to realize that chronic unemployment is the "new normal" and that if other nations can handle high rates of unemployment then so can we. The most optimistic economists are projecting that we can perhaps get the unemployment rate down to around 8 percent by 2012. On the other hand, there are many economists that are convinced that things are going to get even worse.
If you have never been unemployed, it can be hard to describe how soul-crushing it can be. As the bills pile up and the financial obligations mount, the pressure can be debilitating. Being unemployed for an extended period of time can easily plunge you into depression and grind your self-worth away to almost nothing.
After getting rejected dozens of times (or even hundreds of times), many Americans simply give up. There are countless marriages and countless families that are being ripped to shreds by financial pressure even as you read this. When the money is gone and there is no job in sight it can be a really, really empty feeling.
Of course there is a whole lot more to life than money, but it can be difficult to tell that to someone who can barely sleep at night because of the intense pressure to find a job.
The vast majority of Americans have at least one family member or close friend that is looking for work right now. Times are really, really tough and unfortunately the long-term outlook is very bleak. We should have compassion on those who are out of work right now, because soon many of us may join them.
The following are 25 unemployment statistics that are almost too depressing to read....
#1 According to the Bureau of Labor Statistics, the U.S. unemployment rate for November was 9.8 percent. This was up from 9.6 percent in October, and it continues a trend of depressingly high unemployment rates. The official unemployment number has been at 9.5 percent or higher for well over a year at this point.
#2 In November 2006, the "official" U.S. unemployment rate was just 4.5 percent.
#3 Most economists had been expecting the U.S. economy to add about 150,000 jobs in November. Instead, it only added 39,000.
#4 In the United States today, there are over 15 million people who are "officially" considered to be unemployed for statistical purposes. But everyone knows that the "real" number is even much larger than that.
#5 As 2007 began, there were just over 1 million Americans that had been unemployed for half a year or longer. Today, there are over 6 million Americans that have been unemployed for half a year or longer.
#6 The number of "persons not in the labor force" in the United States recently set another new all-time record.
#7 It now takes the average unemployed American over 33 weeks to find a job.
#8 When you throw in "discouraged workers" and "underemployed workers", the "real" unemployment rate in the state of California is actually about 22 percent.
#9 In America today there are not nearly enough jobs for everyone. In fact, there are now approximately 5 unemployed Americans for every single job opening.
#10 According to The New York Times, Americans that have been unemployed for five weeks or less are three times more likely to find a new job in the coming month than Americans that have been unemployed for over a year.
#11 The U.S. economy would need to create 235,120 new jobs a month to get the unemployment rate down to pre-recession levels by 2016. Does anyone think that there is even a prayer that is going to happen?
#12 There are 9 million Americans that are working part-time for "economic reasons". In other words, those Americans would gladly take full-time jobs if they could get them, but all they have been able to find is part-time work.
#13 In 2009, total wages, median wages, and average wages all declined in the United States.
#14 As of the end of 2009, less than 12 million Americans worked in manufacturing. The last time that less than 12 million Americans were employed in manufacturing was in 1941.
#15 The United States has lost at least 7.5 million jobs since the recession began.
#16 Today, only about 40 percent of Ford Motor Company's 178,000 workers are employed in North America, and a big percentage of those jobs are in Canada and Mexico.
#17 In 1959, manufacturing represented 28 percent of U.S. economic output. In 2008, it represented 11.5 percent.
#18 Earlier this year, one poll found that 28% of all American households had at least one member that was looking for a full-time job.
#19 In the United States today, over 18,000 parking lot attendants have college degrees.
#20 The United States has lost a staggering 32 percent of its manufacturing jobs since the year 2000.
#21 As the employment situation continues to stagnate, millions of American families have decided to cut back on things such as insurance coverage. For example, the percentage of American households that have life insurance coverage is at its lowest level in 50 years.
#22 Unless Congress acts, and there is no indication that is going to happen, approximately 2 million Americans will stop receiving unemployment checks over the next couple of months.
#23 A poll that was released by the Pew Research Center back in June discovered that an astounding 55 percent of the U.S. labor force has experienced either unemployment, a pay decrease, a reduction in hours or an involuntary move to part-time work since the economic downturn began.
#24 According to Richard McCormack, the United States has lost over 42,000 factories (and counting) since 2001.
#25 In the United States today, 317,000 waiters and waitresses have college degrees.
But this is what we get for creating the biggest debt bubble in the history of the world. For decades we have been digging a deeper hole for ourselves by going into increasingly larger amounts of debt. In America today, our entire economy is based on debt. Even our money is debt. We were fools if we ever thought this could go on forever.
Just think about it. Have you ever gone out and run up a bunch of debt? It can be a lot of fun sitting behind the wheel of a new car, running your credit cards up to the limit and buying a beautiful big house that you cannot afford.
But in the end what happens?
It always catches up with you.
Well, our collective debt is starting to catch up with us. There is a sea of red ink on every level of American society. It is only a matter of time before it destroys our economy.
If you think that things are bad now, just wait. Things are going to get a whole lot worse. A horrific economic collapse is coming, and it is going to be very, very painful.
China's credit bubble on borrowed time as inflation bites
by Ambrose Evans-Pritchard - Telegraph
The Royal Bank of Scotland has advised clients to take out protection against the risk of a sovereign default by China as one of its top trade trades for 2011. This is a new twist. It warns that the Communist Party will have to puncture the credit bubble before inflation reaches levels that threaten social stability. This in turn may open a can of worms.
"Many see China’s monetary tightening as a pre-emptive tap on the brakes, a warning shot across the proverbial economic bows. We see it as a potentially more malevolent reactive day of reckoning," said Tim Ash, the bank’s emerging markets chief. Officially, inflation was 4.4pc in October, and may reach 5pc in November, but it is to hard find anybody in China who believes it is that low. Vegetables have risen 20pc in a month.
The Communist Party learned from Tiananmen in 1989 how surging prices can seed dissent. "Inflation is a redistributive mechanism in favour of the few that can protect living standards, against the large majority who cannot. The political leadership cannot, will not, take risks in that regard," said Mr Ash. RBS recommends credit default swaps on China’s five-year debt. This is not a forecast that China will default. It is insurance against the "fat tail risk" of a hard landing, with ramifications across Asia.
The Politburo said on Friday that China would move from "relatively loose" money to a "prudent" policy next year, a recognition that credit rationing, price controls, and other forms of Medieval restraint are not enough. The question is whether Beijing has already left it too late. Diana Choyleva from Lombard Street Research said the money supply rose at a 40pc rate in 2009 and the first half of 2010 as Beijing stoked an epic credit boom to keep uber-growth alive, but the costs of this policy now outweigh the benefits.
The economy is entering the ugly quadrant of cycle – stagflation – where credit-pumping leaks into speculation and price spirals, even as growth slows. Citigroup’s Minggao Shen said it now takes a rise of ¥1.84 in the M2 money supply to generate just one yuan of GDP growth, up from ¥1.30 earlier this decade.
The froth is going into property. Experts argue heatedly over whether or not China has managed to outdo America’s subprime bubble, or even match the Tokyo frenzy of late 1980s. The IMF straddles the two. It concluded in a report last week that there was no nationwide bubble but that home prices in Shenzen, Shanghai, Beijing, and Nanjing seem "increasingly disconnected from fundamentals".
Prices are 22 times disposable income in Beijing, and 18 times in Shenzen, compared to eight in Tokyo. The US bubble peaked at 6.4 and has since dropped 4.7. The price-to-rent ratio in China’s eastern cities has risen by over 200pc since 2004.
The IMF said land sales make up 30pc of local government revenue in Beijing. This has echoes of Ireland where "fair weather" property taxes disguised the erosion of state finances. Ms Choyleva said China drew a false conclusion from the global credit crisis that their top-down economy trumps the free market, failing to see that the events of 2008-2009 did equally great damage to them – though of a different kind. It closed the door on mercantilist export strategies that depend on cheap loans, a cheap currency, and the willingness of the West to tolerate predatory trade.
China is trying to keep the game going as if nothing has changed, but cannot do so. It dares not raise rates fast enough to let air out of the bubble because this would expose the bad debts of the banking system. The regime is stymied. "The Chinese growth machine is likely to continue to function in the minds of people long after it has no visible means of support. China’s potential growth rate could well halve to 5pc in this decade," she said.
