Saturday, August 29, 2009

A Reluctance to Spend May Be a Legacy of the Recession

AUSTIN, Tex. — Even as evidence mounts that the Great Recession has finally released its chokehold on the American economy, experts worry that the recovery may be weak, stymied by consumers’ reluctance to spend.

To save money, Heather Nelson, a lawyer, has harvested vegetables from her plot at a community garden in Austin, Tex.

Given that consumer spending has in recent years accounted for 70 percent of the nation’s economic activity, a marginal shrinking could significantly depress demand for goods and services, discouraging businesses from hiring more workers.

Millions of Americans spent years tapping credit cards, stock portfolios and once-rising home values to spend in excess of their incomes and now lack the wherewithal to carry on. Those who still have the means feel pressure to conserve, fearful about layoffs, the stock market and real estate prices.

“We’re at an inflection point with respect to the American consumer,” said Mark Zandi, chief economist at Moody’s Economy .com, who correctly forecast a dip in spending heading into the recession, and who provided data supporting sustained weakness.

“Lower-income households can’t borrow, and higher-income households no longer feel wealthy,” Mr. Zandi added. “There’s still a lot of debt out there. It throws a pall over the potential for a strong recovery. The economy is going to struggle.”

In recent weeks, spending has risen slightly because of exuberant car buying, fueled by the cash-for-clunkers program. On Friday, the Commerce Department said spending rose 0.2 percent in July from the previous month. But most economists see this activity as short-lived, pointing out that incomes did not rise. Some suggest the recession has endured so long and spread pain so broadly that it has seeped into the culture, downgrading expectations, clouding assumptions about the future and eroding the impulse to buy.

The Great Depression imbued American life with an enduring spirit of thrift. The current recession has perhaps proven wrenching enough to alter consumer tastes, putting value in vogue.

“It’s simply less fun pulling up to the stoplight in a Hummer than it used to be,” said Robert Barbera, chief economist at the research and trading firm ITG. “It’s a change in norms.”

Here in Austin, a laid-back city on the banks of the Colorado River, change is palpable.

A decade ago, Heather Nelson gained a lucrative job in telecommunications and celebrated by buying a new Ford sport utility vehicle with leather seats and an expensive stereo system. Today, Ms. Nelson, 38, again has designs on a new vehicle, but this time she plans to buy a Toyota Prius, the fuel-efficient hybrid.

In December, Ms. Nelson was laid off from her six-figure job as a patent attorney at a local software firm. Self-assured, she exudes confidence she will land another high-paying position.

But even if her spending power is restored, Ms. Nelson says her inclination to buy has been permanently diminished. Through nine months of joblessness, she has learned to forgo the impulse buys that used to provide momentary pleasure — $4 lattes at Starbucks, lip gloss, mints. She has found she can survive without the pedicures and chocolate martinis that once filled regular evenings at the spa. Before punishing heat and drought turned much of central Texas brown, she subsisted primarily on vegetables harvested from her plot at a community garden, where only one oasis of flowers remains.

Once intent on buying a home, Ms. Nelson now feels security in remaining a renter, steering clear of the shark-infested waters of the mortgage industry.

“I’m having to shift my dreams to accommodate the new realities,” she said. “Now, I have more of a bunker mentality. If you get hit hard enough, it lasts. This impact is going to last.”

For years, Americans have tapped stock portfolios and borrowed against homes to fill wardrobes with clothes, garages with cars and living rooms with furniture and electronics. But stock markets have proven volatile. Home values are sharply lower. Banks remain reluctant to lend in the aftermath of a global financial crisis.

Households must increasingly depend upon paychecks to finance spending, a reality that seems likely to curb consumption: Unemployment stands at 9.4 percent and is expected to climb higher. Working hours have been slashed even for those with jobs.

Economists subscribe to a so-called wealth effect: as households amass wealth, they tend to expand their spending over the following year, typically by 3 to 5 percent of the increase.

Between 2003 and 2007 — prime years of the housing boom — the net worth of an American household expanded to about $540,000, from about $400,000, according to an analysis of federal data by Moody’s

Now, the wealth effect is working in reverse: by the first three months of this year, household net worth had dropped to $421,000.

“Not only have people lost money, but they don’t expect as much appreciation in the money they have, and that should affect consumption,” said Andrew Tilton, an economist at Goldman Sachs. “This is a cultural shift going on. People will save more.”

As recently as the middle of 2007, Americans saved less than 2 percent of their income, according to the Bureau of Economic Analysis. In recent months, the rate has exceeded 4 percent.

Austin has fared better than most cities during the recession. Increased government payrolls enabled by the state’s energy wealth have largely compensated for layoffs in construction and technology. Local unemployment reached 7.1 percent in June — well below the national average. Housing prices have mostly held. Yet even people with high incomes appear reluctant to spend.

“The only time you do a lot of business is when you throw a sale,” said Pat Bennett, a salesman at a Macy’s in north Austin. “You see very little impulse buying. They come in saying, ‘I need a pair of underwear,’ and they get it and leave. You don’t really see them saying, ‘Oh, I love the way that shirt looks, and I’m just going to get it.’ ”

Mr. Bennett attributes frugality to a general uneasiness about the future.

“Our parents had the Depression,” Mr. Bennett said. “This is like a mini-shock for the baby boomers after the go-go years.”

At a mall devoted to home furnishings, many storefronts were vacant, and survivors were draped in the banners of desperation: “Inventory Clearance,” “50% Off,” “It’s All On Sale.”

But at the Natural Gardener — a lush assemblage of demonstration plots that sells seeds, plants and tools for organic gardening — business has never been better.

Sales of vegetable plants swelled fivefold in March over past years. The company added a public address system and bleachers to accommodate hordes showing up for vegetable-growing classes.

Part of the embrace of gardening stems from concerns about the environment and food safety, says the company’s president, John Dromgoole. Momentum also reflects desire to save on food costs.

“People are very interested in shoring up against losing their jobs,” he said.

















































Stanford group finance officer admits huge fraud

WASHINGTON — The chief financial officer of the investment company owned by Texas cricket mogul Allen Stanford Thursday pleaded guilty to charges stemming from a complex seven-billion-dollar fraud.

James Davis, 60, the former chief financial officer of Houston-based Stanford Financial Group, pleaded guilty to fraud and obstruction charges, the Department of Justice said in a statement.

Davis admitted he and his co-conspirators defrauded investors who bought about seven billion dollars in certificates of deposit administered by the Antigua-based Stanford International Bank.

He admitted the scam dated back to 1990 when he and his co-conspirators began making false entries into the bank’s ledgers about its revenues and revenue balances, the DOJ said.

Stanford, 59, a flamboyant Texan billionaire who sought to revolutionize the world of cricket, pleaded not guilty in June to 21 charges of fraud, money-laundering and obstruction.

He is being held without bail in a jail near Houston, Texas, awaiting trial, and officials said Thursday he had been hospitalized. Attorney Robert Luskin said the disgraced financier was suffering a “heart condition of some kind.”

