Daily Digest

Daily Digest - July 21

Tuesday, July 21, 2009, 10:00 AM
  • BIS, The Central Bank of all Central Bankers: The Central Bank WAS Warned in 2003 (Repost)
  • FSN News Hour Part 3A
  • Ambrose Evans-Pritchard Says End of the Financial World is Nigh
  • Ending the week on a positive note...
  • Persistent Ignorance
  • Denninger on CNBC Follow Up
  • White House putting off budget update
  • Bailouts could cost U.S. $23 trillion
  • Fed member Lockhart calling a mea culpa on Fed policy
  • CRE: I Think The Other Shoe Just Dropped (Chart on Page)
  • USPS May Be Unable to Make Payroll in October and Retiree Health Plan Costs, Unions' Letter to White House Says

Economy

BIS, The Central Bank of all Central Bankers: The Central Bank WAS Warned in 2003 (Repost)

I respectfully suggest reading the entire piece.

FSN News Hour Part 3A July 18, 2009 | WinAmp | Windows Media | Mp3

25% Unemployment & Underemployed
Bank or Hedge Fund
Beware of the Allure of Debt

Ambrose Evans-Pritchard Says End of the Financial World is Nigh

One of the good things about those of the Austrian persuastion is that they serve to protect the flanks of the merely skeptical like me.

I am not exactly keen Ambrose Evan-Pritchard's prescription, which is greater monetary easing with more fiscal restraint. I put banking industry reform (of the root and branch sort) very high on the list, but the sort needed will never happen in the absence of another breakdown. So we patch the system with duct tape and see how long it holds together. Failing that, I have doubts of the efficacy of monetary measures.

But that aside, I do agree with his more general points, that the current policy mix is not a good one, and that too many people are making the dangerous and often self serving assumption that we are out of the woods.

Ending the week on a positive note...

Below is an email I just received from NFTRH subscriber Steve Dore, a man who I consider a friend even though we have not met - yet. I first came upon his work at Financial Sense and thought 'who is this musician - way ahead of his time - singing about gold, silver, inflation and the Fed?'. This was long before the Ron Paul phenomenon kicked in. Steve, in his way was a kindred spirit of mine in that we were using different media to put out a similar message.

Yeh, he is crazy. Just like me. Just like all the crazies out there that nobody wanted to listen to when things appeared okay, conventional or dare I say, normal. We have come a long way indeed. One of the real crazies, Peter Schiff, is exploring a run against Chris Dodd for a Connecticut US Senate seat. A disciple of Austrian economics in the US Senate? Another (Dr. Paul) in Congress? What's this country coming to?! :-) I talked to Schiff on the phone once and I will tell you I got an ear full in just 2 minutes. That guy can TALK... and argue. The time is now for a new debate.

Persistent Ignorance

It's funny -- or sad, depending on your perspective -- how those who supposedly know best -- the highly paid "experts" on Wall Street -- keep misreading what is happening in the real economy.

For example, all signs point to the fact that what we have been going through these past few years is not just a garden-variety recession, but a full-fledged meltdown spawned by the bursting of the biggest credit/housing bubble in history.

Yet the "Wrong Way' Corrigans" who never saw the unraveling coming, who insisted that the crisis would remain "contained" or otherwise end quickly, who kept seeing rebounds and bottoms that never quite materialized, and who are now proclaiming an end to the "recession" -- their word -- persist in trying to mislead or confuse the masses with their profoundly ignorant assurances.

The latest delusion is the notion that allegedly "good" earnings from corporate America herald the beginnings of an economic recovery. In "The Thesis Continues To Validate: GE," The Market Ticker's Karl Denninger puts paid to this silly theory.

Denninger on CNBC Follow Up (Video) 

White House putting off budget update

WASHINGTON (AP) - The White House is being forced to acknowledge the wide gap between its once-upbeat predictions about the economy and today's bleak landscape.

The administration's annual midsummer budget update is sure to show higher deficits and unemployment and slower growth than projected in President Barack Obama's budget in February and update in May, and that could complicate his efforts to get his signature health care and global-warming proposals through Congress.
 

