Daily Digest

Daily Digest - May 18

Monday, May 18, 2009, 10:07 AM
  • Economic Doom is getting Worse!
  • Congressman Alan Grayson, on a roll, (H/T Fujisan, Video)
  • Report: Some at U.S. diplomatic posts earn less than $1 a day (H/T PulV)
  • Beggar thy neighbour
  • U.S. credit card defaults rise to new highs (H/TCM)
  • Roubini on CNBC: "Yellow weeds", Ken Time Bomb - Interest Rates (Video)
  • Loaded Inbound and OUtbound Containers, LA and Long Beach Ports (Chart)
  • House Price Puzzle: Mid-to-High End
  • Empire State Manufacturing Survey: Conditions worsened modestly in May (Chart)
  • Bill Maher With Elizabeth Warren - Good Watch! (Video)
  • Germany drags eurozone faster into slump
  • Hong Kong suffers record contraction
  •  A few A(H1N1) Links Dr. Henry Niman's Map 6,094 U.S. Cases as of this wrtitng, A(H1N1) Current Timeline, CDC Cases


Economic Doom is getting Worse!

The following laundry list puts the US Economy halfway between the Intensive Care Ward and the National Morgue:

- Endless War spending could subsidize every household in America with $1000 per year
- Income is trending down in the United States, England, and Japan
- US banks loan loss reserves are at a 20-year low while profound losses continue
- Of the nearly 9000 US banks, 1575 of them posted a Q1 loss
- Bernanke claims $2 trillion is needed by the big US banks, but they pass the Stress Test
- Municipal bonds and state finances are disasters, as they each appeal for USGovt aid
- A shocking 20% of US homeowners have loan balances greater than their home values
- Half of modified loans result in foreclosure within several months
- Jobs report for April revealed jobless level at 8.9% (massaged) and 15.8% (actual)
- Jobs Report for April included 66k worse revised job losses for March and February
- Continuing jobless claims at 6.56 million, grew 220k just last week
- CALPERS pension fund is insolvent, USGovt pension PBGC guarantee fund in deep deficit
- FDIC requested $500 billion in additional funds to cover bank failures (giant failure coming)
- Car sales still down 40% annually, with steep Japanese car sales declines also
- Detroit carmakers are closing down plants, with huge ripples through entire supply chain
- GM & Chrysler restructures are extremely likely to result in Chapter 7 liquidation in time
- GM burned $1.3B in Q1, burns $113 million per day, unable to transition to green cars
- Business investment down 38% in Q1, a RELIABLE LEADING INDICATOR
- Durable goods up 9% in Q1, but only after Q4 was pushed down from bank shock
- Inventory reduction not key, but rather inventory/sales ratio, since sales way down
- Economic contraction despite lower energy costs from crude oil, natural gas, gasoline
- Housing was false foundation since 2002, now in stubborn decline, the Giant Albatross
- Distress sales make up 40% of all housing sales, led by underwater sales and foreclosures
- Cramdown Law rejection means open season on foreclosures, more huge bank losses
- Banks admit that home loan are not modified after all, a revolving door to foreclosure
- Option ARMs, Jumbos, and Commercial mortgage defaults are ramping up fast
- Commercial mortgage bonds have $70-100 billion that cannot be refinanced, sure to default
- Staggering decline in consumer credit, -80% in Q3, minus $31.7B in Q4/Q1

Note that final line item. Never in modern US Economic history has consumer credit gone negative. Its growth fell sharply in 3Q2008, but it contracted (reduced, shrunk) by $31.7 billion on an aggregate basis in 4Q2008 and 1Q2009.

Congressman Alan Grayson, on a roll, (H/T Fujisan, Video)

Report: Some at U.S. diplomatic posts earn less than $1 a day (H/T PulV)

WASHINGTON (CNN) -- A new State Department report says some local employees hired by U.S. embassies and other posts around the world are so poorly paid they have to cut back to one meal a day or send their children to peddle on the streets.

Beggar thy neighbour

Is this what the first trade war of the global economic crisis looks like?

