September, Monday 26, 2011

DOW + 272 = 11,043
SPX + 26 = 1,162
NAS + 33 = 2,516
10YR YLD = 1.90%
OIL + 1.14 = 81.38
DEC GOLD – 45.00 = 1594.80
DEC SILVER – 1.25 = 29.97

The 30-year U.S. Treasury bond briefly lost more than 2 points in price to yield 2.99 percent. The benchmark 10-year U.S. Treasury note was down 21/32 in price to yield 1.90 percent.

The euro dropped against the dollar and yen.

Oil rose, just when I started dreaming it might drop below $3 dollars a gallon at the pump.

Gold futures fell, on course for their largest monthly slide in three years as investors scrambled for cash. In late trading, December gold has move back up to 1625 an ounce.

European leaders have not been able to agree on the next steps they will take to deal with Europe’s debt problems. Over the weekend they talked and pledged to take bolder steps but there was no agreement on what those bolder steps should be. The immediate issue is whether Greece will default or if it will be bailed out; and if it is bailed out, who pays. Greece needs the next $11 billion dollars in bailouts within the next week or there will be a default. Greece must meet certain requirements for the bailout. Auditors will determine if the Greeks meet those requirements. The auditors have left the country and nobody knows when they will return.

Germany is scheduled to vote on Thursday to decide if they will authorize the next round of bailout payments. German leaders want banks and private institutions that hold Greek bonds to take a bigger loss on those holdings to reduce Greece’s debt burden. European officials have also talked about increasing the size of Europe’s $600 billion rescue fund by allowing it to take loans from the European Central Bank.

Following weekend meetings of the World Bank and the International Monetary Fund, the general, not quite specific idea is to increase the bailout fund to $2 trillion dollars and have somebody take a 50% haircut on Greek debt. The Greek authorities have yet to convince creditors that they can fix a “budgetary hole” in their public finances for 2011-12, or successfully implement a vast privatization scheme demanded by bailout partners. The Greek people are conducting massive, nationwide strikes and protests because they feel they being cheated.

There are still many unanswered questions:

If Greece is bailed out, who pays?

How much is needed to bail out Greece?

How big is Germany’s blank check?

If Greece is bailed out, then how much would it cost to bail out Portugal, Italy and Spain?

What is the difference between the Greek people going on strike and another day at the beach?

If the auditors return to Greece, can they get a taxi?

If $600 billion dollars is not the answer, who will bailout the ECB and the IMF?

Do any of the bailout proposals address the underlying problems?

What was the question?


The mere fact that people were still asking questions and not throwing chairs at each other was taken as great news in the stock markets in Europe. Major indices in German, France, and the UK moved higher; and that optimism spread to Wall Street.

 The general feeling is that there will be a bailout; the price of the bailout is not a major consequence. Of course, if the week passes without a bailout, then all hell will break loose, but don’t worry, because there will be a bailout and the problem will be kicked down the road.

Today, President Obama said the Europeans “haven’t been as quick as they need to be” in finding a solution, and that the financial crisis is “scaring the world.” This weekend, Treasury Secretary Turbo Timothy Geithner called the European Debt problem the “most serious risk now confronting the world economy.” The message seems to be that officials have been scared into a recognition of the severity of the world’s problems and are now prepared to act.


I watched several hours of TV newscasts over the weekend, there was almost no mention of the most serious risk now confronting the world economy. There was a brief report on the nasty week in stocks; some retired guy in Ohio or somewhere was interviewed and he said he was concerned but didn’t know what to do and then he rode off in a golf cart. I saw a couple of stories about people looking for jobs in this economy. There was a fleeting reference to the possibility that maybe the economy could double-dip back into a recession.

Friday afternoon, I got a call from an old friend. He had been listening to the Friday radio show. He asked me if I thought we were headed for a double-dip. I said no – we’re in a depression.

He seemed surprised. He asked if I was aware of the technical definition of a recession and a depression. I tried to assure him I knew the definitions.

The National Bureau of Economics Research’s (NBER) Business Cycle Dating Committee is given the unofficial role of serving as arbiters over what is and is not technically a recession or a depression. The definition of a recession is two consecutive quarters of a decline in real GDP. Although the NBER admits not all recessions exactly match that definition – and there are other factors the NBER considers.

In the recent downturn beginning in December 2007 and ending in June 2009, real GDP declined in the first, third, and fourth quarters of 2008 and in the first quarter of 2009.
The committee announced in December 2008 that the recession began one year earlier, and it announced in September 2010 that the recession had ended — more than one year after the fact.
In September 2010, the committee announced that “any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date.”


