The Grace Commission: Good Advice Ignored

I've often heard the Grace Commission mentioned in various articles, so decided to look it up. From Wikipedia:

The Grace Commission

The Private Sector Survey on Cost Control (PSSCC), commonly referred to as The Grace Commission, was an investigation requested by United States President Ronald Reagan, in 1982. The focus of it was waste and inefficiency in the US Federal government. Its head, businessman J. Peter Grace,[1] asked the members of that commission to "be bold" and "work like tireless bloodhounds. Don't leave any stone unturned in your search to root out inefficiency."[2]

The report
The Grace Commission Report[3] was presented to Congress in January 1984. The report claimed that if its recommendations were followed, $424 billion could be saved in three years, rising to $1.9 trillion per year by the year 2000. It estimated that the national debt, without these reforms, would rise to $13 trillion by the year 2000, while with the reforms they projected it would rise to only $2.5 trillion.[4] Congress ignored the commission's report. The debt reached $5.8 trillion in the year 2000.[5][6] The national debt reached 13 trillion after the subprime mortgage-collateralized debt obligation crisis in 2008.

The report said that one-third of all income taxes are consumed by waste and inefficiency in the federal government, and another one-third escapes collection owing to the underground economy. “With two thirds of everyone’s personal income taxes wasted or not collected, 100 percent of what is collected is absorbed solely by interest on the federal debt and by federal government contributions to transfer payments. In other words, all individual income tax revenues are gone before one nickel is spent on the services [that] taxpayers expect from their government."[4]

Congress was warned. They had the chance to do something about it, and did nothing. We The People, let them do it. Now we are living the consequences.

Mr. Grace, a Democrat Businessman, was an interesting fellow:

J. Peter Grace

[...] In the Kennedy administration, J. Peter Grace was head of the Commerce Department Committee on the Alliance for Progress.[5] President Reagan, in announcing the selection of J. Peter Grace to lead The Grace Commission on waste and inefficiency in the Federal government, said:

We have a problem that's been 40 years in the making, and we have to find ways to solve it. And I didn't want to ruin your appetites, so I waited till now to tell you this, but during the hour we're together here eating and talking, the Government has spent $83 million. And by the way, that includes the price of your lunch. [Laughter] Milton Friedman is right. There really is no such thing as a free lunch. The interest on our debt for the last hour was about $10 million of that.

In selecting your Committee, we didn't care whether you were Democrats or Republicans. Starting with Peter Grace, we just wanted to get the very best people we could find, and I think we were successful.

I'll repeat to you today what I said a week ago when I announced Peter's appointment: Be bold. We want your team to work like tireless bloodhounds. Don't leave any stone unturned in your search to root out inefficiency.[6]

Mr. Grace, a Democrat, was asked what he would say to the campaign theme of Walter Mondale, the 1984 Democratic Presidential candidate, that higher taxes would be required to ease the deficit regardless of who wins the November election.

"I'd tell him he's nuts," Grace said. "He's wrong. He's wrong."[7] [...]

   

Political shifts in Europe

Right Wing’s Surge in Europe Has the Establishment Rattled

[...] All over, established political forces are losing ground to politicians whom they scorn as fear-mongering populists. In France, according to a recent opinion poll, the far-right National Front has become the country’s most popular party. In other countries — Austria, Britain, Bulgaria, the Czech Republic, Finland and the Netherlands — disruptive upstart groups are on a roll.

This phenomenon alarms not just national leaders but also officials in Brussels who fear that European Parliament elections next May could substantially tip the balance of power toward nationalists and forces intent on halting or reversing integration within the European Union.

“History reminds us that high unemployment and wrong policies like austerity are an extremely poisonous cocktail,” said Poul Nyrup Rasmussen, a former Danish prime minister and a Social Democrat. “Populists are always there. In good times it is not easy for them to get votes, but in these bad times all their arguments, the easy solutions of populism and nationalism, are getting new ears and votes.”

In some ways, this is Europe’s Tea Party moment — a grass-roots insurgency fired by resentment against a political class that many Europeans see as out of touch. The main difference, however, is that Europe’s populists want to strengthen, not shrink, government and see the welfare state as an integral part of their national identities.

The trend in Europe does not signal the return of fascist demons from the 1930s, except in Greece, where the neo-Nazi party Golden Dawn has promoted openly racist beliefs, and perhaps in Hungary, where the far-right Jobbik party backs a brand of ethnic nationalism suffused with anti-Semitism.

But the soaring fortunes of groups like the Danish People’s Party, which some popularity polls now rank ahead of the Social Democrats, point to a fundamental political shift toward nativist forces fed by a curious mix of right-wing identity politics and left-wing anxieties about the future of the welfare state.

“This is the new normal,” said Flemming Rose, the foreign editor at the Danish newspaper Jyllands-Posten. “It is a nightmare for traditional political elites and also for Brussels.”

The platform of France’s National Front promotes traditional right-wing causes like law and order and tight controls on immigration but reads in parts like a leftist manifesto. It accuses “big bosses” of promoting open borders so they can import cheap labor to drive down wages. It rails against globalization as a threat to French language and culture, and it opposes any rise in the retirement age or cuts in pensions.

Similarly, in the Netherlands, Geert Wilders, the anti-Islam leader of the Party for Freedom, has mixed attacks on immigration with promises to defend welfare entitlements. “He is the only one who says we don’t have to cut anything,” said Chris Aalberts, a scholar at Erasmus University in Rotterdam and author of a book based on interviews with Mr. Wilders’s supporters. “This is a popular message.”

Mr. Wilders, who has police protection because of death threats from Muslim extremists, is best known for his attacks on Islam and demands that the Quran be banned. These issues, Mr. Aalberts said, “are not a big vote winner,” but they help set him apart from deeply unpopular centrist politicians who talk mainly about budget cuts. The success of populist parties, Mr. Aalberts added, “is more about the collapse of the center than the attractiveness of the alternatives.” [...]

Well,they ain't the Tea Party. Wasn't it Margret Thatcher who said, "The problem with Socialists is, they inevitably run out of other people's money to spend". It's a reality that a growing majority of people seem unwilling to face. I'm not even saying they shouldn't be socialists. I'm saying, everyone needs a budget, NO ONE can spend more money than they have, without continually borrowing until they get into serious deep trouble. That's not politics, it's MATH. And common sense.

     

A country without an operating budget

It's US. Since 2009:

1600 Pennsylvania Avenue and 1600 Days Without a Budget

[...] So here’s a little primer on the fiscal State of the Union.

According to the US Debt Clock, we are $16,970,000,000 in debt. The US Debt Clock is an unofficial tally of our excessive spending.

The federal deficit increased by $146 billion in August, as reported by the CBO four days ago. Yet this conflicts with reports from the Treasury Department.

Yet as reported by CNSnews, “According to the Daily Treasury Statements that the Treasury publishes at 4:00 p.m. on each business day, the debt subject to the legal limit has remained at exactly $16,699,396,000,000–or about $25 million below the legal limit–every day since May 17.”

This makes 118 days, with the September 12 report being the most current, that the debt has stayed at $16,699,396,000,000.

