How to Get to Mars

In the spirit of Labor Day weekend, and a well-deserved break from grim economic news, please consider "How to Get to Mars"



Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Asia Export Machine Cracks Wide Open: South Korea Production Falls at Fastest Rate in Eight Months; Taiwan Exports Deteriorate Sharply; Global Recession Call Revisited

It's not just Chinese manufacturers that are struggling. It is also Japan, South Korea, and Taiwan. In other words, the Asian export machine has cracked wide open.

South Korea

The Markit South Korea Manufacturing PMI® shows Production Falls at Fastest Rate in Eight Months.

Key points

• New orders contract at sharp rate
• New export orders decrease for third month running
• Falling output prices signalled

Summary

Output contracted at the fastest pace in eight months amid reports of a strike in the auto sector. Moreover, respondents stated that the global recession had adversely affected production. Total new business fell and, although sharp, the rate of contraction was slower than in July. New export business also decreased, though at a slight rate. Panellists stated that weaker domestic demand and a downturn in the global economy had both fed through to the latest contraction in order book volumes

Purchasing activity at manufacturing firms in South Korea decreased for the third successive month in August. The rate of contraction was solid, but eased from that recorded in July.

Taiwan

The Markit Taiwan Manufacturing PMI™ shows Output contracts at steepest pace in the year-to-date.

Key points

• New orders and new export orders fall for third month running
• Workforces contract slightly
• Input and output prices fall in line with weaker demand

Summary

Weaker national and international demand led to a third successive fall in output at manufacturing firms in Taiwan. The pace of the latest contraction was steep and the fastest since December 2011. New orders and new export business both declined, extending the current sequence of contraction to three months. According to panellists, the slowdown in the wider economy resulted in weaker demand for manufactured goods.

In line with falling production, backlogs of work decreased for the third month running. Furthermore, the pace of contraction was the sharpest in 2012 so far.

Input prices at Taiwanese manufacturing firms fell for the fourth consecutive month in August. Although marked, the pace of decrease was slower than that recorded in July. Panellists reported that input costs fell in line with decreasing metal and raw material prices. Moreover, it was mentioned that weaker demand also contributed to the latest decline. In line with input costs, charges fell at a solid rate as manufacturers attempted to maintain competitiveness and attract new business, it was reported.

China

Earlier today I noted China New Export Orders Drop Most Since March 2009, Operating Conditions Down 10th Consecutive Month

Japan

On August 31, I noted Japan Manufacturing PMI Hits 16 Month Low, New Orders Plunge

Global Recession

In the South Korea report it was interesting to see the line "respondents stated that the global recession had adversely affected production".

I certainly believe the global economy is in recession and stated so on July 11 in Case for US and Global Recession Right Here, Right Now.

Recession Definitions

Contrary to popular myth, recession does not mean two consecutive quarters of economic contraction. Rather, two consecutive quarters of economic contraction is a sufficient, but not necessary condition.

In the US, the NBER is the official designator of recession start and end points. Many recessions have started with GDP still growing.

The "Conditions for Global Recession" are even looser. "The International Monetary Fund (IMF) considers a global recession as a period where gross domestic product (GDP) growth is at 3% or less. In addition to that, the IMF looks at declines in real per-capita world GDP along with several global macroeconomic factors before confirming a global recession."

Global GDP will struggle to rise 1% and it may even contract. Even 2% is in recession territory, and that is a given.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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China New Export Orders Drop Most Since March 2009, Operating Conditions Down 10th Consecutive Month; China's Export Machine Grind to a Halt

The HSBC China Manufacturing PMI™ shows Manufacturing sector operating conditions worsened at the sharpest rate in 41 months.

Summary

August data signalled a renewed decline in Chinese manufacturing output, as new business decreased at the sharpest rate in nine months. Consequently, backlogs of work fell modestly, and job shedding was recorded for the sixth month in succession. On the price front, average input costs declined at the sharpest rate in 41 months, while the rate of output price discounting remained sharp.



The pace of reduction in new orders was solid, and the most marked in nine months. Meanwhile, new export orders also decreased during August, and at the sharpest rate since March 2009.

With new business decreasing further, companies depleted their volumes of work-in-hand (but not yet completed) over the month. Although only modest, the rate of decline in outstanding business was the sharpest since January 2009.

Commenting on the China Manufacturing PMI™ survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:

“The final reading of the HSBC manufacturing PMI (August) confirmed that China's manufacturing sector still faces intensifying downward pressure. New export orders contracted at the fastest pace since March 2009, this, combined with a record high in stocks of finished goods sub-index, and a 41-month low employment index, suggests China's exporters are facing increasing difficulties amid stronger global headwinds. Beijing must step up policy easing to stabilize growth and foster job market conditions.”

China's Export Machine Grind to a Halt

Notice the last sentence above regarding what China allegedly "must" do. Also note the faith in "easing" to stabilize growth.

Economists seem to believe the role of central banks is to prevent every recession. That policy works for a while, then as happened in the US with the housing crash, an even bigger recession occurs that the central bank is unable to stop or even slow.

The US economy is cooling substantially and Europe is a complete basket case. Moreover, China's infrastructure is already seriously overbuilt. There are no magic solutions for China.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Most Economically Illiterate Journalist In History Proposes "Gold is Backed by Nothing, but US Dollar Backed by Federal Reserve"

Congratulations to Canadian journalist Bridget Brown, a CTV news field reporter for being the most economically illiterate TV journalist in history. Brown proposes gold is not backed by anything but the US Dollar is backed by the Federal Reserve which will be around a year from now.

This story is actually about a year old, appearing as early as September 30, 2011 on Natural News with a story headline of The most moronic TV news journalist ever?

I offer this story and the following video for entertainment on this Labor Day weekend.



Should that video be pulled, you may wish to click on Natural News which is keeping the video alive even with legal threats from CTV. You will need to flash forward to the 13:45 mark to skip past a lengthy Natural News lead-in as to why their posting of the video constitutes fair rights.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Who Do You Blame for the Woes of the Middle-Class?

The Pew Research center ponders The Lost Decade of the Middle Class.

Since 2000, the middle class has shrunk in size, fallen backward in income and wealth, and shed some—but by no means all—of its characteristic faith in the future.

These stark assessments are based on findings from a new nationally representative Pew Research Center survey that includes 1,287 adults who describe themselves as middle class, supplemented by the Center’s analysis of data from the U.S. Census Bureau and Federal Reserve Board of Governors.

Median Income



Median Net Worth



Fully 85% of self-described middle-class adults say it is more difficult now than it was a decade ago for middle-class people to maintain their standard of living. Of those who feel this way, 62% say “a lot” of the blame lies with Congress, while 54% say the same about banks and financial institutions, 47% about large corporations, 44% about the Bush administration, 39% about foreign competition and 34% about the Obama administration. Just 8% blame the middle class itself a lot.

Who Is To Blame?

Three Lost Decades!

Median net worth is back to a level first seen in the 1980s. By that measure, the US has had three lost decades. Wow.

62% Blame Politicians, Only 8% Blame Themselves

Note that 62% blame politicians and 54% blame financial institutions, but only 8% blame themselves.

Five Questions

1. Did banks force people to take out loans they could not pay back, or did people do so voluntarily?
2. Who elects congress? 
3. Do people make enough effort to understand interest rates, debt, the economic policies of politicians, exponential math and its implications, the untenable nature of public union pension plans and promises?
4. Do a significant number of people (if not the majority) get their economic views (assuming they have any economic views) from The View, Oprah, The Talk, or CNBC?
5. Why did PEW leave off the Fed and Fractional Reserve Lending from the list of answers?