Before the 1930’s any economic downturn was referred to as a depression. The Great Depression changed that. Turns out there isn’t an official definition of a depression. So, now the basic definition of a depression is a recession that lasts longer and has a larger decline in business activity. If you want to get more technical, some people say a depression is any economic downturn where real GDP declines by more than 10 per cent – or a recession lasting more than 2 years.


There is the old anecdotal definition; a recession is when your neighbor loses his job; a depression is when you lose your job.


Let me give it a try:

Recessions are common; depressions are rare.  A depression does not mean a non-stop decline. There can be periods of improvement, but the improvements are not enough to undo the damage from the downturn, and there are relapses that drag out over time.

So, what have we seen in way of improvements to the economy? Unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. The official unemployment rate is 9.1%, the U-6 Unemployment rate is 16.2%; that number includes short-term discouraged workers and marginally employed workers – in other words, somebody who takes a part-time job but is still looking for full-time work. Some people have been out of work so long the government stops counting them – these are the invisible people. If you count them, the unemployment rate is just over 23%. In some major cities, and among some groups of the population, unemployment is closer to 50%.

I went to a mall this past weekend, and easily half the shops were vacant. The real estate market has not recovered. It isn’t dropping like a lead balloon, but it hasn’t recovered.  This morning, the Commerce Department reported that sales of new homes dropped last month, for the fourth consecutive month.  We’re seeing a fresh spike in foreclosures.

Last week, the Federal Reserve announced Operation Twist, which looked like an announcement that they were out of fresh ideas.

Both the United States and Europe are well on their way toward Japan-style deflationary traps.

A new Census Bureau report shows the percentage of Americans living in poverty last year rose to the highest level since 1993. Another 2.6 million people slipped below the poverty line in 2010, meaning 46.2 million people now live in poverty in the United States, the highest number in the 52 years the Census Bureau has been tracking it. That figure represented 15.1 percent of the population, up from 14.3 percent in 2009.

Nationwide, median household income fell to $50,046 in 2010, down 1.4% from 2007. That’s not an enormous downturn but it is a prolonged downturn. And that is a huge part of the determination of a depression. Do you think, the median income is going to climb out of that hole in the next couple of years? Or will it continue to decline? A slow, gradual, relentless, grinding decline? What is going to happen to change the decline? Obama’s jobs plan? Boehner’s budget cuts?

A depression is not only a prolonged downturn in economic activity; it is a downturn that doesn’t respond to the typical tweaking of monetary and fiscal policy. We have had two undeniable depressions in U.S. history – the Long Depression – which lasted from 1873 to 1896 (23 years) and the Great Depression – which lasted from 1929 to the end of World War Two. 

Recessions are momentary imbalances; the rubber band gets stretched too far in one direction, and it gets pulled back in the other direction. In other words, there is a reversion to the mean. A recession is a mild depression from which there is an escape. In modern times, that escape has been engineered by Central Banks and inflationary policies. It has worked, but all things have a finite life of usefulness. This time it is going to be different. There will be no recovery borne by the issuance of more money and credit because the problem is too much debt. More credit does not alleviate debt any more than additional chains can alleviate slavery. The system has and will be damaged beyond repair.

A depression is a systemic breakdown. A depression is the result of structural malinvestment. For years now we have been pouring money down a hole. We have abandoned manufacturing. We have embraced usury and a casino mentality to investing. We have committed over $16 trillion dollars to bailouts for the masters of the economy, the very ones that drove the economy into the ditch. And before we get through with this mess in Europe, the bailout numbers will grow much larger. But pause for a moment and consider the consequences. After all, that is a lot of money. That is a lot of malinvestment. We could have just handed out nearly $2,750 dollars to every human being on the planet.

Now when you consider that 3 billion people live on less than $920 dollars per year; that is like handing out three years of income to almost half the population of the world. I know, it will never happen, we can’t just hand out money. Surely much of the money would end up in wrong hands, and much of it would be squandered. Come to think of it, the $16 trillion has ended up in wrong hands and it has been squandered.

But you have to wonder: in a best case scenario we could have taken that money and wiped out hunger and preventable diseases; maybe even eliminated poverty – a new golden age. But of course, that’s did not happen; it will not happen; we won’t eliminate poverty, death, and misery – instead, the money went to the bankers.

We never got a chance to vote on whether we wanted the money to prop up Wall Street gambling, or to put the money back in the hands of Main Street families and businesses. Maybe we could have spent the money to build up America, stronger and better than ever. Maybe we could have spent the money to end poverty. Coulda, woulda, shoulda. Bottom line – it didn’t happen. A choice ahs been made and that choice will be the lasting legacy of this generation.

We never got a chance to vote on the bailout that has already taken place, and we won’t get a chance to vote on the bailout that is about to happen. The bankers of the world are about to spend trillions of dollars on a bailout in Europe. I think you know how to spend your own money better than the bankers.



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