Ordered by Congress to "buy American" when spending money from the $787 billion stimulus package, the town of Peru, Ind., stunned its Canadian supplier by rejecting sewage pumps made outside of Toronto. After a Navy official spotted Canadian pipe fittings in a construction project at Camp Pendleton, Calif., they were hauled out of the ground and replaced with American versions. In recent weeks, other Canadian manufacturers doing business with U.S. state and local governments say they have been besieged with requests to sign affidavits pledging that they will only supply materials made in the USA.

Outrage spread in Canada, with the Toronto Star last week bemoaning "a plague of protectionist measures in the U.S." and Canadian companies openly fretting about having to shift jobs to the United States to meet made-in-the-USA requirements. This week, the Canadians fired back. A number of Ontario towns, with a collective population of nearly 500,000, retaliated with measures effectively barring U.S. companies from their municipal contracts -- the first shot in a larger campaign that could shut U.S. companies out of billions of dollars worth of Canadian projects.

U.S. credit card defaults rise to new highs (H/TCM)

NEW YORK, May 15 (Reuters) - U.S. credit card defaults surged to record highs in April, with American Express, Citigroup, Bank of America and Wells Fargo posting double digit loss rates, as unemployment climbed to its highest level in 26 years.

Credit card defaults often dip in April as consumers receive tax refunds, so the roughly 10 percent rates reported by most major credit card lenders were disheartening, analysts said, cooling hopes of an early recovery in the industry -- or the U.S. economy.

"The idea that we were going to rebound was put to rest for a little bit. And it will only get weaker as the year goes on," said Scott Valentin, an analyst at FBR.

* American Express default rates jumps to 10.10 percent

* Bank of America charge-off rate soars to 10.47 percent

* Citi credit card default rate rises to 10.21 percent

Roubini on CNBC: "Yellow weeds", Ken Time Bomb - Interest Rates (Video)

4:30 on is most interesting

Loaded Inbound and OUtbound Containers, LA and Long Beach Ports (Chart)

House Price Puzzle: Mid-to-High End

I've linked to a few pieces of the puzzle below.

But this adds up to more supply (in the mid-to-high end) because of rising foreclosures - and limited demand because sellers at the low end are mostly banks or short sales (so there are no move up buyers), and tight financing.

To me, this suggests prices will fall much further in many mid-to-high end areas.

Empire State Manufacturing Survey: Conditions worsened modestly in May (Chart)

Bill Maher With Elizabeth Warren - Good watch! (Video)

Germany drags eurozone faster into slump

The recession in the eurozone intensified markedly in the first quarter, dragged down by an almost 4 per cent contraction in the German economy.

Gross domestic product in the 16-country region fell by a much larger-than-expected 2.5 per cent in the period – outpacing the US slowdown – according to official data released on Friday. The contraction deepened what was already the worst recession in continental Europe since the second world war. The final quarter of 2008 had seen a 1.6 per cent fall in GDP.

The scale of the slowdown highlighted the dramatic impact of the global crisis on continental Europe. Germany’s export-led economy, the largest in Europe, shrank by 3.8 per cent in the quarter – the largest drop since the country started compiling quarterly data in 1970.

“Spring has not yet arrived in the euro area,” said Julian Callow, European economist at Barclays Capital. The US economy contracted by 1.6 per cent in the first quarter.

The latest data, which sent the euro sharply lower, came at the end of a week in which European policymakers had become more confident, spotting “green shoots” on the horizon. Jean-Claude Trichet, European Central Bank president, on Monday described the global economy at “around the inflection point”.

Economists said forward-looking indicators still suggested that the worst of the eurozone’s recession was over. However, the latest data will increase the pressure on politicians, who were warned this week by the International Monetary Fund that economic recovery in the region next year depended on bolder and more forceful policy action.

Marco Annunziata, chief economist at UniCredit, argued that the first-quarter slump “increased the chances of a better performance in the second quarter”, but had put previous policy responses in a bad light. The data “showed that there was a strong need for a much more forceful, co-ordinated fiscal response right from the start”.

Besides Germany, the pace of economic contraction was particularly severe in the Netherlands, which saw a 2.8 per cent fall in GDP, and Italy, which reported a 2.4 per cent decline.

However, the most dramatic fall was in Slovakia – the eurozone’s newest member – where GDP fell 11.2 per cent compared with the previous three months, reflecting its dependence on exports to Germany and car sales.

