Trading Firm Accuses Bank of America, JPMorgan, UBS, and Citigroup of Conspiracy to Manipulate LIBOR

Here is a market manipulation story that I can easily believe. Bloomberg reports Chicago Trading Firm’s Lawsuit Claims Banks Conspired to Manipulate Libor

A Chicago trading firm accused Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), UBS AG (UBSN) and Citigroup Inc. (C) of conspiring to manipulate the London interbank offered rate.

The banks drove down Libor to generate billions of dollars in profits from swaps, loans, interest rate derivatives and other financial instruments whose value depended on the rate, Eldorado Trading Group LLC said in a complaint filed July 5 in federal court in Newark, New Jersey.

The civil lawsuit is one of several filed in response to probes by the U.S. Justice Department, Securities and Exchange Commission and Commodity Futures Trading Commission related to whether there were improper attempts to manipulate Libor. The rate, at which banks borrow from one another in the London interbank market, is a short-term, international benchmark.

The banks “had a substantial incentive to manipulate, and in fact did manipulate, Libor downward, in order to increase the income from its interest rate derivatives and similar instruments,” according to Eldorado’s complaint. “This manipulation resulted in billions of dollars in revenue.”

LIBOR, the London Interbank Offered Rate, is a daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market (or interbank lending market).

LIBOR is defined as: "The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 London time."

On Thursday, 29 May 2008 the Wall Street Journal released a controversial study suggesting that banks may have understated borrowing costs they reported for LIBOR during the 2008 credit crunch. Such underreporting could have created an impression that banks could borrow from other banks more cheaply than they could in reality. It could also have made the banking system or specific contributing bank appear healthier than it was during the 2008 credit crunch.

The study found that rates at which one major bank "said it could borrow dollars for three months were about 0.87 percentage point lower than the rate calculated using default-insurance data."

Conspiracy is likely the wrong word. That the accused independently lied for their own benefit is more like it.

LIBOR does not necessarily represent actual transactions. Instead, it represents rates banks say they would charge for bank-to-bank lending. Thus, it is easy to believe charges of manipulation.

Proving those charges is another matter.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Starting Salaries for Lawyers Plunge 20%; Temporary Jobs are 27% of Total, 12.4% of Graduates Receive No Offers

An NALP study finds Law School Class of 2010 Starting Pay Fell 20% as Jobs Eroded

Starting salaries for last year’s U.S. law school graduates plummeted 20 percent as private practice jobs eroded, according to a report by the National Association for Law Placement.

The national median starting salary at law firms dropped to $104,000 from $130,000 in 2009, reflecting a shift in the distribution of jobs and salary adjustments at some firms, the NALP said today. The report cited information submitted by 192 laws schools and covering 93 percent of 2010 graduates.

Aggregate starting salaries fell because graduates found fewer jobs with high-paying large law firms and many more jobs with the smallest firms at lower salaries, Leipold said. More than half of the jobs taken by 2010 graduates were in firms with 50 or fewer attorneys. Jobs at firms with more than 250 attorneys fell to 26 percent from 33 percent in 2009.

The employment rate for 2010 law school graduates was 87.6 percent, down from a high of 91.9 percent for the 2007 class, the NALP said. Part-time jobs accounted for 11 percent and almost 27 percent were reported as temporary jobs, according to the survey.

Law School Graduate Scorecard

• 12.4% No Job
• 27.0% Temporary Job
• 11.0% Part Time Job

The total of those groups is a whopping 50.4%. However, some jobs may be temporary and part-time so the correct total is somewhere between 39.4% and 50.4%, probably towards the high side.

Having a law degree is no guarantee of success. All of those groups will struggle to pay back student debt.

Addendum:

Reader Dave writes ...

Hello Mish

Actually, it's far more grim than it looks.

How many new lawyers took a job at their dad's or mom's small practice? That is very common. How many hang out a shingle and/or start a small law firm with friends or classmates?

From what I've seen, the vast majority who start a practice, close their doors and find a new career in a year or two.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Weekly Unemployment Claims Exceed 400,000 13th Consecutive Week, Exceed 415,000 Ten Out of Last Eleven Weeks

The number of initial unemployment claims remains elevated. Here is the table I posted last week.

Initial Unemployment Claims For 2011



We can now tack on another week.

Please consider the Department of Labor Weekly Claims Report.

In the week ending July 2, the advance figure for seasonally adjusted initial claims was 418,000, a decrease of 14,000 from the previous week's revised figure of 432,000. The 4-week moving average was 424,750, a decrease of 3,000 from the previous week's revised average of 427,750.

Note that last week was revised from 428,000 to 432,000 accounting for 4,000 of today's reported 14,000 drop.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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ECB Suspends Collateral Rules for Portuguese Debt, Hikes Rates .25; Trichet Says "No" to Selective Default, Market Yawns

The comedy show continues in the EU today with an announcement by ECB president Jean-Claude Trichet that he will suspend collateral rules on debt for Portugal.

Please consider ECB signals more rate rises to come, helps Portugal

The European Central Bank raised interest rates for the second time this year Thursday and signaled further policy tightening to come to tackle inflation despite the euro zone's intensifying debt crisis.

The ECB's key rate is expected to rise just once more this year, to 1.75 percent, with only two quarter-point increases forecast to follow for all of next year.

In contrast, the Bank of England kept rates on hold on Thursday.

The ECB has pledged to keep liquidity flowing to euro zone banks that need it, and Trichet said Portuguese debt would be accepted by the ECB as collateral for now, come what may.

"We have decided to suspend the application of the minimum credit rating threshold ... for the purpose of Eurosystem credit operations in the case of marketable debt instruments issued or guaranteed by the Portuguese government," he said.

"This suspension will be maintained until further notice."

The ECB has proved a major stumbling block in agreeing a second rescue plan for Greece as it has threatened to refuse restructured Greek bonds as collateral in its lending operations in the event of a default or a "restricted default," which ratings agencies are threatening to impose.

"We say no to selective default," Trichet said.

Market Yawns

Trichet can shout "no default" from the mountain tops but it is not his call to make.

The market reacted to Trichet's defiance with a big yawn. Portugal 10-year government bonds opened at 12.62% and promptly sold off to 12.93%, not quite a new high.

Italian 10-year government bonds did make a new high at 5.19% and now sit at 5.14% up on the day.

Irish 10-year government bonds also made a new high at 13.02%, topping 13% for the first time. The yield now sits at 12.95%, up a substantial 51 basis points on the day.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Unions vs. Banks: Reader Question Regarding Greek Privatization

Reader Jeddy spots what he thinks is a conflict in my typical "privatization" message and inquires

Hello Mish

I'm confused about your stance in Portuguese 10-Year Government Bond Yield Soars to 13.05%; Italy, Portugal, Ireland, all Fresh New Highs; Focus On the "Unsaved"

Usually you think privatization is the answer to everything. Why have you changed your mind?

Please elaborate on the idea of self-rule, and how that interacts with the concept of rule by an elite group of rich people inside your country (internal looting of public sector assets and 'jobs') as opposed to outside your country (imposed privatization).

Jeddy

Hello Jeddy, thanks for asking.

There is no conflict. I am indeed in favor of privatizing government services. I am not in favor of doing so under duress for the explicit purpose of raping taxpayers for the benefit of banks.

I have many times been accused of being a shill for banks. The idea is preposterous. No one has railed against bank bailouts more than I have.

Rolling List of High Profile Fraud Targets

This list is incomplete. I have stopped updating it, it got so long.

