Search this site powered by FreeFind

Quick Link

for your convenience!

Human Rights, Youth Voices etc.

click here


For Information Concerning the Crisis in Darfur

click here


Northern Uganda Crisis

click here


 Whistleblowers Need Protection



December 16, 2010

Joseph Stiglitz, the iconoclastic Nobel Laureate in economics, sought to trash the common wisdom that the Yuan must appreciate by saying in a video on the WSJ website, “Changes in the exchange rate can actually increase imbalances. The reason is that if the demand elasticities for Chinese goods are relatively low, then when the exchange rate increases, the quantity goes down less than the price goes up. So the net effect could be an increase in the trade imbalances. So the notion that this is a panacea is clearly wrong.” And he is correct, but only up to a point; for this is true only in the short run (but then, these days the short term iseesm to be the only thing that matters).


In the Third Quarter the share of ‘underwater’ home owners declined the 3rd month in a row, to 22.5%, from 23% in the Second. While this is good news, it is nowhere near enough to restore health to the housing market, never mind put it on a growth path.. 

The University of Michigan Consumer Survey found that, for a record 23rd consecutive month, 50+% of all US households didn’t anticipate any income gains over the next year.    

In the 2001 recession 2.7MM people lost their jobs & it took four years before the economy regained them; in this one 8.4MM people did so & now, two years after it officially ended, only 1MM jobs have been recovered (most of them accounted for by temporary placement agencies, rather than permanent employers). 

In 2001 the Supreme Court of Canada in the “Golden Ruling” ruled that “strip searches” of people arrested by the police are “inherently humiliating and degrading”, & an extreme exercise of police power that should be used sparingly, & then only with the prior approval of a supervisor. This message is apparently was lost on, or is being ignored by, the Toronto police; for in the most recent year for which data are available, one in three of the 61,000 people it arrested were strip searched (no data are available for other Canadian cities since their police forces refuse to keep records of strip searches). 

Until very recently the market had overlooked the fact that Belgium, even before the crisis was one of only three EU countries with a debt to GDP ratio > 100% (the others being Greece & Italy), that it’s fiscal situation was better only than Greece’s, & trailed that of the other 14  Eurozone countries,  and that it hadn’t had an effective government for two years prior to last June’s elections (& still hasn’t managed to cobble together a new coalition government in the six months since). But the interview the leader of the largest (Flemish-based) party gave Der Spiegel will make that more difficult. For he called Belgium “the sick man of Europe”, said it had no future & would at some point “evaporate”, and compared the Walloons to “a bunch of junkies” who need Flemish cash to survive (negotiations towards a new coalition government have been hung up on Flemish insistence that both parts of the country should have more control over, & responsibility for, their own revenues & expenditures - i.e. that the Walloons had better ‘learn to live within their means’).  

The Dutch airline KLM is experiencing problems in Iran; for the locals won’t refuel their planes. This is supposedly in retaliation for the Dutch last month having refused to refuel a plane carrying the Iranian Foreign Minister, Manoucher Mottaki, in the Netherlands for a speaking engagement, for fear of being accused of breaking the UN sanctions (by the way Mottaki was unceremoniously sacked this week by Ahmadinejad while on an official visit to Africa - he had never been part of his inner circle and was regarded by the hardliners as being “too soft’ & having failed to prevent the latest round of sanctions 


No. 389 - December 16th, 2010 


  • S&P’s November 16th downgrade of Cyprus from A+ to A is a reminder how similar this three-year Eurozone member is to others on its wobbly periphery. It has a 6%  budget deficit (that its government seems unwilling to come to grips with), outsized banks (with an asset base 7x GDP while Iceland’s were only 6x), a property bust & a poor growth outlook. And its banks hold 5BN Euros in Greek government bonds which, in any future Greek debt restructuring, could wipe out 25% of their Tier 1 capital, & 40% of their borrowers are Greek (which puts another 25% at risk). While OK for now since many nervous Greeks moved their savings out of Greek- into Cypriot banks, if they ever were to get nervous about the latter, one-third of their deposits could vamoose in a heartbeat.    

Round & round she goes, where she’ll stop (next), nobody knows!’ 


    · While Eurozone economic activity has picked up some, the OECD says recovery will be muted, with growth of 1.5% - 2.0% in 2011 & 2012 & “Potential output is likely to be lower in the wake of the crisis, underlining the importance of structural reforms in labour and product markets to boost economic performance.” 