In contrast, France continued to fare relatively well amid the global economic storms, thanks to the bigger role played by domestic demand in supporting growth. It reported a 1.2 per cent fall in first-quarter GDP.

The first-quarter eurozone GDP figures may have been exaggerated by companies cutting production faster than demand fell, and running down inventories, economists said. That could result in a rebound in production in the second quarter.

Hong Kong suffers record contraction 

By Xi Chen and Reuters in Hong Kong
Published: May 15 2009 14:40 | Last updated: May 15 2009 14:40

Hong Kong’s economy contracted at the fastest rate since the Asian financial crisis in the first three months of this year as exports passing through the territory saw their biggest drop in more than half a century.

The government on Friday predicted gross domestic product would contract by up to 6.5 per cent this year, after announcing the economy had shrunk at an annual rate of 4.3 per cent in the first quarter of 2009.

The fall in GDP was double that expected by some analysts and followed a plunge in exports and private consumption, plus signs of a deterioration in investment in the likes of buildings, machinery and other business equipment.

Total exports dropped 22.7 per cent in the first three months of 2009 compared with the previous year – the biggest drop since 1954. Overall investment fell by 12.6 per cent and private consumption by 5.5 per cent. The unemployment rate also rose to a 38-month high of 5.2 per cent in the first quarter.

Despite an upturn in the stock and property markets in the past two months, the Hong Kong economy has been hard hit by the global financial crisis because of its dependence on exports.

In February, the economy was forecast to contract 2.5 per cent for 2009. Now the government estimates it to drop between 5.5 and 6.5 per cent.

”It is obviously worse than expected. It tells you how a severe global financial crisis can affect a healthy, small and open economy,” said Dong Tao, chief economist at Credit Suisse.

”Will Hong Kong see a further deterioration? It is not up to Hong Kong -- it is up to the rest of the world especially the United States, China and the financial market.”

John Tsang, Hong Kong’s financial secretary, said the government would respond to the downturn by unveiling a new package of stimulus measures in the coming month. But he did not give any clue as to what it might contain and the government came under fire from economists for reacting too late to the economic crisis.

Kevin Lai, senior economist at Daiwa Institute of Research, said the government should have done more to support the economy.

”There was a lack of fiscal support in Hong Kong compared with anywhere else and this fiscal timidity is showing in the GDP numbers,” Mr Lai said. ”The government has already promised to do something within a month, but I’m afraid it is too little too late. They have missed the window of opportunity there.” 

  A few A(H1N1) Links Dr. Henry Niman's Map 6,094 U.S. Cases as of this wrtitng, A(H1N1) Current TimelineCDC Cases 


Davos's picture
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Re: Daily Digest - May 18

 Thanks for all the hat tips. I found both on the comment section of the blogs, easiest way for me to capture them.

The Graysen video is priceless. I really like the guy (and his suits remind me of the late "Teflon Don's"). Amazing, no insurance regulator could say enough. Now they are on the gravy train.

Oh well, like another poster (Jesenica) said:

"In my opinion it is clear that the lunatics are running the asylum."
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Re: Daily Digest - May 18


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Re: Daily Digest - May 18

Anybody else think today's move in the markets looks a bit suspicious? Goldman Sachs pipes up this morning with a 'fundamentals sound for recovery' and on the back of little data news the FTSE finshes up around 2.8% and S & P's doing very nicely thank you.

Everything must be fine then...


Oh, and the DAX is up over 3% today - not bad considering Davos's piece above linking to Germany's situation.

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Re: Daily Digest - May 18

Don't know if anyone saw this piece in the WSJ:


The article discusses the changes that the author believes will be coming to the role of the Federal Reserve. I tend to think that the public awareness factor of the article is a big plus, and the fact that it makes mention of some of the broad and unchecked power of the Fed in a crisis is also a good thing. My primary criticism is the outrageous view that the FED is today "independent," and not subject to "politics." If we narrowly define politics to mean Presidential, elephant and donkey stuff, there might be some merit to that statement. But when one considers that Presidents are largely selected based on economic conditions, it is quite easy to see how a Federal Reserve chairman can completely make or break a presidency. Unfortunately, Joe taxpayer always looks to the obvious front man (el presidente) and rarely looks at the real drivers of economic and monetary policy...