Davis admitted Thursday the team misappropriated most of the bank’s investor assets, including by diverting more than 1.6 billion dollars into undisclosed personal loans to a co-conspirator, the Justice Department added.

Despite this, Davis and his co-conspirators claimed the bank’s investments were “well-managed, safe and secure,” boasting to investors that its earnings and assets were increasingly annually.

The company’s chief investment officer Laura Pendergest-Holt has pleaded not guilty to charges arising out of the affair including fraud and conspiracy to commit money-laundering.

The Department of Justice has also charged accountants Mark Kuhrt and Gilberto Lopez, who worked for Stanford-affiliated companies, and Leroy King, head of Antigua’s financial services regulatory commission.

Stanford’s case is the most high-profile alleged scam since Wall Street financier Bernard Madoff was charged in a 50-billion-dollar pyramid scheme in December.

Madoff, 71, is now serving a 150-year sentence for cheating thousands of people and institutions, including celebrities, charities and leading banks, over several decades.

Stanford was the man behind the eponymous Stanford Super Series Twenty20 cricket competition, which culminated with his team of hand-picked Caribbean Superstars last year defeating England at his own ground on the Caribbean island state of Antigua and Barbuda.

He had become a larger than life figure in Antigua, where his company was the largest employer and where he was even knighted in 2006 by the Caribbean island nation’s governor-general.

The England and Wales Cricket Board cut ties with him after the allegations surfaced. No date has yet been set for his trial, but he faces up to 375 years in jail if convicted.

By Agence France-Presse

Hawaii tax picture is worse than expected

HONOLULU - A lack of construction and worries about swine flu caused Hawaii's economic seers to forecast that tax revenues will continue to drop before bouncing back next year.

The Council on Revenues predicted Thursday that revenues will decline through June, but the islands are set for a sharp rebound afterward.

''We're taking notice of some improvement,'' said Paul Brewbaker, the council's chairman. ''But at the same time, there are lingering challenges, primarily in the form of construction.''

This week's news of an uptick in tourism - Hawaii recorded a monthly increase in visitors last month for the first time since February 2008 - was not enough to outweigh concerns over the future.

The number of contractors seeking private building permits is down significantly, and there's a chance that swine flu could infect large numbers of the U.S. population, which would prevent them from taking Hawaii vacations.

Worsening revenue figures put additional pressure on state govern

ment employees to accept concessions during their ongoing labor negotiations, said Speaker of the House Calvin Say. About 1,100 public workers are already facing layoffs, and Gov. Linda Lingle wants other public employees to take unpaid days off.

''To close the remaining budget shortfall, we will need to reduce the state's labor costs, which comprise 70 percent of our operating budget,'' Lingle said. ''At the same time, the public also needs to re-evaluate its expectations of what services government can provide given the realities of our current budget situation.''

The new estimate means the state budget shortfall has widened about $98 million over the next two years, bringing Hawaii's total deficit to $884 million.

The tax revenue forecast is for a 1.5 percent decline in this fiscal year, which runs through June, and 6.5 percent growth in the next fiscal year.

''Maybe we have bottomed out,'' said Say, D-St. Louis Heights-Wilhelmina Rise. ''Looking out the window, I'm optimistic that maybe by the middle of next year, you'll see maybe four or maybe five (construction) cranes, rather than what I see today: just two cranes out there.''

State lawmakers said they would consider legalizing some form of gambling or taking hotel tax money from county governments.

Tax hikes are possible, but it's unlikely that the Republican governor and majority Democratic Legislature would support them during an election year.

''I'm very hesitant about raising the G.E.T. tax (general excise tax) at this point,'' said Sen. Donna Mercado Kim, D-Kalihi Valley-Halawa. ''A lot of businesses are just barely making it, and to add that onto them at this point in time . . . it's just a downward spiral.''

By MARK NIESSE, The Associated Press

Who Put Super-Thermite in the Twin Towers?

The discovery of chips of highly-explosive super-thermite in the dust of the World Trade Center is an essential key to unraveling the entire 9-11 hoax. Understanding the lies about 9-11 reveals in turn the mass deception behind the wars of aggression in Afghanistan and Iraq and the utterly fraudulent "War on Terror." One soon realizes that the whole anti-terrorism Zeitgeist of the past 8 years is nothing but a pack of lies.

The red-gray chips of active thermitic material found in the dust of the demolished towers

The discovery of super-thermite in the dust of the demolished towers opens up the whole can of 9-11 lies. Dr. Steven E. Jones of Brigham Young University discovered unusual red-gray chips in the dust of the demolished twin towers and along with a team of other scientists published a peer-reviewed paper in March 2009 in which they prove that these chips are fragments from a thin layer of active thermite in the nano-size form, i.e. super-thermite. This is the powerful explosive that pulverized the towers. Osama Bin Laden certainly didn't put super-thermite in the twin towers, so who did? This is the question that demands to be answered.

Super-thermite is defined as a thermitic compound in which one of the two main components is in the nano-size range, i.e. less than one-tenth of a micron in size. The main components of Thermite are generally aluminum and ferrous or iron oxide. When these components are reduced to nano-size particles and mixed together, they form super-thermite, a highly energetic and explosive form of Thermite. Other components can be added to the mix to create other effects, such as to produce a gas to increase the pressure of the explosion when the super-thermite is detonated.

Because of the nano-size nature of the components of super-thermite, it is usually mixed and suspended in a solution that can be applied to a surface, such as the floors and walls of the World Trade Center, as a spray, film, or gel. The evidence of the super-thermite chips found in the 9-11 dust suggest that this highly explosive solution had been applied as a thin layer to surfaces of the twin towers as a spray. Who would have done that?

When it was applied it was certainly not known to all that it was super-thermite, but was probably applied under the guise of being a spray coating of paint, fire-proofing, or some kind of asbestos abatement. The people who applied the spray onto the surfaces of the World Trade Center certainly had no idea that what they were applying was actually a very powerful explosive film, although they were probably told not to smoke.

As the application of the super-thermite must have occurred during the months prior to 9-11, I have used FOIA and other means to try to find who could have been doing such work in the towers during 2000-2001. There was one significant clue at the very beginning. Two days after 9-11, Engineering News-Record (ENR) reported that an asbestos abatement and demolition company called LVI had done extensive asbestos abatement work in the World Trade Center:

AMEC Inc., Turner Corp. and Bovis Lend Lease were set to assume "lead roles" in the cleanup effort, says Lee Benish, AMEC vice president. "From the very beginning, we've been deeply involved with the city department of emergency services," he says. "They're sorting through who will be doing what." LVI Services Inc., New York City, which has done extensive asbestos abatement work on the towers in the past, is involved in similar work now as well as other cleanup efforts.

LVI was immediately a suspect because it does a great deal of pre-demolition work in which it prepares buildings for demolition. LVI has done several large demolition jobs with Controlled Demolition, Inc. of Maryland.

