Daily Digest 12/20 - Iceland Offers Economic Lessons for Ireland, Retail Hit by Show Chaos, Gas Prices Quadruple in Iran

State Budgets: Day of Reckoning (60 Minutes News Video.....A must watch)

• 1) State debt for jobless benefits looming (Ohio)

"Although the battle over extending unemployment benefits has been solved in Washington, Ohio still has no way to repay the $2.3 billion borrowed from a federal loan fund to continue the jobless benefits through the recession.

Without a reprieve from Congress, that bill comes due next year, at the same time state leaders will be grappling to close a projected $8 billion shortfall in the two-year state budget that begins in July. "

"Rising unemployment and lingering recession in many parts of the country have drained state unemployment funds across the nation. Thirty states, including Ohio, and the Virgin Islands currently are borrowing from the federal fund, owing a combined $41.7 billion as of Dec. 13, according to the U.S. Department of Labor. Four other states have paid back their loans.

California has needed the most help, more than $9 billion, while Midwestern states, including Ohio, make up four of the top eight borrowers.

“There is a lot of hope that the feds are going to look at this and say, ‘Hey, we have to look at this differently.’ There is an underlying hope that no one wants to speak publicly about and that’s that the feds will step in,” Doehrel said.

Such a provision, however, has not been included in the tax package Congress approved last week, which also renewed funding for extended unemployment benefits."

• 2) Christie Says 'Day of Reckoning' Has Arrived for State Budgets (New Jersey)

"Dec. 20 (Bloomberg) -- New Jersey Governor Chris Christie said U.S. states face a “day of reckoning” as they contend with looming budget deficits in the wake of the longest recession since the 1930s.

Christie, who cut $1.3 billion in aid to schools and municipalities this year to close a $10.7 billion deficit, said states’ pension and debt costs have grown to be “unsustainable.” Benefits, education and health care will be reduced in many states, he said in an interview aired last night on CBS Corp.’s “60 Minutes.”

“The day of reckoning has arrived,” said Christie, 48, a first-term Republican. Areas such as education and pensions “were third rails of politics. We are now left with no alternatives.”

The recession caused the biggest nationwide decline in state tax receipts on record, according to the nonpartisan Center on Budget and Policy Priorities in Washington. States have filled more than $425 billion in funding gaps since fiscal 2009; the combined imbalance is likely to reach $140 billion in the next budget year, the center said."

• 3) Morici: Downgrade US Treasuries to Junk (CNBC)

"As Washington spends and borrows, the Treasury will have to offer higher rates on new 20 and 30 year bonds, making comparable securities issued in 2010 and earlier worth less in the resale market.

That interest rate risk makes U.S. Treasury securities lousy investments.

For rating agencies, Washington’s monopoly on printing dollars makes difficult assigning a conventional rating between AAA and D on its bonds. Those can’t default but investors’ capital is still at grave risk.

Perhaps a special grade: “F” –flee now before you get stuck—is appropriate for the junk sold by the U.S. Treasury."

• 4) Inside Arizona Politics: Budget deficit posing even bigger threat to education?

"PHOENIX - As bad as the state’s financial problems have been the past two years, the crisis is likely to come to a head in 2011.

When state legislators are sworn in on Jan. 10, they will immediately start working on solutions to wipe more than $2.2 billion in red ink off the books. And, unlike in past years, the federal government won’t be opening up its checkbook to give the state money in order to stave off deep budget cuts.

The first order of business will be an estimated $840 million deficit in the current fiscal year.

Legislative leaders are already crafting a plan to fill that hole and lawmakers will likely vote on it by the end of January. Attention will then shift to a $1.4 billion shortfall in the upcoming budget year, which begins in July.

And, despite what voters were told earlier this year when they headed to the polls in overwhelming support of a temporary sales tax increase, there are almost certain to be massive cuts to education."

• 5) For California schools, next year stands to be worse

"School districts already have crammed more students into classrooms, shortened the school calendar and stopped buying new textbooks.

