A balance sheet recession: A balance sheet recession

Max Keiser rides againHe predicted it when it was far from obvious.

Now he's explaining it as it unfolds.

The consequences of a banking system run amok, with loans that can't be paid, and delusions held too tightly.

Do you think the economy is now in a recession, or not?: CNN poll results

http://i2.cdn.turner.com/cnn/2011/images/09/01/rel14h.pdf

35% say the recession is serious, 34% moderate, 13% mild. Only 18% say the country is not is recession.

"Democrats strongly disagree. Eighty-three percent want the president to focus more on job growth, and two-thirds of independents say the same.

This could hint at the president’s economic plan as he campaigns for re-election. With only 34% of Americans approving of the way he is handling the economy, according to a CNN/ORC Poll released earlier this week, job creation could help the president solidify his party’s eroding support, while bringing in key independent voters."

Is It Time For The Financial World To Panic? 25 Reasons Why The Answer May Be Yes

Submitted by Tyler Durden on 08/31/2011 16:49 -0400
Zero Hedge

Every now and then it is easy to forget that the one or two "better than expected" data points blasted by flashing headlines do nothing that merely mask what is an otherwise quite deplorable and deteriorating reality. For the disconnect between America and the rest of the world look no further than this chart showing the dramatic divergence between the DJIA, which has just gone positive for the year, and every other major global stock market. Yet for those who require a narrative to go with their numbers, here is The Economic Collapse with the latest of their traditionally comprehensive bulletins, this time summarizing the "25 signs that the financial world is about to hit the big red panic button."

From The Economic Collapse:

The following are 25 signs that the financial world is about to hit the big red panic button....

#1 According to a new study just released by Merrill Lynch, the U.S. economy has an 80% chance of going into another recession.

#2 Will Bank of America be the next Lehman Brothers?  Shares of Bank of America have fallenmore than 40% over the past couple of months.  Even though Warren Buffet recently stepped in with 5 billion dollars, the reality is that the problems for Bank of America are far from over.  In fact, one analyst is projecting that Bank of America is going to need to raise 40 or 50 billion dollars in new capital.

#3 European bank stocks have gotten absolutely hammered in recent weeks.

#4 So far, major international banks have announced layoffs of more than 60,000 workers, and more layoff announcements are expected this fall.  A recent article in the New York Times detailed some of the carnage....

A new wave of layoffs is emblematic of this shift as nearly every major bank undertakes a cost-cutting initiative, some with names like Project Compass. UBS has announced 3,500 layoffs, 5 percent of its staff, and Citigroup is quietly cutting dozens of traders. Bank of America could cut as many as 10,000 jobs, or 3.5 percent of its work force. ABN Amro, Barclays, Bank of New York Mellon, Credit Suisse, Goldman Sachs, HSBC, Lloyds, State Street and Wells Fargo have in recent months all announced plans to cut jobs — tens of thousands all told.

#5 Credit markets are really drying up.  Do you remember what happened in 2008 when that happened?  Many are now warning that we are getting very close to a repeat of that.

#6 The Conference Board has announced that the U.S. Consumer Confidence Index fell from 59.2 in July to 44.5 in August.  That is the lowest reading that we have seen since the last recession ended.

#7 The University of Michigan Consumer Sentiment Index has fallen by almost 20 points over the last three months.  This index is now the lowest it has been in 30 years. 

#8 The Philadelphia Fed's latest survey of regional manufacturing activity was absolutely nightmarish....

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a slightly positive reading of 3.2 in July to -30.7 in August. The index is now at its lowest level since March 2009 

#9 According to Bloomberg, since World War II almost every time that the year over year change in real GDP has fallen below 2% the U.S. economy has fallen into a recession....

Since 1948, every time the four-quarter change has fallen below 2 percent, the economy has entered a recession. It’s hard to argue against an indicator with such a long history of accuracy.

#10 Economic sentiment is falling in Europe as well.  The following is from a recent Reuters article....

