Archives for July 2013

“What a f’in trainwreck”

“What a f’in trainwreck”

Courtesy of 

The opening salvo from Eric Peters's excellent wknd notes letter:


What a f’in train wreck. And like all tragedies, soon after you bury the broken bodies, bloodhounds first unearth incompetence. Then corruption. Kickbacks. Capital misallocation. It shouldn’t take long to pick up a scent. Spain has Earth’s second longest high-speed network; behind China. They got more lines under construction than all of Europe combined. Of course they also have the world’s lowest ratio of passengers per track-mile. Six times less than Germany and France.

Anyhow, America reluctantly delayed delivery of four F-16’s to Egypt. You see, we got rules here bro. For instance, we don’t fund military coups. Unless of course they’re our puppet shows. But this one ain’t. How do I know? It’s easy. We issue our military dictators gold Ray Ban Aviators. And General Abdul “No-one-calls-Sisi-Sissy” al-Sisi wore black Gucci shades while ordering his increasingly suspicious subjects to join mass anti-Islamist demonstrations. What an utter train wreck. Civil War always is.

And speaking of Civil War, Iraqi Shiites and Sunnis celebrated holy Ramadan by slaughtering 550 men, women and children. That’s the highest body count since 2008. Sunni’s blasted their way past Abu Ghraib’s Shiite guards, releasing 500 Al Qaeda prisoners. “Yippee, we’re free!” Train wreck. Syria’s death toll hit 100,000 (1.7mm refugees). The Taliban attacked a Pakistani ISI spy agency stronghold, and slaughtered 43 people at a market. Sorry, I really gotta stop.

Well, just one more.

Tunisia’s brave secular opposition leader got shot 11 times. And oozed like an ageing Arab spring. Anyhow, not much happened in Europe or America. The S&P levitated near all-time highs, while Chinese stocks hovered near 4yr lows. As the world’s fastest moving train decelerates into a tight corkscrew. And confused conductors pulled the brakes while hitting the accelerator. Announcing plans to simultaneously cut excess industrial capacity, while hastening construction of yet more high-speed trains.


wknd notes by Eric Peters

7 Charts Of The Market’s Complete Divorce From Reality

Courtesy of Michael Snyder via The Economic Collapse

The mainstream media would have us believe that the U.S. economy must be in great shape since the stock market has been setting new all-time record highs this month.  But is that really true?  Yes, surging stock prices have enabled sales of beach homes in the Hamptons to hit a brand new record high.  However, the reality is that stock prices have not risen dramatically in recent years because corporations are doing so much better than before.  In fact, the growth in stock prices has been far, far greater than the growth of corporate revenues.  The only reason that stock prices have been climbing so much is because the Federal Reserve has been flooding the financial system with hundreds of billions of dollars that it has created out of thin air.  The Fed has created an artificial stock market bubble that is completely and totally divorced from economic reality.

Meanwhile, everything is not so fine for the rest of the U.S. economy.  Economic growth projections have been steadily declining over the past two years, and the growth rate of personal income in the United States has been on a huge downward trend since 2008.  The U.S. economy actually lost 240,000 full-time jobs last month, and the middle class continues to shrink.

So welcome to the "new normal" where most Americans struggle at least part of the time.  According to one recent survey, "four out of 5 U.S. adults struggle with joblessness, near poverty or reliance on welfare for at least parts of their lives".  Things are tough out there, and they are steadily getting tougher.

Yes, the boys and girls up on Wall Street are doing great (for the moment), but most of the rest of the country is really struggling.  We have never even come close to recovering from the last major economic crisis, and now another one is rapidly approaching.

The other day, Chartist Friend from Pittsburgh sent me an email and told me that he had some charts that he wanted to share with me and asked if I wanted to see them.  I said sure, send them over right away.  These charts show very clearly that the stock market has become completely divorced from reality.

In a normal market, stock prices would only rise dramatically if the overall economy was healthy and growing.  Unfortunately, our economy is far from healthy and has been declining for a very long time If the financial markets were not being pumped up by so much money printing and so much debt, there is no way that stock prices would be this high.

If we truly did have a free market financial system, stock prices should be a reflection of the overall economy.  Instead, we have a very sick economy and financial markets that have been very highly manipulated.

For example, just check out the first chart that I have posted below.  If the economy was actually getting better, the percentage of working age Americans with a job should be increasing.  Sadly, that is not happening…


This next chart shows how the average duration of unemployment has absolutely skyrocketed in recent years.  Yes, the duration of unemployment has improved slightly in recent months, but we are still very far from where we used to be.  Meanwhile, the stock market has been soaring to new all-time record highs…


Traditionally, there has been a high degree of correlation between stock prices and real disposable personal income.  From the chart below, you can see that this relationship held up quite well through the end of the last recession, and then it started breaking down.  This is especially true at the very end of the chart.  Real Disposable income has started to decline sharply but stock prices just continue to soar…


When an economy is healthy, money tends to circulate through that economy at a healthy pace.  That is why the chart below is so alarming.  The velocity of money is the lowest that it has been in modern times, and this indicates that economic activity should be slowing down.  But the Federal Reserve has enabled the bankers to thrive by pumping massive amounts of money into the financial system…


When an economy goes into recession, freight shipments tend to go down.  In the chart below, you can see that this happened during the past two recessions.  Unfortunately, we have never even come close to returning to the level that we were at before the last recession, and yet the stock market has been able to soar to unprecedented heights…


When an economy is growing and people are able to get good jobs, they tend to go out and buy new homes.  Yes, we have seen a bit of an increase in the number of new homes sold recently, but we are still a vast distance away from the level we were at before the last recession.  And now mortgage rates are starting to rise steadily, and this is likely going to cause the number of new homes sold to start going back down.  The chart below clearly shows us that the real estate market is far from healthy at this point…


For most middle class Americans, their homes are their primary financial assets.  So the fact that home prices have declined so much is absolutely devastating for many families.  But stocks are primarily held by the top 5 percent of all Americans, and as the chart below shows, they have benefited greatly from the antics of the Federal Reserve in recent years…


There is no way in the world that the stock market should be this high.  The economic fundamentals simply do not justify it.  As a society, we consume far more than we produce, our debt is growing at an exponential pace, our economic infrastructure is being absolutely gutted and our financial system is a giant Ponzi scheme that could collapse at any time.

And no market can stay divorced from reality forever.  At some point this bubble is going to burst, and when financial bubbles burst they tend to do so very rapidly.

As Marc Faber recently said, "one day, this financial bubble will have to adjust on the downside."

When it does "adjust", we are likely going to see a financial panic even worse than we witnessed back in 2008.  Credit will freeze up, economic activity will grind to a standstill and millions of Americans will lose their jobs.

Don't assume that the bubble of false prosperity that we are enjoying right now will last forever.

It won't.

Use the time that you have right now to prepare for what is ahead.

A great storm is rapidly approaching, and I don't see any way that it is going to be averted.

Municipal Bonds an “Outrageous Bargain”? Compared to What? Shifting Sands of Muni Bond Market; Three Bad Assumptions

Courtesy of Mish.

David R. Kotok, Cumberland Advisors Inc.’s chairman and chief investment officer believes Municipals Cheap After Detroit Filing

Municipal bonds are an “outrageous bargain” in the wake of Detroit’s bankruptcy filing, according to David R. Kotok, Cumberland Advisors Inc.’s chairman and chief investment officer.

Kotok bases his arguments on a comparison on General Obligation Yields to US Treasuries.

Muni vs. Treasury Yields

More on Munis

In a followup guest post on the Big Picture blog, Kotok offers More on Munis, Detroit, Bloomberg, Whitney & Wilson.

In our recent commentary on municipal bonds and Detroit, we argued in favor of buying the highest-grade AAA tax-free municipal bond It currently yields more than the corresponding taxable US Treasury obligation.

Meredith Whitney, Muni Cassandra emeritus (ae?), weighed in against Munis (FT) and used the Detroit default to say her version of “I told you so.” Bloomberg reported both sides of the argument.

Readers may seek Whitney’s positions and her history of Muni-forecasting on their own. Our position is clear: do the research and buy the bonds that make sense. There are many of them. This is an idiosyncratic market of $3.8 trillion; painting it with a broad brush is a mistake.

We took the position that the default history of the true AAA-rated tax-free municipal bond has the same default history as the US Treasury bond: neither has ever defaulted.

Remember, we are referring to the natural rating of the bond. We are not referring to those bonds that were insured by various bond insurers and thus elevated to an AAA rating because of the bond insurance. Bonds that were rated AAA only because of the insurance have defaulted, but the underlying ratings of those insured bonds always fell below AAA. No true AAA credit ever needed bond insurance to sell a new issue.

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Exclusive: Signs of declining economic security

WASHINGTON (AP) — Four out of 5 U.S. adults struggle with joblessness, near-poverty or reliance on welfare for at least parts of their lives, a sign of deteriorating economic security and an elusive American dream.

Survey data exclusive to The Associated Press points to an increasingly globalized U.S. economy, the widening gap between rich and poor, and the loss of good-paying manufacturing jobs as reasons for the trend.

The findings come as President Barack Obama tries to renew his administration's emphasis on the economy, saying in recent speeches that his highest priority is to "rebuild ladders of opportunity" and reverse income inequality.

As nonwhites approach a numerical majority in the U.S., one question is how public programs to lift the disadvantaged should be best focused — on the affirmative action that historically has tried to eliminate the racial barriers seen as the major impediment to economic equality, or simply on improving socioeconomic status for all, regardless of race.

Hardship is particularly growing among whites, based on several measures. Pessimism among that racial group about their families' economic futures has climbed to the highest point since at least 1987. In the most recent AP-GfK poll, 63 percent of whites called the economy "poor."

Keep Reading: Exclusive: Signs of declining economic security | US National Headlines | Comcast.

Carl the Robot Bartender Mixes Drinks and Chats With Customers

Courtesy of Mish.

Robots are taking on increasingly complex tasks. As a case in point, Carl the robot bartender serves customers at German bar.

He’s handy with a shot glass and customers travel from far and wide to admire him at work.

The only strange thing about Carl the bartender is that he’s not quite human.

The humanoid robot mixes drinks for guests at the Robots Bar and Lounge in Ilmenau, eastern Germany.

The robot is the creation of mechatronics engineer Ben Schaefer, who has spent 23 years working in the field.

He built Carl from the parts of disused industrial robots from the German firm KUKA.

Writing on the bar’s website, Mr Schaefer said his company aims to make humanity in humanoid robots closer to reality and show that ‘scenes as in science fiction films are quite possible’.

