Daily Digest

Daily Digest 2/7 - Rethinking The Great Recession, A Modest Proposal, Oil Tankers After The Egyptian Crisis

Monday, February 7, 2011, 11:43 AM
  • Rethinking The Great Recession
  • A Modest $500 Billion Proposal
  • The Easy Cuts Are Behind Us
  • Morning Update/Market Thread – Disinformation Edition
  • An Export Land Model Analysis for the USA - Part 3
  • The Globe's Limitations: How Peak Oil Threatens Economic Growth
  • Tech Talk - Oil Tankers in the wake of the Egyptian Crisis
  • Perth Area Declared Disaster Zone as Bushfires Rage Near City

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Economy

Rethinking The Great Recession (jdargis)

In some ways, the boom-bust story is both more innocent and more disturbing than the standard explanations of blundering and wrongdoing. It does not excuse the financial excesses, policy mistakes, economic miscalculations, deceits, and crimes that contributed to the collapse. But it does provide a broader explanation and a context. People were conditioned by a quarter-century of good economic times to believe that we had moved into a new era of reliable economic growth. Homeowners, investors, bankers, and economists all suspended disbelief. Their heady assumptions fostered a get-rich-quick climate in which wishful thinking, exploitation, and illegality flourished. People took shortcuts and thought they would get away with them. In this sense, the story is more understandable and innocent than the standard tale of calculated greed and dishonesty.

A Modest $500 Billion Proposal (jdargis)

According to the Congressional Budget Office, this will be the third consecutive year in which the federal government is running a deficit near or greater than $1 trillion. The solution to the government's fiscal crisis must begin by cutting spending in all areas, particularly in those that can be better run at the state or local level. Last month I introduced legislation to do just that. And though it seems extreme to some—containing over $500 billion in spending cuts enacted over one year—it is a necessary first step toward ending our fiscal crisis.

The Easy Cuts Are Behind Us (jdargis)

Another difficult cut is a reduction of $125 million, or about a quarter of current financing, to the Great Lakes Restoration Initiative, which supports environmental cleanup and protection. And a third is a reduction in the Community Development Block Grant program. These flexible grants help cities and counties across the nation finance projects in areas like housing, sewers and streets, and economic development in low- and moderate-income neighborhoods.

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Morning Update/Market Thread – Disinformation Edition (pinecarr)

To be clear, food inflation is massively high. Yesterday I pointed to a study showing that overall global food prices rose by 3.4% in January… that gain is in just one month! And I think it may be understated as many food commodities have increased at rates far greater than that. That gain was the seventh month in a row of gains, and if you annualize that figure it works out to a whopping 40.8% inflation rate in the price of food!


Imagine that you live in a country where it requires 40% of your earnings just to feed yourself. At that rate it won’t be long before you are literally starving.

Energy

An Export Land Model Analysis for the USA - Part 3 (Crash Watcher)

Here in Part 3, I look at some implicit assumptions that are part of the Export Land Model analysis—assumptions about the fungibility of the exportable global supply of oil, assumptions about the behaviors of the top ten facing peak oil, and, assumptions about the ERoEI of the remaining oil supply.

The Globe's Limitations: How Peak Oil Threatens Economic Growth (jdargis)

Peak Oil is the point at which petroleum production reaches its greatest rate just before going into perpetual decline. In “Peak Oil and a Changing Climate,” a new video series from The Nation and On The Earth productions, radio host Thom Hartmann explains that the world will reach peak oil within the next year if it hasn’t already. As a nation, the United States reached peak oil in 1974, after which it became a net oil importer.

Tech Talk - Oil Tankers in the wake of the Egyptian Crisis (jdargis)

To begin with let’s look at the traffic along the Suez Canal itself. Note that there is no immediate port of access into the Mediterranean, and thus to Europe, from Saudi Arabia or the nations of the Gulf.

Environment

Perth Area Declared Disaster Zone as Bushfires Rage Near City (jdargis)

The fires started yesterday in the Roleystone and Kelmscott areas in Perth’s south-east from sparks by a machinist using an angle grinder, WAToday.com cited a FESA spokesman, which it didn’t identify, as saying.

Article suggestions for the Daily Digest can be sent to dd@PeakProsperity.com. All suggestions are filtered by the Daily Digest team and preference is given to those that are in alignment with the message of the Crash Course and the "3 Es."

