Christmas Laughs: How Not to Teach a Bullfrog to Play Video Games; Grandma Got Indefinitely Detained (A Very TSA Christmas)

This remake of "Grandma Got Run Over by a Reindeer" is better than the original. It's cute but also reflects a very sad state of affairs.

Grandma Got Indefinitely Detained



Link if video does not play: A Very TSA Christmas

This next video will have you laughing for sure. Please play to the end. It's only 27 seconds long.

How Not to Teach a Bullfrog to Play Video Games



Link if video does not play: Teach a Bullfrog to Play "Ant Crusher"

Merry Christmas Everyone

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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"Full Faith and Credit" of General Obligation Bonds Comes to Critical Test in Alabama Bankruptcy

General obligation bonds are thought to be perfectly safe because they are backed by the ability to tax, no matter what it takes to pay off the obligation. I have been waiting for a test of this theory and that time is at hand.

Jefferson County Alabama filed the biggest bankruptcy in the history of the US and has stopped paying interest on its general obligation bonds. For background details, please see Jefferson County Alabama Hires Bankruptcy Firm; Record Municipal Bankruptcy Coming; Death Spiral Swaps and JPMorgan Fraud Revisited.

The key issue now is what happens to the "Full Faith and Credit" theory now that the county has defaulted following a bankruptcy declaration.

Please consider Bankruptcy Filing Raises Doubts About a Bond Repayment Pledge.

People who own what is considered the safest type of municipal bond may be in for a surprise.

This safe debt, called a general-obligation bond, is said to be the next strongest thing to Treasuries because it is backed by a “full faith and credit” pledge. That means the government that issued it will pay it on time, no matter what.

But now Jefferson County, Ala., has stopped paying such debt, breaking with convention and setting up a fundamental test of what full faith and credit truly means.

The few places that have gone bankrupt with general obligations outstanding have sent reassuring signals, making payments even though they were not required to in bankruptcy. Orange County, Calif., the previous Chapter 9 record-holder, took a few extra months to pay some maturing debt, but it compensated investors for the delay by giving them almost a full percentage point more interest than it otherwise owed them.

The small city of Central Falls, R.I., has been duly paying its general-obligation debtholders in Chapter 9 this year, bolstered by a new state law giving those investors priority over everybody else.

Jefferson County, by contrast, is taking advantage of the automatic stay granted in bankruptcy, which bars creditors from demanding payments or grabbing collateral. Officials say they stopped sending cash to the county’s paying agent in November and will not send any money this month, either.

Bankruptcy experts have long known that in theory a municipality could use the stay to revoke its full faith and credit pledge, but they have not watched a big distressed city or county go through with it. “You’ve got a case here where the rubber has hit the road,” said Kenneth N. Klee, a bankruptcy lawyer representing Jefferson County, whose debt grew out of poorly conceived efforts to finance a court-ordered rebuilding of its sewer system.

The county’s nonpayment is not its only surprise. Like many places, it used newfangled instruments to circumvent constitutional limits on how much debt it could legally issue. In Alabama, counties are required to hold a referendum before issuing any general-obligation bonds. So Jefferson County has not issued such bonds since the 1950s. Instead, it issues warrants, which look nearly identical but do not require the referendum.

Official disclosures promote the county’s warrants as “general obligations,” toward which “its full faith and credit have been irrevocably pledged.” Sounds good, but what does it really mean? Conventional wisdom has it that if a government defaults on a general obligation, its creditors can take it to court, where the judge will order it to raise taxes — as much as it takes, no matter how painful.

But that now appears to be a hollow threat in Jefferson County. Counties in Alabama do not have the legal authority to raise taxes. Only the state can do that.

Mr. Klee, the county’s bankruptcy lawyer, said about 40 percent of America’s counties appear to be in the same boat, issuing full faith and credit debt even though they have no legal authority to raise taxes, as the term implies.

“Jefferson County made a very different decision than Rhode Island did,” Mr. Klee said. “Rhode Island put bondholders ahead of its citizens, and Jefferson County is not going to do that.”

He called the notion that a full faith and credit pledge was inviolate, and that a debtor must honor it even in bankruptcy, “a myth and a scare tactic.”

“The issue of full faith and credit,” Mr. Klee said, “is whose full faith and credit?”