As it happens, Fitch Ratings has just done a study with Oxford Economics on what would happen if China does indeed slow to under 5pc next year, tantamount to a recession for China. The risk is clearly there. Fitch said private credit has grown to 148pc of GDP, compared to a median of 41pc for emerging markets. It said the true scale of loans to local governments and state entities has been disguised.
The result of such a hard landing would be a 20pc fall in global commodity prices, a 100 basis point widening of spreads on emerging market debt, a 25pc fall in Asian bourses, a fall in the growth in emerging Asia by 2.6 percentage points, with a risk that toxic politics could make matters much worse. It is sobering that even a slight cooling of China’s credit growth led to economic contraction in Malaysia and Thailand in the third quarter, and sharp slowdowns across Asia. Japan’s economy will almost certainly contract this quarter.
Albert Edwards from Societe General said the OECD’s leading indicators are signalling a "downturn" for Asia’s big five (Japan, Korea, China, India, and Indonesia). The China indicator composed by Beijing’s National Bureau of Statistics has fallen almost as far as it did at the onset of the 2008 crash. "I remain convinced we are witnessing a bubble of epic proportions which will burst – catching investors as unawares as the bursting of the Asian bubbles of the mid-1990s. Ignore these indicators at your peril," he said.
In a sense, inflation is a crude way of curbing China’s export surpluses and therefore of resolving a key trade imbalance that lay behind the global credit crisis. If China continues to stoke inflation – and blaming the US Federal Reserve for its own errors help – there will no longer be any need for a yuan revaluation against the dollar, and the US Congress can shelve its sanctions law.
On a recent visit to a chemical plant in Suzhou, I was told by the English manager that wage bonuses for staff will average nine months pay this year. This is what it costs to keep skilled workers. His own contract is fixed in sterling, which has crashed against the yuan over the last two years. "It is a sobering experience," he said.
China may have hit the "Lewis turning point", named after the Nobel economist Arthur Lewis from St Lucia. It is the moment for each catch-up economy when the supply of cheap labour from the countryside dries up, leading to a surge in industrial wages. That reserve army of 120m Chinese migrants everybody was so worried about four years ago has already dwindled to 25m.
China’s problem is that this is happening just as the aging crisis starts to bite. The number of workers will decline in absolute terms within four years. The society will then tip into precipitous demographic decline. Unlike Japan, it will become old before it is has built a cushion of wealth. If there is a hard-landing in 2011, China’s reserves of $2.6 trillion – or over $3 trillion if counted fully – will not help much. Professor Michael Pettis from Beijing University says the money cannot be used internally in the economy.
While this fund does offer China external protection, Mr Pettis notes wryly that the only other times in the last century when one country accumulated reserves equal to 5pc to 6pc of global GDP was US in the 1920s, and Japan in the 1980s. We know how both episodes ended. The sons of Mao insist that they have studied the Japanese debacle closely and will not repeat the error. And I can sell you an ocean-front property in Chengdu.
Top Chinese official doesn't believe country's own GDP figures
by Malcolm Moore - Telegraph
China's economic figures are unreliable and not to be trusted, according to Li Keqiang, one of the country's most senior officials. The 55-year-old is widely tipped to become China's next prime minister and is currently the country's executive vice premier, with responsibility for macro-economic management.
However, in private talks with the US ambassador in 2007, when he was still just the head of the Chinese province of Liaoning, Mr Li cast doubt on China's much-vaunted economic statistics. A diplomatic cable leaked by Wikileaks, the whistle-blowing website, reveals that Mr Li described China's gross domestic product figure as "man-made" and "therefore unreliable".
Chinese officials have repeatedly been found to have artificially inflated their local GDP figures in order to win face and hit their targets. On several occasions, the sum of all of China's local GDP tallies added up to more than the national statistic. In 2009, for example, the National Bureau of Statistics said first half GDP had grown by 7.1pc to 13.99 trillion yuan (£1.37 trillion), only to find that the sum of local GDP readouts was 10pc higher.
Mr Li said he used three ways of evaluating Liaoning's economic activity, focusing on electricity consumption, the volume of rail cargo and the amount of bank loans disbursed. "By looking at these three figures, Li said he can measure with relative accuracy the speed of economic growth," the cable said. "All other figures, especially GDP statistics, are 'for reference only,' he said smiling," it added.
Former OMB Director Debunks The Economic Recovery Myth
by Tyler Durden - Zero Hedge
There is propaganda, and there are facts. For anyone seeking just one concise, definitive and completely true (as in fact-, not hope- based) explanation of what has happened to the American economy in the past 2 years, we suggest this presentation by former OMB director David Stockman, whose 10 minute appearance on the CNBC's strategy session left the hosts with absolutely nothing to retort.
Among his observations: the government sector for the first time in history is shrinking: "the reason is that governments are broke... we are going to have to cut back government employment." And it gets scarier: "if you take core government plus the middle class economy (65 million jobs), that's the breadwinning economy, if we take some numbers - how many jobs in the "core economy" in November - zero; how many jobs since last December: net zero; how many jobs since the bottom of the recession in June 2009: still a million behind from when the recession ended." As to whether the economy can grow without employment growth: "I can't imagine how it can because employment growth generates income growth which is the basis for spending and saving ultimately and we are not getting income growth out of the middle class." And the stunner: the job "growth" has come almost exclusively from the part-time economy (two-thirds). Why is this a major problem: "there is 35 million jobs in that sector, with an average wage of $20,000 a year: that is not a breadwinning job, you can't support a family on that, you can't save on that. Those jobs will not generate income that will become self-feeding into spending." As for the biggest condemnation, it is reserved to what Zero Hedge has been claiming for two years now is a completely broken market: "I can't explain the market... I don't know what it is pricing today, I don't think the market discounts anything anymore, it is purely a daytraders' market that is trading off the Fed, trading off the headlines. One day it is manic, the next day it is depressive, and we can't draw any conclusions." And scene.
Bernanke On '60 Minutes': Defends Bond Buys, Says Years Until 'Normal' Unemployment
Federal Reserve Chairman Ben Bernanke is stepping up his defense of the Fed's $600 billion Treasury bond-purchase plan, saying the economy is still struggling to become "self-sustaining" without government help. In a taped interview with CBS' "60 Minutes" that aired Sunday night, Bernanke also argued that Congress shouldn't cut spending or boost taxes given how fragile the economy remains.
The Fed chairman said he thinks another recession is unlikely. But he warned that the economy could suffer a slowdown if persistently high unemployment dampens consumer spending. The interview is part of a broad counteroffensive Bernanke has been waging against critics of the bond purchase plan the Fed announced Nov. 3. The purchases are intended to lower long-term interest rates, lift stock prices and encourage more spending to boost the economy.
Critics, from Republicans in Congress to some officials within the Fed, say they fear the Fed's intervention could spur inflation and speculative buying on Wall Street while doing little to aid the economy.
On other issues in the "60 Minutes" interview, Bernanke:
• Argued that unemployment would have been far higher – "something like it was in the Depression, 25 percent" – had the Fed not provided extraordinary aid to Wall Street firms, banks and other companies to ease a credit crisis.
• Said it could take four or five more years for unemployment, now at 9.8 percent, to fall to a historically normal 5 percent or 6 percent.
• Reiterated that the Fed is prepared to buy even more than $600 billion in Treasury bonds over the next eight months, should it decide the economy needs the fuel of even lower interest rates.
• Argued that the risk of inflation is overblown. Bernanke said he's "100 percent" confident the Fed will be able to ward off inflation, when the time is right, by raising interest rates and unwinding its stimulative programs.
• Called the risk of deflation – a prolonged drop in prices, wages and the values of homes and stocks – "pretty low." He said the likelihood would have been greater if the Fed weren't maintaining super-low interest rates.
• Urged Congress to improve the nation's tax code "by closing loopholes and lowering rates" for individuals and companies. He said doing so would create greater incentives for people to invest.
Critics who fear the Fed is raising the risk of inflation have complained that its bond purchases mean the Fed is, in effect, printing more money. In the interview, Bernanke called that a "myth." He insisted the Fed isn't printing money when it buys Treasurys and said the program won't expand the amount of money in circulation in a "significant way."