30 Comments

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Re: Daily Digest 2/7 - Rethinking The Great Recession, A ...

About Rand Paul "A Modest $500 Billion Proposal" link:

I'm wondering how much $500B cut in spending translates in deficit reduction? People would lose their jobs and instead the government would pay unemployment benefits. Fiscal income would be lower as well.

I followed pretty closely the pension reform in France regarding delaying the retirement age. One of the argument was if you work longer then unemployed people have to wait longer to get a job, so what you save on one hand (pension benefit) you kind of lose it on the other hand (unemployment benefit).

So to reduce by $500B the federal deficit, how much spending has to be cut, $600B, $700B, $800B ? Is there any metrics to get an idea? Or is this another example of very complex systems where the outcome is unpredictable when under stress?

Also if I understand correctly Rand Paul wants to move some of the expenses from the Federal pocket to the State pocket. So it's not really a cut as far as the tax payer is concerned?

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Re: Daily Digest 2/7 - Rethinking The Great Recession, A ...

SailAway wrote:

About Rand Paul "A Modest $500 Billion Proposal" link:

I'm wondering how much $500B cut in spending translates in deficit reduction? People would lose their jobs and instead the government would pay unemployment benefits. Fiscal income would be lower as well.

I followed pretty closely the pension reform in France regarding delaying the retirement age. One of the argument was if you work longer then unemployed people have to wait longer to get a job, so what you save on one hand (pension benefit) you kind of lose it on the other hand (unemployment benefit).

So to reduce by $500B the federal deficit, how much spending has to be cut, $600B, $700B, $800B ? Is there any metrics to get an idea? Or is this another example of very complex systems where the outcome is unpredictable when under stress?

Also if I understand correctly Rand Paul wants to move some of the expenses from the Federal pocket to the State pocket. So it's not really a cut as far as the tax payer is concerned?

I believe he does have some cost shifting in mind, but at least he's making a serious proposal.  During the last campaign the Rs were promising $100B in cuts.  As of this past weekend, it's down to $35B.  Who are they kidding?  The deficit is $1.4 trillion with a T.  If interest rates start going up that pittance will be erased in a heartbeat by interest payments on the Federal debt.

I don't think we can count on the current DC crowd doing anything meaningful.

Doug

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Re: Daily Digest 2/7 - Rethinking The Great Recession, A ...

SailAway wrote:
I'm wondering how much $500B cut in spending translates in deficit reduction? People would lose their jobs and instead the government would pay unemployment benefits. Fiscal income would be lower as well.

I'm sure it will result in other issues, but what are the alternatives?  Continue to pretend that deficit spending can go on forever?  Unemployment benefits are a key problem as are minimum wage laws.  They hide the true value of labor.  Like all other resources if you have a glut, the price should go down.  We can continue to pretend for a while longer that this is not the case, but it will only make the problem worse later on.  Its just like pretending we can afford all the benefits promised from the entitlement programs and pension plans.    Unfortunately those that these programs are designed to help are the ones being hurt the most.  We are seeing wages drop from the top down simply displacing those at the bottom and pushing them into unemployment.  Pretty soon all the Star Bucks baristas and McDonalds fry cooks will have advanced degrees. Cry

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Credit card w/a 79.9% rate?

You betcha.  

http://money.cnn.com/2011/02/07/pf/credit_card_interest_rate/index.htm

The article quotes people discussing the preposterous rates (59.9%, 79.9%) in a matter-of-fact way.  

Just another sign of how far we are through the looking glass.  Whatever economic game we're all involved in here, it's over.  There's still residual momentum, I guess, but the jig is *up*...

Viva anyway -- Sager

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Re: Credit card w/a 79.9% rate?

"I about had a heart attack when I got a disclosure notice saying that my starting rate of 29.9% was going up to 79.9%," said Riss. "It was ludicrous. Talk about a highway robbery."

LoL

Really? Like 29.9% didn't strike her slightly high?

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Re: Daily Digest 2/7 - Rethinking The Great Recession, A ...

rhare wrote:

I'm sure it will result in other issues, but what are the alternatives?  Continue to pretend that deficit spending can go on forever? 

But my questions are: Can we avoid the financial collapse anyway? Is cutting the government spending could really change the outcome?