Rhode Island legislature screwed taxpayers by bailing out bondholders. Alabama tried hard to do the same, but fortunately Jefferson County filed anyway.

A major twist is Jefferson County had no legal authority to issue general obligation bonds without first holding a voter referendum. Jefferson County did not have a voter referendum and instead issued warrants. Does it matter the warrants were promoted as "Full Faith and Credit" obligations?

I have had it with the notion that bondholders can never take a loss. The best court ruling would be those are  indeed general obligations bonds, but bankruptcy changes the game.  My guess is the courts will duck the issue based on the fact Jefferson County never issued a referendum.

Still, it would be a huge victory for taxpayers in a major court case, assuming the county's attorney is correct in that "40 percent of America’s counties appear to be in the same boat, issuing full faith and credit debt even though they have no legal authority to raise taxes"

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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College Football Nothing But a Free Farm-System for the NFL; Who are the Winners and Losers in the Current System?

While watching the myriad of college bowl games this holiday season, many of them between teams that have no business being in bowl games at all, please step back and ponder who the winners and losers of this system are.

My high-school friend David Wise takes a critical look at college football in a Real Clear Sports article proclaims it's Time for Colleges to Rein In Football

Since 1985 college tuition has increased nationally by 498 percent compared with 115 percent for prices overall – an unsustainable bubble. Higher education commentators Andrew Hacker and Claudia Dreifus have commented that a large portion of this additional college tuition revenue is being funneled into athletics and not towards education. Over the same time the average compensation of public college football coaches has increased 750 percent compared with 32 percent for professors. The two colleges that will play for the BCS championship this season spend $1,320 per every member of the student body ($204,919 per player) to support the football programs.

In the words of Dr. James J. Duderstadt, the former president of the University of Michigan, athletics “has drifted so far from the educational purpose of the university. They exploit young people and prevent them from getting a legitimate college education. … We are supposed to be developing human potential, not making money on their backs.”

And the failure of colleges is not just in things such as the whopping 51 percent disparity between the graduation rates of African-American and white players on last year’s BCS champion Auburn Tigers or the combined 34 percent graduation rate for all players on the 2005 champion the Texas Longhorns. Colleges and the education system in general are failing young men who at age 22 graduate at the rate of 100 males for every 187 females.

In a time of crushing state government deficits and student loan debt, it makes absolutely no sense for American universities to operate as free farm systems for the NFL and NBA. At a time when the American competitive position in the world is under more stress than ever, we cannot allow our universities – an area in which American still holds undisputed world leadership – to erode. Rather than have the NFL subsidize college sports, a cure that would be worse than the disease, there are other options.

The low point this year is to be found in the “Kraft Fight Hunger Bowl,” which features two teams whose seasons were so disastrous that they both just fired their head coaches and one team, UCLA, which enters the bowl game with a losing record.

This year it is possible that almost a third of the games (10 out of 35) could end up with a so-called “bowl team” with a losing season. And some collection of attorneys general out there should examine whether the Supreme Court’s prohibition against “horizontal restraint” in the 1984 landmark case NCAA v. The Board of Regents of the University of Oklahoma is being observed.

Who are the Winners and Losers?

Wise points out that of the 30,000 kids in college football, only abut 310 are ever seriously considered for the NFL.

The rest may get passing grades, but how many of them actually get an education? We all hear that bowl games are "big money makers" but for who?

In the "Kraft Fight Hunger Bowl", Illinois 6-6 just fired its coach. UCLA 6-7 just fired its coach. Both states are financial basket cases.

Both schools will probably sustain large losses participating in these useless bowls that should not even be held. Taxpayers of Illinois and California will make up the difference.

I propose a name change from the "Kraft Fight Hunger Bowl" to the "Tidy Toilet Bowl" because both teams belong in the toilet, not in bowl games. No matter who wins, one team is sure to end up with a losing season and taxpayers of both states will foot the bill for this monstrosity.

Please consider the winners and losers in the current setup.