Further, it is difficult to call the Fed politically independent when we see the revolving door politics that take place between the major banks, the FED itself, the government, and favored academic institutions. In just those two people, we combine the major elements: Paulson representing Goldman Sachs but masquerading as a Treasury Secretary; and Bernanke representing the major banks and academia while masquerading as an "independent" central banker.

The article further mentions Larry Summers' research that central banks are "less effective at fighting inflation when politics drives their decisions." This type of language is intentionally misleading. First, the Fed is the ultimate cause of inflation - not the fighter thereof. Is it reasonable to complain that the arsonist does not have the tools he requires to fight fires adequately? Secondly, it is quite clear in hindsight (and perhaps at the time as well) that the dismantling of the Glass Steagall Act greatly fueled the entangled banking interests that enabled the subprime disaster. I was too young to care at the time (1999), but I'd really like to know what Larry's justification for that was. For now, I see that he caved in to corporate banking interests. That's what I call corrupt politics. Clearly, this man knows exactly how to "fix" the Federal Reserve. Good luck to us all.

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Re: Daily Digest - May 18
Davos wrote:


Oh well, like another poster (Jesenica) said:


"In my opinion it is clear that the lunatics are running the asylum."


When I saw that comment the other day I immediately thought of the song by Fun Boy Three and the dam song has been rolling around in my head ever since.

So that others can suffer the same plight (since we are all in this together), I thought I would post the utube link to the song :-)


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Re: Daily Digest - May 18


Moody's lowered Japan's sovereign credit rating!

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Re: Daily Digest - May 18

Mike, by "independent" they mean "independent from pressure by the electorate at large". The result is a FED run by and for bankers and their interests. One often sees this argument made that alowing Treasury to perform its proper function is a bad idea because it would be subject to "political" pressure. Politics and corruption are a fact of life - thus a system of checks and balances is requited and penalties meted out for those who step out of bounds. By allowing the above argument to be persuasive the country finds itself without easy recourse when the banker's interests diverge from the nation's as a whole.

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Re: Daily Digest - May 18

The problem with buy American is that the United States' and the Canadian industrial engines are almost fully integrated.  For example, the big steel plants in Hamilton Ontario, (owned by US Steel) make things that American mills don't make.  And American mills make things that Canadian mills don't make.  Same with all kinds of industries like automotive manufacturing, paper, wood and so on.

Most Canadians would love to see NAFTA re-opened.  Oil, matural gas and electricity  (all of which has to be exported to the United States) would be first on the negotiation list.  I'm not sure Canadians really need NAFTA now that the car industry is dead.



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Re: Daily Digest - May 18

Brazil and China eye plan to axe dollar

"Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar, according to Brazil’s central bank and aides to Luiz Inácio Lula da Silva, Brazil’s president."



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Re: Daily Digest - May 18

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Re: Daily Digest - May 18

mcafeejs and Mikey1052, very interesting links; thanks!

Sam, that cartoon is so right!

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Re: Daily Digest - May 18

 naked capitalism: Guest post: A populist interpretation of the latest Boom-Bust cycle


As with my most recent post here on Naked Capitalism about Larry Summers, I want to write a thought piece here, as much for discussion’s sake as for its analysis. Now, the core of what you are about to read is something I put together and posted on Credit Writedowns in March of ‘08. At the time, I was struggling with the dichotomy between the perceived increase in wealth in the United States and the obviously poor macro statistics on debt, leverage and earnings for the middle class. This piece was the product of that struggle.

I should warn you that it is at odds with some of what you will see me write here since I am basically a libertarian and the piece is very populist. When I wrote the piece, I can’t say I was 100% behind this interpretation of events. Nevertheless, as time has passed during this financial crisis, many events have validated this view in my eyes (the dichotomy between the bank/insurance company bailouts and the auto bailouts being a prime example). Therefore, I would be curious to read your responses.

As to the data that reinforces this view, you can find more at the following posts:

Chart of the day: real hourly earnings (Jun 2008)
Charts of the day: US macro disequilibria (Oct 2008)

I intend to follow this post with one titled “De-regulation as crony capitalism” or something to that effect, because the theme underneath this post is that Special Interests which favor elites are always present in any society, at any time regardless of the form of government. This was true in Egypt, Rome and Greece. It was true in the Soviet Union and it is certainly true in the United States. Therefore, it is axiomatic that de-regulation favors elites through crony capitalism, which is basically what we have seen over the past few decades. This is not the invisible hand of Adam Smith on display and makes the case for some minimal level of regulatory oversight.

