"The economy that we had before the recession is gone," said Kenneth Goldstein, economist at the Conference Board. "It's not coming back."
The U.S. economy is transitioning to a new normal in which businesses invest less and consumers spend less than before the recession, Goldstein told The Huffington Post in an interview last week. As a result, he said, economic growth and job growth will be slower than before.
He said that businesses, consumers and the government would need to spend at least $1 trillion more than they are likely to spend in order for the economy to return to its pre-recession growth rate. But he added that no one is willing to spend the money necessary to jumpstart the economy, since the government is cutting spending, consumers are saving more, and businesses expect a lower return on their investments.
"Where's the money?" Goldstein asked.
The Conference Board, which counts half of all Fortune 500 companies among its members, provides economic and business advice and research to its member companies.
The main problem is that consumers' expectations for the future have plunged, Goldstein said. They suffered from such a large economic shock in 2008 and 2009 that many older people now do not expect to return to work, and many younger people no longer expect to make that much money, he continued. As a result, Americans have cut back on spending.
Consumers are indeed saving more than they did before the recession. They saved 3.7 percent of their incomes at the end of 2011, in contrast to less than 2 percent of their incomes during all of 2005, according to government statistics. Their wages, when accounting for inflation, actually fell in 2011.
Consumer confidence has been at recessionary levels for the past four years, according to the Conference Board's Consumer Confidence Index.
Like consumers, businesses are spending less because they have lowered their expectations of future income, Goldstein said. While businesses could expect returns of 8 to 12 percent on their investments before the recession, they are now expecting returns of about half that amount. If they raise prices too much, consumers will choose cheaper alternatives, he said.
Exports are one of the only bright spots sustaining U.S. economic growth at this slower pace, he added.
Now that people's homes are often worth less and credit is expensive, people are relying on their wages to be able to spend money -- and their wages have barely been growing, said Lynn Franco, director of the Conference Board's Consumer Research Center. She said this means that economic growth will be slower than it was before the recession for the foreseeable future, since consumer spending comprises two-thirds of the U.S. economy.
"If you just take a look at the fundamentals alone," she said, "you cannot get back to the levels of consumer spending that we had prior to the crisis."
Tuesday, February 14, 2012
Greece Takes to Twitter and YouTube as Riots Consume Athens
Greek parliament approved a controversial austerity deal Sunday so the indebted country can get a bailout from the European Union. After the vote, angry Greeks began rioting and hurling fire bombs and stones at police and storefronts.By Monday morning, the violence had subsided. The EU told Greece that the vote was welcome, but more action was still needed to avoid default and “disastrous consequences.”
Greeks used Twitter and YouTube to share scenes of the turmoil with the rest of the world. Mashable has collected tweets, photos and videos that best represent the riots and the day-after reckoning of the damage.
Goldman Sachs Shorted Greek Debt After It Arranged Those Shady Swaps
Goldman Sachs arranged swaps that effectively allowed Greece to borrow 1 billion Euros without adding to its official public debt. While it arranged the swaps, Goldman also sought to buy insurance on Greek debt and engage in other trades to protect itself against the risk of a default on those swaps. Eventually, Goldman sold the swaps to the national bank of Greece.
Despite its role in creating swaps that may have allowed the Greek government to mask its growing debts, Goldman has no net exposure to a default on Greek debt, a person familiar with the matter says.
Despite its role in creating swaps that may have allowed the Greek government to mask its growing debts, Goldman has no net exposure to a default on Greek debt, a person familiar with the matter says.
Congress Debt Ceiling Debacle May Repeat Before Presidential Election
WASHINGTON -- Last year's torturous congressional debate over raising the federal debt ceiling eventually resulted in a deal that President Barack Obama and congressional leaders believed would keep the federal government funded through the 2012 elections. Not so fast.
In what one top congressional aide calls a "nightmare scenario," the federal government could wind up hitting the debt ceiling at the height of the presidential campaign. The Treasury Department is now contemplating the prospect of invoking "extraordinary measures" to keep the government funded through November.