Why is this important? The current debt ceiling limit is $16,699,421,095,673.60. According to the debt clock, however, and if CBO reports for June, July, and August were added to the Treasury statements amount since May 17th, we would be way past the debt ceiling limit. In fact, August alone would have crossed the threshold. So what is our current debt?

Incidentally, the reason why Congress even has to consider the question of funding the government or shutting it down past September 30 (the last day of the fiscal year) is that there is no operating budget. The last time the Senate passed a budget was April 29, 2009. Nearly the entirety of Obama’s time as President has been this way. For the Senate to abrogate its basic fiduciary responsibilities in such a major way is unconscionable. [...]

Is "unconscionable" becoming the new "commonplace"? How can the Treasury just "stop" the debt clock at May 17? It makes their daily statements completely meaningless. Ditto the inflation index, which no longer includes the cost of food or fuel. And all this phoney talk about the "approaching" debt ceiling, when we have already passed it. What happened to reality? How many people are actually paying attention?

A household or a business without a budget gets into trouble quickly. Why should a country be any different?
     

Solve Financial Crisis with a single coin?

Yeah, sure. Geithner's just gotta mint one before he leaves the Treasury Department:

A Trillion-Dollar Coin Brings a Jackpot of Jests

[...] WASHINGTON — A bizarre but seemingly legal idea to get around the country’s debt ceiling using a trillion-dollar coin is having its day in Washington.

The proposal, which originated in economics and business blogs and has a vanishingly remote chance of happening, has won ample attention and garnered new controversy as Republicans and the White House seem to be headed for yet another standoff over a legal limit on the country’s debt — a fight that may come as soon as next month.

[...]

The workaround would come from exploiting a 1997 law that allows the Treasury to “mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the secretary, in the secretary’s discretion, may prescribe from time to time.”

The idea was that a secretary might authorize the creation of a commemorative eagle coin, for instance, to be put on sale for collectors. But the law inadvertently gave the Treasury secretary the power to mint, say, a $1 trillion coin, or even a $5 trillion coin, or even a $1 quadrillion coin.

Rather than selling it, he might deposit it at the Federal Reserve. Presto! The shiny new asset would erase a trillion dollars in debt liabilities. Then, the Treasury could carry out its spending — including disbursing Social Security checks and Medicare payments — without hitting the ceiling, a cap on total debt issuance that currently stands at about $16.4 trillion.

When Congress raised the ceiling again, the administration could then take the platinum coin and destroy it. With a token the size of a penny, the White House could head off another round of Congressional brinkmanship and another run at a fiscal cliff.

Blog commentators came up with the idea in 2010, and it gained some attention from financial writers and monetary policy followers during the 2011 debt ceiling standoff. Now, with Republicans and the White House again at odds, the country is expected to run out of spare cash sometime between mid-February and early March. [...]

I find it unbelievable that ADULTS can even talk like this. Talk about clueless. And people wonder why we're in sh*t street.

How about a REAL solution:

Reforming a Congress that spends like teenagers

It used to be called common sense. Remember common sense? I do. And I say, bring it back!
   

The Literal High Price (or prices!) of QE3

 QE3 Will Further Destroy U.S. Dollar

  [...] The actions of the Federal Reserve have a dramatic impact on the lives of every single American. The central bank essentially controls the value of the money that we have in our pockets. QE1 and QE2 can be blamed in large part for the skyrocketing price of food at the grocery store. The same supply and demand rules apply to money. The more dollars we have in the circulation, the less valuable the money becomes. The Fed is a main reason why it’s costing us more dollars to fill up our gas tank nowadays.

For decades, Rep. Ron Paul (R-Texas) was the lone voice in Washington speaking out against the Federal Reserve. He writes that “the inflation tax, while largely ignored, hurts middle-class and low-income Americans the most. Simply put, printing money... dilutes the value of the dollar, which causes higher prices for goods and services. Inflation may be an indirect tax, but it is very real — the individuals who suffer most from cost of living increases certainly pay a ‘tax.’” QE1, QE2 and QE3 are nothing more than stealing wealth from the people through the hidden tax of inflation.

Our Founding Fathers would surely be outraged by the existence of the Fed. These great men believed in a limited government that was held accountable to the people. The Federal Reserve, which is generally regarded as a quasi-governmental entity, has less oversight than even the Central Intelligence Agency (CIA). The most powerful central bank in the world makes all of its decisions without even a single vote from our elected representatives in Congress.

You can bet that the Fed is up to no good behind closed doors. Due to a provision under the misguided Dodd-Frank financial overhaul law, the Government Accountability Office (GAO) conducted a one-time, watered-down audit of the central bank back in July. It gave the American people their first peek into the central bank’s books but prevented investigators from peering into their deliberations on interest rates and the most crucial transactions of the Fed. We still need to pass a true audit the Fed bill like Ron Paul’s Federal Reserve Transparency Act of 2011 that would require comprehensive audits on a regular basis.

The first ever audit revealed that the central bank “loaned” out $16 trillion at a zero percent interest rate to corporations and banks around the world during the height of the financial crisis. To put that number into perspective, the Gross Domestic Product (GDP)—the value of all economic activity within a country— of the United States is only $14.12 trillion. It’s no wonder that the Fed is desperately trying to protect their privileged secrecy. 
[...]

There is much evidence to demonstrate that the Federal Reserve is a major part of the problem, not the solution:

Fed Up with the Fed?

[...] The policies of this administration make it risky to lend money, with Washington politicians coming up with one reason after another why borrowers shouldn't have to pay it back when it is due, or perhaps not pay it all back at all. That's called "loan modification" or various other fancy names for welching on debts. Is it surprising that lenders have become reluctant to lend?

Private businesses have amassed record amounts of cash, which they could use to hire more people— if this administration were not generating vast amounts of uncertainty about what the costs are going to be for ObamaCare, among other unpredictable employer costs, from a government heedless or hostile toward business.

As a result, it is often cheaper or less risky for employers to work the existing employees overtime, or to hire temporary workers, who are not eligible for employee benefits. But lack of money is not the problem.

Those who are true believers in the old-time Keynesian economic religion will always say that the only reason creating more money hasn't worked is because there has not yet been enough money created. To them, if QE2 hasn't worked, then we need QE3. And if that doesn't work, then we will need QE4, etc.

Like most of the mistakes being made in Washington today, this dogmatic faith in government spending is something that has been tried before— and failed before. [...]

Sowell goes on to show how history is repeating itself.

Owning a business is similar in some ways, to raising a child.  You have to anticipate all of it's needs in advance, and provide for them.   When the economic climate is uncertain, you have to maintain cash reserves to plan to deal with the unexpected, to insure that your business will continue to survive.  The current Administration seems to have no clue about this, just as it has failed to learn the lessons of history.

Germany in the 1920's learned a very hard lesson about Quantitative Easing, as the article at the following link demonstrates, with pictures of the actual currency in the final months. Absolutely horrific:

Quantitative Easing, Weimar Edition

Would it not be better to learn from the mistakes of those who have gone before us, instead of repeating those mistakes ourselves?    

At Last: the Truth about the Euro Crisis

At last, someone has said it. It ain't pretty, but it's pretty true:

Europe: No solution 'til it gets much worse

[...] By one count, this is the 17th summit dealing with the Euro crisis. Why do they all disappoint on a fundamental level?

