Fiscal Stimulus Canadian Style

Price deflation is turning up in interesting places. Please consider Tickets To See Bill Clinton Slashed To $5.

A much-hyped appearance by a certain charismatic former U.S. President is receiving a cool reception in the city.

After two weeks of sluggish ticket sales to hear Bill Clinton speak, the Canadian National Exhibition has slashed prices from $20 to five dollars plus admission.

Organizers were hoping to fill the 25,000-seat BMO Field, but to-date have only sold 7,000.

Can someone please explain how promoting Bill Clinton in Canada was supposed to stimulate anything other than Pepto-Bismol sales and the pocketbooks of the organizers?

I suppose not. At least it's not as destructive as cash for clunkers. Then again maybe this is Canada's version of cash for clunkers.

Thoughts on the Canadian Housing Bubble

In response to Mish Videos - On the Edge with Max Keiser when I mentioned the Canadian housing bubble, I received numerous emails from people telling me that Canadian banks were in better shape than the US, that lending standards on houses were tighter, and how commodities would support home prices.

Perhaps banks are in better shape but that does not mean they are in good shape. But the real reason we can say Canadian housing is in a bubble is the same reason the US was in an identifiable bubble:

Home prices are standard deviations above rental prices and wages. That may not be true of every city Canada (it was not true in places like Danville, Illinois either), but judging from housing prices in Toronto, Vancouver, etc, it is crystal clear Canada is in trouble.

I cannot quantify exactly how many standard deviations above norm the major Canadian cities are, but a look at home prices and acceleration in appreciation is telling in and of itself. In the US, homes prices to wages and rent were a whopping 3.5 standard deviations from the norm at the peak.

Canadian home prices are a bubble waiting to pop. When the bubble does pop, it will take as long to fix as in the US, 6-8 years minimum, perhaps way longer, depending on how big the bubbles got in each location and the speed of the declines.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Yes, The Government Can!

Here is an entertaining video by Tim Hawkins called "The Government Can"



If you need an entertaining look on how the country is going to hell in a hand basket, that's the one. It's sure to make you laugh, although what he talks about in reality is no laughing matter.

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

Spending Collapses In All Generation Groups

It's no secret that boomers fearing an underfunded retirement have sharply cut spending. However, it's not just boomers cutting back. Consumer attitudes toward debt have changed across all age groups.

A recent Gallup Poll shows just how dramatic a spending shift has taken place. Please consider Boomers’ Spending, Like Other Generations’, Down Sharply.

Baby boomers' self-reported average daily spending of $64 in 2009 is down sharply from an average of $98 in 2008. But baby boomers -- the largest generational group of Americans -- are not alone in pulling back on their consumption, as all generations show significant declines from last year. Generation X has reported the greatest spending on average in both years, and is averaging $71 per day so far in 2009, down from $110 in 2008.

Self-Reported Spending



Population Share By Age Group



The chart shows Boomers and Generation X are the two demographic largest groups. Spending is down by 34.7% among boomers and 35.4% in Generation X. Spending is down by 33.7% in generation Y, the third largest demographic group. That is a remarkably consistent decline in spending.

Spending by the "Greatest Generation" is down a whopping 44% but that group only constitutes 5% of the population.

Here are some more interesting charts from the article.

Annual Incomes - Boomers vs. Generation X



Surprisingly, annual incomes are nearly identical for boomers and generation X. However, Generation Y income is dramatically less as the following chart shows.

Annual Incomes - Boomers vs. Generation Y



Bottom Line

Baby boomers have pulled back considerably on their spending this year, but they are not alone in doing so. Gallup finds significant declines among all generations in average reported daily spending in 2009 compared to 2008. Given that consumer spending is the primary engine of the U.S. economy, it's not clear how much the economy can grow unless spending increases from its current low levels. But spending may not necessarily be the best course of action for baby boomers as they approach retirement age and prepare to rely on Social Security and their retirement savings as primary sources of income. Indeed, the two generations consisting largely of retirement-age Americans consistently show the lowest levels of reported spending.

I can add to those thoughts. Boomers and Generation X are loaded to the gills with debt. Boomers in particular are downsizing and income growth is stagnating across the board.

Moreover, boomers headed into retirement are scared half to death about insufficient funds. Those boomers are not about to go on a spending spree.

Please consider the Incredible Shrinking Boomer Economy.

Boomer Statistics

• $400 Billion: Amount that will come out of annual U.S. consumption as thrifty boomers push savings rate from 1% to nearly 5%.
  
  
• 47%: Boomers share of national disposable income in 2005 before the bubble burst. Boomers contributed only 7% to national savings.
  
  
• 2.4%: Forecasted GDP growth over the next three decades as boomers ratchet back. GDP has grown 3.2% a year since 1965.
  
  
• 69%: Portion of boomers aged 54 to 63 who are financially unprepared for retirement.
  
  
• 78%: Boomers' share of GDP growth during the bubble years of 1995 to 2005

Those stats are from a McKinsey study, and there is nothing remotely inflationary about boomer demographics.

Nor is there anything inflationary about Generation X demographics. Generation X's have seen boomers blow it. By sharply curtailing spending, generation X at least has chance to right the ship before retirement. It's too late for most boomers. Time ran out.

Now consider generation Y with 19% of the population. Think the income levels of generation Y are going to catch boomers or generation X?

When?

Finally, think about tightening lending standards and attitudes about debt in general. Because of lower incomes and tighter lending standards, it is unlikely that Generation Y will be either able or willing to carry debt burdens to sustain a strong recovery.

Distortionary vs. Inflationary

Bernanke can flood the world with "reserves" and indeed he has. However, he cannot force banks to lend or consumers to borrow.

Here is a simple analogy that everyone should be able to understand: You can lead a horse to water but you cannot make it drink. And if the horse does not want to drink, it was a waste of time and energy to lead the horse to the water.

Yet every day someone comes up with another convoluted theory about how inflationary this all is. It is certainly "distortionary" in that it creates problems down the road and prolongs a real recovery by keeping zombie banks alive (as happened in Japan). However, it is not (in aggregate) going to cause massive inflation because it is not spurring the creation of new debt.

Consumers and banks both are suffering from a massive hangover. Their willingness and ability to drink is gone. No matter how many pints of whiskey Bernanke sets in front of someone passed out on the floor, liquor sales will not rise.

In a debt-based economy, it is extremely difficult to produce inflation if consumers will not participate. And as noted above, demographics and attitudes strongly suggest consumers have had enough of debt and spending sprees.

Those pointing to flawed measures of money supply as proof of inflation just don't get it, and likely never will.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Countdown To Dollar Implosion Madness

It never ceases to amaze me what hype people will believe. The latest is a series of posts by Jim Sinclair who on August 14, started a countdown to dollar oblivion.

Aug 14 2009: The Motivation Behind The Countdown

85 days to go!

The primary reason for this “out on the limb statement” is that the recent China/US financial Summit meeting in Washington which was requested by China, was not significantly pre-planned.

As I understand it there are two things wanted and one thing disapproved of.