Barring a major economic shock -- a financial meltdown in Europe, for instance -- the emergency measures should be enough to get the federal government past the election. But even under a rosy scenario, the next Congress will be forced to raise the debt ceiling as one of its first orders of business in 2013, if the lame duck outgoing body doesn't do it. And if the Treasury does have to invoke "extraordinary measures" before the election, it's easy to imagine a re-run of last year's political circus, magnified many times over.
Deficit projections have changed repeatedly over the past six months and are likely to change again. Treasury is uncertain whether it would actually need to invoke "extraordinary measures" before the election. The Treasury only deploys them after the government has actually hit the debt limit. Using financial maneuvers, the Treasury can give itself head room under the debt ceiling -- but only for a few months. That's what happened last summer, when the government continued functioning without a deal to increase the debt ceiling until August, even though the country hit the debt limit in May.
The premature return of the debt ceiling is being driven by three major factors: increased spending, slow economic growth and the failure of the congressional Super Committee.
In August, lawmakers agreed to raise the debt ceiling by $2.4 trillion. In the context of a $3.6 trillion budget with a $1 trillion budget deficit, the number seemed adequate, even with weak economic growth. But a full $300 billion of the August hike depended on the Super Committee reaching a deal on long-term spending cuts. The Super Committee reached no agreement, so the debt ceiling was only raised by $2.1 trillion.
Obama's plan to boost the economy with a payroll tax cut has also expanded the deficit in the short term. In December, lawmakers agreed to a package extending the tax cut for two months, along with unemployment benefits and Medicare payments to doctors, at a cost of $33 billion. The deal was entirely funded under government accounting rules. But budgeting rules allow for 10 years worth of revenue or spending cuts to be counted against the cost of an up-front expense -- paying you Tuesday, so to speak, for a hamburger today. Doing it any other way would undermine the stimulative value of the spending or tax cuts, but it puts Treasury in a bind. The two-month extension was paid for with 10 years of modestly increased fees on mortgages guaranteed by Fannie Mae and Freddie Mac. Only 10 months of those fees will actually hit the books by election time -- about $3 billion, leaving an extra $30 billion in borrowing not anticipated by the August debt deal.
But that's only for the two-month deal.
The budgeting dynamics are likely to be similar for a pending package to extend the terms throughout 2012. The cost is expected to be $166 billion. A similar funding plan for the full-year package would require roughly $145 billion in borrowing before November. As a result, the pre-election deficit would be about $175 billion more than lawmakers anticipated in August, bumping up the timing of the debt-ceiling collision by at least a month.
But a more pressing concern for Treasury is the economic underperformance since August. Treasury emphasizes that the terms of the August deal were negotiated by members of Congress, but acknowledges that it provided the information. Among the key facts -- the U.S. could expect to run an average monthly budget deficit of about $125 billion for the next couple of years. That estimate was based on economic assumptions from the White House Office of Management and Budget. The assumptions have proved off the mark.
At the time Congress cut the debt ceiling deal, OMB expected real gross domestic product growth of 2.7 percent and an average interest rate on 10-year Treasury bills of 3 percent for 2011. For 2012, the office expected GDP growth of 3.6 percent and interest rates of 3.6 percent. That resulted in expected tax revenue of $2.2 trillion for 2011 and $2.6 trillion for 2012.
Growth missed the 2011 target, with OMB now expecting final 2011 growth of just 1.6 percent, more than 40 percent below the predictions, according to new data published on Tuesday. OMB has now downgraded its 2012 growth projections from 3.6 percent to just 2 percent, a 44 percent decrease.
Lower growth translates to less tax revenue from income and corporate profit. Lower tax revenue means a bigger deficit, which calls into question whether the debt deal from August will prevent the government from hitting the debt limit before November.
Interest rates, however, have proved significantly more favorable than the administration projected, meaning that the government will pay less to borrow money to fill that hole than it expected. For 2011, the average rate on 10-year Treasury notes was 2.8 percent. OMB now expects average interest rates of 2.3 percent for 2012. Those rates only apply to new debt issued by the government. Prior debt issued under higher interest rates still must be paid back at those previous, higher rates.