One last comment: this post also is in line with my view that the United States has been in relative decline for some time, probably since World War II. The U.S. reached its apex as an economic and military power when large parts of Europe and Asia lay in ashes in 1945. In the intervening time, the U.S. has not recognized its relative decline. This has led to imperial over-stretch and a redistribution from the middle class to elites (This view is in line with Kennedy’s “The Rise and Fall of the Great Powers’ and deserves another separate post as well).

Below is the post. Feel free to comment whether you agree or disagree. Enjoy.

In an earlier post, I said that populism was the problem, not the solution. I reject populist methods of tariffs and protectionism because they are self-defeating economic poison. However, in this brief post, I do want to give voice to a populist interpretation of the last 35 years of U.S. economic history. This is a story of unequal re-distribution of wealth from the less fortunate to the more fortunate. This is a story of the United States in which the rich get richer at the expense of everybody else. At the conclusion, ask yourself: is this true and, if so, what should we do about it?

The Theory of Kleptocracy 

First, let's use a theory from Guns, Germs, and Steel by Jared Diamond as the center-piece for this little theory. In Chapter 14, entitled "From Egalitarianism to Kleptocracy," Diamond postulates that more stratified societies are by definition less egalitarian, but more efficient and are, thus, able to eradicate or conquer more egalitarian, less stratified societies. Thus, all 'advanced' societies with high levels of GDP are complex and hierarchical.

The problem is: these more stratified, more complex societies are in essence Kleptocracies, where those in power re-distribute societal wealth to themselves. Those at the bottom of the society's pyramid accept this unequal, non-egalitarian state of affairs because they too benefit from their society's relative advancement. It's a case of a rising tide lifting all boats.

Diamond says the Kleptocrats maintain power using 4 different methods:

"1. Disarm the populace, and arm the elite."
"2. Make the masses happy by redistributing much of the tribute received, in popular ways."
"3. Use the monopoly of force to promote happiness, by maintaining public order and curbing violence. This is potentially a big and underappreciated advantage of centralized societies over noncentralized ones."
"4. The remaining way for kleptocrats to gain public support is to construct an ideology or religion justifying kleptocracy."

Kleptocracy in America?
The obvious corollary of this theory is that most successful modern societies are, in fact, kleptocracies. The key is to use the four methods to gain popular support in order to re-distribute as much wealth to the ruling class as the populace will support. If the ruling class takes too much, it will be overthrown and replaced by a new ruling class (which in turn will re-distribute wealth to itself using the same four methods).

While this angle seems cynical, it is a a line of argument that has great internal consistency.

So, is the United States a kleptocracy? Of course it is! Is that bad? Well, it obviously depends on who you are in society. But, it also depends on whether the kleptocracy is efficient and fair over the long term. Let me explain this last statement a bit more.

Efficiency and Fairness
Because any heavily stratified society is by its very nature non-egalitarian, there always exists the potential for disenchantment amongst the masses. The U.S. is no exception. In order to prevent this disenchantment from leading to revolt, the ruling class must appear to strive for efficiency and fairness.

According to dictionary.com, efficiency means "accomplishment of or ability to accomplish a job with a minimum expenditure of time and effort." So, for the US, it means the ability to increase productivity at a rate which makes the U.S. wealthier on a per capita basis now and in the future. And remember, it is the perception of efficiency, not actual efficiency which is important.

To be fair is to be "free from bias, dishonesty, or injustice." For the United States, this means maintaining the perception that most every person has the opportunity to succeed while few, if any, have unobstructed paths to guaranteed success.

Is the U.S. efficient and fair?
That's the $64,000 question, isn't it. My populist take: no, the United States is neither efficient nor fair.

The United States has been living beyond its means for some time. Since the 1960s, we have run up a massive federal debt and current account deficit, while debt levels have doubled on a percentage of GDP basis. Our present levels of consumption are simply not justified by our current levels of productivity, if we want to maintain our present standard of living in the future.

