Sunday, June 5, 2011

Lessons from the Great Depression Part 33. The McDonald’s and paper-mill education economy funded by a too big to fail bank.

The current struggle to add jobs brings up bigger implications for the flailing housing market. The recent report on jobs reflects the underlying reality that the recession is still ongoing for many Americans. The recession officially ended in summer of 2009 but this is really only because of the expansion of GDP that was juiced by large investment banks leveraging cheap money from the Federal Reserve. Some of this money trickled into the housing market but here we are facing a double-dip in housing and a possible double-dip for the economy. The quality of jobs being added is also a hindrance to potential home price growth. The 54,000 added jobs fell well short of the 150,000 baseline figure just to keep steady with demographic growth. Then you have places like McDonald’s going on hiring sprees but how is this good for home values? The Great Recession is looking a lot of like the Great Depression in duration even though official GDP figures reflect a different story.

This is part 32 in our Lessons from the Great Depression series:

28. The Gospel of Economic Prosperity

29. New home sales fell 80 percent from 1929 to 1932 and fell 82 percent from 2005 to 2011.

30. Economic déjà vu from the 1937-38 recession

31. When government and financial institutions become one.

32. Housing prices continue to fall as other costs eat up disposable income.

The question of jobs

civilian unemployment

One of the better measures of employment health is the civilian participation rate. The above chart reflects the more than a decade long trend of doing more with fewer workers. This might seem good in terms of productivity but technology and banking thievery have allowed more workers to be shelved in the market. This might be good for the bottom line of a banking CEO but this reduces the number of households with adequate income to support the housing market. This is why home prices have now reached a new nominal post-bubble low:


By far this is the deepest housing crash on record. Home prices are falling lower even in the face of record low mortgage rates and the Federal Reserve eating up over $1 trillion in mortgage backed securities that the market wants nothing to do with. Again the question should be about jobs but also the quality of jobs being added. Simply adding tens of thousands of people working at McDonald’s or Wal-Mart does little for the growth in U.S. housing. So this pushes home values into the worse housing crash ever:



One of the big issues of the Great Depression was creating jobs. People may forget that even after massive government intervention the unemployment rate remained in double digits for the entire 1930s. Government spending directly on hiring people did help but it was not the answer to the panic and market collapse of the 1920s. The 1920s was an era of graft and spectacular market speculation. It was a bubble market like the 1990s tech bubble or the 2000s real estate bubble. It seems that our economy is one of continuous bubbles when Wall Street is allowed to reign supreme. Only after World War II did we see long-term sustained growth for many Americans, not only the financial elite who were kept in check by adequate market enforcement.

When do we get back to normal?

The question of back to normal for most people is one in which the unemployment rate is low. What use is it if a certain company is making billions of dollars in profits but employs people overseas while enjoying the laws and government structure of the U.S.? This is a new market in which unemployment is absurdly high yet profits are still decent for companies as they gouge local employees and off shore jobs to the cheapest markets possible to exploit workers abroad. Again, how is this good for housing values? Next, just to get back to pre-recession unemployment we would have to add 250,000 jobs for many months straight:

250K Jobs_0

Source: Zero Hedge

66 months it would take. Does that even seem plausible with the current number of jobs being added? The Great Depression struggled for over a decade to add jobs. We are now four years away from the start of this recent recession and here we are with an official 9.1 percent unemployment rate. Much of the support was through trillions of dollars channeled into the financial system but also government investment into projects. What industries are hiring right now? If we look at the BLS report closely we see a good amount in service sector jobs (i.e., McDonald’s) and health care (i.e., hello old baby boomers). This is the big part of our growth. Both of those groups cannot support the over 6 million homes in the shadow inventory.

Price floors rarely work in the long-run but this is what the government and Wall Street have tried to do with the housing market. How can you keep prices inflated if incomes are falling? Keep in mind the data only reflects those who are working because if you are unemployed, your real income is actually zero. This is now becoming one of the longest downturns in U.S. history:


Home prices are now lower so this is an ongoing issue here. Yet we have seen markets fall much harder as well. U.S. home prices as measured by the Case-Shiller are down over 30 percent. Will our bottom be at 40 or 50 percent? I think this question will be answered not on the housing front but on the employment front. Many areas in the country now have ridiculously low housing prices like Arizona, Nevada, and Michigan. But there is reason for that and that involves lack of jobs. Investors have swarmed Nevada and Arizona but most of the selling after the fact has been to other eager investors. The underlying market is weak for those who actually live in those areas. The low prices simply reflect this new reality. To think prices will zoom back up is naïve at best but many of these people are coming in with cash so at least they are not borrowing government loans to speculate in their endeavors.