Two Bonus Questions

1. Would the majority of respondents know anything at all about the Fed and Fractional Reserve lending had the PEW listed those options?
2. Who is really to blame for what is happening?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Harrisburg to Run Out of Money in October; Inside America's Most Indebted City; Labyrinth of Fraud

Congratulations to Harrisburg, the capital of Pennsylvania, for having the highest per capita debt of any city in the country.

The town's 50,000 citizens are on the hook for $1.5 billion according to the NPR article Inside America's Most Indebted City.

The city has delayed payments to light bulb venders and paper sellers. Restaurants have hired their own security. A local strip club paid to keep the street light on. The city is projected to run out of money entirely in October.

A judge has recently ordered a 1% income tax hike on the people still left in Harrisburg. But the city council has promised to fight it.

$1.5 Billion Does Not Include Schools, Pensions, Unfunded Liabilities

The Patriot News notes Harrisburg's eye-popping debt total is just one piece of city's bleak financial puzzle

It’s almost impossible to say exactly how much money the elected and appointed officials of Harrisburg have borrowed.

Missing financial audits, complicated transactions and intertwining finances create a labyrinth of money that stretches decades into Harrisburg’s history.

At best estimates, based upon reviews of independent reports and audited financial statements, the amount of debt owed by the city and its affiliated entities — with interest — stands somewhere north of $1.5 billion.

That’s roughly $30,285 for each of the 49,528 men, women and children living in the city and almost twice the income of the average city resident.

While the amount of debt is eye-popping, it is only one piece of the jigsaw puzzle that is the city’s bleak financial background.

It does not account for past-due debt payments or unfunded pension and healthcare obligations. Nor does it include the estimated annual deficits in the city’s and school district’s budgets, which this year are so far estimated at $6.8 million for the city and at least $7 million for the school district, even with drastic cuts such as eliminating kindergarten.

A declining tax base contributes to the overall problem — between 2009 and 2012, the assessed value of property in the city dropped by more than $30 million, according to a school district report.

Meanwhile, each time property taxes increase, fewer people pay them. According to a school district report, property tax collection rates have fallen from 87 percent to 83 percent.

THE DOMINO EFFECT

City schools may find themselves in a similar situation.

In 2009, the district refinanced almost $280 million of outstanding debt to exit swap agreements and lower debt payments over the first few years by securing lower interest rates. It also borrowed an additional $10 million for building projects and equipment purchases.

In his recovery plan, former Receiver David Unkovic noted that according to the last completed financial audit of the city — and the letter of the law — the city could borrow still more money.

According to his office’s calculations, the city could legally borrow up to an additional $117 million.

Whether anyone would agree to offer the city another loan, however, is an entirely different question.

Labyrinth of Fraud

Whenever you see stories like this, you can bet your last dime that massive amounts of fraud are in play.

The NPR article profiled David Unkovic, the man appointed by the state of Pennsylvania to fix the Harrisburg debt problem.

Unkovic resigned in May, then completely vanished from public life after scrawling out a hand-written letter of resignation.

Months later, NPR tracked him down and now Unkovic believes there is something more sinister than gross mismanagement at play.

From NPR

"Illegal conduct occurred," Bill Cluck, who serves on the board that runs Harrisburg's incinerator, told me. "I think false statements were submitted under penalty of law to the state government in connection with the financing."

Stephen Reed was the mayor of Harrisburg from 1980 to 2009. People in town famously say he never met a bond he didn't like. He used the money borrowed on the incinerator to do all sorts of things.

He bought strange artifacts from all over the country, dreaming of building a Wild West museum. The city borrowed money to buy a baseball team and build a stadium; the team was later sold at a loss.

"The fundamental problem is he was borrowing more than he was really allowed to under state law," Unkovic says.

In 2007, Harrisburg filed a document called an 8110 b certificate. It was a promise, Bill Cluck says, that all the previous debt borrowed on the incinerator was still self-liquidating — that the incinerator would bring in enough money to pay the money that had been already borrowed on it.

"They knew it wasn't true when it was submitted, and it's never been corrected to this day," Cluck says.

And that, according to Cluck, was a crime.

There were 17 different revenue projections showing that the incinerator could never earn back all the money that had been borrowed.

So how was it that nobody — none of the law firms, none of the financial advisers — raised questions about the wisdom of this loan?

We asked, but they refused to respond on the record. And, Cluck notes, all those advisers made hundreds of thousands of dollars in fees from the loan.

Almost none of the $30 million the city borrowed in 2007 went to the actual incinerator upgrade. It went to pay back old debt, and to pay fees to the many firms that set up the deal in the first place. The same firms ended up on virtually every deal, Cluck says.

To make matters worse, the city ultimately was on the hook. If the incinerator couldn't make the money back, it would fall to the taxpayers of Harrisburg. And this makes Bill Cluck crazy.

"Where's the advocate for the city to say, 'Hey, you're getting screwed by the terms of these deals,'" he says. "It never happened."

Where Did the Money Go?

Stories like this irritate me because they always seem to stop short. Citing Cluck, NRR says money went to "pay fees to the many firms that set up the deal in the first place. The same firms ended up on virtually every deal".

I can certainly believe that. Indeed I would be shocked to find out otherwise. But where is the list of names? What banks and politicians profited from these shady deals? Inquiring minds and taxpayers have a right to know.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Foreclosure Stats From You Walk Away

Here are some interesting stats courtesy of Jon Maddux, CEO of You Walk Away.

State	% of You Walk Away Clients With No Foreclosure Notice	Average Months Without Foreclosure Notice
Washington	79%	13
Nevada	79%	13
Georgia	75%	12
Michigan	73%	18
Virginia	72%	18
Oregon	69%	13
Pennsylvania	66%	12
Hawaii	60%	21
California	59%	15
New York	57%	16
New Jersey	53%	14
Arizona	52%	14
Colorado	52%	8
Florida	45%	17
Ohio	37%	19

Says Maddux

In Florida, 45% of our clients are in pre-foreclosure status. On average, these Florida homeowners are 17 months delinquent and have yet to receive even their first formal foreclosure notice. 59% of our California clients are in pre-foreclosure status. These California borrowers are an average of 15 months delinquent and also have yet to receive their first formal foreclosure notice. Eighty-five percent of the homeowners we’re working with are in pre-foreclosure and have not made a mortgage payment for an average of 14 months.

Structural Issues

• Kids graduating from college are deep in debt and holding off home buying, getting married, and starting families.
• Boomers looking to retire and downsize have few candidates able and willing to buy larger homes, even with deep discounts
• Shadow inventory and the pent-up foreclosure list are huge forces in play.

Maddux believes the data points to significant backlog, eventual foreclosure activity and a drop in value for home prices.

I think home prices are bottoming in many areas, but even if so, prices in general are not going anywhere fast because of aforementioned structural issues.

Addendum

Questions came up regarding the size of the sample.

You Walk Away has 7,000 clients.

Is that a representative enough sample?

I do not know. It is certainly not scientific sampling. However, I suspect it is at least reasonable.

From Maddux ...

Information Regarding Our Methodology:

YouWalkAway.com has worked with over 7000 clients nationwide. One part of the service includes monitoring their foreclosure and providing weekly updates and a personalized foreclosure timeline. Once enrolled, we begin by asking each client when was the date of their last mortgage payment and weekly research each client’s property to determine if a foreclosure start notice has been filed. We then continue to monitor every property and record each milestone of the foreclosure process until the home goes back to the bank or is sold in a short sale.