Hitting the debt limit before the election could result in political chaos. Both the National Republican Senatorial Committee and the National Republican Campaign Committee -- fundraising entities for congressional Republicans -- rolled out attack ads and a barrage of press releases targeting swing state Democrats during last summer's debacle. And while both groups declined to comment for this article, the Senate team has plenty of ammunition to use against vulnerable Democrats.
In May, the senatorial committee rolled out a web ad hitting Sens. Claire McCaskill (D-Mo.), Sherrod Brown (D-Ohio), Bob Casey (D-Pa.), Jon Tester (D-Mont.) and Bill Nelson (D-Fla.), all of whom are up for reelection this fall.
WATCH the Republican attack ad:
That bond market quieted some of the airwave chatter from Republicans, who had held the debt ceiling increase hostage in exchange for deep spending cuts, raising the prospect of a U.S. default, which would have sent global financial markets into a tailspin (President Obama then followed suit by insisting on a "grand bargain" to cut Social Security and Medicare, a demand that was ultimately rejected.)
The National Republican Campaign Committee bombarded the districts of more than 30 House Democrats with press releases, claiming each member had "helped champion a spending spree that resulted in record deficits and debt levels," and were now seeking "another blank check for more spending by supporting a higher borrowing limit without any spending cuts."
Failing to raise the debt ceiling would have forced the government to default on its previous financial commitments.
The campaign committee also ran ads targeting Reps. Brad Miller (D-N.C.) and Kate Marshall (D-Nev.), engaging in a bit of China-baiting by warning of the debt owed to "The Peoples' Republic of China" and flashing the image of a red credit card. China is America's largest foreign creditor, but owns just 8 percent of all U.S. government debt. Most American debt is owned by American investors.
Watch the Republican attack ad against Kate Marshall:
In his 2006 Senate run, Pennsylvania's Bob Casey criticized then-Sen. Rick Santorum (R-Pa.) for voting to raise the debt limit, during an appearance on "Meet the Press." That same year, the Democratic Senatorial Campaign Committee ran an ad slamming then-Sen. Mike DeWine (R-Ohio) for doing the same thing, aiding now-Sen. Brown of Ohio, as Politico has reported. In 2007, Missouri's McCaskill voted against raising the debt limit, and Republicans have plenty of quotes about the debt ceiling from Florida's Nelson from this 2004 speech.
Treasury will have a better idea about its 2012 finances after April, when tax returns are due. Most workers pay taxes out of regular paychecks, providing a steady stream of revenue to the government. But others who are not traditional employees of a company pay once a year in April, and the total revenue from that one-time haul can be difficult for the government to predict.
But even if all goes as congressional Democrats believed it would last summer, the new congressional class of 2013 can look forward to a debt ceiling battle as one of their first orders of business. And the stakes in January of next year will be just as high as those from last summer.
In what one top congressional aide calls a "nightmare scenario," the federal government could wind up hitting the debt ceiling at the height of the presidential campaign. The Treasury Department is now contemplating the prospect of invoking "extraordinary measures" to keep the government funded through November.
Barring a major economic shock -- a financial meltdown in Europe, for instance -- the emergency measures should be enough to get the federal government past the election. But even under a rosy scenario, the next Congress will be forced to raise the debt ceiling as one of its first orders of business in 2013, if the lame duck outgoing body doesn't do it. And if the Treasury does have to invoke "extraordinary measures" before the election, it's easy to imagine a re-run of last year's political circus, magnified many times over.
Deficit projections have changed repeatedly over the past six months and are likely to change again. Treasury is uncertain whether it would actually need to invoke "extraordinary measures" before the election. The Treasury only deploys them after the government has actually hit the debt limit. Using financial maneuvers, the Treasury can give itself head room under the debt ceiling -- but only for a few months. That's what happened last summer, when the government continued functioning without a deal to increase the debt ceiling until August, even though the country hit the debt limit in May.
The premature return of the debt ceiling is being driven by three major factors: increased spending, slow economic growth and the failure of the congressional Super Committee.
In August, lawmakers agreed to raise the debt ceiling by $2.4 trillion. In the context of a $3.6 trillion budget with a $1 trillion budget deficit, the number seemed adequate, even with weak economic growth. But a full $300 billion of the August hike depended on the Super Committee reaching a deal on long-term spending cuts. The Super Committee reached no agreement, so the debt ceiling was only raised by $2.1 trillion.