The US financial leadership wants, but more so needs, Chinese buying of US Treasury offerings to remain at these levels but more so to increase to offset the wholly unavoidable increase in offering of US Federal Debt.

The Chinese wish to see the USA support the creation of a Super Sovereign Currency as an offset to dependence on the dollar for international settlements and national reserves.

The Chinese rightly feel that the greatest risk to their present dollar position’s valuation is quantitative easing. or simply put, the monetization of one’s own debt by the electronic creation of money for funding yourself.

I am informed that Chinese interests want to see both in 2009.

Tools of timing, some I have not shared with you, indicate a major potential turning point that could easily see a break below .7600 or .7200 coming in the final quarter of this year.

Add this all together and you get a November bull’s eye for a loss of confidence in the US dollar internally as well as externally. That will end the misguided belief that MOPE, via its tool SPIN, defeats economic law.

An 85 day countdown to a break on the US dollar below .76 from .78 hardly seems worthy of a countdown.

And it would be nice if Sinclair told us a bit more than "I am informed that Chinese interests want to see both in 2009."

Informed by who? A top ranking official? Minnie Mouse? Uncle Joe? At least give us a hint.

OK the US and China met in an unplanned meeting. This is grounds for a "November bull’s eye" collapse on the dollar? All the way to a shocking .76?

If you are going to hype about dollar implosions, please hype with dignity. Give us our hype's worth.

Aug 19 2009: The Countdown To The Implosion Of The Dollar

My Dear Friends,

You can take your waves, percentages, algorithms, quants and quarks and throw them directly into the basket. The time for lines and squiggles are behind us. The common shares of the US dollar are and have been in a long term downtrend. That downtrend is 81 days from implosion. The selling of the US dollar and US dollar instruments is increasing in international markets, making it ever more difficult to manipulate the popular US dollar index, the USDX.

COT has cooked its own goose.

China holds in its hands the future of the category, “Foreign Purchasers of US bonds.”

China wishes the annihilation of the Fed policy of “Quantitative Easing.”

The Fed wishes to accommodate China.

The US Treasury is absolutely opposed to any such consideration as it would cement the present Administration into a one term wonder.

The US Treasury must win this battle because the boss of this opposition has the power to appoint the new Chairman of the Fed, either Summers or Geithner.

China as spokesman for the BRICs has publicly stated their desire for the institutions of a Super Sovereign Currency. This is not an intended as an immediate substitute for the dollar as a reserve currency but rather an alternative in new commitments.

It is my understanding that the BRIC countries, not China alone, have given the US until early November to deliver.

As a result of the above I see 81 days left for the US dollar.

The gold price has but one criteria and that is the US dollar. Armstrong and Alf are correct on the levels awaiting the gold price.

I know $1224 and $1650 are certain.

Once again inquiring minds must ask the obvious "understanding from who?"

The odds that the BRIC countries (Brazil, Russia, India, China) got together and gave the US an ultimatum on anything for November are none and none.

By the way, can I have a timeframe on that $1650 please? Is that also November?

Foreign Purchases and Sales of Long-Term Domestic and Foreign Securities by Type

Sinclair posted the following chart with this comment:

"I Find this simple chart so ominous I had to send it. Decelerating year-over-year inflows and outflows across the board. Stick your head in the sand if you like, but string this trend out a little longer and you’re going to have flight from the dollar."



click on chart for sharper image

Basic Math

That chart may look ominous but in fact it is returning to normalcy.

The amount of US securities foreign countries buy is directly related to the trade deficit as shown in the following chart.

US Trade Surplus vs. GDP




click on chart for sharper image

The above chart from New York Times, A Shrinking Trade Deficit, at Least for Now, May 1, 2009.

The trade balance has shrunk again and is now sitting at -27 billion as the following chart of U.S. International Trade in Goods and Services shows.



A year or so ago the US trade deficit was a whopping $77 billion. It has since shrunk to $27 billion. The chart shows exports have shrunk, but imports shrunk faster as the US consumer threw in the towel.

If the price of oil drops again, as I expect it will, the trade deficit is likely to shrink more, which would be US$ friendly.

Households Start to Rival the Chinese in Treasury Market

Inquiring minds are reading the Wall Street Journal Article Households Start to Rival the Chinese in Treasury Market.

China is center stage when it comes to fears that buyers will one day spurn U.S. Treasurys. The bond market has been the source of much political theater between the U.S. and China in recent months, with Chinese officials passing up few chances to lecture the U.S. on its profligacy.

But that has obscured an important change: The market for Treasury bonds is now more reliant on U.S. buyers -- including the Federal Reserve after its recent buying spree -- than the Chinese.

China held $801.5 billion in Treasury debt at the end of May. The Fed at that time held about $598 billion, although that has now risen to $704 billion. The latest figures for U.S. households, from the first quarter, showed holdings of $643.9 billion -- more than double the $266.6 billion in the fourth quarter of 2008.

The rising budget deficit, which has led to record issuance in recent months, doesn't necessarily mean the government is becoming more indebted to foreigners. While the U.S. government is borrowing furiously, the current account deficit has actually halved from an annualized $829 billion in mid-2005 to an annualized $409.5 billion in the first quarter of 2009. That shows the U.S. is now less dependent on external financing, because it is saving more domestically. The U.S. government may be in hock, but it is increasingly to its own citizens.

US doesn’t need foreigners to finance the US fiscal deficit

For those interested in China, I have a recommendation: The best financial blog on China, bar none, is Michael Pettis' China Financial Markets.

It has been banned in China. So has my blog.

Pettis posts infrequently but his latest happens to be on this subject. Please consider The USG doesn’t need foreigners to finance the US fiscal deficit? Who knew?

In referring to the Wall Street Journal article above Pettis says...

This shouldn’t be a surprise. The reason for the growing US fiscal deficit is to slow the economic impact of a rise in US household and corporate savings. This means that the period in which very high Asian savings were matched by very low US household savings is changing to one in which the pressures to save in Asia remain while US households are increasing their savings (or reducing their borrowing, which amounts to almost the same thing). The pool from which the US Treasury can borrow is increasing, not decreasing.

In addition, as the US current account deficit drops, foreign net purchases of dollar assets must also drop. The rising US fiscal deficit will increasingly be financed by Americans and less and less by foreigners, and the much-decried impact on US interest rates of the massive US borrowing turns out to be very small.

Although there are plenty of good reasons for China to worry about the value of its dollar holdings, and I hope many people, not just the Chinese, are looking warily at growing US fiscal deficits and making disapproving noises, the fact is that there is little China can do about its dollar holdings without either causing a damaging rise in trade tensions with Europe (or any other country whose currency is an alternative to the dollar) or causing a collapse in its export industry. As long as China’s trade surplus directly or indirectly is connected to the US trade deficit, China will have to recycle the surplus into the dollar pool that ultimately funds the US fiscal deficit, and it is in the best interest of the US that the US trade deficit decline smoothly, which means that it is also in the best interest of the US that foreigners, including the Chinese, buy fewer US dollar assets.