Carl can also conduct short conversations with the customers who take up the bar’s nine seats, though they probably don’t sparkle like the drinks because his speech recognition skills and ability to interact are, for the moment, limited.

For now, Carl will be part-tourist attraction and part test-dummy while Mr Schaefer and his team work out how to shake humanoid robotics out of its ‘stagnant’ state.

Carl-like robots are not about to replace human bartenders en masse just yet, but technology is certainly advancing at breakneck speed.

I find these kinds of articles fascinating. …

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Fukushima Problems Escalating, Radioactive Water Going into Pacific

Fukushima Problems Escalating, Radioactive Water Going into Pacific

Courtesy of Yves Smith of Naked Capitalism

The Fukushima nuclear plant crisis continues unresolved in a bad way. Two reports in the last week indicate that the cheery face that plant mismanager operator Tepco has been trying to put on the aftermath of the disaster is not in line with conditions at the plant.

If I parse these English language accounts correctly, there are two separate problems that Tepco has been forced to confess to in the last week (corrections and amplifications from those who can read Japanese appreciated; even in the days when Japan was heavily covered by the business press, there were large gaps between what was common knowledge in Tokyo v. what you’d see in the Western press).

One outstanding problem got a nasty update over the weekend. Tepco admitted some time ago that radioactive water was getting into the Pacific, but has been at a loss to explain how that was happening. The Japan Times (hat tip Deontos) tells us that Tepco announced this past weekend that they think they’ve figured it out:

Tokyo Electric Power Co. said Saturday that the trench problem at the crippled Fukushima No. 1 nuclear plant has cropped up again and is sending highly radioactive water into the sea.

The water in the underground passage, which runs under the turbine building of reactor 2, contains 2.35 billion becquerels of cesium per liter, roughly the same as that measured right after the crisis began in spring 2011…

The trench is believed to be the source of the groundwater problem that’s been baffling Tepco’s experts for months. Their current theory is that the highly radioactive water found and left in the trench in 2011 is now leaking directly into the groundwater, which is seeping into the sea.

Tepco finally admitted Monday that contaminated water was getting into the Pacific. The admission came after the Nuclear Regulation Authority pointed out that highly radioactive water was “strongly suspected” to be seeping into the ground under the site and making its way to the sea.

Yves here. This sort of thing is above my pay grade, but as a layperson, I find several things to be troubling. First is that the radioactivity is apparently getting into the ocean via groundwater. Have there been any reports on the extent of the groundwater contamination? Even if Tepco could wave a magic wand and stop the leaking now, you’d still have continuing effects from the contaminated groundwater then contaminating the ocean (yes, the main effects will be local, such as on local fish, but still…).

Second is that the concentration of radioactivity in the trench water has not fallen much in two years despite the leakage. Shouldn’t the impact of the leak be to reduce the level of radioactivity in the trench water? If this was an osmotic type-process, you’d expect to see the radioactivity of water in the trench fall as the radioactivity of the water on the other side rose. And if this is a straight leak (radioactive water goes into clean water, no flowback), wouldn’t you see pressure and/or water levels in the trench falling (as in why would it take these guys so long to figure this out?)

Third is that Tepco “hopes” to fix the problem by (per the Japan Times) by “building a wall out of liquid glass between the reactors and the sea” to isolate the radioactive water and then removing it. “Hopes” is one of those formulations in Japanese that often refers to aspirations rather than plans. Does anyone know if a process like this has ever been implemented successfully?

The second problem came to light last week, but appears to have gone largely unnoticed in the West. Tepco has been using water to cool the No. 1 reactor. It’s running out of storage space for the contaminated water. It promises to clean it up some before discharging it into the ocean.

If you read this article from OilPrice carefully, I believe it has some elements of the story that was updated over the weekend (the confession about groundwater leakage) conflated with the other issue (what to do about ever-increasing amounts of water contaminated by cooling the plant that eventually has to go…somewhere). This conflation may not be OilPrice’s doing. Japanese allows speakers to be very vague, and if I were Tepco, I’d be as vague and confusing as possible.

By Charles Kennedy. Cross posted from OilPrice

The 11 March 2011 earthquake and subsequent tsunami that devastated Tokyo Electric Power Co.’s Fukushima Daiichi nuclear power plant has left TEPCO struggling with a potential public relations disaster ever since.

Since the onset of the incident TEPCO used massive sprays of water to cool the damaged reactor complex.

The debacle ignited concerns worldwide about the release into the environment of radioactive debris from the stricken nuclear facility, a topic that both TEPCO and the Japanese government worked to downplay.

Relentlessly upbeat and optimistic information has been sparingly released by TEPCO ever since, but on July 25 the Japanese newspaper Asahi Shimbum reported that Japan’s Nuclear Regulation Authority chairman Shunichi Tanaka told journalists that “The Fukushima No. 1 (nuclear reactor) plant is filling up with water. Inevitably the contaminated water will have to be discharged into the sea after TEPCO processes it properly and lowers (its radioactivity levels) below the standards.”

Since the incident TEPCO has been pouring water over the damaged complex reactors to cool them for more than two years, but contaminated water has been building up at the rate of an Olympic-size swimming pool each week since then. Three months ago TEPCO stated that the space to store the irradiated water was limited and asked for government approval to shift groundwater with “low levels of radiation” from the stricken facility to the Pacific via a “bypass.”

Japan’s Nuclear Regulation Authority head Shunichi Tanaka cautiously told journalists, that he believed that the maritime leakages since Fukushima were ongoing, stating, “I think contamination of the sea is continuing to a greater or lesser extent. It was contaminated at the time of the accident, but I think it has been continuing for the last two years. Coming up with countermeasures against all possible (contamination) scenarios is a top priority.”


Mindless With Money

Mindless With Money

Courtesy of Tim of the Psy Fi Blog

Non-conscious Numbskulls

We all know the feeling of mindlessness. You get it when you drive the same roads as usual and get out at the end not remembering anything about the journey, or when you eat a meal without tasting it, or leave a meeting without the faintest idea what just happened. Yet to everyone around us we’ve behaved just the same way we always do.

There’s something really odd about this, because it suggests that we don’t need to be conscious of what we’re doing to achieve what we want to do. Whether that’s a good thing or not is debateable, because being mindless with money is likely to cause results that might be best described as “unfortunate”.


The modern idea of mindlessness as a problem in everyday life originated by Ellen Langer, who is one of the more interesting personalities in the psychology community. Langer’s interests bridge the scientific with the esoteric, and I don’t mean that in a negative sense: she believes that you can’t boil an individual down to a few tests and that personal psychology is as important as broader trends. Langer’s interest in mindlessness – and it’s opposite, mindfulness – seems to have originated in her research into the illusion of control:

“Perceived control has been shown to have very positive effects on stress reduction and health … It is the perception of control, rather than any objectively viewed control, that is the significant variable. Interestingly, when a person behaves mindlessly, the perception of control is not possible. Therefore we conducted several investigations … to see if mindfulness in elderly populations could be increased with positive effects. We found that this could be accomplished with relatively simple manipulations, for example, having more control over one’s schedule and taking care of plan[t]s”

Yes, giving an old person a pot-plant to look after significantly increased their lifespan. By increasing their feeling of being in control, and reducing their opportunity for mindlessness, the addition of a pot plant and some minor control over their schedules – such as when they went to see a movie – made a major difference.

You Are Not A Computer

Mindlessness itself is a rather odd concept, since it suggests that we can navigate our way through daily life without really being aware of what we’re doing. It’s doubtful that anyone reading this hasn’t experienced this feeling. The alternative, Langer’s mindfulness, is to be fully cogniscent of what we’re doing and feeling.

Underlying this is a direct refutation of the metaphor “the brain is a computer”: if a question can’t be boiled down to an equation then it can’t be solved by a computer, and if it can be then it doesn’t require consciousness. As Langer puts it:

“All that investigations based on the mind-as-computer metaphor can tell us is whether our problem-solving processes deviate from the normative precepts that make up the metaphor in question. Thus, we are not informed about the possibly nonalgorithmic processes by which people come to solve the practical problems that cognitive scientists expect them to solve by algorithmic means”.


Or, to put it another way, we tend to operate on autopilot whenever we can. There are good reasons for this, as Kathleen Vohs and colleagues demonstrated in this paper:

“[We] suggest that self-regulation, active initiative, and effortful choosing draw on the same psychological resource. Making decisions depletes that resource, thereby weakening the subsequent capacity for self-control and active initiative. The impairment of self-control was shown on a variety of tasks, including physical stamina and pain tolerance, persistence in the face of failure, and quality and quantity of numerical calculations. It also led to greater passivity.”

This problem is that the more decisions we make the less resilient we become, and goes some way towards explaining mindlessness. The research suggests that it’s active decision making that causes this depletion of resources, whereas simply “deliberating and forming preferences about options” is less tiring. This is similar to mindlessness, as described by Weick and colleagues:

“Characterized by reliance on past categories, acting on “automatic pilot” and fixation on a single perspective without awareness that things could be otherwise.”

We’ve seen plentiful examples of mindlessness with money – it seems to be particularly depleting for many people to actually think about this stuff, and much easier to drop into a mindless mode of operation. Numerous psychological effects are implicated such as herding, confirmation bias, reliance on authority, the disposition effect, the mere exposure effect … I could go on and on. Thinking is a great deal harder than mindlessly following a simple rule.

Mindful With Money

The Weick paper, specifically about the dangers of mindlessness in safety critical organisations – think Three Mile Island and Chernobyl – come up with a short list of five processes which can lead away from mindlessness. It’s equally useful for investors:

  1. Be pre-occupied with failure. Nothing focuses the mind like the possibility of failure – people who worry more about things going wrong are far less likely to lapse into a mindless state, and far more likely to spot potential problems.

  2. Be reluctant to simplify interpretations. Don’t simply lapse into default behaviors because that’s what you’ve always done, and don’t simply rely on default methods of selecting stocks for similar reasons, continually examine your decision making process.

  3. Be sensitive to operations. Keep looking for things that are odd and don’t ignore them when you find them – and try to figure out what they mean in the overall context of your investing strategy.

  4. Learn to be resilient. This is all about recovering from failure – setbacks are part and parcel of investing, embrace them and learn from them. Don’t default to hiding under the bed when everything goes wrong.

  5. Don’t over-specify your decision structures. Try to avoid totally prescriptive checklists and rule sets, because they’ll leave you dead when the situation changes. You need flexibility to cope with the unexpected.

