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EmailSunday, November 1, 2009, 10:48 am, by DailyDigest
- US Economic Growth Deconstructed
- Catching Argentinian Disease
- Burden of Safety Law Imperils Small Toymakers
- Spotlight on Eastern European Currencies and Gold
- The Grim Reality Is That America Is Not Out Of Recession
- Federal Debt: What Happens If Governments Can't Repay?
- FED Held Retreats At Luxury Resorts After Blasting AIG For The Same
- Inflation 'Supply Shock' Inferno
- How And Why China Will Flood the Gold Market
- Tuna ban 'justified' by science
- Solar Hybrid Ferries To Set Sail
Economy
US Economic Growth Deconstructed (james_knight_chaucer)
As my generous neighbour is lending me so much food, he comes around to visit my barn, and see how I am running things. As reassurance, I count out my units of output, and show him how much my output has increased. I am very pleased with myself, and I smile with pleasure as I count the units. Then I note that my neighbour is frowning and I am puzzled to find that my neighbour does not share my pleasure.
Catching Argentinian Disease (JRB)
As I have been writing, the United States in particular, and the developed world in general, are faced with a series of very unpleasant, if not downright bad choices. The time for good choices was ten years ago. Now we face the prospect of painful decisions, no matter what we do. It is not a matter of pain or no pain, of somehow avoiding the consequences of our bad decisions, it is simply deciding how much pain we will take and when, or allowing the pain to build up to a climactic event. Today we look at what I think would be the worst choice of all.
Burden of Safety Law Imperils Small Toymakers (Joemanc)
For 35 years, William John Woods has made wooden toys for children. Each one of the 2,000 or so he makes each year passes through his hands at his shop in Ogunquit, Maine, and no child, he said, has ever been hurt by one of his small boats, cars, helicopters or rattles. But now he and others like him — makers of small toys and owners of toy resale shops and boutique stores — say their livelihood is being threatened by federal legislation enacted in the last year to protect children from toxic toys through more extensive testing.
Spotlight on Eastern European Currencies and Gold
While most eyes have been on the US dollar, I am not alone in thinking a crisis might start elsewhere."
The Grim Reality Is That America Is Not Out Of Recession (M.W.)
The emerging giants of the East are rising, but what's happening in the US still dominates global economic sentiment. I was pleased last week when I heard that, after four successive quarters of contraction, America's economy grew by an impressive 3.5pc between July and September, compared to the quarter before. "The US is out of recession" numerous newspaper headlines screamed. No wonder share prices surged. As ever, the numbers warrant a closer look.
Federal Debt: What Happens If Governments Can't Repay? (M.W.)
The idea that the government of a major advanced country would default on its debt—that is, tell lenders that it won't repay them all they're owed—was, until recently, a preposterous proposition. Argentina or Russia might stiff their creditors, but surely not the likes of the United States, Japan, or Great Britain... it's no longer entirely unimaginable. Governments of rich countries are borrowing so much that it's conceivable that one day the twin assumptions underlying their burgeoning debt (that lenders will continue to lend and that governments will continue to pay) might collapse. What happens then?
FED Held Retreats At Luxury Resorts After Blasting AIG For The Same (M.W.)
The Federal Reserve is coming under fire for holding conferences at exotic high-priced locales even after prior excursions by bailed-out companies like AIG raised the ire of government officials and taxpayers alike. Earlier this month, the San Francisco Fed held a conference on Asia at the Bacara Resort & Spa near Santa Barbara where suites range from $800 to $2,000. Just days later, the Boston Fed organized their annual conference at the Wequassett Inn right by the water on Cape Cod, an inn where suites cost up to $1,860 a night.
Inflation 'Supply Shock' Inferno (M.W.)
The gasoline for rampant inflation already permeates the US economy – and all it will take is one bad day for a series of interrelated supply shocks to set off an inflationary inferno. As we will cover in this article, the accelerant in this case is the $700 billion annual U.S. trade deficit. We’ll explore how the real world economics of being the world’s largest debtor in a globalized economy trump insular deflationist monetary theory. What would happen if the United States had to actually live on what we all produce? What would happen if other nations would only provide us with the goods and services that we could pay for with our own goods and services? What if other nations stopped manipulating the value of the dollar, stopped propping it up, and let it find its free market value? This idea of living within our means – whether we want to or not – is radical stuff, but it could be happening fairly soon given the current global economic situation.
How And Why China Will Flood the Gold Market (M.W.)
As you read this, the Chinese government is doing an extraordinary thing... something nearly unheard of in the modern world. It is encouraging citizens to put at least 5% of their savings into precious metals.