I called LVI and spoke with Burton T. Fried, the founder and CEO of the company, and asked him if his company had done extensive asbestos abatement work
in the twin towers as reported in ENR. He immediately denied that his company had done the work saying that another company called AASI had, but he added that they had gone out of business. (NB -- One of the branch offices of LVI is named ASI.)

Burton Fried of LVI

I then contacted the authors of the original ENR article to see what they had based their statement on. Debra Rubin, one of the authors, confirmed the information in the article and told me that LVI, i.e. the company itself, had been the source of the information. This is quite interesting because ENR and LVI clearly have an on-going relationship in which any substantial error, especially of such importance, would be corrected. ENR's report is, after all, on the record that LVI did extensive asbestos abatement work in the now demolished twin towers. This is certainly a very significant error that would have to be corrected -- if it were false. Although Fried denied to me that his company had done extensive asbestos abatement work in the twin towers, he has not demanded a correction or retraction from the engineering magazine, a journal of record in the engineering industry. Furthermore, LVI has continued to do work at Ground Zero, where it has been involved recently in the pre-demolition clean-up of the Deutsche Bank building at the south end of the site.

We do know that a million-dollar contract for asbestos abatement in the twin towers had been put up for bids by contractors in the fall of 2000, exactly one year before 9-11:

Contract WTC-115.310 - The World Trade Center Removal and Disposal of Vinyl Asbestos Floor Tiles and Other Incidental Asbestos-Containing Building Materials Via Work Order Estimate Range: $1,000,000 annually Bids due Tuesday, October 17, 2000. (advertised by the PA on September 12, 2000)

So why would Burton Fried deny to me that his company had worked in the twin towers but not demand that ENR correct the record? During the past two months I have tried to reach Mr. Fried by phone and by email to clarify this matter and ask some questions about his company and the work they have done at the World Trade Center, before and after 9-11. Although Fried is listed as the company spokesman and person who answers questions for the press, he has not answered any of my emails. Why is he avoiding my questions?

I sent my first set of questions to Mr. Fried shortly after the Jones' paper on the discovery of super-thermite was published in March 2009. The key question was stated thusly:

The article from Engineering News-Record of September 13, 2001, says that LVI did extensive asbestos abatement work in the World Trade Center. Is this correct? Debra Rubin, one of the authors, told me that LVI had been the source of this information for the article. You previously told me that LVI had not done this work and that a company named AASI had done the work. Who was AASI and where were they from? Do you still stand by that statement that you told me that LVI had not done any asbestos abatement work in the twin towers?


Later, at the end of May, I sent a question to Mr. Fried about his company's million-dollar "research and development" work with the U.S. Army, particularly in 2000:

Dear Mr. Fried,

The LVI website says that questions from the media should be sent to you. I have a couple questions about the work LVI has done for the U.S. Army, especially about the millions of dollars of work done in Research and Development. These questions are for the purpose of an article to be published.

I would like to ask a few questions about the work LVI Group, Inc. did with the U.S. Army. In 2000, LVI did about $3 million in R&D work for the U.S. Army, which was the largest part of the total contract for $3.2 million that year. records show that LVI did Applied Research and Exploratory Development (R&D) work for nearly $3 million that year.


What was the nature of the $3 million in R&D work that LVI did for the U.S. Army in 2000? Was any of it related to Thermite? Has LVI done any work of any sort with nano-composite thermite?

In 2001, LVI had a negative amount shown of some $2.8 million with the U.S. Air Force. Can you tell me what that was about? In 2002 and 2003, LVI did about $500,000 of R&D with the U.S. Army. What kind of R&D was LVI doing for the U.S. Army in those years?

Thank you for your consideration of my request for information about your company's business with the federal government and U.S. Dept. of Defense.

These questions were sent to Burton T. Fried, Chairman, LVI Services Inc., and to LVI's other press contact, Amy McGahan of Dix & Eaton. Neither Fried nor McGahan ever responded with one word to a single question. When I called, Fried was always out. That seemed very strange. This was a standard press inquiry. Here is a company that does a great deal of business with the U.S. military and government but refuses to answer any questions for the press about its reported work in the World Trade Center or the nature of its multi-million dollar research and development contracts with the U.S. Army.

Why would LVI not want to discuss its work in the twin towers or million dollar contracts with the U.S. military? To understand LVI, we need to understand the man who runs the company.


Burton T. Fried is a lawyer who founded LVI Services Inc., as a part of LVI Group in 1986. Fried (born February 26, 1940, NYC) worked as a lawyer for 10 years before getting involved with LVI in 1974. He was executive vice president, general counsel and secretary of LVI Group from 1974-86; vice chairman, general counsel, director, 1985-91; and president of LVI Group Inc., 1991-93. After founding LVI Services in 1986, Fried was president and CEO of that company from 1986—2006. Since 2006, Fried has served as chairman of the board of LVI Services, which describes itself thusly:

LVI Services Inc. is the United States’ leading provider of a wide array of integrated facility services, including environmental remediation, demolition and related services for commercial, industrial, multi-family residential and governmental facilities. LVI focuses on projects involving asbestos, lead paint, mold, infection control, specialized environments, hazardous materials, emergency and disaster services, fireproofing and demolition. Founded in 1986, LVI has more than 30 offices across the United States, is licensed in every state, and is experienced in responding to natural and manmade disasters around the world. The company’s annual revenues exceed $380 million. For more information, visit


Fried had a family member who probably helped him at the
World Trade Center. His only brother-in-law, Gary M. Grossberg, was the Port Authority architect and project manager until 1995. The World Trade Center, which was leased to Larry Silverstein in late July 2001, was actually owned and operated by the Port Authority. Grossberg's obituary was published in the Star-Ledger of New Jersey on August 1, 2008. Grossberg was married 51 years to Fried's only sibling, his sister Estelle Fried.

LVI has a documented history of hiring illegal aliens to do the dirty and dangerous work. The Times Union of Albany (NY), for example, reported on June 5, 2004, that LVI asbestos workers had been arrested at a "General Electric Co. plant where, federal authorities said, they found evidence of significant asbestos-removal violations."


The investigation is now focusing on the Manhattan-based cleanup company, LVI Environmental Services Inc., and whether it has properly vetted its employees. The eight men arrested on federal fraud charges are from Ecuador and allegedly used fraudulent Social Security cards to obtain asbestos removal licenses from the state of New York, according to the charges.

Several other workers scattered during the raid and were not caught, authorities said.

"What we're trying to do is figure out what this very large asbestos abatement company was doing utilizing an illegal work force,'' said Assistant U.S. Attorney Craig S. Benedict. "This wasn't an instance where one worker slipped through the cracks. Given their lack of English (speaking) skills, it is certainly hard to imagine how it could have escaped the attention of LVI officials.''

Sources close to the investigation said federal agents found evidence of asbestos violations that included having loads of dry asbestos -- which is supposed to be wet during removal to prevent it from becoming airborne.