The end of worker protection


Source: Vote Now

Some of the strongest growth our country has ever experienced came with a large portion of our economy being supported by unions. From 1945 to 1960 over 30 percent of non-agricultural workers worked under a union. No doubt there are serious issues with unions but here you have some protection for workers. Keep in mind prior to the Great Depression you have extreme worker exploitation and massive income inequality. Six or seven day work weeks, child labor, and unsafe working conditions and this was argued as being part of the “free market” so those that argue it today fail to parallel this massive predatory market with how the current de-regulated Wall Street ran roughshod on the American public. But guess what? The union apparatus is virtually non-existent today so you can’t blame that for our current demise.

The voice of the working and middle class American has been drowned out and ironically many keep voting for laws and regulations that keep the gig going for the predators. For example, last week extremely favorable regulations passed for the paper-mill for-profit colleges and guess what happened to their stock values?

“(Fast Company) It’s a heartening example of government working for you–if “you” means a team of lobbyists. Shares of Apollo Group (Phoenix U), the Washington Post Co (Kaplan U), and other publicly traded for-profit colleges rose sharply yesterday as the Department of Education released new regulations for the sector, significantly softened from a draft version published last July.

The original idea behind the “gainful employment” rules was to impose a little basic accountability on the kinds of colleges that advertise on the bus, by the crude measure of whether their graduates are able to pay back their student loans. Besides the obvious public interest, the federal government has significant skin in the game here: it underwrites these loans, to the tune of almost three quarters of a trillion dollars. And for-profit students, who make up only 12% of all college students, account for 46% of loan defaults.

Under the new rules, colleges with pretty crappy results will remain eligible for federal student aid. As long as at least 35% of grads are paying back their loans, the college is A-OK. It even counts if the former students are on an interest-only payment plan, which can keep students indebted for 25 years or more. No colleges will be kicked out of the program until at least 2016, and there’s a three-strikes rule, meaning they must fail three out of four years. Only 5% of for-profits are predicted to be put out of business by the new rules, compared to 55% that would have been in a marginal “yellow zone” under the draft rules.”

So there you have it folks. I would argue that instead of loaning money to these toxic institutions why not funnel the money into infrastructure jobs or aiding local state schools to re-train workers in a variety of job fields? Instead of funneling money into the banking system where they speculate in global stock markets and help other nations why not use that money to fund small businesses that have to be here in the U.S. and create jobs here? Wall Street likes to talk about the free market but they are nothing more than corporate socialists with welfare queen attitudes. With very little worker protection, a mainstream media controlled by corporate powers, you can expect any information like this to make it to the airwaves. So expect home values to fall lower and the working conditions of Americans to falter for years to come unless something drastically changes. The profits at big banks and American Idol ratings with no mass protests tell me people enjoy believing in this fantasy story as their economic prospects are washed away. Keep the bread and circus flowing.

A 62% Top Tax Rate?

Democrats have said they only intend to restore the tax rates that existed during the Clinton years. In reality they're proposing rates like those under President Carter.

Media reports in recent weeks say that Senate Democrats are considering a 3% surtax on income over $1 million to raise federal revenues. This would come on top of the higher income tax rates that President Obama has already proposed through the cancellation of the Bush era tax-rate reductions.

If the Democrats' millionaire surtax were to happen—and were added to other tax increases already enacted last year and other leading tax hike ideas on the table this year—this could leave the U.S. with a combined federal and state top tax rate on earnings of 62%. That's more than double the highest federal marginal rate of 28% when President Reagan left office in 1989. Welcome back to the 1970s.

Here's the math behind that depressing calculation. Today's top federal income tax rate is 35%. Almost all Democrats in Washington want to repeal the Bush tax cuts on those who make more than $250,000 and phase out certain deductions, so the effective income tax rate would rise to about 41.5%. The 3% millionaire surtax raises that rate to 44.5%.