A monthly European Commission survey showed economic sentiment in the 17 countries using the euro, a good indication of future economic activity, fell to 98.3 in August from a revised 103 in July with optimism declining in all sectors.

#11 The yield on 2 year Greek bonds is now an astronomical 42.47%.

#12 As I wrote about recently, the European Central Bank has stepped into the marketplace and is buying up huge amounts of sovereign debt from troubled nations such as Greece, Portugal, Spain and Italy.  As a result, the ECB is also massively overleveraged at this point.

#13 Most of the major banks in Europe are also leveraged to the hilt and have tremendous exposure to European sovereign debt.

#14 Political wrangling in Europe is threatening to unravel the Greek bailout package.  In a recent article, Satyajit Das described what has been going on behind the scenes in the EU....

The sticking point is a demand for collateral for the second bailout package. Finland demanded and got Euro 500 million in cash as security against their Euro 1,400 million share of the second bailout package. Hearing of the ill-advised side deal between Greece and Finland, Austria, the Netherlands and Slovakia also are now demanding collateral, arguing that their banks were less exposed to Greece than their counterparts in Germany and France entitling them to special treatment. At least, one German parliamentarian has also asked the logical question, why Germany is not receiving similar collateral.

#15 German Chancellor Angela Merkel is trying to hold the Greek bailout deal together, but a wave of anti-bailout "hysteria" is sweeping Germany, and now according to Ambrose Evans-Pritchard it looks like Merkel may not have enough votes to approve the latest bailout package....

German media reported that the latest tally of votes in the Bundestag shows that 23 members from Mrs Merkel's own coalition plan to vote against the package, including twelve of the 44 members of Bavaria's Social Christians (CSU). This may force the Chancellor to rely on opposition votes, risking a government collapse.

#16 Polish finance minister Jacek Rostowski is warning that the status quo in Europe will lead to "collapse".  According to Rostowski, if the EU does not choose the path of much deeper economic integration the eurozone simply is not going to survive much longer....

"The choice is: much deeper macroeconomic integration in the eurozone or its collapse. There is no third way."

#17 German voters are against the introduction of "Eurobonds" by about a 5 to 1 margin, so deeper economic integration in Europe does not look real promising at this point.

#18 If something goes wrong with the Greek bailout, Greece is financially doomed.  Just consider the following excerpt from a recent article by Puru Saxena....

In Greece, government debt now represents almost 160% of GDP and the average yield on Greek debt is around 15%. Thus, if Greece’s debt is rolled over without restructuring, its interest costs alone will amount to approximately 24% of GDP. In other words, if debt pardoning does not occur, nearly a quarter of Greece’s economic output will be gobbled up by interest repayments!

#19 The global banking system has a total of 2 trillion dollars of exposure to Greek, Irish, Portuguese, Spanish and Italian debt.  Considering how much the global banking system is leveraged, this amount of exposure could end up wiping out a lot of major financial institutions.

#20 The head of the IMF, Christine Largarde, recently warned that European banks are in need of "urgent recapitalization".

#21 Once the European crisis unravels, things could move very rapidly downhill.  In a recent article, John Mauldin put it this way....

It is only a matter of time until Europe has a true crisis, which will happen faster – BANG! – than any of us can now imagine. Think Lehman on steroids. The U.S. gave Europe our subprime woes. Europe gets to repay the favor with an even more severe banking crisis that, given that the U.S. is at best at stall speed, will tip us into a long and serious recession. Stay tuned.

#22 The U.S. housing market is still a complete and total mess.  According to a recently released report, U.S. home prices fell 5.9% in the second quarter compared to a year earlier.  That was the biggest decline that we have seen since 2009.  But even with lower prices very few people are buying.  According to the National Association of Realtors, sales of previously owned homes dropped 3.5 percent during July.  That was the third decline in the last four months.  Sales of previously owned homes are even lagging behind last year's pathetic pace.

#23 According to John Lohman, the decline in U.S. economic data over the past three months has beenabsolutely unprecedented.

#24 Morgan Stanley now says that the U.S. and Europe are "hovering dangerously close to a recession" and that there is a good chance we could enter one at some point in the next 6 to 12 months.