Environment
Tuna ban 'justified' by science (E.S.)
Banning trade in Atlantic bluefin tuna is justified by the extent of their decline, an analysis by scientists advising fisheries regulators suggests.
Solar Hybrid Ferries To Set Sail (M.W.)
The image of an old wooden junk with orange sails is ubiquitous in Hong Kong lore. It's on matchbooks, advertisements and postcards in this famous port city, but the traditional wind-powered Chinese boat cruising Victoria Harbor is a rare site these days. The reality is a bit less picturesque: the second busiest port in the world is filled with diesel-powered ships, ferries and fishing boats that belch toxins into the infamously polluted Hong Kong skyline. That could be changing. Early next year, four new solar hybrid ferries will set sail in the Hong Kong harbor, using solar collectors to power an electric engine.
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(I post a lot about pensions. Please take a close look at #1. Oregon's pension (#7) is even worse):
"In California, most government agencies have not set aside money for health care promised current workers when they retire. A governor’s commission last year made the first estimate of the total unfunded debt: $118 billion over the next 30 years.
Now GASB has begun a routine “re-examination” of the accounting rules for public employee pension systems. One of the questions put out for comment is about the method used to determine the present cost of future benefits.
Public pensions use their assumed annual earnings, 7.75 percent a year in the case of a CalPERS portfolio that includes stocks and a wide range of investments. GASB asked about switching to the method required for corporate pensions.
It’s called the “risk free” or “market value” method because it’s based on interest rates and bonds, rather than unpredictable stocks and other investments. But the assumed yield from risk-free bonds is likely to be lower.
So, if the public pensions switched to the “market value” method, the accounting change could force an increase, perhaps a big one, in the annual pension contributions from government agencies."
"Nov. 1 (Bloomberg) -- CIT Group Inc., the 101-year-old commercial lender seeking to avoid collapse, may file for a prepackaged bankruptcy as soon as today after striking deals with billionaire Carl Icahn and Goldman Sachs Group Inc."
"Congress is again looking to give companies more time to replenish employee pension plans, worried that looming payments will crimp their cash flow and slow hiring.
But by allowing pensions to remain inadequately funded, lawmakers would also increase the risk that the government would have to pick up the tab for pension payments owed by bankrupt companies. A bill introduced on Tuesday in the House would give struggling employers the option of spreading out required contributions to retirement plans over nine years, rather than the seven years they are now allowed. Under the proposal, companies would make only token payments for the first two years."
"GD's pensions were in an underfunded position of $2.9 billion as of the end of 2008, equivalent to a 62% funded position. Required pension contributions are not a credit issue in 2009, but they will likely increase in future years depending on pension performance and assumptions set in 2009."
"The recession has accelerated the terminations of single-employer defined benefit pension plans, a federal official testified to a Senate committee yesterday.
From its beginning in 1974 through the end of fiscal year 2008, the Pension Benefit Guaranty Corp. has terminated almost 4,000 single-employer defined benefit plans covering some 1.2 million workers and retirees, noted Barbara D. Bovbjerg, director of education, workforce, and income security for the U.S. General Accounting Office.
“Since 2008, the economic downturn has brought a new influx of pension plan terminations to PBGC, and more are expected to follow,” Bovbjerg told members of the U.S. Senate Committee on Health, Education, Labor, and Pensions.
Through second quarter of fiscal year 2009, the PBGC’s deficit had tripled since the end of FY 2008, from about $11 billion to about $33.5 billion, Bovbjerg said. Since then, the influx of large plan terminations has continued."
"The company also said in court documents it had reached a deal that makes the government agency the trustee of the company's defined benefit pension.
The PBGC said the plan, which has 4,786 participants, was underfunded by $106 million.
The company will make $2.8 million in missed pension payments, issue unsecured notes to the PBGC and grant the PBGC distributions under its reorganization plan as part of the deal."
"A financial investment that has helped fill gaps in pension funding since 2002 quickly turned sour with the stock market's misfortunes last year, losing $1.9 billion for nearly 140 government agencies in the state, according to a Statesman Journal analysis.
The investment strategy called for selling bonds and investing the proceeds. It was backed by the financial companies that stood to profit from the investment move."
"The financial crisis has pushed the issue of the dollar’s status as the world’s reserve currency to the forefront of the market’s agenda. And as ultra-loose US fiscal and monetary policies have weighed on its value, so calls for an alternative to the US currency as the world’s numeraire have increased."