But payroll taxes, which are income taxes on wages and salaries, must also be included in the equation. So we have to add about 2.5 percentage points for the payroll tax for Medicare (employee and employer share after business deductions), which was applied to all income without a ceiling in 1993 as part of the Clinton tax hike. I am including in this analysis the employer share of all payroll taxes because it is a direct tax on a worker's salary and most economists agree that though employers are responsible for collecting this tax, it is ultimately borne by the employee. That brings the tax rate to 47%.

Then last year, as part of the down payment for ObamaCare, Congress snuck in an extra 0.9% Medicare surtax on "high-income earners," meaning any individual earning more than $200,000 or couples earning more than $250,000. This brings the total tax rate to 47.9%.

But that's not all. Several weeks ago, Mr. Obama raised the possibility of eliminating the income ceiling on the Social Security tax, now capped at $106,800 of earnings a year. (Never mind that the program was designed to operate as an insurance system, with each individual's payment tied to the benefits paid out at retirement.) Subjecting all wage and salary income to Social Security taxes would add roughly 10.1 percentage points to the top tax rate. This takes the grand total tax rate on each additional dollar earned in America to about 58%.

Then we have to factor in state income taxes, which on average add after the deductions from the federal income tax roughly another four percentage points to the tax burden. So now on average we are at a tax rate of close to 62%.

Democrats have repeatedly stated they only intend to restore the tax rates that existed during the Clinton years. But after all these taxes on the "rich," we're headed back to the taxes that prevailed under Jimmy Carter, when the highest tax rate was 70%.

Steve Moore of the editorial board on the prospects for tax reform in Washington.

Taxes on investment income are also headed way up. Suspending the Bush tax cuts, which is favored by nearly every congressional Democrat, plus a 3.8% investment tax in the ObamaCare bill (which starts in 2014) brings the capital gains tax rate to 23.8% from 15%. The dividend tax would potentially climb to 45% from the current rate of 15%.

Now let's consider how our tax system today compares with the system that was in place in the late 1980s—when the deficit was only about one-quarter as large as a share of GDP as it is now. After the landmark Tax Reform Act of 1986, which closed special-interest loopholes in exchange for top marginal rates of 28%, the highest combined federal-state marginal tax rate was about 33%. Now we may be headed to 62%. You don't have to be Jack Kemp or Arthur Laffer to understand that a 29 percentage point rise in top marginal rates would make America a highly uncompetitive place.

What is particularly worrisome about this trend is the deterioration of the U.S. tax position relative to the rest of our economic rivals. In 1990, the highest individual income tax rate of our major economic trading partners was 51%, while the U.S. was much lower at 33%. It's no wonder that during the 1980s and '90s the U.S. created more than twice as many new jobs as Japan and Western Europe combined.

It's true that the economy was able to absorb the Bush 41 and Clinton tax hikes and still grow at a very rapid pace. But what the soak-the-rich lobby ignores is how different the world is today versus the early 1990s. According to the Organization for Economic Cooperation and Development, over the past two decades the average highest tax rate among the 20 major industrial nations has fallen to about 45%. Yet the highest U.S. tax rate would rise to more than 48% under the Obama/Democratic tax hikes. To make matters worse, if we include the average personal income tax rates of developing countries like India and China, the average tax rate around the world is closer to 30%, according to a new study by KPMG.

What all this means is that in the late 1980s, the U.S. was nearly the lowest taxed nation in the world, and a quarter century later we're nearly the highest.

Despite all of this, the refrain from Treasury Secretary Tim Geithner and most of the Democrats in Congress is our fiscal mess is a result of "tax cuts for the rich." When? Where? Who? The Tax Foundation recently noted that in 2009 the U.S. collected a higher share of income and payroll taxes (45%) from the richest 10% of tax filers than any other nation, including such socialist welfare states as Sweden (27%), France (28%) and Germany (31%). And this was before the rate hikes that Democrats are now endorsing.

Perhaps there can still be a happy ending to this sad tale of U.S. decline. If there were ever a right time to trade in the junk heap of our federal tax code for a pro-growth Steve Forbes-style flat tax, now's the time.

Mr. Moore is a member of the The Journal's editorial board.

"Sweet Justice:" B of A Foreclosed Upon By The Homeowners They Tried To Screw (VIDEO)

The best part is the look on their Lawyer's face as he calls the turn of events "sweet justice" and fights to suppress his glee...