For an aging Europe 2% isn’t really all that shabby, especially at a time when some peripheral economies will act as ‘boat anchors’ on overall growth. 


  • They were down 28% MoM & 12% YoY to 67,428, a post-May 2009 low. But the YTD total of 980,000 makes breaking the 1MM mark a done deal. While lower than the 1.2MM expected earlier, this is primarily due to the problems with the foreclosure process that surfaced last September.

While this will prompt another low number in December, the pace is expected to pick up again in 2011 as lenders improve their foreclosure procedures, and the basic factors driving it, high unemployment, a weak housing market, flat-to-falling home prices & massive numbers of home owners ‘underwater’ on their mortgages, continue unabated. 


  • New claims for unemployment benefits dropped 3,000 to 420,000 in the week to December 11th, the 3rd decline in four weeks. And the four-week moving average fell for the 6th straight week to 422,750, its lowest level since August 2008, the month before Lehman collapsed. On the other hand, while new home starts were up 3.9% MoM to 555,000, this is still just 16% above the 50-year record low of 477,000. And they were still 76% below their January 2006 peak  & far short of the 1MM annual rate analysts say is needed to have a healthy housing market

And economists say new initial applications for unemployment benefits must consistently be below 375,000 for unemployment to start declining significantly.   


    · Printing money isn’t having the hoped-for results. QE2 looks like a flop. Stephen Roach, chairman of Morgan Stanley Asia (who worked at the Fed in the 70's before joining Morgan Stanley where he long was its high profile economic guru), noted “They’ve gotten the opposite results ... If anything, that takes a little bit out of economic growth instead of adding to it.” The Obama tax deal will also work at cross purposes to QE2; for while the latter was to “flood” the system with US$600BM in new cash, the former will syphon off US$900BN over a slightly longer period due to the new bond sales needed to fund it (so Bernanke is now musing publicly about QE3). QE2's hoped-for pump-priming effect was also undermined by much of the US$2TR the Fed has printed since Dec/08 not having benefited households & small businesses (that create over half of all new jobs) but instead having ended up in the Fed’s vaults as “excess reserves” of the banks, & in the corporate sector’s US$2TR cash ‘hoard’. And while it created wealth in the Third Quarter by raising the value of stocks held by US households by US$1TR, this was offset by the US$747BN decline in household wealth due to falling house prices - with the former disproportionately benefiting the already well-to-do & the latter impoverishing the increasingly restive middle class.      

Even before Bernanke was born, a time-tested market axiom was that in monetary policy “you cannot push on a string”, i.e. you cannot make people borrow (or lend) if they don’t want to.. But monetary policy makers & players often are like ships passing in the night.  


    · The House has passed a massive 2,000 page US$1.27TR spending bill & Democrats want the Senate to pass it by midnight on December 18th, when the current funding authority for the government will expire, to avoid having the government have to shut down. But, encouraged by Senate Minority Leader Mitch McConnell (R.-Ky.), Senate Republicans vow to vote against it, at least until it is stripped of its ‘earmarks’ (funding for politicians’ pet projects in their states). For apart from US$1BN for the new health care law (which alone is enough to make Republicans see red), it contains US$8BN in earmarks, such as US$400,000 for solar parking canopies & plug-in electric stations in Kansas. 

Sen. John Cornyn (R.-Texas) called it an “ominous”-, rather than an “omnibus-”, bill.       


    · Prior to 2009 mass transit riders could set aside US$120/month of their pre-tax income  to pay for their mass transit costs (& drivers US$230/month for parking - ever since 1984 the former has always lagged the latter). While the 2009 stimulus bill raised it also to US$230, on January 1st it will revert back to US$120 (the effect of which will be offset in part by the one-year cut in workers’ SS taxes that is part of Obama’s tax deal with the Republicans). This comes at a bad time for mass transit users. For many states have been slashing their contributions to mass transit agencies, leaving them no option but to raise fares. Bus fares in LA are up 40% in two years, in Dallas commuter rail fares rose 67% last year & will rise another 40% in October, in New York transit users will pay 17% more on December 30th, the third increase in three years, metro riders in Washington, D.C. have been paying 18% more since last summer, fares in New Jersey increased  44% last May, and in Seattle mass transit users started paying one-third more last June & face another fare hike next June.  

This move is highly regressive. The savings from ending this program (US$106MM/year) is picayune compared to that of extending the Bush tax cuts for high income earners (US$55BN/year).Favouring parking over mass transit use won’t help reduce US oil im,ports (& is just “Drill baby, drill” in drag). But as I was told many years ago “if you think politics makes sense, you will go crazy; if, however, you start out from the premise that the system is totally & absolutely crackers, the pieces soon start falling into place.” 


