Daily Digest

Daily Digest - July 12

Monday, July 12, 2010, 9:48 AM
  • Crisis Awaits World’s Banks as Trillions Come Due
  • Trillions of Bank Debt Coming Due
  • Debt Commission Leaders Paint Gloomy Picture
  • Obama's Debt Commission Warns Of Fiscal 'Cancer'
  • The Eta-Recovery
  • Dear Candidate - What Will You Do if Growth Is Over...?
  • Austrian Economics: True Money Supply, Deflation and Inflation
  • Jesse's Paradox: Gold Can Perform Well In Both Monetary Inflation and Deflation
  • Is The Fed Funding The Treasury Through The Banks?
  • Renewed Push On Ending U.S. Dollar Hegemony
  • Cairn Energy's Arctic Oil Drilling Plan Condemned As Irresponsible
  • The Chinese Coal Monster
  • Corn Prices Bolt Up As USDA Downsizes 2010 Crop Estimates
  • USDA Reports Food Shortages: Wall Street 'Caught Off Guard' by Severity


Crisis Awaits World’s Banks as Trillions Come Due (jdargis)

“There is a cliff we are racing toward — it’s huge,” said Richard Barwell, an economist at Royal Bank of Scotland and formerly a senior economist at the Bank of England, Britain’s central bank. “No one seems to be talking about it that much.” But, he added, “it’s of first-order importance for lending and output.”

Trillions of Bank Debt Coming Due (Davos)

Banks worldwide owe nearly $5 trillion to bondholders and other creditors that will come due through 2012, according to estimates by the Bank for International Settlements. About $2.6 trillion of the liabilities are in Europe.

Debt Commission Leaders Paint Gloomy Picture (SolidSwede)

The nation's total federal debt next year is expected to exceed $14 trillion -- about $47,000 for every U.S. resident.

"This debt is like a cancer," Bowles said in a sober presentation nonetheless lightened by humorous asides between him and Simpson. "It is truly going to destroy the country from within."

Obama's Debt Commission Warns Of Fiscal 'Cancer' (joemanc)

The co-chairmen of President Obama's debt and deficit commission offered an ominous assessment of the nation's fiscal future here Sunday, calling current budgetary trends a cancer "that will destroy the country from within" unless checked by tough action in Washington.

The two leaders -- former Republican senator Alan Simpson of Wyoming and Erskine Bowles, White House chief of staff under President Bill Clinton -- sought to build support for the work of the commission, whose recommendations due later this year are likely to spark a fierce debate in Congress.

The Eta-Recovery (pinecarr)

Which of these scenarios – U, V, or W – is the most likely? Unfortunately, none of these is likely. It rather looks like we are in for a ride on a Greek letter which no-one wants to know or talk about.

Dear Candidate - What Will You Do if Growth Is Over...? (woodman)

“Our current world is about as prepared for "no growth" as is a fish to walk on land. All our current claims systems, the credit outstanding, including government debt, our pension expectations, our savings, our hopes and dreams, are mostly focused on "more tomorrow". Should this "more" disappear as a possibility, we will likely not just see small implications, but rather a disruptive destruction of perceived wealth and security, accompanied by the shattering of hopes and dreams, which might cause further trouble in our highly complex societies. But the worst will happen if we run into such a world completely unprepared. This is why we urgently need policymakers to face the risk of "no-growth", to understand possible implications and to work on mitigation approaches.”

Austrian Economics: True Money Supply, Deflation and Inflation (Davos)

This could help some people understand why the expected effects of monetary deflation have not been appearing as they planned. There is certainly an undeniable slump in aggregate demand that it putting pressure on prices, and some sectors, like housing, are experiencing the collapse of asset bubble.

Some point to credit contraction as deflation, but as the Austrian school would point out, credit is not money, only a means of money creation. The Fed owns a printing press, and as most recently seen, can expand its Balance Sheet and True Money Supply almost at will.

Jesse's Paradox: Gold Can Perform Well In Both Monetary Inflation and Deflation (Davos)

Gold will be topping when it the smart money believes that the real economy is becoming naturally sustainable, robustly organic in its credit creation, and healthy in the growth of the median wage to support consumption, without subsidy or interference from the Federal Reserve or the draconian taxes of an outsized financial sector.

Is The Fed Funding The Treasury Through The Banks? (pinecarr)

Recently I decided to take another look at the Fed's balance sheet, and while I am none too surprised, I must report that the Fed has printed approximately $200B from April 7th 2010 to June 30th 2010. What is interesting is *how* they went about doing it.