With the assumption that cheap energy times are over and consequently real GDP growth is over (and most likely GDP will have to decrease with energy cost rising) it's not only that we have to reduce the deficit by $1.5T a year but we would have to continue cutting spending beyond that every year as the GDP decreases.  Is it just mathematically possible?

I keep this image in mind from the Crash Course with the stadium being filled by these drops doubling every minute. Even if you double the size of the stadium you only add 1 minute to the outcome.

So if we reduce our deficit by 50%, are we just adding 1 minute until the financial outcome?

Don't get me wrong, I'm not saying we shouldn't try at least, but I'm wondering how much time we would buy by doing so? Or is there still a way to save the system or is too late already?

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Re: Daily Digest 2/7 - Rethinking The Great Recession, A ...

SailAway wrote:
Don't get me wrong, I'm not saying we shouldn't try at least, but I'm wondering how much time we would buy by doing so? Or is there still a way to save the system or is too late already?

I don't have any illusion that we are probably far past the point of no return.  And if your completely in Chris's camp that debt based money must alway grow (I still have my reservations - but agree that is true in our current situation), then you have to believe it will collapse no matter what happens.  However, that doesn't mean we should just put on the gas.  That simply results in more malinvestment into unsustainable things - just look at the retail space and housing still be built despite huge gluts.  We are still encouraging people to go to college and run up student loan getting a liberal arts degree despite the fact that many will never get a job that allows them to pay back the degree.  As long as we continue to allow government to fund programs and projects that have no negative feedback loop, then we will continue to squander resources and potentially miss other opportunities that don't get a chance because they are starved for resources due to our ever growing government.

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Re: Credit card w/a 79.9% rate?

Johnny Oxygen wrote:

"I about had a heart attack when I got a disclosure notice saying that my starting rate of 29.9% was going up to 79.9%," said Riss. "It was ludicrous. Talk about a highway robbery."

LoL

Really? Like 29.9% didn't strike her slightly high?

Riizzacktly!  When somebody is grateful/relieved to have a card that only charges 29.9%, I have to suspect that they only care that they have a card (and they're going to use it until it's pried from their cold, bankrupt hands) -- and have an infant's understanding of what debt, interest and compounding are.  

IMO, this state of affairs is reflected at the top levels inasmuch as everybody only wants to raise the debt ceiling -- as opposed to having a WWE-style debate on how to live within our means.  (Even if I do believe it's too late for remedies, it'd do my nerves some good to watch our Clowns-In-Charge at least *talk* about correct actions...)

>Shudder!< -- Sager

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Re: Credit card w/a 79.9% rate?

Johnny Oxygen wrote:
Really? Like 29.9% didn't strike her slightly high?

This is another one of those situations where it's easy to point to the evil credit card company if you don't think about why this situation occurs.  It's a good sound byte that outrages peoples and pushes for more government involvement which only makes it worse.  Here's why:

If you happen to have been irresponsible in the past and ended up with a bad credit rating, how do you improve it?  Can you really survive in the world without a credit card, particularly if you have to travel?  You can't rent a car, you can't buy things on-line (think airline tickets), and you have a strong government push to eliminate cash, so what do you do?

So you have to go to a sub-prime credit card lender (such as the one in the article).  You have to actually be responsible and only buy what you can afford.  You have to make payments on time and eventually you should get a better credit rating and then you can change to a prime lender.  But what would you do if there were no sub-prime lenders?  How would you ever re-establish credit worthiness?

So now look at it from the lenders side.  They enter the market because there is a demand that is not being met by the prime lenders (won't lend to borrowers with bad credit).  However, it's really really risky.  The default rates are probably north of 50% and it's very hard to collect because of many collection regulations put in place (good or bad judgments aside - they raise the cost considerably).  The government has put lots of regulations limiting how the credit card companies can operate, so they have to basically raise the cost for everyone since trying to target specific risks is less possible.  You may think that the 79.9% rate is highway robbery, but I bet they aren't making anymore profit than the prime lenders.

So you say, well that's just awful, so what do you do?

  • Outlaw sub-prime lending - now you've just left someone who screwed up once with no way to recover.
  • Massively regulate sub-prime lending - lenders go out because they can't make a profit so it's better to use the money in some other way, and you end up at the same result as outlawing sub-prime lending. Or a worse outcome is you push lending underground so you end up with broken knee-caps.
  • Require prime lenders to lend to sub-prime borrowers - that raises the cost for everyone, is unfair because the responsible are punished for the irresponsible.  Eventually resulting in revolt by the responsible, and you move to ...
  • Nationalized lending or government guarantees - So now the tax payer is on the hook and once again the responsible are punished.  Fannie Mae and Freddie Mac are good examples of this scenario.