Bailouts could cost U.S. $23 trillion


A series of bailouts, bank rescues and other economic lifelines could end up costing the federal government as much as $23 trillion, the U.S. government’s watchdog over the effort says – a staggering amount that is nearly double the nation’s entire economic output for a year.
 

Fed member Lockhart calling a mea culpa on Fed policy

I believe for the very first time, a Fed member is admitting that it was an artificially low fed funds rate that ‘helped create the housing bubble’ (I’m quoting Bloomberg). Voting member Lockhart just made the comment in a Q&A after a speech on the US economy. He took office as head of the Atlanta Fed in 2007 so he of course was not party to the Greenspan/Bernanke Fed that cut rates to 1% and left it there for one year. While I’d love to say ‘the first step to recovery is to acknowledge the problem,’ Lockhart went on to say a low rate policy will likely hold ‘for some time,’ today’s low rate is not repeating history and the low rate will not lead to a bad outcome. This time is different is always scary to hear, specifically so with Fed policy.

CRE: I Think The Other Shoe Just Dropped (Chart on Page)

USPS May Be Unable to Make Payroll in October and Retiree Health Plan Costs, Unions' Letter to White House Says

The letter, which the FederalTimes.com blog provided a scanned copy late last week, says:

"[USPS] top executives are now saying that the USPS will default on a $5.4 billion payment to prefund future retiree health benefits on September 30, 2009. And its government affairs representative are now telling Congressional staff that the Postal Service may not be able to make payroll in October and will be forced to issue IOUs instead."

20 Comments

Davos's picture
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Re: Daily Digest - July 21

Vacation @ Block Island

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News From 1930 Tidbit

Governor R.A. Young of Fed. Reserve Bd. warns banks to be careful about the increasing amount of loans against securities. About the crash last fall, says: “there is food for serious thought in the fact that, under our excellent banking system ... we nevertheless came to the brink of a collapse, had to resort to heroic action to prevent a panic, and were not able to avoid ... severe liquidation and what appears to be a business depression. Is this unavoidable? Is it necessary for this country to go through periods of reckless exuberance, accompanied by enormous credit expansion and fantastic levels of money rates that profoundly disturb the financial structure not only here but all over the world?” The cost of these episodes is paid in unemployment and worldwide depression. Reminds banks that security loans are safe only if a liquid market exists for the security; large scale sales can cause a drop in value, “and there is no telling when such a drop may terminate and what catastrophe may follow ...” Calls on banks not to assume Fed will always be able to help them, since its resources are “not inexhaustible.”

Monday, July 21st, 1930

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Re: Daily Digest - July 21

Sweet view Davos!!!! Hope you had a relaxing time.

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Ruhh
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Re: Daily Digest - July 21

Brazil, Canada pull money out of Treasurys
http://www.marketwatch.com/story/story/print?guid=F22AA21D-1069-4E39-B35...

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RogerA
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Jeff Borsuk
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Re: Daily Digest - July 21

Re: Block Island...looks like all you need now is golf balls, tees and driver...

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Re: U.K.'s Tax Well Running Dry

While suffering through the Fed testimony, it was interesting to come across this blatantly truthful article in Forbes (emphasis mine).

http://www.forbes.com/2009/07/21/britain-tax-revenues-markets-economy-deficit.html?feed=rss_markets

The collapsing property market, high numbers of bankruptcy claims and a slide in consumer spending has cost the U.K.'s coffers $10 billion, $8.2 billion and $10.5 billion in stamp duty, corporation tax and value-added tax, respectively, in the last year.

The National Audit Office, a public body responsible for auditing the government's finances, found that in the 2008-2009 tax year, $7.5 billion of outstanding debts owed to the government had been written off because they were unrecoverable. Meanwhile, the amount of "doubtful debt," or debt that the government doesn't expect to reclaim, rose to $27.1 billion from $12.9 billion, partly as a result of self-assessment tax forms and fraud.

 

Tony Dolphin, senior economist at the Institute for Public Policy Research, believes that there's little the British government can do to patch up its finances in the short term. "The interest rate is almost at zero, fiscal stimulus has been all but used up," he said. "It's now down to the Bank of England and quantitative easing."