Who Loses?
The students
The Players
Taxpayers
Teachers who are quasi-forced to give passing grades to kids so they can stay eligible

Who Wins?
The NFL who avoids having a farm system
Advertisers
College coaches and their staff who make preposterous salaries

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

4 out of 5 Australians Worry about Debt; New Reality - Owing More on Your Home Than You Own; Shocking Year for Corporate Collapses ; Merry Christmas to Those Down Under

Merry Christmas to all my Australian readers. Here is an economic roundup, with many links sent from Australian readers over the past couple weeks, especially Tony the "Brisbane Bear".

Boxing Day Sale Before Christmas

Boxing Day is traditionally the day after Christmas. Not this year, at least for all retailers.

Tony Writes ... "Talk about desperation! We are now having the traditional Boxing day sales before Christmas. This will not make any difference in the longer run as everyone is now so accustomed to deals that any retailer who doesn't offer substantial discounts won't get any business. It is a whole new paradigm in retail that will eventually spread to all sectors. Businesses with high fixed costs will go broke in droves."

Please consider Myer brings forward online 'Boxing Day' sale

December 23, 2011
The annual Boxing Day sales need a new name, it seems.

This year retail giant Myer will launch its annual post-Christmas shopping bonanza two days early, on Christmas Eve, for online customers.

Myer spokesman Steven Carey said more than 1100 new items would be available for purchase on the Myer website from 6pm tomorrow - the first time the company had launched its stocktake sale early online.

While some customers were expected to stick to the annual tradition of queueing outside stores on Monday to snap up a bargain, Mr Carey said more and more people were choosing to shop from the comfort of their own home.

‘‘We’ve got to cater to both the online and the bricks-and-mortar customer,’’ Mr Carey said.

It comes as electronics giant Harvey Norman, which has long complained about the rise of international online shopping, began selling computer games this week via a website in Ireland that lets Australian consumers avoid GST.

Chairman Gerry Harvey said the company had launched the initiative reluctantly. "We are not doing this with a great deal of joy. We have been able to do this for a long time, we have held off," he said. "But you get to a point where you can’t hold off."

Mr Carey said if Myer’s online experiment this year was successful, it could become an annual event.

Treasurer Swan takes a potshot at 'whinger' Retailer Gerry Harvey

Tony writes ..."The Treasurer and our biggest retailer are having a slanging match right on Christmas. The party is over and everyone is getting very, very agitated as they try to deal with the new reality."

Please consider Swan takes a potshot at 'whinger' Gerry Harvey

December 23, 2011
Treasurer Wayne Swan says it's just not Christmas if retailer Gerry Harvey isn't whingeing about soft sales.

The co-founder of Harvey Norman has been highly critical of the rise of international online shopping, which he says is threatening Australian jobs and businesses.

Mr Swan defended the GST threshold on goods bought offshore, saying a Productivity Commission report into the issue found it wasn't the cause of retailers' woes.

"I can't remember a Christmas where Gerry Harvey wasn't whingeing," he told ABC Radio today.

"Back when we put the original stimulus package in place he spent a lot of time whingeing about that, but ultimately it did lift consumption in Australia."

Mr Harvey responded, saying he wasn't a whinger and just wanted to protect the whole retail sector, not only his business.

"To call me a whinger when you are poll-driven, that's just an illusion," he told ABC Radio.

He told Mr Swan: "I've been telling you and your government for a long time ... you have a major problem: the GST. You thought it was more important to think about the votes you were going to get."

Retailers Rocked as Debt Crisis Spreads

Tony writes ... "Hi Mish. I have been saying for ages that we have cost structures set to boom time conditions with no way of lowering costs.

Panic is setting in. Prominent broker Charlie Aitken has warned that the industry has a cost base tailored for a boom year such as 2007, when volumes are more in line with 2002."

Please consider Retailers rocked as debt crisis spreads

December 20, 2011
THE nation's shoppers have firmly closed their wallets amid fears of a full-blown debt contagion in Europe, while Billabong shares were smashed by 44 per cent yesterday after the iconic surfwear company released a shock profit downgrade.

The Billabong malaise extended to other discretionary retail stocks such as David Jones and JB Hi-Fi, as more than $30 billion was shed from the value of local equities.

4 out of 5 Australians Worry about Debt

The Sydney Morning Herald reports Most Australians worried about debt

December 19, 2011
Four out of five Australians are worried about their ability to meet future debt repayments, a survey shows.