Lou Crandall, chief economist at Wrightson ICAP, said Bernanke is right that the Fed's purchases won't significantly change the amount of money circulating in the economy. That's mainly because banks aren't lending most of the money they already hold in reserve. When the Fed buys Treasurys, it increases the reserves in the banking system. For those reserves to actually "create" money, the banks would have to lend it. Still, Crandall suggested that the bond-buying program creates the appearance of printing money, something that could put the central bank's credibility at stake.
Bernanke's apperance Sunday night is part of a public-relations blitz he's mounted since the Fed announced the program Nov. 3. In private and public appearances, Bernanke has sought to explain and defend the program to ordinary Americans, investors and lawmakers on Capitol Hill. His efforts have included an Op-Ed article in The Washington Post and discussions with students in Jacksonville, Fla., economists in Jekyll Island, Ga., business people in Columbus, Ohio, central bankers in Europe and members of the Senate Banking Committee.
Criticism has come from both home and abroad. Officials in China, Germany, Brazil and other countries have argued that the Fed's plan is a scheme to give U.S. exporters a competitive edge by keeping the value of the dollar weak. A weak dollar makes U.S. goods cheaper abroad and foreign goods more expensive in the U.S. It's rare for a sitting Fed chairman to grant an interview, whether for broadcast or print. But this was Bernanke's second appearance on "60 Minutes." His first was in March 2009. At the time, he was facing anger over Wall Street bailouts and rising anxiety about the economy.
In the interview that aired Sunday, Bernanke pointed out that the economy is growing at an annual pace of around 2.5 percent – far too slow to reduce unemployment. For a self-sustaining recovery, consumers and businesses would need to spend more, so the economy could grow faster. Bernanke has said he hopes the Fed's bond-buying program will help lift stock prices. In part, that's because lower yields on bonds would cause some people to shift money into stocks and also because lower corporate bond rates will spur business investment.
Higher stock prices would boost the wealth and confidence of individuals and businesses. Spending would rise, lifting incomes, profits and economic growth. Bernanke has referred to this as a "virtuous cycle." Asked whether the recovery is self-sustaining, Bernanke responded: "It may not be. It's very close to the border." Given the economy's still-weak growth, he said: "We're not very far from the level where the economy is not self-sustaining."
Trillions In Secret Fed Bailouts For Global Corporations And Foreign Banks – Has The Federal Reserve Become A Completely Unaccountable Global Bailout Machine?
by MIchael Snyder - Economic Collapse
Has the Federal Reserve become the Central Bank of the World? That is what some members of Congress are asking after the Federal Reserve revealed the details of 21,000 transactions stretching from December 2007 to July 2010 that totaled more than $3 trillion on Wednesday. Most of these transactions involved giant loans that were nearly interest-free from the Federal Reserve to some of the largest banks, financial institutions and corporations all over the world.
In fact, it turns out that foreign banks and foreign corporations received a very large share of these bailouts. So has the Federal Reserve now become a completely unaccountable global bailout machine? Sadly, the truth is that we would have never learned the details of these bailouts if Congress had not forced this information out of the Fed. So what other kinds of jaw-dropping details would be revealed by a full audit of the Federal Reserve?
It is important to try to understand exactly what went on here. Banks and corporations from all over the globe were allowed to borrow gigantic piles of money essentially for free. Yes, when you are getting interest rates such as 0.25 percent, the money is essentially free.
These loans were not available to everyone. You or I could not have run over to the Federal Reserve and walked away with tens of billions of dollars in loans that were nearly interest-free. Rather, it was only the megabanks and megacorporations that are friendly with the Federal Reserve that were able to take advantage of these bailouts.
In this way, the Federal Reserve is now essentially acting like some kind of financial god. They decide who survives and who fails. Dozens and dozens and dozens of small to mid-size U.S. banks are failing, but the Federal Reserve does not seem to have much compassion for them. It is only when the "too big to fail" establishment banks are in trouble that the Federal Reserve starts handing out gigantic sacks of nearly interest-free cash.
Just think about it. Which financial institution do you think is in a better competitive position - one that must survive on its own, or one that has a "safety net" of nearly unlimited free loans from the Federal Reserve?
Now that is oversimplifying the situation, certainly, but the truth is that the Federal Reserve had fundamentally altered the financial marketplace and is significantly influencing who wins and who loses.
But even more disturbing is what the Federal Reserve is turning into. This is an institution that is "independent" of the U.S. government, that does not answer to the American people, that controls our money supply and that is just tossing tens of billions of dollars to foreign banks and to foreign corporations whenever it wants to.
In fact, if Congress had not forced the Fed to tell us what was going on with these bailouts we would have never even found out.
The truth is that the Fed is taking incredible risks with "our money" and yet they want to continue to exist in a cloak of almost total secrecy.
In a recent article in the Washington Post, Dallas Federal Reserve President Richard Fisher acknowledged that the Federal Reserve played fast and loose with trillions of dollars of our money...."We took an enormous amount of risk with the people's money."
Are you deeply disturbed by that quote?
Well, if not, you should be.
The American people became so infuriated about the bailouts and stimulus packages passed by Congress, but it turns out that they were nothing compared to these Federal Reserve bailouts.
U.S. Senator Bernie Sanders is one of the members of Congress that is now expressing extreme outrage about what the Federal Reserve has done....
"The $700 billion Wall Street bailout turned out to be pocket change compared to trillions and trillions of dollars in near zero interest loans and other financial arrangements that the Federal Reserve doled out to every major financial institution."
In fact, Senator Sanders was so disgusted by how much of the money went overseas that he was led to make the following remark...."Has the Federal Reserve become the central bank of the world? I think that is a question that needs to be examined."
Advocates for the Federal Reserve insist that if all of these foreign banks and foreign corporations were not bailed out the financial crisis would have been much worse. In fact, they say we should be thankful that the Federal Reserve prevented a total financial collapse.
If our financial institutions are so fragile that a stiff wind will knock half of them over maybe they need to just fail.
You know what, life is tough. Nobody is going to cry most of us a river of tears if we lose our jobs. Most of us have learned to scratch and claw to survive with no safety net underneath us.
So maybe it is time for these big financial institutions to start playing by the same rules the rest of us are playing by.
No, when these "too big to fail" financial institutions get into a little trouble they start whining like a bunch of little babies.
"Give us some big sacks of cash!"
Well guess what? Most of the rest of us are just not going to have too much sympathy for these big banks from now on.
The following is a list of just a few of the banks, financial institutions and global corporations that received nearly interest-free loans from the Federal Reserve during the financial crisis.....
Big U.S. Banks And Financial Institutions
JP Morgan Chase
Bank of America
Pacific Investment Management Co. (PIMCO)
Big Global Corporations
Royal Bank of Canada
European And Asian Banks
Bank of Scotland
The Korean Development Bank (South Korea)
But those defending the Federal Reserve will insist that the financial world as we know it would have ended if the Fed had done nothing.
That may well be true.
The entire financial system might have gone down in flames.
But that just proves the main point that this column has been trying to make for months.
An economic collapse is coming.
The Federal Reserve can desperately try to keep all of the balls in the air for as long as it can, but eventually it is inevitable that this entire thing is going to come crashing down.
The fact that the Federal Reserve had to resort to such extreme measures to "save" the financial system just shows how desperate things really are.
We really have reached a "tipping point" for the world financial system. There is going to be crisis after crisis after crisis and even bigger bailouts are going to be required in the future.
The world financial system is a house of cards built on a foundation of sand. The Federal Reserve can keep throwing around gigantic sacks of "our money" as much as it wants, but in the end there is nothing that can be done to prevent the inevitable collapse that is coming.
Hidden fees cut UK pension payouts by 75%
by Holly Watt - Telegraph
Savers are losing up to three quarters of their pensions in little-known fees charged by the investment funds that manage their money, a report by senior pension experts warns.
Private pensions in Britain pay out on average half as much retirement income as equivalent schemes in Europe, the report says, with hidden costs blighting the retirement plans of millions. The report, by David Pitt-Watson, one of the country's leading pension fund managers, and a team from the Royal Society for the Encouragement of Arts, Manufactures and Commerce, warns the Government that the system is in need of urgent reform to bring these costs down.
Earlier this year, The Daily Telegraph disclosed that a range of little-known fees and levies typically wiped more than £100,000 off the value of a middle-class worker's private pension. Mr Pitt-Watson, the boss of Hermes, which manages the BT pension scheme, has written to Steve Webb, the Pensions Minister, to set out his concerns. His three-year study highlights how British savers suffer in comparison with their European counterparts because of the fees charged by pension funds.