The data was compiled using our current client database we compiled lists of the number of active clients in every state and compared the number of borrowers who had received their foreclosure start notice and those who have defaulted, but not yet received the foreclosure start notice. This was done to see what percentage of our clients had defaulted, but were not yet in the formal foreclosure process. After realizing that the numbers were higher than expected, especially in light of recent news indicating that lenders had picked up the pace as a result of the $26 billion mortgage settlement, we decided to see how many months delinquent on average these “pre-foreclosure” borrowers were. Again, the numbers came back much higher than expected. This indicates that, while there may have been a recent uptick in foreclosure filings, lenders are still dealing with years of backlog.

Mike "Mish" Shedlock
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Spain's Budget Deficit Already Exceeds Maximum for Entire Year; Path of Convergence

Spanish unemployment rate is 25% and rising. Youth unemployment is 52.9% and rising. Meanwhile Spanish budget deficits are such that Spain will need more austerity. I keep wondering what it will take for this setup to blow sky high in riots.

Via Google Translate from Libre Mercado central government deficit already exceeds the maximum provided for the year

The central government posted a deficit of EUR 48,517,000 through July in terms of national accounts, the 4.62% of GDP, representing an increase of 25.8% compared to last year, according to data provided by the Secretary of State Budgets, Marta Fernandez Currás. The deficit figure exceeds the new limit has assumed the state, which has risen to a point, to 4.5%, for the extra year he gave Brussels to Spain to reduce the deficit to 3%.

The deficit through July was a result of payments stood at 100.694 million euros, up 9.8%, while revenues totaled 52.177 million euros, representing a fall of 1.8%. On a comparable basis, net of transfers to regional governments and social security, among other authorities, the deficit stood at 4.12% of GDP.

Humorous Comment of the Day

"We are on the path of convergence required by Brussels," said Currrás, recalling that the deficit is an annual target, so the balance recorded until July continues to be a reference.

Mike "Mish" Shedlock
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China, Germany to Settle More Trade in Yuan, Euros; What's That Mean for Gold, the Dollar?

Inquiring minds note China, Germany Plan to Settle More Trade in Yuan, Euros.

Germany and China plan to conduct an increasing amount of their trade in euros and yuan, the two nations said in a joint statement after talks between Chancellor Angela Merkel and Chinese Premier Wen Jiabao in Beijing on Thursday.

"Both sides intend to support financial institutions and companies of both countries in the use of the renminbi and euro in bilateral trade and investments," said the text of the statement.

It also said that both parties welcomed investments in China's interbank bond market by German banks and supported the settlement of business in the yuan by German and Chinese banks and the issuance of yuan-denominated financial products in Germany.

Announcement Mean Anything?

That's the announcement, and I have no doubt people who do not understand trade math will trump this up as if it's news of big significance.

Well, it's not. The announcement is a common sense function of math.

There is more bilateral trade between Germany and China, so fundamentally it makes sense that this agreement would be worked out. Indeed, mathematically, the markets would eventually force such an agreement.

If Germany goes back to the Deutschmark, then one should expect bilateral trade between the countries to be in Deutschmarks and Yuan.

The only relevance to the dollar is if Germany is taking away US trade with China. If not, the announcement is a meaningless function of math.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Brussels Pushes for Another "All Powerful" Banking Committee, Headed by ECB, In Spite of Objections by ECB and Germany

Once nannycrats grab on to an idea, they never relinquish it. Eurobonds are the perfect example.  Many other ideas float around despite numerous objections in key places. Some of these ideas involve creation of more commissions and more working groups.

Here is a sampling of commissions and groups that I am aware of.

• The European Commission is headed by president José Manuel Barroso
• The European Council is headed by president Herman Van Rompuy
• The Euro Group is headed by president Jean-Claude Juncker
• The European parliament president is Martin Schulz
• Numerous other committees set policy on trade, energy, and nearly everything else under the sun.

Barroso now wants another new commission, this one under the ECB with the task of being the "all powerful" banking supervisor.

As envisioned, Barroso's plan would create a 23-member board: a national representative from each eurozone country plus six independent members, including its chair and vice-chair.

No doubt there will be dozens if not hundreds of staff members all intent on expanding their own power.

The Financial Times has more details in Brussels pushes for wide ECB powers

The European Central Bank would be given sweeping authority over all 6,000 eurozone banks under a plan being drawn up by the European Commission, putting Brussels on a collision course with Germany and the ECB itself, which have urged a more decentralised first step towards “banking union”.

The plan, agreed at a meeting this week between top aides to José Manuel Barroso, commission president, and Michel Barnier, the EU’s senior financial regulator, would strip existing national supervisors of almost all authority to shut down or restructure their countries’ failing banks, giving those powers to Frankfurt.

The German government has resisted centralising all supervisory powers with the ECB, however, arguing that Frankfurt should be left to deal with just the eurozone’s 20-25 largest banks. National supervisors would then be left as independent and co-ordinating agencies for smaller banks.

Some senior ECB officials had taken a similar view in closed-door consultations with Brussels, EU officials said, though Mario Draghi, the ECB chief, is more sympathetic to the commission’s view.

Germany’s objections also stem from a desire to keep national control over smaller, politically connected regional savings banks.

Despite the resistance, Mr Barroso this week decided to adopt the more ambitious proposal advocated by the commission’s internal market directorate, drafters of the plan, which argued a narrower approach would disappoint financial markets.

Splitting responsibility could complicate the next steps in creating a banking union: setting up a eurozone-wide deposit guarantee scheme and bank bailout fund. If only large banks were covered by those schemes, depositors could flee smaller banks for more secure larger ones, officials argued.

To become law, all 27 nations must agree. Barroso hopes for a summit before the end of the year.

In addition to unanimous approval for such a position, I would point out that ceding power to Brussels is a change so sweeping that Germany would require a national referendum, just as with the eurobonds idea.

Nannycrats do not care about such issues, they just plow ahead, then blame Germany when it will not go along.

Speaking of which, I highly suspect Merkel has taken a partial stance out of political expediency. Perhaps she thinks she can avoid a referendum by limiting authority to only the largest banks.

Mike "Mish" Shedlock
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Bad News For Super-Models: Computer-Generated Fashion Models Better Than Real Thing; Fashion Questions of the Day

Here is an easy prediction: Price of fashion models in advertizements is going to collapse, if indeed the industry survives at all.

Why should retailers pay for fashion models when an advertizing department can generate models with the perfect height, weight, breast size, nationality, and complexion for whatever designs they want to promote?

Bad News For Super-Models

MarketWatch describes the setup in 5 computer-generated sales pitches

To save on costs—and perhaps assembly time—Swedish retailing giant IKEA created computer-generated images of its furniture for the new catalog, rather than hiring a photographer. By next year, a quarter of the scenes depicted in IKEA’s print and online advertising will be digitally drawn rather than photographed, The Wall Street Journal reported last week. In fact, IKEA says it is able to better depict its products with computer images than actual photography.

IKEA is not alone. Hollywood filmmakers increasingly create characters—and not just special effects—with CGI animation. And some fashion lines are finding that it’s less expensive to create the perfect specimen digitally than to track down America’s Next Top Model. These computer-generated realities may be cheaper, more appealing, and more versatile than the genuine articles.

Related Ideas

The MarketWatch article also discussed simulated driving of cars, movie special effects, and 3-D dream homes.

Special effects are nothing new. New car models come out only once a year. And I believe most people want real images of homes, not simulated models.

In contrast, clothing changes four times a year, with each season, and also varies by weight, height, size, nationality, skin color, age, etc.

Fashion Questions of the Day

Do I care if the person wearing a sweater in a printed image is generated or real? Why would I? How would I know in the first place?

Supermodels on magazine covers may or may not go away due to importance of name recognition, but every modeling job on down is likely to be eliminated over time.

Virtual models simply have too many advantages for real models to compete effectively. This in turn will pressure wages of even the super-models.