What is confusing is the conflict between China’s natural position and its stated position. Rather than demand reassurance that the US will control its fiscal spending, China should be secretly hoping that the US fiscal deficit will mushroom. It is after all largely the size of the US fiscal deficit that will determine the speed with which US imports and the US trade deficit contract, and it is in China’s best interest that these contract very slowly.

Pent Up Demand For Treasuries

In regards to the savings rate and US Treasuries, I have been saying the same things as Pettis for quite some time.

Flashback January 20, 2008: Time To Short Treasuries?

Kass: Central banks are diversifying away from U.S. government bonds. With the creation and proliferation of sovereign wealth funds, a growing portion of central bank reserves are being invested in non-bond assets. So, over time, central banks (especially of an Asian kind) could be lowering their U.S. bond purchases.

Mish: China is diversifying away from U.S. government bonds right now. It did not stop treasuries from rallying. Furthermore, the pent up demand for treasuries in the US is enormous. They are despised by nearly everyone here. This internal pent up demand can easily pick up any slack from reduced purchases by foreigners. 2.5% yields may looks measly, but not vs. 15% declines in the stock market. 30%? 50%? Most are severely underestimating the potential for enormous stock market declines here.

Virtually no one, including Bernanke thinks deflation can happen in the US. My position is that Things That "Can't" Happen are about to. The result will be Deflation American Style.

Predictably Wrong

Maybe something happens in November, maybe not, but this dollar implosion countdown based on unnamed sources regarding impossible to believe demands and a trade chart interpreted assbackwards is more than just a bit silly. Yet, every day someone asks me about it, thus this reply.

The thing about these kind of predictions is how predictably wrong they have all been.

Based on interpretations of the Commitment of Traders Reports (COT) we have see a couple countdowns to running out of gold and or silver on COMEX by various people. Those never happened. We have seen "gold to the moon" hyperinflation calls based on backwardation. Those never happened, either.

There is also a bunch of hype going around right now about bank holidays and a devaluation of the dollar vs. all major currencies coming up this Autumn. The across the board dollar devaluation idea is potty because the US dollar floats. There is nothing to devalue it to. And even if there was, Europe and Japan do not want stronger currencies and would not go along. For that matter the US would not want to do it either fearing a market crash. Yet, the theories persist.

If something does happen in November, it will not be because some blogger knows something. It will be happenstance.

But for those counting, it's about 70 days. I can hardly wait.

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

What Barney Frank Really Said About Ron Paul's HR1207

On Friday, I stated Barney Frank Says Ron Paul's Audit The Fed Bill Will Pass In October.

Quite a few others made the same mistake as noted by RonPaul.Com in Misinformation Alert: Barney Frank Never Said That HR 1207 Will Pass In October.

Several blogs and forums reported during the past 24 hours that Chairman of the House Financial Services Committee, Barney Frank, said that Ron Paul’s bill to audit the Federal Reserve, HR 1207, will pass in October.

Incorrect Reports about Barney Frank’s Statement on HR 1207

* Washington Times: Barney Frank says Ron Paul bill will pass
* Politico: Barney: Fed audit bill will pass in October
* Business Insider: Barney Frank: Yes, We Will Pass Ron Paul’s “Audit The Fed” Bill
* United Liberty: Frank: Vote on HR 1207 in October
* Daily Paul: Video: Barney Frank Says House Will Pass HR1207 in October
* ZeroHedge: Barney Frank Says The House Will Pass HR 1207 In October
* Mish: Barney Frank Says Ron Paul’s Audit The Fed Bill Will Pass In October
* Washington Independent: Ron Paul’s ‘Audit the Fed’ Bill to Get October Vote?

RonPaul.Com notes a key sentence was missing from the end of the transcript. Indeed there was.

The sentence, “That will be part of the overall federal regulation that we are redacting,” is for some reason missing from the widely distributed transcript, and has therefore been completely ignored by bloggers and commentators.

The article attributed the error to the Washington Times.

The incorrect transcription was mine, not the Washington Times'. I transcribed that on the road, in a quite noisy place and Barney Frank mumbles.

There were many sentences I played over and over and over attempting to understand his mumbling. I easily spent 30 minutes playing and replaying a 3-minute video. I could not make out that second to last sentence, at least the last word "redacting". Moreover, I am not the only one who could not figure out "redacting" either.

Calculated Risk missed it as well (now corrected on his blog). However, I should have handled it the way Calculated Risk did initially: Put in the sentence leaving out unintelligible words and placing an interpretation or [unintelligible] in brackets. I was concentrating so much on figuring out the word, that I missed the context of the sentence. At any rate, that is how the sentence was dropped.

The concern now is that Barney Frank intends to put together some legislation, possibly containing dramatically watered down or altered language from Ron Paul's legislation.

In theory "the overall federal regulation" of which Barney Frank speaks could contain everything in Ron Paul's bill. However, many are fearful of something watered down, and rightfully so.

Amanda Carpenter at The Washington Times (see Barney Frank says Ron Paul bill will pass) is guilty of lifting my transcript, word for word including several typos such as "power to go consumer protection" which should read "power to do consumer protection". I also said, "Federal Reserve buys itself" which should have been "Federal Reserve buys and sells".

Carpenter said "Below is a complete transcript of Mr. Frank's remarks concerning the bill." That is clearly a falsehood.

Opportunity Knocks

Whether or not you are in Barney Franks district, please call Barney Frank at

DC Phone: 202-225-5931
DC Fax: 202-225-0182

In your own words ....

Tell Barney Frank you heard his latest Town Hall video and you are not interested in some watered down version of Ron Paul's HR 1207 legislation. Mention that you want HR 1207 passed as is, stand-alone.

Whether Frank is your Rep or not, please call Barney Frank today. Then call again tomorrow and for good measure once later in the week.

Put the pressure on. Opportunity is knocking.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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On Assignment: Teeny Tiny Halophiles

I was shooting scientists at the Center of Marine Biology at the Inner Harbor in Baltimore recently. Typical in-lab stuff, as in this through-the-window shot of work being done in a refrigerated incubator.

But what really caught my eye was a collection of halophile living in pure salt crystals. They would indeed be pretty happy in such a crystal, as the very definition of a halophile is an organism that can thrive in a high-salinity environment. They can even withstand extreme radiation to survive in space. Very cool stuff.

But the crystals in which the salt-o-holics were living were barely a quarter inch across. Not even the size of a pencil eraser. So even with my D300 crop on a 55 micro, I was not going to get close enough.

That is one reason why I always carry my point-and-shoot with me when shooting a job. Not only can it gather audio and/or video in a pinch, but it gets insanely close in macro mode.

Inside, a walk-thru of my efforts at getting a decent shot of the little pink buggers with a consumer camera.
__________


My Ultra-Macro Kit

As I have said before, I am big on getting detail shots. And when those details are of something really small, here's my extreme macro setup:


A Canon G9, an SB-800 out of my speedlight bag and the ten-meter version of YongNuo's aftermarket TTL cord. (The link is to the 1m version.)

That cord, by the way, is also my fail-safe remote trigger for my DSLRs just in case I am working in an environment so cluttered with RF that the Pocket Wizards go crazy.