#25 Minneapolis Fed President Narayana Kocherlakota says that he is so alarmed about the state of the economy that he may drop his opposition to more monetary easing.  Could more quantitative easing by the Federal Reserve soon be on the way?

And the conclusion which is, as usual, spot on:

Things have not looked this bad for global financial markets since 2008.  Unless someone rides in on a white horse with trillions of dollars (or euros) of easy credit, it looks like we are headed for a massive credit crunch.

What we witnessed back in 2008 was absolutely horrifying.  Very few people want to see a repeat of that.  But as things in the U.S. and Europe continue to unravel, it appears increasingly likely that the next wave of the financial crisis could hit us sooner rather than later.

None of the fundamental problems that caused the crisis of 2008 have been fixed.  The world financial system is still one gigantic mountain of debt, leverage and risk.

Authorities around the globe will certainly do all they can to keep things stable, but in the end it is inevitable that the house of cards is going to come crashing down.

Let us hope for the best, but let us also prepare for the worst.

Global Recession, Right Here, Right Now:

Global Recession, Right Here, Right Now: Japan

It's time to stop debating whether or not the US or Europe is headed into recession. The facts show the entire global economy is in recession.

Global Recession Supporting Data-Points

• Euro zone’s manufacturing purchasing managers’ index fell to a two-year low of 49.0 in August, down from a preliminary reading of 49.7. (Business Insider)
• PMI’s contractions in Ireland, France, Italy, Spain and Greece. (Business Insider)
• Germany’s manufacturing PMI slowed to its lowest level since September 2009, slumping to 50.9, well below an initial estimate of 52.0. (Business Insider)
• US Manufacturing ISM ex-inventory Growth in contraction (Mish)
• Japan's PMI fell at three-month low (Financial Times)
• PMI Readings in Switzerland, Sweden Drop (Financial Times)
• British manufacturing PMI falls 49, a 26-month low, in contraction (MarketWatch)
• Germany private consumption fell for first time since Q4 2009, Manufacturing growth slowest in 23 months (Reuters)
• Japan Capital Spending Plummets 7.8% In Q2, Expectations were 1% Increase (RTT)
• US Construction Declines 3.5% vs. Same period in 2010 (US Census Bureau)
• China exports to US contract, PMI barely above contraction (Reuters)
• Container traffic at Port of Long Beach drops 3.17% smack in face of normal Christmas season ramp-up (Bloomberg)
• Canada GDP unexpectedly declines led by a 2.1% drop in exports(Bloomberg)
• Brazil Unexpectedly cuts interest rates .5% to combat recession.62 of 62 Analysts Miss Call on rate cut (Mish)
• Taiwan's PMI dropped to 45.2 in August, the lowest reading since January 2009 (Reuters)
• German economy grew just 0.1 percent in the second quarter (Reuters)
• Switzerland, economy grew at its slowest pace since 2009, as a record strong Swiss franc also bites into exports. (Reuters)
• Retail Giant in Australia Warns of Massive Price Deflation and Falling Sales, "Hardest Christmas in Retailer Lives" Coming Up (Mish)
• US Zero Jobs Growth, Unemployment Rate Flat at 9.1%; Charts, Graphs, Details (Mish)

Ten Things to Remember

1. Prior stimulus in the US is dead, having run its full course
2. There is no incentive in the US Congress for more stimulus
3. Austerity measures have yet to hit Italy and France
4. Austerity measures will continue to bite Spain, Greece, Ireland
5. Germany export machine will die without the rest of Europe
6. QE3 will fail much sooner than QE2 as interest rates already extremely accommodating
7. Gold may respond well to competitive currency devaluation schemes
8. The Eurozone is highly likely to breakup although timing is unknown
9. Global equities and commodities are priced for perfection.
10. Perfection is not happening.

Additional Reads

Talk of avoiding recession when the global economy is clearly in one and fundamentals are horrendous is sheer lunacy.

In case you missed them, please consider ....