COLLIER COUNTY, Fla. - A bank foreclosure story you've got to see to believe. A Collier County couple turns the tables on Bank of America, the bank that tried to foreclose on their home. Now, the family is foreclosing on the bank! Even bringing trucks and deputies ready to seize property.
The foreclosure nightmare started when Warren and Maureen Nyerges paid cash for a home owned by Bank of American in the Golden Gate Estates. They never had a mortgage whatsoever. But, the bank fouled it up and wound up issuing a foreclosure through their attorney.

Tables Turn:
Deputies and movers show up at bank to seize property for homeowner,
Wink News: , Floride.

Be seeing you. (Sooner I hope than later.)

Half of Last Month's New Jobs Came from a Single Employer — McDonald's

According to the unemployment data released this morning, the economy added only 54,000 jobs, pushing the unemployment rate up to 9.1 percent. However, this report from MarketWatch suggests the data is much worse than that:

McDonald’s ran a big hiring day on April 19 — after the Labor Department’s April survey for the payrolls report was conducted — in which 62,000 jobs were added. That’s not a net number, of course, and seasonal adjustment will reduce the Hamburglar impact on payrolls. (In simpler terms — restaurants always staff up for the summer; the Labor Department makes allowance for this effect.) Morgan Stanley estimates McDonald’s hiring will boost the overall number by 25,000 to 30,000. The Labor Department won’t detail an exact McDonald’s figure — they won’t identify any company they survey — but there will be data in the report to give a rough estimate.

If Morgan Stanley is correct, about half of last month's job growth came from the venerable fast-food chain. That is hardly the sign of a healthy economy.

Wall Street Baffled by Slowing Economy, Low Yields: Trader

New York Stock Exchange
Timothy A. Clary | AFP | Getty Images

Wall Street is having a hard time figuring out what to do now that the U.S. economy appears to be sputtering and yields are so low, Peter Yastrow, market strategist for Yastrow Origer, told CNBC.

"What we’ve got right now is almost near panic going on with money managers and people who are responsible for money," he said. "They can not find a yield and you just don’t want to be putting your money into commodities or things that are punts that might work out or they might not depending on what happens with the economy.

"We need to find real yield and real returns on these assets. You see bad data, you see Treasurys rally, you see all bonds and all fixed-income rally and then the people who are betting against the U.S. economy start getting bearish on stocks. That’s a huge mistake."

Stocks extended losses after the manufacturing fell below expectations in May and the private sector added only 38,000 jobs during the month.

"Interest rates are amazingly low and that, thanks to Ben Bernanke, is driving everything," Yastrow said. "We’re on the verge of a great, great depression. The [Federal Reserve] knows it.

"We have many, many homeowners that are totally underwater here and cannot get out from under. The technology frontier is limited right now. We definitely have an innovation slowdown and the economy’s gonna suffer."

However, he said he wouldn’t sell stocks.

"Any bears out there better be careful because the dividend yields on these stocks look awesome relative to all the other investment vehicles out there," Yastrow said. "So bears are going to have to find a new way to express their discontent with the U.S. economy."

NPC servers set to strike over tip sharing, proposed wage freeze

Two sides will meet Friday for conciliation talks; workers could walk by Canada Day

The servers who work at four of the Niagara Parks Commission's restaurants are "pissed off" that the NPC wants them to continue sharing their tips with restaurant management staff after being told to take a two-year wage freeze, said an organizer with the union representing the workers.

Now, because of the dispute, the servers have voted 100% in favour of strike action and could walk out before the Canada Day long weekend, said Alex Dagg, Canadian director of the Workers United union.

"It reflects that people are pissed off at the Niagara Parks Commission and that they support the union and they're willing to take that action if necessary," Dagg said.

The two sides will resume talks Friday after negotiations reached a stalemate, with a conciliation officer expected to discuss the hot-button issues with the two sides separately.

NPC chair Fay Booker said she hopes the two sides can avert a strike.

"I'm really hoping that we come to a mutual resolution," Booker said. "I want our staff to be satisfied that they're being respected."

Close to 100 workers belong to the Workers United Local 2347 union and work at Elements on the Falls, Edgewaters Tap and Grill, Whirlpool Golf Course, and Legends on the Niagara golf course.