Looking for a career? Fashion modeling is not a good choice.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Japan Manufacturing PMI Hits 16 Month Low, New Orders Plunge

Markit reports Japan Manufacturing PMI Hits 16 Month Low

Key Points:

Output and new orders down at accelerated rates
Near-stagnation of employment
Purchasing costs fall to greatest extent since November 2009

Markit/JMMA Manufacturing PMI



After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers’ Index™ (PMI™) posted 47.7 in August, down from 47.9 one month previously, signalling the sharpest worsening of Japanese manufacturing sector operating conditions since April 2011. Moreover, the latest deterioration in business conditions was broad-based across all three market groups.

Japanese manufacturing production declined further in August, with the rate of contraction accelerating to the fastest in 16 months. The latest reduction in factory output was the third in as many months.

Reflecting falling new orders and corresponding spare capacity, backlogs of work decreased further in August. The rate at which firms depleted work-in-hand (but not yet completed) was sharp, and the steepest since May 2009.

Japan is in its third deflationary decade in spite of massive fiscal stimulus, massive monetary stimulus, and the major industrial world's highest debt-to-GDP ratio.

US demographics are not as bad, but US consumer debt overhang and student loans are worse. The deflationary forces facing Bernanke are massive.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Reader Questions On Hyperinflation; Would Printing $50 Trillion Tomorrow Do Anything?

In response to Economist Fired for Expressing Opinions on Max Keiser Show; Errors in Observation where I stated "The Fed Cannot Realistically Cause Hyperinflation" I received a couple of emails worth reviewing.

Reader Philip writes ...

I do not understand how you could say that the Fed cannot cause hyperinflation. The government has a huge debt. The debt is manageable at super low rates. But, if rates rise due to some inflation or even just caution from abroad then the government starts paying a very large sum in interest. That takes away from its obligations even more than the current deficit amount. Either the Fed has to step in and monetize the debt by printing more and more money spiraling out of control.

Definition of Terms

As always, before one can have a rational discussion, one must agree on definitions. Hyperinflation is a complete loss of faith in currency. In other words, currency becomes worthless in a short period of time.

Is there a risk of high interest rates? Yes. But I do not think that risk is high in the near future. Even assuming I am wrong, high rates are not the same as hyperinflation.

The US dollar is not headed to zero given the US has the largest stash of gold of any country. That alone would preclude hyperinflation. There are many other reasons that I have touched upon that suggest interest rates are not going up fast.

Credit Markets

The Fed has tried to revive the credit markets but has essentially failed, except for student loans. Making debt slaves out of students is actually a hugely deflationary force.

Moreover and as I have stated many times, the Fed cannot give money away, spend it, or force anyone to spend it. That is a very tough battle for the Fed with attitudes where they are (and as I have mentioned, attitudes are very important).

Banks do not want to lend, credit-worthy businesses do not want to borrow, and consumers are still deleveraging. Those are extremely deflationary forces.

Would Printing $50 Trillion Tomorrow Do Anything?

Ignoring interest on excess reserves (a proviso I mentioned), printing $50 trillion dollars tomorrow might not do anything.

Indeed, if $50 trillion printed tomorrow sat as excess reserves (the most likely event), it would have the same effect as if it was buried in the ground, or not printed at all. Such is the nature of a credit-based economy, and a point that has caused hugely inaccurate inflation forecasts from many Austrian economists.

As previously mentioned, such massive printing might briefly cause a temporary attitude change accompanied by a brief asset bubble of some sort (especially in long-dated treasuries given banks would put some of it to that use).

However, massive printing would collapse treasury rates, further destroying those on fixed income, and make it even harder for pension plans to meet assumptions.

Since printing $2 trillion did not spur credit expansion, pray tell why would $50 trillion?

Theory vs. Practice

Certainly we are guessing as to what printing $50 trillion might do. As a practical matter, the odds of finding out are essentially zero. The Fed is not going to print $50 trillion tomorrow.

More realistically, would printing $2 trillion a year for the next 10 years cause hyperinflation?

No, it won't.

So where is Fed induced hyperinflation going to come from? The answer is it isn't.

Government vs. the Fed

At this stage in the cycle, and in sharp contrast to what most believe, the Fed is essentially powerless (which is exactly why Bernanke is begging Congress to act)

In contrast to a Fed that cannot spend money (except to meet its payroll and expenses and pay interest on reserves, etc), the federal government could actually spend $50 trillion tomorrow. But it won't.

Hyperinflation? Even from a monetary aspect hyperinflation is nowhere in sight.

Hyperinflation is a Political Event, Not a Monetary Event

It's important to note that hyperinflation is not really a monetary event in the first place. Rather, hyperinflation is a political event caused by governments.

I responded that way in an email to reader Peter who replied "Sorry, but your theory is not based on the data. Read the literature on high and hyperinflation episodes."

Well, I have read countless excerpts and Peter is badly mistaken.

Please consider Hyperinflation Nonsense in Multiple Places.

The entire post is worth a look for some remarkably silly predictions, but for the debate at hand, here is the pertinent snip:

Jeff Harding at the Daily Capitalist asks Why Does Hyperinflation Occur?

In every modern case of hyperinflation the decision to inflate was a political one, not an economic one. In almost every case hyperinflation followed a war or a coup or some massive political change such as the end of the Soviet empire or the rise of a dictator or a populist-socialist takeover, and other political unrest.

In the 20th Century there were quite a number of hyperinflationary events. I used the Wikipedia list of modern hyperinflations (Since WWI) and researched the political circumstances of each country. The circumstances can be put into three rough categories: post-war disruption, post-Soviet collapse, and socialist-populist regimes.



For example we all know what happened in Germany during after WWI when politicians, mostly socialists, blamed all their problems on reparations and continued to print so much money that it resulted in the famous cash-in-a-wheelbarrow photos. They literally had no clue what they were doing.

The post-Soviet empire collapse is easier to understand as former communist/socialist regimes fought for power and struggled with economic policy. Many of these countries have reformed or were forced to reform their monetary and fiscal policies.

Many of the socialist-Marxist regimes were Latin American populist governments who employed “revolutionary” anti-capitalist nostrums for economic policy. Chile (Allende) and Argentina are good examples. Argentina has had years of high inflation to hyperinflation since 1980. In Africa most countries were a mixture of strongmen with socialist-Marxist policies. I am not suggesting that these were pure socialist governments, but rather the typical situation where the government seizes or controls large parts of industry and issues regulations controlling much economic activity.

These hyperinflations all had one common denominator: during a period of instability, spending was used as a political tool and it got out of hand. I understand that the circumstances of each country were different and that it is perhaps unfair to say, lump Israel in with Argentina. But each country faced political factors that created instability or a national crisis; the government spent heavily to gain popular support, and resorted to the printing presses to pay for their spending.

Harding is correct. This is how I further elaborated...

Zimbabwe vs. Weimar

In Zimbabwe, the Mugabe government initiated a "land reform" program intended to correct the inequitable land distribution created by colonial rule. Ultimately, Mugabe's attempt to to bail out the poor at the expense of the wealthy is what triggered capital flight and loss of faith of the currency.

His reforms not only caused a flight of capital and human capital (the wealthy), they also led to sanctions by the US and Europe. In response, Mugabe turned on the printing presses but the loss of faith in the currency had already occurred.

In Weimar Germany, printing for war reparations kicked off hyperinflation. Wikipedia provides a good accounting in Inflation in the Weimar Republic.

It is certainly not impossible for there to be a complete loss of faith in the US dollar, however there odds are extremely remote.

Can The Fed Cause Hyperinflation?