• US In Recession Right Here, Right Now


• Yes Virginia, U.S. Back in Deflation; Inflation Scare Ends; Hyperinflationists Wrong Twice Over

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

The President Surrenders

The President Surrenders
By PAUL KRUGMAN
July 31, 2011


A deal to raise the federal debt ceiling is in the works. If it goes
through, many commentators will declare that disaster was avoided. But
they will be wrong.

For the deal itself, given the available information, is a disaster,
and not just for President Obama and his party. It will damage an
already depressed economy; it will probably make America’s long-run
deficit problem worse, not better; and most important, by
demonstrating that raw extortion works and carries no political cost,
it will take America a long way down the road to banana-republic
status.

Start with the economics. We currently have a deeply depressed
economy. We will almost certainly continue to have a depressed economy
all through next year. And we will probably have a depressed economy
through 2013 as well, if not beyond.

The worst thing you can do in these circumstances is slash government
spending, since that will depress the economy even further. Pay no
attention to those who invoke the confidence fairy, claiming that
tough action on the budget will reassure businesses and consumers,
leading them to spend more. It doesn’t work that way, a fact confirmed
by many studies of the historical record.

Indeed, slashing spending while the economy is depressed won’t even
help the budget situation much, and might well make it worse. On one
side, interest rates on federal borrowing are currently very low, so
spending cuts now will do little to reduce future interest costs. On
the other side, making the economy weaker now will also hurt its
long-run prospects, which will in turn reduce future revenue. So those
demanding spending cuts now are like medieval doctors who treated the
sick by bleeding them, and thereby made them even sicker.
And then there are the reported terms of the deal, which amount to an
abject surrender on the part of the president. First, there will be
big spending cuts, with no increase in revenue. Then a panel will make
recommendations for further deficit reduction — and if these
recommendations aren’t accepted, there will be more spending cuts.
Republicans will supposedly have an incentive to make concessions the
next time around, because defense spending will be among the areas
cut. But the G.O.P. has just demonstrated its willingness to risk
financial collapse unless it gets everything its most extreme members
want. Why expect it to be more reasonable in the next round?
In fact, Republicans will surely be emboldened by the way Mr. Obama
keeps folding in the face of their threats. He surrendered last
December, extending all the Bush tax cuts; he surrendered in the
spring when they threatened to shut down the government; and he has
now surrendered on a grand scale to raw extortion over the debt
ceiling. Maybe it’s just me, but I see a pattern here.

Did the president have any alternative this time around? Yes.

First of all, he could and should have demanded an increase in the
debt ceiling back in December. When asked why he didn’t, he replied
that he was sure that Republicans would act responsibly. Great call.
And even now, the Obama administration could have resorted to legal
maneuvering to sidestep the debt ceiling, using any of several
options. In ordinary circumstances, this might have been an extreme
step. But faced with the reality of what is happening, namely raw
extortion on the part of a party that, after all, only controls one
house of Congress, it would have been totally justifiable.

At the very least, Mr. Obama could have used the possibility of a
legal end run to strengthen his bargaining position. Instead, however,
he ruled all such options out from the beginning.

But wouldn’t taking a tough stance have worried markets? Probably not.
In fact, if I were an investor I would be reassured, not dismayed, by
a demonstration that the president is willing and able to stand up to
blackmail on the part of right-wing extremists. Instead, he has chosen
to demonstrate the opposite.

Make no mistake about it, what we’re witnessing here is a catastrophe
on multiple levels.

It is, of course, a political catastrophe for Democrats, who just a
few weeks ago seemed to have Republicans on the run over their plan to
dismantle Medicare; now Mr. Obama has thrown all that away. And the
damage isn’t over: there will be more choke points where Republicans
can threaten to create a crisis unless the president surrenders, and
they can now act with the confident expectation that he will.
In the long run, however, Democrats won’t be the only losers. What
Republicans have just gotten away with calls our whole system of
government into question. After all, how can American democracy work
if whichever party is most prepared to be ruthless, to threaten the
nation’s economic security, gets to dictate policy? And the answer is,
maybe it can’t.