The Los Angeles City Council faces a $100-million budget shortfall even after passing a trio of cost-cutting measures today that include two labor contracts and a plan for shaving 2,400 civilian employees off the payroll.
"The mayor, sheriff and City Council recklessly gave away the store to the police and firefighters unions. The unfunded liability is close to $800 million - about $1,000 per Jacksonville resident, and about $3,000 or more per household.
This harms property values and is unaffordable."
"A new study concludes that many nonprofit organizations are having major problems trying to sustain the benefits they provide employees through pension plans.
Numerous organizations are coping by offering less generous retirement benefits and reducing the scope and scale of their plans’ coverage, “actions which have serious implications for nonprofit workers and their families,” said the report by the Johns Hopkins University’s Listening Post Project."
"Salary and benefit costs continue to be a challenge. The city has been unable to reduce police and fire pension costs to a targeted cap of 37% of covered payroll, still a very high level. Fire employee contributions to the pension fund were increased 1% to 8% and will increase an additional 1% in March 2010 if the 37% goal is not met. The city disclosed a sizeable Other Post Employment Benefits (OPEB) unfunded accrued actuarial liability of $480 million, resulting in an annual required cost (ARC) of $37.4 million, well in excess of the current pay-go amount of approximately $10 million. City officials recently adjusted some benefits and expect to realize a small annual operating savings."
"The Treasury secretary said it’s not yet time to announce steps to cut the U.S. deficit, which has shot up to a record $1.4 trillion in the last year, triple the previous year, after the U.S. Congress committed billions to bailing out banks and President Barack Obama and lawmakers committed $787 billion to an economic stimulus package.
Geithner said it’s “not yet” time to discuss whether another economic stimulus package should be considered, because only about half of the first one has been spent."
"RAINY-DAY, STIMULUS MONEY DEPLETED
Schools must compete with other state needs for the shrinking funds. The state likely faces a $100 million increase in Medicaid costs and must find about $6 million to operate a new prison, Hammon said.
Moreover, the cushion of cash that spared public education from deep reductions this year is nearly gone.
Public schools are spending $145 million in federal economic-stimulus money and about $93 million from a rainy-day fund for state schools in the 2009 and 2010 budget years to compensate for reduced state tax revenue. About $56 million of stimulus and school rainy-day money remains."
"SAN FRANCISCO—Officials for the financially struggling Golden Gate Bridge may get rid of toll takers, raise tolls and start charging cyclists and pedestrians to help overcome a $132 million budget deficit.
The Golden Gate Bridge Highway and Transportation District says fewer drivers mixed with cuts in state funding have contributed to its money woes."
"WASHINGTON — Many communities hit hardest by job losses, those built around dying factories and mills, have been slowest to see relief from President Barack Obama's stimulus plan, underscoring how hard it is for Washington policymakers to create lasting work in areas that need it most.
The manufacturing industry has shed hundreds of thousands of jobs during the recession as plants have closed or scaled back. Places such as the southwest Missouri city of Lamar, tucked amid endless fields of winter wheat and soybeans, have seen the cornerstones of their economies disappear, leaving a gap that even billions in roadwork and government aid cannot fill."
“When we think of hunger in the iconic, stereotypical terms, we think of people that are homeless, the bag-lady in the street. What we’re seeing now are working families that are struggling,” she said.
“It’s our neighbors. It’s our friends. It’s the soccer mom. It’s people in the community that never ever would have thought they’d be facing hunger issues.”
"When lawmakers return to Frankfort in January, one number will loom large: $1.19 billion.
According to preliminary estimates, that's how much money lawmakers must find in the couch cushions of state government to continue spending at current levels through June 2012."
"The oil-exporting world is worried, for oil is priced in dollars. The Indian infotech industry is worried. The bulk of its earnings are in dollars. The Chinese are practically paranoid, for they are the world's biggest lenders to the US. With a $2.27 trillion hoard, most of it held in US government bonds, they are fretting about what a dramatic decline in the dollar will do to their hard-earned assets.
Zhou Xiaochuan, the governor of the People's Bank of China, wrote in a recent essay that the world needs a new global currency to replace the dollar. If China dumps the dollar, the currency's value will certainly crash."
"For two centuries, banking crises have generally been followed by a pick-up in sovereign debt defaults. These problems normally afflicted developing economies. Today, however, the public finances of most emerging markets are in pretty robust shape. By contrast, the fiscal afflicted position of the older industrialised nations is poor. Their government debt burdens are larger and economic growth prospects dimmer. Among these countries, Japan’s problems look particularly acute."