Renewed Push On Ending U.S. Dollar Hegemony (pinecarr)

The US dollar should be cast off as the world's main reserve currency according to a recent U.N. report, with a number of states including Russia and China calling for a new reserve currency system. Dmityr Medvedev’s opening words at the St. Petersburg International economic forum were that the world has changed with the economic centre of gravity has shifting.


Cairn Energy's Arctic Oil Drilling Plan Condemned As Irresponsible (pinecarr)

A decision by a British oil company to start drilling wells in "iceberg alley" off Greenland has been described as "completely irresponsible" by environmental groups in the light of BP's problems in the Gulf of Mexico.

The Chinese Coal Monster (Jeff B.)

Like everything else in China, coal production statistics are simply immense. China now consumes and produces close to 50% of all the coal in the world. Thus, changes in Chinese consumption and / or production may have a dramatic impact upon the global coal market.


Corn Prices Bolt Up As USDA Downsizes 2010 Crop Estimates (Davos)

U.S. Department of Agriculture report showing 1 million fewer acres of corn planted this year than earlier projected, and almost 300 million fewer bushels of corn in storage.

USDA Reports Food Shortages: Wall Street 'Caught Off Guard' by Severity (Davos)

Several recent headlines indicate that food prices will continue their swift climb upward. These troubling new reports show that agriculture production and stored grains are critically low and experts are now predicting food shortages on a grand scale.

Please send article submissions to: [email protected]


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Re: Daily Digest - July 12

"A CHINESE firm that aims to compete with Western rating agencies declared the United States a worse credit risk than China in its first report on government debt yesterday.

Dagong International Credit Rating Co's verdict was a break with Moody's, Standard & Poors and Fitch, which say US government debt is the world's safest.

Dagong said it rated the US below China and 11 other countries, including Switzerland and Australia, because of high debt and slow growth. It warned that the US is among countries that might face rising borrowing costs and risks of default.

The report comes amid complaints by Beijing that Western rating agencies fail to give China full credit for its economic strength, boosting borrowing costs - a criticism echoed by some foreign analysts. At June's G20 summit in Toronto, President Hu Jintao called for the creation of a more accurate system.

Dagong, founded in 1994 to rate Chinese corporate debt, says it is privately owned and pledges to make its judgments impartially.

Dagong's chairman, Guan Jianzhong, said the current Western-led rating system is to blame for the global crisis and Europe's debt woes. He said it "provides the wrong credit-rating information" and fails to reflect changing conditions."

.......................1A) China's Rating Agency Grades USA Only With AA

"TOKYO (Dow Jones)--A sovereign debt analyst at ratings service Standard & Poor's said Monday that the Democratic Party of Japan's losses in Sunday's elections may negatively affect the nation's sovereign ratings, which have already faced threats of downgrades.

"Under the current DPJ-led coalition government, it'll take time for important legislation to be passed. This could be indirectly negative for Japanese sovereign ratings," Takahira Ogawa, director for S&P's sovereign ratings, told Dow Jones Newswires.

Prime Minister Naoto Kan's DPJ won less than 50 of the 54 seats it was contesting in Sunday's Upper House elections, and the coalition it dominates lost its majority in the chamber. The DPJ will remain the ruling party because of its hold on the more powerful Lower House, but legislation could grind to a halt as the DPJ will need the help of other parties in the upper chamber to pass any laws other than those regarding budgets.

But Ogawa said the ratings agency should examine how successful the government will be in terms of reducing spending before the agency reflects the election results in its ratings.

Ogawa also warned that the government needs to cut its debt ratio within the next few years.

Public liabilities are expected to top 200% of gross domestic product this year, the highest ratio among industrialized nations, according to recent International Monetary Fund estimates. "

"The true scale of the national debt is £2 trillion - more than twice the official figure, an alarming study shows.

The black hole in the public accounts equates to £78,000 for every household in the country.

The 'real' state of the national finances is exposed in a study published today by the Centre for Economics and Business Research, which warns of a series of mammoth debts that aren't revealed by the official figures.

The national debt - forecast to reach £932m by next spring - does not include a number of expensive liabilities, such as the cost of civil service and town hall pensions and projects funded under the Public Finance Initiative.