On May 19, 100% of the union's members voted in favour of a strike if necessary.

The servers' previous contract expired Dec. 31, 2010.

In previous bargaining rounds, the union agreed to share tips with management staff as a concession for securing a "decent wage" to start of $9 an hour for adult workers and $8.90 an hour for student staffers, the union said.

That wage is less than the provincial $10.25-per-hour minimum wage but on par with the $8.90 starting wage for servers at licensed establishments in Ontario.

Common practice for workers across the province who earn that $8.90 servers wage is that they make up for the lower hourly amount with their tips.

Although, as Booker noted, some restaurants pool their tips for all of the restaurant staff to share.

"It's actually quite common in the industry that there is a sharing of tips with all the staff that are operating the restaurant," Booker said. "It's staff, it's not the company. Niagara Parks, the company, doesn't take any of the tips. It's people that are working at the site, if you're a frontline supervisor at a banquet, for example."

But Dagg said customers of those Niagara Parks restaurants would likely be "offended" if they were to find out that their tips aren't going to their waiter, but to a pool that is also shared with management staff who make a "much higher" wage than the servers.

"I actually think that if a lot of the customers knew that some of their tip was going to management staff, they might be kind've offended," Dagg said.

Dagg said she doesn't know exactly what the management staff makes because the union doesn't represent them.

"We don't have full disclosure of that because we don't bargain for them, but it's a substantially higher hourly rate than what the servers get," she said.

Booker could not say what the restaurant management staff are paid.

"I don't know if we would actually share what an individual's salary is," Booker said. "I would think that's going to fall into a personnel matter."

The Real Truth on U.S. Phantom-Jobs

In many previous commentaries I have lamented the fact that the “statistics” produced by the U.S. Bureau of Labor Statistics are now so severely doctored as to have lost almost any relevance or analytical value. With mere “exaggerations” we can at least estimate points of reference and then proceed with analysis. However, the fabrications produced by the BLS have severed virtually any connection to the real world.

Where we can still find some small analytical value in these numbers is to compare the differences in the BLS’ (revised) aggregate numbers with the “headline” lies it has been dispensing each month. Unfortunately, the revised aggregate numbers only provide us with data up to the end of 2010, however we can still reach some interesting conclusions based upon the available numbers.

The U.S. propaganda-machine tells us that the “Great Recession” ended in March 2009, while the BLS has been reporting monthly “job gains” in nearly every report since that time. As a matter of simple arithmetic, if the U.S. economy began adding jobs in the Spring of 2009 (and the job losses had supposedly eased in the months immediately prior to that), then when we looked at the total number of employed workers in the U.S. (as calculated by the same BLS) we should have seen the year-over-year numbers turn positive no later than the end of 2009.

This is not what the BLS’ own data indicates. In its own “Comparison of All Employees” (seasonally adjusted) we see that December of 2009 marked the absolute bottom for total employment in the U.S. In other words, during the first eight months of “job creation” during this supposed “economic recovery” the U.S. economy lost more jobs on a net basis.

By the summer of 2010, the Obama regime was bragging that it had “created or saved” over 3 million jobs – based largely upon the fraudulent monthly “non-farm payrolls” reports of the BLS. Yet by the end of 2010 we see that total employment in the U.S. had inched upward by a mere 1 million jobs from the absolute low.

Note that this feeble level of “job creation” is less than half the amount of new jobs needed just to keep up with population growth. In other words, throughout this mythical “recovery” U.S. unemployment has worsened (proportionately) month-after-month. Keep in mind that by itself population growth will always generate more jobs. New additions to the population mean more “mouths” to feed, more people who need clothes, housing, and an endless assortment of consumer goods.

Obviously population growth alone could have accounted for that entire, paltry one million jobs. This means that despite the largest “stimulus package” in the history of the world, and more than $10 trillion in additional Fed “credit” and hand-outs to Wall Street that the U.S. economy has generated nothing in terms of jobs – and in fact has lost ground due to the population growth which has occurred over that period.

Of course the BLS isn’t the only propaganda-mouthpiece boasting about “job creation”. The Federal Reserve itself likes to make grandiose claims about fantasy-jobs which never existed. New Fed-head Janet Yellen claims that Fed money-printing (by itself) will have “created 3 million jobs” by the end of 2012. And critics of this piece will argue that (supposed) job-creation has been “even stronger” in 2011 than in 2010.