I do not think the Fed itself can cause hyperinflation and more importantly I am sure they would not if they could. The reason is "Hyperinflation Would End The Game"

• Hyperinflation by definition would destroy the currency and thus the banks
• Hyperinflation would destroy the wealthy and all their corporate bond holding
• Hyperinflation would destroy the Fed
• Hyperinflation would destroy the wealthy political class

To understand how powerless the Fed is, one needs to understand the difference between credit and money, how much the former dwarfs the latter, and what the Fed's role is in getting banks to lend.

Hyperinflation Model is Complete Silliness

Those calling for hyperinflation are extremely misguided. It is not going to happen in any timeframe worth discussing.

On the political side, no country is going to force war reparations on the US. The US is not going to peg its currency to another, the Fed is not going to print $50 trillion (and it would not matter anyway unless Congress spent that much), government is not going to confiscate land to the point of causing massive human and capital flight, etc. etc.

Moreover, the US's gold holding, the fact the US has the largest capital and bond markets in the world coupled with ease in starting a business vs. nearly anyplace else in the world, absolutely 100% precludes a hyperinflationary outcome for the foreseeable future.

The hyperinflation model is absolute complete silliness.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Eurozone Retail Sales Decline 15th Month, Plunge Led by Italy, France; German Sales Contract Slightly

Once again there is grim data from Europe. The safe thing to do is expect grim data every time European data is reported. Except for an occasional outlier, you will not be too far off.

Eurozone Retail Sales Decline 15th Month

Markit Reports Eurozone retail downturn deepens in August

Key points:

• Revenue contraction extends to tenth month
• German sales flat; sharper falls in France and Italy
• Inflationary pressures build up

Retail sales in the Eurozone continued to fall sharply on an annual basis in August. The rate of contraction accelerated to the fastest since May, and extended the current sequence of continuous decline to 15 months. This was despite a further year-on-year increase in Germany, and reflected substantial declines in both France and Italy.





Employment Declines 5th Month

Employment at retailers in the Eurozone declined for the fifth month running in August. The rate of job shedding remained modest, reflecting sustained workforce growth in the German retail sector. French retailers posted the steepest job cuts for over three years, while the rate of contraction in Italy eased since July.

Prices Paid Rise

The Prices Paid Index rose for the third month running from May’s 19-month low in August, signalling a strengthening rate of inflation of wholesale prices in the Eurozone. Sector data signalled that clothing & footwear and food & drink drove cost pressures in August.

Gross Margins Drop

Retailers’ gross margins continued to fall sharply in August. The rate of deterioration eased since July, but was still among the fastest registered to date. Reflecting the relative strength of demand, Italian retailers posted the steepest drop in margins, and German retailers the weakest.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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France to Hire 150,000 Subsidized Workers With Zero Qualifications; Why Stop There?

Looking for a loony idea to address unemployment in France? Look no further because I have a doozie.

Via Google Translate from El Economista, France will create 150,000 jobs for young people without qualifications

The French Government has today adopted a draft law providing for the creation of 150,000 subsidized jobs for young people with little or no qualifications, which are most affected by unemployment and employability harder.

The beneficiaries of these so called "jobs of tomorrow" will work for municipalities, hospitals, schools, social organizations, associations or, exceptionally, in private companies, and will receive a grant of up to 75% of their compensation.

The estimated cost is 500 million euros in 2013 and "more than 1,500 million" next year by the state budget, said Labor Minister Michel Sapin, at a press conference.

"We want contracts defined privilege" said Sapin, who nevertheless admitted that the storms are also accepted, and said that public support will be maintained in each case between one and three years, provided that employers provide a "accompaniment" to "very great difficulty youth push" to which they are targeted.

He insisted that the "accompaniment", which may include training for classical channels is "fundamental" to the 500,000 eligible people likely to have between 16 and 25 years, lack of skills and work.

Why Stop at 150,000?

The second half of that translation is a bit choppy but the bill clearly targets "500,000 eligible people" between 16 and 25 with no skills and no qualifications.

So, why stop at 150,000? Why not hire them all? And why stop at age 25? Why not hire everyone with no skills and no qualifications regardless of age?

Hopefully the answers are so obvious that hiring even 5,000 with no qualifications seems preposterous.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Governor Brown Admits the Obvious "We Have Lived Beyond Our Means"; Brown Agrees to Vast Overhaul of the California's Pension System; Unions Howl Over Obvious Truth

In a long-overdue moment, governor Jerry Brown has finally admitted the obvious, the state's pension system is broke and California Has "Lived Beyond Our Means". Unions of course are howling at that obvious admission.

Please consider California leaders strike public pension reform deal

California Governor Jerry Brown and lawmakers have reached a deal to raise public employees' retirement ages, have them pay more into their pension accounts, and cap retirement payments in a vast overhaul of the state's pension system that he says will save $30 billion.

California faces a huge liability for funding the nation's largest public pension system, but other states and cities also have enormous pension funding gaps and will be watching the state closely.

Brown did not get everything he wanted from lawmakers, such as a hybrid plan that would funnel some contributions into 401(k)-style accounts, and some of the deal's measures will not affect current employees.

"We have lived beyond our means," he said. "The chickens are coming home to roost and this is just one in a series of countermeasures that will be required over the next decade."

LABOR UNIONS OUTRAGED

Democrats in a conference committee of both legislative chambers approved the deal 4-0 late on Tuesday. The two Republicans on the committee abstained, protesting lack of time to study the measures, and labor groups were stunned.

"We are outraged that a Democratic governor and Democratic legislature are taking a wrecking ball to retirement security for teachers, firefighters, school employees, and police officers," said Dave Low, chairman of Californians for Retirement Security, which represents 1.5 million public employees and retirees.

Outside the state building where Brown unveiled the agreement, union activists said the deal unfairly bypassed collective bargaining rights.

"Labor did not have input on this and we are very, very concerned on what this will mean for rank-and-file workers," said Barbara Maynard, also with Californians for Retirement Security.

Labor Did Not Have Input

That my friends is precisely the way it should be. Labor does not deserve any input and collective bargaining by public unions needs to go the way of dinosaurs.

There is no public benefit to public unions, so there is no need for them. All public unions do is raise costs. The goal of public unions is to do no work for mammoth wages and benefits.

No one in their right mind would willingly take input from such a group.

Beacon of Light in Ocean of Darkness

The key sentence from Governor Brown stands out like a beacon of light in an ocean of darkness. In case you missed it, here it is: "This is just one in a series of countermeasures that will be required over the next decade."

Precisely. Brown's proposal is not the end of what needs to happen, it is the beginning of the beginning of what needs to happen.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Economist Fired for Expressing Opinions on Max Keiser Show; Errors in Observation

According to Forbes, economist Sandeep Jaitly was forced to resign from his position at the Gold Standard Institute after expressing his views with Max Keiser.

Said Phillip Barton, president of GSI "Lest there be any misunderstanding, the views expressed by Sandeep Jaitly in his interview with Max Keiser are not the views of The Gold Standard Institute. To the contrary, we strongly disagree with those views. .... Sandeep Jaitly has resigned from his position as Senior Research Fellow with the Institute and we sincerely thank him for his past contributions."

Let's Tune Into Max

You can read the interview at Keiser Report: Frankenmarkets and Austrian Economics.

What appears to have gotten Sandeep in trouble is his criticism that Mises made "too many mistakes".

However, Sandeep did say, "He [Mises] was certainly the greatest economists of the twentieth century. It’s just that he made a slight, few errors of observation. That’s all."

Errors in Observation

When it comes to errors in observation, Sandeep has made a few of his own. For example consider these statements from the interview: "What I want to make very clear Max is that you don’t need marginal quantitative easing from here for asset prices to start escalating. You only need what has already been printed to start spinning more quickly. And once things start spinning, nothing can slow it down."