The biannual survey by data intelligence company Veda, found 82 per cent were worried about their ability to meet debt repayments in the future, up from 75 per cent a year ago.

The survey also found that one in five Australians was struggling to repay their current credit commitments.

However, about 29 per cent of this sub group were considering applying for more credit in the next six months, the survey found.

"It is concerning that there are people struggling with their current debt levels but are turning to more credit as the answer, potentially edging closer to a debt spiral," Veda senior adviser Matthew Strassbourg said in a statement.

Here is a stat straight from the Twilight Zone: 82% are concerned about debt yet 29% of those worried want more credit.

New Reality - Owing More Than You Own

The Age reports on the "New Reality" Owing More on Your Home Than You Own

Rising property values have been an article of faith in the housing market for a generation of Australians who borrowed big as real estate prices marched ever upward.

While the percentage of home owners with so-called negative equity remains tiny - about one in fifty of the 3 million households with mortgages - the number may well swell in 2012 if home prices extend their declines as some analysts expect.

The emergence of a sector of the housing market ‘‘under water’’ on their mortgages may hurt an already fragile real estate market. Any forced sales would obviously dent individual household wealth but further drops in home prices would deter investors from buying residential properties.

Tony writes "Hey Mish, Negative equity is a new buzz word slowly entering the lexicon."

Yes indeed. For starters, I highly doubt that only 1-in-50 are underwater. Regardless, I expect that number to be 40-in-50 of those who bought or did a substantial cash-out refi in the last four years. I do not know what percentage that is, but I do know it is far more than 2%.

Shocking Year for Corporate Collapses

Tony comments "Hey Mish, panic is setting in as retail chains go broke daily. The banks are warning that next year will be very tough. It is a vicious cycle and it is gathering speed as panic spreads and people stop spending"

SmartCompany reports Tools chain Glenfords placed in voluntary administration

The shocking year for Australian corporate collapses has continued, with discount tools chain Glenfords now up for sale after being placed in voluntary administration last week.

The sale of the chain comes as the do-it-yourself sector has reached a major transformation point, with market leading hardware chain Bunnings now battling the Woolworths-backed Masters chain.

Analysts have said mid-tier and smaller operators will slowly be pushed out of the market as Bunnings and Masters stores dominate areas once controlled by SMEs.

The construction industry has been one of the worst hit this year – it suffers the highest number of insolvency appointments out of any sector. Glenfords has likely suffered alongside that drop in demand.

Talent Two and Billabong Shares Smashed

Tony writes ... "The interesting downgrade was Talent2, these guys have been very successful for a long time but it seems white collar jobs are drying up fast"

The Australian reports No 'ho ho' from Billabong, Talent Two

December 19, 2011
THERE'S no ho ho ho on the bourse today, as hopes for a consumer-led recovery evaporate as quickly as snow on an outback nativity set.

Talent Two and Billabong -- smashed by 50 per cent and 37 per cent respectively -- tell two parts of the dismal story.

Talent Two, a leading recruiter, reported current-half earnings wouldn't come within cooee of expectations because of reduced hiring caused by “fears of European contagion and the volatility of financial markets”.

Talent Two's full-year EBITDA is expected to come in at less than half the expected $30m or so, but the shares probably received an extra dollop of punishment because the “market update” was issued at beer-o-clock on Friday.

Talent Two focuses on white-collar hiring, especially in the financial services sector where fearful workers rue their lack of skill at driving mining earthmovers or sealing S bends with O rings. It doesn't take a (still employed) rocket scientist to work out scared workers won't be buying electronic gizmos or surfwear, hence JB Hi-Fi's surprise downgrade last week (also after market close) and the ever-erratic Billabong's shocker this morning.

Retail Malaise Spreads Like Wildfire

The Age Reports Myer to close or shrink stores as retail malaise bites

Last week, failed apparel retailer Fletcher Jones said it would close a third of its stores immediately and shed 61 staff as administrators try to revive and sell the company.

Myer stores at Tuggeranong in the Australian Capital Territory and at Forest Hill in Melbourne's east will close early next year. Others outlets will be shrunk when the shopping centres in which they operate are redeveloped.

Real estate stockbroking analysts suggested the Myer stores at Dandenong Plaza and possibly in Wollongong, south of Sydney, could also be closed.