Thoughtful Processes

All this is easier said than done, of course. Most wise old investors rightly argue that process is more important than anything else, primarily because it guides you away from being continually sidetracked by your psychological urges. Unfortunately you can take this too far, and if this ends up with a default state of mindlessness where you simply follow a pre-cooked recipe you will, eventually, come a cropper. Process should guide you towards the things that need further investigation, not simply replace the engagement of the brain.

This adds to the research discussed in To Go Boldly: Risk and the Prime Directive, where non-conscious goal driven behavior can take us over without us realising it.  Developing techniques to encourage mindfulness can reduce these effects and seems to have a range of other beneficial side-effects:

"In more than 30 years of research, we've found that increasing mindfulness increases charisma and productivity, decreases burnout and accidents, and increases creativity, memory, attention, positive affect, health, and even longevity. When mindful we can take advantages of opportunities and avert the dangers that don't yet exist."

Mindlessness, resource depletion added to the Big List of Behavioral Biases.

What Does Heart Surgery Really Cost, And Why Is It 70 Times More Expensive In The US?

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Indian philanthropist and cardiac surgeon, Devi Prasad Shetty is obsessed with making heart surgery affordable for millions of Indians. As Bloomberg notes, Shetty is not a public health official motivated by charity. He’s a heart surgeon turned businessman who has started a chain of 21 medical centers around India. By trimming costs, he has cut the price of artery-clearing coronary bypass surgery to 95,000 rupees ($1,583), half of what it was 20 years ago, and wants to get the price down to $800 within a decade. The same procedure costs $106,385 at Ohio’s Cleveland Clinic. Of course, this will come as no surprise after we showed the incredible spread of the price of an appendectomy. “It shows that costs can be substantially contained,” notes the World Heart Federation, "it’s possible to deliver very high quality cardiac care at a relatively low cost." But, for Americans of course, when you have government footing the cost (and deficit spending), who cares?

Via WaPo,

Via Bloomberg,

“It shows that costs can be substantially contained,” said Srinath Reddy, president of the Geneva-based World Heart Federation, of Shetty’s approach. “It’s possible to deliver very high quality cardiac care at a relatively low cost.”

Medical experts like Reddy are watching closely, eager to see if Shetty’s driven cost-cutting can point the way for hospitals to boost revenue on a wider scale by making life-saving heart operations more accessible to potentially millions of people in India and other developing countries.

“The current price of everything that you see in health care is predominantly opportunistic pricing and the outcome of inefficiency,” Shetty, 60, said in an interview in his office in Bangalore, where he started his chain of hospitals, with the opening of his flagship center, Narayana Hrudayalaya Health City, in 2001….

In the future, Shetty sees costs coming down further as more Asian electronics companies enter the market for CT scanners, MRIs and catheterization labs — bringing down prices. As India trains more diploma holders in specialties such as anesthesiology, gynecology, ophthalmology and radiology, Narayana will be able to hire from a larger, less expensive talent pool.

One positive unforeseen outcome may be that many of the cost-saving approaches could be duplicated in developed economies, especially in the U.S. under health reform.

“Global health-care costs are rising rapidly and as countries move toward universal health coverage, they will have to face the challenge of providing health care at a fairly affordable cost,” said the World Heart Federation’s Reddy, a New Delhi-based cardiologist who is also president of the Public Health Foundation of India.

Meet The “Mental Asylum” – The Department Of Homeland Security’s New ‘Pentagon’

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

The Department of Homeland Security (DHS)…


is building a $4.5 billion headquarters at St. Elizabeth's Hospital, a former mental asylum.


It’s the largest construction project in DC since the Pentagon was completed in 1943 and won’t be completed until 2026 – a decade behind schedule and $1 billion over budget (with no guarantee that the next stage of the project will be fully funded).


St. Elizabeth's was the oldest federally funded psychiatric hospital in the country and irony of ironies for the endless sprawl of agencies that has become the DHS, the hospital's most infamous resident was John Hinckley, Jr., the man who attempted to assassinate President Ronald Reagan in 1981.


Today, DHS has 240,000 employees and a yearly budget of $60 billion and St. Elizabeths' first new tenants – the Coast Guard – will move in this August. But, as Bloomberg Businessweek notes, the future of the rest of the project remains uncertain


and "[It’s] increasingly apparent that DHS’s scheme to build its headquarters on the grounds of a former mental hospital is inherently flawed," he writes. "Some would say it’s crazy."


“I said anyone who thinks you can combine 22 agencies and 200,000 people and it’s going to be more efficient and economical needs to have their head examined.”


They started planning this thing in 2005, and now it’s projected to be completed in 2026,” he says.


That’s 21 years. The estimated cost is now $4.5 billion. That’s $1 billion more than their original estimate.”

DHS’s senior leadership heartily endorsed the concept. Michael Chertoff, the secretary at the time, couldn’t wait to get everybody together at St. Elizabeths. “Maybe it doesn’t seem like a big deal,” he says, “but the reality is, if people come to a single building and they see a lot of mingling together in the cafeteria and mingling in the gym and people coming in and out of each other’s offices, it reinforces the idea of a single department.”

…and “The D.C. traffic was awful.”

Source: Bloomberg Businessweek

Larry Summers and Presidential Arrogance

Courtesy of Pam Martens.

Half a decade has now passed since the great Wall Street collapse of 2008.  Millions of words have attempted to capture the epic greed, arrogance and corruption that brought on the greatest financial implosion since the Great Depression. The Financial Crisis Inquiry Commission issued 662 pages on the subject. The U.S. Senate and House of Representatives have held an endless stream of  hearings. Dozens of books by authors who had a front row seat to the chaos line our bookshelves and libraries. 

And yet, despite all this, the President of the United States can’t seem to remember who caused the collapse of our financial system; who caused the collapse of the housing market and millions of foreclosures and the resulting joblessness that still grips the country. 

President Obama can’t seem to recall that it was the financial de-regulators of the Clinton administration who bullied and ridiculed their opponents and strong-armed through the repeal of the Glass-Steagall Act. It was that repeal that paved the way for financial Armageddon in America. The outcome has left 46.2 million Americans living in poverty and the greatest wealth disparity in a century. 

Surely if the President understood how this great collapse occurred he wouldn’t  seriously be  considering putting Lawrence (Larry) Summers into the post of Chairman of the Federal Reserve. Would he? 

Summers, one of the core members of the de-regulation swat team, was at the November 12, 1999 signing ceremony for the Gramm-Leach-Bliley Act, the de-regulatory legislation that repealed the depression era Glass-Steagall Act and allowed commercial banks holding insured deposits to merge with investment banks, brokerage firms and insurance companies to become vast gambling casinos and too-big-to-fail taxpayer albatrosses.  Summers became U.S. Treasury Secretary after his former boss, Robert Rubin, left the post and headed directly to Citigroup’s Board – a post that would pay him $120 million over an 8-year span for a non-management job. (Citigroup was one of the key firms heavily lobbying for the deregulation.) 

Summers said this at the signing ceremony: 

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Why Larry Summers Will Be Next Fed Chair

Courtesy of Larry Doyle.

The race to occupy the most influential position in the nation — that is, the chairman of the Federal Reserve — is now widely acknowledged to be a two horse sprint between Janet Yellen and Larry Summers.

Those supporting the appointment of Ms. Yellen, including Nancy Pelosi, Christina Romer and others, are actively and publicly voicing their endorsement of the current Vice-Chairman of the Federal Reserve.

Meanwhile we hear little from those most closely aligned with the oft-described arrogant — and sleep-deprived? — Mr. Summers. I gather that Robert Rubin and others supporting Summers are more comfortable operating under the blanket that has come to define Washington as being in bed with Wall Street.

So who will President Obama appoint?

Actually let’s stop right there.

Are we supposed to believe that simply because the position of Fed chair is an appointment made by the President, that fact actually means he makes the selection as well? Or does the President merely read the delivery that is provided to him by those who write up a background review on the individual whom the major banks want to oversee them?

The Federal Reserve is not a public institution but rather an independent entity — or at least it is supposed to be independent — that derives it authority from Congress but — let’s be serious — serves at the behest of our major banks.

To that end, are we supposed to think that President Obama or any other President unilaterally selects the chairman of the world’s most powerful institution? In my opinion, NO WAY.

I strongly believe the President takes his directive in appointing the chairman whom the banks themselves want to run the institution that oversees them.

Remember, despite what some in Washington may like to present publicly, Wall Street is very much a self-regulated industry that sends on average $1 billion a year to Washington to fill campaign coffers and sprinkle lobbyists’ dollars around the capitol.

Are we supposed to think that the bankers do not expect something as important as the position of Fed chair in return for their do-re-mi? No, I do not think so. As such, they will tell our President whom to appoint. So who do the banks want? The individual whom they have already bought and paid for, that is, Larry Summers.

For a wealth of supportive material indicating that Summers will be the choice, I would recommend people read Sheila Bair’s book, Bull by The Horns. Ms. Bair, a highly respected Washington insider herself as the the former chair of the FDIC, provides extensive detail as to how then Treasury Secretary Tim Geithner and Director of the National Economic Council Larry Summers operated effectively in a vacuum in implementing economic policy during Obama’s first term. (Recall that Summers was also a critical supporter in the late ’90s of legislation allowing for the deregulation of the derivatives market despite the desperate attempts of Brooksley Born to forestall that disaster.)

Bair highlights the frustration experienced by herself, Ms. Romer and others who thought they had a seat at the economic table only to discover that Tim and Larry had already made decisions that have impacted us all over the last few years.

I personally would prefer to see Thomas Hoenig or Richard Fisher as Fed chair but despite their strong experience this race has seemingly always been between Yellen and Summers.

I hope I am wrong but I would actually make a small wager that the fix is in and Summers is the choice.

What do others think?

Larry Doyle

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Former ECB Chief Economist Warns “ECB Will Soon Have to Support France with Bond Purchases”

Courtesy of Mish.

Juergen Stark, former ECB chief economist (who resigned in 2011 over a dispute regarding bond purchases), says in an interview in Handelsblatt “The Euro crisis will worsen in late autumn”

Via Google Translate

A year ago, ECB chief Draghi announced plans to do anything to save the euro. The former ECB chief economist Juergen Stark considers this fatal. He fears that the ECB will soon have to support France with bond purchases.

“I think the crisis will come to a head in late autumn. We are entering a new phase of crisis management, “Stark told the Handelsblatt (Friday edition). After the parliamentary elections in late September that France would increase the pressure on the ECB and Germany. The government bond purchase program OMT should actually be used in Spain and Italy. “But the pressure will be enormous, use the instrument in France. And without that, the country must go to the rescue, “said Stark.