While the annual levy can appear small, its effect after decades of saving is substantial, the report warns. This is because the fee is calculated annually as a percentage of the total amount in the pension fund. Each year, therefore, the amount levied increases. According to Mr Pitt-Watson, someone saving £1,000 a year throughout their working lives would retire on an inflation-protected pension worth £16,080 a year if they did not pay fees. However, the typical fees levied by British pension funds would reduce the payout to £9,900 annually.
The Dutch and Danish systems have funds with far lower costs, the report says. For example, ATP in Denmark charges about 0.04 per cent to manage its fund, or £5 per person annually. By contrast, British pension funds can charge three per cent or more, the study found. This means that three-quarters of the possible pension is swallowed up by cost, the report says. Even a fee of 1.5 per cent a year translates to 37.5 per cent of the money saved over the 25-year life of a pension, the report says.
"When people hear that they are being charged 1 per cent or 3 per cent, they think they are being charged 3p in the pound or 1p in the pound, and think 'that's fine'. But because of compounding, the pension costs actually add up to 40 per cent," said Mr Pitt-Watson. The research shows that savers are often unaware of how much pensions cost.
A panel of ordinary savers were said to have been "aghast" when they realised the cost of private schemes. British workers are also badly affected by private pension costs because the UK has the lowest rate of state pension provision relative to any of the OECD group of developed countries. The report concludes that the system of pension provision in Britain is "not fit for purpose".
Although the forthcoming new state pension scheme, the National Employment Savings Trust (Nest), aims to reduce costs, Mr Pitt-Watson said "the danger is that we are creating a weakened monopoly rather than healthy competition". The law currently bars the creation of European-style supersized pension schemes which, because of their size, have lower costs.
Last year, the Department for Work and Pensions blocked plans for a scheme enabling members to pay into a collective fund instead of into individual savings accounts, allowing investment risks to be shared among members. Mr Pitt-Watson said this was a "mistake". Many of the costs involved in pensions are created by people switching between schemes. Mr Pitt-Watson believes these costs could be avoided if there were a limited number of large providers, with economies of scale reducing costs.
"By common consent, the UK private pensions system is not fit for purpose. It is hugely inefficient. The Government has taken steps to address the problem but it remains in real danger of spoiling the ship for a ha’p’orth of tar," he said. The maximum individuals will be able to save with Nest will be limited to £3,600 a year. Mr Pitt-Watson said the upper limit should be scrapped, because it would make Nest, which launches next year, less competitive.
The advisory board for the Tomorrow’s Investor report included Sir John Banham, the chairman of the Johnson Matthey chemical company, and Vicky Pryce, a former civil servant and senior managing director at FTI Consulting. Miss Pryce is the estranged wife of Chris Huhne, the Energy Secretary. As well as an increasing gap between public sector and private sector pensions, recent research by Aviva and the accountants Deloitte, showed that the UK had the largest pensions gap per person in Europe. British adults need to save an average of £10,300 more every year if they want to keep their current standard of living in retirement.
Britain's final salary pensions schemes no longer to be protected
The Government has abandoned plans to ban the transfer of final salary pensions to defined contribution schemes. The Department for Work and Pensions (DWP) announced in October that it will not proceed with a policy that would, it said, have restricted "the choice members currently have as to how they manage their pension provision" and risked "creating an artificial transfer market up to 2012".
Draft legislation published by the DWP in June would have prevented the transfer of many final salary or defined benefit pension rights to defined contribution schemes. But the DWP will now allow contracted-out defined benefit rights to be transferred to contracted-in schemes when contractedout defined contribution schemes disappear in April 2012. This is when the option to contract out of the state second pension into a defined contribution scheme is being abolished.
Fiona Bruce, Huw Edwards and Martha Kearney joined a strike by BBC jounalists in November over pension changes at the Corporation. The dispute stems from attempts by Mark Thompson, the BBC director-general, to bridge a predicted deficit in the corporation's pension fund of up to £2billion. His initial proposals in June would have forced many employees to give up their "gold-plated" final salary pensions in favour of the kind of "defined contribution" scheme common in the private sector. The final payout depends on the amount invested and the performance of the stock market.
Managers were forced to step in to present news programmes and bulletins during the 48 hour strike. The threat of strikes caused Mr Thompson to back down twice, and his current offer would leave existing BBC employees with guaranteed pensions based on their average salary across their careers at the corporation.
Numbers look great when jobless just give up
by Jay Bryan - Montreal Gazette
Canada's job market perked up slightly in November, adding a modest 15,200 jobs after a two-month dry period that produced a small net loss. But even though the unemployment rate enjoyed a dramatic drop to 7.6 per cent from 7.9 the previous month, the improvement was more apparent than real. About three-quarters of the decline was caused not by new jobs but by discouraged workers simply exiting the job market -and therefore the unemployment rolls.
Quebec, after a long stretch of good performance, stumbled in November, with unemployment dropping to 7.9 per cent from 8.0 even though 14,100 jobs disappeared. This was because an even larger number of workers, 21,400 of them, left the job market. The only strong provincial job gain came in Ontario, which added 31,200 positions, cutting unemployment to 8.2 per cent from 8.6 as it struggles back from severe losses in the recession.
Manufacturing was a big drag on Canada's employment picture, shedding 28,600 jobs in a reflection of feeble U.S. demand and a high-priced loonie, both of which helped to squeeze exports. This poor trade performance dragged Canadian economic growth down to a minimal one per cent annual pace in the third quarter from 2.3 per cent in the second, even though economic activity within Canada remains strong.
On the plus side, health care jobs almost precisely offset the losses in factories, adding 28,400 positions. And in a sign that Canadian consumers are going to keep boosting spending during the important Christmas season, the number of jobs in retailing and wholesaling expanded by 26,200. The quality of new jobs was soft, with a decline of 11,500 full-time jobs offset by the creation of 26,700 part-time ones.
But perhaps more important, the number of hours put in by all workers rose by a healthy 0.7 per cent in November -the strongest gain in seven months -suggesting that more workers were gaining hours than seeing them cut. As a result, payroll outlays grew by 0.5 per cent in November, "showing a strong 4.8-per-cent advance" at an annual rate, note economists Yanick Desnoyers and Matthieu Arseneau at the National Bank.
The implication: with more money in workers' pockets, the likelihood is that Canada's economy is speeding up now, perhaps on track to grow two per cent or more in the fourth quarter. With the economy showing something of a rebound, said senior economist Pascal Gauthier at the Toronto-Dominion Bank, "the labour market's gradual healing from the recession back to a healthier state should continue through potentially volatile numbers in the months ahead."
Still, it could easily be next spring before the boost in economic activity propels job gains to a much higher level, suspects Douglas Porter, deputy chief economist at BMO Capital Markets. In the meantime, he said, the outlook is for employment growth of only about 10,000 to 15,000 a month, not enough to bring a significant further improvement in unemployment.
The most hopeful sign for Canada, strangely enough, comes from the U.S., where unemployment actually rose two ticks to 9.8 per cent after the weakest gain in private-sector job creation since January. But there were multiple signs of gathering momentum in the U.S. economy this week -including credible indications of renewed strength in the job market. They included a new downtrend in unemployment insurance claims, a report of strong job gains from a big private payroll processor, robust sales gains at auto dealerships and chain stores, and indications of continued strength among manufacturers.
With all these positive signs, Porter is inclined to downplay the November employment report and assume that a substantial improvement will show up in December's numbers -and that this development will gain strength in following months. That wouldn't have a big impact on Canada's economy immediately, but by spring, it could be helping to boost employment numbers on this side of the border.
Flaherty encouraged, but also worried
"I am encouraged by the unemployment numbers this morning in Canada," Finance Minister Jim Flaherty told a news conference in Montreal yesterday. "It's a bit discouraging to see the unemployment numbers in the United States ... there's a persisting concern with respect to the American economy," he said. Flaherty and Bank of Canada Governor Mark Carney have consistently identified weak U.S. growth as one of the main risks for the Canadian economy.
Other factors holding the domestic economy back are the strong Canadian dollar and the after-effects of the global crisis. Flaherty said he expected modest economic growth over the next few years and repeated he was satisfied Canada was on track to balance its budget in the medium term.