I saw the 10m cord at PMA this year, and wrangled a sample out of YongNuo with some sweet talkin' (and a little ~$50 PayPal chaser). They do not normally sell direct, and if I had a retail source for these or I would link it. If you know where to snag one, please hit us in the comments.

I love it because it gives me some wiggle room as to where I place my closest corded SB-800, then I can slave all of the other '800's off of that flash. Great to have in a pinch, and no batts required. And with the Nikon version cord on the Canon G9, it makes the camera think there is no flash on top. Still fires the corded flash, but the camera does not limit the shutter speed to 1/500th. Which of course, makes it great for hi-speed syncing up to 1/2500th of a sec.

But in this case, it would allow me to use that cord length to position my flash wherever I wanted in a macro environment. So it fits the bill nicely.


Right out of the gate I tried something to use the crystals as lenses of sorts. I figured they would bend the light and highlight the colonies of halophiles living inside.

My background is a sheet of printer paper, which is always easy to scrounge. I laid the crystals on the paper, and placed the flash a few inches away, lying on the same paper. This gave a hard angle to the light to get the cool transmissive qualities of the crystals. A second, folded sheet of paper on the other side for fill and you keep your contrast range manageable.



Here is the diagram. Nothing great, just a first look.

And here is a good example of what I was talking about earlier, as far as neutral density filters being very useful. My limits on the G9 were ISO 80, at f/8. Even at a 128th power on the SB-800, you can only bring that flash in to about 10 inches before you are too hot. A little ND on the flash would give me a lot more flexibility for light placement. Be nice to get in closer with the light on a subject this tiny.

As you can see in the highly technical scale drawing, the G9 gets me so close the front element is almost touching the crystals. You can only get this close on the wide setting of the lens, and with the camera set in macro mode.

Speaking of the G9, I skipped the G10 but am pining for the new Canon G11, as they finally went after the only thing that was wrong with these little gems -- chip noise at higher ISOs. They actually dropped the megapixels and went for better quality. Hallelujah. Plus, it has an articulating screen, which will be awesome for video.

So this is (maybe) okay for a first attempt. But the translucence of the crystals isn't really happening for me, and there is no relief showing the internal imperfections in which the halophiles are growing. Strike one.


For a second try, I backlight them. Same gear setup, but now I am shooting through the crystals and right into the light source. I used a piece of printer paper as a diffuser in between. This is starting to make the halophile colonies look better, but what I really need is a dark background -- with backlight -- to highlight the imperfections and colonies.



Here is the diagram for that one. The counter is actually a very dark gray, but I am picking up the reflections of the backlight paper because of my shooting angle. So it all looks white.

Again, close but no cigar -- strike two.

I can see the transparent qualities of the crystal, but the internal imperfections are washed over by the white backlight.


By raising my shooting angle up a little, I get the dark gray countertop as my background, and still get that backlight refracted by the imperfections in the crystals.

Ooooo, that's a BINGO.

Now, you get both the translucent and transparent qualities of both the crystals and halophiles from one light source. And a with a sheet of printer paper as your only light mod, no less.



Here is the angle. Same, exact lighting setup as above, but the elevated camera angle makes the difference. Swaps the white background for a dark one, and now the crystals pop.

Raiding the printer paper drawer is standard operating procedure when I am going to shoot anything small. I'll almost always be able to use paper as a background, a tiny light tent, a reflector -- something.


A Sucker for the Little Hacks

I spent all day shooting photos like the one at the top of the post -- three or four speedlights, gels, etc.

But the one I was most pleased with at the end of the day was the halophiles in crystal on the dark background. And the scientists were pretty psyched, too. As far as they know, no one had yet made a quality close-up of halophile colonies embedded in salt crystals.

So I got that going for me. Which is nice.

If you want to see more about what they are studying, start here. Suffice to say, those hardy little guys will dance on our graves. Amazing little creatures -- and even more of a salt-o-holic than I am.
__________


(For many more articles like this, see the On Assignment section.)

Mish Videos - On the Edge with Max Keiser

On August 23 I was On the Edge with Max Keiser in a pair of videos discussing deflation and the state of the US economy.

Part One



Part Two



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

Survival Of The Biggest

On account of Fed sponsorship, Banks 'Too Big to Fail' Have Grown Even Bigger.

When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation's leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system.

Today, the biggest of those banks are even bigger.



J.P. Morgan Chase, an amalgam of some of Wall Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.

"It is at the top of the list of things that need to be fixed," said Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. "It fed the crisis, and it has gotten worse because of the crisis."

Fresh data from the FDIC show that big banks have the ability to borrow more cheaply than their peers because creditors assume these large companies are not at risk of failing. That imbalance could eventually squeeze out smaller competitors. Already, consumers are seeing fewer choices and higher prices for financial services, some senior government officials warn.

Officials waived long-standing regulations to make the deals work. J.P. Morgan Chase, Bank of America and Wells Fargo were each allowed to hold more than 10 percent of the nation's deposits despite a rule barring such a practice. In several metropolitan regions, these banks were permitted to take market share beyond what the Department of Justice's antitrust guidelines typically allow, Federal Reserve documents show.

"There's been a significant consolidation among the big banks, and it's kind of hollowing out the banking system," said Mark Zandi, chief economist of Moody's Economy.com. "You'll be left with very large institutions and small ones that fill in the cracks. But it'll be difficult for the mid-tier institutions to thrive."

"The oligopoly has tightened," he added.

Last October, when the Fed was arranging the merger between Wells Fargo and Wachovia, it identified six other metropolitan regions in which the combined company would either exceed the Justice Department's antitrust guidelines or hold more than a third of an area's deposits. But the central bank thought local competition in each of those places was sufficient to allow the merger to go through, documents show.

Camden Fine, president of the Independent Community Bankers of America, said those comments reveal the government's preferential treatment of big banks. He doubted whether the Fed would approve the merger of community banks if the combined company ended up controlling more a third of the market.

"To favor one class of financial institutions over another class skews the market. You don't have a free market; you have a government-favored market," he said. "We will never have free markets again if you have the government picking winners and losers."

At times Shelia Bair seems to have a clue, other times not. Judging from her comment on too big to fail: "It fed the crisis, and it has gotten worse because of the crisis", she once again shows signs of intelligent thought.

There's lots more to see in the article including a link to charts showing Residential Mortgage and Bank Deposit Market Share.

For more on how too big to fail is creating winners and loses, please see Tale of Two Economies.

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

Tale of Two Economies

How well corporations have fared in the recovery depends largely on two factors.

1) How much cash on hand they had and how conservative they were heading into the recession

2) How much Uncle Sam (taxpayers) bailed them out

The Wall Street Journal has the story in Halting Recovery Divides America in Two.

The U.S. recovery is a tale of two economies.

At one extreme of Corporate America is a cadre of companies and banks, mostly big, united by an enviable access to credit. At the other end are firms, chiefly small, with slumping sales that can't borrow or are facing stiff terms to do so.

On Main Street, there are consumers with rock-solid jobs -- but also legions of debt-strapped individuals struggling to keep their noses above water.