The answer is fairly simple: The real solutions will require painful actions that conflict with national myths in key countries and the politicians do not believe the public is yet scared enough to accept that much pain.

Some political problems, like our own debt ceiling debate of last summer, cannot be solved until the very last moment, because the external pressure has to be so high that politicians can gain forgiveness for making painful choices.

It also becomes less attractive to do the wrong thing, because it would be clear that the politicians triggered the ensuing disaster.

The ultimate solution to the crisis will likely require the strong countries to guarantee the debts of the weak countries, a commitment national leaders cannot explain to their voters unless the alternative is the prospect of immediate disaster.

Germany has its lowest unemployment rate in years, making it a bit hard to convince the public that everything is going to pieces. The strong countries also do not trust the weak to make the necessary reforms to avoid having the guarantees from the strong nations turn into real costs when the struggling countries default.

Therefore, the ultimate solution will also require countries in the euro area to give centralized European authorities a veto power over their budgets. Voters in the weak countries are not yet frightened enough to allow their leaders to hand over this much power to Brussels or Frankfurt. [...]

The author believes they can get through it, but only at the height of the crisis, at the last minute. It seems inevitable. And what they are preparing for now.


Also see:

Euro Crisis an excuse for consolidation of power?

EU Member Nations to Sacrifice Sovereignty?
     

EU Member Nations to Sacrifice Sovereignty?

They may find it difficult not to:

Euro crisis: It's still not over

[...] Banking union: European Union leaders are expected to discuss plans to form a banking union in Europe when they hold a summit June 28-29.

The EU proposal would include a single deposit guarantee organization covering all banks in the union, something similar to the FDIC in the U.S..

There would also be a common authority and a common fund that would deal with bailouts needed for the cross-border banks that are major players in the European banking system.

In addition, there would be a single EU supervisor with ultimate decision-making powers for the major banks, and a common set of banking rules.

The move would represent a step towards greater centralization of European authority. But it remains to be seen if all 17 eurozone governments will agree to sacrifice sovereignty for the sake of the union. [...]

I've posted previously that those who've created this crisis are now using it to consolidate their power. Sure looks like it.

The article also mentions that France as well as Greece, are having elections on June 17th, which are expected to move both further left politically, probably in the hopes of avoiding austerity measures. I suspect that further consolidation of the EU will then be offered as the only possible solution. We shall see.
     

Are we are moving beyond peak oil and into "peak everything."?

Exactly one year ago, I posted about peak oil. But can that concept be applied to ALL the worlds resources? Someone thinks so:

The Earth is full

(CNN) -- For 50 years the environmental movement has unsuccessfully argued that we should save the planet for moral reasons, that there were more important things than money. Ironically, it now seems it will be money -- through the economic impact of climate change and resource constraint -- that will motivate the sweeping changes necessary to avert catastrophe.

The reason is we have now reached a moment where four words -- the earth is full -- will define our times. This is not a philosophical statement; this is just science based in physics, chemistry and biology. There are many science-based analyses of this, but they all draw the same conclusion -- that we're living beyond our means.

The eminent scientists of the Global Footprint Network, for example, calculate that we need about 1.5 Earths to sustain this economy. In other words, to keep operating at our current level, we need 50% more Earth than we've got.

[...]

Even the previous heresy, that economic growth has limits, is on the table. Belief in infinite growth on a finite planet was always irrational, but it is the nature of denial to ignore hard evidence. Now denial is evaporating, even in the financial markets. As influential fund manager Jeremy Grantham of GMO says: "The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash." Or as peak oil expert Richard Heinberg argues, we are moving beyond peak oil and into "peak everything."

Despite this emerging understanding, the growth concept is so deeply ingrained in our thinking that we will keep pushing economic growth as hard as we can, at whatever cost is required.

As a result, the crisis will be big, it will be soon, and it will be economic, not environmental. The fact is the planet will take further bludgeoning, further depleting its capital, but the economy cannot -- so we'll respond not because the environment is under great threat, but because the science and economics shows that something far more important to us is jeopardized -- economic growth.

[...]

So when this crisis hits, will we respond or will we simply slide into collapse? Crisis elicits a powerful human response, whether it be personal health, natural disaster, corporate crisis or national threat. Previously immovable barriers to change quickly disappear.

In this case, the crisis will be global and will manifest as the end of economic growth, thereby striking at the very heart of our model of human progress. While that will make the task of ending denial harder, it also means what's at risk is, quite simply, everything we hold to be important. The last time this happened was World War II, and our response to that is illustrative of both the denial and delay process and the likely form our response to this crisis will take. [...]

It's not all grim. The author seems to think we may get through it somehow, if we adapt.

It's food for thought. But consider, what if the "peak oil" theory is completely wrong:

Fossil Fuels: They've only just begun

Is the financial crisis really being caused by growth, or is growth just going to be the official scapegoat?
     

Where the "Debt Crisis" is going

This is one of the most concise and direct explanations I've read:

How The Debt Crisis Will End

It became increasingly clear this month how the debt crisis will end - and it is not going to be comfortable.

The latest phony solution is for the large, "responsible" countries to demand more fiscal responsibility from the smaller and purportedly "less responsible" countries. In Europe, Germany's Angela Merkel and France's Nicolas Sarkozy are demanding that other European states give up some of their sovereignty and agree to strict limits on their deficit spending.

President Obama and Treasury Secretary Timothy F. Geithner, as well as British Prime Minister David Cameron, have been lecturing the European Union about being more fiscally responsible. How odd and hypocritical, based on their own behavior.

Given normal growth of roughly 3 percent, annual deficits of 3 percent or less tend not to be a problem. Small deficits tend not to increase the ratio of debt to gross domestic product (GDP) and debt service as a percent of GDP. That is why the annual deficit limit under the European Union Maastricht Treaty was set at 3 percent.

The table on the right shows the dismal record of the major countries when it comes to hitting the annual deficit target during the 13 years that the euro has been in existence.

Of the 17 eurozone countries, only Finland and Luxembourg have been in compliance all 13 years. The three biggest eurozone countries, Germany, France and Italy, have been out of compliance more years than they have been in compliance. The three big, democratic, non-eurozone countries, the United States, the United Kingdom and Japan, also have had dismal records in keeping their own deficits under the prudent 3 percent rule.

The simple fact is that most democracies are unable to police their own fiscal behavior, let alone the behavior of other countries.

Europe not only is sitting on a fiscal time bomb, which already is starting to explode, but also has a demographic time bomb with a rapidly aging population. Despite the fiscal crisis of the past few years, which is accelerating, most of Europe has done next to nothing to cut back entitlements to a manageable level, which is equally true of the United States.

Looking at the actions of the European leaders, rather than listening to their words, it is obvious that they increasingly are using the European Central Bank to buy the sovereign debt of their members after repeatedly saying they would not. [...]

Read the whole thing, to see the table of countries referred to, and to read the blunt but to-the-point summation of the article. While it's not what most people want to hear, it's none the less refreshing to hear someone being honest about what's really going on, and where it's going. But I would say the details of the "transition" it speaks of, and what comes after, is anyone's guess.

     

Will Greece, Italy and other PIIGS sink the Euro?