It is not just the stores that are shrinking. Myer has already reduced the range of white goods, electrical items, DVDs and CDs it offers, and is also reducing the number and range of location devices such as GPSs in response to changed sales conditions.

Harvey Norman is following suit, shrinking the space devoted to electrical goods in response to a plummet in prices, which means the retailer has to sell many more television sets, for example, to make the same money.

Tony writes ...

Hey Mish.

Myer is probably our oldest and most respected retail department store. (I would guess Sears or Bloomingdale's would be US equivalents) they are in real trouble and are proposing closing stores and downsizing others.

Retail business models are broken (as are 1000's of other business models in various sectors) and reality is sinking in. It will be very ugly when people realise that there is literally no way out.

Wages are way, way too high and working conditions are way too generous and most all other overheads are way too costly. Throw in terrible industrial relations laws that this Socialist government has introduced and you have a recipe for disaster.

Spotlight on Australia

For those who think Australia can do no wrong and Australia is the place to be, need to take another look at Australian housing, Australian retail, and also the slowdown in China.

I contend things are going to get very nasty for those down under. 

Thanks for the Links - Merry Christmas

I get links from "Brisbane Bear" nearly every day and links from Bran in Spain nearly every day.

Indeed, I get links from all over the world every day and I appreciate them. Sometimes they stack up like this before I use them and sometimes I never use them. But I do appreciate them regardless.

Many times I get 30 or more emails on a story gone viral. I Typically do not respond to such articles or use them.

If you do send a link, my most common response is simply "thanks". I get hundreds of emails a day and often cannot say much more than that.

If I never respond (not once, but repetitively), I cannot use the stories you send, you are consistently late, or I have already seen them. Most often I will not use or respond to conspiracy theories.

Finally, to those who email every day, please note I may say "thanks" only occasionally.

Merry Christmas Australia (they are nearly day ahead of Chicago), and to everyone else too!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Consumers Win Game of Chicken; 40-60% Off "Entire Store" at Some Retailers; Low Prices are Good; US Senate Economic Illiteracy

Buyer's Remorse

I have questioned all these glowing retail sales estimates in light of Buyer's Remorse; Record Volume of Returns Before Christmas; $217 Billion Returns Expected, Up 14%.

Retail Sales Not In Alignment With Shipping

Moreover, stores were supposed to be run low on merchandise so they could charge full prices. Yet reported retail sales are not in alignment with truck fuel usage as noted in Ceridian Fuel Index Shows Christmas Doesn't Come Early to the Trucking Industry

However, the Ceridian index is in essential alignment with with energy usage as noted on December 9 in US Petroleum and Gasoline Usage Plunges Last 5 Weeks Compared to Prior Years

Consumers Win Game of Chicken

Today we get a third piece of evidence that all is not well in retail-land. In spite of a glowing "Black Friday" reports, consumers held back and won a victory over retailers.

This was not supposed to happen, but Retailers Are Slashing Prices Ahead of Holiday, not just select items but rather entire stores.

Half off at the entire store at Ann Taylor. Sixty percent at Gap. Forty percent off almost everything at Abercrombie & Fitch.

“It’s really a game of chicken,” said David Bassuk, managing director and head of the retail practice at the consultant firm AlixPartners.

Many retailers entered the season “with pretty optimistic plans” that shoppers would rush into stores and pay full price, Mr. Bassuk said. But that did not pan out, and the final days before Christmas have retailers being “much more aggressive in terms of promotions being offered,” he said.

Toys “R” Us announced on Thursday new deals on dozens of items for Friday and Saturday, including ‘buy one, get one half off” on popular toys like Legos. A sampling of other promotions: Up to 70 percent off toys at Amazon; up to 50 percent off gifts at Restoration Hardware; 40 percent off almost everything at American Eagle Outfitters, Talbots, Limited and Wet Seal; and 30 percent off everything at J. Crew.

“There’s been kind of a waiting game with retailers,” Gerald L. Storch, the chief executive of Toys “R” Us, told CNBC last week. “And it looks like the consumer wins.”

Paul Lejuez, an analyst at Nomura Equity Research, surveyed mall deals over the weekend and said he was concerned. “It looks like 40 percent is the new level you have to be at, 40 percent off, to drive traffic. Those that weren’t at that level weren’t getting their fair share,” he said.