Moody's Downgrades Hungary
by Margit Feher - Wall Street Journal
Credit rating agency Moody's Investors Service Inc. downgraded Hungary by two notches on Monday citing fiscal-sustainability concerns, holding the country in investment-grade territory but maintaining its negative rating outlook. "We expect that the headline budget deficit figures will be met thanks to temporary measures but in a situation like this, we need to look beyond the headline figures," said Dietmar Hornung, vice-president of Moody's Investors Service. "We expect a significant deterioration in the structural deficit."
Moody's downgraded Hungary's foreign- and local-currency government bond ratings by two notches to Baa3 from Baa1, citing increased concerns about the country's medium- to long-term fiscal sustainability and higher "external vulnerabilities" than most of Hungary's rated peers. "Today's downgrade highlights Hungary's lack of commitment to fiscal reform," said Eurasia research director Preston Keat. "The government hasn't shown any indications yet that they are serious about this."
Further downgrades, to below investment grade, which are possible as Hungary has a negative outlook at all three major rating agencies, would be problematic for Hungary as its needs to repay its European Union and International Monetary Fund loans in the coming year. Hungary was the first EU country to secure EU/IMF support when hit by the global economic crisis. Mr. Hornung didn't specify the rate of the expected structural budget deterioration but said that the ratings agency forecasts a deterioration both next year and in 2012, compared with this year.
The Hungarian government has levied extraordinary taxes on mostly large multinational companies across a number of sectors, including retail, telecommunications, energy and banking, to raise budget revenue. It has also been redirecting personal assets in private pension funds to help it meet strict EU budget deficit targets as well as to reduce public debt. Hungary has the largest debt levels as a ratio of gross domestic product in central and Eastern Europe. "A sustainable consolidation path—a sound [fiscal] footing—would be beneficial, including expenditure-side measures," Mr. Hornung said.
Hungary's government, which came to power after elections in the spring, cut taxes for small and medium-sized companies and on personal income in an effort to boost growth after refusing to endorse further budget austerity measures as recommended by the IMF. It broke with the IMF in the summer. The government's plan to reduce the country's GDP-to-debt ratio by boosting economic growth "may work when growth picks up by the rate the government suggests or beyond," Mr. Hornung said. "However, there are uncertainties associated with that strategy."
The Hungarian government, which declined to comment on the downgrade, projects that GDP growth will accelerate to 3% next year and to 3.5% in 2012, from this year's expected 0.8% growth, after Hungary underwent its deepest economic contraction last year for nearly two decades. "The government has embarked on a pro-growth strategy financed by aggressive ad hoc fiscal measures," said Barclay's Capital in a research note.
This, together with the strong support the Hungarian manufacturing industry is receiving from robust demand from core Europe, particularly Germany, should support growth in the short term but could lead to a sharp rise again of fiscal deficits in one or two years, it added. "Based on recent experience, the market may be less likely to react to lip service and will want to see concrete structural spending reform implementation plans."
Firewall needed as eurozone stands on brink of meltdown
by Sir John Gieve - Telegraph
Developments in euro debt markets remind me more and more of September 2008. Unless Europe’s policymakers seize the initiative to secure the position of Spain and Italy, we could see a new seizure in bank funding markets which would force the euro area either to underpin monetary union with some mutual fiscal guarantees or to fragment.
In the first half of 2008, the banking industry seemed to be recovering from the initial sub-prime shock. Capital was raised and interbank spreads narrowed. Liquidity support and the rescues of Bear Stearns and European banks demonstrated the authorities’ determination to stabilise markets if necessary with public funds.
However the limits to that support especially in the US were not made clear and, over the summer, markets tested its credibility. We saw a succession of banks deny they needed help only to be forced into state rescues until the US tried to draw the line at Lehman.
Its failure triggered a general loss of confidence in banks which was only reversed by explicit government guarantees of all their banks’ liabilities, going far beyond what would have been needed to save Lehman.
This year doubts have been growing about the guarantees of euro members. Taken as a whole the euro area is in a better position to meet its debts and to bail out its banks than the US or Japan. It is in broad current account balance, its debt burden is not exceptional and its taxable capacity is huge. What is unclear is how far it is willing to act collectively. And, without fiscal support from the rest of the union, it seems doubtful that Greece can dig its own way out of its sovereign debt hole or that Ireland can redeem its banks’ debts.
First Greece, then Ireland have been forced to turn to the EU and IMF for help. But the rescues have offered only more time to pay and have stopped short of promising transfers either now or if the plans go off track. Not surprisingly markets have continued to price in defaults in those cases and have moved on to question whether, on these terms, others can honour their debts and stand behind their banks.
It only needs a small level of risk to make it sensible to steer clear. So now it is Portugal and Spain issuing the denials while Italy, Belgium and even France try to dismiss any threat as absurd. A simple way out would be for the euro area to underpin its members’ guarantees with a measure of fiscal support conditional on domestic reform and retrenchment. This would be a deepening of the union which was expected and desired by its designers. But there does not appear to be sufficient political support for that, particularly in Germany.
Although for the present, banks and sovereigns can turn to the European Central Bank for funding, the ECB is wary of being drawn into providing fiscal transfers through the back door (by buying sovereign and bank debt which will in time be written down). In short, the uncertainty is not resolved.
One lesson of 2008 is that once market confidence begins to ebb, it develops its own momentum. Any bank requires a continuous flow of funds and the question ceases to be whether it is solvent as a going concern and becomes simply whether it will be able to refinance maturing debt at an acceptable price. The worry that it won’t becomes self fulfilling. And in the complex and opaque network of international finance doubts about one bank swiftly spread to others.
The euro area is standing on the brink of such a meltdown today. It needs urgently to establish a firewall against contagion by identifying a country which can demonstrate its ability to meet its debts and then giving it full support. I suspect it could still do this in Spain. For Spain, with continuing access to finance at reasonable rates, should be able to service its own debts and support its banks as it wants.
But it is failing to persuade the markets of this because it cannot be sure of continued funding at affordable rates and because it appears still to be in denial about the true level of bad debts in its banking system (widely thought to be at least €50bn (£42bn) more than published).
The best course is for Spain to announce a credible plan for its banks with fiscal retrenchment and supply side reforms, and for the euro area to back that with facilities, at a modest spread over bunds, which are sufficiently long term and sufficiently large to give Spain time to earn its way out of trouble. That would allow the ECB to reinforce the firewall by increasing purchases of Spain’s bonds. In time it should then be possible to manage the debt restructuring Ireland and Greece need.
If the euro area waits for the crisis to deepen and spread before acting, there is a real risk of a run on their banks like that in 2008. Not only will that set back recovery but the euro area will only restore calm and preserve the union by issuing the sort of collective guarantees of sovereign and bank debt they have been so desperate to avoid.
Sir John Gieve is senior adviser to GLG Partners, part of Man Group, and a former deputy governor of the Bank of England
Eurozone ministers set for crisis talks
by Peter Spiegel - Financial Times
Finance ministers from the 16 eurozone nations are expected to debate new ways to combat the continuing debt crisis at a meeting on Monday night amid growing signs of discord over how to allay fears in the bond market that further bail-outs might be needed.
Ahead of the meeting in Brussels several ministers have publicly proposed new measures – including raising the amount in the eurozone’s €440bn ($583bn) rescue fund and creating a Europe-wide bond – aimed at improving the European Union’s system of dealing with rising borrowing costs for so-called "peripheral" countries.
Germany has, however, proved resistant to the proposals and in a news conference on Monday, Angela Merkel, the German chancellor, rejected both the new Eurobond idea and moves to increase the size of the bail-out fund. After meetings in Berlin with Donald Tusk, the Polish prime minister, she said: "I see no need to expand the fund right now". She added that the EU’s treaties currently did not "allow Eurobonds, as far as we’re concerned."
The German rejection leaves the European Central Bank’s aggressive purchase of eurozone sovereign debt as the main weapon for the EU in fighting to keep the two most vulnerable countries, Portugal and Spain, from being forced into a bail-out. Ireland last week became the second eurozone country after Greece to be bailed out after financial markets ditched Irish bonds amid fears that Dublin would not be able to manage debt it took on while trying to restructure the country’s ailing banking sector.