For my fishtank, I got one of those Greco-Roman Ruins backgrounds. I thought perhaps, to make it contemporary, all I needed to do was add a Euro ATM machine:


It would be ironic if Greece and Italy, from which the principles of Western Civilization sprang, turn out to be also the springboard for it's collapse and ruin.

Is it really that bad? I can't say for sure. But it does look alarming, as the Europeans seem unable to contain the problem:

Spain and France: Market says you're next!

NEW YORK (CNNMoney) -- Next up on the 2011 Europe Financial Calamity tour? Spain and France.

Yes, government bond yields in Italy are still climbing -- even after the resignation of Silvio Berlusconi. With the Italian 10-year back above 7%, it's clear that investors are still very nervous about the debt problems in Europe's boot.

But perhaps more alarming is the fact that the market is now increasingly wary of Italy's Mediterranean neighbors as well.

Yields on Spain's 10-year bond have climbed to about 6.3%. That's dangerously close to the 7% level that many investors feel could signal the need for a Spanish bailout.

And France's bonds are starting to look like French toast. With yields now around 3.67%, that puts the "pain" in pain perdu. (Yes, I watch Top Chef.)

[...]

The verdict from the experts I spoke to: Unless the European Central Bank steps up to the plate with a real plan to stop the bleeding, Europe will keep bleeding.

"The market keeps looking ahead to the next potential victim in Europe," said Jurgen Odenius, chief economist for Prudential Fixed Income in Newark, N.J. "Volatility is rising because there is no comprehensive, credible solution. It's becoming readily apparent that there's only one game in town, an ECB rescue."

Europe: New leaders, same debt crisis

Odenius said he doubts that Europe will be able to convince China and other global sovereign wealth funds to put up enough capital to increase the leverage of the European Financial Stability Facility bailout fund. That means the ECB may have to be the proverbial lender of last resort.

If the ECB does not take more bold action -- namely a strong commitment to keep buying more sovereign debt -- Odenius thinks Spanish yields may soon hit 7% like in Italy. And if that happens, France could also be in serious trouble.

"The French have problems in their banking system related to Italy, Spain and other countries. Investors are not suggesting that France is a crisis just yet, but it is murky," he said.

Michelle Gibley, senior market analyst with the Schwab Center for Financial Research in Denver, agreed. European leaders need to bust out a "bazooka" to deal with the debt crisis, she said.

[...]

But the problem facing Europe right now is that leaders haven't even acknowledged they have a big financial weapon, let alone talk about a willingness to use it.

"I am concerned that European policy makers have yet to find the bazooka," Gibley said. "The crisis is rolling from one nation to the next. The contagion has not been contained."

Eurozone teeters on edge of recession

Her biggest worry is that European governments are simply choosing to focus on austerity to deal with their fiscal problems. But while budget cuts, higher taxes and more responsible spending can help cut onerous debt loads, such actions do nothing to help stimulate their economies.

"The debt crisis is now potentially entering a dangerous cycle where austerity just reduces growth, borrowing costs continue to rise and credit ratings get downgraded. That's because nobody is addressing growth," Gibley said. "How much more turmoil does there need to be before the ECB does more?" [...]

But how much more CAN they do? Can they stimulate economic growth, sufficient enough to stay on top of their debt payments? If they don't have a bazooka, will they get one in time?

It all remains to be seen. Hopefully not on a fish tank backdrop.


Also see:

Why Greece is in trouble. And a warning for us.
     

Beggars can't be choosers. Or CAN they?

Greece to hold referendum on Europe debt deal

[...] "This referendum will be a supreme act of democracy and of patriotism," Papandreou said, apparently catching many lawmakers by surprise. "The [Greek] citizen will be called upon to say a big 'yes' or 'no' to the new loan arrangement."

But asking voters to support harsh austerity measures that were part of a painstakingly crafted bargain with Greece's creditors casts uncertainty over the country's ability to meet its part of the deal.

Greece is facing the possibility of a devastating default that could imperil the fate of Europe's single currency, shatter global markets and get the country evicted from the 17-nation Eurozone.

[...]

Angelos Tolkas, a government spokesman, said details involving a referendum were under review. It would be the first such public ballot in Greece since 1974, when voters decided to abolish the monarchy after a brutal military dictatorship.

"It will most likely take place in January and it will be binding," Tolkas said.

[...]

A poll published in the To Vima weekly newspaper over the weekend showed 6 in 10 Greeks opposing last week's rescue deal, many fearing more cutbacks in wages and jobs. Still, 54.2% supported the idea of a referendum, while 40% believed Parliament should decide whether the deal makes sense for Greece.

Whispers about a referendum had been heard for weeks. Still, Papandreou surprised opposition rivals, and even some of his aides.

Members of the Communist Party referred to the move as blackmail. Rival conservatives said Papandreou was dangerous, with New Democracy party spokesman Yannis Michelakis saying that instead of "withdrawing honorably, [Papandreou] dynamites everything."

Senior government officials said Papandreou could push the agreement through Parliament should the public knock down the debt deal in the referendum.

Whatever the contingency plan, Christopher Pissarides, a Nobel economics laureate, told Sky News, "a rejection [of the European deal] will be disastrous."

"Greece will default immediately," Pissarides said, "and I can't see them staying in the euro having rejected such a vital EU plan."

So if they decide having half of their debt eliminated isn't good enough, they will take the global economy down with them? I thought kicking them out of the EU was not an option?

Pure democracies always destroy themselves. Is that what we are going to see here? The Greek president using his "dynamite" and going out with a bang? And taking the global economy with him?

I guess we'll see in January, won't we?


Also see:

Why Greece is in trouble. And a warning for us.

     

The Itchy & Scratchy Junker & Rompuy Show

Would you buy a used car from these guys? I wouldn't:

Eurogroup president Jean-Claude Junker and
Herman Van Rompuy, head of the European Council

EU officials scramble to solve the crisis

[...] As a work around, officials are reportedly considering a plan to use EFSF funds to provide loans that governments can use to partially insure new issues of domestic debt. But this would effectively add to already unsustainable levels of public debt.

"All of this is stupidity," said Columbia Business School professor David Beim. "All they can think to do is get an ever larger fund and throw it into ever worse assets."

Beim, like many economists, argues that the first step toward stabilizing the eurozone is to restructure the Greek government's debt load. All else merely delays the inevitable and perpetuates the crisis. [...]

If you read the full article, it sounds like it's all about going nowhere quickly. Re-arranging deck chairs on the Titanic. Borrowing from Peter to pay Paul.

It sure doesn't inspire confidence. I wouldn't much care what they do, except that it will have global consequences. And what might those be?
     

The Great Irony in the Wall St. Protests

Well, at least the most obvious one:


Down With Evil Corporations! [Photo]

[...] Last night, Mark Levin used a caller as a foil to deconstruct this idiocy.

• Who's the biggest health insurer in the country?
• Who's the biggest bank in the country?
• Who's the biggest land-owner in the country?
• Who runs the biggest retirement plans in the country?
• And who alone has the force of law to force you to comply with their decisions?

That would be the federal government, an extra-constitutional monolith that controls every aspect of our lives, from shower-heads, to automobile bumper design, to thermostats, to building codes, to carbon dioxide emissions, to the size of toilet tanks, to health insurance plans, to... [...]

It goes on to make a comparison with the Soviet Union.