Interestingly, the first sentence is true. However, the following sentences show Sandeep fails to understand the role of attitudes as well as the fundamental nature of credit in a credit-based economy.

The statements imply that printed money may come spinning into the economy at any time causing massive inflation the Fed could not stop.

There are two errors in such an analysis. The first error is that banks do not lend from excess reserves. Rather, banks lend, on two conditions, both of which need to be true.

1. Banks are not capital impaired
2. Banks believe they have credit-worthy borrowers.

By credit-worthy I mean "lending rates are high enough, or assets strong enough for banks to believe they will make a profit commensurate with risk".

Clearly banks made serious mistakes in the housing bubble in regards to the credit-worthiness of borrowers (primarily based on belief that home prices would not fall), however, both conditions were met.

Sure, banks can start lending again at any time (which is why Sandeep's first sentence regarding no need for further QE to ignite a credit boom is true in isolation). However, the idea that excess reserves are about to come spinning into the economy at any moment is fatally flawed.

For a complete rebuttal to Sandeep's mistaken observation, please see Can Bernanke Force Banks to Lend by Halting Interest on Excess Reserves?

Attitudes Have Changed

Note how much attitudes have changed. Banks are not lending now out of rightful fear of more losses.

Very few Austrian economists seem to understand the nature and role of attitudes and credit in boom and bust cycles. Most woodenly stick to views that excess reserves will come pouring into the economy 10 times over causing massive inflation.

Careful observation would suggest the economy does not act as prevailing Austrian theory believes it does. Unfortunately, this is why many Austrians have looked ridiculously silly vs. Paul Krugman when it comes to inflation predictions.

This is by no means a defense of Bernanke or Krugman, as Bernanke has created other very serious problems and economic distortions of all sorts. Moreover, Fed policies and deficit spending have indeed created boom-bust cycles of ever-increasing amplitude.

Indeed, the policies espoused by Bernanke, forever bailing out banks whenever they have gotten in trouble is one of the factors driving money and assets to the 1% vs. the 99%. Clearly, those on fixed income have been destroyed by Bernanke's policies.

Bernanke Translated

For a short, yet thorough trashing of Bernanke's defense of his policies, please see Mish Translation of Bernanke's Statements on the Treasury Carry Trade and the Tax on Savers.

The only way to fix the problem is to end fractional reserve lending and return to sound money. On this point the Austrians are 100% correct.

Spinning Out of Control?

The second error in observation Sandeep makes is belief that "once things start spinning, nothing can slow it down."

That is ridiculous.

The Fed could easily rein in inflation by the simple matter of hiking interest rates. Whether or not the Fed would do so is certainly debatable. However, please be aware that the Fed in and of itself cannot cause hyperinflation without purposely trying to do so, and perhaps not even then.

Fed Cannot Realistically Cause Hyperinflation

The Fed cannot force banks to lend. Nor can the Fed force consumers and businesses to borrow. In a credit-based economy that is what matters most.

Once again, my observation is Austrian economists in general have failed to observe this crucial point. Bear in mind that the Total Credit Market Debt Owed is over $50 trillion!  From that aspect, the idea that $1.5 trillion in excess reserves is going to come spinning into the economy causing inflation the Fed cannot stop, is simply ridiculous.

Sure, in theory, the Fed could print $100 trillion and agree to pay 4% interest on excess reserves, but the Fed is not out to destroy the banking system.

Interestingly, if interest on excess reserves was zero, it is debatable whether printing $100 trillion would do much of anything at all other than perhaps cause a brief asset bubble and subsequent crash. I actually doubt it would spur lending or hiring and once again, careful observers will note lending and credit are what matters most.

Practical Restraints

Remember, the Fed is beholden to bankers. Moreover, the Fed does not want to wreck the system because to do so would wreck the banks and the Fed's power along with it.

In a nutshell, hyperinflation fears caused by the Fed are silly. Hyperinflation fears caused by Congress giving away money are more realistic in theory. However, such odds are still extremely low because Congress would not give enough money away in the first place.

With a total credit market exceeding $50 trillion, $1 trillion deficits would not cause hyperinflation for a long, long time.

That said, a global currency crisis at some point in the future is unavoidable if countries keep on the path they are on. Deficit spending and competitive currency debasement globally for the sole benefit of banks and the wealthy (the 1%) is simply not sustainable. Something has to give somewhere, and it will, most likely in multiple places, at a very inopportune time.

Addendum:

Max Keiser reports that Professor Antal Fekete Supports Sandeep Jaitly, with Fekete stating "truth can be approximated only through debate and that at no point was GSI envisaged as a ‘thought police’".

For a brilliant trashing of an article in The Atlantic against the gold standard, please see Pater Tenebrarum's article The Atlantic Weighs In on the Gold Standard

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Investment Conference Featuring John Hussman, Michael Pettis, Jim Chanos, John Mauldin, Mike "Mish" Shedlock, Chris Martenson

I am pleased to announce an economic conference in Sonoma, California on April 5, 2013 featuring some of the best economic thinkers and speakers in the world including...

• John Hussman
• Michael Pettis
• Jim Chanos
• John Mauldin
• Chris Martenson
• Mish
• Special Guests

Sonoma is in "Wine Country", west of the Napa Valley and slightly north of San Francisco. If you like the idea of enjoying great weather, excellent food and wine, plus inside access to many of today’s best economic minds – all together in one of the most beautiful places in the world – this conference will likely interest you.

Reservations and Details

For reservations and details please click on Wine Country Conference.

The list of speakers includes select economic forecasters that I respect most. The group includes experts on China, monetary policy, and investment opportunities in a shrinking-yield world.

These minds have never all been in the same place at the same time before, so I cannot tell you how excited I am for us all to be together.

Net Proceeds to Charity

Net proceeds from this event go to an extremely worthy cause: funding research for ALS, more commonly known as Lou Gehrig's disease.

Matching $100,000 Grant From Hussman Foundation

From now until the start of the conference on April 5, 2013, the John P. Hussman Foundation will generously match $1,000 of each conference registration fee as well as match any donations made to the Les Turner ALS Foundation, up to a total of $100,000.

Book Your Conference Reservations Now

There will be presentations and panels throughout the conference, as well as ample time to meet the speakers during breaks and mixers.

Please book your reservations now. There is a nice discount for those who book early. The total number of reservations is limited to 200.

Donations and Raffle Tickets

Matching donations continue up to April 5th but raffle tickets are not included in that match.

For those not familiar with the raffle, it is something I organized in honor of my wife Joanne, who passed away on May 16, 2012 from ALS.

If you missed it, please see My Wife Joanne Has Passed Away; Stop and Smell the Lilacs

In response to the above article, donations have come in from 40 countries around the globe! See link for details.

Raffle Ticket Entries are split 50-50 with ticket buyers in a drawing to be held November 8 (a change from my original posting date of November 15). Ticket sales end September 27, but you can still make a donation at any time.

Checks

To make a cash donation by check or money order, please send a check or money order to
Lacey Wood
Mish Campaign
Les Turner ALS Foundation
5550 W. Touhy Avenue, Suite 302 Skokie, IL 60077
847.679.3311 (Main)
Any questions, please call the above number.

Credit Card

You can make a donation or purchase raffle tickets by credit card on the Les Turner ALS Site.

Some people emailed they did not like entering the information fields required. However, the purpose is only to ensure the foundation knows how to get in touch with raffle winners!

People move, phone numbers change, and email addresses change. It's as simple as that.

Thanks!