Burton T. Fried, LVI 's president, said he was not aware of the arrests until told about the investigation by a reporter on Friday afternoon. He asked to review a copy of the U.S. Attorney's news release on the case but then declined to return a telephone call seeking additional comment.

There are many similar stories about LVI being caught employing illegal aliens around the nation and using unsafe practices. Several LVI employees, usually Hispanic workers, have been killed or badly injured on the job. The record clearly indicates that LVI is a company that has a long-standing practice of exploiting illegal aliens in very dangerous working conditions. These illegal practices don't seem to prevent the company from getting multi-million dollar federal contracts with the U.S. government and military. The demolition company has some very unusual "research and development" contracts with the U.S. military, such as the multi-million dollar R&D contract with the U.S. Army in 2000. What kind of R&D does a private demolition company do for the U.S. Army? Did any of these projects involve super-thermite in demolition?

Burton Fried is certainly not talking.


"Industry Firms Pitch in for World Trade Cleanup While Others Account for Employees in Doomed Buildings," Engineering News-Record, September 13, 2001, Richard Korman, Debra Rubin, and Gary Tulac

More Americans are having their power shut off as the weak economy makes it harder to pay bills.

USA today

More Americans are having their power shut off as the weak economy makes it harder to pay bills.

"We see record numbers of households becoming disconnected or in danger of disconnection," says Mark Bixby, energy director of Rockford, Ill. Five years ago, his office distributed federal funds annually to about 300 households that had their power cut off. Last year, it was 1,834 households, and the number is likely to go up this year, he says: "It's families that can't find work."

ComEd, which supplies electricity to 3.8 million customers in northern Illinois, says it has disconnected more this year than last but declined to provide specifics. The utility saw a 14% increase in bills 60 days late in the first half of this year compared with the same period last year, spokeswoman Kim Johnson says.

Regulations differ by state, but utilities generally may not cut power off during extremely cold, and in some cases extremely hot, weather.

Utilities say they try to help customers avoid disconnection with payment plans, referrals to social service agencies and grants to pay bills.

This fiscal year, the federal Administration for Children and Families distributed a record $5.1 billion to states to help low-income households pay energy costs. The federal stimulus package includes $1.5 billion to prevent homelessness, in part by helping people pay utility bills.


• Piedmont Natural Gas, which has 1 million customers in North Carolina, South Carolina and Tennessee, disconnected 9,039 North Carolina customers from November 2008 through February 2009, up 68% from the same period a year earlier. "The economy's having an impact," spokesman David Trusty says.

• Public Service Electric and Gas, which has 2.3 million customers in New Jersey, has seen a 20% increase so far this year in customers at least two months behind, says billing director Victor Viscomi.

This year, 30,000 more customers received financial assistance. Unemployment and foreclosures are growing, Viscomi says, and "bankruptcies are up approximately 30% among customers."

• At Arizona's Home Energy Assistance Fund, requests for help with utility bills are up 40% from last year, program manager Katie Morales says.

Chris Cox, 30, of Tucson, called after he got a cutoff notice. The father of four says he's two months behind and owes $400.

Cox, who works in ad sales, says his commissions have fallen by more than half in four months. "I have family and friends that would have normally been in a position to help, but they aren't able to now," he says. "I don't know what I'm going to do."

Zero Hedge Exclusive: Is State Street Trading For Federal Accounts?

Zero Hedge has always been fascinated by the behemoths of securities lending (or not so much lately) State Street and Bank Of New York: these firms, which allegedly had just marginal toxic exposure, were in the front lines for the TARP bailout and have traditionally been handled with velvet gloves by the administration. In fact, many would say the custodian firms are in a league of importance much higher than even Goldman or JP Morgan as with their repo activity, security lending and cash collateral reinvestment, they are the de facto center of the shadow banking system.

A Cliff notes version of the stock lenders' Modus Operandi, sent in compliments of a reader:
  • In the securities lending arb, stocks and bonds are lent out by custodians and investment managers. The loan is collateralized by the borrower with cash, the lender promises the borrower a return on that cash and then invests the cash in repo and short-term debt at a spread to that promised rate of return. The sec lending market is in the trillions. This market is basically rolling overnight repo right now as it tries to dig itself out of the MTM/liquidity hole.
  • Many of the Fed/Treasury balance sheet efforts have been basically attempts to supplant securities lenders. Sec lending funds were the biggest buyers of 1-3yr FRNs (hence, TLGP). Lenders were also the biggest buyers of AAA cards and autos (read TALF 1.0). They were the second-biggest buyers of ABCP after 2a7 funds (ergo AMLF). Indirectly they were the largest funder of LT2 bank debt (via SIVs MTNs). They're large repo counerparties, and did everything from short-dated CDS to liquidity put options on Canadian levered super-senior CDOs.
  • Many stock lending funds, which have similar accrual accounting regimes to '40 Act money-market funds, have broken the buck but are still trading at $1. for example see the section beginning "We may be exposed to customer claims" on p.11. What does this mean? Not only are certain securities lending providers opening themselves up to significant litigation risk but, importantly, clients in stocks can't reallocate to bonds (or vice-versa), since the sec lending funds aren't letting them out (except in-kind). Finally, of course, as long as sec lenders remain hurt but unsupplanted, they stay short duration, which extracts hundreds of billions of $$ in term financing capacity out of the market. Fed won't act as a lender of last resort since they're still smarting from the AIG sec lending bail-out they didn't see coming.
It is no surprise that in order to incite a return to pre-Lehman economic levels (the administration's #1 goal bar none), not only the stock market would have to much higher from its March lows (a task largely accomplished through market increases on disappearing breadth, liquidity extraction by the likes of Goldman Sachs, and assorted last minute inexplicalbe ramp ups in the various futures and ETF markets), but also the shadow system would have to be back with a vengeance. And while new mechanisms to achieve this such as securitization replacement alphabet soups have yet to prove their efficacy, the real heart of the shadow banking system Frankenstein is and has always been the repo market.

Which is why we were greatly troubled when we learned recently on good authority that Federal representatives may have opened multiple undisclosed-type accounts with none other than State Street Global Advisors over the past few months. All of these accounts are allegedly handled by one single trader, who is cocooned and isolated from interaction with other partners.

Zero Hedge can, as of yet, not vouch for this being 100% factual and is asking readers who may have additional knowledge of the situtation to please come forward and share their views ( If, indeed, the Federal Reserve or other derivatives of the administration, are now directly involved in trading, managing repo terms, stock lending, collateral distribution and other liquidity-crucial aspects of what was once an efficient market, then indeed this rally could be written off not merely as the biggest short covering rally of all time, but one that has been explicitly orchestrated by those who should be most impartial to an efficiently working market.

Mind blowing speech by Robert Welch in 1958 predicting Insiders plans to destroy America

Check this link ......

Hudson: The Financial Parasites Have Killed the American Economy

Hudson: The Financial Parasites Have Killed the American Economy, and They Are Sucking as Much Money Out as They Can Before Jumping Ship

Michael Hudson is a highly-regarded economist. He is a Distinguished Research Professor at the University of Missouri, Kansas City, who has advised the U.S., Canadian, Mexican and Latvian governments as well as the United Nations Institute for Training and Research. He is a former Wall Street economist at Chase Manhattan Bank who also helped establish the world’s first sovereign debt fund.