Since the ECB began its new round of bond purchases late last week, the markets have levelled off for Portugal, Spain and Italian debt, leading many officials to believe they have some breathing room to debate possible new measures. No firm decision is expected before a summit of European heads of government, scheduled for December 16-17.
Both Portugal and Spain have in recent days announced new fiscal measures to bolster their case further with the financial markets but officials remain uncertain whether the austerity and restructuring initiatives will be enough to lower borrowing costs to a more sustainable level.
The debate over additional measures began at the weekend, when Didier Reynders, the Belgian finance minister, expressed support for increasing the size of the €440bn bail-out fund.
Because of the fund’s complex rules, the amount available to lend to cash-strapped countries is far less than €440bn and Mr Reynders’ support follows similar signals from members of the ECB.
Mr Reynders’ comments were followed by the publication in the Financial Times of a proposal by Jean-Claude Juncker, the Luxembourg prime minister who chairs the 16-member eurogroup, and Giulio Tremonti, the Italian finance minister, proposing Eurobonds as a way to lower borrowing costs for peripheral economies.
Merkel rejects debt crisis proposals
by Peter Spiegel and Quentin Peel - Financial Times
Angela Merkel, the German chancellor, has ruled out two of the most widely-backed ideas for combating the eurozone debt crisis, saying she saw no need to increase the size of the European Union’s €440bn rescue fund and that the bloc’s treaties did not allow for the creation of a Europe-wide bond.
Ms Merkel’s comments on Monday came as finance ministers from the 16 countries that use the euro were gathering in Brussels for a regular meeting where both ideas were expected to be debated behind closed doors.
The German rejection leaves the European Central Bank’s aggressive purchase of eurozone sovereign debt as the main weapon for the EU in fighting to keep the two most vulnerable countries, Portugal and Spain, from being forced into a bail-out. Proposals to increase the size of the bail-out fund gained momentum over the weekend when Didier Reynders, the Belgian finance minister who chairs the EU’s economic affairs council, backed the move and said it had support from the International Monetary Fund. ECB officials have also signalled their support for the increase.
But at a joint press conference with Donald Tusk, the Polish prime minister, Ms Merkel said that "for the time being" she saw no need to increase the fund, which when other EU and IMF commitments are included totals €750bn. The fund’s size has been called into question because rules governing its operation make the eurozone unable to lend its complete €440bn to debt-burdened member states. If the EU were forced to use the fund to rescue Portugal and Spain, some have estimated that additional lending capacity would be required.
Heading into Monday night’s meeting, Olli Rehn, the EU’s top economic official, said increasing the size of the fund was one of the issues that would be debated during the session, but did not comment on whether he backed an increase. Mr Rehn said he found the idea of a Europe-wide bond to be "intellectually attractive", but noted that a similar proposal was rejected by member states at the height of the Greek debt crisis in May.
A spokesman for Ms Merkel said her government was opposed to the Eurobond idea on both economic and legal grounds, noting that creating it would force the EU into the "most extensive changes" in its treaties. The idea of a Eurobond was put forward on Monday by Jean-Claude Juncker, the Luxembourg prime minister who heads the 16-member eurogroup of countries, and Giulio Tremonti, the Italian finance minister, in an article in the Financial Times.
Since the ECB began stepping up its round of bond purchases late last week, the borrowing costs for countries such as Portugal and Spain have begun to ease, but the market remained unsettled on Monday amid low trading volumes. According to the latest figures, the ECB had bought nearly €2bn in government bonds through the middle of last week, the most in months.
Will 2012 Be As Critical As 1860?
by Jim Quinn - Burning Platform
“We are not enemies, but friends. We must not be enemies. Though passion may have strained, it must not break our bonds of affection. The mystic chords of memory will swell when again touched, as surely they will be, by the better angels of our nature.” – Abraham Lincoln
We are approximately five years into The Fourth Turning Crisis. Every previous Fourth Turning had an economic dimension that eventually led to a do or die all out war. The mainstream linear thinkers see a recovery and a return to their concept of normality. They will be shocked and flabbergasted when they realize that this is only the beginning of a 20 year period of turmoil, chaos and war. It seems that some study of history would benefit the mainstream talking media heads pretending to know what is happening and political hacks in Washington D.C. who pretend to administer the affairs of state. The cycles of history are not identical, but the alignment of generations is always the same. The cycles are consistent because a long human life is always between 80 and 100 years. The previous Fourth Turnings in U.S. history were the American Revolution, the Civil War and the Great Depression/World War II. The descriptions are as follows:
American Revolution (Fourth Turning, 1773-1794) began when Parliament’s response to the Boston Tea Party ignited a colonial tinderbox—leading directly to the first Continental Congress, the battle of Concord, and the Declaration of Independence. The war climaxed with the colonial triumph at Yorktown (in 1781). Seven years later, the new "states" ratified a nation-forging Constitution. The crisis mood eased once President Washington weathered the Jacobins, put down the Whiskey Rebels, and settled on a final treaty with England.
The Civil War (Fourth Turning, 1860-1865) began with a presidential election that many southerners interpreted as an invitation to secede. The attack on Fort Sumter triggered the most violent conflict ever fought on New World soil. The war reached its climax in the Emancipation Proclamation and Battle of Gettysburg (in 1863). Two years later, the Confederacy was beaten into bloody submission and Lincoln was assassinated–a grim end to a crusade many had hoped would “trample out the vintage where the grapes of wrath are stored.”
The Great Depression & World War II (Fourth Turning, 1929-1946) began suddenly with the Black Tuesday stock-market crash. After a three-year economic free fall, the Great Depression triggered the New Deal revolution, a vast expansion of government, and hopes for a renewal of national community. After Pearl Harbor, America planned, mobilized, and produced for war on a scale that made possible the massive D-Day invasion (in 1944). Two years later, the crisis mood eased with America’s surprisingly trouble-free demobilization.
There is a consistent tempo to all Fourth Turnings. An event or series of events leads to the initial Crisis. As the Fourth Turning progresses it becomes more intense, chaotic, dire and bloody. It eventually exhausts itself as a victor is left in control of the battlefield. Picture George Washington at Yorktown, Ulysses S. Grant at Appomattox, and Douglass McArthur on the Battleship Missouri. The events during a Fourth Turning will always be different. The consistent aspect of all Fourth Turnings is the mood of the country, the same generational dynamics, and the reactions of the generations to events. Strauss & Howe describe this Crisis period as follows:
“The spirit of America comes once a saeculum, only through what the ancients called ekpyrosis, nature’s fiery moment of death and discontinuity. History’s periodic eras of Crisis combust the old social order and give birth to a new. A Fourth Turning is a solstice era of maximum darkness, in which the supply of social order is still falling but the demand for order is now rising.”
The turnings of history are like the seasons. It is impossible to go directly from Fall to Spring. You must withstand the bitter harshness of Winter in order to get to the revitalizing warmth of Spring. The intensity and depth of Winters will vary. Those who prepare for a potentially harsh Winter in advance will be more likely to survive. The morphology of Fourth Turnings as described by Strauss & Howe is:
- A Crisis era begins with a catalyst – a startling event (or sequence of events) that produces a sudden shift in mood.
- Once catalyzed, a society achieves regeneracy – a new counterentropy that reunifies and reenergizes civic life.
- The regenerated society propels toward a climax – a crucial moment that confirms the death of the old order and birth of the new.
- The climax culminates in a resolution – a triumphant or tragic conclusion that separates the winners from losers, resolves the big public questions, and establishes the new order.
An honest assessment of where we sit in this cycle shows that we are still in stage one. The housing collapse brought about the near destruction of the worldwide financial system. The sudden shift in mood has been borne out by the angry rise of the Tea Party and the startling result from the recent election. Society is on the verge of stage two. There has yet to be the reunification and reenergizing of society. It still feels like things are falling apart. The sun is slowly setting on this stage and a dark brutal Winter night beckons.
1860 Election – Spark that Ignited an Epic Conflagration
Turnings throughout history have consistently lasted between 15 and 25 years, except one. The Civil War Crisis Turning lasted only 5 years and seems to not fit the standard definition of a Turning. Strauss & Howe reflected that:
“By the usual pattern of history, the Civil War Crisis catalyst occurred four or five years ahead of schedule and its resolution nearly a generation too soon.”