• October 10, 2010: FDIC Authorizes $1 Billion Lawsuits Against Failed-Bank Executives; Token Search for Low-Profile Scapegoats


• April 29, 2010: Barofsky Threatens Criminal Charges in AIG Coverup, Goldman Sachs Abacus Deal, TARP Insider Trading; New York Fed Implicated


• April 16, 2010: Rant of the Day: No Ethics, No Fiduciary Responsibility, No Separation of Duty; Complete Ethics Overhaul Needed


• March 2, 2010: Geithner's Illegal Money-Laundering Scheme Exposed; Harry Markopolos Says “Don’t Trust Your Government”


• January 31, 2010: 77 Fraud, Money Laundering, Insider Trading, and Tax Evasion Investigations Underway Regarding TARP


• January 28, 2010: Secret Deals Involving No One; AIG Coverup Conspiracy Unravels


• January 26, 2010: Questions Geithner Cannot Escape


• January 07, 2010: Time To Indict Geithner For Securities Fraud


• October 20, 2009: Bernanke Guilty of Coercion and Market Manipulation


• July 17, 2009: Paulson Admits Coercion; Where are the Indictments?


• June 26, 2009: Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America "Turd in the Punchbowl"


• April 24, 2009: Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis

I am not in favor of bailouts. Nor I am in favor of privatizing government services under duress for the explicit purpose of raping taxpayers to benefit of banks.

Greece desperately needs reform. Its pension structure and union protectionism must change. The same is true in the United States. Unions attack me for that position.

However, I am not willing to rape Greek citizens for the benefit of French banks to achieve that end. Sadly, that is exactly what is happening.

Unions should take a hit and so should banks. Anyone taking that stance is attacked from both sides, and I have a ton of emails to prove it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Greek Sovereignty Massively Limited; You Cannot Roll Over What You Do Not Have; Railing Against the Truth; EU Seeks to Curb Big Three Rating Firms

Jean-Claude Junker, the man who says "When it becomes serious, you have to lie", apparently has had a sudden splash of honesty, stating Greek sovereignty to be massively limited.

Greece faces severe restrictions on its sovereignty and must privatize state assets on a scale similar to the sell off of East German firms in the 1990s after communism fell, Eurogroup chairman Jean-Claude Juncker said.

"The sovereignty of Greece will be massively limited," he told Germany's Focus magazine in the interview released on Sunday, adding that teams of experts from around the euro zone would heading to Greece.

"One cannot be allowed to insult the Greeks. But one has to help them. They have said they are ready to accept expertise from the euro zone," Juncker said.

Massive Loss of Sovereignty is an Insult

If I was Greek, I would take a statement regarding massive loss of sovereignty as an insult, not help. Thus, true to form, in aggregate, Juncker's statements are a collective lie.

EU Seeks to Curb Big Three Rating Firms

Bloomberg reports EU Seeks to Curb Big Three Rating Firms After Portugal Downgrade.

European policy makers lashed out at rating companies after Moody’s Investors Service cut Portugal’s debt to junk, reviving calls to curtail their clout.

German Finance Minister Wolfgang Schaeuble said the grip of the big three rating companies had to be broken when asked about Moody’s downgrade. “I have said before that we have to curb the influence of the rating agencies,” Schaeuble told reporters in Berlin today. There’s a need to “break up” the companies’ dominance, he said.

European Commission President Jose Barroso said he “deeply” regrets the timing and magnitude of Portugal’s downgrade by Moody’s and said proposals for increasing regulation of the rating companies in Europe would come out this year. The moves by Moody’s “do not provide for more clarity. They rather add another speculative element to the situation,” Barroso told reporters in Strasbourg today.

The commission, the European Union’s executive arm, “is looking into the regulation of rating agencies to determine whether there are some measures that need to be taken with regard to the prevention of possible conflicts of interest and other matters,” he said. “Developments since the sovereign- debt crisis show we need to take a further look at reinforcing our rules.”

Truth Not Appreciated

I agree with Schaeuble regarding the need to “break up” the rating agencies. I have spoken about this many times. The key article is Time To Break Up The Credit Rating Cartel.

Everyone readily accepted lies about US housing debt that anyone with an ounce of common sense could have spotted an ocean away.

However, I have to laugh at the irony and motivation of Schaeuble's proposal. The fact of the matter is Moody's , Fitch, and the S&P are finally telling the truth about something.

Greek Banks Ready for Debt Rollover

Please consider Greek Banks Ready for Debt Rollover as Investors Meet to Discuss Aid Plan

Greek banks are willing to roll over their government bonds as part of a European Union aid plan, Finance Minister Evangelos Venizelos said, as debt-holders meet in Paris today to discuss their role in rescuing the country.

“The Greek banks are ready to participate,” Venizelos said yesterday in an interview with Bloomberg Television in Athens. “We must respect absolutely the voluntary character of this procedure. This is very sensitive and I give a very crystal clear answer on this topic.”

About 20 banks and insurance companies are meeting in Paris to discuss the role of bondholders in a new Greek aid plan, said the Institute of International Finance, a banking-lobby group hosting the gathering. Talks began last week in Rome under the auspices of IIF Managing Director Charles Dallara, a former U.S. Treasury official.

Incredibly Funny For Multiple Reasons

The above story is incredibly funny for more than one reason.

For starters Venizelos' statement regarding the "absolutely the voluntary character of this procedure" is straight out of the Jean-Claude Juncker "lie when it's serious" playbook.

Venizelos goes on to say he wants to “take the opportunity but not the risk.”

Everyone knows there is nothing "voluntary" about the debt rollover proposal. The idea is so preposterous even the rating agencies cannot stomach the lie.

More importantly ...

You Cannot Roll Over What You Do Not Have

The Wall Street Journal reports Greek Rescue Snarled by Sales

Europe's hopes for a significant contribution by private bondholders to a new bailout for Greece are fading, as it becomes clear that banks have sold off a substantial proportion of their Greek government-bond holdings despite pledges by some of the institutions not to do so.

Greece has about €64 billion ($93 billion) of benchmark bonds coming due in the next three years, among other liabilities, and euro-zone leaders had hoped that private lenders would voluntarily take on longer maturities in order to improve the country's battered finances.

Euro-zone officials have described €30 billion as their target for private-sector participation in the new bailout. Governments want holders of Greek bonds that mature before the end of 2014 to agree to reinvest some of the money as the bonds mature. But the €30 billion target appears increasingly unrealistic.

The problem is that the banks and insurers at the negotiating table no longer hold as much of the debt maturing through 2014 as they did a year ago. In May of last year, German banks and insurers made a nonbinding pledge to maintain about €8 billion in Greek debt and loans for three years. Yet the current Greek debt holdings of those institutions suggests they have sold some of their holdings anyway.

In an interview with Der Spiegel, the German weekly, Chief Executive Officer Michael Diekmann said Allianz had fulfilled its commitment under last year's pledge not to sell into "a falling market." He also said that the insurer had agreed not to sell only for as long as it made "economic sense."

Analysts said banks were likely to have sold off short-term Greek debt because it trades at a smaller discount to face value than does longer-term debt. Meanwhile, hedge funds and other investors, who are likely to have bought up the paper, are less likely to be persuaded to engage in the debt rollovers being proposed by euro-zone governments.

Pledge Not to Dump as Long as it Made Economic Sense

Banks dumped some Greek debt and lightened their load. Pray tell what's wrong with that?

Everyone should be happy about this, except perhaps banks that were not smart enough to dump when the dumping was good. Could that be French banks by any chance?

Pondering the After the Dump Options

The chain of amusement continues as Bankers Ponder Greek Debt Options.

Bankers on Wednesday wrapped up their latest meeting on a private-sector contribution to alleviate Greece's debt crisis, and the chairman of BNP Paribas SA said they were now pondering a range of options.

"There are a number of technical propositions that have been made," said BNP Paribas chairman Michel Pébereau on French radio station BFM. "I hope we'll find a solution that satisfies those who don't want a default and at the same time the effort from the private sector to accompany the action of public powers."