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Farmer Brown
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Regional Banks Post Losses as Loans Sour

from: http://www.cnbc.com/id/32043649

Quote:
Regions Financial and Comerica, two large U.S. regional banks, posted second-quarter losses on Tuesday as deteriorating commercial lending and property markets cause bad loans to soar.
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Davos
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Re: Daily Digest - July 21

Hello Jeff: Last time I played golf it was cold and the iron flew out of my hand and I took out a picture window, I'll leave the golf to little Davos now...

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Treasury yields fall on Fed exit strategy

from: http://www.ft.com/cms/s/0/6317cbc4-7608-11de-9e59-00144feabdc0.html?nclick_check=1

I think some quotes here qualify for Dr. M's "quotable quotes/DOW graph".  By the way, have any updates been made to that graph?

Quote:

Treasury yields fall on Fed exit strategy

By Sarah O’Connor and Tom Braithwaite in Washington and Michael Mackenzie in New York

Published: July 21 2009 16:28 | Last updated: July 21 2009 19:10

Yields on US Treasuries fell sharply on Tuesday as Ben Bernanke outlined the Federal Reserve’s plan to extricate itself from its policy of near-zero interest rates but stressed the economy was too fragile to implement it soon.

In response to increasing ­pressure from investors and ­politicians, Mr Bernanke set out the Fed’s “exit strategy” for its policies, which have pumped huge amounts of liquidity into the economy and prompted fears about inflation.

“I want to be clear that we have a very long haul here because even if the economy begins to turn up in terms of production, unemployment is going to stay high for quite a while, so it’s not going to feel like a really strong economy,” he said in his bi-annual report to Congress.

The Fed expects the economy to start growing again at the end of this year but thinks the unemployment rate – now at 9.5 per cent – will remain elevated through 2011.

His testimony boosted the price of Treasuries and sunk the yield on the 10-year note by 12 basis points to 3.46 per cent as investors were persuaded that rates would stay low for a long time.

Marco Annunziata, chief economist at UniCredit Group, said that reaction might not last. “Long-term yields will again face upward pressures from a combination of inflation fears and recovery hopes,” he said. “Inflation will not be a risk for some time but inflation fears could still complicate the Fed’s job sooner than it would like.”

The Fed has lowered interest rates to close to zero to support the recession-ravaged economy and greatly increased the amount of bank reserves in the system as a by-product of its programmes, including the purchase of $300bn of Treasuries.

“We…believe that it is important to assure the public and the markets that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed,” Mr Bernanke said in testimony to the House Financial Services committee.

The Fed could raise the interest paid on reserve balances to help set a floor under interest rates, Mr Bernanke said, and use “reverse-repo” agreements in which it would sell securities from its portfolio with an agreement to buy them back at a later date. It could even simply sell off long-term securities should that prove necessary, he added.

Barney Frank, Democratic chairman of the committee, was satisfied: “I am persuaded by the chairman and others that we are able, in an orderly way, to undo what we had to do so that there will not be that inflationary impact.”

However, Mr Bernanke faced scepticism and some outright criticism from other lawmakers, many of whom have become concerned about the major role the Fed has assumed during the crisis.

Ron Paul, the Texan Republican, said the Fed’s policies had caused the financial crisis and would lead to a weaker dollar, a loss of confidence from foreign governments and ”political turmoil”.

”Doubling the monetary supply didn’t work; quadrupling it won’t either,” he said.

Mr Paul, a long-time critic of the Fed, wants to give Congress oversight of monetary policy in a bill that has gathered the support of more than half the members of the House of Representatives.

Mr Bernanke mounted a defence of the independence of the Fed amid such calls for greater scrutiny. “A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability,” he said.

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Re: Daily Digest - July 21

Nice to see Ambrose Evans-Pritchard carrying the torch for the defcon1 financial armageddon brigade. If he see this http://www.ft.com/cms/s/0/b576ec86-761e-11de-9e59-00144feabdc0.html?ncli... he will need to be tied down. No T Bills thanks America, just useful stuff. Have a nice holiday!

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China to Deploy Forex Reserves

http://www.ft.com/cms/s/0/b576ec86-761e-11de-9e59-00144feabdc0.html

China to deploy forex reserves

By Jamil Anderlini in Beijing

Published: July 21 2009 19:09 | Last updated: July 21 2009 19:09

Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday.