As bleak as things are for California schools, however, next year stands to be worse.

K-12 schools and community colleges could receive at least $2.2 billion less because of lower state tax rates in 2011, state budget analysts say. To make matters worse, many districts will have less federal aid to rely upon.

The reduction seems to be a foregone conclusion at the Capitol because the state's projected 18-month budget shortfall – as great as $29 billion – would otherwise be higher.

So districts are bracing for another round of teacher furloughs, school closures and the elimination of programs outside the core teaching mission.

"To paint the mental picture, it's as if two people are looking over a forest of stumps, and one person says, 'Let's go get that low-hanging fruit,' " said Elk Grove Unified School District Superintendent Steven Ladd. "Well, there's not even a tree out there.""

• 6) Students bear brunt of state budget deficit (Colorado)

"Parents in Colorado may want to start putting more money into their kids' college fund. Almost all of the universities and colleges in our state are considering double digit tuition increases next year to overcome cuts in state funding."

"Senate Majority Leader John Morse, (D) Colorado Springs says he and his fellow lawmakers must balance the budget, and with a billion dollar deficit, higher education is low hanging fruit."

• 7) Parker taking city pension cuts battle to Legislature (Houston)

"Instability in its three pension systems is the greatest threat to Houston's financial solvency, city officials and financial analysts say.

Within three years, according to an actuarial study commissioned by the city, the pension for firefighters will require the city to contribute 45 percent of its payroll costs for that retirement plan, a burden Mayor Annise Parker says is unsustainable.

The other two plans are in even worse shape. The police and municipal employee pensions are underfunded by $2.1 billion, roughly the equivalent of what the city spends annually for public safety and general operations.

"The bottom line is the whole system is completely unsustainable with current benefit levels and the city's financial position," said John Diamond, a Rice University public finance fellow and governmental tax consultant. "

• 8) Auditor warns supervisors of unfunded pension cost (El Dorado County, CA)

"El Dorado County's auditor-controller has issued a warning to the Board of Supervisors about unfunded pension liability.

According to Joe Harn's letter to the supervisors last week, the liability has more than doubled from June 2008 to June 2009, the most recent reported.

The current liability is $264 million, he said.

"It's just an ugly number," Harn said."

• 9) Federal Reserve Places 70% Per-Security Limit on Treasury Debt Holdings

"The Federal Reserve said it will limit purchases to 70 percent of any single Treasury security as part of its plan to expand its balance sheet that’s known as quantitative easing.

The central bank had temporarily relaxed its 35 percent limit in November when announcing additional purchases of $600 billion of Treasuries through June. The New York Fed in a statement today gave allowable purchase percentages for three brackets in its system open market account, or SOMA, consisting of securities it holds, from more than 30 percent to 70 percent."

.......................9A) Treasuries Rise for Third Day as Fed Debt Purchases May Break Daily High

"Treasuries rose for a third day in the longest winning streak this month as the Federal Reserve prepared to purchase as much as $17 billion in two operations, the biggest amount in a single day."

• 10) Christie Cuts to Local Aid Make New Jersey Towns Lead U.S. Bond Downgrades

"Municipal bond-rating cuts by Moody’s this year also include Los Angeles, San Francisco, Philadelphia and Chicago, after the slumping housing market ate into real-estate values and assessments of property declined.

Across the U.S., local governments collected 1.8 percent less in taxes this year than in 2009, the Washington-based National League of Cities said in an October report. Revenue may continue declining into 2012 as governments lag at least 18 months behind the private sector in feeling the effects of any economic turnaround, the group said."

• 11) Moody's downgrades ratings on Irish banks

"LONDON (AP) -- Ratings agency Moody's on Monday downgraded four Irish banks and an insurer, dropping two of them to junk status -- a reminder of the financial mess the country faces at it looks to draw on an international rescue loan.