The banks are trying to figure out a way to participate in a deal to repackage Greece's debts so that European taxpayers don't have to supply all the funds—but they want to do so in a way that avoids Greece being declared in default.

The main proposal on the table is a French plan to roll over part of Greece's debt that will reach maturity before 2014. However, Standard and Poor's said Monday this plan would leave participating bondholders worse off, and therefore would probably lead to Greece being declared in "selective default."

Stiffing the Taxpayers

Please notice the key sentence "The banks are trying to figure out a way to participate in a deal to repackage Greece's debts so that European taxpayers don't have to supply all the funds—but they want to do so in a way that avoids Greece being declared in default."

Why should taxpayers have to supply any funds? Was it taxpayers that made stupid bets or banks? Those who made stupid bets should pay for them.

Betting on Bailouts

As I see it, the secretive dumping transferred some of the risk to hedge funds and others betting precisely on a guess that taxpayers will indeed pony up 100% and debt will be paid back.

This takes us back to my June 27 article Leading German Economist Buys Greek Bonds On Belief in "Boundless Stupidity of German Government", Says Bailout Programs Will Exacerbate Problems

Stefan Homburg, a leading German economist believes the bailout of Greece is exactly that wrong thing to do and will exacerbate bankruptcy problems.

Nonetheless Homburg invested a "considerable sum" in Greek bonds on belief in the "boundless stupidity of the German government to pay up".

The only thing that makes any sense is a full and complete default.

To any extent banks dumped bonds, the better off they will be in a default situation. Make the speculators and the banks not bright enough to dump foot the bill, not taxpayers.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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"Hamster Wheel Economy"

Trimtabs says the U.S. economy added 171,000 jobs in June. However, real wage and salary growth is -2.0% year-over-year when adjusted for 3.6% inflation and 2% payroll tax cut.

Via Email ...

The U.S. economy added 171,000 jobs in June, reports TrimTabs Investment Research. The June gain follows increases of 127,000 in May and 181,000 in April.

“Employment growth accelerated in June after reaching an interim peak in March followed by a slowdown in April and May,” says Madeline Schnapp, Director of Macroeconomic Research at TrimTabs. “The rapid increase in oil prices earlier this year spooked everyone. Hiring managers put the brakes on hiring until oil prices moderated.”

TrimTabs employment estimates are based on analysis of daily income tax deposits to the U.S. Treasury from all salaried U.S. employees. They are historically more accurate than initial estimates from the Bureau of Labor Statistics.

TrimTabs cautions that while employment improved in June, the improvement may be temporary. Several other economic indicators suggest that economic growth is likely to remain sluggish for the foreseeable future:

• Adjusted for the 3.6% annualized increase in inflation, wage and salary growth was only $90 billion annualized in June. When corrected for the $114 billion Federal stimulus coming from the 2% payroll tax reduction, real wage and salary growth is -2.0%.


• The housing market remains depressed despite low mortgage interest rates. Since there are an estimated 12 million underwater homeowners, 6.4 million delinquent mortgages, and 24 million unemployed or underemployed workers, it will take several years before housing makes a meaningful contribution to economic growth.


• Vehicle sales, an important component of durable goods sales, declined in June. Sales fell to 11.4 million annualized units in June from 11.8 million in May. While part of the decline can be attributed to inventory problems, sales are sluggish due to consumer’s unwillingness to take on a big purchase in the face of economic uncertainty.


• Three of the five Federal Reserve manufacturing districts—New York, Philadelphia, and Texas—reported deteriorating manufacturing conditions in June as manufacturers struggled to adjust to high input prices.

“The rebound in employment in June is likely to cheer equities, but the improvement could prove fleeting,” cautions Schnapp. “What we may be seeing is a hamster wheel economy where the economy is finally creating jobs, but net of inflation, income growth is barely positive. Subtract government stimulus, and income growth is actually negative.”

Going Nowhere Fast

Despite the alleged "improvement" in jobs, TrimTabs describes the economy as a "Hamster Wheel Economy" -- the hamster runs faster and faster in its wheel but goes nowhere.

Don't Count on a Big Rebound

The "rebound" in employment will only cheer the markets if there is a significant rebound. Last month the BLS report was +54,000 jobs.

I except to see a rebound above that anemic total. However, I will take the "way under" line on Trimtabs +171,000 jobs estimate for Friday's jobs report. Anything under +125,000 and the unemployment rate is likely to tick up, perhaps significantly.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Portuguese 10-Year Government Bond Yield Soars to 13.05%; Italy, Portugal, Ireland, all Fresh New Highs; Focus On the "Unsaved"

By now, everyone knows that "Greece is Saved" even though 2-year government bonds are trading today at 28.3%, up from 26.62% at the open.

Let's turn our attention away from Greece to the "Not Saved Yet" group of countries including Spain, Portugal, Ireland, and the big Kahuna, Italy.

Portugal 10-Year Government Bonds - 13.05%



Ireland 10-Year Government Bonds - 12.43%



Greece 10-Year Government Bonds - 16.82%



Spain 10-Year Government Bonds - 5.61%



Italy 10-Year Government Bonds - 5.12%



Please note that 10-year yields in Italy are now approaching 10-year yields in Spain.

Also note that yields are not up across the board in Europe.

Germany 10-Year Government Bonds - 2.93%



Today's Scorecard

Country	Yield	Change	New High	Saved	Spread to Germany
Germany	2.93	-0.08			0
Portugal	13.05	+2.03	Y		10.12
Ireland	12.43	+0.89	Y		9.5
Greece	16.82	+0.30		Y	13.89
Spain	5.61	+0.13			2.68
Italy	5.12	+0.12	Y		2.19

I don't know about you, but I am sure glad "Greece is Saved". I look for equally impressive results when Portugal, Ireland, Spain, and Italy are "saved".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Services ISM "Unimpressive"

Manufacturing rebounded last month largely on the "strength" of inventory rebuilding, but the services ISM came in weaker than expected. Nigel Gault, chief U.S. economist at IHS Global Insight, summed things up nicely in one word "unimpressive".

Please consider the June 2011 Non-Manufacturing ISM Report On Business®



click on chart for sharper image

Expectations were for 53.7, the index came in at 53.3. This was not a disaster, it just was not very good. Employment was the one bright spot, but it was up a statistically meaningless .1.

Backlog of orders is contracting, as is the backlog of manufacturing orders. I expect more weakness coming in both the services ISM and the manufacturing ISM in the months ahead.

Inventory rebuilding will not sell cars, boats, or durable goods in general. In case you missed it, please see Manufacturing ISM Weaker Than it Looks; Digging Into the Numbers; Inventory Restocking Accounts for Much of the Rise

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Moody's Cuts Portugal Debt Four Levels to Junk, Warns of Second Bailout; Reflections on "Political Will"

It can't be contagion because we all know "Greece Has Been Saved". Nonetheless Moody's cuts Portugal to junk, warns of second bailout

Moody's Investors Service slashed Portugal's credit rating by four levels, to Ba2, causing the debt-laden Iberian country to follow Greece into junk territory below investment grade. Greece is rated much lower, at Caa1.Moody's said there is an increasing probability Portugal will not be able to borrow at sustainable rates in capital markets in the second half of 2013 and for some time thereafter.

There was a "growing risk that Portugal will require a second round of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a pre-condition," Moody's said.

Some economists think Ireland may also need additional support, and investors worry Spain and Italy could be next in line for aid.

"It goes to show that this whole crisis isn't over just yet," said Jay Bryson, global economist for Wells Fargo Securities in Cape Hatteras, North Carolina. "Even if they cough up some more money for Greece, and that looks like it's a done deal, it's not over."

Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto, said Moody's move was "a bit extreme" and was likely to exacerbate concerns over Portugal's debt.

"Either they don't believe in the power of the political will by the European Union to avoid default, or they are underestimating this political union," he said.

Political Will vs. Reality

There would never have been a sovereign default in history if "political will" was a guaranteed savior.

Greek 2-year bonds are trading at 26.91%. They opened today at 26.03%.

The market does not think much of "political will" and neither do I.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bill Gross' Fatally Flawed Plan to Fix the Education System and the Fractured U.S. Job Market; Mish's 8-Point Alternative Plan

Bill Gross has a Plan to Fix the Fractured U.S. Job Market.

However, before you can fix any problem you have to understand what the problem is. Interestingly, Gross seems to have a handle on some aspects the problem. Here are two key points from the article on which I agree with Gross.

If we are to compete globally while maintaining a higher wage base, we must train for “middle” in addition to “high” tech. Philosophy, sociology and liberal arts agendas will no longer suffice. Skill-based education is a must, as is science and math.

The private sector is the source of long-term job creation but in the short term, no rational observer can believe that global or even small businesses will invest here when the labor over there is so much cheaper. That is why trillions of dollars of corporate cash rest impotently on balance sheets awaiting global – non-U.S. – investment opportunities. Our labor force is too expensive and poorly educated for today's marketplace.

Gross also cites several facts about the cost of education in the US that also hit the mark.

Fact: College tuition has increased at a rate 6% higher than the general rate of inflation for the past 25 years, making it four times as expensive relative to other goods and services as it was in 1985. (Click here for a list of the ten most expensive colleges and universities in the U.S.)Subjective explanation: University administrators have a talent for increasing top line revenues via tuition, but lack the spine necessary to upgrade academic productivity. Professorial tenure and outdated curricula focusing on liberal arts instead of a more practical global agenda focusing on math and science are primary culprits.

Fact: The average college graduate now leaves school with $24,000 of debt and total student loans now exceed this nation's credit card debt at $1.0 trillion and counting (7% of our national debt). Subjective explanation: Universities are run for the benefit of the adult establishment, both politically and financially, not students. To radically change the system and to question the sanctity of a college education would be to jeopardize trillions of misdirected investment dollars and financial obligations.

Conclusion to ponder: American citizens and its universities have experienced an ivy-laden ivory tower for the past half century. Students, however, can no longer assume that a four year degree will be the golden ticket to a good job in a global economy that cares little for their social networking skills and more about what their labor is worth on the global marketplace.

5-Point Summary of the Problem

1. U.S wages are out of line
2. U.S. education is too expensive
3. U.S. universities are run for the benefit of teachers, teachers' unions, and administrators, not for the benefit of students
4. Student loan programs make life-long debt slaves out of students
5. U.S. tax policy encourages flight of capital and jobs overseas

Bill Gross' Proposed Solution

“We need a program as ambitious as the GI Bill,” but one that focuses on retraining existing unemployed workers and redirecting our future students.

Government must step up to the plate, as it should have in early 2009. An infrastructure bank to fund badly needed reconstruction projects is a commonly accepted idea, despite the limitations of the original “shovel-ready” stimulus program in 2009. Disparate experts such as GE's Jeff Immelt, Fareed Zakaria, Jeffrey Sachs and Paul Krugman believe an infrastructure bank to be an excellent use of deficit funds: a true investment in our future.

In the end, I hearken back to revered economist Hyman Minsky – a modern-day economic godfather who predicted the subprime crisis. “Big Government,” he wrote, should become the “employer of last resort” in a crisis, offering a job to anyone who wants one – for health care, street cleaning, or slum renovation. FDR had a program for it – the CCC, Civilian Conservation Corps, and Barack Obama can do the same. Economist David Rosenberg of Gluskin Sheff sums up my feelings rather well. “I'd have a shovel in the hands of the long-term unemployed from 8am to noon, and from 1pm to 5pm I'd have them studying algebra, physics, and geometry.”

Those who advocate that job creation rests on corporate tax reform (lower taxes) or a return to deregulation of the private economy always fail to address dominant structural headwinds which cannot be dismissed: 1) Labor is much more attractively priced over there than here, and 2) U.S. employment based on asset price appreciation/finance as opposed to manufacturing can no longer be sustained. The “golden” days are over, and it's time our school and jobs “daze” comes to an end to be replaced by programs that do more than mimic failed establishment policies favoring Wall as opposed to Main Street.

Pure Keynesian Nonsense

Gross correctly cited college expense as a problem. He also correctly cited global wage arbitrage as a problem. What proposal did he make to fix either of them?

The answer is he didn't. Instead he cited self-serving clean-energy nonsense from GE.

Of course GE's Jeff Immelt wants a massive energy build-out. Such a program would benefit GE and the value of Immelt's stock options.

Of course Krugram always wants more fiscal stimulus because he is a Keynesian clown, and that's what Keynesian clowns always want.

The golden days are indeed over, but Bill Gross' solution is pure Keynesian nonsense. Neither Gross, nor Immelt, nor Krugman ever say how we are supposed to pay for their proposed "infrastructure bank.

Time to Scrap Davis-Bacon, End Public Union Collective Bargaining

Unlike Krugman, Gross seems to understand one key point: the "U.S. labor force is too expensive".

Logically, that must be the starting point for any discussion.

Before any project can be economically viable, labor costs must be addressed, and that is exactly why we need to scrap Davis-Bacon and all prevailing wage laws. We also need to eliminate collective bargaining of public unions, preferably getting rid of public unions in entirety.

Unless and until we do that, we will dramatically overpay for infrastructure projects and taxpayers will pay through the nose for them.

Government should strive to provide the most services at the least cost. Public unions strive to provide the fewest services at the most cost. Is it any wonder cities and states are broke?

Killing Collective Bargaining the Single Best Thing for Education

The results are in: Union-Busting is a "Godsend"; Elimination of Collective Bargaining is the Single Best Thing one Can do for School Kids

Congratulations to Governor Scott Walker for sticking to his guns. The state of Wisconsin is far better off because of it. So are taxpayers. Most importantly, so are the school kids.

Please consider Union curbs rescue a Wisconsin school district

The Kaukauna School District, in the Fox River Valley of Wisconsin near Appleton, has about 4,200 students and about 400 employees. It has struggled in recent times and this year faced a deficit of $400,000. But after the law went into effect, at 12:01 a.m. Wednesday, school officials put in place new policies they estimate will turn that $400,000 deficit into a $1.5 million surplus. And it's all because of the very provisions that union leaders predicted would be disastrous.

In the past, teachers and other staff at Kaukauna were required to pay 10 percent of the cost of their health insurance coverage and none of their pension costs. Now, they'll pay 12.6 percent of the cost of their coverage (still well below rates in much of the private sector) and also contribute 5.8 percent of salary to their pensions. The changes will save the school board an estimated $1.2 million this year, according to board President Todd Arnoldussen.

"The monetary part of it is not the entire issue," says Arnoldussen, a political independent who won a spot on the board in a nonpartisan election. Indeed, some of the most important improvements in Kaukauna's outlook are because of the new limits on collective bargaining.

In the past, Kaukauna's agreement with the teachers union required the school district to purchase health insurance coverage from something called WEA Trust -- a company created by the Wisconsin teachers union. "It was in the collective bargaining agreement that we could only negotiate with them," says Arnoldussen. "Well, you know what happens when you can only negotiate with one vendor." This year, WEA Trust told Kaukauna that it would face a significant increase in premiums.

Now, the collective bargaining agreement is gone, and the school district is free to shop around for coverage. And all of a sudden, WEA Trust has changed its position. "With these changes, the schools could go out for bids, and lo and behold, WEA Trust said, 'We can match the lowest bid,'" says Republican state Rep. Jim Steineke, who represents the area and supports the Walker changes.