Going into the holiday season, inventories had grown more than three times as fast as sales at several retailers, including American Eagle Outfitters, Aéropostale, Gap Inc., Urban Outfitters, Chico’s and Talbots.

“The inventory is worth so much less in two weeks,” said the chief executive of a retailer, who asked not to be named because he did not want to reveal his store’s strategy. “With that kind of inventory, you’ve got to get rid of it. Whatever the margin is today, it’s that much lower next week and the week after when traffic stops.”

Low Prices are Good

Low prices are good. The more the competition the better. Yet economic fools including US senators think otherwise.

Senator Snowe Calls on Amazon to Cancel Attack on Small Businesses

In an extremely misguided news conference Republican Senator Olympia Snowe Calls on Amazon to Cancel Attack on Small Businesses

U.S. Senate Committee on Small Business and Entrepreneurship Ranking Member Olympia J. Snowe (R-Maine) issued the following comment regarding Amazon.com's upcoming promotion targeting small business pricing:

Senator Snowe, said:

"Amazon's promotion - paying consumers to visit small businesses and leave empty-handed - is an attack on Main Street businesses that employ workers in our communities. Small businesses are fighting everyday to compete with giant retailers, such as Amazon, and incentivizing consumers to spy on local shops is a bridge too far. I often tour Main Streets in cities and towns across Maine to speak directly with local business owners, and they have told me repeatedly that they rely on increased sales during the holidays to grow their businesses and create new jobs. Indeed, according to the latest NFIB Economic Trends Survey, small business owners listed "poor sales" as the top problem they face. As such, during the busiest shopping season of the year, we should remember that our local restaurants, bookshops, and hardware stores are the economic engines in our communities. I urge Amazon to cancel its planned promotion, and look for ways to partner with Main Street, not promote anti-competitive behavior that could shutter the doors of America's small businesses."

Economic Idiocy at Its Finest

Senator Snowe's message is economic idiocy at its finest. She wants everyone to pay more for merchandise to protect small businesses. For starters, people have enough problems with high gas prices, high food prices, high debt, and shrinking real wages. Consumers need to save every cent they can. Competition from Amazon is a godsend.

Effectively Senator Snowe is asking everyone suck up to protect mom-and-pop businesses. Her message is misguided in more ways than one.

As noted, Snowe's position is a bad bargain for consumers, regardless of whether Amazon would comply. Ironically, even if Amazon complied (Amazon won't and they shouldn't), business would not go to mom-and-pop stores but to Walmart or Target or some other firm slashing prices 40-60%.

Need for More Amazons!

We need more Amazons not less. Every dollar consumers save on clothing, electronics, books, etc is another dollar that can go to food, shelter, and gasoline.

Speaking of which, more online shopping would help cut down on gasoline usage, and in case no one has noticed the world is running out of cheap energy sources.

It is disappointing but not surprising to see such economic incompetence in the US Senate, and that is one of the reasons the US is in such a fiscal mess in the first place.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

ECB Holds Off Bond Purchases, Italian 10-Year Yield Back Over 7 Percent

The ECB has held off purchasing sovereign debt bonds in Europe the past two weeks and the results were easily predictable. Yield on 10-Year Italian debt is back over 7%.

Italy 10-Year Government Bond Yield



ECB Buys Mere $25 Million in Bonds

Yahoo!Finance reports ECB buys few bonds for second week

The European Central Bank held its bond purchases to a bare €19 million ($24.8 million) this week.

The scant amount indicates that the bank has for now almost ceased the controversial program which has helped keep borrowing costs down for Italy and Spain.

It bought a minimal €3.36 million last week. That makes two weeks of near-negligible purchases, following €635 million the week ending Dec. 9 and €3.66 billion the week ending Dec. 2.

The program has helped keep Italy and Spain from financial disaster from high borrowing costs. But the ECB says it is of limited amount and duration and that it is up to governments to cut their deficits and not wait for a central bank bailout.