“We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,” he told Chinese diplomats late on Monday.

Mr Wen said Beijing also wanted Chinese companies to increase its share of global exports.

The “going out” strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China.

Qu Hongbin, chief China economist at HSBC, said: “This is the first time we have heard an official articulation of this policy ... to directly support corporations to buy offshore assets.”

China’s outbound non-financial direct investment rose to $40.7bn last year from just $143m in 2002.

Mr Wen did not elaborate on how much of the $2,132bn of reserves would be channelled to Chinese enterprises but Mr Qu said this was part of a strategy to reduce its reliance on the US dollar as a reserve currency.

“This is reserve diversification in a broader sense. Instead of accumulating foreign exchange reserves and short-term financial assets, the government wants the nation to accumulate more long-term corporate real assets.”

State-owned groups, particularly in the oil and natural resources sectors, have stepped up their hunt for overseas companies and assets on sale because of the global crisis.

China Investment Corp, the $200bn sovereign wealth fund, has been buying stakes in overseas resources companies and has taken a 1.1 per cent stake in Diageo, the British distiller.

In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies.

“Everyone is saying we should go to the western markets to scoop up [underpriced assets],” said Chen Yuan. “I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.”

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Re: Daily Digest - July 21

Fantastic Q&A with Grayson. Too bad they don't get more than 5 minutes to ask questions!

And now on to the ridiculous....

Bernanke Gets Top Marks as Investors Say Economy Is Past Worst

Quote:
Sixty-one percent of investors surveyed in the first Quarterly Bloomberg Global Poll say the world economy is stable or improving and almost 75 percent take a favorable view of the 55-year-old chairman. By almost a three-to-one margin, they say Bernanke has earned another four-year term when his current one expires in January.

WOW!

http://www.bloomberg.com/apps/news?pid=20601170&sid=ayUz0vNR2XGc

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Re: Daily Digest - July 21

http://www.cnbc.com/id/32050489

Two Biggest US Pension Funds Suffer Huge Losses
By: Reuters

Calpers, the largest U.S. pension fund, said on Tuesday it suffered a record 23.4 percent drop in the value of its assets in the last year.

Assets fell to $180.9 billion on June 30 from $237.1 billion a year earlier, the California Public Employees' Retirement System, or Calpers, said. "This result is not a surprise; it is about what we expected given the collapse of markets across the globe," Joe Dear, the fund's chief
investment officer, said in a statement.

The fund's assets dipped as low as $160 billion in March of this year.

Calpers said it wanted flexibility to invest in private equity, real estate and infrastructure and planned a fuller asset allocation and liability review in 2010.

Last week Calpers sued the three largest credit rating agencies for giving perfect grades to securities that later suffered huge subprime mortgage losses.

Separately, the California State Teachers' Retirement System, or Calstrs, said it posted a 25.0 percent loss in the fiscal year ended June 30.

Calstrs, the second-largest U.S. public pension fund, said its initial estimate is that its assets totaled $118.8 billion for the fiscal year.

"In addition to the severe downturn in the global stock markets, the return results were affected by how Calstrs recorded the unprecedented drop in real estate values," the fund said in a statement.

"Calstrs recorded or 'wrote down' the value of its worldwide real estate holdings in a single year, rather than spreading out the expected losses over several years," the fund said.

Moody's Investors Service said on Friday the top AAA credit ratings of California's two main public pension funds— Calpers and Calstrs— were placed on review for a possible downgrade in the latest fallout from the state's budget crisis, which was finally resolved late on Monday. Lawmakers may vote on the agreement between Governor Arnold Schwarzenegger and lawmakers by Thursday.

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Your Tax Dollars/Stimulus at work

Sliced ham at $550,000 lb....hyper-inflation is here already!

http://www.recovery.gov/?q=content/contracts-recipient-summary&id=12-AG3...

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eternal sunshine
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Not funny

Industrial Action at Vestas' UK Plant

Newport, UK [RenewableEnergyWorld.com]

Workers arriving at the Vestas wind turbine factory on the Isle of Wight today are being turned away by police due to a sit-in protest by about 25 employees, the BBC reports.