So while it's easy to vilify companies like First Premier as being evil, are they really?  If you find it outrageous, what would you require as interest to lend to someone with bad credit?  How about if you lend to them and discover if they just default you have little recourse?

Ultimately you have to keep responsiblity with the borrower and lender.  The more government involvement raises costs for everyone.

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Re: Daily Digest 2/7 - Rethinking The Great Recession, A ...

rhare wrote:

I don't have any illusion that we are probably far past the point of no return.  And if your completely in Chris's camp that debt based money must alway grow (I still have my reservations - but agree that is true in our current situation), then you have to believe it will collapse no matter what happens. 

Thanks for your response again rhare.

Regarding the "debt based money must always grow" I don't fully understand it. If a country runs surplus instead of a deficit, then it should be possible to pay back the dept shouldn't it?

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Re: Credit card w/a 79.9% rate?

rhare wrote:

Johnny Oxygen wrote:
Really? Like 29.9% didn't strike her slightly high?

This is another one of those situations where it's easy to point to the evil credit card company if you don't think about why this situation occurs. 

Actually -- unless I've got JO wrong (but I'm sure about where I'm coming from) -- the point is that some people should not have credit cards.  As I said, they have an infantile grasp of money and debt.  It's like letting a 2-year-old have the car keys.

You can buy things online with a debit card, if you must buy something online.

V/S

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Re: Credit card w/a 79.9% rate?

If you happen to have been irresponsible in the past and ended up with a bad credit rating, how do you improve it?  Can you really survive in the world without a credit card, particularly if you have to travel?  You can't rent a car, you can't buy things on-line (think airline tickets), and you have a strong government push to eliminate cash, so what do you do?

You use a pre paid debit card.

The statement I put in bold is what I believe is at the heart of the problem. Who says you have to be in debt? The fact that life is made inconvenient by not having a credit card is a relatively new occurence. Once you start to think about your 'credit rating' then you may not be thinking 'why do I have to have credit? Maybe my life would be easier if I paid as I went.

Debt should not be part of travel, groceries, entertainment, etc. We have just been conditioned over time to accept it. If you want to buy a house and the terms are acceptable then fine. But no one should be racking up credit everyday on simply living.

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Re: Credit card w/a 79.9% rate?

SagerXX wrote:
- the point is that some people should not have credit cards.

No disagreement from me.  But who should get to make the decision on who is smart enough and who is not?  I say it has to be between the borrower and the lender.  If the borrower doesn't like the terms, then they can say no.  It's also the responsiblilty of the lender to look out for their best interest as well in deciding to whom they should lend.  Voluntary on all sides.

SagerXX wrote:
You can buy things online with a debit card, if you must buy something online.

True - I never consider using a debit card because you have much fewer protections against fraud than with a credit card. I'm not sure how much this changed with the Credit CARD Act.

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Re: Credit card w/a 79.9% rate?

Johnny Oxygen wrote:
Debt should not be part of travel, groceries, entertainment, etc. We have just been conditioned over time to accept it. If you want to buy a house and the terms are acceptable then fine. But no one should be racking up credit everyday on simply living.

I understand you believe that, but I'm quite happy using my credit card for everything.  It's my choice just as it should be your choice not to use one in that manner.  What gives you or anyone else the right to dictate how I have to live my life?  It's this continual push to try to dictate how I have to behave (credit, salt, caffine, drugs, ....) instead of leaving it to me, including the responsiblity for such actions that is the problem.  This credit/no credit debate falls into that category.

Pastor Martin Niemoller wrote:

First they came for the communists,
and I didn't speak out because I wasn't a communist.

Then they came for the trade unionists,
and I didn't speak out because I wasn't a trade unionist.

Then they came for the Jews.
and I didn't speak out because I wasn't a Jew.

Then they came for me
and there was no one left to speak out for me.

When will you decide to stand up against/or stop being the mob dictating how an individual must behave?  Will it be when you can no longer stockpile food because that is hoarding?  How about when you aren't allow to own gold, silver, chickens, guns, garden....  It's a slippery slope when we try to dictate how one should live and try to remove responsibility for ones actions.