Obama's plan to boost the economy with a payroll tax cut has also expanded the deficit in the short term. In December, lawmakers agreed to a package extending the tax cut for two months, along with unemployment benefits and Medicare payments to doctors, at a cost of $33 billion. The deal was entirely funded under government accounting rules. But budgeting rules allow for 10 years worth of revenue or spending cuts to be counted against the cost of an up-front expense -- paying you Tuesday, so to speak, for a hamburger today. Doing it any other way would undermine the stimulative value of the spending or tax cuts, but it puts Treasury in a bind. The two-month extension was paid for with 10 years of modestly increased fees on mortgages guaranteed by Fannie Mae and Freddie Mac. Only 10 months of those fees will actually hit the books by election time -- about $3 billion, leaving an extra $30 billion in borrowing not anticipated by the August debt deal.
But that's only for the two-month deal.
The budgeting dynamics are likely to be similar for a pending package to extend the terms throughout 2012. The cost is expected to be $166 billion. A similar funding plan for the full-year package would require roughly $145 billion in borrowing before November. As a result, the pre-election deficit would be about $175 billion more than lawmakers anticipated in August, bumping up the timing of the debt-ceiling collision by at least a month.
But a more pressing concern for Treasury is the economic underperformance since August. Treasury emphasizes that the terms of the August deal were negotiated by members of Congress, but acknowledges that it provided the information. Among the key facts -- the U.S. could expect to run an average monthly budget deficit of about $125 billion for the next couple of years. That estimate was based on economic assumptions from the White House Office of Management and Budget. The assumptions have proved off the mark.
At the time Congress cut the debt ceiling deal, OMB expected real gross domestic product growth of 2.7 percent and an average interest rate on 10-year Treasury bills of 3 percent for 2011. For 2012, the office expected GDP growth of 3.6 percent and interest rates of 3.6 percent. That resulted in expected tax revenue of $2.2 trillion for 2011 and $2.6 trillion for 2012.
Growth missed the 2011 target, with OMB now expecting final 2011 growth of just 1.6 percent, more than 40 percent below the predictions, according to new data published on Tuesday. OMB has now downgraded its 2012 growth projections from 3.6 percent to just 2 percent, a 44 percent decrease.
Lower growth translates to less tax revenue from income and corporate profit. Lower tax revenue means a bigger deficit, which calls into question whether the debt deal from August will prevent the government from hitting the debt limit before November.
Interest rates, however, have proved significantly more favorable than the administration projected, meaning that the government will pay less to borrow money to fill that hole than it expected. For 2011, the average rate on 10-year Treasury notes was 2.8 percent. OMB now expects average interest rates of 2.3 percent for 2012. Those rates only apply to new debt issued by the government. Prior debt issued under higher interest rates still must be paid back at those previous, higher rates.
Hitting the debt limit before the election could result in political chaos. Both the National Republican Senatorial Committee and the National Republican Campaign Committee -- fundraising entities for congressional Republicans -- rolled out attack ads and a barrage of press releases targeting swing state Democrats during last summer's debacle. And while both groups declined to comment for this article, the Senate team has plenty of ammunition to use against vulnerable Democrats.
In May, the senatorial committee rolled out a web ad hitting Sens. Claire McCaskill (D-Mo.), Sherrod Brown (D-Ohio), Bob Casey (D-Pa.), Jon Tester (D-Mont.) and Bill Nelson (D-Fla.), all of whom are up for reelection this fall.
WATCH the Republican attack ad:
That bond market quieted some of the airwave chatter from Republicans, who had held the debt ceiling increase hostage in exchange for deep spending cuts, raising the prospect of a U.S. default, which would have sent global financial markets into a tailspin (President Obama then followed suit by insisting on a "grand bargain" to cut Social Security and Medicare, a demand that was ultimately rejected.)
The National Republican Campaign Committee bombarded the districts of more than 30 House Democrats with press releases, claiming each member had "helped champion a spending spree that resulted in record deficits and debt levels," and were now seeking "another blank check for more spending by supporting a higher borrowing limit without any spending cuts."