Thanks in advance to all who attend the conference, make a donation, or purchase a raffle ticket. Money will be used for ALS research, a very worthwhile cause.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Capital Flight in Spain Hits 15-Year High

If Spain is going to be saved, someone better convince Spanish citizens because Deposit flight from Spanish banks hits 15-year high as bailout rumours grow

Spanish banks lost €1 out of every €20 deposited with them in July, making it the worst month for deposit flight in 15 years as rumours grew that the country is edging closer to a full bailout.

News that banks were losing deposits came as Spain's statistics institute revealed the current recession is worse than thought, with the economy shrinking at an annual rate of 1.3% in the second quarter.

"The downturn in the Spanish economy is deeper than previously thought and accelerating," warned Robert O'Daly of the Economist Intelligence Unit.

Tuesday's revised figures showed recession started three months earlier than previously indicated. "The data shows the recession started in the third quarter of last year," secretary for state for the economy, Fernando Jiménez admitted.

A collapse in internal consumption in a country squeezed by government austerity and massive unemployment is largely to blame for the recession, as this fell at an annual rate of 3.9% in the second quarter.

Unemployment is already at 25% but the speed at which jobs are being destroyed quickened to an average rate of 800,000 jobs a year in the second quarter, according to the statistics institute.

That helps explain why Spaniards, and their companies, are both reducing spending and putting less money in the bank.

The amount of money Germany is going to lose when Spain and Italy decide to exit the euro grows leaps and bounds every month.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Anti-EU, Anti-Brussels Sentiment Rises in Netherlands; Don't Expect Much From a "Merkollande" Summit

Emile Roeme, a socialist running on an anti-Brussels, anti-austerity plan is likely to become the next prime minister of the Netherlands.

On the extreme right, populist Geert Wilders wants the Netherlands to withdraw from the eurozone completely.

The centrists who support the nannyzone feel squeezed in the middle, and their days appear numbered.

In a case of Dutch Discontent, Socialists Ride Wave of Anti-EU Sentiment

The economy is in trouble and unemployment is rising -- in the Netherlands as in much of the rest of Europe. Ahead of upcoming elections, the Socialists are riding a wave of euro-skepticism and may emerge as the strongest political force in the country.

According to the polls, [Emile Roeme] the former elementary school teacher could become the next prime minister of the Netherlands.

'Over My Dead Body'

Roemer owes this popularity to his skepticism about Europe. "Having even more Brussels is not the solution to Europe's crisis," he says. The Socialist rails against the European Commission's austerity targets, under which the Netherlands is supposed to reduce its budget deficit to below the Maastricht Treaty ceiling of 3 percent of GDP by next year.

"Over my dead body," says Roemer, referring to the possibility of penalties being imposed by the European Commission. It is also a jibe at the German chancellor, who used similar language to express her views on introducing euro bonds. Too much power has been placed into the hands of uncontrollable technocrats, Roemer claims. "The economic policy Brussels wants to dictate to us is downright antisocial."

If Roemer prevails in the parliamentary election on Sept. 12, German Chancellor Angela Merkel will lose one of the few supporters of her Europe-wide austerity program. The Dutch have stood with the Germans when it comes to imposing strict conditions on countries like Greece.

Now the Socialist leader wants his fellow Dutchmen to vote in a referendum on the fiscal pact, one of Merkel's pet projects, which aims to impose budgetary discipline on the 25 signatory countries. The government in The Hague, which collapsed in April over a national austerity package, has not ratified the agreement yet.

One Fewer Gold Star

Right-wing populist Geert Wilders, who is known for his anti-Islam stance, is also fighting against Europe. He opposes the euro and wants the country to withdraw from the European Union. He even says that one of the 12 gold stars should be removed from the European flag if the Netherlands were to leave the EU.

The left and the right in the Netherlands are coming at the traditionally pro-European centrist politicians from both sides. "It's like a horseshoe," says a senior EU official, talking about his home country. "The extremes are almost touching each other." The center-right Christian Democratic Appeal party (CDA) and the center-left Labor Party are being overtaken by populists on the left and the right.

In a country that, like Germany, has particularly benefited from the common currency, champions of the euro have seen their numbers decline. "Some 60 to 70 percent of our income depends on exports to other European countries," says Mona Keijzer, a top Christian Democratic politician. But she too stresses that each country should address its own problems, and she roundly rejects any additional transfer of sovereignty to Europe. "We want to be a sovereign country," says Keijzer. "We are Dutch."

First Sarkozy, Now Merkollande

Former French president Nicolas Sarkozy and German chancellor Angela Merkel were uneasy allies in an effort to unite Europe. Sarkozy wanted eurobonds, an idea Merkel emphatically rejected at least 20 times.

Hollande has now replaced Sarkozy, and the alliance would appear to be even more tenuous. Not only does Hollande want eurobonds, he also wants to rework some of the austerity measures insisted upon by Merkel.

Thus it is amusing to see politicians who cannot see eye-to-eye on much of anything agree to work together on solution to eurozone crisis.

Germany and France have moved on Monday to bury months of squabbling over how to resolve the euro crisis by agreeing to form a joint policymaking body to create a more integrated economic and fiscal policy in the eurozone and structure a new banking supervision regime.

The German and French finance ministers, Wolfgang Schäuble and Pierre Moscovici, said the aim of the new working group was to produce common policies on how to deal with Greece, Spain and Italy. as well as mapping out longer-term strategies. The Germans hope this will conclude in a full-scale political union within the eurozone.

Full-Scale Political Union? Really?

OK, Hollande wants to save the euro too. Lovely. However, he does not want to cede power to Brussels.

Consider this snip from the Wall Street Journal article France Shows Caution on EU Integration on July 8.

As they debate over the pace of future political integration, Mr.Hollande and Ms. Merkel are expected to spar over whether time has come to appoint a euro-zone budget czar. German officials have called for giving the European Commission more powers to police national budget, and make sure profligate nations don't put the currency union at risk any more.

France, fearing a loss of control over its national budget, has so far rejected that idea.

Instead, Mr. Hollande wants to boost the status of the leader of the Eurogroup, the informal forum where the leaders and finance ministers of the countries that use the euro currency meet.

How Long Can the Merkolande Alliance Last?

My guess is not long given radically different viewpoints on how to get there from here.

United States of Merkel

Let's recap what I said yesterday, in Merkel Pushes Convention to Draft New EU Treaty; United States of Merkel?

Do the German people want a centralized authority over budgets led by bureaucrats in Brussels or is is it primarily Merkel?

I suggest the latter. Merkel wants as her legacy a United States of Merkel (which I define as a United States of Europe in which she gets primary credit for building). She does not care what it costs Germany as long as it gets her in the history books forever and a day.

Numerous Problems

The problems should be obvious. Many countries, especially the club-med states, do not want austerity or loss of sovereignty. They want printing.

Also note that Holllande wants to continue his tax the rich policies while lowering the retirement age and preventing businesses from firing workers.

Will Hollande's ideas work in a United States of Merkel?

Let's assume they will work. Indeed that should be Germany's big fear. Put a bunch of nannycrats together and they are likely to decide anything. And whatever rules they decide will apply to every country in the nannyzone that foolishly signs the treaty.

If the treaty is a simple majority rule treaty, Germany would be at risk of being overruled by the club-med states. If  the treaty is by percentages, the club-med states would be at risk of being dominated by what is good for Germany and France (assuming of course Germany and France can agree).

Do-or-Die Political Expediency

Finally, politicians might want a nannyzone, but citizens of many countries would not, and I strongly suspect that includes Germany.

Recall that France and Germany pushed through a treaty in December (still not ratified). Also recall that Hollande ran on a platform of renegotiating the treaty.