Were we not the world's major military superpower with the world's reserve currency and the world's largest economy, we would have succumbed to our profligacy years ago. Paul Kennedy has a great book on "The Rise and Fall of the Great Powers." By contrast, many developing countries have gone bankrupt in the last 30 years from Argentina to Zimbabwe. Yet, we are in worse shape than were they, if one looks at the signposts which represent our macroeconomic health: debt-to-GDP levels, current account deficit as a percent of GDP, Government budget deficit, savings rate, etc.

The fact is our day of reckoning is upon us. We will soon realize that our massive debt and an outsized credit bubble have not only saddled us with debt, but it has also misallocated capital so that we are less productive than we believed. We have built miles and miles of telecom dark fibre when we could have invested in schools. We have built massive numbers of new homes, when we could have repaired our bridges and roads. The last 35 years have been an illusion of extreme productivity and wealth because we have artificially pulled forward demand by misallocating resources in order to consume today, what could have been consumed tomorrow. In essence, we are consuming today, while unwittingly making it more difficult to consume tomorrow because we believe we are wealthier than we truly are.

And as for fairness, Real Weekly Earnings peaked over 35 years ago in September 1972! Using the CPI to adjust wages to today's dollars, the average worker made $738.48 per week in September 1972. In January 2008, that figure was $598.18.

(Note: these figures are expressed in Jan 2008 dollars. I use the CPI Index to calculate real dollars, which is based on 1982-1984 dollars. But, I then multiply this figure by 2.1108, which represents the BLS's index factor for Jan 2008).

So, we are getting poorer. And we have been for over 35 years. Only during the end of the Clinton Administration was there an appreciable upswing in real weekly wages over this time period. Don't believe me? See the raw data yourself, here and run the numbers.

In the meantime, CEOs are earning hundreds of millions of dollars, even when they are forced to leave because of poor management which cost their firms billions. In 2005, the average CEO earned 262 times what an average worker gets. In 1965, that figure was 24 times (see story).

There it is: the U.S. ruling class is not living up to its role in either efficiency or fairness. We are getting poorer.

That is why people are so angry. That is why the poll numbers for the President and Congress are so low [remember, I wrote this in March 2008]. And that is why so many people are suffering from the housing bubble.

The question you should ask yourself is this: Why has it taken the citizens of the U.S. so long to figure all this out? Answer: Even though the gulf between rich and poor was widening and the rich were getting richer, we thought we too were getting richer as well. We thought that we too were profiting from all of this "productivity." In the 1980s, we came out of a steep double dip recession and stagflation and we won the cold war. This inflated our sense of well-being. In the 1990s, there was the tech bubble to inflate our assets. In this decade, there was the housing bubble. So, we thought we were getting rich too. We didn't mind that the ruling class was benefiting disproportionately as long as we too appeared to be benefiting.

But, what was really happening is we were loading up on debt. We were not benefiting at all

And now that there are no more cold wars we can win quickly, no more tech stocks, no more double digit house price increases, and no more asset bubbles to hide the naked truth -- now we realize that we were getting poorer all the time -- just as it felt to us. The ruling class have used the four methods to maintain popular support that I enumerated before in order to give the appearance of equity and efficiency. All the while, the rich were milking the system for all they could.

I advise anyone who finds this populist line of argument compelling to read Jared Diamond's Pulitzer Prize-winning book. Chapter 14 is especially rich. Once you realize that we the American people have been duped for the last generation, you will be angry. And this is why we need a major change in Washington. The politics and policies of the past just will not do.


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Re: Daily Digest - May 18

 AFP: IMF warns against complacency on world economy



TOKYO (AFP) — The global economy could still worsen and consumer demand is unlikely to recover as strongly as it has in the past, a senior IMF official said Tuesday.


While that would be good news for Japan, the fallout from the credit crunch means that people may not be rushing back to the shops as quickly as they did during previous recoveries, he said.


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Re: Daily Digest - May 18
Davos wrote:


Oh well, like another poster (Jesenica) said:


"In my opinion it is clear that the lunatics are running the asylum."


Jasenica mate, Jasenica. :-)

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Re: Daily Digest - May 18

 Hello Jasenica:

My apploigies, I read very quickly and can't spell cat. No offense meant and I like what you said! Take care

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