A year ago the head of the ECB, Mario Draghi announced in London to do anything to save the euro. A little later, he presented the plans for the bond purchase program OMT.

Draghi bought the governments in Europe time. “But this time was wasted,” Stark said.

Mike “Mish” Shedlock

Continue Here

Euro Sucks Italian Blood; Prime Minister Blames Tax Evasion; Reflections on Italy’s Shadow Economy

Courtesy of Mish.

This summer a private air plane has been flying over Italian beaches with a banner message Euro is Sucking Italian Blood

The article states “Italians have only one solutions to fight against this situation : leave Italy.

No End in Sight to Italy’s Economic Decline

Der Spiegel says No End in Sight to Italy’s Economic Decline

The Italian economy may be the third largest in the euro zone, but it is also plagued by inefficiency and continues to shrink. The country’s political leadership has proven unable to implement badly needed reforms and the future looks grim.

Italy, despite being the third-largest economy in the euro zone after Germany and France, finds itself in dire straits, having been in decline for years. Its GDP has dropped by 7 percent since 2007. The last few years, says Gianni Toniolo, an economics professor in Rome, represent “the worst crisis in (the country’s) history,” even more devastating that the period between 1929 and 1934.

Some sectors have lost even more capacity, with the automobile industry having declined by 40 percent. According to Paolazzi, Italy is experiencing an “unprecedented process of deindustrialization.”

But why?

Wages aren’t the problem. They are 15 percent lower than Belgian and French wages and 30 percent lower than wages in Germany, according to a current Bank of Italy comparison. But according to Confindustria, the Italian economy faces a tax burden that is 20 percent higher than in Germany. And unit labor costs are about 30 percent higher than German levels, say central bank officials.

The CGIA research institute in Mestre, near Venice, found that one in two small businesses was only able to pay its employees in installments. Three out of five companies are forced to take out loans to pay their high tax bills.

In addition to the tax burden, a bloated bureaucracy obstructs almost all economic activity, an inefficient judiciary deters potential investors with trials that can last for decades. Italy has a relatively low education level and a poor infrastructure characterized by potholed streets, an energy supply prone to failure, constantly delayed trains and outmoded communication networks….

Continue Here

A Lost Generation

A Lost Generation


It is pretty well established that a tax increase, especially an income tax increase, will have an immediate negative effect on the economy, with a multiplier of between 1 and 3 depending upon whose research you accept.

As far as I am aware, no peer-reviewed study exists that concludes there will be no negative effects. The US economy is soft; employment growth is weak – and yet we are about to see a significant middle-class tax increase, albeit a stealth one, passed by the current administration. I will acknowledge that dealing a blow to the economy was not the actual plan, but that is what is happening in the real world where you and I live. This week we will briefly look at why weak consumer spending is going to become an even greater problem in the coming years, and we will continue to look at some disturbing trends in employment.

Last week, I noted at the beginning of the letter that an unintended consequence of Obamacare is a rather dramatic rise in the number of temporary versus full-time jobs. This trend results from employers having to pay for the health insurance of employees who work more than 29 hours a week.

I quoted Mort Zuckerman, who wrote in the Wall Street Journal:

The jobless nature of the recovery is particularly unsettling. In June, the government's Household Survey reported that since the start of the year, the number of people with jobs increased by 753,000 – but there are jobs and then there are "jobs." No fewer than 557,000 of these positions were only part-time. The June survey reported that in June full-time jobs declined by 240,000, while part-time jobs soared 360,000 and have now reached an all-time high of 28,059,000 – three million more part-time positions than when the recession began at the end of 2007.

That's just for starters. The survey includes part-time workers who want full-time work but can't get it, as well as those who want to work but have stopped looking. That puts the real unemployment rate for June at 14.3%, up from 13.8% in May.

As it turns out, the unintended consequences of Obamacare are not the only problem. Charles Gave wrote a withering indictment of quantitative easing this week (which we will look at in a few pages) and included the following chart, which caught my eye. Note that the relative increase in part-time jobs began prior to Obama's even assuming office. The redefinition of part-time as less than 29 hours a week and the new costs associated with full-time employment due to Obamacare simply accelerated a trend already set into motion.

An Ugly Secular Trend in Part-Time Work

Look closely at this graph. It turns out the trend toward part-time employment started in the recession of the early 2000s, paused only briefly, and then really took off in the recent Great Recession. This is clearly a secular trend that was in place well before 2008.

This development is very troubling, especially because it primarily affects young people and those with fewer skills. As I documented in letters last year, workers 55 and older are actually taking "market share" from younger workers. I went back tonight to see if that trend is still in place. The first graph below (the next few graphs are from the St. Louis Fed's FRED database) is one we are familiar with: the actual employment level over the last ten years. We are still two million jobs down since the onset of the last recession, some six years later. The only reason the unemployment rate has fallen at all is that several million people have simply left the labor force for one reason or another.

The next graph is the number of employed 25-54-year-olds. What you will notice is that the above graph shows about 7 million new jobs since the very bottom of the employment cycle, yet employment in the 25-54 age cohort has barely risen. Who got all the jobs?

That mystery is solved courtesy of the next chart, which shows the number of employed in the 55+ age group. Even acknowledging that there is a growing Boomer population does not account for the rather spectacular increase in employment in the 55+ age group. Can you find the recession in this chart? If the St. Louis Fed hadn't shaded the recession in gray, you certainly couldn't find it in the data. Not only did Boomers see a rise in employment, they took jobs from younger groups. If you dig down deeper, you find that the younger you are, the higher the unemployment level of your age-mates. I will spare you that exercise, as this is already depressing enough, unless you are 55+.

Note that I am not arguing that those of us over 55 should be put out to pasture. Many can't afford to quit working (especially when their kids are living with them!). I am just reporting on the facts. The only way to solve this is to grow our way out of it, yet whatever we are doing is not working.

The Emergence of a US Underclass

Let's turn back to my good friend Charles Gave's analysis, picking up in the middle of his work. He has divined a rather interesting reason for our current employment malaise. I am going to quote at length because this is just so good and deserves a wide audience in the current debate over monetary policy.

This chart [below] shows a steady increase in part time employment since the early 2000s back toward levels that persisted through the 1976-2001 period. The big change is the precipitous decline in full time jobs which started in 2002 and accelerated after 2008. It can be seen that the number of part time jobs has risen by 3mn, while full time jobs have decreased by a similar amount. This compositional shift is unprecedented.

The next step is to measure the difference in job growth for part time and full time workers. This is done by comparing the rolling seven year series for each classification of jobs and noting the differential. As this gap widens in favor of part time employment, we would expect a greater share of the US labor force to be earning lower wages. To test this proposition we compare this seven year differential measure with the median income level for US households.

The results are quite striking. The correlation between our differential measure for the kinds of jobs being created and the real median income was 0.82 between 1974 and 2013; from 1997 to 2013 it moved up to 0.95. This matters because periods when individuals have stable full time jobs are associated with rising median income, while incomes tend to decline in an unstable job market.

Put simply, median income has slumped because a very large share of Americans can no longer find proper jobs.

Behind this economic, political and social disaster, stand many factors such as technological change which has undermined traditional low-skilled employment and the rise of China as a fierce industrial competitor.

What is less well understood is the pernicious impact that US monetary policy has had on the US labor market.

A collapse in the US median income level has historically coincided with the Fed running a policy of negative real interest rates. The reason why unemployment tends to be lower during periods when capital has a real cost attached was explained in some detail in a piece written in early 2011. This dour relationship has been maintained over the last two years and median income has, as I suspected, continued to fall. Make no mistake, if monetary policy is not substantially changed, then median incomes will continue to fall.

When poor people cannot earn a return on their savings or on their labor they remain trapped in poverty. The effect is to subsidize what are effectively overpaid financial jobs and undermine employment prospects within traditional sectors.

As a result, periods of negative real rates tend to be accompanied by the Gini coefficient rocketing higher. Today, this policy is effectively leading to the emergence of a poorly paid and chronically insecure "lumpen proletariat". At least half of the US population may be moving deeper into a poverty trap, which, over the long-run, must negatively impact consumption. Moreover, I never saw a structural bull market in equities take place against a backdrop of falling median income.

So why is Bernanke doing it? It would seem for the same reasons that the Japanese did 20 years ago. He is protecting not so much the banks as the bankers. To cut a long story short and to paraphrase a famous quote: What is good for the US Investment Banks is bad for America.

Bernanke's policies are aimed at guaranteeing the prosperity of this elite, and as such he has been wildly successful. Paul Volcker, arguably the best ever central banker, cared for the interests of ordinary people over those of investment bankers. By contrast, Bernanke has helped create his own "lumpen proletariat" and a parallel class of the "super-rich." This will have many consequences, not all of them pretty.

  • Marx is back! Class struggle will be the main political theme in the years to come. This is what happens when you entrust a common good such as money to an over educated technocrat who believes he is smarter than the markets.
  • In a democracy it is bad politics to follow a monetary policy which favors the rich and condemns the majority to an ever more difficult life (witness damages caused by the euro). This is the "Road to Serfdom" towards socialism or technocracy rather than a sustainable capitalist economy.
  • This system will become increasingly unstable: socially, financially, economically. Such unfairness breeds the conditions for political instability. Under similar circumstances, Theodore Roosevelt and the US Congress went after the "Robber Barons." Franklin Roosevelt acted 20 years later during the depression to separate commercial banks from investment banks. The obvious parallel in the crisis of our times is that President Obama is no Roosevelt.
  • I have no idea how this problem is going to be addressed, but addressed it will be. My hope is that a normal monetary policy will resume in the near future lest we end up dealing with a vengeful demagogue some way down the line.

For this reason, I saw the potential for so called tapering as the first step towards a return to economic sanity (see Volcker's Return). Alas, I seem to have been wrong. Bernanke has the fortitude of a cheese cake, and once again, I misjudged him. The implications for job creation, fair income distribution and indeed the future prosperity of the US may be far reaching. I am worried.

A Lost Generation

We are watching the Fed employ a trickle-down monetary policy. They hope that if they pump up the banks and stock market, increased wealth will lead to more investment and higher consumption, which will in turn translate into more jobs and higher incomes as the stimulus trickles down the economic ladder. The kindred policy of trickle-down economics was thoroughly trashed by the same people who now support a trickle-down monetary policy and quantitative easing. It is not working.