Vestas is set to lay off 525 workers at the Newport factory at the end of July due to what it says is reduced demand for wind turbines in northern Europe. However, the offices at the site have now reportedly been occupied by workers at the plant, who say they will stay until "someone listens" having previously called for government action to preserve ‘green’ jobs

One un-named worker was quoted saying: "What we would like to see is the government actually taking it over and possibly nationalising it."

Vestas has not publicly commented on the issue.

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LogansRun
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Re: Not funny

eternal sunshine wrote:

Industrial Action at Vestas' UK Plant

Newport, UK [RenewableEnergyWorld.com]

Workers arriving at the Vestas wind turbine factory on the Isle of Wight today are being turned away by police due to a sit-in protest by about 25 employees, the BBC reports.

Vestas is set to lay off 525 workers at the Newport factory at the end of July due to what it says is reduced demand for wind turbines in northern Europe. However, the offices at the site have now reportedly been occupied by workers at the plant, who say they will stay until "someone listens" having previously called for government action to preserve ‘green’ jobs

One un-named worker was quoted saying: "What we would like to see is the government actually taking it over and possibly nationalising it."

Vestas has not publicly commented on the issue.

Typical European attitude.....The Gov't should take care of me....sad.

On a recent trip out of the country I met a Brit that was on Holiday with his family.  He was there on the gov'ts dime via living assistance.  He then went on to tell me that he has had 5 jobs over the past 10 years.  All in which he had received gov't assistance to start the company.  None went well due to his lack of work ethic but this last time he said he couldn't get a loan from the gov't but if he was a Packie he'd get one all day long.  Sad.  He lengthened his Holiday by 7 days (he had been there for 17 days already) and said his customers could wait.  This was not an isolated attitude by the 40 or so Brits that were on Holiday at the same time.  Almost to a man, they felt the gov't should be taking better care of them and their entitlement of funds from the gov't was a given.  Sad.  Remember when the Brits were known to be tough, never give up attitude?  No longer.  They're becoming French.

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Re: Daily Digest - July 21

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5857074/Fiscal-ruin-of-the-Western-world-beckons.html

Not sure I agree with the proposed solution, but the diagnosis is right on IMO.

Fiscal ruin of the Western world beckons

For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state.

 
 

Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.

A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go. "The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb", said the Teachers Union of Ireland.

Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc.

"Something has to give," said Professor Colm McCarthy, the report's author. "We're borrowing €400m (£345m) a week at a penalty interest."

No doubt Ireland has been the victim of a savagely tight monetary policy - given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

As the International Monetary Fund made clear last week, Britain is lucky that markets have not yet imposed a "penalty interest" on British Gilts, given the trajectory of UK national debt – now vaulting towards 100pc of GDP – and the scandalous refusal of this Government to map out any path back to solvency.

"The UK has been getting the benefit of the doubt, both in the Government bond market and also the foreign exchange market. This benefit of the doubt is not going to last forever," said the Fund.

France and Italy have been less abject, but they began with higher borrowing needs. Italy's debt is expected to reach the danger level of 120pc next year, according to leaked Treasury documents. France's debt will near 90pc next year if President Nicolas Sarkozy goes ahead with his "Grand Emprunt", a fiscal blitz masquerading as investment.

There was a case for an emergency boost last winter to cushion the blow as global industry crashed. That moment has passed. While I agree with Nomura's Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan's Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l'outrance.

Such policies have crippled Japan. A string of make-work stimulus plans - famously building bridges to nowhere in Hokkaido - has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan's gross public debt will reach 240pc of GDP by 2014 - beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan's bond market will blow up.

Error One was to permit a bubble in the 1980s. Error Two was to wait a decade before opting for monetary "shock and awe" through quantitative easing.

The US Federal Reserve has moved faster but already seems to think the job is done. "Quantitative tightening" has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of "exit strategies".

Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that Autumn.

The Fed's doctrine – New Keynesian Synthesis – has let it down time and again in this long saga, and there is scant evidence that Fed officials recognise the fact. As for the European Central Bank, it has let private loan growth contract this summer.

The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.

My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.

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MarkM
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Re: Not funny

LogansRun wrote:

 Sad.  Remember when the Brits were known to be tough, never give up attitude?  No longer.  They're becoming French.

Socialism will steal a man's soul.

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