This split helps explain the patchiness of the recovery that appears to be taking hold after the worst recession in a half-century.

The split between companies that can borrow and those that can't shows the extent to which any recovery depends on reviving the nation's ailing banks and squeamish credit markets. Until that happens, the vigor of the economy will remain in doubt.

"If you're not making money, you need to borrow money," says John Graham, a finance professor at Duke University's Fuqua School of Business. But "you need to be creditworthy in order to borrow, and if you're not making money, you're creditworthiness isn't very strong."

Mr. Graham, who oversees a quarterly survey of CFOs, says more companies are doing better than they were a few months ago. Still, he estimates, one in four is in "dire straights due to lack of profits combined with not being able to borrow."

Companies big enough to bypass banks and go directly to capital markets are finding a warmer reception. That's because the markets are showing more willingness to make risky loans: In January, only eight of the 56 companies that sold bonds were rated below-investment-grade, or "junk," according to Dealogic. In August, by contrast, 24 of the 60 deals had junk ratings.

Since the start of the year, companies have been increasingly turning to the bond markets to raise money. Through August thus far, companies have issued $395.4 billion in bonds over 512 deals, according to Dealogic, a healthy increase from the second half of last year when the markets went months with fewer offerings and less than a handful of junk bond deals.



In the business of finance itself, a divide between early winners and others appears to be opening up as well. Many of the nation's biggest financial institutions, benefiting from federal-government backing, have been able to raise equity and debt from private investors. Some large money-management companies such as BlackRock Inc. are profiting by helping the Treasury with the clean-up from the burst bubble.

Some of the nation's largest banks could, in fact, emerge from the crisis stronger than they entered it. While they have suffered huge losses on complex financial products, and are still facing mounting loan defaults, they were stabilized with tens of billions of dollars of taxpayer money. In the second quarter, the seven largest commercial banks earned more than $14 billion, even as thousands of smaller banks were in the red.

Big lenders are currently enjoying an advantage in their "cost of funds" -- the raw material of a bank, which is in the business of borrowing cheaply and lending at a higher rate. The handful of banks with more than $10 billion in assets were paying 1.18% to borrow money in the second quarter, the FDIC said in data issued Thursday. By contrast, banks with $100 million and $1 billion in assets were paying 1.97%, a big difference in a business where tenths of a percentage point translates into millions of dollars in profits.

As of June 30 the three largest banks -- Bank of America, Wells Fargo, and J.P.Morgan -- collectively had $2.3 trillion in domestic deposits, or 31% of the industry total, according to the Federal Deposit Insurance Corp. Two years earlier, the top three had only 20% of the industry total.

There is much more in the article including some winners and losers. Panera Bread, having no debt is a winner. Panera franchisees have a tougher go.

And the biggest of big banks, Bank of America, Wells Fargo, and J.P.Morgan appear to be doing well thanks to bailouts and low costs of funds. Because those banks are regarded as "well capitalized" they pay a smaller insurance rate to the FDIC. "Regarded" is the key word. They can continue to be regarded as "well capitalized" but commercial real estate loans, credit card defaults, and pay option ARMs problems are the 800 pound gorillas in the room.

When it comes to deposits, the big got bigger. Too big to fail is now "Too Bigger To Fail".

However, as long as the corporate bond market holds together, equities will fetch a bid. How much longer that can last is anyone's guess. I suspect not much longer. The pool of greater fools is not unlimited.

In the meantime ponder the key sentence in the article by Mr. Graham, who oversees a quarterly survey of CFOs "one in four [businesses] is in dire straits due to lack of profits combined with not being able to borrow."

That is in addition to: Greater Than One in Four FDIC Insured Institutions are Unprofitable; Bank Problem List at 15 Year High.

The best all this world record stimulus could do is create a bifurcated economy leaving one in four businesses and banks on the brink of disaster. Meanwhile there is no recovery in jobs, and no relief for cash strapped consumers.

In due time this "recovery" is going to start flying apart.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Paul Krugman: "Deficits Saved The World"

Dateline August 27, 2009
Paul Krugman: "Deficits Saved The World"

Inquiring minds are reading Till Debt Does Its Part

So new budget projections show a cumulative deficit of $9 trillion over the next decade. According to many commentators, that’s a terrifying number, requiring drastic action — in particular, of course, canceling efforts to boost the economy and calling off health care reform.

The truth is more complicated and less frightening. Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump. The longer-term outlook is worrying, but it’s not catastrophic.

If governments had raised taxes or slashed spending in the face of the slump, if they had refused to rescue distressed financial institutions, we could all too easily have seen a full replay of the Great Depression.

As I said, deficits saved the world.

In fact, we would be better off if governments were willing to run even larger deficits over the next year or two. The official White House forecast shows a nation stuck in purgatory for a prolonged period, with high unemployment persisting for years. If that’s at all correct — and I fear that it will be — we should be doing more, not less, to support the economy.

But what about all that debt we’re incurring? That’s a bad thing, but it’s important to have some perspective. Economists normally assess the sustainability of debt by looking at the ratio of debt to G.D.P. And while $9 trillion is a huge sum, we also have a huge economy, which means that things aren’t as scary as you might think. ....

Dateline November 3, 2004
Paul Krugman: "[The Budget Deficit] is comparable to the worst we've ever seen in this country. It's bigge[r] than Argentina in 2001."

Inquiring minds are reading Krugman calls on Bush to reign in the red.

TONY JONES: Well, the US is not just labouring under a record trade deficit, there are warnings tonight that its budget deficit could precipitate a Latin American style financial crisis.

Influential economist Paul Krugman says the US will face a severe downturn before the end of the decade unless the $500 billion fiscal debt is rectified.

In his latest book, The Great Unravelling, the Princeton University economist is calling on President Bush to abandon his program of trillion dollar tax cuts, otherwise, he claims, there may not be enough funds to pay for the waves of baby boomers who will soon retire.

I spoke to Paul Krugman a short time ago.

TONY JONES: Paul Krugman, history proved your predictions right over the Asian financial crisis.

You're now warning essentially that the engine of the world economy, the United States itself, is heading for a South American style financial crisis.

What's the evidence for that?

PROFESSOR PAUL KRUGMAN, PRINCETON ECONOMIST: Well, basically we have a world-class budget deficit not just as in absolute terms of course - it's the biggest budget deficit in the history of the world - but it's a budget deficit that as a share of GDP is right up there.

It's comparable to the worst we've ever seen in this country.

It's biggest than Argentina in 2001.

....

TONY JONES: It's a bit more than arithmetic though, isn't it?

Would you agree with the proposition that you're slowly transforming yourself, in a way, from a pure economist into also something of a political activist?

PROFESSOR PAUL KRUGMAN: Well, yeah, I mean, it's not what I intended. But I came in writing as a journalist, writing occasional columns in the 90s, mostly about economical fears with a political tinge.

I came to the New York Times intending to do pretty much the same thing.

But then it became clear very early on that the President of the United States was irresponsible and dishonest on matters economic and it turned out that what I learned there was true of other kind of policies as well.

So, I was forced, if you like, just by the arithmetic of understanding how the budget works into a much broader critique of this really kind of scary thing that's happening to my country.