Failing to raise the debt ceiling would have forced the government to default on its previous financial commitments.
The campaign committee also ran ads targeting Reps. Brad Miller (D-N.C.) and Kate Marshall (D-Nev.), engaging in a bit of China-baiting by warning of the debt owed to "The Peoples' Republic of China" and flashing the image of a red credit card. China is America's largest foreign creditor, but owns just 8 percent of all U.S. government debt. Most American debt is owned by American investors.
Watch the Republican attack ad against Kate Marshall:
In his 2006 Senate run, Pennsylvania's Bob Casey criticized then-Sen. Rick Santorum (R-Pa.) for voting to raise the debt limit, during an appearance on "Meet the Press." That same year, the Democratic Senatorial Campaign Committee ran an ad slamming then-Sen. Mike DeWine (R-Ohio) for doing the same thing, aiding now-Sen. Brown of Ohio, as Politico has reported. In 2007, Missouri's McCaskill voted against raising the debt limit, and Republicans have plenty of quotes about the debt ceiling from Florida's Nelson from this 2004 speech.
Treasury will have a better idea about its 2012 finances after April, when tax returns are due. Most workers pay taxes out of regular paychecks, providing a steady stream of revenue to the government. But others who are not traditional employees of a company pay once a year in April, and the total revenue from that one-time haul can be difficult for the government to predict.
But even if all goes as congressional Democrats believed it would last summer, the new congressional class of 2013 can look forward to a debt ceiling battle as one of their first orders of business. And the stakes in January of next year will be just as high as those from last summer.
Guest Post: The Fed’s European “Rescue”: Another Back-Door US Bank / Goldman bailout?
Submitted by Nomi Prins, former Goldman Sachs Managing Director
Guest Post: The Fed’s European “Rescue”: Another Back-Door US Bank / Goldman bailout?
Guest Post: The Fed’s European “Rescue”: Another Back-Door US Bank / Goldman bailout?
In the wake of chopping its Central Bank swap rates, the Fed has been called a bunch of names: a hero for slugging the big bailout bat in the ninth inning, and a villain for printing money to help Europe at the expense of the US. Neither depiction is right.
The Fed is merely continuing its unfettered brand of bailout-economics, promoted with heightened intensity recently by President Obama and Treasury Secretary, Tim Geithner in the wake of Germany not playing bailout-ball. Recall, a couple years ago, it was a uniquely American brand of BIG bailouts that the Fed adopted in creating $7.7 trillion of bank subsidies that ran the gamut from back-door AIG bailouts (some of which went to US / some to European banks that deal with those same US banks), to the purchasing of mortgage-backed–securities, to near zero-rate loans (for banks).
Similarly, today’s move was also about protecting US banks from losses – self inflicted by dangerous derivatives-chain trades, again with each other, and with European banks.
Before getting into the timing of the Fed’s god-father actions, let’s discuss its two kinds of swaps (jargon alert - a swap is a trade between two parties for some time period – you swap me a sweater for a hat because I’m cold, when I’m warmer, we’ll swap back). The Fed had both of these kinds of swaps set up and ready-to-go in the form of : dollar liquidity swap lines and foreign currency liquidity swap lines. Both are administered through Wall Street's staunchest ally, and Tim Geithner's old stomping ground, the New York Fed.
The dollar swap lines give foreign central banks the ability to borrow dollars against their currency, use them for whatever they want - like to shore up bets made by European banks that went wrong, and at a later date, return them. A ‘temporary dollar liquidity swap arrangement” with 14 foreign central banks was available between December 12, 2007 (several months before Bear Stearn’s collapse and 9 months before the Lehman Brothers’ bankruptcy that scared Goldman Sachs and Morgan Stanley into getting the Fed’s instant permission to become bank holding companies, and thus gain access to any Feds subsidies.)
Those dollar-swap lines ended on February 1, 2010. BUT – three months later, they were back on, but this time the FOMC re-authorized dollar liquidity swap lines with only 5 central banks through January 2011. BUT – on December 21, 2010 – the FOMC extended the lines through August 1, 2011. THEN– on June 29th, 2011, these lines were extended through August 1, 2012. AND NOW – though already available, they were announced with save-the-day fanfare as if they were just considered.