(AP, Stephen  Ohlemacher)  

    · Social Security is funded from a 6.2% payroll tax (matched by employers) on the first US$106,800 of earnings. The Obama tax package will cut that to 4.2% for 2011. The Administration & CBO say this will give the economy a fast-acting shot in the arm since it immediately increases take-home pay for 155MM workers (but only if they spend it, rather than save it, or use it to pay down debt). But this means Washington must borrow US$112BN more, to make Social Security whole & former Rep. Barabara B. Kennelly (D.-Conn), now head of the National Committee to Preserve Social Security and Medicare, says “This 2 percent payroll tax is the beginning of the end of National Security as we know it.” 

“National Security as we know it” is on death watch anyway, having been persistently underfunded. But this will hasten its demise, & the rate at which the US is hurtling towards a fiscal abyss. For, as the Economist put it, ‘America is injecting itself with another dose of fiscal stimulus just when Europe is checking into rehab and enduring cold turkey” (while throughout history there have been few, if any, that trying to borrow your way back to prosperity have ever worked. 



    · Illinois is still paying last year’s bills. Arizona no longer funds some organ transplants under Medicaid. California last year paid its bills with IOUs. States are freeing prisoners early to cut costs. Newark, N.J. laid off 13% of its police force. Such events are raising fears state & local governments are in such financial dire straits that at some point investors will refuse to buy the weaker ones’ bonds, creating a crisis that will spread, as it did in Europe.

    · While their short-term budget woes preoccupy state officials, it’s their long-term debt problems that worry others. For historically states have always faced their biggest fiscal challenges in late recession/early recovery when rainy day funds are depleted & the easy things to do done.  Matters will be made worse this time by the fact that the federal stimulus money, that funded over one-third of state budgets last year, will run out next year. And what makes observers most nervous is the local governments’ hidden debt : while they have US$2.8TR in debt on their books, that’s only a fraction of what many have off their books : their unfunded pension liabilities alone amount to US$3.5TR.

    · “Munis” were always deemed a ‘widows & orphans-safe’ investment on the grounds they seldom default. But in recent weeks municipal bonds funds reported big sell-offs, & hedge funds, with help from Wall Street, have been placing large bets against some states’ debt instruments. Nevertheless, the credit ratings of many local governments have improved in the past year because the rating agencies changed their way of analyzing them since municipal defaults are much rarer than corporate defaults, and states & cities have always made it a priority to repay their bond holders, even before paying for essential services. Thus S&P recently opined the crises facing states & municipalities are “more about tough decisions than potential defaults”, & Moody’s justified rating all 50 states’ bonds higher than most US non-financial companies’ on the grounds Washington is ‘more likely to bail out a teetering state than a bankrupt company’.

    · There are eerie similarities between the subprime crisis & the states’ debt woes :

      · housing was a safe bet since house prices would never fall; now  “munis” are “safe” because states can always raise taxes to pay bond holders;

      ·  just like much mortgage-related debt, much state debt is ‘off the books’;

      ·  those issuing warnings are dismissed as “alarmists”. 

The rating agencies’  reasoning has more holes in it than Swiss cheese. It ignores that what really matters in bankruptcy & default is not insolvency but illiquidity, & that capital markets at their core are psychological-, not logical-, beasts, ruled by perception, not reason. It blandly assumes, despite signs of a swelling taxpayer revolt, that local governments can raise taxes at will. It fails to appreciate that Joe & Jill American Tax Payer are likely to bond holders as just more odious & self-serving Wall Street “fat cats”. It ignores the fact that Washington has fiscal problems of its own up the yingyang & may have a hard time saving its own hide, never mind bailing out others. And it makes no provision for the fact that interest rates (& hence debt servicing costs) can only go up (which makes one wonder if they have done any “stress tests” on states’ finances). And it’s hard to understand the reason for upgrading states sitting on unimaginable piles of debt while denigrating a corporate sector that sits on incredible piles of cash.  