We have a younger generation that is having trouble finding full-time work and developing the skills needed for the transition to more stable, higher-paying employment. The longer the situation persists, the more difficult making up lost ground and lost time becomes for them. As Charles wrote, we may be seeing a new underclass develop, which has disastrous implications for the country. This week President Obama gave a speech on the economy that sounded like a campaign speech except that he should not be running any longer. He blamed the rise of technology for the loss of jobs, the decimation of the power of unions for flat incomes, and the policies of his predecessor for the current malaise. The speech was a wish list of new programs and promises, yet nothing is getting done. He fails to engage with the most pressing problems of our time and doubles down on a healthcare plan that is a train wreck even his most ardent supporters are walking away from. Did you see the recent letter from multiple union leaders asking for a course correction on healthcare?

The Congressional Budget Office now estimates that 7 million people will lose their employer-provided health insurance at the end of the year. One would assume that those are almost all full-time workers. So instead of getting health insurance in some form as a benefit, they will likely soon be paying $1400 a year (minimum) in mandated taxes (the level set by the Supreme Court), and those costs will rise dramatically over the next few years, according to the current schedule. That is a HUGE tax increase for those people.

Young people who have no insurance and are making more than $10 an hour will be paying about $1300 a year, or close to 10% of their after-tax income. That blows a monster hole in their disposable income at those levels. There is no other way to look at this: it's a huge lower-middle-class tax increase. Yes, they get a benefit (health insurance) that someone somewhere in society was already paying for, but they personally did not have these costs before.

The unintended consequences of the healthcare bill are going to be vicious. Not only is there a tax increase on the rich and on small employers, there is a tax increase on young people and the middle class. And it's a tax increase that comes in the middle of the slowest recovery on record. It is possible that we grew at less than 1% this last quarter. And the burden piles on top of a secular shift in employment practices that is making life more difficult for the younger generations.

We are getting close to the point where not only are there no good choices left, but the difficult choices are starting to look pretty bad indeed. And no one in DC is talking about the budgetary choices we are going to be forced to make. The recent drop in the deficit is temporary, fueled by people taking income in 2012 and paying taxes at a lower rate. That "tax dividend" is just about done. Deficits are going to be the number one topic in 2016, with jobs a close number two. Hide and watch.

Maine, Montana, and San Antonio

I have been in Newport, Rhode Island, at the Naval War College, where I attended a small Summer Study Group for the Office of Net Assessment for the Department of Defense. My mind is on overload trying to absorb all I heard and learned and to fit all that into my limited understanding of how the world works. It is a very complex world that the US military finds itself in. Shrinking budgets and an expanded menu of options and demands mean difficult choices. Factor in rapidly changing geopolitical and technology environments, and the challenges become even more complex. When I think of the limits our budget process is going to force on our set of choices, the situation does not make me comfortable.

The one thing that did make me feel good was the caliber of the people I met. They were most impressive. Admittedly, those in the room were among the best and brightest in the military; nevertheless, it was comforting to see the quality of thought and training going into the decision-making process. These are scholars with wide-ranging educational backgrounds as well as warriors proud of their service. I have to tell you, I do not get that same level of comfort when I am in a roomful of political leaders. There are some good ones but not enough of them.

I am in New York for a few meetings before I head on to Maine. My partners in Mauldin Economics, David Galland and Olivier Garret, will be here Wednesday; and as a special treat I get to have dinner with Jack Rivkin on Tuesday. I may even try to attend a meeting of the Friends of Fermentation if they allow teetotalers to show up. My youngest son, Trey, will fly up to meet me here, and we'll head north on Thursday morning. It will be good to be with friends and talk about the issues of the day at Leen's Lodge, amidst the beauty of Grand Lake Stream . Then I'll be home for a week before heading out to join Darrell Cain at his summer home in Montana. My fall schedule looks to be light on travel for some odd reason, and that's ok with me. I need some catch-up time.

And speaking of Mauldin Economics, I continue to be impressed by Grant Williams' ability to see through the smoke in the market today and pinpoint where it's headed. This skill lets him spot investment opportunities that others tend to overlook. You get his Things That Make You Go Hmmm… for free as a subscriber to my letters, but if you haven't yet subscribed to his excellent monthly advisory, Bull's Eye Investor, I recommend you do so. You can sign up now at a 50% discount by clicking this link:

It is time to hit the send button. Have a good week and enjoy your summer. I intend to.

Your worried about the kids analyst,

John Mauldin

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Weekend Viewing: I Am Fishhead

Weekend Viewing: I Am Fishhead

Courtesy of Jesse's Cafe Americain

"An ordinary human being, with a personal conscience, personally answering for something to somebody and personally and directly taking responsibility, seems to be receding farther and farther from the realm of politics. 

Politicians seem to turn into puppets that only look human and move in a giant, rather inhuman theatre; they appear to become merely cogs in a huge machine, objects of a major civilizational automatism which has gotten out of control and for which nobody is responsible."

Vaclav Havel, 24 May 1993


I have a high regard for Frank Ochberg, although he normally writes about other aspects of psychology especially Post Traumatic Stress Disorder and victimization. 

Like others in business, I have had the occasional misfortune to encounter a few obvious narcissists, and probable psychopaths, during my thirty years long corporate business career. I learned to avoid them at all costs, no matter how intriguing or attractive their activities and personalities may have been.  There was always a price to be paid.  And if you have one as a boss, change is sometimes the only recourse.

They are rarely responsive to or capable of genuine friendship, but rather tend to relate best on a power-subordinate level, and in peers prefer more active controls like greed, scheming, and if possible, various forms of blackmail, often financial but sometimes more involved.

They do not like the independent minded person or moral personality in the least.  They despise and fear them because they view morality or other limitations as a weakness, and fear them because they do not bend easily to control. Even if loyalty is offered they do not trust it because they do not know what it is.  It is most often about the need for certainty and control on a primitive level.

Invariably if you know someone who holds quite a few people in contempt, and not mere dislike, the chances are pretty good that at some point they will hold you in the same contempt as well.  If you wish to know the measure of a person, watch how they treat those who they perceive to be weaker or vulnerable.  Listen to their words, but pay more regard to their actions.

And they tend to attract other people with personality disorders into loose groupings that can become self-promotional.   If they ever obtain a significant amount of control of a business, that entity will sooner or later be in serious trouble, often shockingly so.  What were they thinking?  They were well beyond reason, and their morality is largely self-referential.

It is a problem that far too often power attracts those who would abuse it.  And so there is a need for transparency, checks and balances, and rules that limit concentrations of power, both in the corporate and in the political worlds.

All systems that rely on the assumption of a natural rationality and inherent goodness of leaders and key participants are doomed to a tragic failure.  There is strength in diversity, simple because as Lord Acton observed, 'where there are concentrations of power in a few hands, all too frequently men with the mentality of gangsters get control. History has proven that.'


Farm Robots to Make Migrant Worker Vegetable Pickers Obsolete; Welcome the “Lettuce Bot”, the “Grape Bot”, the “Strawberry Bot”

Courtesy of Mish.

The migrant worker agricultural jobs that few legal US citizens are willing to do for the price farmers are willing to pay will vanish within a decade as robots will soon be able to perform even those tasks cheaper.

Welcome the "Lettuce Bot", the "Grape Bot", the "Strawberry Bot"

Time reports Robots to Revolutionize Farming and Ease Labor Woes.

On a windy morning in California’s Salinas Valley, a tractor pulled a wheeled, metal contraption over rows of budding iceberg lettuce plants. Engineers from Silicon Valley tinkered with the software on a laptop to ensure the machine was eliminating the right leafy buds.

The engineers were testing the Lettuce Bot, a machine that can “thin” a field of lettuce in the time it takes about 20 workers to do the job by hand.

The thinner is part of a new generation of machines that target the last frontier of agricultural mechanization – fruits and vegetables destined for the fresh market, not processing, which have thus far resisted mechanization because they’re sensitive to bruising.

Researchers are now designing robots for these most delicate crops by integrating advanced sensors, powerful computing, electronics, computer vision, robotic hardware and algorithms, as well as networking and high precision GPS localization technologies. Most ag robots won’t be commercially available for at least a few years.

On the Salinas Valley farm, entrepreneurs with Mountain View-based startup Blue River Technology are trying to show that the Lettuce Bot can not only replace two dozen workers, but also improve production.

“Using Lettuce Bot can produce more lettuce plants than doing it any other way,” said Jorge Heraud, the company’s co-founder and CEO.

The Lettuce Bot uses video cameras and visual-recognition software to identify which lettuce plants to eliminate with a squirt of concentrated fertilizer that kills the unwanted buds while enriching the soil.

Blue River, which has raised more than $3 million in venture capital, also plans to develop machines to automate weeding – and eventually harvesting – using many of the same technologies.

Another company, San Diego-based Vision Robotics, is developing a similar lettuce thinner as well as a pruner for wine grapes. The pruner uses robotic arms and cameras to photograph and create a computerized model of the vines, figure out the canes’ orientation and the location of buds – all to decide which canes to cut down….


Continue Here


Weekend Reading: WSJ’s Saving Detroit from Itself

Courtesy of Larry Doyle.

The Wall Street Journal writes today that there should be no federal bailout of Detroit.

The AFL-CIO and its friends are mourning Detroit as a victim of capitalism, claiming the government has a moral obligation to rescue the bankrupt city. This is a nice political fable, but the hard truth is that Motown is a victim of its own political vices and a bailout would merely forestall the necessary rehab.

For lots of informative details adding up to a whole lot of sense on cents:

Saving Detroit from Itself


Payroll Employment for Age Group 18 to 29 Shows Fewer Full-Time Employment “Regardless of Education”

Courtesy of Mish.

A Gallup Poll on US Payroll Employment for Age Group 18 to 29 shows Fewer Young Adults Holding Full-Time Jobs in 2013.

Fewer Americans aged 18 to 29 worked full time for an employer in June 2013 (43.6%) than did so in June 2012 (47.0%), according to Gallup’s Payroll to Population employment rate. The P2P rate for young adults is also down from 45.8% in June 2011 and 46.3% in June 2010.

Younger Americans Less Likely to Have Full-Time Work Now, Regardless of Education

Older Americans More Likely to Hold Full-Time Jobs Now Than a Year Ago

The lack of new hiring over the past several years given a recovering economy seems to have disproportionately reduced younger Americans’ ability to obtain full-time jobs. On the other hand, Americans aged 30 to 49 this June were, at 61.4%, about as likely to have a full-time job as they were in June of each of the prior three years.

The percentage of Americans aged 50 to 64 who have a full-time job increased in June 2013, to 48.2%, from 46.6% a year ago and 45.7% in June 2010. Similarly, 8.4% of Americans 65 or older had a full-time job in June 2013, compared with 7.2% in June 2012 and 6.2% in June 2010.