Off that topic:

Johnny Oxygen wrote:
You use a pre paid debit card.

Not for everything. Maybe you can now, but in the past a debit card could not be used to rent a car.

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Re: Daily Digest 2/7 - Rethinking The Great Recession, A ...

I have been uncovered

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Re: Daily Digest 2/7 - Rethinking The Great Recession, A ...

Johnny Oxygen wrote:
I have been uncovered

Laughing

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Re: Daily Digest 2/7 - Rethinking The Great Recession, A ...

I've been reading here on CM for 2 years now.  I think this is my first post, but I may be wrong.  So...  $500B in cuts.  What we have in our country is a very tangled web of both negative and postive feedback loops.  I see the government as mostly payroll and not consuming very much (not including defense/military).  I'm just throwing random numbers out.  First a high-ball.  60% of government spending is payroll.  Of the $500B cut, $300B is payroll.  Supposing most government workers are earning $60k annually, they would qualify for the maximum unemployment benefit of $25k annually (using a round number). Divide 25 into 60 and you have 40-ish percent.  Now instead of a $300B cut, you really only did about $180B.  20-ish% tax revenue is lost for the $180B, so that's another $35B.  Pull that out of the $180B and now you have $135B in actuall net savings.  Add that to your $200B in purchasing cuts and your $500B turned into only $335B.  If you lowball and say 40% is payroll, similar math brings it to around $400B.  My opinion on the matter is that at best we would probably only see 75% efficiency in the final results. 

Now for an encore:  I crunched some numbers based on how I think the world is reacting to us bumping into our debt ceiling - AGAIN.  We will hit this ceiling in March, and we'll be 1/4 the way through a $1.5T expected defecit for the year.  If they raise it the 1.9T that I've been hearing, that gives us a new ceiling of $16.2T.  It sounds unlikely we would go past that without some heavy austerity measures.  Based on the projections for 2012 defecit, we would hit that $16.2 trillion somewhere in the neighborhood of August to September of 2012.  Supposing we got a proposed $500B haircut package pushed through and it came in at $400B for results, that would possibly cancel out 1/3 of the 2012 defecit, this buying us another 4 months, thus giving us an end-game date of Dec2012/Jan2013 (what was that? I thought I heard a Mayan say something....) 

Lastly....  I do not take into account 1) inflation, 2) rising interest rates, 3) stock-market being less than flat.  Any of these three items adds to the deficit and shortens a possible end game date.  I realize this is a bit of a slop-job, but I welcome others to work from the platform where I just performed a dusting and set up a spotlight.

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Re: Credit card w/a 79.9% rate?

rhare wrote:

True - I never consider using a debit card because you have much fewer protections against fraud than with a credit card. I'm not sure how much this changed with the Credit CARD Act.

I'm 47 years old and have never had a credit card. I have never even considered getting one. I do have a debit card and have even used it out of country. I don't even know if I have a credit score or if I do what it is. I normally pay for everything in cash if I can. I don't ever ever buy anything online using my debit card. I'll send them a cashiers check. I do have a mortgage but it is through a private lender @ 7% 30 years

You absolutely can live life without a credit card or credit for that matter...

ericg

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Re: Daily Digest 2/7 - Rethinking The Great Recession, A ...

Hey Johnny O,

be careful when you walk down the street these days.

http://dl.dropbox.com/u/20625040/to%20good%20to%20ignore%20Kopie.jpg

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Re: Daily Digest 2/7 - Rethinking The Great Recession, A ...

China's central bank raised interest rates on Tuesday, its second increase in just over a month, intensifying its fight against stubbornly high inflation.

Although annual inflation slowed to 4.6 percent in December, it is set to pick up again in January with food prices on the rise.

Benchmark one-year deposit rates will be lifted by 25 basis points to 3 percent, while one-year lending rates will also be raised by 25 basis points to 6.06 percent, the People's Bank of China said.

The rises take effect from Feb. 9.

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Re: Daily Digest 2/7 - Rethinking The Great Recession, A ...

If one stock-picker emerged intact from the wreckage of the financial crisis, it was Meredith Whitney.

Meredith Whitney on Closing Bell
CNBC
Meredith Whitney on Closing Bell

With a prescient warning about bank stocks in 2007 — as well as a gift for the perfect sound bite — she became a media darling, celebrated in a Fortune cover article and in frequent television appearances as a market seer.