Ridiculous Cost of Education

Nowhere does Gross address the cost of education other than to cite it as a problem.

The student loan program is a huge price of the problem. It does nothing but make students debt slaves for life. Student loans should be scrapped entirely. Education costs will drop dramatically once that happens.

Moreover, pension benefits of teachers and administrators are outrageous, especially at the university level. Salaries for sports coaches are outrageous.

All of those excesses need to be reined in.

Corporate Tax Law Changes

Every few years one or both parties proposes a corporate tax holiday to repatriate profits held by corporations overseas. Such actions must stop. All repatriation holidays do is encourage more outsourcing of jobs and capital, while corporations bide their time, waiting for the next tax holiday.

US companies that only do business inside the US are at a huge disadvantage to large corporations who can shift profits overseas.

GE is a prime example. Please consider G.E.’s Strategies Let It Avoid Taxes Altogether.

In 2010, GE reported $14.2 billion in profit, $5.1 billion in the US. Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.

Gross has high praise for GE.

The only thing GE deserves high praise for is an army of lawyers and lobbyists to reduce its tax bill to the detriment of struggling small businesses who cannot compete and get no such breaks.

If we are going to have a corporate tax, we should have a fair one.

Mish's Proposed Plan for Jobs and Education

1. Scrap Davis-Bacon and all prevailing wage laws
2. Enact national right-to-work laws
3. Kill defined benefit plans for public workers
4. Scrap student loan programs entirely
5. End all support for for-profit colleges
6. Revise corporate tax laws
7. Stop corporate tax repatriation holidays
8. Slash military spending. The US can no longer afford to be the world's policeman.
   

Those ideas will increase corporate tax revenues, end corporate tax unfairness to small US businesses, lower infrastructure costs, lower education costs, allow more public workers to be hired at the same costs as before thereby lowering the unemployment rate.

A key reason we have a jobs problem and an education problem is costs are too high. Gross purports to fix the problem via more government spending.

The solution cannot be the same as the problem, yet Gross proposes just that. Unions, untenable wages and benefits, and excessive government spending caused Greece to go bankrupt. Massive public works programs put Japan in a very precarious situation, with nothing but debt to show for its efforts.

History has proven time and time again that public spending proposals cannot and will not work. Gross and Krugman are blind to history. Immelt is talking about what is good for GE, not America.

The bond market forced Greece's hand. If we listen to Gross, Krugman, and Immelt, the US will soon be in the same spot.

Addendum:

Reader "Brian"comments

1. Government doesn't create jobs. Government jobs come at the expense of private sector jobs.

2. Bill Gross' comment "I'd have them studying algebra, physics, and geometry" is wrong. Not everyone needs to learn algebra, physics, and geometry. If money is to be spent in education, it should be where it is needed in trade tech schools. Americans are brainwashed into thinking that getting a four year degree is a path to financial success when a highly skilled tradesman makes more money and is more in demand today than a student with a fluff degree working in an office. We are creating a nation of unskilled workers in debt and ill prepared for the necessary jobs in a diverse economy.

3. Bill Gross won't speak poorly of educators or unions so long as endowments and pension funds make up a large portion of PIMCO investors

Thanks again for the article!
Brian

Regarding point number 1 above: Much government "work" is makeshift, and not needed at all.

Regarding point number 2 above: How many math majors do we need? How many PhDs do we need? If everyone has a PhD, then by definition, Walmart greeters and trash collectors will be PhDs. As Brian suggests, much is to be said for learning a trade instead.

Regarding point number 3 above: Clearly PIMCO suffers from the same credibility problem as GE. Of course, one has to look at ideas presented instead of making Ad Hominem attacks, but Gross' proposal was very weak as noted. One cannot help wondering if Gross purposely strove to avoid offending unions and pension plans.

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

Credit Crisis in Brazil: Consumer Loan Rates Hit 47%, Defaults Soar, Debt Service Tops 50% of Disposable Income

Those looking for inflation and high interest rates can find them in much beloved emerging markets, especially Brazil.

Reader Otavio, from Brazil writes ...

Hello Mish

Otavio here, a Brazilian follower of your blog. Today I want to express my satisfaction as I read you latest post entitled Preposterous Statements - Jim Rogers: "No Food at Any Price"; Barton Biggs: " U.S. Needs Massive Infrastructure Program".

When I hear statements like these, it feels like the move up in commodity prices might be near the end. I cannot stress more the fact that high prices fueled by zero interest rates in developed and many emerging markets (for many years now) are a fruit of rampant speculation.

We have our own credit bubble here, which in my opinion has a good chance of busting sooner rather than later, via one or more of the following:

1. Central Bank over-tightening local rates
   
2. Slowdown in China, which would change our terms of trade and contract global capital flows to EM and Brazil (as we are suppliers of commodities to China), tightening monetary conditions here as a result
3. Deterioration of credit crisis in Europe (and US), would also contract global capital flows and tighten monetary conditions here

I took the liberty of forwarding you a FT article about Brazil.

I think you might appreciate this as maybe a topic for future posts of yours, since you are keen in identifying and warning readers and investors of potential bubbles around the world that may be close to busting. For the record, I will say that in my opinion, Brazilian real estate, many local stocks, and our currency (the Real), are extremely overvalued as well.

Cheers
Otavio

Brazil Risks Tumbling From Boom to Bust

With thanks to Otavio, please consider a few highlights from the Financial Times article Brazil risks tumbling from boom to bust

Cash Flow Burden Astronomical and Rising

• Average rate of interest on consumer loans 47%, up from 41% in 2010
• Consumer debt service burden was 24 per cent of disposable income in 2010, slated to rise to 28 per cent in 2011. This compares with 16% for an “overburdened” US consumer and a mid-single digit reading for other emerging markets such as China and India.
• Debt service burden for the so-called “middle class” in Brazil has now breached 50% of disposable income
• Delinquencies in Brazil (defaults in excess of 15 days) have begun to move up rapidly, from 7.8 per cent to 9.1 per cent of total loans between December 2010 and May 2011.
  
• Delinquencies are now rising at a very hectic rate. They have risen at 23 per cent in the first five months of this year in absolute terms or at an annualised rate of 55 per cent.
• Normally credit indicators cyclically lag the economic cycle. When they begin to deteriorate before any economic weakness it usually represents a structural problem relating to underlying cash flow or underwriting weakness in the quality of credit – Brazil has both problems.

In light of facts elsewhere around the globe, it's really quite humorous to hear repeated chants of hyperinflation every time US treasury yields inch up slightly.

Brazil Targets Currency Speculators

Brazil's Finance Minister, Guido Mantega Mulls New Currency Measures

Brazil will continue to act to curb the strength of its currency, with restraining excess speculation in the futures and derivatives markets among possible options, the country's finance minister said on Tuesday.

"The government will continue to take measures to contain the over-valuation of the exchange rate ... We've taken measures on reserve requirements, we can take measures on derivatives and futures. But these are not measures we will pre-announce," Mantega told reporters.

Despite aggressive measures to curb the strength of its currency, including taxes on fixed-income inflows, the real is trading close to its strongest level against
the dollar in 12 years.

In recent weeks, foreign investors have raised their bets that the real will continue rising to record levels.

Last year, Mantega accused governments around the world of deliberately weakening their currencies to boost their export competitiveness, warning of an "international currency war."

But for Alberto Ramos, Latin America economist at Goldman Sachs in New York, Brazil is "no passive victim."

Near-zero rates in developed markets and high rates in emerging economies are drawing investment to countries like Brazil. At the same time, though, Brazil has failed or refused to contemplate measures that could ease flows, such as cutting
government spending, which makes up a whopping 40 percent of gross domestic product, he said.