The slow economy of recent years has limited new hiring. This has likely increased the percentage of older Americans with jobs, as companies may be placing a greater value on their experience and productivity and as older workers decide to continue to work when given the opportunity to do so. It also may suggest that far fewer workers are retiring voluntarily. In turn, this may imply that the current labor participation rate will increase, as those who involuntarily left the workforce return in greater numbers than expected once the U.S. economy begins to grow significantly.

These results are not surprising. Here is a snip from my May 1, 2008 post on the Demographics Of Jobless Claims

Ironically, older part-time workers remaining in or reentering the labor force will be cheaper to hire in many cases than younger workers. The reason is Boomers 65 and older will be covered by Medicare (as long as it lasts) and will not require as many benefits as will younger workers, especially those with families. In effect, Boomers will be competing with their children and grandchildren for jobs that in many cases do not pay living wages.

Social Security Cliff in Sight

And so here we are. Boomers are competing with their children and grandkids for jobs. Demographics are awful. And the ramifications of an aging workforce with fewer workers than ever vs. retirees puts stress no only on public union pension plans, but also on Social Security.

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Who Will Stand Up to Wall Street?

Who Will Stand Up to Wall Street? 

This post first appeared in In These Times

Wall Street

(AP Photo/Henny Ray Abrams)

Wall Street held itself a big fat profit party last week. The nation’s six largest banks reported $23 billion in profits. That’s for one quarter — three months. Pop the champagne. Buy another Lamborghini.

Well, if you’re a Wall Street banker, that is. Not if you’re a college student looking for a loan. Because bankers and Congress don’t intend to give you a break today.

Not if you’re one of the hundreds of thousands of workers furloughed because of the sequester. Because Congress has no intention of charging highflying banks a financial transaction tax, the revenues from which could prevent many of those cuts.

Not if you’re one of those middle class Americans who bailed out the banks and now fears renewed recklessness on Wall Street will require another rescue. Because Wall Street has persuaded Congress that it really, really should not closely regulate banks.

But, hey, they’re partying on Wall Street, right? The thing is, people are supposed to rule. Not Wall Street, not banks, not money. People rule in a democracy. This is something apparently forgotten by some in Congress. Banks are corporations, which are legal entities established under rules written by people. Their existence should advance America and Americans. Not the other way around. Many in Congress need to be reminded of that.

Keep Reading: Who Will Stand Up to Wall Street? | Perspectives, What Matters Today |

The Depressing Tale of How Greedy Financial Titans Crushed Innovation and Destroyed Our Economy

Lynn Parramore: The Depressing Tale of How Greedy Financial Titans Crushed Innovation and Destroyed Our Economy

By Lynn Parramore, a senior editor at Alternet. Posted on Naked Capitalism, originally from Alternet

Whatever happened to innovation in America? President Obama told us that our future depends on it. Across the political spectrum, everyone pretty much agrees that innovation is vital to prosperity.

So why aren’t we getting the job done? Clearly, we’re in desperate need of clean technology that won’t poison us. Our information and communications systems are not up to snuff. Our infrastructure is outdated and crumbling before our eyes. We’re not investing enough in these areas, and it shows. Yet they’re necessary not only for America’s economic health, but for stability and prosperity around the globe.

The U.S. used to be the envy of the world when it came to innovation, making things that dazzled the world and enhanced the lives of millions. But the Information Technology & Innovation Foundation, a bipartisan think-tank that ranks 36 countries according to innovation-based competitiveness, tells us we’re getting pushed aside on the global innovation stage. In 2009, to the surprise of those conducting the study, the U.S. ranked #4 in innovation, behind Finland, Sweden and Singapore. In 2011, the U.S. ranking was unchanged. Worse, the U.S. ranked second to last in terms of progress over the last decade.

Research by the Organization for Economic Cooperation and Development (OECD) also shows that the U.S. is not making as many cutting-edge products as it used to, and that other countries with strong investment in the foundations of innovation, like education and research and development, and fewer of the things that hinder it, like income inequality, are making greater strides than we are.

What Went Wrong?

Keep reading: Lynn Parramore: The Depressing Tale of How Greedy Financial Titans Crushed Innovation and Destroyed Our Economy « naked capitalism.

The True Cost To Americans of The Medical Mafia Skim And The Failure of OCare To Bust It

Courtesy of Lee Adler of the Wall Street Examiner

Peter Schiff has posted a video regarding the US being 27th in the world in wealth per capita. I have to wonder if that’s not directly related to the US health care scam, and the drag that imposes on the US economy.

The fact that the US ranks last among major industrial nations in health care outcomes is pretty well publicized, although a broad segment of Americans would prefer to ignore that fact. The fact that its health care costs are the highest in the world is well known in some quarters, not in others, where again, the preference is to be ignorant.

I’ve often mentioned the fact that US health care costs absorb 18-19% of GDP, while the rest of the world is around 10-11%. The US medical industrial mafia syndicate that controls the delivery of medical services in the US skims 7% of GDP.  If you have any interest in statistics on how the US stacks up with the rest of the world in terms of outcomes and costs, this paper is chock full of them.  Those who prefer to remain ignorant are welcome to. Be my guest.

I just want to show something very simple in one picture.

I want to to illustrate the US medical mafia skim that marks up the true cost of the service by 70% and steals 7% of our productive worth each year. Now at 17.9% of GDP, Kaiser Health says that figure will rise to 20%  in eight years. The medical mafia skim now totals $1 trillion per year, and that will only increase in the years ahead.  That’s $7,500 per year, per average US household. Every American household is paying that much to a mafia protection racket. That’s what the US medical industrial complex is, a protection racket.

The US Medical Mafia Skim Robs Americans of the Wealth

The US Medical Mafia Skim Robs Americans of the Wealth – Click to enlarge

This is outright legalized theft, and it will become even more entrenched under the OCare fraud. It is just another transfer of wealth from the US middle class, in this case to the medical mafia syndicate kingpins and their capos, extracting the vig at every layer of this legalized criminal enterprise.  The pigmen at the top of the scam are multibillionaires.

The true cost is what it costs to deliver health care in the rest of the world. Most of those countries have small private systems in addition to their public health systems, and virtually all have private enterprise participants, particularly drug and medical equipment companies, who earn substantial profits included in their sales. These base costs in all other nations therefore include a profit element. Our medical mafia adds a 70% markup on top of that base.

US medical doctors (not including primary care docs) earn double what specialists earn everywhere else in the world. Hospital fees are double, triple, or even quadruple. Hospital administrators in the US are paid millions, often 5 to 10 times what health care admins earn anywhere else in the world. Insurance sales forces are paid billions. Medical advertising adds billions more. None of those costs even exists elsewhere in the world to any appreciable degree.

Drugs cost two or three times as much in the US. Labs and clinics charge two or three times as much. Those labs and clinics are often owned by the doctors who are overcharging for basic services. Then they order excessive tests and overcharge again.

Only in the US is this legal. Every other nation on earth has stopped the theft by crushing the medical cartels. Americans need to wake up and demand an end to this rampant, entrenched criminality. The alternative is that the middle class will ultimately be squeezed out of existence in any recognizable form. And some will still be shut out of the system altogether under Ocare.

Meanwhile this system penalizes US competitiveness in the world. If it costs 70% more here, and employers must bear the cost, then how can US companies compete? Simple, they move their operations to places where they aren’t responsible for the cost of health care.

The OCare fraud that takes full effect next January solves none of the cost issues. In fact, it simply further entrenches the US medical mafia skim. The US will remain uncompetitive with the rest of the world. Americans will continue to be robbed of their wealth by the medical industrial mob syndicate. The vast majority of self employed Americans who are just shy of Medicare age will be forced to go without health insurance. The cost of insurance for a married couple aged 60 and over is in excess of $2,000 per month in most of the most populated areas of the country.  Those earning more than $46,000 per year won’t be eligible for government subsidy, so unless that person’s income is well into 6 figures, purchasing health care won’t be an option.

OCare solves none of these issues. It entrenches the skim, and will continue to leave millions with no coverage at all. It’s a scam.

There is a solution. It’s the solution used by every industrialized nation on earth. Bust the cartels. End the skim, either via government run health care, or by treating the industry as a public utility. Tightly regulate it, and clamp down on the price gouging that makes the US system so expensive. But first and foremost, cover everybody. That’s just basic humanity. The US is the last civilized nation on earth not to do that. It is less than civilized, and it stops us from reaching our economic potential.

Track the data that matters, and stay up to date with the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market,  in the Wall Street Examiner Professional Edition. Try it risk free for 30 days. If it doesn’t help you, I’ll give your money back. Don’t miss another day. Get the research and analysis you need to understand these critical forces. Be prepared. Stay ahead of the herd. Click this link to try WSE's Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to the Wall Street Examiner.

Former IMF Head To Be Tried For Aggravated Pimping

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

While this story is not Friday humor, it may explain the preponderance of "erect hockeystick" formations in IMF's legacy projection charts. Former IMF head Dominique Strauss-Kahn is no stranger to sexual scandal – in fact Anthony Weiner may learn a thing or two from the man who once upon a time was said would be France's next president. However, being charged with "aggravated pimping" may be a new low even for DSK, or new high if in the New Normal it is finally 50 Cent who sets ethical and moral standards. The reason for the lawsuit is that during numerous sex parties which DSK had
attended in various cities over the years, there were prostitutes also
present, often times in groups.

For those confused, Reuters explains:

Investigating judges in the case determined that Strauss-Kahn, 64, should be judged by a criminal court over allegations he was complicit in a pimping operation involving prostitutes at the Carlton hotel in the northern city of Lille.

The decision was a surprise after a public prosecutor recommended in June that the inquiry be dropped without trial and it will thrust Strauss-Kahn's private life back into the spotlight just as he was putting the U.S. scandal behind him.

His lawyers said there were no legal grounds to try him and he was being targeted because of his notoriety after a New York hotel maid's charge, later dropped, that he sexually assaulted her in his suite in May 2011 when he was International Monetary Fund chief.

"No offence has been found to exist. So there can be no conviction in this affair," Frederique Baulieu, one of his lawyers, told BFM TV. "We should be focused on the law, not morality. Sadly, in this affair, investigating magistrates have been led astray by morality."