Hudson has frequently described Wall Street as “parasitic”. For example, in a 2003 interview, Hudson said:

The problem with parasites is not merely that they siphon off the food and nourishment of their host, crippling its reproductive power, but that they take over the host’s brain as well. The parasite tricks the host into thinking that it is feeding itself.

Something like this is happening today as the financial sector is devouring the industrial sector. Finance capital pretends that its growth is that of industrial capital formation. That is why the financial bubble is called “wealth creation,” as if it were what progressive economic reformers envisioned a century ago. They condemned rent and monopoly profit, but never dreamed that the financiers would end up devouring landlord and industrialist alike. Emperors of Finance have trumped Barons of Property and Captains of Industry.

Hudson: The Financial Parasites Have Killed the American Economy 150709banner2

More recently, Hudson said:

You can think of the financial sector as being wrapped around the real economy, almost like a parasite, and that’s why it’s been called parasitic for so long. The financial sector extracts interest from the economy, the property sector extracts economic rent, as do monopolies. Now the key thing about parasites, is that it’s not simply that they extract nourishment from the host. The parasite takes over the
host’s brain, to make it think it’s part of the economy, to make it think
it’s part of the host’s own body, and, in fact, that’s it almost like a child of the host, to be protected. And that’s what the financial sector has done today.

You have Obama coming out and saying, “We have to save the banks in order to save the real economy”. The fact is, you can’t serve both the parasite and the host.

And see this.

On August 10th, Hudson went even further. Specifically, he said:

  • The giant financial institutions have already killed their host – the real American economy
  • Since they realize that the American economy is dead, they are trying to suck as much blood out of America as possible while the corpse is still warm
  • Because the American economy is dead, their plan is to soon jump to another host. They will ship all of their money overseas

Economic Collapse: Bank Runs, China, Peter Schiff, Gerald Celente, Max Keis

Very good link, you must watch ........

Glenn Beck: "Speak without fear" - 8/26/2009

Must watch link .......

Moon Mission Accidentally Burns Up Fuel Reserves


In an unexpected control glitch this weekend, NASA’s Lunar Crater Observation and Sensing Satellite (LCROSS) went berserk and burned up all its extra fuel.

It turns out the spacecraft had an attitude problem: A broken sensor in the LCROSS attitude control system, which keeps track of the satellite’s orientation, caused the spacecraft to repeatedly fire its thrusters and burn up about 140 kg of hydrazine propellant. Fortunately, NASA says the spacecraft was carrying more fuel than it needed and still has 50 kg left, enough to complete its mission.

If all goes well, LCROSS will release its Centaur rocket on October 9, 2009, sending the projectile hurtling at the south pole of the moon at 1.55 miles per second, about twice the speed of a bullet. Scientists hope the impact will send up a huge plume of moon debris, possibly containing ice, vapor or traces of hydrated materials that prove the existence of water on the moon.

Four minutes later, the rest of the spacecraft will follow the rocket’s path through the cloud of lunar dust, analyzing its contents and transmitting data back to Earth before the entire spacecraft crashes into the moon’s surface. NASA says the impact will generate a cloud of dust so big that we may be able to see it from Earth using an amateur telescope.

This isn’t the first time we’ve crashed rockets into extraterrestrial bodies to find out what’s inside. In 2005, NASA’s Deep Impact spacecraft sent a probe crashing into Comet Tempel 1 to study the contents of the comet’s interior. A European probe called SMART-1 crashed into the moon in 2006, and Japanese scientists crashed their Kayuga probe into the moon this June. So far, none of the missions have discovered the water LCROSS is looking for.

Image: Artist’s rendering of LCROSS launching its Centaur rocket into the moon/NASA.

Killing of China steel plant boss halts sale

The privatisation of a state steel group has been scrapped after an executive was beaten to death by workers angry at the threat to their jobs from a takeover of their company, according to a Hong Kong rights group.

The violent riot in north-east China late last week involved up to 30,000 workers, a reminder of the ongoing sensitivity about lay-offs from state companies in industries targeted for consolidation.

The government laid off about 50m workers in state enterprises in the 1990s, equal to the combined workforces of Italy and France at the time, but many companies still retain bloated staffing rosters.

Tonghua Iron & Steel, a traditional state enterprise, has about 50,000 workers and has struggled to make consistent profits in recent years, making it a prime target for restructuring by its owner, Jilin province.

The privately held Jianlong Group, one of China’s largest private steel companies, had first proposed taking over Tonghua in 2005, backed out of the deal when the economy slowed last year, but re-entered negotiations recently when industrial demand picked up.

Propelled by the government’s stimulus package, China produced steel at an annualised rate of 545m tonnes in June, a record level of output.

The interim general manager sent by Jianlong to run Tonghua, Chen Guojun, had infuriated the workers with his high-handed attitude, according to comments posted on internet bulletin boards in China.

He had reportedly said that he would re-establish Tonghua “under the name of Chen” and lay off almost all the employees.

“With Tonghua Steel’s retired workers each receiving only Rmb200 ($29) a month for living expenses, Chen Guojun was paid an annual salary of Rmb3m,” the rights group reported.

When Mr Chen returned to the plant late last week, a large crowd of workers surrounded his office and beat him unconscious, according to a report issued by the Hong Kong Information Centre for Human Rights and Democracy.

Outside the factory, mobs of workers stopped an ambulance and police from entering the compound to rescue him. The thousands of riot police then mobilised by the authorities took several hours to bring the situation under control.

Staff at Jianlong’s headquarters in Beijing confirmed Mr Chen’s death but declined to give any further details.

Zhang Zhixiang, the owner of Jianlong, was China’s 10th-richest man in 2008, according to China’s most widely quoted rich list, with a fortune estimated at $2.9bn.

Private entrepreneurs in China have made substantial inroads into the steel sector in the past decade, usually by buying up and restructuring tottering state-owned companies such as Tonghua.

FDIC List of Problem Banks Surges, Putting Reserve Fund at Risk

Aug. 27 (Bloomberg) -- The U.S. added 111 lenders to its list of “problem banks,” a jump that suggests rising bank failures may force the Federal Deposit Insurance Corp. to deplete a reserve fund that shrank 40 percent this year.

A total of 416 banks with combined assets of $299.8 billion failed the FDIC’s grading system for asset quality, liquidity and earnings in the second quarter, the most since June 1994, the Washington-based FDIC said in a report today. Regulators didn’t identify companies deemed “problem” banks.

The U.S. has taken over 81 banks this year, including Guaranty Financial Group Inc. in Texas and Colonial BancGroup Inc. in Alabama, amid the worst financial crisis since the Great Depression. The surge forced regulators to charge banks an emergency fee to raise $5.6 billion for its insurance fund, which fell to $10.4 billion as of June 30 from $13 billion in the previous quarter, the agency said. The total was the lowest since the savings-and-loan crisis in 1993.