(Scroll down to see the document he refers to)
"Earlier this year, federal regulators relaxed the "mark-to-market" accounting rules that forced banks to tell the truth about what their assets were worth.
This allowed banks to pretend that assets were worth, say, 90 cents on the dollar when their market value was closer to 50 cents. This makes the banking system seem much healthier than it is (look, ma, no writeoffs!). But because the market value of the assets is 50 cents for a reason, the change has likely just prolonged the agony. Instead of banks that would have been fixed rapidly, if painfully, by marking to market, we've got zombie banks.
And, now, regulators have essentially done the same thing for commercial real estate loans.
The commercial real-estate crisis is taking a while to play out, and the new rules will ensure that it takes even longer. Instead of having to foreclose and take writeoffs, the new rules encourage banks to modify existing commercial real-estate loans, even when the value of the asset has fallen below the value of the loan."
"Because of an unprecedented drop in sales tax revenue, the Valley Transportation Authority faces an operating deficit of $98 million over the next two years — and will consider cutting service, laying off workers, slashing employee benefits and diverting money from new projects to stay afloat.
The soaring deficit, disclosed in a report released Friday, is four times as great as predicted just four months ago. It amounts to about 15 percent of the agency's operating budget.
"We are looking at a crisis," VTA General Manager Michael Burns said. "Significant decisions will have to be made to maintain a relevant transit system. The situation is not good and is not getting better.""
......The people saying that the recession is over are in denial.
If you have a mortgage free farm & $500,000 cash in the bank – what would you do with that cash?
If you have a mortgage free farm & $500,000 cash in the bank – what would you do with that cash?
Diversification is always a good plan. But I would consider having some supplies as Chris suggests and some physical gold and silver on hand (locked down securely), say 10 to 20 percent. Wow, that would be $100K in gold, kind dangerous to have that amount around really.
But what to diversify in? Agree, not a good idea to have 100K in gold sitting in your safe! No good if there is a burglary!
saxplayer00o1, what a sense of humour you have!!
That takes the definition of denial to a new level
.
If I had a mortgage free farm...I hope I'd feel better about the coming situation than I do. Currently I live on a golf course. Mortgage free, but then, not much good for gardening. I buy my food from the grocery store. I'm like everyone else around here: totally dependent on JIT inventory. I know squat about gardening.
I talked with a friend at church this morning about his experience in Kenya several years ago. He said that on a Sunday night, there was some "event" and by the next morning, the grocery stores were literally out of stock. Riots in the streets. Folks don't go to work. Fruit and produce does not arrive. Power outages. Restlessness. Hmmmmm.
What would I do with $500K? I'd get the majority of it OUT of USD and related PAPER claims. I'd put a chunk of it into physical metals. I'd go 70/30 silver/gold. I'd buy 90% silver (coins) and 1 ounce Krugerrands. These two have the lowest premium and are readily accepted without assay around the world. Buy two big fire-proof gun safes to store your metal. The safes alone will weigh 500#'s. Put them out of the way somewhere. Tell no one.
Then start learning about farming. Goats, chickens, hogs, horses. Solar. Drill a working earthen "well". Get self-sufficient as much as possible. Buy an Isuzu or a fuel sipper. Read all that you can about seeds and gardening. Buy a gun and learn how to shoot. Network with like-minded folks. Get back to local communities.
Most of all, continue to learn from this wonderful on-line community. Attend a seminar. Put things into action.
I would seriously look into holding your money in the form of silver and gold in an allocated account. Look into goldmoney.com, your PM will be held in an off shore storage facility in either the UK or Switzerland. You can wire funds to their site and purchase gold, silver, and platinum online. This company was founded by James Turk and has been recomended by Mish Shedlock and Peter Schiff amoung others. I don't know if this company has been discussed here at CM but I would like to get Chris's take on it.
Get two safes. One that is easily found and holds about 10,000 so the robbers will think they got it. Then put your real stash behind a wall, etc.
I'm considering solar for power interruptions.
Already got the 4Gs, of course, as you can tell by my screen name.
@tomadkins
So what are some SAFE ways to “get the majority of it OUT of USD and related PAPER claims”? I agree with putting a chunk of it in metals, I’m just not sure what a safe quantity to have on hand is. I guess maybe diversity there too would help by possibly not having it all in one location. I just think having $100K in physical gold might be creating more risk that it solves?
Your thoughts…
25% in GLD
25% in USO
Silver, Gold and Palladium seems like a good diversity of metals for me. (Platinum is a bit high-priced at the moment).
Any other suggestions?
If you have a mortgage free farm & $500,000 cash in the bank – what would you do with that cash?