How does one define pimping in the French criminal code? As follows: "Under French law, pimping is a broad crime that encompasses aiding or encouraging prostitution." So how is aggravated pimping different besides just involving lots and lots of pimping? Per CNN, "Aggravated pimping” describes pimping with aggravating circumstances. Under the French penal code, those include prostituting a minor, involving a weapon, and—potential factors in Strauss-Kahn’s charge—using more than one prostitute and working with a group. "Aggravated pimping" is punishable by ten years in prison and 1.5 million Euro fine. Strauss-Kahn was originally under investigation for “aggravated pimping as part of an organized gang,” which can draw 20 years in prison, but the charges announced Friday are less severe.

And while the former finance minister acknowledged attending said "parties", he claims he was unaware the women taking part were paid sex workers. Back in February 2012, when DSK was arrested for his role in the prostitution ring, his lawyer Henri Leclerk had this to say to the general public: "He could easily not have known, because as you can imagine, at these kinds of parties you’re not always dressed. I challenge you to distinguish a naked prostitute from any other naked woman."

Come to think of it, he does have a point. Now if only the same defense worked for NYC mayoral candidates.

Funniest and Most Absurd Real Estate Promotion in Years

Courtesy of Mish.

Those attending the International Property Expo in Singapore, to learn about “the best property in Asia” can win a free house by attending.

Guess where the house is located.

One might think somewhere in Asia because that’s the focus of the expo. But No! The free house is located in the mother of all choice spots, Detroit, Michigan.

Check out the image.

Note the creative description: “Yes, it’s true we are giving away a home! This is a gorgeous 3 bedroom brick home located in an excellent neighbourhood just a stone’s throw away from key facilities like the Triumph Hospital and the Bel Air Shopping Centre. It boasts a garage and basement and has just been newly furnished. It’s Freehold Landed U.S property with 3 bedroom and 1 bathroom. A lot size of 4,225 sq ft with Garage, basement and tenant included! This property has a net selling price US $38,000.

Is this ad supposed to entice people to attend or scare them away?

It’s Too Late

The promotion clearly needs a nice corresponding “better buy now before it’s too late” message.

And I have one in mind too. Please consider my December 13, 2005 article It’s Too Late.

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How Central Banks Buy Growth

Courtesy of The Automatic Earth.

Dorothea Lange Good Coffee May 1937
"Post office Finlay, Texas"

The best of the lot must be the Daily Telegraph's headline: Economy firing on all cylinders as growth hits 0.6%. I mean, how does one trump that? Looks like they need to install extra cylinders just to grow 1%. I must admit I also really liked the claim that the UK economy will receive a £250 million boost from the Royal Baby™. Yes, in the United Magic Kingdom solid GDP growth can apparently come from the sale of millions of cups and plates and trinkets from one Brit to another, even if most are produced in China. All you need to do is get British citizens to spend £10 for a royal mugshot and we're on our way to recovery. Why don't they all just crash into each other's cars at 100 miles an hour, that's even much better for GDP.

The wish for growth must be a continuing strong incentive for many, because all over Europe there are claims that one country or another (France, Spain) have left the recession behind them. One green shoot and people think they're lost in a rainforest. S&P does not agree:

House prices to continue decline in Europe, says S&P

House prices are set to continue falling in much of Europe this year, with some of the steepest declines coming in core eurozone countries such as the Netherlands and France, according to a Standard & Poor's report out today. [..]

Spain will be worst hit, with house prices tumbling 8% this year and another 5% in 2014 because of "a lack of solvent demand to absorb excess supply", said S&P economist Sophie Tahiri. But she warned that the fall could be even worse. [..]

The second steepest drop in house prices will come in the Netherlands, S&P said, putting it down to weak growth, falling purchasing power, higher unemployment and changes to regulations. It forecast declines there of 5.5% this year and 1% next year, with the market bottoming out in 2015.

France will experience a 4% fall this year and next year, despite the market there proving "more resilient" than the rating agency expected. "Low interest rates and supportive lending policies imply a softer landing in France over the next 18 months," the report said.

And the IMF can also still see the forests for the trees:

IMF: Euro region at a high risk of stagnation

A year after the European Central Bank doused the risk of a euro-zone breakup, bank lending continues to collapse, unemployment is still increasing, and signs of recovery remain “elusive,” the International Monetary Fund reported Thursday in a sobering new analysis of the currency union. The IMF, which has loaned massive amounts of its own money to bail out euro-zone nations and keep the monetary union intact, portrayed the group of countries as at a “high risk of stagnation,” with few short-term options for turning their economies around.

The combined debt of households, companies and governments has barely budged from recent peak levels, constraining them from borrowing to buy or invest. Banks, stung by losses on government bonds in places like Greece, have retreated behind national borders and remain hesitant to lend to one another or take risks in other nations. Political momentum for reform has slowed, with major projects like a banking union half-finished.

ECB head Mario Draghi promised last summer to do “whatever it takes” to keep the euro zone together. With the risk of a larger collapse averted, it was hoped that politicians, banks and entrepreneurs could fix some of the region’s other problems — from misaligned wages and prices to a financial market that is fragmented along national lines.

Some of that has happened, said IMF euro-zone mission chief Mahmood Pradhan. But it has moved far more slowly than expected and has left the region vulnerable if the world economy slows further. “Relative to a year ago, it looks weaker,” Pradhan said.

“This is a depression”, Carl Weinberg, chief economist at the High Frequency Economics consulting firm, wrote after data showed another monthly drop in euro-zone bank lending — the 18th monthly drop in the past 21 months. “The contraction of credit is a death sentence.”

Moreover, the Fund sees a threat to Europe from America:

IMF fears Fed tapering could 'reignite' euro debt crisis

The tapering of stimulus by the US Federal Reserve risks reigniting the eurozone debt crisis and pushing the weakest countries into a "debt-deflation spiral", the International Monetary Fund has warned. Early tapering by the Fed "could lead to additional, and unhelpful pro-cyclical increases in borrowing costs within the euro area", the IMF said.

"The macroeconomic environment continues to deteriorate," said the Fund in its annual `Article IV' health check on the eurozone. "Recovery remains elusive. Growth has weakened further and unemployment is still rising, and the risks of prolonged stagnation and inflation undershooting are high. Mounting social and political tensions pose an increasing threat to reform momentum."

The report warned that the onset of a new tightening cycle in the US had already led to major spill-over effects in the eurozone, pushing up bond yields across the board. Early tapering by the Fed "could lead to additional, and unhelpful, pro-cyclical increases in borrowing costs within the euro area. This could further complicate the conduct of monetary policy and potentially damage area-wide demand and growth. Financial market stresses could also quickly reignite," it said.

The Fund said the European Central Bank must take countervailing action to prevent "a vicious circle setting in," ideally by cutting interests, introducing a negative deposit rate, and purchasing a targeted range of private assets.

It should launch "credit-easing" policies to alleviate the deepening lending crunch in Spain, Italy, and Portugal, where borrowing costs for firms are 200 to 300 basis points higher than in Germany, with small businesses struggling to raise any money at all. The IMF said the more the Fed tightens in the US, the more the European authorities need to offset this with other forms of stimulus.

The report came as fresh data from the ECB showed that loans to the private sector contracted by €46 billion in June, after falling by €33 billion in May , and €28 billion in April. The annual rate of contraction has accelerated to 1.6%.

The M3 broad money supply is also fizzling out, with growth dropping to 2.3% year-on-year. There has been almost no growth in M3 since October 2012. The money data tends to act as an early warning indicator for the economy a year or so ahead, and therefore casts doubt on recent claims by EU leaders that the crisis is over.

And there are more ugly stats available for your reading pleasure:

Eurozone Debt Burden Hits All-Time High Even After Austerity

Europe's debt dynamics keep getting worse in spite of years of cost-cutting and tax hikes designed to return public finances to health. Official figures showed Monday that the debt burden of the 17 European Union countries that use the euro hit all-time highs at the end of the first quarter even after austerity measures were introduced to rebalance the governments' books.

Eurostat, the EU's statistics office, said government debt as a proportion of the total annual GDP of the eurozone rose to a record 92.2% in the first quarter of 2013, from 90.6% the previous quarter and 88.2% in the same period a year ago. [..]

Greece, which in 2009 became the first euro country to suffer a loss of investor confidence over the state of its public finances, has the highest debt burden in the eurozone of 160.5%. That's up from the previous quarter's 156.9% and from the previous year's equivalent 136.5%.

The second highest debt-to-GDP ratio in the eurozone is Italy's 130.3%. Though Italy has not needed a financial rescue like Greece, Ireland, Portugal, Spain and Cyprus, its government has pursued a raft of measures to make sure its investors are happy to keep on lending money so it can service its 2 trillion euros debt on its own.

Across the eurozone, total debt stood at €8.75 trillion ($11.4 trillion) at the end of the first quarter, up from €8.6 trillion the previous quarter and €8.34 trillion the year before.

It's not just the euro countries that are suffering a debt overhang. Across what was then the 27-country EU, which includes non-euro countries such as Britain and Poland, the debt burden rose to 85.9% at the end of the first quarter from 85.2% the previous quarter and 83.3% the year before. Total debt stood at €11.11 trillion, up from €11.01 trillion the previous quarter and €10.67 trillion the year before.

Enough about Europe. Let's move on to Japan. According to Ambrose Evans-Pritchard, it's a country of miracles these days. Me, I'm not so sure:

Abenomics has worked wonders but can it save Japan?

Japan refuses to go quietly into genteel decline. The revolutionary policies of premier Shinzo Abe have done exactly what they were intended to do – a triumph of political will over the defeatist inertia of Japan's establishment.

Abenomics has not caused a collapse of confidence in Japanese debt after all. The bond vigilantes are, for now, resigned, as the Bank of Japan soaks up 70% of state bond issuance each month, printing almost as much money as the Fed in an economy one third the size.

"Abenomics is working," says Klaus Baader, from Societe Generale. The economy has roared back to life with growth of 4% over the past two quarters – the best in the G7 bloc this year. The Bank of Japan's business index is the highest since 2007. Equities have jumped 70% since November, an electric wealth shock.

"Escaping 15 years of deflation is no easy matter," said Mr Abe this week, after winning control over both houses of parliament, yet it may at last be happening. Prices have been rising for three months, and for six months in Tokyo. Department store sales rose 7.2% in June from a year earlier, the strongest in 20 years.

Japanese retail sales have grown recently, albeit in a fairly volatile fashion, and reached a new peak in May. "Above all, Abenomics has shifted the yen," said Mr Baader. The 22% devaluation since October has held, rather than snapping back as usual. The psychology of yen appreciation is breaking. Exports have jumped 7.4% from a year ago.