No Passive Victim

I am inclined to agree with Otavio who says the Real is "extremely overvalued".

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

Jobs, Income Data Show Right-To-Work States Have Advantage

Investor's Business Daily reports Jobs, Income Data Show Right-To-Work States Working

The business world is abuzz over the National Labor Relations Board's complaint vs. Boeing's new South Carolina production line. For NLRB critics, the case boils down to one thing: "right-to-work" laws.

Right-to-work states have generally lower unemployment, higher job growth, lower taxes and better business climates. They have growing populations and have been attracting businesses from other states.

In most states, once a workplace is unionized, employees are required to join the union or they can't work there. But 22 states, including South Carolina, have passed laws that give employees the right not to join. Hence the term "right-to-work."

Between 1977-08, employment grew 100% in right-to-work states vs. the national average of 71% and 56.5% in non-right-to-work states. That's according to a January study that Ohio University economics professor Richard Vedder did for the Indiana Chamber of Commerce.

In this period, real per capita income in the right-to-work states grew 62.3% vs. the national average of 54.7% and 52.8% for non-right-to-work states.

Vedder has studied right-to-work laws for decades and argues that this success is not a coincidence.

" I've been looking for ways to show that these laws don't really (impact) anything. But I haven't found it yet," Vedder said.

Right-to-work fans concede that a variety of factors go into the relative success of a state's economy. But the labor laws are a strong indicator, they argue.

"Nobody is saying that right-to-work is the only factor, but if the bottom 14 states for personal income growth (between 1999 and 2009) are all non-right-to- work states, that's a pretty strong negative correlation," said Stan Greer, senior research associate for National Right to Work's National Institute for Labor Relations Research.

I support national right-to-work laws for the simple reason it is the right thing to do. Forcing people to belong to unions to get a job is forced slavery. Dictating what people can and cannot do with their free time is also slavery.

Sadly, unions even dictate what non-union members can do with their free time.

Want to donate time to your school, cleaning classroom or planting shrubs? It's likely you can't because of unions. Want to be a volunteer fire-fighter? You may not be able to do that either.

For further discussion of the slavery issue, please see

• Collective Bargaining neither a Privilege nor a Right
• Paul Krugman, Stephen Colbert, Bill Maher, others, Ignore Extortion, Bribery, Coercion, and Slavery; No One Should Own You!
• Professor at Alaska University Chimes in on Public Unions and the Situation in Wisconsin

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

S&P Warns Greek Bailout Plan Constitutes Default; Greece at Risk of Missing June Target; Spoon Feeding will Continue Until Greece Dies

Before receiving the next bailout tranche, Greece May Have Missed June Primary Balance Target

Greece is at risk of missing a key budget target in June, European Union experts said in a report, a sign of the uphill struggle the country faces as it tries to get its deficit reduction plans back on track.

The report, prepared by European Commission budget experts with input from European Central Bank officials and published over the weekend, says that Greece could miss its June target for its primary budget balance, a measure of the government deficit that excludes interest payments on outstanding debt.

Government revenue faces "significant" shortfalls that have only partially been offset by lower spending and delayed payments, the report says. "As a result, the quarterly performance criterion on the primary balance could be missed already in June."

Spoon Feeding will Continue Regardless of Shortfalls

Short of telling the ECB, EU, and IMF to go to hell, nothing will stop the Plan to Spoon-Feed Greece to Death

The original bailout was 110 billion Euros, now it takes another $85 billion (and counting). When the fire sale of Greek assets does not bring in enough money, the banks and IMF will place even harsher terms on Greece.

Notice the plan to spoon-feed payments to Greece in 12 billion-euro bites while demanding "progress". This will ensure Greece is sucked dry (at fire sale prices) of any government assets worth owning by the time the "bailout" is over.

Portugal, and Ireland should make note of the process. The same "bailout" plan will be used on them unless they tell the IMF and EU to go to hell.

French Plan to "Save Greece" Constitutes Default

The New York Times reports S.&P. Warns Bank Plan Would Cause Greek Default

Greece risks being judged in default on its debt obligations if banks are forced to bear part of the pain, Standard & Poor’s said Monday, suggesting that current proposals for rescuing the euro zone’s weakest member may have to be reconsidered.

In particular, a plan proposed by the French government and banks “could require private sector debt restructuring in a form that we would view as an effective default,” S.&P. said in a statement.

The rating agency also said it was cutting its long-term rating on Greece three notches deeper into junk territory, to CCC from B.

A finding by the credit ratings agencies of default would also require the E.C.B. to impose discounts, known as haircuts, on the Greek debt it has accepted as collateral. That would inflict more financial pain on banks holding that debt.

Euro-zone finance ministers agreed over the weekend to provide Athens with financing of €8.7 billion, or $12.6 billion, from the €110 billion bailout agreed to last year, to help the Greek government function through the summer. The new aid eliminates the prospect of a near-term default.

But the finance ministers put off the question of how to provide a second bailout, reportedly valued at up to €90 billion, to keep the country operating through 2014, when it is hoped that Greece will be able to return to the credit markets.

Nicolas Sarkozy, the French president, announced June 27 that French banks had agreed to a plan under which the banks would reinvest most of the proceeds of their holdings of Greek debt maturing between now and 2014 back into new long-term Greek securities.

But Standard & Poor’s said Monday that it “views certain types of debt exchanges and similar restructurings as equivalent to a payment default”: when a transaction is seen as “distressed rather than purely opportunistic” and when it results “in investors receiving less value than the promise of the original securities.”

Both conditions would appear to be met by the French proposal, it said.

Rating Agency Rollover Default Conditions

1. It's a default if rollovers are distressed rather that opportunistic.
2. It's a default if "investors receiving less value than the promise of the original securities”

Point number one deals with the "voluntary" nature of the dealing. If banks roll over debt under duress, fearing bigger losses if they don't, the rating agencies will not consider that a "voluntary" rollover.

Even if a voluntary rollover can be constructed, condition number two must still be satisfied. I fail to see how that is possible, at least without destroying Greece.

Making Sense of the French Rollover Plan

There is a nice article on Zero Hedge by Peter Tchir of TF Market Advisors called Making Sense of the French Rollover Plan

The French proposal is slightly complex at best and convoluted at worst. Before digging into the specifics, let’s look at what a true rollover would look like. If Participants agreed with Greece to extend the maturity AND reduce the coupon AND do it immediately, that would be a clear example of a rollover that benefited Greece.

There are 3 key elements to a real rollover. The first is that they would agree to the rollover now. That would take away uncertainty. The maturity extension is the rollover, and the longer it is delayed, the better for Greece. The coupon on the new debt should be lower than the coupon Greece is currently paying. If all 3 of these criteria are met, and the new bonds are pari passu with the existing bonds, then I think everyone would agree that Greece benefits, the Troika would benefit, and the Participants would have made a sacrifice.

We need to stop right there. What Tchir says is true, but since when is the plan to benefit Greece? Moreover, even if the plan was to benefit Greece, notice the key phrase "the Participants would have made a sacrifice. "

A sacrifice implies "investors receive less value than the promise of the original securities”. That in turn implies default, at least to the rating agencies.

Tchir continues ...

The French proposal, as we will see, potentially does not satisfy any of the 3 aspects listed – it is not immediate, the coupon will be higher than existing debt, and the maturity extension is linked to taking some debt out of the market, so it’s not as clearly a benefit as the headlines make it seem.