“We’re right in the middle of the cycle and it’s a very tough place to be,” said James Chessen, chief economist at the American Bankers Association, a Washington-based industry group. “We’ll have another couple of more quarters where banks will be working through these loan-loss problems.”

An $11.6 billion increase in loss provisions for bank failures caused the decline in the reserve fund, the FDIC said. If the fund is drained, the FDIC has the option of tapping a line of credit at the Treasury Department that Congress extended in May to $100 billion, with temporary borrowing authority of $500 billion through 2010.

Line of Credit

The agency doesn’t expect to use the Treasury line of credit, FDIC Chairman Sheila Bair said in a news conference releasing the data. Bair said the number of problem banks and failures will remain elevated as banks and thrifts continue to clean up their balance sheets.

“For now, the difficult and necessary process of recognizing loan losses and cleaning up balance sheets continues to be reflected in the industry’s bottom line,” she said.

FDIC-insured banks reported a net loss of $3.7 billion in the second quarter, compared with a $5.5 billion gain in the first quarter. The quarterly loss, the second the industry has reported in 18 years, was driven by increased expenses for bad loans, the FDIC said.

Funds set aside by banks to cover loan losses rose to $66.9 billion in the second quarter from $60.9 billion in the first quarter.

Nonperforming Loans

More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival, according to data compiled by Bloomberg.

The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound.

The FDIC insures deposits at 8,195 institutions with $13.3 trillion in assets. The agency is a state-bank regulator that insures bank customer deposits, helps find buyers for failing banks and liquidates lenders that have collapsed.

The agency this week approved new guidelines for private- equity firms that invest in failed banks to increase the pool of buyers beyond traditional lenders and reduce costs to the banking industry and taxpayers.

By Alison Vekshin

Economic Collapse: Bank Runs, China, Peter Schiff, Gerald Celente, Max Keiser

Max Kaiser speaks about the predicted bank run and currency destruction of the US economy. He also speaks about how China will be on top of the depression because they are spending their stimulus on domestic growth. Peter Schiff makes a guest appearance, as well as Gerald Celente.

Economic Collapse: Bank Runs, China, Peter Schiff, Gerald Celente, Max Keiser  150709banner2

Whirlpool to close Evansville plant

Whirlpool Corp. announced Friday that it will close its manufacturing plant in Evansville, Ind., eliminating about 1,100 full-time jobs by mid-2010.

Next year's closing is among several changes in the company’s North American manufacturing operations.

Whirlpool (NYSE: WHR), based in Benton Harbor, Mich., said in a news release that production of top freezer refrigerators made at Evansville will be transferred to one of the company's existing plants in Mexico.

Production of icemakers produced in Evansville will be relocated to a site yet to be determined.

Friday’s announcement follows a comprehensive review of alternatives for product consolidation within the refrigeration product category.

The company also said that it is currently evaluating options for the best location for the Refrigeration Product Development Center, which is also in Evansville and has about 300 employees.

“This was a difficult but necessary decision,” Al Holaday, vice president, North American Manufacturing Operations for Whirlpool, said in the release. “To reduce excess capacity and improve costs, the decision was made to consolidate production within our existing North American manufacturing facilities. This will allow us to streamline our operations, improve our capacity utilization, reduce product overlap between plants, and meet future production requirements.

“We are announcing this decision nearly one year in advance as part of our commitment to make the transition as smooth as possible.”

Home-appliance maker Whirlpool had sales of about $19 billion in 2008. It has 70,000 employees and 67 manufacturing and technology research centers around the world, and its brands include Whirlpool, Maytag, KitchenAid and Jenn-Air.

Ron Paul and Lew Rockwell discuss Obamacare, Swine Flu and Big Government

Last week Ron Paul sat down with his old friend Lew Rockwell to discuss Obamacare, liberty, the swine flu, and the dangers of big government.


Lew Rockwell: Around these days it seems like the hot issue is Obama’s socialized medical bill or do we call it a fascist medical bill or interventionist medical bill? I don’t know, but it involves vastly increasing. There are already horrible amount of government intervention in the medical system. But it looks like there is so much opposition. Is he going to get it through?

Ron Paul: One thing we can agree on it’s not a free market approach to medical care. I don’t think he’ll get the whole thing through. You know, looking back at what has happened with my bit of an experience in Washington is that they never get everything, but they always get a bunch and I imagine he’s going to keep moving this.

But they’ve been doing this for maybe 50 years. Incrementalism, the American people accept incrementalism. But you know, if in the 1940s or 1950s, they would have said, “We want social healthcare,” The American people would have rebelled, and even today they resent being in socialized medicine and they’re rebelling, but they’re going to take a little bit more and they’ll keep moving. So I think they’re going to move in that direction and you know, Republicans are doing a pretty good job in opposing it, but the Democrats have more votes.

But the real tragedy is whether you have the Republicans in charge or the Democrats in charge, you know what happens, it still marches on. I mean, look at what happened under Bush. We had that prescription drug program and it sailed right through and here we go, we’re even looking for a much greater influence from government, so unfortunately, I don’t think this is going to be much benefit to our patients.

Lew Rockwell: And of course, you’re right about both parties having increased government intervention in medicine. As you’ve pointed out that with Hill Burton and starting with the Eisenhower administration in the 1950s, whereas Truman, even at the height of his popularity could not get a socialized medicine bill through.

Ron Paul: Right.

Lew Rockwell: Yet, Eisenhower did it. Of course, LBJ with Medicare and Medicaid. Nixon with the HMOs and Healthcare Financing Administration and Reagan increased intervention in medical care and Clinton and so I guess Obama is going to just continue on that same path.

Ron Paul: So you can understand and empathize with those people who are getting angry, especially that they’ve been introduced to free markets and believe in liberty and believe in the Constitution, let them be angry and I think it’s very justified that people are upset and angry, and hopefully this is a healthy sign that people are starting to realize that the federal government can’t deliver and ultimately, I think that’s what our country is facing; a government that can’t deliver, but that should be a very positive thing for us if we come of it without violence, I think this could be very helpful to us.

Lew Rockwell: I think it’s thrilling. Of course, the government uses only violence, right? I mean, that’s how they get their medical bill through. If you don’t obey, if you don’t pay their taxes, they use violence against you. But the opposition, they’re just arguing against these things.

Ron Paul: Yeah, they have a lot of guns that they use. You know, I argued that we should have gun control on all the federal bureaucrats. I think we have 100,000 federal bureaucrats who carry guns now. When you think of all of the agencies of government, they’re permitted to carry guns and of course, sometimes that one individual American have guns, the left goes nuts, you know, “What, somebody has a gun?”

Lew Rockwell: Because these guys will bring them on planes. They can carry them anywhere. State law doesn’t apply to them. They sail above it.