Then, there are the sneakily-dubbed “foreign currency liquidity swap” lines, which, as per the Fed's own words, provide "foreign currency-denominated liquidity to US banks.” (Italics mine.) In other words, let US banks play with foreign bonds.
These were originally used with 4 foreign banks on April, 2009 and expired on February 1, 2010. Until they were resurrected today, November 30, 2011, with foreign currency swap arrangements between the Fed, Bank of Canada, Bank of England, Bank of Japan. Swiss National Bank and the European Central Bank.
They are to remain in place until February 1, 2013, longer than the original time period for which they were available during phase one of the global bank-led meltdown, the US phase. (For those following my work, we are in phase two of four, the European phase.)
That’s a lot of jargon, but keep these two things in mind: 1) these lines, by the Fed’s own words, are to provide help to US banks. and 2) they are open ended.
There are other reasons that have been thrown up as to why the Fed acted now – like, a European bank was about to fail. But, that rumor was around in the summer and nothing happened. Also, dozens of European banks have been downgraded, and several failed stress tests. Nothing. The Fed didn’t step in when it was just Greece –or Ireland - or when there were rampant ‘contagion’ fears, and Italian bonds started trading above 7%, rising unabated despite the trick of former Goldman Sachs International advisor Mario Monti replacing former Prime Minister, Silvio Berlusconi’s with his promises of fiscally conservative actions (read: austerity measures) to come.
Perhaps at that point, Goldman thought they had it all under control, but Germany's bailout-resistence was still a thorn, which is why its bonds got hammered in the last auction, proving that big Finance will get what it wants, no matter how dirty it needs to play. Nothing from the Fed, except a small increase in funding to the IMF.
Rating agency, Moody’s announced it was looking at possibly downgrading 87 European banks. Still the Fed waited with open lines. And then, S&P downgraded the US banks again, including Goldman ,making their own financing costs more expensive and the funding of their seismic derivatives positions more tenuous. The Fed found the right moment. Bingo.
Now, consider this: the top four US banks (JPM Chase, Citibank, Bank of America and Goldman Sachs) control nearly 95% of the US derivatives market, which has grown by 20% since last year to $235 trillion. That figure is a third of all global derivatives of $707 trillion (up from $601 trillion in December, 2010 and $583 trillion mid-year 2010. )
Breaking that down: JPM Chase holds 11% of the world’s derivative exposure, Citibank, Bank of America, and Goldman comprise about 7% each. But, Goldman has something the others don’t – a lot fewer assets beneath its derivatives stockpile. It has 537 times as many (from 440 times last year) derivatives as assets. Think of a 537 story skyscraper on a one story see-saw. Goldman has $88 billon in assets, and $48 trillion in notional derivatives exposure. This is by FAR the highest ratio of derivatives to assets of any so-called bank backed by a government. The next highest ratio belongs to Citibank with $1.2 trillion in assets and $56 trillion in derivative exposure, or 46 to 1. JPM Chase's ratio is 44 to 1. Bank of America’s ratio is 36 to 1.
Separately Goldman happened to have lost a lot of money in Foreign Exchange derivative positions last quarter. (See Table 7.) Goldman’s loss was about equal to the total gains of the other banks, indicative of some very contrarian trade going on. In addition, Goldman has the most credit risk with respect to the capital it holds, by a factor of 3 or 4 to 1 relative to the other big banks. So did the Fed's timing have something to do with its star bank? We don't really know for sure.
Sadly, until there’s another FED audit, or FOIA request, we’re not going to know which banks are the beneficiaries of the Fed’s most recent international largesse either, nor will we know what their specific exposures are to each other, or to various European banks, or which trades are going super-badly.
But we do know from the US bailouts in phase one of the global meltdown, that providing ‘liquidity' or ‘greasing the wheels of ‘ banks in times of ‘emergency’ does absolute nothing for the Main Street Economy. Not in the US. And not in Europe. It also doesn’t fix anything, it just funds bad trades with impunity.
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