The ISDA credit derivative definitions for a Restructuring Credit Event have to meet 2 tests. The first part of the test is straightforward and is met if bonds are extended, or the coupon is reduced, for example. This condition would be met. The second condition is effectively that it is involuntary. If the actions of some bondholders can force other bondholders into an agreement then this condition would be met and there would be a CDS Credit Event. In the case of Greek bonds, that looks unlikely. I have only looked at the offering circulars from a couple of bonds, but there does not appear to by anything that could force a bondholder to change the terms of the debt. There is no reason, that on a €1 billion issue, €950 million could be exchanged and €50 million could remain outstanding. If that is the case, then there would be no CDS Credit Event under this true rollover.

The rating agencies have taken the position (right or wrong), that if a rollover is done under duress, the rollover is not voluntary.

However, Tchir goes on to say "The Rating Agencies can be largely ignored".

The plan as it stands is complicated. Tchir does his best to explain it by comparing the rollover to 30 year mortgages.

The Participants are not lending to Greece for 30 years, the duration is much shorter, and the coupon payments start out potentially high, and become usurious in the later years.

The structure is designed in a such a way to make it look like the Participants are being helpful – 30 years at a low coupon, but separating the SPV into its zero coupon component and the loan to Greece clearly demonstrate that the terms being offered to Greece are far worse than the headlines that the Participants are selling to the public.

I would be surprised if Greece agrees to the loan terms as included in the French proposal and wonder if they have even been consulted?

Greece has had no say in this for the simple reason the plan is not to save Greece, but rather save the French banks who are most on hook should Greece default.

It will be interesting to see if the plan changes now that the S&P has warned the French plan for Greece constitute default. Even if the plan is modified, I do not see how it can be modified to meet the "voluntary" rollover criteria of the rating agencies.

Unless Tchir is correct that the rating agencies truly are irrelevant, something has to give.

Actually, something has to give anyway. The situation in Greece is so dire, and the economy, politics and riots so messy that Greece is going to default sooner or later anyway.

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

"Jobless and Wageless" Recovery in Pictures; Trends in Jobs and Wage Growth

Please consider a collections of charts from The “Jobless and Wageless” Recovery from the Great Recession of 2007-2009. Annotations in red (where present)are by me.

GDP 2007 Q4 - 2011 Q1



GDP made a new high but look at the amount of US fiscal stimulus from Congress, monetary stimulus from the Fed, and global stimulus especially China, that it took to achieve that.

Nonfarm Jobs



Total Civilian Employment



By the "end" of the recession the US economy shed 7 million nonfarm jobs and 6 million civilian jobs. Since the official end of the recession, there has been a small net loss of both nonfarm jobs and civilian jobs.

Mean Weekly Private Sector Hours



Mean weekly hours have risen by .5 hours since the recession ended but are still .2 hours below the start of the recession.

Change in Civilian Jobs vs. Prior Recessions 7 Quarters Later



Private Sector Real Hourly Earnings in Constant 201o Dollars



Thanks to the Fed specifically and central bankers in general, real wages are below where they were when the recession ended.

Real Median Weekly Earnings Full-Time Wage and Salary Employees in Constant 2010 Dollars



Trends in Annualized Wage and Salary Accruals CPI-U Adjusted 2010 Dollars



Annualized Value of Corporate Profits in Constant 2010 Dollars



Snip from the report ....

"To date, through the first quarter of 2011, the nation’s recovery from the 2007-2009 recession is both a jobless and a wageless recovery. Aggregate employment still has not increased above the trough quarter of 2009, and real hourly and weekly wages have been flat to modestly negative. The only major beneficiaries of the recovery have been corporate profits and the stock market and its shareholders. Most holders of savings and money market accounts also are net losers due to declining real interest rates which have been in negative territory for many interest bearing and money market accounts."

There are more charts, tables and commentary in the 23 page PDF report.

Given the global economy is clearly weakening (disregarding inventory building and the latest US manufacturing ISM numbers), there is every reason to believe the jobless, wageless, "state of affairs" will last.

Notice I called it "state of affairs". The recovery, if that is what one wants to call what we had, is on its last legs.

For a look at the latest manufacturing ISM numbers and trends in other countries, please see Manufacturing ISM Weaker Than it Looks; Digging Into the Numbers; Inventory Restocking Accounts for Much of the Rise

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

Case for a Balanced Budget Amendment; Charts of the Day: Transfer Payments (Medicare, Medicaid, Food Stamps, etc.) vs. Total Government Receipts

Inquiring minds are investigating Personal Transfer Receipts.

Personal current transfer receipts are benefits received by persons for which no current services are performed. They are payments by governments and businesses to individuals and nonprofit institutions serving individuals.

Personal Current Transfer Receipts Examples

• Medicare
• Medicaid
• Food Stamps
• Social Security
• Unemployment Insurance
  

Personal Current Transfer Receipts



Note that transfer receipts are nearly $2.4 trillion.

Federal Government Receipts



Ratio of Personal Transfer Receipts to Federal Government Receipts



Notes

• Nearly every dime of federal government receipts goes to personal transfer payments.
• Between 1960 and 1970, personal transfer payments were 30-35% of federal government receipts.
• From 1980-2000 the percentage fluctuated between 50% and 65%.
• If (when) the economy slips back into recession personal transfer payments will exceed 100% of federal government receipts.

Given personal transfer receipts take up nearly 100% of federal government receipts, in theory, there should be no room for anything else, including wars, roads and bridges, and wages of federal employees.

Unfortunately, the government wastes money on wars, wastes money on bureaucracies that should not exist, and overpays on roads, bridges, and infrastructure (because of Davis-Bacon, collective bargaining, and prevailing wage laws).

The only way to remedy this is with an iron-clad, no-exceptions, balanced budget amendment.

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

China Bought More Treasuries Than Disclosed, Perhaps Illegally; Nuclear Dollar Dumping Theory Revisited

Not only did China buy more treasuries than disclosed, it did so in violation of treasury auction rules.

When the Treasury Department revamped its rules for participating in government bond auctions two years ago, officials said they were simply modernizing outdated procedures.

The real reason for the change, a Reuters investigation has found, was more serious: The Treasury had concluded that China was buying much more in U.S. government debt than was being disclosed, potentially in violation of auction rules, and it wanted to bring those purchases into the open - all without ruffling feathers in Beijing.

Guaranteed Bid

The United States sells its debt to investors through auctions that are held weekly - sometimes four times per week - by the Treasury's Bureau of the Public Debt, in batches ranging from $13 billion to $35 billion at a time. Investors can buy the bonds directly from the Treasury at auctions, or through any of the 20 elite "primary dealers," Wall Street firms authorized to bid on behalf of customers. The Treasury limits the amount any single bidder can purchase to 35 percent of a given auction. Anyone who bought more than 35 percent of a particular batch of Treasury securities at a single auction would have a controlling stake in that batch.

By the beginning of 2009, China, which uses multiple firms to buy U.S. Treasuries, was regularly doing deals that had the effect of hiding billions of dollars of purchases in each auction, according to interviews with traders at primary dealers and documents viewed by Reuters.

Using a method of purchases known as "guaranteed bidding," China was forging gentleman's agreements with primary dealers to purchase a certain amount of Treasury securities on offer at an auction without being reported as bidders in that auction, according to the people interviewed. After setting the amount of Treasuries the guaranteed bidder wanted to buy, the dealer would then buy that amount in the auction, technically on its own behalf.

The practice kept the true size of China's holdings hidden from U.S. view, according to Treasury dealers interviewed, and may have allowed China at times to buy controlling stakes - more than 35 percent - in some of the securities the Treasury issued.

The Treasury department, too, came to believe that China was breaching the 35 percent limit, according to internal documents viewed by Reuters, though the documents do not indicate whether the Treasury was able to verify definitively that this occurred.