Q. What's different?

A: Politics: a democrat ultra-liberal is in the White House.

Krugman is not only a Keynesian Clown, but a hypocrite.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Whirlpool Plant in Evansville, Ind. Shuts Down, Taking 1,100 Jobs to Mexico

Evansville, Indiana continues to suffer from jobs and population flight. It's population was 121,582 in 2000, falling to 113,627 in 2006.

Tonight Evansville is taking another hit as Whirlpool to shut Indiana plant, cut 1,100 jobs.

Whirlpool Corp. announced Friday it will close its Evansville, Ind., factory next year, moving the plant's production of top-freezer refrigerators to a facility in Mexico.

Citing the need to trim manufacturing capacity, Whirlpool said the mid-2010 plant closure will eliminate 1,100 full-time jobs.

Whirlpool (WHR) , like most manufacturers, has seen its sales slump over the past year as a global economic recession and housing market slump hurt demand for home appliances. Whirlpool's latest revenue numbers show sales in the second quarter fell 18% to $4.17 billion from the second quarter of 2008.

Closing the Evansville plant is part of Whirlpool's ongoing drive to consolidate its North American manufacturing operations.

The company said it is also considering relocating its Evansville refrigeration product development center, a move that would affect another 300 jobs. "A decision is expected in the near future," the company said.

"This was a difficult but necessary decision," Al Holaday, Whirlpool vice president of North American manufacturing operations said in a statement.

"To reduce excess capacity and improve costs the decision was made to consolidate production within out existing North American manufacturing facilities. This will allow us to streamline our operations, improve our capacity utilization, reduce product overlap between plants, and meet future production requirements," he added.

Whirlpool has been busy downsizing its operations for several years. Last fall it announced plans to ax about 5,000 jobs, or 7% of its workforce, by the end of 2009. The cuts include 500 salaried positions in North America and another 1,900 jobs abroad, mostly in Europe.

Evansville, Indiana Demographics



Demographics from MuniNet Guide.

This is a huge loss for a relatively small town far from major population centers. 1,100 jobs (more likely 1,400 if the refrigeration unit goes as well) will not easily be replaced.

At least those employees have a year to prepare.

Consolidation is a One-Way Street

Consolidation is a one way street with a fork in the road. One fork heads to Mexico, the other to India or China. No consolidation roads lead to the US.

Outsourcing and global wage arbitrage are major deflationary forces that have still not finished playing out.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Rosco Thinks Big by Thinking Small

Okay, so maybe I am predisposed to like this new gel kit, what with that catchy name and all. But this was the result of a very organic collaboration between a web community and an existing business, in which we were both the problem and the solution.

Basically, too much of a good thing almost made the good thing go away. Then we saved it by making the good thing better.

More, inside.
__________



A Little Backstory

Rosco has long had a sample program, wherein they give away packs of gels that are sized to do a serviceable job as small flash gels.

As long as you extend them a little (and don't mind the spindle hole) you can surf the whole rainbow for free if you can get your mitts on a pack or two. This program chugged along just fine, with the sample packs serving as a nice gateway drug for the full-sized, $7 20x24-inch sheets.

After all, how useful is a sample gel for a ProPhoto shooter? Not very.

But people were always quietly using the sample packs for small flashes, holes or no holes. You'd use the "good" gels and chuck the rest. A little wasteful, but what the hell -- they're free, right?

And that works fine, as long as some bonehead doesn't come along and send a gazillion people emailing in for free sample packs. Which is exactly what happened.

They went from losing an acceptable amount of money to losing way, way too much money on the free samples. Just because the gels were free to us does not mean they were free for Rosco. Ditto the multiple, full-time positions they had dedicated to cutting and assembling them. (Heck, I thought they had, like, a replicator or something ... )

So, about a year ago the sample program was put on the chopping block. Which was, of course, the worst possible outcome. So I got in touch with a man named Joel Svendsen at Rosco, and we put our heads together to come up with a solution.


The Strobist Collection



So, there it is. There are 55 gels in all -- multiple copies of the really useful ones, with no holes. (Only single copies are shown here, for illustration of color selection.) The kit is $9.95, suggested retail price. And while $9.95 is not as good as free, free was not going to keep happening.

There have been several parties -- individuals like Mason Trullinger and stores like MPEX -- buying big gels and cutting them into kits for resale. But the scale was not sufficient to offset the problem of the demand for increasingly expensive free samples.

With this kit (not free but still chump change on the photo gear scale) we go from nearly exploiting a situation to death to sustaining it. I think this is a fantastic solution by Rosco, as they were full ready to kill the sample program before we got them to think about it differently.

Because of the multiple copies of the most-used gels, one kit should last several times longer than a typical sample pack. And this is an honest transactional model which is sustainable for Rosco, for photo retailers and for small-flash photographers.

Plus, I'm gonna make an absolute killing in licensing fees.

(Kidding.)

Actually I am not getting any money from Rosco, because licensing fees paid by them at the OEM level would be roughly tripled by the time they were passed through a distributor and on to retail. Futher, Strobist has committed to advertising support for the project in the form of 3,000,000 free pageviews for a banner ad for the packs. I want to see them succeed and I hope you'll support them, too.


Which Colors, and Why

A lot of thought went into the color and frequency selection, and I think we did a good job with it.


Five each:

• Full-cut, half and quarter CTO's and CTB's. In addition to their primary use as light balancing gels, this provides a calibrated warm-up/cool-down capability. Additionally, they offset each other (in identical strengths) for cool/warm dual lighting. Where both lights hit, the light is neutral, but shadows from each light are warm or cool. (Neat building blocks for cool portraiture or conceptual product/still life. CTO's and CTB's are among the most useful gels in the Rosco library.

• Rosco 08 - The classic gel for skin on a key light. Once you shoot skin with a slight warming gel, you will never go back. I go back and forth between this and a 1/8 CTO, but I think the #08 is better. Leave your camera WB on daylight and warm the key light. Why warm the whole frame, ambient and all, by WB'ing to flash setting? Warm just the subject and leave those background skies blue.

• Tough Plusgreen - For balancing with cool fluorescents. In a pinch, this can be combined with varying degrees of CTO warming gels (see above) to balance with warmer fluorescents.

[NOTE: In this setup, your photos would be warm, overall. But the flash and FL's would be consistent, which is the important thing. You then shift it all to neutral in post. And besides, I have a an idea for an all-in solution for flash and *any* color of light source coming shortly. Stay tuned.]


Two each:

• N9, N6 and N15 neutral density (ND) filters -- These will make any manual flash more useful. In 1/2-, 2- and 3-stop strengths, you can turn a full-power-only eBay special flash into a useful unit. Also, flashes with full-stop manual setting (Vivitar 285, LumoPro LP120, etc.) get partial-stop fine tuning. Most important, you can now take any variable-manual flash way down below 1/128th power, for killing unneeded power for close-up work.


One each:

Sometimes you gotta add a little more cowbell to kick it up a notch. While I had a strong hand in choosing the above gels, the folks at Rosco took the lead on selecting nine different colors for adding strong effects when you need them. These guys know color and lighting, and I happily deferred to their expertise here.