Until now, that is. These days, Ms.Whitney, 41, finds herself pilloried in the news media and by colleagues for predicting a calamity in municipal bonds.

Critics say the call is overstated, but it has alarmed investors in that usually sleepy market.

Ms.Whitney is also drawing scrutiny from Washington, where a Congressional panel will meet on Wednesday to examine the turmoil in the muni bond market, including whether Ms.Whitney’s call has fed the volatility and allowed some investors to profit unfairly.

Citing scheduling conflicts, Ms.Whitney has declined an invitation to appear before the panel of the House Oversight and Government Reform.

But the subcommittee’s chairman, Representative Patrick T.McHenry, Republican of North Carolina, said that would not dissuade him from investigating her record.

“This isn’t a gotcha thing, but she’s going to be part of the hearing, whether or not she participates,” he said. “If she doesn’t want to come forward in a venue like this, that makes a statement.”

Ms.Whitney has not been shy about making statements in the past, whether it was delivering bold predictions about unemployment or dressing up as Paris Hilton for her firm’s Halloween party.

 But her scathing report on deteriorating state finances in September, followed by an appearance on “60 Minutes” in December, has been catnip to her critics.

 “There’s not a doubt in my mind that you will see a spate of municipal bond defaults,” she said in the “60 Minutes” interview. “You could see 50 sizable defaults, 50 to 100 sizable defaults, more. This will amount to hundreds of billions of dollars worth of defaults.”

Normally, Wall Street analysts are loath to criticize one another, at least on the record.

But since then, even fellow analysts are calling her out for stepping beyond what she knows, bank stocks, into less familiar territory.

Others, especially municipal bond market players, have gone on the warpath.

“I’ve seen a copy of the report, and frankly, I’ve seen better papers from graduate students in finance,” said Richard P.Larkin, director of credit analysis at Herbert J.Sims & Company, a municipal bond broker and underwriter. “It’s ludicrous, reckless and irresponsible, and it’s being done without any regard for the consequences.”

Investors were pulling money out of municipal bond funds even before Ms.Whitney’s appearance on Dec.19, but in the weeks since, the pace of withdrawals has accelerated, with more than $14 billion coming out between Dec.22 and Feb.2.

Ms.Whitney declined to comment for this article.

But a number of academics and others who have studied pension, health care and other obligations of states and municipalities say bigger problems loom than just short-term budget deficits that stem from the recession.

They see structural problems that may require decisive, painful action in the most indebted places.

But it is Ms.Whitney’s contention that hundreds of billions of dollars’ worth of defaults could come to pass that has aroused a firestorm.

“Meredith’s analysis highlighted problems in the muni market that have been known for years,” said Josh Rosner, a structured finance analyst at Graham Fisher & Company.

Still, she has gone too far in his view.

“She drove a rush to the exits,” he said, “which wasn’t about the fundamentals, but about a momentum trade.”

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Re: Daily Digest 2/7 - Re: credit cards

Just a note of interest....I have been a retail merchant for 23 years, and I have 90 % of my customers paying with credit cards, I have to pay the banks (visa-mastercard, AMEX, Discover) a processing fee ranging from 2% up to 3.1%  on each transaction. They just suck it out of my account. They call it the "discount rate".

So every time a customer buys a piece of furniture from me (average sale $400-$800) I have to pay the percentage. BUT the truth is YOU pay the percentage. You paid for your free airmiles or what ever you think you get back when you pull out that credit card. We merchants factor that in to each sale.

The Banksters are sweeping a little vig off of each sale. Legalized mafia skimming and they are passing laws to protect You. Laughter here please.  See the light......... and use currency.

Remember the opposite of credit is the word DEBT.

We merchants have added 3- 4% to the price already built in as a cost of operations. So every time you pull out your "Rewards Card" to get those FREE airmiles, just know that YOU paid for it. So enjoy the ride.

We merchants won't take the hit. We just pass it on. So my advice to you is..CASH IS KING.( Gold and silver work too.)

Money talks. Sorry if I come across a little direct, but this is an issue with me and the ever increasing fees these visa/mastercard bank processors charge us merchants. Remember also, American express took bailout money and became a bank to get that bailout cash from the public.