The truth is that instead of a drawn out Crisis over 15 to 20 years that would have had undulations of pain and suffering, the U.S. experienced the most savage 5 years in our history, with 620,000 Americans killed and 400,000 wounded. Ten percent of all Northern males 20–45 years of age died, as did 30 percent of all Southern white males aged 18–40. Strauss and Howe conclude that there are two lessons from the Civil War Crisis:
- The Fourth Turning morphology admits to acceleration.
- That acceleration can add to the tragedy of the outcome.
The catalyst for the Crisis was the election of Abraham Lincoln as President of the United States. After the Compromise of 1850, who would have envisioned the election of an unknown Congressman from an abolitionist party that didn’t even exist in 1850. Beyond that, could anyone have predicted the carnage from the bloodiest war in the history of mankind being the result of that election? Many people do not know that there were four candidates for President in 1860 and that Lincoln won the election with only 39.8% of the popular vote. Lincoln won the Presidency and he wasn’t even on the ballot in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, Tennessee, or Texas.
The Republican Party realized they had a tremendous opportunity to win the Presidency as the Democrats were in disarray. Since it was essential to carry the West, and because Lincoln had a national reputation from his debates and speeches as the most articulate moderate, he won the party’s nomination on the third ballot on May 18, 1860. The Republican platform stated that slavery would not be allowed to spread any further, and it also promised that tariffs protecting industry would be imposed, a Homestead Act granting free farmland in the West to settlers, and the funding of a transcontinental railroad. All of these provisions were highly unpopular in the South.
The Democratic Party split into two factions due to the issue of slavery. Stephen A. Douglass became the Northern Democrat candidate. He was a moderate on the slavery issue. John C. Breckinridge was selected by the Fireaters from the Deep South. Breckinridge supported extending slavery into territories whose voters did not want it. A fourth party called the Constitutional Union Party made up of die-hard former Southern Whigs and Know Nothings who felt they could support neither the Democratic Party nor the Republican Party was formed. They nominated John Bell of Tennessee for President. The party platform advocated compromise to save the Union, with the slogan “the Union as it is, and the Constitution as it is.”
The voter turnout rate in 1860 was the second-highest on record (81.2%, second only to 1876, with 81.8%). The voter turnout in 2008 of 56.8% was the highest for a Presidential election since 1968.
Abraham Lincoln John C. Breckinridge
Party: Republican Party: Southern Democrat
% of Vote: 39.8% % of Vote: 18.1%
Electoral Votes: 180 Electoral Votes: 72
John Bell Stephen A. Douglass
Party: Constitutional Union Party: Northern Democrat
% of Vote: 12.6% % of Vote: 29.5%
Electoral Votes: 39 Electoral Votes: 12
As the 1850s progressed the firebrands in the North and South became more entrenched in their dogmatic positions. The Transcendental Generation Prophets came to power and compromise was no longer an option. Both Lincoln and Jefferson Davis were from this Prophet generation. Aging Prophets are always the moralistic drivers of Fourth Turnings. Strauss & Howe stress the importance of the Prophet Generation during a Fourth Turning:
A Crisis catalyst occurs shortly after the old Prophet archetype reaches its apex of societal leadership, when its inclinations are least checked by others. A regeneracy comes as the Prophet abandons any idea of deferral or retreat and binds the society to a Crisis course. A climax occurs when the Prophet expends its last burst of passion, just before descending rapidly from power.
The election of Abraham Lincoln proved to be the catalyst for the Crisis. Seven southern states seceded from the Union before Lincoln took office. The attack on Fort Sumter started a spiral of carnage and butchery that could not be reversed. The Crisis reached regeneracy after the Union debacle during the First Battle of Bull Run. Lincoln realized winning this war would require full mobilization and all out war. He ordered the enlistment of 500,000 soldiers, suspension of habeas corpus, taxation, and expansion of government power. The next four years were a swirl of savagery and unprecedented tragedy. It convulsed to a chaotic conclusion with the surrender at Appomattox and assassination of Lincoln in the same week. The Crisis exhausted itself with the climax seeming more like a defeat than a victory.
Are the actions of politicians 150 years ago worth understanding in order to determine how our current Crisis will develop? Since every Crisis period has the exact same generational configuration and generations react to events in similar manner, I believe it is worthwhile to examine the Civil War dynamics. Historian Gordon Leidner’s conclusions about the Civil War period are revealing:
- Although the majority of the American people– including many moderate politicians like Abraham Lincoln–wanted to avoid Civil War and were content to allow slavery to die a slow, inevitable death, the most influential political leaders of the day were not.
- On the southern side, “fire-eaters” like Robert Rhett and William Yancey were willing to make war to guarantee the propagation of their “right” to own slaves.
- On the northern side, abolitionists like John Brown and Henry Ward Beecher of Connecticut were willing to make war in order to put an immediate end to the institution of slavery.
- Southern politicians convinced their majority that the North was threatening their way of life and their culture. Northern politicians convinced their majority that the South, if allowed to secede, was really striking a serious blow at democratic government. In these arguments, both southern and northern politicians were speaking the truth–but not “the whole truth.”
- It was also about the constitutional argument over whether or not a state had a right to leave the Union, and–of primary concern to most southern soldiers–the continuation of antebellum southern culture. Although the majority of Southerners had little interest in slaves, slavery was a primary interest of Southern politicians–and consequently the underlying cause of the South’s desire to seek independence and state rights.
The insights gained from the Civil War Crisis are that compromise and moderation are discarded. The firebrands control the field. The Prophets push for an all out war to settle the pressing issues of the day. They are willing to sacrifice the young in their moralistic fervor to satisfy their vision of the future. The final verdict will depend on the strength, judgment, and wisdom of the Prophet leaders during a Crisis.
2012 Election – Crisis Leader Sets Stage for Dark Days Ahead
Nomad (Gen X) Prophet (Boomer) Prophet (Boomer)
Prophet (Boomer) Nomad (Gen X) Prophet (Boomer)
By 2012 we will have reached the 7th year of this Crisis. The linear thinking media and supposed “thought leaders” are convinced that the worst days of this Crisis have passed. They believe that the Federal Reserve and Government leaders have taken the proper actions to avert a Great Depression. They will be shocked when the Crisis deepens and gets far worse than today. Every action taken by our leaders since 2005 has worsened the Crisis. Rather than letting the culprits of the financial crisis fail, they have propped up these criminal institutions with taxpayer funds. By not accepting the pain early in this Crisis, these leaders have ensured that this Crisis will be more tragic, brutal and wrenching. The mood of the country continues to darken, even as the mainstream media and government cheerleaders falsely insist that things are getting better.
By year 7 of the American Revolution Crisis, George Washington was on the verge of defeating the British at Yorktown and bringing that Crisis to a positive conclusion. The Civil War Crisis had concluded with Union victory by year 5. The Great Depression/WWII Crisis was in a lull period, with GDP growing by 13% in 1936 as government spending and personal consumption surged. The economy gave the appearance of recovery because FDR’s New Deal programs created make work schemes using government funds. Americans know the 1930s as the Great Depression. As proof of how meaningless GDP calculations are versus how real Americans are affected, the GDP increased by 63% in the four year period between 1934 and 1937. Despite this phenomenal growth, the unemployment rate remained at 17%. In comparison, GDP has advanced by only 5.1% from the bottom in the 2nd quarter of 2009 until today and the unemployment rate on a comparable basis is 23%. Franklin Delano Roosevelt won the 1936 election over Alfred Landon in one of the greatest landslides in history, with 523 electoral votes to Landon’s 8.
The current Crisis appears to be in a lull similar to the 1930s. Government actions can mask deeper problems for awhile, but pressure continue to build. The problems did not go away. The bad debts did not disappear. The Wall Street criminals are still free to loot the American middle class. No one has been prosecuted for the greatest financial fraud in history. The National Debt continues to balloon by $4 billion per day. The USD is slowly being replaced as the worldwide reserve currency. Political ideologues have taken control of both parties. Worldwide trade tensions and social contract broken promises are leading to riots and chaos across the Europe. The onset of peak cheap oil is raising prices for fuel and food and setting the stage for coming resource wars. Fundamentalist religious leaders are pushing for a religious war between Christianity and Islam. The extremists are gaining control of the agenda.