Too much government. It's not the answer; it's the PROBLEM.

And there's one more Great Irony to consider:


Occupy Wall Street: the "herbal tea party"

I know where they're coming from - but...

Do you want chamomile or patchouli in your hot water?

I was born and raised in Africa and to me these "impoverished" neo-hippies are risible.

Taylor Marvin checks the math of the above image, which has been making the rounds: [...]

It's not far off.


Also see:

Adbusters behind "Occupy Wall Street"

     

Is the EU financial crisis more important than ours because it's possible financial collapse is more imminent?

Or is it?

Why Europe Won’t Implode

The global financial system is currently being roiled by one thing and one thing only: the fate of Europe. This past weekend, high-level meetings of both the International Monetary Fund and the G20 nations took place in Washington, and the predominant focus was on Europe and whether the nations of the European Union and the euro zone would be able to stave off what increasingly appears to be a make-or-break crisis over banks, the sovereign debt of Greece, and the stability of the international financial system.

[...]

Contrary to what many are now predicting, Europe—reeling though it is—will not implode.

The fear is that the European Union as constituted doesn’t have the ability to move quickly enough. It isn’t the size of Greek debt per se, but the fear that the hundreds of billions of dollars potentially exposed will so undermine European banks that the whole system—and that means the entire global banking system—might be imperiled. With so many actions dependent on each of the legislative branches of the 17 euro-zone countries, there is a viable concern that real-world events will move far more rapidly than the political institutions can respond. A Greek default on debts would then trigger various runs on French and German banks, which would then lead to massive selling of any liquid assets anywhere—and stocks above all—which would then cascade around the globe in a fashion not unlike what happened after Lehman Brothers collapsed three years ago this month.

[...]

The widely shared belief is that the United States is either in or on the verge of a recession; that China is slowing precipitously based on weakening exports, imploding urban real-estate bubbles and slack consumer demand; and that Europe is on the verge of an unraveling as historic as the forces that brought it together 20 years ago when the European Union was formed.

So the question is, will Europe implode? Contrary to the widespread assumption, I think not.

It isn’t just that Angela Merkel, Germany’s answer to Margaret Thatcher, has drawn what for her is an unequivocal line that Greece will not leave the European Union or the euro zone. It’s that slowly, sloppily, the governments of Europe are awakening to the realization that since they have tethered their collective economic fate to each other, the costs of unraveling are so immense as to be untenable. No government feels comfortable demanding more funds to bail out Greece or shore up banks or create a backstop for the tenuous finances of Italy. But each government understands at some animalistic level that no electorate will celebrate the consequences of doing too little. Even those supposedly dour, disapproving burghers of Düsseldorf who are tired of bailing out what they see as profligate Greeks would blanch at the market consequences of the end of the euro. Germany doesn’t just pay to maintain that union; it benefits mightily as well.

There is no way to prove that the officials of the EU will access their better angels at the last moment (however auspiciously named the German chancellor is). But this crisis is shaping up as the European version of the American debt-ceiling debate: messy, disheartening, but when pushed to stare at the alternatives, deeply clarifying. [...]

This article makes some good arguments as to why the EU will try to hang in there and make it work; they have invested too much in it. They won't let the EU unravel, because the consequences of that aren't likely any better than what they are facing now.

But the article does not convince me that they can avoid financial implosion. Sure, they are motivated to stop it. Yes, they would not just "let" it happen. But the question is, do they have the power to STOP it from happening?

Clearly, they are going to try. And clearly, whatever happens, the effects will be felt globally, in our Brave New World. Lets hope it's Brave enough.


Also see:

Merkel risks rebellion on euro rescue fund

     

Advice for America from a Mexican Tycoon

Carlos Slim Fixes the Economy

Mexican telecom tycoon Carlos Slim Helú—whose family fortune of about $74 billion makes him the world’s richest human (well ahead of Bill Gates and Warren Buffett on the Forbes list of billionaires—plays against type.

[...]

How do we fix this recession?

“With the same things that were done in 2000 and 2001, when it was temporarily solved with big expenditures and very aggressive monetary and fiscal policy,” he tells me. “Aside from lowering taxes, we should be directing more money to the real economy, not to the financial economy. The volatility of the markets is so great that more is won or lost in a single day than in five years of accumulated interest. And that’s not a good thing.”

I ask if he agrees with President Obama’s so-called Buffett rule, which would mandate that rich people like Warren Buffett—who benefits from a 15 percent tax rate because his money comes from capital gains—pay at least the same rate as their secretaries.

“I don’t know what Warren Buffett pays,” Slim says, “but I think that the fiscal policy should be fair. You don’t need to raise taxes on rich people, because they create capitalization and investment. But you need to tax speculation—meaning capital gains. Why should it be just 15 percent? Salaried people pay 35 percent. Why shouldn’t that be paid on capital gains?”

Anything else?

“The welfare policies that you are following—you and Europe—are unsustainable,” Slim argues. “You cannot have people retiring at 60 years old, and you cannot provide universal health care the way you do. That’s crazy. The focus should be the support of small- and middle-size business. That is where the employment is. And there should be investment in the real economy. Infrastructure is an example. And the best way to do that is with the private sector. It’s more efficient.”

I ask what should be done about the terrible violence surrounding the illegal Mexican drug trade, with grisly murders in the tens of thousands.

“It’s a problem coming from the United States,” Slim says.

Because of the demand?

“Because of everything. You stay with the money and the drugs. We stay with the weapons and the violence. And you’re selling the weapons to the consumers in Mexico. And the retail price [of the drugs] is, I don’t know how much bigger, let’s say 10 times in the U.S. what it is in Mexico. And that means the demand is here and the money is here. It’s like what used to happen during Prohibition in Chicago. You had a lot of violence there.”

What’s the solution?

“Follow the money.”

Would it help to legalize the drugs and, as with Prohibition, eliminate the incentive for crime?

“It doesn’t ‘help,’ ” Slim says. “It finishes.” [...]

Interesting. The article has a photo.
     

Borrowing from Peter to pay Paul?

American Dollars to prop up the Euro:

Central Banks Act in Concert to Ease Fears on Europe Debt

FRANKFURT — Worried that Europe’s debt impasse posed a growing threat to the global financial system, the world’s major central banks moved Thursday to assure that European banks would not run short of cash as troubled nations like Greece and Italy sought to stabilize their economies.

The central banks, in a coordinated action intended to restore market confidence, agreed to pump United States dollars into the European banking system in the first such show of force in more than a year. Some banks have found it hard to borrow dollars as American lenders grew nervous about their financial condition.

Thursday’s action, coming almost exactly three years after the collapse of the investment bank Lehman Brothers, lifted global stock markets, sharply increasing the value of shares in banks heavily exposed to debt from Greece and the other struggling members of the euro zone. The euro, which had been falling in recent days, rebounded.

The central bank action came as European finance ministers and other policy makers were gathering in Wroclaw, Poland, for meetings on Friday and Saturday. The United States Treasury secretary, Timothy F. Geithner, who was scheduled to attend, was expected to urge European officials to act more aggressively to contain the sovereign debt crisis, which has already begun to undercut growth in Europe.

While the move will relieve some pressure on troubled banks, it does not address the underlying problems that made it difficult for the banks to borrow dollars on their own.