Moody's Investors Service said it had lowered ratings on bank deposits and senior debt for Allied Irish Banks, Bank of Ireland, EBS Building Society, Irish Life & Permanent and Irish Nationwide Building Society. It also downgraded their bank financial strength ratings and most of the groups' junior securities.

The move came after Moody's on Friday downgraded Ireland's sovereign credit rating by five notches to Baa1 -- just three steps above junk-bond status."

• Other news, headlines and opinion:

French AAA Grade at Risk as Downgrades Sweep Europe

Fears over French Downgrade Restrain Euro

Germany's robust economy not enough to stop record debt

German Public Debt Rises To EUR 1.8tln

EU Plans $17 Billion of Bond Sales for Ireland Bailout, FT Says

China plans 900 billion yuan deficit in 2011 to fuel economy

Stocks Rising 17% Since Bernanke Disclosed QE2 Disarms Fed's Worst Critics

Alberta deficit at $5 billion

Underfunded pensions dwarf deficit (Connecticut)

California's teaching force shrinks, as K-12 population set to grow

Weak Get Weaker as Muni Bonds Are Sold Off

City waits, frets over $41 million in state aid (Columbus)

City budget cuts hit crunch time (Cincinnati....$60 million deficit)

Incoming Nevada Governor Weighs Deeper Cuts

3 states in regional compact raid pollution funds

20 Companies That Cratered in 2010

Iranian riot police out in force as food and fuel subsidies end

IRELAND NEEDS TO DEFAULT JIM CORR RUSSIA TODAY (Video)

European financials see dollar funding gap widen

School board borrows to pay off pension liability (Wisconsin)

Unintended Consequences (Inflation US Video)

This was an awesome weekend read in the NYTimes, which starts out a bit slow but on page 4 we find this gem

A Physicist Solves the City

West illustrates the problem by translating human life into watts. “A human being at rest runs on 90 watts,” he says. “That’s how much power you need just to lie down. And if you’re a hunter-gatherer and you live in the Amazon, you’ll need about 250 watts. That’s how much energy it takes to run about and find food. So how much energy does our lifestyle [in America] require? Well, when you add up all our calories and then you add up the energy needed to run the computer and the air-conditioner, you get an incredibly large number, somewhere around 11,000 watts.

Now you can ask yourself: What kind of animal requires 11,000 watts to live? And what you find is that we have created a lifestyle where we need more watts than a blue whale. We require more energy than the biggest animal that has ever existed. That is why our lifestyle is unsustainable. We can’t have seven billion blue whales on this planet. It’s not even clear that we can afford to have 300 million blue whales.”

The historian Lewis Mumford described the rise of the megalopolis as “the last stage in the classical cycle of civilization,” which would end with “complete disruption and downfall.” In his more pessimistic moods, West seems to agree: he knows that nothing can trend upward forever. In fact, West sees human history as defined by this constant tension between expansion and scarcity, between the relentless growth made possible by cities and the limited resources that hold our growth back.

“The only thing that stops the superlinear equations is when we run out of something we need,” West says. “And so the growth slows down. If nothing else changes, the system will eventually start to collapse.

The unsustainability of the human condition (as it is currently configured) is right there, for all to see, out in the open.  The article then goes on to note that the way around this disturbing limit is to simply up the pace of innovation, which is a delightfully naive world view, utterly absent any notion of the role of energy in maintaining the order and complexity necessary to free up human talent so that innovation can happen in the first place.

The article continues on and explores this tension a bit:

“These major innovations completely changed the way society operates,” West says. “It’s like we’re on the edge of a cliff, about to run out of something, and then we find a new way of creating wealth. That means we can start to climb again.”

But the escape is only temporary, as every innovation eventually leads to new shortages. We clear-cut forests, and so we turn to oil; once we exhaust our fossil-fuel reserves, we’ll start driving electric cars, at least until we run out of lithium. This helps explain why West describes cities as the only solution to the problem of cities. Although urbanization has generated a seemingly impossible amount of economic growth, it has also inspired the innovations that allow the growth to continue.