Guaranteed bidding wasn't illegal, but breaking the 35 percent limit would be. The Uniform Offering Circular - a document governing Treasury auctions - says anyone who wins more than 35 percent of a single auction will have his purchase reduced to the 35 percent limit. Those caught breaking auction rules can be barred from future auctions, and may be referred to the Securities and Exchange Commission or the Justice Department.

At the beginning of 2009, Treasury officials began discussing the issue of guaranteed bidders, with a focus on China's behavior, internal documents seen by Reuters show. The culmination of their efforts was a change to the Uniform Offering Circular published on June 1, 2009 that eliminated the provision allowing guaranteed bidding.

In the first auctions conducted after guaranteed bidding was banned, a key metric rose sharply: the percentage of so-called indirect bidders, those who placed their auction bids through primary dealers. Indirect bidders are seen as a proxy measure for foreign central bank buying, because foreign central banks most often bid through primary dealers. With the elimination of the guaranteed bidder provision, far more buyers were put in this class in reports to the Treasury Department.

Direct vs. Indirect Bidding Comparisons Invalid

As a result of the rule change, comparisons of direct and indirect bidding now to a few years ago are invalid. Foreign governments were buying more US debt before than they disclosed.

Sadly, the article perpetuated widely spread nonsense regarding China dumping of US debt:

"If the Chinese sold their Treasuries all at once, it could undermine U.S. markets and the economy by driving interest rates higher very quickly. Scenarios of this sort have been discussed in Washington defense-policy circles for at least a year now. Not knowing the full extent of these holdings would make it even more difficult to assess China's political leverage over U.S. finances."

The irony was China was buying more than disclosed, while the fear was otherwise. China can still be accumulating more US debt than disclosed via the secondary markets and possibly via foreign markets.

Secret Treasury Buying

Flashback January 21, 2011: China Secretly Buying US Treasuries Via UK Accounts? Trade Deficit Math; "Hot Money" Math

Floyd Norris at the Wall Street Journal thinks China May Be Masking Its Purchase of U.S. Securities

Who Is Buying US Debt?

Here are two charts from the graphic: Who Buys U.S. Debt?

China



Foreign Buyers and Sellers




Trade Deficit Math

The two charts above are not believable for a mathematical reason that Norris did not explicitly state: When the US runs a deficit, some other nation must (as a function of pure math) accumulate US assets. Those assets could be dollar reserves, treasuries, investments in US companies, US property, or US equities.

One humorous aspect of all this alleged selloff of US treasuries by China is the hyperinflationist rant "China is Dumping Treasuries" when the reality is that China is likely accumulating US dollars or US treasuries a function of trade deficit math.

My one quibble with Norris' article is his statement "If China has been buying through money managers, it may be easier at some point for it to begin selling Treasuries through the British channel without others understanding where the selling pressure is coming from."

While technically true, please remember the math. Were the US to start running trade surpluses with China, then China certainly would be an outright seller of treasuries or US$ reserves. How likely is that?

China's Treasury Holding Revised up 30%

On March 1, 2011, I noted China Holdings of US Treasuries Revised Up 30%

Annual revisions released Monday show that China's holding of US treasuries is 30% greater than reported just weeks ago.

I am not surprised given that persistent rumors of China dumping treasuries made little mathematical sense from a balance of trade standpoint. Instead, I suggested China was accumulating treasuries via trading desks in the UK. We now see that is precisely the case.

Silly Rumors Surface Constantly

Nonetheless, rumors circulate consyantly that China is dumping treasuries or soon will dump treasuries causing soaring interest rates or hyperinflation in the US.

Nuclear Dumping Theory Revisited

For a detailed rebuttal to the silly "nuclear dumping" theory and belief China and Japan will refuse to buy US debt or hold US dollars, please see ...

• Should China Dump Dollars for Commodities? What about the "Nuclear Option" of Dumping Treasuries? Can Global Trade Collapse?


• Hyperinflation Nonsense in Multiple Places

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Union-Busting is a "Godsend"; Elimination of Collective Bargaining is the Single Best Thing one Can do for School Kids

Congratulations to Governor Scott Walker for sticking to his guns. The state of Wisconsin is far better off because of it. So are taxpayers. Most importantly, so are the school kids.

Please consider Union curbs rescue a Wisconsin school district

"This is a disaster," said Mark Miller, the Wisconsin Senate Democratic leader, in February after Republican Gov. Scott Walker proposed a budget bill that would curtail the collective bargaining powers of some public employees. Miller predicted catastrophe if the bill were to become law -- a charge repeated thousands of times by his fellow Democrats, union officials, and protesters in the streets.

Now the bill is law, and we have some very early evidence of how it is working. And for one beleaguered Wisconsin school district, it's a godsend, not a disaster.

The Kaukauna School District, in the Fox River Valley of Wisconsin near Appleton, has about 4,200 students and about 400 employees. It has struggled in recent times and this year faced a deficit of $400,000. But after the law went into effect, at 12:01 a.m. Wednesday, school officials put in place new policies they estimate will turn that $400,000 deficit into a $1.5 million surplus. And it's all because of the very provisions that union leaders predicted would be disastrous.

In the past, teachers and other staff at Kaukauna were required to pay 10 percent of the cost of their health insurance coverage and none of their pension costs. Now, they'll pay 12.6 percent of the cost of their coverage (still well below rates in much of the private sector) and also contribute 5.8 percent of salary to their pensions. The changes will save the school board an estimated $1.2 million this year, according to board President Todd Arnoldussen.

Of course, Wisconsin unions had offered to make benefit concessions during the budget fight. Wouldn't Kaukauna's money problems have been solved if Walker had just accepted those concessions and not demanded cutbacks in collective bargaining powers?

"The monetary part of it is not the entire issue," says Arnoldussen, a political independent who won a spot on the board in a nonpartisan election. Indeed, some of the most important improvements in Kaukauna's outlook are because of the new limits on collective bargaining.

In the past, Kaukauna's agreement with the teachers union required the school district to purchase health insurance coverage from something called WEA Trust -- a company created by the Wisconsin teachers union. "It was in the collective bargaining agreement that we could only negotiate with them," says Arnoldussen. "Well, you know what happens when you can only negotiate with one vendor." This year, WEA Trust told Kaukauna that it would face a significant increase in premiums.

Now, the collective bargaining agreement is gone, and the school district is free to shop around for coverage. And all of a sudden, WEA Trust has changed its position. "With these changes, the schools could go out for bids, and lo and behold, WEA Trust said, 'We can match the lowest bid,'" says Republican state Rep. Jim Steineke, who represents the area and supports the Walker changes. At least for the moment, Kaukauna is staying with WEA Trust, but saving substantial amounts of money.

Then there are work rules. "In the collective bargaining agreement, high school teachers only had to teach five periods a day, out of seven," says Arnoldussen. "Now, they're going to teach six." In addition, the collective bargaining agreement specified that teachers had to be in the school 37 1/2 hours a week. Now, it will be 40 hours.

The changes mean Kaukauna can reduce the size of its classes -- from 31 students to 26 students in high school and from 26 students to 23 students in elementary school. In addition, there will be more teacher time for one-on-one sessions with troubled students. Those changes would not have been possible without the much-maligned changes in collective bargaining.

A tip of the hat to the Washington Examiner for an excellent article.

• Taxpayers are better off.
• School kids are better off
• Class sizes are down
• Struggling school districts now have a budget surplus

Teachers' unions did not want this of course. Why? Because they are blatant liars that's why. There is not a damn thing unions do for kids. Every action by public unions is for public unions and no one else.

The results are in. Elimination of collective bargaining is one of the best things, if not the absolute best thing one can do for school kids. There is no other rational way of looking at this.

We need national right-to-work laws, elimination of prevailing wage laws, and the end of all public union collective bargaining as soon as possible.

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