[...]

The European Central Bank said it would allow banks to borrow dollars for up to three months, instead of just for one week as before, giving them breathing room for the rest of the year. The E.C.B. said it was acting in cooperation with the Federal Reserve of the United States, the Bank of England, the Bank of Japan and the Swiss National Bank.

In recent days some European banks have faced difficulties in borrowing dollars, whether from other banks or from money market funds in the United States. There was fear that if they could not borrow dollars, they would be forced to cut off loans to American companies or sell dollar-denominated assets, perhaps forcing prices down in already unsteady markets.

The move was possible under deals between the central banks that were already in existence, and the Fed saw no need to make an announcement on Thursday.

While there now is more certainty that banks will have access to funds, deeper issues remain unresolved, including whether they have enough capital to withstand a possible default by Greece on its government debt.

An official forecast warned Thursday that growth in Europe would come “to a virtual standstill” toward the end of the year. It predicted, though, that Europe would just barely avoid a double-dip recession.

[...]

Analysts said they expected Mr. Geithner to press European ministers in Wroclaw to increase the resources available to their bailout fund for the euro zone countries. But even the expansion of the fund to 440 billion euros ($611 billion), agreed to in July, has yet to be ratified. There is some worry that countries guaranteeing the bailout fund might themselves face doubts about their own credit. [...]

Gee, ya think?

Worried about losing your high credit rating? Just borrow from somebody whose already lost theirs.

     

"The psychological pain will be much greater than the Great Depression, even though the physical conditions will be much better."

That's a quote from an author selling a book about the coming burst of the "dollar bubble", and what changes it will bring to life in the USA.

I've posted previously about dangers to US currency, about various scenarios such as a complete collapse of our currency similar to (or even worse than) the hyper inflation of 1920's Germany.

But what if, the actual consequences were not as bad as any of those? Or even as bad as the Great Depression of the 1930s? Authors of a new book make a similar claim, but they also say it's going to SEEM worse to us, because we've gotten so used to easy money and credit for so long.

Their book is called "Aftershock":

Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown

From the Inside Flap
From the authors who accurately predicted the domino fall of the conjoined real estate, stock, and private debt bubbles that led to the financial crisis of 2008 and 2009, now comes the definitive look at what is still ahead in 2012 and beyond—and what investors can do right now to protect themselves.

Based on the authors' unmatched track record of precise predictions in the two landmark books America's Bubble Economy and Aftershock, this Second Edition of Aftershock updates the original book by more than 35 percent with fresh analysis of the latest economic developments, plus offers new in-depth advice for how readers can prepare now for protection and profits in the next global money meltdown.

The second edition of Aftershock shows readers:

Why the latest actions by the U.S. Federal Reserve will eventually damage the dollar and hurt investors worldwide

How future rising inflation and interest rates will harm your specific investments, and what to do about it

The future fall of China's bubble economy, as well as current and future problems with European debt

Detailed investment advice about real estate, retirement, annuities, life insurance, and much more

What's next for stocks, bonds, currencies, commodities, and other assets

How to buy and own gold and silver before, during, and after the coming Aftershock

O.K. fine, another one of THOSE books. They all seem to say "buy gold", which is fine if you got plenty of spare cash lying around. Sorry, none of mine is spare or lying around, it's all working. Then they usually offer advice about managing your stock portfolio, your 401K, and other things I don't even have.

I haven't read this book, so I don't know if it's like that. I don't even know if I would buy it. So why am I writing about it?

Because, the authors claim that their publishers made them delete a chapter from the book, that talks about what life is going to be like in the USA after the currency bubble bursts, on the grounds that it was "too grim".

Well, that did make me curious. And it turns out, they have made that 20 page chapter available as a free download on their Amazon page:

More to Explore: Bonus Chapter
Read a bonus chapter (PDF)--available exclusively on Amazon.com--which details the authors' predictions and recommendations for a post-dollar-bubble world.

Now of course I know this is a promotional device for selling the book. Duh. But that doesn't mean that some of the ideas expressed aren't interesting. Lets have a look at a few excerpts and see:

[...] When the dollar bubble collapses, the huge government debt bubble will fall, too. That means the falling value of the dollar will have caused enough foreign investors to become concerned enough about the value of their dollar-denominated investments that they will no longer be willing to buy U.S. government bonds at a reasonable price. This means the government will not be able to refinance its debt (just like a company that loses the faith of its creditors) and instead the government will have to resort to inflation, tax increases, and budget cuts to deal with the situation (see Chapter 3).

Like a family without their credit cards, the U.S. government will be forced to live within the constraints of its actual income, which at this point will be a rapidly declining tax base, much like what California is now facing, but far worse because the U.S. government became very comfortable receiving so much income from deficit financing. Inflation would normally be an additional tool for the government to raise money, but inflation can only be raised so far without destroying a modern industrial economy, such as that in the United States. The amount of inflation the government can feasibly run was discussed in Chapter 3 (about 50 to 100 percent).

That means the government will not be able to create any big stimulus packages or tax cuts or anything of the sort. It will have to cut, cut, cut spending so it can live on its income. Some may see this as a refreshing change—a government that lives within its means. But it will not feel very refreshing. Many things we take for granted, like large pensions, will have to be curtailed. We have gotten very comfortable with a government that always has money and never has to worry about running out; a government that never has to raise taxes to fund wars or stimulus packages; a government with unlimited credit. That’s over.

Even during the Great Depression the government’s finances were rock solid and it could certainly borrow money, if needed. But, in the post-dollar-bubble world, the government will be like the rest of us, only worse. It will have its credit cards cut off and a much lower income while still having a massive debt that it can’t possibly make payments on or even pay interest on, and eventually it won’t make principal or interest payments. So, it will have to live within its means.

[...]

Key cuts will hit both the "guns and butter" of the government budget. Cuts in military spending will be much larger than contemplated today and will focus disproportionately on the Navy and Air Force.

On the "butter" side, the most important cut will be to make Social Security means tested, making Social Security essentially a welfare program. For those who have little or no income or assets, Social Security will definitely be there to help. However, for those who have income or assets, forget it.

In addition, Medicare (medical care for older people) reimbursements to doctors and hospitals will be reduced. Since huge numbers of unemployed people and retirees with no more retirement money will qualify for Medicaid (medical care for poor people), Medicaid will explode in size so reimbursements to doctors and hospitals will have to be cut from their already abysmally low levels, and there will be tougher rules on what gets reimbursed. A large percentage of doctors today won’t even accept Medicaid payments because the reimbursements are too low. But Medicaid will grow to be so important that doctors won’t have any choice but to accept its payments. Essentially, in a post-dollar-bubble world, Medicaid will become our national health care program.

High inflation will do much of the dirty work in cutting budgets. Remember, when inflation is high, budget cuts are accomplished simply by not raising budgets to match inflation. So, inflation will be blamed for much of the government budget cutting. [...]

It goes on to describe huge "progressive" tax increases, why they are unavoidable, how they will play out, etc. All important and interesting but too much for me to excerpt here.

