SAR #11218

SAR #11218

Everyone justifies his own passion.

Ray of Sunshine: In Europe, Italy seems destined to default, while "there is a real chance that Spain may avoid default." First the ECB said it would not support Italy, then it said it would, but only if (fill in a long list of austerity measures that the Italians will pretend to institute). None of the market's gyrations invested much hope that the euro will long survive. The latest pledge from the ECB requires that the EFSF (the bailout fund) be increased from €450 billion to somewhere north of €2.5 trillion. This would place about 50% of Germany's entire GDP - via their required guarantees of the ECB funding - at risk. When France gets downgraded to the walking-wounded category, German contingent liabilities would exceed 130% of its GDP. Try selling that at the local bierstube.

With God On Their Side: Syrian protesters chanting "God is with us" ran into more violence on Friday as the regime shelled Hama, Syria's third largest city, now a ghost town.

The Message: The interest rate on US 10-year Treasury bonds is hovering around 2.5% . The message is simple; investors are not worried about inflation, they are worried that the economy is on a slippery slope. It also says that the debt/deficit hawks in Washington have been utterly, totally wrong. Things are falling apart. Maybe someone should do something?

Homework Assignment: Set aside some time to read Dr. Galbraith's diagnosis, prognosis and prescription. (Now also available here.)

Rest Area: Before we follow Rome much further down the path, perhaps we should do a little thought experiment: How much can we sustainably produce and what is the most equitable way to distribute that production? Start with extremes and work towards a morally acceptable answer.

Take A Number:Federal 'enhanced' funding for Medicaid ran out last month, now the program faces cuts in nearly every state. Without the extra federal funds, states would have to pony up an extra $16 billion next year, at a time when they are cutting funding for education, transportation and other forms of public assistance. States want the administration to permit extensive revisions to their programs in order to reduce costs. One proposal is to tie increases in per-person Medicaid spending to the rate of growth (or deterioration) of state revenues. If there are not sufficient funds to cover the current program, cuts in benefits and eligibility would follow.

Primrose Path: US consumers went another $15.5 billion in debt in June, the most in four years, led by a $10 billion increase in non-revolving debt, including student loans. 9% unemployment may be encouraging Americans to stay in school longer rather than face the current job market. Revolving debt (plastic, mostly) increased by $5.21 billion, the most since March 2008. Some see this as consumer optimism, others view it as consumer desperation.

Is This The Party To Whom I Am Speaking? Global competition has driven wages in the US so low that some companies are repatriating jobs – call center jobs. Jobs that pay minimum wage and take minimal infrastructure, especially if the worker has to work at home. But it's a job and come next January the competition will be fierce.

Worse: The Fed can't cut interest rates – they're already effectively zero. Congress has had it with "stimulus". The public has had it with bailouts. That means the government's ability to do anything about a market crash and a crippled economy is severely limited. Yes, we'll almost certainly have QE3 to prop things up a bit. But it won't fix the fundamental problem, which is jobs for the consumer.

The Crying Game: Non-farm payrolls rose by 117,000 jobs, unemployment declined 0.1% to 9.1%. Total unemployed, underemployed, given up hope etc. was 25.1 million . Labor force participation rate was flat at 63.9% and the employment/population ratio was 58.1%, a new low for this cycle.

Bait & Switch: Those nice Republican gentlemen who gave us all those nice tax cuts a few years ago seem to have had ulterior motives. Yes, a lot of their rich friends got to keep more of their money, but the real goal was to decimate government revenues. Then those same nice fellas gave us older folks a prescription drug plan - which turned out to funnel a lot of money to the drug companies and cost the government gazillions more. Then they went and protected us from Saddam and that other guy, but didn't bother us with taxes to pay for the adventure. Now it turns out the whole idea was to "starve the beast", which they have done. Now they politely and sadly tell us that we have to get by on less; less Social Security, less Medicare, less Medicaid, less unemployment insurance, less student loans... It has been the longest running con ever played on the American people. But on the bright side, we're going to get the government off our backs.

Porn O'Graph: Mean duration of unemployment. Very mean.