Putting these liabilities into the official figure would add £1.13 trillion to Britain's whopping overdraft, according to CEBR. "

................3A) Pound Falls on Speculation UK Economic Recovery Is Faltering

"BOSTON — The heads of President Barack Obama's national debt commission painted a gloomy picture Sunday as the United States struggles to get its spending under control.

Republican Alan Simpson and Democrat Erskine Bowles told a meeting of the National Governors Association that everything needs to be considered — including curtailing popular tax breaks, such as the home mortgage deduction, and instituting a financial trigger mechanism for gaining Medicare coverage.

The nation's total federal debt next year is expected to exceed $14 trillion — about $47,000 for every U.S. resident.

"This debt is like a cancer," Bowles said in a sober presentation nonetheless lightened by humorous asides between him and Simpson. "It is truly going to destroy the country from within."

Simpson said the entirety of the nation's current discretionary spending is consumed by the Medicare, Medicaid and Social Security programs.

"The rest of the federal government, including fighting two wars, homeland security, education, art, culture, you name it, veterans, the whole rest of the discretionary budget, is being financed by China and other countries," said Simpson. China alone currently holds $920 billion in U.S. IOUs."

"July 12 (Bloomberg) -- States can’t count on the federal government for more budget bailouts, the heads of President Barack Obama’s debt commission told governors yesterday.

States that are expecting Congress to authorize more bailout money are “going to be left with a very large hole to fill,” said Erskine Bowles, co-chairman of the National Commission on Fiscal Responsibility and Reform. States including New York and California have urged Congress to extend stimulus spending authorized to combat the recession, including extra Medicaid funding and money to pay public school teachers.

“I don’t think we can count on the federal government again,” Bowles, White House chief of staff under former President Bill Clinton, said at the National Governors Association meeting in Boston. “They just do not have the financial resources.”

While the economy has been expanding, states have yet to recover from the longest recession since the Great Depression. The economic rout cut into tax collections and led them to raise taxes and slash spending on schools, social services and other expenses. States have projected total budget deficits of $127 billion through 2012, according to a report last month by the governors association and the National Association of State Budget Officers."

"US small businesses are having to pay more to borrow relative to the Federal Reserve’s benchmark rate than at any time in at least a quarter of a century, according to official data from the central bank.

The data suggest that small businesses – which form the backbone of the US economy – are not receiving the full benefit from the ultra-low rates that are supporting some larger employers."

"BP PLC will have to step up pension plan contributions at a time costs from its Gulf of Mexico oil-rig explosion and the ensuing environmental disaster are draining much of its cash flow, according to an analyst.

BP executives “are spending all the time worrying about the liability in the Gulf, but there is the pension liability they have to worry about, (too),” said Kenneth S. Hackel, president of CT Capital LLC, Norwalk, Conn., and publisher of credittrends.com."

"July 12 (Bloomberg) -- China is buying unprecedented amounts of uranium, signaling that prices are poised to rebound after three years of declines.

The nation may purchase about 5,000 metric tons this year, more than twice as much as it consumes, building stockpiles for new reactors, according to Thomas Neff, a physicist and uranium- industry analyst at the Massachusetts Institute of Technology in Cambridge. "

"July 12 (Bloomberg) -- Bank of America Corp. and Wall Street firms that notched perfect trading records in the first quarter are now depending on an accounting benefit last used in the depths of the credit crisis to prop up their results.

Bank of America, the biggest U.S. bank by assets, may record a $1 billion second-quarter gain from writing down its debts to their market value, Citigroup Inc. analyst Keith Horowitz estimated in a June 23 report. The boost to earnings, stemming from an accounting rule that allows banks to book profits when the value of their own bonds falls, probably represented a fifth of pretax income, Horowitz wrote."

"Ignore the uber-low yields on U.S. government debt. It's only a matter of time before markets lose confidence in the U.S. government argues Harvard professor Niall Ferguson.

Right now Washington is benefiting from global worries, such as those being seen in Europe, but that won't last for long. If you want to look for a pivotal moment: Watch for when debt interest payments begin to eclipse defense payments. In fact, this will happen inevitably, even if there's no imminent spike in Treasury yields."