There is lots more, but I'm going to skip to a few highlights:

[...] The high unemployment and high bankruptcy rates of the post-dollar-bubble economy, combined with a greatly pared down government will, for a while, create an unusual set of economic conditions. For example, in such a chaotic economic situation, there will be little incentive for people to pay their mortgages or other debts. Many of their creditors will be insolvent and there will be no significant market for selling the properties. Much of the management of these debts will be handed over to an overwhelmed government with little interest in foreclosure. Even if it did foreclose, who would it possibly sell the properties to? And there will be no serious financing available for buyers at that point, anyway. Certainly, the government won’t be able to provide financing.

A good decision for many people will be to simply stop paying their debts. Even rent may not be worth paying as evictions could become increasingly politically difficult for elected sheriffs to carry out. Plus, it will be difficult for landlords to find good tenants to replace the bad ones. Debt repayment will become a bit lawless during this period.

Businesses will follow a similar path as individuals. They will stop paying mortgages and other debts and even limit the rent they pay to what is needed to fund basic utilities and maintenance. They won’t be making much money and if they have to pay rent above basic costs, in many cases, they will go under—something the landlord doesn’t want to see either since there are no good tenants to replace them.

As a result of all this, squatters will be increasingly common for business, and even more common for individuals since it will be politically difficult, and of little economic advantage, to throw tenants out. Local governments will have very tight budgets and won’t have the resources to spend on throwing people (and voters) out of their homes so that the landlord can have a vacant property with no prospects of rental. This situation will not last forever, but in the meantime, people will take advantage of it.

[...]

Pension fund investments in stocks, bonds and real estate will plunge in value. Government contributions to pension funds will also plunge along with falling tax receipts. Government unions may protest, but the reality will be a lack of tax revenue and there will be little ability or interest in raising taxes to fund payments to employees who aren’t working while governments have to massively cut the number of employees who are working.

Yes, there may be lots of legal challenges, but in the end, the bottom line will be the bottom line. Also, since inflation will be high, the easy way to cut pensions will simply be to raise them less than inflation. If pensions are not inflation adjusted, they are easy to eliminate. If they are inflation adjusted, expect the laws to be changed so that they are no longer inflation adjusted.

Yes, there will be court fights, but the money simply won’t be there anymore. Even federal pensions will go the way of state and local pensions. So, clearly there will be will be no federal government bailouts of state and local pensions.

[...]

FDIC insured savings accounts are a bit different. There will likely be some sort of needs based payment for small insured accounts. Clearly, there won’t be full payment, but the government may be able to pay with inflated dollars some portion of FDIC insured savings when banks fail. Since so many banks will be failing, the government can’t possibly pay accounts that are above the insured level, but it could pay some amount of money on accounts under the maximum level of insurance, currently $250,000.

The government will also be able to maintain a payments mechanism so that there will be no problem conducting transactional banking business, such as writing checks or using debit cards. The government will also be able to support banks in making asset- based loans on items such as inventory and receivables. However, the government won’t be able to support banks to make mortgage loans, non-asset based business loans, commercial real estate loans, loans to buy businesses, credit card loans, etc.

[...]

No New “New Deal”

While some people now say they are worried about drifting toward socialism or "sharing the wealth," in fact there won’t be much wealth to share. Instead of the rich funding the poor, the middle class will shoulder most of that burden by paying very high taxes to fund nearly all of the enormous number of people on welfare. Instead of shared wealth we will have "shared poverty".

With the government essentially in default on its loans, it will have no way to raise money for its welfare programs, other than through taxes. And since there will be so few wealthy people left to tax, that leaves only the middle class and the much smaller upper-middle class to carry the load. Still, working and paying very high taxes, perhaps as high as 50 percent, will be better than not working at all.

[...]

The most important difference in the post-dollar bubble world from the pre-dollar bubble world won’t be lower stock or real estate prices, but interestingly, jobs. On a day-to-day level, the lack of jobs will be what affects people the most. Many people lucky enough to have jobs will move down the ladder, not up. For example, a former senior accountant at an accounting firm might have to take a job as a bookkeeper or very junior accountant at a business, and at much lower pay, rather than at an accounting firm Employees will work longer hours for less pay and in less appealing conditions. Benefits will be gone or reduced and competition for jobs will be fierce. Just about everyone will know they could be easily replaced.

However, it won’t be anything like the Great Depression of 1929 because of two important differences:

1. The nation will be much wealthier, so few will suffer like they did in the Great Depression.

2. Paradoxically, because we are much wealthier, unemployment will be much higher, likely in the 40- to 60-percent range, when counting the discouraged unemployed.

Unemployment can be much higher when the nation is wealthier because people don’t have to have jobs. Unemployed people can live with parents, children, relatives, or friends. Plus, there will be a solid safety net of welfare from the government, although people who are used to today’s prosperity will consider the net abysmally low.

In the Depression, if there were a job paying pennies for picking oranges (as in The Grapes of Wrath) you’d take it because you had to. In our much wealthier society, the people who do have jobs will be much better paid and will help support friends and relatives who are unemployed.

[...]

With unemployment in the 40- to 60 percent range, GDP will also drop by a similar amount, but again, even with a 50 percent drop, that would still be a $7 trillion economy in today’s dollars. That’s still pretty big bucks. However, it won’t feel like big bucks. And that is another big difference between the post-dollar-bubble world and the Great Depression: The psychological pain will be much greater for us today.

[...]

As mentioned earlier, This is because expectations were so very high prior to the Bubblequake; much higher than before the Great Depression. Real estate had gone up phenomenally, stock values had gone up phenomenally, and money was easy, not only in the United States but overseas, as well. It seemed like a new billionaire was born every minute. [...]

There is lots, lots more. How small businesses, student loans, education, banks etc. are going to be affected. And of course a pitch to read the whole book.

I'm not saying I think it's all true; but I can see the logic of many of the arguments. Anyway it's food for thought, in the interesting times we live in. Read the whole thing and see what you think.

Whether or not it's a glimpse of the Brave New World ahead of us, remains to be seen. At any rate, we shall see.
     

Who sucks, S&P or our Government?

I'd say, our overspending government:

Ouch! U.S. booted from Triple-A debt club

[...] On Friday, S&P downgraded the United States to AA+, an investment grade level just one notch below triple-A. It marked the first time the world's largest economy has been downgraded, since Moody's first gave the country a credit rating in 1917.

S&P cited estimates that U.S. government debt would balloon to 79% of the size of the entire U.S. economy by 2015, and 85% by 2021 -- a level S&P says is consistent with AA+ rated countries.

In comparison, estimates from the International Monetary Fund show triple-A rated Canada's debt is likely to only rise to 34% of its economy by 2015, and Germany's is forecast to rise to 52%. (The IMF does not publish forecasts out to 2021).
Your money in a AA-rated U.S.

The debt of Belgium, another AA+ rated country on S&P's list, is expected to grow to 85% of GDP by 2015, according to the IMF. [...]

If the growth of debt as a portion of GDP is the criteria they use for assigning ratings, and we are on a par with Belgium, which is also rated AA+, then isn't the changing of the rating for the United States justified? People and nations who over-extend themselves by borrowing too much, lower their credit ratings. Sad but true.

Yet, I know there are other nations on that 15 member AAA list that are having financial troubles too. The article didn't mention all their Debt as a portion of GDP growth projections, I'd like to see those.