Debt Madness Was Always About Killing Social Security by Robert Scheer

This phony debt crisis has now passed through the looking glass into the realm where madness reigns. What should have been an uneventful moment in which lawmakers make good on the nation’s contractual obligations has instead been seized upon by Republican hypocrites as a moment to settle ideological scores that have nothing to do with the debt.House Speaker John Boehner of Ohio looks on during a news conference at The Republican National Committee. (AP / Carolyn Kaster)

Hypocrites, because their radical free market ideology, and the resulting total deregulation of the financial markets, is what caused the debt to spiral out of control this last decade. That and the wars George W. Bush launched but didn’t have the integrity to responsibly finance. The consequence was a banking bubble and crash leading to a 50 percent run-up of the debt that has nothing to do with the “entitlements” that those same Republicans have always wanted to destroy. 

Even Barack Obama has put cuts in those programs into play, warning ominously that a failure to lift the debt ceiling could cause the government to stop sending out Social Security checks. Why, when the Social Security trust fund is fully funded for the next quarter-century and is owed money by the U.S. Treasury rather than the other way around? Why would we pay foreign creditors before American seniors? The answer, offered as conventional wisdom by leaders of both parties, is that we cannot endanger our credit by failing to back our bonds, even though the Republicans have aroused the alarm of the main U.S. credit rating agencies by their brinkmanship on the debt.

What a topsy-turvy world when the same credit rating agencies that gave the thumbs up to the bankers’ toxic mortgage-backed securities and credit default swaps now threaten the AAA rating of U.S. Treasury bonds. According to them, it will not be enough to merely lift the debt ceiling—what had been assumed by both Republican and Democratic presidents to be a routine act. In addition to that, as the credit agency Standard & Poor’s has insisted, more than $4 trillion has to be cut from programs that mostly benefit the victims of the banking meltdown. Otherwise the agencies will downgrade the U.S. credit rating, leading to higher interest rates that will destroy what remains of the U.S. housing market, dim the prospect for any improvement in employment and further enrich the Chinese government and other holders of U.S. debt.

President Obama and the Senate Democratic leadership are clearly poised to cave in to those demands in the spirit of “compromise,” Obama’s favorite word, but the Republicans keep upping the ante. The GOP is shameless: Speaker John Boehner has sanctimoniously responded to Obama’s plea for a bargain that gives up almost everything to the right wing by rebuffing the president on the grounds that the Republican Party is the last line of defense against big government.

Boehner dared blame Obama for “the largest spending binge in American history,” which he attributed to the health care reform, most of which has yet to be enacted, and a stimulus program that was an underfunded effort to save American jobs. Not a word from Boehner or the other Republicans about the banking collapse that resulted from their deregulatory policies, the real cause of the inflated debt.

Boehner’s slogan, “I’ve always believed, the bigger government, the smaller the people,” is downright bizarre coming from someone who supported the Bush tax cuts for the rich, the banking bailout and the highest war spending since World War II, all of which is what caused government to get this big. Was it job stimulus spending that kept GM jobs in this country that made people smaller, or the loss of their homes and jobs as a result of the policies that are at the core of the Republican program?

What is at stake is a radical Republican agenda to totally reverse the progress in economic justice that began with the great reforms of Franklin Roosevelt and his New Deal. Consider the direct consequence of the economic crisis that unfettered Wall Street greed has wrought, particularly in reversing the gains made by the most underprivileged sectors of the population. As The Wall Street Journal reported, based on a Pew Research Center study from 2005 to 2009, “The wealth gap between whites and each of the nation’s two largest minorities—Hispanics and blacks—has widened to unprecedented levels amid the housing crisis and the recession. … The disparities are the greatest since the government began tracking such data a quarter-century ago. …”

But there is plenty of suffering to go around as a result of the deep recession. The wealth of whites in that period declined by 16 percent, not to mention the ever-greater chasm between the top 2 percent and everyone else. That’s the same 2 percent whose tax cuts the Republicans are determined to preserve.

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