The reality here is that the “stronger growth” in jobs this year is 100% accounted for the bigger lies the BLS has been adding with its thoroughly discredited “birth/death model”. Who has “discredited” the birth/death model? The BLS itself.

Over the last few years, the BLS has added roughly 1 million “phantom jobs” per year via its birth/death calculation. And then after each of those years it “revises” its calculation (using real data) and then subtracts all of those jobs. It is the BLS itself which has calculated that none of these “birth/death” jobs ever existed.

This year, if we subtract the 600,000+ phantom-jobs added by the birth/death model since January, we see virtually all of the supposed “new jobs” vanish. And keep in mind that all of the numbers from this year will be “revised” again (lower), just as the BLS has been doing every year.

Thus, as we near the mid-point of 2011, here is the reality of the U.S. economy – minus the lies of the BLS. At best, since the U.S. “Great Recession” supposedly ended the U.S. economy has added roughly 1 million new jobs: less than one new job for every eight lost-jobs which have (officially) been recorded since the U.S. economy crashed. And those jobs were generated not by real “economic growth”, but simply due to a swelling population.

In terms of the “unemployment rate”, the numbers are unequivocal: the percentage of employable Americans who are without jobs continues to go up every month – due to the combined effect of the still extremely high weekly lay-offs, plus the fact that the number of “new jobs” doesn’t come close to even matching the growth in population.

We’ve already been through this charade in the U.S. housing market. Again we were told by countless media talking-heads and “experts” (on countless occasions) that the U.S. housing market had “bottomed” in 2009. These shills even had the audacity to claim there was a “recovery” taking place in the U.S. housing market – as opposed to merely a “dead-cat bounce” after the worst real estate crash in the history of the U.S. economy. Returning to the real world, we have now seen U.S. housing prices plunge through that supposed “bottom”, meaning that even the propagandists have been forced to abandon their lie about a “recovery” in this sector of the economy.

We are about to reach the same point with the U.S. jobs market. After two years of lying about “gains” of phantom-jobs, even the propagandists themselves are now talking about the “jobs market stalling”. The fraudulent BLS monthly report released today claimed that the U.S. economy added an anemic 54,000 jobs. Buried beneath the “headline”, the BLS quietly added over 200,000 mythical birth-death jobs. What this means is that even when we add in all of the other statistical deceptions which the BLS uses in falsifying these reports (such as bogus “seasonal adjustments”) that without the birth/death lie the U.S. economy would have lost 150,000 jobs in May.

Obviously there was never more than a tiny trickle of job-creation in the U.S. during this pretend-recovery. Obviously the U.S. economy is again losing jobs on a monthly basis. And we arrive at this conclusion just as the last of the Obama “stimulus” dollars are being spent and with the Federal Reserve again pretending that it is about to “end” its own gravy-train of $trillions in “free money” (for Wall Street).

Meanwhile, brain-dead Republicans in Washington are flexing their muscles and talking about “slashing spending”. One has to wonder whether any of these ‘Einsteins’ are familiar with the word “suicide”?

The situation is now very clear with the U.S. economy. If Washington politicians follow through on their promise/threat to subtract from current spending levels, the anemic U.S. economy will completely implode – and as revenues collapse even from today’s extremely depressed levels, the U.S. is facing a Soviet Union-style disintegration in less than two years. Given that the most extreme/reckless “stimulus” in the history of the world did nothing but allow the U.S. economy to “tread water”, removing all that stimulus from this still-crippled economy can only result in catastrophe.

The other scenario is equally bleak. With the U.S. economy even weaker than when it first crashed in 2007, and much more bloated with debt, it would require a significantly more extreme “stimulus” program just to allow the U.S. economy to avoid collapse. Actual “economic growth” is now a mathematical impossibility.

With the U.S dollar already teetering on an historic collapse when the market thought that the Fed would “end” its reckless money-printing, should it instead ramp-up this currency-dilution even faster, the only possible result is the collapse of the U.S. dollar (and the hyperinflation this directly implies).

The cheap parlor tricks of this “smoke and mirrors” economy have run their course. The 10’s of millions of Americans without jobs will soon become 10’s of millions without food, if state Republicans follow through on their plans to slash unemployment benefits, pension benefits, and health-care benefits.