Meanwhile, we are going to have to deal with the repercussions of this:

Dollar Weakens to Record Versus Franc as S&P Lowers U.S. Rating

[...] “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said.

Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. on Aug. 2, the day President Barack Obama signed a bill that ended the debt-ceiling impasse which had pushed the Treasury to the edge of default. Moody’s and Fitch also said downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.

S&P’s move “highlights the much-less advanced pace of fiscal consolidation in the U.S., relative to Europe and the U.K.,” John Normand, the London-based global head of foreign- exchange strategy at JPMorgan Chase & Co., wrote in a report to clients.

Haven Rally

Foreign exchange strategists at Barclays Capital said in a note to clients that S&P’s move may initially lead to a rally in assets and currencies perceived to be a haven, such as the franc and yen, while causing currencies of economies that are depend on commodities to weaken. The dollar may also benefit from the “risk impact of the shock,” though longer-term U.S. “fiscal problems are likely to mean a weaker dollar.”

“S&P had been very clear about what it wanted to see in order for the U.S. to maintain its AAA rating, and the agreement reached last week had not met those criteria,” Paul Robinson, a strategist at Barclays in London, wrote in a note to clients. “Commodity currencies look most vulnerable in the short run, again because of the risk element.” [...]

This is what happens when you keep spending money you don't have. It's not politics, it's MATH.
     

"... don't give up on America"

The deal disappoints, but don't give up on America

Derbyshire, England (CNN) -- Tucked away here at a family reunion among rolling hills, one can easily drift into another, more pleasant world, but the old realities keep intruding. Time and again, English relatives have gingerly but worriedly asked, "What is to become of America after this debt struggle?"

How to answer? The truth is that none of us knows, and deep insights are especially elusive at this distance.

I try to tell them that the United States is going through a rough patch: the rise of lots of problems that we have allowed to fester over the years now coming to a head just when our politics are polarized, poisoned and paralyzed. Moreover, there is almost no one in high places who commands the full trust of the country -- from the White House to Wall Street, from Congress to the media.

But, I hasten to add, don't write off America -- we are usually at our best when we are down. These are the toughest tests we have faced since the 1930s and '40s, but remember how well we pulled together then.

[...]

Still, this is a deal that deserves only one hand clapping, not two. It fell far short of a "grand bargain," a dream scuttled by the tea party as well as the White House. In particular:

• With at least $10 trillion in new deficits expected over the next decade, it cuts only a little more than $2 trillion. The grand bargain called for $4 trillion.

• It solves neither of our biggest fiscal problems: reform of Medicare, Medicaid and Social Security and reforms of taxes that are not only fairer but bring in more revenues, especially from the affluent.

• It does not provide for an equal sharing of burdens: The middle class and working people are likely to bear the most.

• It fails to provide an extension of payroll tax relief and jobless benefits into next year, which are so needed in this economy.

• It could well weaken the economy in the near term and, given the debates that will now arise in this congressional committee, will set off a flurry of lobbying and uncertainty in a business community that desperately craves a clearer sense of policy and regulation.

• And it threatens to savage the Defense Department with cuts that will force the United States to pull back from its leadership role in the world and reduce the pay and benefits of those in uniform.

With the fight over, it is like waking up to a bad dream and realizing that much of the nightmare is still here.

The markets recognized that hard realities still persist on Monday after the deal was done -- stocks sank at the end of the day -- and the rest of us will likely get our dose Friday with new unemployment numbers. The politicians will immediately turn their attention to jobs, but they seem to be mostly out of ammunition and so is the Fed. (QE 3 anyone?) [...]

QE3? I sincerely hope not. QE1 & 2 have only created more problems, and devalued our currency. Why would QE3 be any different? Why keep doing what doesn't work? Unless you WANT to collapse our currency and destroy our economy?

I've resisted the temptation to blog on all this; it's been such a dog and pony show. And if doing things like balancing the nations budget and living within our means are now considered to be radical, dangerous "fringe" ideas, I can only say, "Where are all the grown-ups?". If this is what America has become, then I can only wonder if it can, or even should, survive? I only say that because, Nature does not tend to favor the foolish for survival.

No, I've not given up yet. But it's hard not to feel pessimistic as we continue following policies that are failing us. Also, it's taken a while for us to get in this mess; I suspect getting out of it will not happen in a hurry either.

The author of the article ends his piece by saying: "Can Gabby Giffords just show up a few more times this summer? She surely reminds us that no one should ever give up on America." That's a nice sentiment, but we are going to need a lot more than that. We are about to see if we have what it takes.
     

Greece has an 81 percent chance of defaulting?

Those don't sound like good odds:

Euro zone warns Greeks on sovereignty and privatization

BRUSSELS/BERLIN (Reuters) - Euro zone finance ministers have approved a 12 billion euro ($17.4 billion) installment of Greece's bailout, but signaled that the nation must expect significant losses of sovereignty and jobs.

Ministers in the Eurogroup gave the go-ahead for the fifth tranche of Greece's 110-billion-euro financial rescue agreed last year, and said details of a second aid package for Athens would be finalized by mid-September.

But within hours of Saturday's decision, Eurogroup chairman Jean-Claude Juncker warned Greeks that help from the EU and International Monetary Fund would have unpleasant consequences.

"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 be heading to Athens.

"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.

Greeks are acutely sensitive to any infringement of their sovereignty and any suggestion that foreign "commissars" might become involved in running the country is an incendiary political issue and could trigger more street protests.

[...]

Juncker also said Greece must privatize on a scale similar to the sell off of East German firms in the 1990s.

"For the forthcoming wave of privatizations they will need, for example, a solution based on a model of Germany's 'Treuhand agency'," Juncker said, referring to the privatization agency that sold off 14,000 East German firms between 1990 and 1994.

[...]

Financial markets still see an 81 percent chance that Greece will eventually default, and German Finance Minister Wolfgang Schaeuble told Der Spiegel in an interview that Berlin was making preparations for such an event -- even though it does not expect it to happen.

Private financial institutions have held talks with finance ministry and central bank officials in euro zone countries to discuss under what conditions the private sector would be willing to help finance Greece and by how much.

Those discussions continue, with the involvement of the private sector in the next package a must for several euro zone countries as voters grow increasingly opposed to shouldering the burden of bailing out Greece on their own.

But private sector involvement must be voluntary to avoid triggering another downgrade of Greek debt to default status by ratings agencies, a development which could put the whole Greek banking sector at risk. [...]

It sounds like they (the EU) knows that what they are doing is going to fail, and they are hoping that the private sector will somehow bail them out of the mess government has made? How much sense does that make? And as for their comparison to East Germany's Treuhand selloff... well. Read the whole thing. It doesn't sound promising at all.

Meanwhile, back home:

Debt ceiling: Why Sunday could be make-or-break day for 'grand bargain'

I hope they do reach a grand bargin. I have no doubt that it won't be perfect, and that it will be criticized from both sides (as compromises usually are). But compromise IS the nature of politics in a democratic republic. An even though the "bargain" will be imperfect, I think it will be better than the continuing doubt and uncertainty being created by the ongoing lack of a budget, and lack of a plan to deal with the deficit. It's dangerous; we are teetering on the edge of an abyss. And the fact that it has been allowed to go on this long, is shocking. Tragic and shocking.