Abenomics has not caused a collapse of confidence in Japanese debt after all. The bond vigilantes are, for now, resigned, as the Bank of Japan soaks up 70% of state bond issuance each month, printing almost as much money as the Fed in an economy one third the size.

The IMF says Japan's gross debt was 216% of GDP in 2010, 233% in 2011, 238% in 2012 and will reach 245% this year. This is already a debt-compound spiral.

Mr Abe had to confront this head-on before the cataclysm hit. He has done so by turning to the ideas of Takahashi Korekiyo, the statesman of the early 1930s, later assassinated by military officers.

Takahashi tore up the rule book and combined monetary and fiscal stimulus, each reinforcing the other, until Japan was booming again, and the debt trajectory came back under control. The BoJ became a branch of the treasury, ordered to finance spending. "What he accomplished was what can be called the most successful application of Keynesian policies," said Mr Abe in his Guildhall speech last month.

"Five years before John Maynard Keynes published his General Theory, Takahashi succeeded in extricating Japan from deep deflation ahead of the rest of the world. His example has emboldened me." Takahashi's triumph was to smash expectations. "It is impossible to get rid of ingrained deflationary psychology unless you clear it out all at once. I myself have attempted to do exactly that," said Mr Abe.

[..] There is a contradiction to the BoJ's policy. If printing money does raise inflation to a new target of 2%, bondholders will suffer, either by a capital loss if yields jump or by slow erosion if they don't. Life insurers and pension funds might at any time refuse to buy. But it is a question of picking the lesser poison. The Fed navigated such reefs in the late 1940s, mostly with financial repression to whittle away war-time debt. Japan can do the same. This will be horrible for pensioners.

I would humbly suggest that perhaps Japan got out of the 1930's depression the same way Germany and the US did; through warfare, not through (pre) Keynesiasm. What's more, I think all Abe and the Bank of Japan are doing is spending their people's money to buy something that may look like growth, but is not that at all. Because I also have an idea where the present positive numbers for Tokyo come from. And that idea, which I have already written about quite a bit recently, was further reinforced this week by reading two pieces from Tyler Durden. The first is 3 months old:

How The Fed Holds $2 Trillion (And Rising) Of US GDP Hostage

When it comes to the real measure of a nation's economic output, one can rely on "flexible", constantly changing definitions of what constitutes the creation of "goods and services" as well as transactions thereof, goalseeked to meet the propaganda of constant growth no matter what (and which it appears will now, arbitrarily, include intangibles such as iTunes), or one can go to the very core of "growth" (just ask the anti-Austerians for whom debt and growth are interchangeable) which is and has always been a reflection of the increase (or decrease) in broad and narrow liquidity or money supply, which in turn means how much money is created through loans, either via commercial banks or the central monetary authority, also known as the Federal Reserve.

This is best shown by the following chart which shows the near unity (on the same axis) between US GDP and total liabilities in the US commercial banking system (traditionally the primary source of loan creation) as reported quarterly by the Fed's Flow of Funds statement (combining statements L.110, L.111 and L.112)


The chart above implies one simple thing: if there is loan creation, and thus injection of liquidity in the system, there is growth. If there is no liquidity injection, there is no growth, at least growth as defined by GDP-tracking economists.

And here we run into the problem.

A quick look at just loan and lease creation in the US commercial bank system reveals something very troubling: at $7.290 trillion as of the week of April 17 (a decline of $12 billion from the week before) there has been exactly zero loan creationin the US commercial bank sector, conventionally the primary locus where money demand translates into new loans as the Fed itself defines it in Modern Money Mechanics: A Workbook on Bank Reserves and Deposit Expansion, since the failure of Lehman brothers. Specifically, in October 200/ total loans and leases outstanding in the US were $7.323 trillion. This means that loans, historically the biggest asset on bank balance sheets by far and whose matched liability is deposits, have been responsible for negative $30 billion in GDP growth in the past five years (source).


And yet, as the first chart above shows, total US bank liabilities have grown by $1.6 trillion since the failure of Lehman (from $13.6 trillion at December 2008 to $15.3 trillion as of the end of 2012) which means bank assets have also grown by a comparable amount, resulting in a matched GDP growth of roughly $2 trillion. How is this possible if commercial bank loan creation has been dormant at best, and in reality – negative, and no incremental matched liabilities could have possibly been created?

Simple: Presenting "Exhibit A" – the Federal Reserve, which has created $1.8 trillion in incremental reserves since the failure of Lehman, bringing its total balance sheet to $3.3 trillion.


The chart above shows that far more than merely goosing the market to record levels based on nothing but hot potato chasing by Primary Dealers loaded to the gills with record liquidity, and momentum-escalating High Frequency Trading algorithms, the Fed's "out of thin air" created excess reserves (a liability for the Fed) have come home to roost on the balance sheets of banks in the US (including foreign banks operating in the US) as positive carry (at the IOER rate) assets.

It also means that the Fed's excess liquidity, at least from an accounting identity standpoint, has manifested itself purely in the form of consumer and corporate deposits held at US banks ($9.351 trillion as of April 17), which as the chart below shows, used to track loans on a one to one basis, until QE started, and have since then surpassed total loans by just about the amount that the Fed has injected into the system.


Of course, the sad reality of what happens to the economy when the Fed pushes not only reserves into banks, but forces "deposits" into the hands of consumers and corporations, is precisely the one we have witnessed for the past four years: no real growth apart from the propaganda, with occasional spurts of growth driven by confusing the surge in the stock market (which is more than happy to absorb the record liquidity and where JPM and other banks use the excess deposits over loans to buy stocks and other risk assets) with a push higher in the economy. In the meantime, the middle class evisceration continues, the real unemployment is 11.6% or unchanged since 2009, US households on foodstamps are at a new record high every month, core CapEx spending is imploding to a pace not seen since 2008,  corporate earnings and revenues are stagnant at best, while companies continue to get stigmatized for daring to keep excess cash on their books instead of investing it (that the rate of return on such "investments" would be negative according to the corporate executives themselves is apparently entirely lost on the propaganda media and political talking point pundits).

But at least the S&P is at record highs, and corporate and sovereign yields are at record lows.

Sadly, since there never is a free lunch, what the above data tells us is that due to the persistent refusal of banks to take over from the Fed as lender (and money creator) of main resort over four years into the "recovery", that $2 trillion of the $16 trillion in US GDP is now held hostage by the Fed. In other words, if it wasn't for the Fed's "narrow liquidity", "low power money", whatever one wants to call it, creation, US GDP would be 12% lower, or at June 2007 levels. It also means that virtually every incremental dollar of US GDP "growth" comes solely courtesy of Ben Bernanke's narrow money spigot.

And since the US has to "grow", since US GDP has to be spoonfed to the masses as increasing at a ~1.5% annualized rate every quarter, and since US banks continue to not lend (and in fact their eagerness to not lend is further cemented by the far easier returns they can generate courtesy of the Fed in chasing stocks, and not take on NPL risk in exchange for meager 4-5% annual returns, which means a feedback loop is created where more QE means less bank lending means more QE means less bank lending), can all trivial and absolutely meaningless discussion over whether the Fed will halt QE (now or ever) finally end? It absolutely never will, until everything one day comes crashing down.

And the second Durden piece, the icing on the cake of the first is from this week.

How Much US GDP Growth Is Thanks To The Fed?

By now even the most confused establishment Keynesian economists agree that when it comes to economic "growth", what is really being measured are liabilities (i.e., credit) in the financial system. This is seen most vividly when comparing the near dollar-for-dollar match between US GDP, which stood at $16 trillion as of Q1 and total liabilities in the US financial system which were just over $15.5 trillion in the same period.

What, however, few if any economists will analyze or admit, and neither will financial pundits, is the asset matching of these bank liabilities: after all since there is no loan demand (and creation) those trillions in deposits have to go somewhere – they "go" into Fed reserves (technically it is the reserves creating deposits but that is the topic of a different article). It is here that we can discern directly just what the contribution of the Fed to US GDP, or economic growth.

The chart below shows the time series of US GDP since 1960 compared to total US financial liabilities over the same time period (compiled as the total of U.S.-Chartered Depository Institutions, Excluding Credit Unions (L.110), Foreign Banking Offices in U.S. (L.111) and Banks in U.S.-Affiliated Areas (L.112) all from the quarterly Flow of Funds, Z.1., report). This is a chart we have shown previously.

What we have broken out this time in the red shaded area, however, is how much of bank liability funding is matched by reserves originating by none other than the Federal Reserve. This amounted to a record $1.75 at March 31. It also means that excluding the Fed, US banks would have some $1.75 trillion fewer in assets and thus liabilities. Finally, it also means that the broadest aggregate of "credit creation", the US economy, would be some $1.75 trillion lower at the end of the first quarter.


And a quick update: we await the next full Z.1 update to reflect Q2 balances due out in a month, we do know that total Fed reserves grew by $250 billion in Q2 to $2 trillion, and as of last week stood at a new record high of $2.1 trillion. This is "money" that is inextricably linked to the US GDP, and also means that absent a pick up in credit creation in the private sector, that would be US commercial banks whose total loans and leases once again declined and continue to still be below Pre-Lehman levels (!), have to step up. Sadly, in a world in which all the banks are habituated to relying on the Fed for all money creation, and instead invest excess reserves manifested at the bank level in the form of excess deposits over loans, this is not going to happen.

So perhaps the question that economists should ask is: what will be the impact of the Taper on US GDP going forward (hint: very negative). And what happens when the establishment admits that as of last quarter, some $2 trillion in US GDP was exclusively thanks to the Federal Reserve, a number which will rise to $2.3 trillion at September 30 (and continue rising).

The truth is, you can't buy growth. No free lunch. But you can indeed fool people into believing that you can. Which is a remarkably easy thing to do when they are sufficiently eager to believe. That's the game all western governments and central banks, plus China, are playing these days. Have been playing for 5 years or more now. At a huge cost to the citizens of their countries, and their children (no free lunch!), and a huge profit for the wealthy.

There is no actual GDP growth in the US. There's only the $2 trillion+ that Bernanke has pumped into the Wall Street banks' excess reserves. That's what the red area in that last graph tells you. There's no growth in Europe or Japan either. While Chinese numbers get uglier and more questionable by the day. Central bankers cannot continue to "buy growth" in this fashion forever. And when they stop, there will be contraction, and deflation. There is no real source of growth. It's one big costly fake. Just look at the graphs.

We have told you for years to get out before that steamroller comes. Many of you today are thinking and saying: but it looks so good! Now you know, if you didn't already, and from yet another angle, what makes it look good.