Portugal 10-Year Government Bond Yield



I expect Portugal to blow sky high at any time, but the yield stubbornly remains at or near an unsustainable 13 percent. Nonetheless, the upward trend is clear and it is only a matter of time before this blows.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Spanish Implosion Coming Up; Deficit Up, Receipts Down, a Need to Cut 40 Billion in Expenses from 90 Billion; Spain's "Hidden Deficit"

My friend Bran from Spain sent a pair of articles in Spanish that highlight the impossible situation facing Spain. The links below have a target of Google Translations.

Need to Cut 40 Billion Euros from 90 Billion 

Spain needs to cut 40 billion euros from its budget to meet its deficit target for 2012. The problem is there is only 90 billion of expenses to 'play with' according to an article in Libre Mercado: The maze of Montoro: save 40,000 million without "social cuts"

To reach the deficit target agreed with Brussels, the new finance minister will have to come to his office with scissors ready.

The key figure is 4.4%. This is the deficit target committed to the EU by 2012. Would overcome a difficult situation in Spain, both to their partners as compared to international investors. In theory, 2011 will end with a deficit of 6% (so say government forecasts), this would leave a hole of 16,500 million for the coming year.

The problem is that almost no one believes any longer in these figures. Funcas predictions published yesterday, which included a deficit of 8% this year. With this figure, the gap would be closed would be about 40,000 million.

To climb this column, Treasury can raise taxes or trust fund to increase the current rates. The first has been ruled out by [Prime Minister] Rajoy, at least in the short term.

The following graph shows the distribution of state revenues by item. As seen, the vast majority, almost 70% comes from direct taxes and social contributions (income tax and companies mainly). Obviously, these items depend very much on the economic activity, any slowdown could even make predictions of the Government go down, which would make the situation even more complicated.



With this background, most of the adjustment will have to come, necessarily, on the expenditure side. At his inauguration, Montoro says he will not come to the Treasury to "make cuts, but to make reforms."

65% of spending is directed to pay the debt, the Ministry of Labour and Social Security (pensions).

The rest (35%) will have to come almost all the adjustment. This is a 91,000 million euros. Imagine the magnitude of the task.

Mission Impossible

The article says debt, pensions, and unemployment are not touchable. Also, Prime Minister Rajoy has ruled out tax hikes (for the short-term) whatever that means.

The entire setup is mathematical nonsense. Should the prime minister resort to tax hikes, it will plunge Spain even deeper into recession.

Spanish unemployment is already 22.8%. 

Spain's Hidden Deficit

A second article discusses Spain's Hidden Deficit

One of the foremost experts on national circumstances says "Rajoy has no room to bring out all the hidden deficit and will not." Their main argument is the experience of what happened in Greece, where Papandreou, just come to power deficit brought to light hidden by the previous government and that is the source of the recent seizures in the debt market.

The challenges for 2011 will close with a deficit equivalent to 6% of GDP today seem to me almost insurmountable. Especially considering the revenue performance.

The data announced yesterday by the Tax Office indicated, namely that fiscal consolidation measures have saved up to 8.167 million in November, including the reduction in the VAT rate to 4% on the purchase of new housing, at a cost to the exchequer audience estimated at 115 million euros.

According to the Tax Agency , the comparison between the total amount of regulatory impacts and increased revenues accumulating to November (761 million) it follows that in the absence thereof, the tax revenues would decline recorded in 2011 around -4%, "in line with the fall of the aggregate tax base of taxes in the first three quarters."

This drop in real income-without 'extraordinarios'-explains the suspicion that the real deficit will grow as and when the accounts of the autonomous communities, municipalities and social security itself, which will close this year with a deficit, when expected a surplus of four tenths of GDP, about 4,000 million euros. Especially considering that during the second half of the year the economy has performed worse than the first. And in this context, appear with a deficit of 7% or 8% before the markets seems to be a problem for the new government.

The simple translation is Spain's budget deficit is bigger than they say and revenues are expected to drop next year by 4%.

Bran writes ... "This article tells us that the new government cannot afford to bring out all the debt into the open because when Greece did so, the markets abandoned the country. For each 1% the deficit is off target, another 10 billion must be cut from 2012. People are placing the deficit for 2011 at 7 or 8% as opposed to the planned 6%. FUNCAS gave the 40 billion cut needed mentioned above based on 8% deficit this year."

The Prime Minister apparently thinks if he does not admit the debt and the worsening deficit, the market will ignore the problem. We will soon find out for how long.

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