If they don’t follow through on these misguided threats, and simply continue racking-up the same humungous deficits, hyperinflation looms directly ahead. The only thing we can say for sure is that regardless of which of these two economic catastrophes takes place there will be no jobs for Americans.

Goldman Sachs Lost 98% of Libya’s $1.3B Sovereign Wealth Fund Investment

As civil war roars on in Libya and Colonel Muammar Gadhafi vows to remain in power, reports surfaced that the Northern African country entrusted $1.3 billion through its sovereign wealth fund to Goldman Sachs in 2007, of which the investment bank lost approximately 98%, sparking the ire of Libyan officials. The fascinating drama includes Goldman offering Libya preferred equity and debt which could’ve made it one of the investment bank’s largest shareholders during the onset of the crisis, as well as intimidation and violent threats by Libyan officials.

Libya’s sovereign wealth fund, the Libyan Investment Authority (LIA), was among many funds set up by emerging economies to grow their export-based riches. When the U.S. government lifted sanctions in 2004 prohibiting American firms from doing business with and investing in Libya, Western financial institutions flocked to the oil-rich nation, according to a recent investigation by the Wall Street Journal.

The LIA, headed by chief investment officer Hatem el-Gheriani and Chairman Mustafa Zarti approached 25 different financial institutions around June 2007, when the LIA was launched with approximately $40 billion in assets. Despite forging its strongest relationships with Goldman Sachs, the LWI also invested with Societe Generale, HSBC, JP Morgan, Carlyle Group, Lehman Brothers, and Och-Ziff Capital Management Group.

Recent information, derived from “interviews with close to a dozen people who were involved in the matter, and on Libyan Investment Authority and Goldman documents,” show that Goldman essentially lost all of Libya’s $1.3 billion investment in option contracts on a basket of currencies and six stocks. (Read Amidst Rumors That Gadhafi’s Been Shot, Swiss And Brits Freeze His Assets).

Goldman executives including Youssef Kabbaj, executive in charge of North Africa, and Driss Ben-Brahim, an Arabic-speaking emerging-markets trading chief, met with Zarti and Gheriani in London and in Libya’s capital, Tripoli. After an initial investment of $350 million in two of Goldman’s most exclusive funds, the Libyans were ready for more.

Between January and June 2008, Goldman execs set up a $1.3 billion investment in option contracts on Citigroup, Italy’s UniCredit, Spain’s Banco Santander, German insurer Allianz, French energy company Electricite de France, Italian energy company Eni. The investment, which also included a basket of currencies, worked on the thesis that the stocks would rise in value.

But, as the crisis kicked in, the underlying securities took a nose dive, taking the value of the investment down to just $25.1 million by February 2010, a mere 2% of the original investment, according to internal Goldman documents.

Massive losses sparked the ire of Zarti, who met with Goldman’s Kabbaj and another employee at the LIA’s headquarters in July ’08 and, “like a raging bull,” cursed and threatened the Goldman employees. Zarti, according to the Journal, is a close friend of Col. Gadhafi and maintains close ties with the Col.’s London School of Economics-educated son, Saif al-Islam Gadhafi. Kabbaj and the other Goldman employee were assigned body guards until they left the country the next day.

In their attempts to fix the relationship and make up for the losses, Goldman executives offered Libya various investment options that included large stakes in the company. Negotiations which included CEO Lloyd Blankfein, CFO David Viniar, and European top exec Michael Sherwood, resulted in the company offering to finance a $3.7 billion investment that would give LIA $5 billion in stock and a payment of 4% to 9.25% annually for 40 years. There were other offers including preferred shares, unsecured debt, a special purpose vehicle in the Cayman Islands, and investments in credit default swaps.

After meeting for the last time in June 2010, the deal never materialized. As of that date, the LIA had about $53 billion in assets. In 2011, after civil war erupted in Libya and Gadhafi said he would not step down, the U.S. government seized about $37 million in Libyan funds, including some still managed by Goldman Sachs, according to the Journal. (Read Gadhafi’s $30 Billion In US Assets Blocked By Treasury).