Ron Paul: That’s right and that’s what should really scare us. What scares me is the use of the gun to take away our liberties. You know, even though they’re not shooting at us, the gun is always behind everything that they do and just the idea of paying for this medical program, where are they going to get the money? It’s all the use of force and guns. They go to the IRS and then, of course, they borrow money and they pay interest on this money, then they use force, a sinister tack like inflation, the Fed prints the money, and then they haven’t talked that much about paying for this bill.

Obama talks about all these good things that are going to come from it, but I don’t even think the conservatives have done a real good job in talking about the real cost of this thing. You know, where does this come from? And what amazes me is we have… we’re living in a period of time now where the national debt has gone up to $2 trillion this year and it doesn’t hardly even faze him to talk about another program they claim is going to be a trillion, but you know that have you ever seen a government program proposed to cost a billion or 2 billion or 10 billion and not being 2 or 3 times more.

So this is not going to cost a trillion dollars because they can’t know. Because costs are always going to go up. You know, so what they’re projecting… I mean, their programs, their computers are telling, “Well, everything is going to cost this much.” Oh, yes, but we’re going to get rid of the waste and fraud and that’s how they’re going to pay for it.

Lew Rockwell: I also like the fact that they claim that they’re going to cut costs. I mean, government loves spending money, they sort of exist to spend money. So when in human history has any government ever cut the cost of anything?

Ron Paul: When you think about how much the bureaucracy costs in lost time and inefficiency with the little cost of paying these people and who thinks for a minute they’ll be less federal bureaucrats involved in this program. You know, the one thing that bothers me is it’s going to involve some bureaucrats and that is this electronic surveillance of all the medical records. You know, the procedures are already in place. They’ve gotten the authority to set up the medical documentation of electronic records.

In this bill, if it pass, has $50 billion in there. So if anybody cares about medical privacy, it’s essentially gone. This HIPAA thing that came up a few years ago, it was designed… it has made everything accessible to the government and to the big insurance companies.

Lew Rockwell: In the name of privacy.

Ron Paul: Yeah, in the name of privacy and now, they’re talking about making it… but what they want to do is monitor every single transaction; everything the patient does, everything the nurse does, everything the doctor does, and how many pills have been prescribed and monitor this and review everything to find out if everybody is doing the right thing and they think they’re going to bring down the costs. It bewilders me to think that anybody could believe this stuff.

Lew Rockwell: And who can doubt that your medical records would be part of your dossier to be accessible to the Department of Homeland Security, maybe every cop on the beat. They’re going to have all that information on you; your financial information, legal information, medical information.

Ron Paul: Yeah, and you know, that under the HIPAA law, they explicitly say that you’re protected, unless the government needs these records for health matters and think about all the hype on this flu… this swine flu and they’re getting ready for that and are we going to have mandatory inoculations and all this and then you’re going to be in a computer, “Oh, Joe Blow, he didn’t get his shot, you know, round him up.” So it’s scary stuff. You know, it looks like it’ll make 1984 look attractive one of these days.

Lew Rockwell: It sure was interesting how disappointed, openly disappointed they were when the swine flu business didn’t bloom into the full-fledged epidemic they were hoping for.

Ron Paul: No, and they’re still sort of hoping for it. You know, they’re trying to do this and all that… and I guess, you do remember a little bit about 1976, when we were worried about [...]. You remember Larry McDonald and I voting against that thing.

Lew Rockwell: Yes.

Ron Paul: And more people died from the inoculation than did from the flu. But you know, this isn’t… I never want to belittle the principle of inoculations. I think people get way, way to many and we break down our immune system, but the whole idea, if it’s a shot that’s good or bad, why is it that it has to be massive and why is it that it have to be with everybody? Why is it that it has to be the government? Why can’t the parents make these decisions? Why can’t the doctors make these decisions on whether somebody has to get a flu shot? And you can argue the pros and cons of that, but this idea that there’s going to be a government decision, you know, the Federal government is going to make the decision and of course, drug companies tend to be involved as well. Oh, boy, I guess that is going to be a big customer if I can do a flu shot for everybody in the country.

Lew Rockwell: And of course, this always leaks into foreign policy, it seems too, given the empire. So I remember when the Ford administration used the swine flu virus to attempt to infect all the farm animals in Cuba in an active germ warfare, right? We call it an act of terrorism today if somebody else were doing it into the US.

Ron Paul: No, no, that’s verging on conspiracy.

Lew Rockwell: Yeah.

Ron Paul: Now, you’re telling the truth, telling the truth about what our CIA has done over the years. You know, you might find out that not too… in recent years or decades, when they did this survey and find out that we’ve attempted over 50 assassination of government leaders. So whether it’s the health matters or oil or whatever, I think we’re way too much involved, so…

Lew Rockwell: That’s for sure. Ron, thank you so much.

Ron Paul: Okay, good. It’s good to talk to you, Lew.

Lew Rockwell: And also to you.

The Spend-And-Borrow Economy

What's the exit strategy from the monetary and fiscal easing?

In the last few months the world economy has been saved from a near-depression. That feat has been achieved by a range of extraordinary government stimulus measures: In the U.S. and in China, and to a lesser extent in Europe, Japan and other countries, governments have pumped liquidity, slashed policy rates, cut taxes, primed demand and ring-fenced and back-stopped the financial system. All of this has worked, but at a cost. Governments have been spending and borrowing like never before. The question now is: how do they stop?

This is not a simple problem. Restore normality too soon and the risk is that a weak recovery will double dip into a second and deeper recession. Restore it too late and inflation will already be ingrained.

Consider how much has been committed and how much has been spent. In the U.S. alone, when you add up the government's liquidity support measures, its re-capitalizations of banks, its guarantees of bad assets, its extension of deposit insurance and guarantees of unsecured bank debt, at least $12 trillion has been committed, and a quarter of that has already been spent. Along with the rise in spending there has also been a very large fiscal stimulus, pushing the federal budget deficit to 13% of gross domestic product this year. (Next year, on current plans, the deficit will fall back but still amount to 10% of GDP.)

Not all the measures adopted appear on the budgetary bottom line. As well as monetary easing and fiscal stimulus, the U.S. and other governments have resorted to unconventional measures to ease monetary conditions. In the U.S., Japan and the U.K., real interest rates have been pushed down to zero, and governments have resorted to buying long-dated securities, the goal of which--only partially achieved--was to hold down long-term interest rates.

The Fed, for example, has committed to spending $1.8 trillion on longer-dated Treasury bonds and other securities, but most of this spending is money the government has printed itself, simply by creating central bank monetary base. It doesn't add to the budget deficit, although it does add to the long-term risk profile of the government doing the spending as monetization of fiscal deficit can eventually be inflationary.

This massive escalation of central government spending and borrowing was necessary. For most of last year, governments lagged well behind the curve of the unfolding crisis. For too long policymakers continued to believe that the house-price bubble was an isolated aberration that would self-correct without impacting the wider economy, and that the unprecedented growth in household indebtedness was not a matter of concern. By the final quarter of last year, however, the global economy was in freefall, with industrial production, private demand, employment and broad GDP all contracting at a rate indicating something close to depression at hand. Policymakers suddenly went into corrective overdrive in late 2008--not a moment too soon.