The sudden shift in mood has occurred. The hard working middle class of this country are frustrated, angry and feel betrayed by their leaders. The American people are fed up with all politicians. The liberal ideologues and conservative ideologues have staked out immovable positions on social, financial, and foreign trade issues. Compromise is as likely as it was in 1860. The Tea Party will not compromise. Their agenda is to change politics in Washington DC. They will be a thorn in both party’s side. The possibility of the Tea Party becoming a 3rd party is quite possible. This brings us to the 2012 Presidential election. The current configuration of Congress guarantees that absolutely nothing will get done in the next two years. Both parties will ignore the looming disaster of debt, devaluation, and depression as they position themselves for the 2012 election. The Crisis has not yet entered the regeneracy stage. This is the stage where the country unifies behind a leader and deals with the sudden threats that previously have been ignored or deferred, but which are now perceived as dire. The likely threats are the National Debt, a currency collapse, the Christian/Muslim conflict, Peak Oil, the rise of China, or more likely a combination of some of these issues.
Strauss & Howe‘s words regarding the approaching Crisis, written in 1997, are eerie and haunting:
“In retrospect, the spark might seem as ominous as a financial crash, as ordinary as a national election, or as trivial as a Tea Party. The catalyst will unfold according to a basic Crisis dynamic that underlies all of these scenarios: An initial spark will trigger a chain reaction of unyielding responses and further emergencies. The core elements of these scenarios (debt, civic decay, global disorder) will matter more than the details, which the catalyst will juxtapose and connect in some unknowable way. If foreign societies are also entering a Fourth Turning, this could accelerate the chain reaction. At home and abroad, these events will reflect the tearing of the civic fabric at points of extreme vulnerability – problem areas where America will have neglected, denied, or delayed needed action.”
As I try to assess the next phase of this Crisis, I have been seeking guidance from previous Fourth Turnings. At this juncture, the Crisis seems to have aspects of the Great Depression/World War II and Civil War Fourth Turnings. A financial crisis morphed into recession, much like the 1929 Crash and subsequent recession. Like the Great Depression, government borrowing and spending has given the false hope of recovery. The difference is that government actions have failed to generate a strong rebound in GDP and unemployment continues to ratchet higher. A landslide election victory by Barack Obama in 2012 is not only impossible; he may not even be the Democratic nominee. The 2012 Presidential election is already destined to be a defining moment in our country’s history. The future path, intensity and pain of this Crisis will be greatly impacted by the outcome of this election. The darkening skies of Crisis are likely to become more threatening by 2012.
A recent Gallup poll gives an early indication of the likely Republican nominee in 2012. The front runners (Mitt Romney, Sarah Palin) have remained static, while the firebrands (Newt Gingrich, Mike Huckabee) have gained ground. The move towards a moralistic Prophet summoner of human sacrifice is not a surprise. The financial and world events that lead up to the 2012 election will determine which candidate is selected from the Republican field. The firebrands are likely to push to resolve ever-deepening moral choices through military force.
Usually an incumbent President can be sure of re-nomination as the Democratic candidate, but Obama’s popularity is so low and his effectiveness as President has been so wanting that a challenge from Hillary Clinton is a distinct possibility. Clinton has the Prophet persona and would command the respect of Americans looking for foreign relations expertise. A failed challenge to Obama’s nomination would likely weaken Obama and allow the Republican candidate an easy victory. A potential wildcard would be an insurgent independent campaign by billionaire Michael Bloomberg. His financial background and moderate positions on social issues could attract moderate Republican and Democratic voters. Another possibility is that the Tea Party is unable to assimilate within the Republican Party and decides to nominate its own candidate. This could lead to an 1860 like situation, with four candidates vying for the Presidency. The victor in this scenario might need to be selected by the Electoral College. The next President could be elected with less than 40% of the popular vote. Could this election result lead to secession movement? Will large segments of the population not accept the election verdict?
Will America Survive this Fourth Turning?
We are poised on the brink of the regeneracy phase of this Fourth Turning. The open question is what incident or events will lead to Americans rallying around a Prophet leader. Regeneracy during the American Revolution occurred in 1776 with the Declaration of Independence. It occurred during the Civil War when Lincoln demanded full mobilization and total war after the Battle of Bull Run. The election of FDR in 1932 produced a regeneracy based upon his New Deal policies. The issues confronting our nation appear intractable. The government “solutions” to the initial phase of this Crisis have been to paper over bad debts, prop up insolvent financial institutions, defer hard entitlement choices, debase the currency in an effort to alleviate overwhelming levels of government debt, ignore the imminent implications of cheap peak oil, and waging never ending lifeblood draining wars on terror. Ben Bernanke, a self described “expert” on the Great Depression, and his Federal Reserve, which has inflated away 96% of the USD purchasing power since 1913, will be the likely culprit in the next phase of this Crisis. Countries around the world are scrambling to reduce their exposure to the USD. Ben Bernanke has proven unable to comprehend the most basic economic signals (housing collapse, derivatives, Wall Street fraud). He will be blindsided by the sudden collapse of the US currency.
It is likely that phase two of this financial Crisis will lead to the election of a dogmatic Republican Prophet Boomer in 2012. This person will take office in January, 2013, eight years into this Fourth Turning. They will be faced with the realization that peak cheap oil is a fact, as even the linearist thinkers realize that technology and green energy will not provide the bumper sticker solution for our oil dependent society. The devastating combination of a currency collapse, oil supply shortages, and the draining war on terror will either unify the country behind the Prophet leader in their effort to save the country or it could result in the country’s fabric tearing apart with the Federal government losing control of sections of the country. A World War over dwindling natural resources is easily foreseeable. The actual denouement of events remain a mystery. Much will depend on the leader we choose. Much will depend on the strength, fortitude, and sacrifice of the American people.
Strauss & Howe provide four possible outcomes to our current Crisis:
- This Fourth Turning could mark the end of man. It could be an omnicidal Armageddon, destroying everything, leaving nothing. If mankind ever extinguishes itself, this will probably happen when its dominant civilization triggers a Fourth Turning that ends horribly. For this Fourth Turning to put an end to all this would require an extremely unlikely blend of social disaster, human malevolence, technological perfection and bad luck.
- The Fourth Turning could mark the end of modernity. The Western saecular rythm – which began in the mid-fifteenth century with the Renaissance – could come to an abrupt terminus. The seventh modern saeculum would be the last. This too could come from total war, terrible but not final. There could be a complete collapse of science, culture, politics, and society. Such a dire result would probably happen only when a dominant nation (like today’s America) lets a Fourth Turning ekpyrosis engulf the planet. But this outcome is well within the reach of foreseeable technology and malevolence.
- The Fourth Turning could spare modernity but mark the end of our nation. It could close the book on the political constitution, popular culture, and moral standing that the word America has come to signify. The nation has endured for three saecula; Rome lasted twelve, the Soviet Union only one. Fourth Turnings are critical thresholds for national survival. Each of the last three American Crises produced moments of extreme danger: In the Revolution, the very birth of the republic hung by a thread in more than one battle. In the Civil War, the union barely survived a four-year slaughter that in its own time was regarded as the most lethal war in history. In World War II, the nation destroyed an enemy of democracy that for a time was winning; had the enemy won, America might have itself been destroyed. In all likelihood, the next Crisis will present the nation with a threat and a consequence on a similar scale.
- Or the Fourth Turning could simply mark the end of the Millennial Saeculum. Mankind, modernity, and America would all persevere. Afterward, there would be a new mood, a new High, and a new saeculum. America would be reborn. But, reborn, it would not be the same.
The Fourth Turning is not a prophecy of doom. It is not some sort of Nostradamus like prediction of what will happen on a certain date. The Fourth Turning is part of a cycle of history tied to a long human life that has happened before and hopefully will happen again. Our trials await. Will America respond with strength of character, wise choices, and a willingness to sacrifice for future unborn generations? It is time to find out.
For everything there is a season, and a time for every matter under heaven:
A time to be born, and a time to die;
a time to plant, and a time to pluck up what is planted;A time to kill, and a time to heal;
a time to break down, and a time to build up;
A time to weep, and a time to laugh;
a time to mourn, and a time to dance;
A time to throw away stones, and a time to gather stones together;
a time to embrace, and a time to refrain from embracing;
A time to seek, and a time to lose;
a time to keep, and a time to throw away;
A time to tear, and a time to sew;
a time to keep silence, and a time to speak;
A time to love, and a time to hate;
a time for war, and a time for peace.
Ecclesiastes 3: 1-8