UPDATE: Even tho the Rosco site lists them as 1"x3", they are actually 1.5"x3.25". This is straight from the horse's mouth. FWIW, Rosco mistakenly forwarded the dimensions of an old sample pack when doing the page. Please use the bigger measurement when checking to see if the gels will cover your particular model of strobe.


Available Now

Rosco already has a network of U.S. dealers stocking the gels, and you can see where to get them (and the colors they chose for the effects gels) here. In the UK/EU, The Flash Centre will be carrying them too. I'll post a link when they are up and running.

Thanks for helping to spread the word. And if your local dealer carries Rosco gels, feel free to suggest that they consider us small-flash shooters and get onboard.

Greater Than One in Four FDIC Insured Institutions are Unprofitable; Bank Problem List at 15 Year High

The second quarter 2009 Quarterly Banking Profile has some interesting charts and facts that inquiring minds will be interested in.

Insured Institution Performance

• Higher Loss Provisions Lead to a $3.7 Billion Net Loss
• More Than One in Four Institutions Are Unprofitable
• Charge-Offs and Noncurrent Loans Continue to Rise
• Net Interest Margins Show Modest Improvement
• Industry Assets Decline by $238 Billion
• The Industry Posts a Net Loss for the Quarter

The Industry Posts a Net Loss for the Quarter

Burdened by costs associated with rising levels of troubled loans and falling asset values, FDIC-insured commercial banks and savings institutions reported an aggregate net loss of $3.7 billion in the second quarter of 2009. Increased expenses for bad loans were chiefly responsible for the industry’s loss. Insured institutions added $66.9 billion in loan-loss provisions to their reserves during the quarter, an increase of $16.5 billion (32.8 percent) compared to the second quarter of 2008. Quarterly earnings were also adversely affected by writedowns of asset-backed commercial paper, and by higher assessments for deposit insurance.

Almost two out of every three institutions (64.4 percent) reported lower quarterly earnings than a year ago, and more than one in four (28.3 percent) reported a net loss for the quarter. A year ago, the industry reported a quarterly profit of $4.7 billion, and fewer than one in five institutions (18 percent) were unprofitable. The average return on assets (ROA) was -0.11 percent, compared to 0.14 percent in the second quarter of 2008.

Net Charge-Off Rate Sets a Quarterly Record

Net charge-offs continued to rise, propelling the quarterly net charge-off rate to a record high. Insured institutions charged-off $48.9 billion in the second quarter, compared to $26.4 billion a year earlier. The annualized net charge-off rate in the second quarter was 2.55 percent, eclipsing the previous quarterly record of 1.95 percent reached in the fourth quarter of 2008.

The $22.5 billion (85.3 percent) year-over-year increase in net charge-offs was led by loans to commercial and industrial (C&I) borrowers, which increased by $5.3 billion (165.0 percent). Net charge-offs of credit card loans were $4.6 billion (84.5 percent) higher than a year earlier, and the annualized net charge-off rate on credit card loans reached a record 9.95 percent in the second quarter. Net charge-offs of real estate construction and development loans were up by $4.2 billion (117.0 percent), and charge-offs of loans secured by 1-4 family residential properties were $4.0 billion (41.1 percent) higher than a year ago.

Noncurrent Loan Rate Rises to Record Level

The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status)increased for a 13th consecutive quarter, and the percentage of total loans and leases that were noncurrent reached a new record.

Institutions Continue to Add to Reserves

The industry’s reserves for loan losses increased by $16.8 billion (8.6 percent) during the second quarter, as loss provisions of $66.9 billion exceeded net charge-offs of $48.9 billion. The ratio of reserves to total loans and leases set another new record, rising from 2.51 percent to 2.77 percent. However, the pace of reserve building fell short of the rise in noncurrent loans, and the industry’s ratio of reserves to noncurrent loans fell from 66.8 percent to 63.5 percent, the lowest level since the third quarter of 1991.

“Problem List” Expands to 15-Year High

The number of insured commercial banks and savings institutions reporting financial results fell to 8,195 in the quarter, down from 8,247 reporters in the first quarter. Thirty-nine institutions were merged into other institutions during the quarter, twenty-four institutions failed, and there were twelve new charters added.

During the quarter, the number of institutions on the FDIC’s “Problem List” increased from 305 to 416, and the combined assets of “problem” institutions rose from $220.0 billion to $299.8 billion. This is the largest number of “problem” institutions since June 30, 1994, and the largest amount of assets on the list since December 31, 1993.

FDIC Problem Institutions At 15 Year High


click on any chart for sharper image

Troubled Loans Still Growing But At Slower Pace



Provision Expenses As Percent Of Operating Revenue



Noncurrent Loan Growth Outpaces Reserve Growth


Fed Fails To Recapitalize Banks

In spite of mammoth injections of cash by the Fed, huge efforts by banks to raise capital, a Fed swap-o-rama of biblical proportions, monetary printing by the Fed, and capital injections from the Treasury, and a massive 50% stock market rally, noncurrent loan growth still outpaces reserve growth.

Excess Reserves Revisited

Let's review Creative Destruction

Reluctance to lend can easily be seen in a chart of bank reserves.

Excess Reserves of Depository Institutions



Conventional wisdom regarding money supply suggests there is massive pent up inflation in the works as a result of the buildup of excess reserves. The rationale is that 10 times those excess reserves (via fractional reserve lending) will soon be working its way into the economy causing huge price spikes, a collapse in the US dollar, and possibly even hyperinflation.

The reality is excessive debt and falling asset prices have rendered the best efforts of the Fed impotent.

Banks are not well capitalized, they are insolvent, unwilling and unable to lend.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Barney Frank Says Ron Paul's Audit The Fed Bill Will Pass In October

Occasionally, even the most hopeless of politicians get something right. Here is stunning proof:



Barney Frank:

I have been pushing for more openness from the Fed. I want to restrict the powers of the Federal Reserve. First of all, the Fed will be the major losers of power if we are successful, as I believe we will be, setting up a financial product protection commission.

The Federal Reserve is now charged with protecting consumers. They were supposed to do subprime mortgage restrictions.

Congress in 1994 gave the Fed powers to ban subprime mortgages. Alan Greenspan refused to do it. They had the power to ban credit card abuses. Under Greenspan they did nothing. Under Bernanke they started but only after Congress acted.

That's one of the reasons why in the new consumer protection agency, we will take away from the Federal reserve the power to go consumer protection.

Secondly, they have has since 1932 a right under Herbert Hoover to intervene in the economy whenever they could. Last September, the Federal Reserve they were going to advance $82 billion to AIG.

I was kind of surprised and said Mr Bernanke do you have $82 billion? Mr. Bernanke replied I have $800 billion and under section 13.3 of the Federal Reserve Act they can lend anything they want.

We are going to curtail that lending power. We are going to put some restrictions on it.

Finally we will subject them to a complete audit. I have been working with Ron Paul, who is the main sponsor of that bill. He agrees that we don't want to have the audit appear as if influences monetary policy as that would be inflationary.