There is a serious complication to this triumphant narrative of cliff edges and creativity, however. Because our lifestyle has become so expensive to maintain, every new resource now becomes exhausted at a faster rate. This means that the cycle of innovations has to constantly accelerate, with each breakthrough providing a shorter reprieve. The end result is that cities aren’t just increasing the pace of life; they are also increasing the pace at which life changes.

“It’s like being on a treadmill that keeps on getting faster,” West says. “We used to get a big revolution every few thousand years. And then it took us a century to go from the steam engine to the internal-­combustion engine. Now we’re down to about 15 years between big innovations. What this means is that, for the first time ever, people are living through multiple revolutions. And this all comes from cities. Once we started to urbanize, we put ourselves on this treadmill. We traded away stability for growth. And growth requires change.”

I'll go further than that; growth requires energy.  The dark hint lurking here is that in trading away stability for growth, what happens when the growth goes away?

Does the stability go away too?

Many have concluded that there's every risk of this occurring and so they prepare for the possibility of social unrest.

I would love to see what would happen if Dr. West turned his prodigious talents to the study of the intersection between the economy and energy.  That would be something to behold, I suspect.

the study of the intersection between the economy and energy

aka, Biophysical Economics

by way of introduction, C-realm has a nice pair of interviews of Charles Hall who is a leader in this relatively new field

Just a heads up on what's happening as the problems of agricultural land scarcity and food scarcity crop up and nation states start looking for solutions... When things are scarce, the powerless are marginalized and pushed to the side:

Land grab fears for Ethiopian rural communities
"The government of [Ethiopia] is pioneering the lease of some three million hectares of land over the next five years, an area the size of Belgium.
"The policy is targeting massive lowland areas mostly in the west and south-west of the country.
These are regions populated by smaller minority ethnic groups.
"The government denies conducting any repression, and says instead that its policy is aimed at lifting local people out of poverty.
"Foreign investors in Gambella include Chinese, Indian and Saudi firms.
"The Saudis alone say they are hoping to produce as much as a million tonnes of rice per year, most of it for their own domestic market."
http://www.bbc.co.uk/news/business-11991...

Trivia question: What country was it that had such a huge famine that the world came together? Yeah. That one.

Poet

A Bleak Year in Europe

"Images define a year. A captured moment. A snapshot. Some we share together - like Charles and Camilla caught open-mouthed as the mob circles. Other images are our own. Three, in particular, stay with me.

"It is early morning in Madrid. A pre-school hour. The street is narrow and dark, where the sun rarely reaches. There is already a line of people - perhaps 250 - hunched together against the morning chill. They are waiting to collect their unemployment benefit. What catches my eye is how many of them are reading. These are mainly young, intelligent people. A young woman turns her back to the camera. She is a part-time actress and doesn't want to be seen on the line. Beyond her the queue snakes around the corner and in that moment I glimpse a lost generation.

"On another day I am in Dublin, at a technical college on the outskirts of the city. I am in a room with engineering students. They are bright, alive with ambition. I ask how many are considering emigrating in search of work. Every hand bar one goes up. That's the image. There is no hesitation or reluctance, only certainty. For Ireland once again the best and the brightest are heading out - a generation lost to the still new worlds of Canada and Australia.

"Then in Italy, in the late year's sun. A vast crowd is walking from the Colosseum towards Piazza Venezia. They are mainly students. Many have linked arms. At their sides hang motorcycle helmets which they will wear when they confront the police. In their shoulder bags they have thunder-flashes, flares - even rocks. Some are here to fight. Many don't want to be breakers, but they will get drawn in anyway because their frustration runs deep. This is a tinder-dry generation - with youth unemployment running at over 20%. As we neared the river they chanted "if you block us we'll bring down the city!" Let Rome in Tiber fall. And later the image - the numbers, helmets firmly on, fighting the police.

"Three snapshots that for me go to the heart of Europe in 2010..."

http://www.bbc.co.uk/blogs/thereporters/...

Poet