Germany and France are still bickering. How's that supposed to work? Does Merkel think an agreement now is likely?

I think not. Instead, her proposal is simply a matter of do-or-die political expediency and her one last chance to push for the United States of Merkel.

Don't Expect Much (Except Bickering) From a "Merkollande"Summit

While Hollande is skeptical at best, the Netherlands is downright anti-Brussels belligerent.

So please tell me again how the Merkolande summit is supposed to work given the Netherlands, Germany, and France still not have ratified the last one, and numerous countries do not want to create a United States of Merkel led by nannycrats with budgetary veto powers.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Fed a Profit Center for Taxpayers?

Congratulations to CNBC for one of the silliest economic assertions in history. Please consider this sentence from Fed steps up release of results, says first-half income up.

Its release of first and second quarter results detailed a sharp rise to $46.447 billion in its payments to the Treasury, from $40.456 billion in the first six months of 2011, reminding U.S. taxpayers the Fed has been a significant source of income.

Fed a Significant Source of Income?

Say what? From Federal Reserve FAQs

The Federal Reserve does not receive funding through the congressional budgetary process. The Fed's income comes primarily from the interest on government securities that it has acquired through open market operations. Other sources of income are the interest on foreign currency investments held by the Federal Reserve System; fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations; and interest on loans to depository institutions. After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury.

Got that? The Fed receives interest on government debt. The more it bloats its balance sheet, the more interest it receives (from the government, courtesy of US taxpayers of course). Whatever the Fed does not waste on salaries and other expenses, it returns to the US treasury.

Somehow the authors of that article managed to turn the Fed into a significant, $46 billion, profit center for the US taxpayers. Wow.

Furthermore, by suppressing interest rates, the Fed has crucified those on fixed income. Also recall that Fed fueled the housing bubble in the first place by holding interest rates too low, too long, in its open market operations.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Government Spending as Percentage of GDP

Here are a couple of charts from Doug Short at Advisor Perspectives regarding government spending.

Federal Government Spending as Percent of GDP



Total Government Spending as Percent of GDP



I asked Doug for those charts because Paul Krugman said he would be concerned if government spending hit 50% of GDP. The trend does not look good, but by Krugman's measure there is a ways to go.

Nonetheless, I think we should be concerned now. The numbers ignore exploding national debt and interest on national debt. Interest on national debt will skyrocket if rates go up or growth estimates penciled in do not occur. Both of those are likely, although Japan proves that amazingly low interest rates can last longer than anyone thinks.

For a discussion of interest, please see Trends in Interest Rates on National Debt Suggest Currency Crisis is Coming

The figures also ignore ever-escalating costs of Medicare, Social Security, and pension promises, all of which are guaranteed to soar in the not so distant future. Romney says Unfunded liabilities amount to $520,000 per household.

I will point out that those liabilities are not debt yet. So might Krugman. However, I am comfortable in reducing benefits and slashing spending while Krugman is not.

Clearly there are many ways to spin this data but please note that government spending in France exceeds 50% of GDP. Also note that French unemployment is 10.2% and Hollande is poised to hike the top marginal tax rate to 75%.

Do we really want to imitate France?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Food Stamp Usage up 64% in Last Four Years, Cost up 114% in Same Period; SNAP Charts, Facts and Figures

Here are a couple of charts from Tim Wallace on the food stamp program, now called "SNAP" to remove the stigma. SNAP stands for Supplemental Nutrition Assistance Program.

SNAP Participants

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SNAP Program Costs in Millions

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SNAP Facts and Figures

• In the last four years the number of participants increased by 64.7%
• In the last four years the program cost is up by 114.4%
• Since 2000, the number of participants is up 170%
• Since 2000, the program cost is up by 395%

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Merkel Pushes Convention to Draft New EU Treaty; United States of Merkel?

Will Merkel get her wish for a Unites States of Europe led by nannycrats in Brussels? I suspect not because a vote would likely go up in flames. Nonetheless, Merkel Pushes for Convention to Draft New EU Treaty

Chancellor Angela Merkel's plans for a new treaty governing the European Union are becoming more concrete. SPIEGEL has learned that the German leader wants the EU to begin working on a draft this year, with the aim of providing Brussels with greater power to monitor budgets. But many countries are deeply opposed to the idea.

A date for the beginning of the convention is expected to be fixed at an EU summit in December. Merkel has been pushing for some time now to complement the recently approved fiscal pact, which harmonizes budget policies within 25 of the EU's 27 countries, with a political union. Germany would like to see, for example, a legal basis that would give the European Court of Justice the jurisdiction to monitor the budgets of member states and to punish deficit offenders.

So far, though, the German proposal has found few supporters in the other EU member states. During a meeting of the so-called Future Group, an informal gathering of 10 foreign ministers from EU countries, the majority opposed a call by German Foreign Minister Guido Westerwelle for a new treaty convention. Other countries, including Ireland, do not want to take the risk of a national referendum, which a new EU treaty would entail in some member states.

When Merkel previously brought up the subject during a December EU summit meeting, many people reacted with indignation. Initially, the other EU countries were unwilling to go along with the calls from Merkel and then-French President Nicolas Sarkozy for automatic sanctions for repeat offenders of budget rules. In the end, the Germans and French found a common position, saying they would push forward with a new EU treaty -- either with the entire bloc or with the 17 members of the euro zone if other countries were unwilling to go along with it.

United States of Merkel

Do the German people want a centralized authority over budgets led by bureaucrats in Brussels or is is it primarily Merkel?

I suggest the latter. Merkel wants as her legacy a United States of Merkel (which I define as a United States of Europe in which she gets primary credit for building). She does not care what it costs Germany as long as it gets her in the history books forever and a day.

Numerous Problems

The problems should be obvious. Many countries, especially the club-med states, do not want austerity or loss of sovereignty. They want printing.

Also note that Holllande wants to continue his tax the rich policies while lowering the retirement age and preventing businesses from firing workers.

Will Hollande's ideas work in a United States of Merkel?

Let's assume they will work. Indeed that should be Germany's big fear. Put a bunch of nannycrats together and they are likely to decide anything. And whatever rules they decide will apply to every country in the nannyzone that foolishly signs the treaty.

If the treaty is a simple majority rule treaty, Germany would be at risk of being overruled by the club-med states. If  the treaty is by percentages, the club-med states would be at risk of being dominated by what is good for Germany and France (assuming of course Germany and France can agree).

No matter how a treaty is structured, some countries are guaranteed not to like it.

Mathematically Impossible

1. The Bundesbank said there should be no banking union until there is a fiscal union.
2. Angela Merkel said that there should be no fiscal union until there is political union.
3. François Hollande said that there should be no political union until there is a banking union.
4. The German supreme court will not allow a political union nor a fiscal union, nor a banking union without a German referendum.

Assume the Bundesbank will be ignored. Further assume Germany puts this to a vote and it passes. There still remains a big rift between the viewpoints of France and Germany as well as a big rift between Northern and Southern Europe.

In Italy sentiment to leave the euro is very strong. So is the sentiment in Germany. Would Germans really vote for this boondoggle? Would the Netherlands? Austria?

The next election in Italy may very well seal the fate against a new treaty idea even if Merkel and Hollande can work out major differences.

Do-or-Die Political Expediency

Finally, politicians might want a nannyzone, but citizens of many countries would not, and I strongly suspect that includes Germany.

Recall that France and Germany pushed through a treaty in December (still not ratified). Also recall that Hollande ran on a platform of renegotiating the treaty.

Germany and France are still bickering. How's that supposed to work? Does Merkel think an agreement now is likely?

I think not. Instead, her proposal is simply a matter of do-or-die political expediency and her one last chance to push for the United States of Merkel.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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