One of the things the audit will show you is what the Federal Reserve buys itself. And that will be made public, but not instantly because if it was made instantly people would be trading off it, so the data would be released after a time period of several months, enough time so it will not be market sensitive.

This will probably pass in October.

This is clearly not perfect. However, it is a step in the right direction. The only reason it it may happen is people are overwhelmingly in support of it. Change is possible, over time, at least occasionally, if public opinion is solidly behind something.

If you have not yet done so, or even if you have (please do it again) Speak Out - Audit the Fed, Then End It!

Important Addendum:

Barney Frank did not quite say that "HR 1207 Will Pass In October". A key sentence was missing.

Please see What Barney Frank Really Said About Ron Paul's HR1207 for complete details.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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California State Income Taxes Rise Because Of Deflation; Federal Status In Question

California state income taxes are indexed to the CPI. As a result of the the recent unprecedented drop in the CPI, taxes are going up.

Please consider State taxes going up because of deflation.

California taxpayers just got hit with another increase in state income taxes, and it didn't require a vote from a single legislator.

The culprit: deflation.

In 1982, California voters approved a proposition that indexed state income tax rates to inflation. So each year, the California Franchise Tax Board adjusts tax brackets and certain deductions and credits for inflation. The annual adjustment is tied to the California Consumer Price Index, and it usually goes up. Indexing is designed to prevent people from paying higher taxes as their incomes rise proportionately with inflation. But when inflation turns negative, indexing works in reverse. Tax brackets and credits are adjusted downward. If your income remains the same, the result is a tax increase.

The Franchise Tax Board has just released adjustments for 2009, and for the first time since 1983 they are down, reflecting a 1.5 percent drop in the California Consumer Price Index between June 2008 and June 2009.

Proposition 13 limited the annual increase to 2 percent but didn't say exactly what would happen if there was deflation. The California Board of Equalization expects to announce next week whether property taxes will go down next year if the CPI is negative.

Some seniors are complaining because they probably won't get an increase in Social Security benefits next year because of deflation. Benefits are indexed each year to inflation, but by law can never go down.

Federal taxes also are indexed to inflation. Adjustments for 2009 were announced in October and were based on the change in U.S. CPI for the 12 months that ended Aug. 31, 2008. Inflation during that period was positive, so adjustments were up. It's not clear what will happen in 2010 if inflation for the 12 months ending in August is negative.

"It's likely it would be down about 1.7 percent," says Mark Luscombe, principal tax analyst with publishing company CCH. Technically, the IRS could adjust brackets down, "but there is speculation the IRS might have enough wiggle room to leave it the same," thus preventing a tax increase.

"The IRS is aware of the issue, but we are not speculating at this time," says IRS spokesman Jesse Weller.

I have the CPI at negative 6.2%, but the official CPI is -2.1%. Please see What's the Real CPI? for details.

Given that -2.1% is the largest drop since the 1950's, I do no see what "wiggle room" Mark Luscombe is talking about. Nonetheless, the IRS "refuses to speculate".

Technically there is nothing to speculate about. With a month to go, it is a certainty the CPI will be negative year over year.

Politically is another matter. Obama will not want to raise taxes on the lower and middle classes, even by a slight amount. It will be interesting to see what magic the Administration comes up with.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Savage Review: Pneumatic Posing Table

I try not to spend much space here on product reviews. And generally when I do review something, it is because I really like it.

Usually, my logic is, "Why waste both my time and yours if I am just going to dog something?"

Usually.
__________


What a Posing Table is Supposed to Do

The idea is simple. The combination of a stool and posing table allows for a comfortable support for arms, elbows, etc., so you can have lots of flexibility with body position when shooting relatively tight portraits.

And to be fair, I will give Savage props for hitting a very attractive price point -- $120. That's not only for the table, but a stool and two fill reflectors (silver and gold) to fit the table.

That would be a killer deal. If it worked.


That Sinking Feeling

The problem is that it simply will not support even modest pressure on the table. It purports to be adjustable, but as soon as you pose on it, it slooooowly heads south.

Clearly they were cutting some corners to hit the price. But jeez, this thing is about as stable as North Korea.

I took a chance on it even though one of the two reviews on Amazon mentioned the exact same problem. I figured maybe the guy got one that was a little out of whack and I'd be luckier.

With mine doing exactly the same thing, I have to think there might be a design problem at play. Sad, as I only planned to give it light duty and thought I could get away with going the bargain route.

As a stop gap, I have taken to wrapping a collar of gaffer's tape around the center column where I want the handy quicksand action to stop. (You can better see the tape collar if you click through on the pic above.) But I really should not have to do that.

If you are in the market for a posing table, I'd recommend skipping this one. And if you have one to recommend, please hit us with a comment and link below.

Fed's Dual Mandate Is Mission Impossible

While market participants are giddy with thoughts of a V-Shaped Recovery, and Bernanke is taking victory laps celebrating Orwellian Madness "We Saved The World" other members of the Fed are a bit more realistic.

For example, Fed's Lockhart sees protracted high unemployment.

"My forecast envisions a return to positive but subdued gross domestic product growth over the medium term weighed down by significant adjustments to our economy," Federal Reserve Bank of Atlanta President Dennis Lockhart said in prepared remarks.

"My forecast for a slow recovery implies a protracted period of high unemployment," said Lockhart, a voting member of the Fed's policy-setting committee this year.

"The challenge my colleagues and I face is navigating between the risk that early removal of monetary stimulus snuffs out the recovery and the risk that protracted monetary accommodation stokes inflation expectations that could ultimately fuel unwelcome inflationary pressures," he said.

"The Fed must deal with this tension, particularly in coming quarters, as we pursue our dual mandate of price stability and maximum employment," Lockhart added.

Dual Mandate Equals Mission Impossible

Here's the deal.

1. The Fed can control money supply but it will have no control over interest rates (or anything else).

2. The Fed can control short-term interest rates, but then it would have no control over money supply (or anything else).

That is the full and complete extent of the Fed's "control". Note that neither price stability nor unemployment is in either equation. The reason is the Fed controls neither.

Sure, the Fed can increase money supply but all those who thought it would necessarily cause prices to rise sure got it wrong.

The CPI is now a negative 2.1% year over year and my preferred measure called Case-Shiller CPI is running at negative 6.2% year over year. Please see What's the Real CPI? for details.

The simple truth of the matter is the Fed can print money, but it cannot control where it goes, or even if it goes anywhere at all. Indeed the Fed can encourage but not force banks to lend, and encourage but not force consumers to borrow.

The result of all the recent Fed printing is a big yawn, otherwise known as excessive reserves as the following chart shows.

Excess Reserves of Depository Institutions



Does that chart look like the Fed is in control? If so, control of what?

Bear in mind that those excess reserves are a mirage. They do not really exist. Pending writeoffs in foreclosures, bankruptcies, credit cards, and especially commercial real estate will eat up those reserves and then some.

Although the Fed's "Dual Mandate" is complete nonsense, I do agree with Lockhart on one key point: The US economy will suffer with Structurally High Unemployment For A Decade.

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