...................10A) Nial Ferguson Says Paul Krugman's Advice Will Lead Us Down A Road To Ruin

  • Other news and headlines:

Chance of Euro Death up 50%: Economist (CNBC)

Funding fear could put UK back into recession

BP in talks to sell Apache $12 billion in assets and BP says oil spill costs climb to $3.5 billion 

More Oil Funds Could Be Needed (In addition to the $20 billion)

Seattle's price tag for clean water: $500 million

Farmers Fear Loss of Tax Breaks--and Land (California)

Default worries grow on Belgian, French bonds, among others (For the second quarter)

US commercial property sales 'sluggish'

Federal Reserve Worry List Gets Longer (ABC News)

California's stimulus funding starts to run dry

NC tax delinquents rise, adding to budget woes

Doctors Threaten to Pull Out of Texas Medicaid

Temporary fixes have Ohio ahead of red-ink trend, but $8B gap likely next year

Russia to Boost Ruble Debt Sales to Fund Deficit

Analysts expect further 10% plus price falls in residential property in Dubai and Abu Dhabi

'Radical changes' in store for Montgomery County 2011 budget

Failed Islamic Bond Auctions Forcing Govt to Look Overseas (Indonesia)

Nortel forced to repay £2bn UK pensions shortfall

Government may plug BT pensions (UK)

More Americans' credit scores sink to new lows

Pensacola Beach Daily Oil Spill Report July 12 2010 (Video....sending out samples of water to see why it bubbles)

Gen. Casey: America may be in Iraq and Afghanistan for another decade

Survey: Teachers Retirement System Underfunded (Oklahoma....only 50.5% funded)

City taxpayers foot 90% of municipal pensions (New York)

Teen employment levels plunge (""This could end up being the worst teen summer job market in employment records going back to 1948," said John Challenger, CEO of Chicago outplacement firm Challenger, Gray & Christmas.")

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Re: Daily Digest - July 12

Lots of good stuff today. Sax, Chris, as always - great work.



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Re: Daily Digest - July 12

Re the Austrian Economic article:  To not evolve a definition of money supply to reflect reality since the world went online and global is pretty pathetic I think.  Credit not being considered money is laughable.

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Re: Daily Digest - July 12


"LINCOLN (CHICAGOPRESSRELEASE.COM) — Springfield isn’t the only community hurting because the state can’t pay its bills on time.

Lincoln is suffering on two fronts, Mayor Keith Snyder says.

One is that the city’s share of state income tax revenue is about seven months behind. The other is the Illinois Department of Corrections failure to keep up with sewer bills for two state prisons south of Lincoln."

"Snyder said Lincoln received only nine income tax payments in the fiscal year ending April 30, compared to 12 the year before. And because of the economy, even those receipts ran 16 percent lower than last year’s income tax revenue.

“We’ve been hit both ways,” he said.

Sewer bills owed by the Lincoln Correctional Center and the Logan Correctional Center are also taking a toll.

“Back in May, the state was well over $100,000 arrears in those payments. They made some movement in catching up and they’re now $69,245 in arrears for both,” Snyder said."


Late payments from the state totaling more than $400,000 for the last five months are a major problem for Taylorville, Treasurer Terri France said.

“Additionally, we have the Taylorville Correctional Center in our community, and they have a water bill,” she said. “At the end of May, they owed us over $100,000 for their water bill lone.”

The corrections department since then has made two payments and brought the delinquent amount down to $62,000.

“We’re just kind of at the state’s mercy until they send a check, and it’s kind of few and far between,” France said."


Village Manager Del McCord said the state owes Chatham about five months worth of income tax distributions, totaling about $350,000.

“It just affects our whole operation. We just can’t make any plans to complete projects or to fill positions that have been open for a while in the police department or electric department,” McCord said."


"The state’s debt to Jacksonville totals about $800,000, Mayor Andy Ezard and city treasurer Ron Smiljanich said.

Last month, the city received $147,209 in income tax payments it was owed for January."


Rochester is borrowing from its sewer and water funds to make up for the lack of income tax payments, Village President Dave Armstrong said.

Office manager Steve Ransford said the village received its January income tax voucher in June and is owed $121,700 for the last five months."

"But S&P said the negative outlook reflects the potential for a downgrade if the government doesn't stick to the scale of its ambitious fiscal consolidation plan. "A slackening of that effort, in our view, could put the U.K.'s net general government debt burden on a trajectory that would be incompatible with a AAA rating," Cullinan said."