    · In a law suit initiated by Virginia’s Attorney-General Ken Cuccinelli (an hard-right, anti-tax arch-conservative,  & a darling of Fox News), Virginia District Court Judge Henry E. Hudson, a 2002 Bush appointee, declared its central provision, requiring everyone to buy health care insurance or be fined, unconstitutional on the grounds that “An individual’s personal decision to purchase - or decline to purchase - health insurance from a private provider is beyond the historical reach of the constitution.” Earlier more favourable rulings originated with judges that had been Democrat appointees & this case’s next stop will be the 4th U.S. District Court of Appeals in Richmond, Va. where these also hold sway. There are few doubts this will end in the U.S. Supreme Court a couple of years hence.  Even though Judge Hudson denied requests to strike down the entire law, or at least block its implementation (which in any case won’t be until 2014) until it goes to the Supreme Court, this invigorated the law’s Republican opponents who plan to have it repealed, or at least starved from funding, after they gain control of the House on January 20th

Ken Cuccinelli immediately launched a big on-line fund-raising blitz. 


    · Over the December 10th weekend Israeli Defence Minister Ehud Barak told a Washington forum attended, among others, by Secretary of State Hilary Clinton, that Jerusalem will have to be shared as part of any peace deal. But a government official said this view didn’t reflect the government’s & on December 12th Prime Minister Netanyahu reinforced this by saying he didn’t intend to share Jerusalem. This came days after the Administration ended its efforts to extend the settlement building freeze & days before White House Mideast Envoy George Mitchell will come once again to try & move the peace process forward. 

The question is not whether, but when, Barak will resign from a Netayahu government in which he has always been the odd man out. When he does, he will deprive it of its majority in the Knesset & bring on a political crisis that, may end the stranglehold that a relatively small gaggle of hardliners has had on the country’s policy-making processes. 


    · In 2007 Nelson Mandela organized a group of international luminari, aka The Elders, to tackle world conflicts. On December 13th it issued a statement saying a new approach is needed for the Middle East peace talks, describing as “flawed” Washington’s attempts to get a renewed settlement ban by offering big freebies. It said “We now urge a renewed effort, firmly based on international law and respect for human rights, aimed at defining boundaries between Israel and a new Palestinian state and addressing security issues, without neglecting the other issues at the core of the conflict.” Furthermore, that Israel had to halt all settlement activity in the occupied Palestinian territory, incl. East Jerusalem, lift its “illegal and inhumane” blockade of Gaza, & agree to boundaries of a Palestinian state based on the 1967 borders with East Jerusalem as its capital. 

Its bottom line is that “We need peace in the Middle East, not just a process.”  Still, the peace process will continue to go nowhere fast as long as there is a government in place that thinks of the West Bank as the West Bank, and not as the Biblical lands of Judea & Samarai (the position of Netanyahu’s rightwing coalition partners (the group currently includes Aung San SUU Kyi, Desmond Tutu, Jimmy Carter, Kofi Annan, Mary Robinson, one-time President of Ireland & UN Human Rights Commissioner, Gro Brundtland, one-time Prime Minister of Norway & WHO Director-General, Lakdar Brahimi, a one-time UN Special Representative to Haiti, and to South Africa, and to Iraq & to Afghanistan, & one-time Brazilian President Fernando H. Cardoso).   


    · Consumers continued to take advantage of government incentives that may expire at yearend. Car sales rose to 1.34MM, surpassing January’s 1.32MM record, & YTD are up 35% to 12.45MM. Total vehicle sales, incl. trucks & buses, were up 26.9% YoY to 1.697MM, & 34% YTD to 16.4MM. GM has introduced a new “affordable” brand called “Baojun” it will start selling next year in an effort to grow its market share & Ford opened 25 new dealerships on November 25th & plans to open 26 more by yearend. 

With total sales for the year now expected to be in the 18MM unit range, i.e. in excess of US sales at its peak a few years ago, China has now become the world’s largest vehicle market, and going forward is likely to become more so.  


    · After a call by Mahmoud Abbas to recognize a Palestine based on the 1967 borders now, its Foreign Policy Council reiterated “its readiness, when appropriate, to recognize a Palestinian state” but also expressed disappointment that Israel hadn’t extended its settlement freeze & said “Our views on settlements, including in East Jerusalem, are clear : they are illegal under international law and an obstacle to peace.”


Where might this leave France that on December 8th, after Argentina & Brazil joined the 100+ nations recognizing a Palestinian state based on the 1967 borders, said it would follow suit.  


    · Portugal is trying to avoid an EU/IMF bailout. So its Finance Minister recently made low profile visits to Brazil & China to try & persuade their  governments to buy his government’s bonds. 

China has been buying European government bonds for some time (apparently partly in the belief that at its core Europe’s longer term fiscal position beats that of the US).

Home Books Photo Gallery About David Survey Results Useful Links Submit Feedback