When you use a credit card, you pay for that luxury whether you realize it or not.

Tommy

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ericg
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Joined: Mar 23 2010
Posts: 101
Re: Daily Digest 2/7 - Re: credit cards

Tommygun wrote:

Just a note of interest....I have been a retail merchant for 23 years, and I have 90 % of my customers paying with credit cards, I have to pay the banks (visa-mastercard, AMEX, Discover) a processing fee ranging from 2% up to 3.1%  on each transaction. They just suck it out of my account. They call it the "discount rate".

So do you have to pay this fee if I use a debit card with a Visa logo ? Just curious....

Ericg

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hunt4riches
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Posts: 5
Re: Daily Digest 2/7 - Re: credit cards

You are 100% right about merchant fees being baked in the cake for customers.  About 5 years ago ebay introduced a 2% cashback rewards program, and pomptly raised auction commissions by about 2%.  My formula is:  Sale_Price = (Cost + Cost_of_Sales)*(1+Desired_Profit_Margin) where Desired_Profit_Margin is greater than or equal to about 0.1.

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rhare
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Posts: 1271
Re: Daily Digest 2/7 - Re: credit cards

Tommygun wrote:
The Banksters are sweeping a little vig off of each sale. Legalized mafia skimming and they are passing laws to protect You. Laughter here please.  See the light......... and use currency.

I agree that the laws we have seen recently are definitely not really aimed at the consumer but make a good sound bite.  I also was quite shocked that merchants didn't revolt with the pass thru fees for the frequent flyer cards.  I felt those should have been eaten by the issuing banks (bank that issues credit card - consumer side)  as they are the ones that gain the marketing advantage.

However, there are advantages and disadvantages to all forms of payments for both the merchant and consumer - even with cash.  Different payment types cash, credit, debit, check, ACH, paypal, phone, ... all have different costs associated with them either through fees paid or indirect costs.

From a consumer point of view, I nearly always use credit cards (my preference).  I don't have to carry cash (less theft risk), don't have to go to the bank/ATM to get cash (theft risk, inconvenience, reduced driving), no worries about counterfeit bills, protection from fraudulent merchants or products (merchant charge--back), easy tracking of purchases/money management/budgeting (trade off is government snooping), theft protection in that if stolen I'm not out anything (better protection in this area than debit/check/ACH).  Also some credit cards offer enhanced warrantees if you use them for a purchase.

Of course, as a merchant there are costs that you pay and I'm fully aware that you have to pass those costs on to your customers - anyone who thinks otherwise is just naive (this applies to all those wonderful helpful government programs/regulations as well) - but I will tell you I do on occasion avoid merchants that don't accept my prefered payment method (but that's my choice as it is the merchants).  From a cash perspective you have costs as well: risk of counterfit bills, risk of theft due to large cash on hand (insurance/legal issues if a theft occurs and someone is injured) and during deposit, reduced sale potential when a customer doesn't have cash on hand but does have another payment method.  Also, if you happen to have international clients you don't have to deal with currency exchange issues with a credit card.

As a savy consumer, for any large purchases I know you as a merchant have increased your costs to cover credit cards, so I always try to negotiate a cash discount. Laughing

Also, for anyone thinks cash protects you from government snooping, just try and buy something with a large amount of cash (> $10K).  You have forms to fill out at the bank and forms to fill out at the merchant.

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Tommygun
Status: Bronze Member (Offline)
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Posts: 65
Re: Daily Digest 2/7 - debit cards...

debit cards 1.75 % of sale plus .10 cents per transaction

On my last statement there were 26 different classifications for Visa and MC types of reward cards all with different levels of charges to the merchant !!

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tbh524
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Joined: Dec 17 2008
Posts: 8
Re: Daily Digest 2/7 - Re: credit cards

re:Tommygun

Problem is, those retailers don't OFFER me a cash discount so I HAVE to use my credit card to get something extra out of the transaction.

I'd use a lot more cash if there were incentive to do so.

(case in point...there's a Gas station that doesn't take credit cards...they're about $.20 a gallon cheaper than the 3 stations around them so I gladly fuel up there with cash..still, there are plenty of people gassing up at the more expensive stations...don't ask my why)

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dickey45
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Joined: Oct 12 2008
Posts: 74
Re: Daily Digest 2/7 - Re: credit cards

OK TBH - which gas station is that?

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