"WASHINGTON (MarketWatch) -- Trimming short-term interest rates further would be one tool the Federal Reserve could use to support the economy if threatened by a renewed downturn, said Federal Reserve Board Governor Elizabeth Duke on Monday. "We still have tools. Obviously we have more room on the tightening side than we do on the easing side," Duke said in an interview on Fox Business Channel. "But we still have balance sheet tools and we could still bring interest rates down just a bit," Duke said. At the moment, it doesn't look like a double-dip recession is likely, Duke said. "It is a moderate recovery even though some of the recent data has come in pretty soft," she said. Economists said the Fed could lower the interest rate paid on excess reserves to zero from 0.25%. The Fed's primary interest rate tool, the Fed funds rate, is currently set in a range between 0 and 0.25%. "



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Re: Daily Digest - July 12
rickets wrote:

Re the Austrian Economic article:  To not evolve a definition of money supply to reflect reality since the world went online and global is pretty pathetic I think.  Credit not being considered money is laughable.

Something told me you'd get great pleasure out of that. With that in mind I'm certain you will also find these links to be another super read.



I'm kind of curious as to your background Rickets...

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Re: Daily Digest - July 12

Re the Austrian Economic article:  To not evolve a definition of money supply to reflect reality since the world went online and global is pretty pathetic I think.  Credit not being considered money is laughable.


Now I'm interested. I'm fairly new to this economics-thing and see myself pretty much self-taught. It's the Austrians that have caught my interest and, it's their views that resonate the most with my observations as well.

I'd be happy arguing that credit isn't money, because while it becomes money when it is used, that moeny needs to be repaid, destroying it. This means that credit represents a temporary 'mini-bubble' of money. Of course, credit on which one defaults turns into permanent money, as no non-consumption production (the repayment) offsets the non-production consumption (the loan) that the credit enabled.Thus after the use and repayment of credit, the amount of money is again the same as before.

Still, we see that we have rapid credit expansion (contraction, yatta yatta), where the money created by the credit won't get destroyed by repayment - by design - thus the process is inflationary.

Is the distinction here that credit isn't money because it enables the creation of money, and only a default will cause the credit-created money to be permanent?

Or am I missing something?




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Re: Daily Digest - July 12

Interesting how these towns feel the state "has them over a barrel" on late payments for water/sewer.  IF it was a private customer, they would simply cut off the water supply.  WHY don't they simply try that with the state ?  I bet a few days of no water at the correctional facility would prompt the state to reset it's spending priorities, huh ?

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Re: Daily Digest - July 12


There is an endless debate on what should be included in calculating money supply.  My last post was more in response that the author seemed to think people who were supposedly Austrian economists were changing what that group's definition of money is.  My point was to say that is a little crazy not to evolve a definition of money over the last 20 years given all the changes to how money works and moves. 

I am certainly not arguing against the Austrian logic here.  My personal preference regarding what is money:  I think revolving lines of credit and credit card lines of credit and loans along these lines should be viewed as cash to some extent.  Businesses die when their revolving lines get pulled.  Many - not all - consumers use their credit cards as cash and a lifeline.  These vehicles add to the velocity of money, and can be used instantly for buying power.  When they are taken away, velocity slows and access to cash/cash equivalents diminish.  Currency, if you will, is reduced.  This money, to me, is more money than what the banks have parked at the fed.  That money has many more hurdles to clear before it starts circulating around the economy.

For Davos - I love that John Williams calculates M3 still - and I find that at least intuitively persuasive!  Its why I subscribed to him for a while. 


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Re: Daily Digest - July 12

In regard to the "shocking news" of food shortages, the USDA statistics are worthless, as they are always cooked to reflect a continual surplus of commodities.  Farmers lost billons of dollars in income this past year, due to USDA manipulating the estimated numbers of bushels upward. I wonder how on Earth there could have been record crops last year when 35% of agricultural counties were declared disaster areas.  As a well known person once said, the Math just doesn't add up.

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Re: Daily Digest - July 12

It's still too early to be sure, but it looks like a huge corn crop here this year.  USDA was offering a very attractive crop insurance program for dryland corn, and a lot of growers signed on, thinking they'd cash in on the failure.  As luck would have it, it's been a pretty good year for rain in some parts, and I'm seeing some good looking corn out there.  Won't be record yields per acre, but it's a lot of acres... basically everyone's non-irrigated land.

I think a lot of growers are wondering where they're going to find an extra corn header pretty quick...

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Re: Daily Digest - July 12
Don't you love how everything is circling the drain?
"Throughout the recession and recovery, many European banks have sought to sweep their problems under the carpet in the hopes that they could solve them in a better and more profitable future. Now, though, they're running out of time."

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