Gaddafi's Stolen Billions: Max Keiser Explains 'Financial Terrorism'

Peter Schiff: 'US economy heading for disaster'

China Has Divested 97 Percent of Its Holdings in U.S. Treasury Bills

Dees Illustration
Terrence Jeffrey
CNS News

China has dropped 97 percent of its holdings in U.S. Treasury bills, decreasing its ownership of the short-term U.S. government securities from a peak of $210.4 billion in May 2009 to $5.69 billion in March 2011, the most recent month reported by the U.S. Treasury.

Treasury bills are securities that mature in one year or less that are sold by the U.S. Treasury Department to fund the nation’s debt.

Mainland Chinese holdings of U.S. Treasury bills are reported in column 9 of the Treasury report linked here.

Until October, the Chinese were generally making up for their decreasing holdings in Treasury bills by increasing their holdings of longer-term U.S. Treasury securities. Thus, until October, China’s overall holdings of U.S. debt continued to increase.

Since October, however, China has also started to divest from longer-term U.S. Treasury securities.

Thus, as reported by the Treasury Department, China’s ownership of the U.S. national debt has decreased in each of the last five months on record, including November, December, January, February and March.

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Gates vows new weapons for US role in Asia

Gates: US military would maintain a "robust" presence across Asia
© AFP Roslan Rahman

SINGAPORE (AFP) - Defense Secretary Robert Gates on Saturday vowed the US military would maintain a "robust" presence across Asia that includes new high-tech weaponry to protect allies and safeguard shipping lanes.

Seeking to reassure Asian countries mindful of China's growing power and Washington's fiscal troubles, Gates told a security conference in Singapore that Washington's commitment to the region would not be scaled back.

Instead, the US military would expand its presence, sharing facilities with Australia in the Indian Ocean and deploying new littoral combat ships (LCS) to Singapore where it has regular access to naval facilities, he said.

The LCS is a speedy, lighter ship designed to operate in shallow coastal waters. The waters around Singapore, a staunch US ally, are among the world's busiest commercial sea lanes.

Singapore's defence ministry told AFP the US was exploring the deployment of "one or two" vessels usually manned by 75 crew per ship.

"The LCS is expected to make other port calls in the region to engage regional navies through activities such as exercises and exchanges," the ministry said in an emailed reply.

Gates said the US was also considering "prepositioning" supplies to improve disaster response in the region, which has been hit in recent years by a slew of natural disasters including the massive March quake and tsunami in Japan.

The Defense Secretary, who steps down at the end of the month after more than four years in office, said the US military will conduct more port calls and training programmes with Asian countries as part of its security commitment.

His speech, made before he flew later Saturday to Kabul, came as countries facing a rising China watch the US for signs of its long-term security plans in Asia, amid mounting disputes over territorial rights in the potentially resource-rich South China Sea.

Gates warned that clashes may erupt in the South China Sea unless nations with conflicting territorial claims adopt a mechanism to settle disputes peacefully.

"I fear that without rules of the road, without agreed approaches to deal with these problems, that there will be clashes. I think that serves nobody’s interests," he said.

On the US presence in Asia, Gates cited investments in radar-evading aircraft, surveillance drones, warships and space and cyber weapons as proof that Washington was "putting our money where our mouth is with respect to this part of the world -- and will continue to do so".

The planned weapons programmes represent "capabilities most relevant to preserving the security, sovereignty, and freedom of our allies and partners in the region", he said.

They also include maintaining America's nuclear "deterrence" amid continuing concern over North Korea's atomic weapons.

Senior US officials have long pointed to China's military buildup, saying Beijing's pursuit of anti-ship and anti-aircraft missiles as well as cyber warfare capabilities pose a potential threat to US naval power in the region.

Without naming China, Gates said the new hardware was a response to "the prospect that new and disruptive technologies and weapons could be employed to deny US forces access to key sea routes and lines of communications".

Although the Pentagon's budget would come under growing scrutiny and military spending in some areas would be cut back, Gates predicted that investments in the key "modernisation" programmes would be left untouched.

This would ensure "that we will continue to meet our commitments as a 21st century Asia-Pacific nation -- with appropriate forces, posture, and presence", he said.

Gates held talks with his Chinese counterpart Liang Guanglie on the sidelines of the Singapore meeting.

He said efforts to promote a security dialogue with Beijing had borne fruit and military relations had steadily improved in recent months.