The second-quarter GDP estimates for the U.S. show just how significant this aggressive front-loaded policy stimulus has been. While total GDP growth was sharply negative in the first quarter--around -5.6%--the rate of decline in the second quarter had moderated to around -1.5%. Credit this relative improvement to governmental monetary, fiscal and financial stimulus. The private components of GDP, private demand and capital expenditure, were actually still very weak. But government spending rose by 5.6%, breaking what otherwise would have been another quarter of headlong GDP contraction.

Necessary as the stimulus has been, it cannot go on indefinitely. Governments cannot run deficits of 10% or more of GDP, and they cannot go on doubling the monetary base, without eventually stoking inflation expectations, pushing up long-term interest rates and eventually eroding their very viability as sovereign borrowers. Not even the U.S. can do that.

The fiscal implications of the current policy package are particularly serious. For the time being, fiscal policy has been put at the service of survival, but the current price of survival is that net public debt is going to double as a share of GDP between 2008 and 2014. Even using the very optimistic forecasts of the Congressional Budget Office, which anticipate growth of around 4% over the next few years, the net debt burden will rise from 40% of GDP to 80%--that's an increase in the debt stock of about $9 trillion. The interest charge alone on that increased debt will be in the region of $300 billion to $400 billion a year, which in turn may mean more borrowing to pay the interest if primary deficits are not reduced. When governments reach the point where they are borrowing to pay the interest on their borrowing they are coming dangerously close to running a sovereign Ponzi scheme.

Ponzi schemes have a way of ending unhappily. To get out of the Ponzi trap, governments will have to raise taxes, or cut spending, or monetize the debt--or most likely do some combination of all three.

Monetization is already happening. This is where a government effectively prints money by allowing the central bank to create base money that is used to buy government debt, thereby increasing liquidity and holding down long-term interest rates (because the additional demand for these securities pushes up bond prices, thereby lowering the real interest rate the securities pay, as well as putting money into the pockets of the investors who have sold the securities).

Over time, monetization is inflationary, but the inflationary effect is insidious because it is not immediately visible. In the short run deflation will outplay inflation. In most developed countries today there is so much slack in economies, with weak demand and high unemployment, that prices cannot rise. The velocity of money is also weak, as financial institutions are receiving liquidity from central banks and hoarding it to rebuild their balance sheets, instead of lending it out. But as the economy recovers, these effects will abate, and the growth of the monetary base caused by monetization will eventually drive expected and actual inflation. And once markets start to anticipate that scenario, it may already be too late to avert an inflationary surge.

Simply issuing debt in the form of Treasury bonds offers no escape. The more debt a government issues, the higher the risk it will eventually face refinancing problems and/or default on that debt. Accordingly, investors will demand a higher return for investing in that debt, and that in turn will push up rates. Independent rating agencies have already downgraded the sovereign risk rating of countries like Greece and Ireland, and it cannot be ruled out that core economies of the OECD, including the U.S., could eventually be downgraded.

As it happens, there is little sign today of investors demanding a significantly higher risk premium on U.S. government debt. That is partly because private savings are increasing: Those savings have to be invested somewhere and investors are cautious about alternative investments. Foreign demand for U.S. bonds also remains robust so far. But this demand is unlikely to survive another big round of government-financed stimulus and bailout spending. And unfortunately, such a spending round is rather likely.

Consider that by the end of 2010 most of the tax cuts legislated by the Bush administration in 2001 and 2003 are due to expire. This means that there will be a sharp tax hike, including income taxes, capital gains taxes and taxes on dividends and estates. This hike--equivalent to around 1.5% to 2% of GDP--is already factored in to future calculations of government indebtedness. So if by next year the recovery proves as anemic as I expect, and if unemployment is around 10.5%-11%, as I also expect, then the pressure for another stimulus round early in 2010 will be strong.

A rough calculation goes like this: Stimulus money to keep the lid on rising unemployment is likely to be around $200 billion. Add to that the likely temporary partial extension of the Bush tax cuts and funding of the current administration's plans for universal health care (an additional bill of around $1.5 trillion over 10 years) and you get deficits close to12% of GDP.

This amounts to a fiscal train wreck. For the U.S., it means deficits could remain over 10% of GDP for years. Bond issuance will remain enormous, and it will mean that the Fed will almost certainly have to monetize a proportion of the debt by buying even more government or government-backed securities.

A combination of higher official indebtedness and monetization has the potential to yield the worst of all worlds, pushing up long-term rates and generating increased inflation expectations before a convincing return to growth takes hold. An early return to higher long-term rates will crowd out private demand, as lending rates on mortgages and personal and corporate loans rise too. It is unlikely that actual inflation will emerge this year or even next, but inflation expectations as reflected in long-term interest rates could well be rising later in 2010. This would represent a serious threat to economic recovery, which is predicated on the idea that the actual borrowing rates that individuals and businesses pay will remain low for an extended period.

Yet the alternative--the early withdrawal of the stimulus drug that governments have been dispensing so freely--is even more serious. The present administration believes that deflation is a worse threat than inflation. They are right to think that. Trying to rebuild public finances at a deflationary moment--a time when unemployment is rising, and private demand is still contracting--could be catastrophic, turning recovery into renewed recession.

History offers more than one example of this error. It happened in Japan in the late 1990s when the Japanese government feared the effects of fiscal deficits and of an increase in inflation as the economy was beginning to recover after almost a decade of deflation. Consumption taxes were raised too soon and the "zero interest rate policy" was abandoned. Within a year the economy was back in recession.

It also happened in the U.S. in the 1930s. President Roosevelt instituted a massive stimulus package when he came to office in 1933, to push the U.S. economy out of the depression, but by 1937 the administration was worrying that inflation was returning and that deficits were too large; so it cut spending and raised rates and the Fed tightened monetary policy. By 1938 the economy was heading back into near-depression.

So policymakers are between a rock and a hard place. Stop spending now and risk renewed recession and deeper deflation (stag-deflation). Keep spending now and risk renewed recession amid rising inflation expectations (stagflation).

Yet there is a space between the rock and the hard place. It is not a big space, but it is there.

Governments will have to manage perceptions. Today investors remain willing to bankroll federal spending without any clear or firm indication of how the fiscal crisis--and it is a crisis of extraordinary proportions--is going to be dealt with. That won't last. Clear indications will soon be needed as to how and when public finances will be repaired. That doesn't have to be accomplished soon--but it does have to be communicated soon.

Monetary policy can most likely remain looser for longer (in the developed economies at least)--as long as there is a clear commitment to fiscal consolidation. But a credible fiscal commitment to medium-term fiscal sustainability is vital, because that is what will open up the very narrow window that is the exit route from our current and unsustainable spend-and-borrow economy.

by Nouriel Roubini
Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, is a weekly columnist for Forbes.