0 German Economy Shrinks Most in Three Years; Situation Significantly Worse Than Mood

Germany is in recession. It's not a "technical recession", no matter how anyone labels it. And the recession will pick up steam as the year progresses.

Please consider Germany’s economy shrinks most in 3 years as crisis hits eurozone powerhouse.

WIESBADEN, Germany — The German economy was hit hard by the eurozone crisis in the final quarter of last year, shrinking more than at any point in nearly three years as traditionally strong exports and investment slowed, the Statistics Office said on Tuesday.

Economists expect Germany to bounce back after forecasts for weak growth in the first quarter but Europe’s largest economy will be less of a pillar of support for the rest of the currency bloc, where many of its peers are deeply in recession.

Gross domestic product shrank by 0.5% in the final three months of 2012, the worst quarterly performance since Germany fell into a recession during the global financial crisis in 2008/2009 and only the second contraction since it ended.

The parlous fourth quarter pushed overall growth for the year down to 0.7%, a sharp slowdown from the 3.0% registered in 2011 and a post-reunification record of 4.2% in 2010. The 2012 figure was a tad below a Reuters consensus forecast for growth of 0.8%.

The government is due to publish an estimate for 2013 growth on Wednesday. An official from the Economy Ministry said growth would be 0.4% this year, less than half the government’s existing forecast of 1.0%.

Situation Significantly Worse Than Mood

“The situation is significantly worse than the mood. But the eurozone crisis is far from over. It’s wishful thinking to expect otherwise,” said Clemens Fuest, incoming head of ZEW research institute.

I certainly concur with Feust. Note the GDP downgrade from 1.0% to .4% for 2013. Expect another and another. The only thing the Europe has going for it is a recovering bond market but don't expect that to last either.

Italy and Spain are known basket cases. More importantly, France, the Hidden Zombie in Europe, is about to take a deep plunge.

Finally, the recent pickup in China is not sustainable, and the US is clearly weakening.

Since Germany cannot export to itself, its export machine will grind to a halt as I said well over a year ago.

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

0 Obamacare Sticker Shock; Expect Insurance Premiums to Soar; Aetna CEO Says Some Rates Will Double

Consumers are about to find out that the Affordable Care Act, widely known as Obamacare is not exactly affordable. The Wall Street Journal says Health-Insurance Sticker Shock is just around the corner.

Health-insurance premiums have been rising—and consumers will experience another series of price shocks later this year when some see their premiums skyrocket thanks to the Affordable Care Act, aka ObamaCare.

The reason: The congressional Democrats who crafted the legislation ignored virtually every actuarial principle governing rational insurance pricing. Premiums will soon reflect that disregard—indeed, premiums are already reflecting it.

Central to ObamaCare are requirements that health insurers (1) accept everyone who applies (guaranteed issue), (2) cannot charge more based on serious medical conditions (modified community rating), and (3) include numerous coverage mandates that force insurance to pay for many often uncovered medical conditions.

Guaranteed issue incentivizes people to forgo buying a policy until they get sick and need coverage (and then drop the policy after they get well). While ObamaCare imposes a financial penalty—or is it a tax?—to discourage people from gaming the system, it is too low to be a real disincentive. The result will be insurance pools that are smaller and sicker, and therefore more expensive.

Eight states—New Jersey, New York, Maine, New Hampshire, Washington, Kentucky, Vermont and Massachusetts—enacted guaranteed issue and community rating in the mid-1990s and wrecked their individual (i.e., non-group) health-insurance markets. Premiums increased so much that Kentucky largely repealed its law in 2000 and some of the other states eventually modified their community-rating provisions.

While ObamaCare won't take full effect until 2014, health-insurance premiums in the individual market are already rising, and not just because of routine increases in medical costs. Insurers are adjusting premiums now in anticipation of the guaranteed-issue and community-rating mandates starting next year.

Although President Obama repeatedly claimed that health-insurance premiums for a family would be $2,500 lower by the end of his first term, they are actually about $3,000 higher—a spread of about $5,500 per family.

Aetna CEO Sees Obama Health Law Doubling Some Premiums

Bloomberg reports Aetna CEO Sees Obama Health Law Doubling Some Premiums

Health insurance premiums may as much as double for some small businesses and individual buyers in the U.S. when the Affordable Care Act’s major provisions start in 2014, Aetna Inc. (AET)’s chief executive officer said.

While subsidies in the law will shield some people, other consumers who make too much for assistance are in for “premium rate shock,” Mark Bertolini, who runs the third-biggest U.S. health-insurance company, told analysts yesterday at a conference in New York. The prospect has spurred discussion of having Congress delay or phase in parts of the law, he said.

“We’ve shared it all with the people in Washington and I think it’s a big concern,” the CEO said. “We’re going to see some markets go up as much as 100 percent.”

The Obama administration said last year that “middle-class families” buying insurance through the law’s new online exchanges may save as much as $2,300 a year starting in 2014. Nick Papas, a White House spokesman, declined to comment on Bertolini’s predictions.

The CBO estimated in 2009 that the law will increase premiums 10 percent to 13 percent for individuals and have little effect on small and large-employer plans. After the subsidies are factored in, individual bills will go down by about 60 percent, the agency predicted.

Fantasyland CBO Projection

Obamacare pretty much did what Romneycare did and the results will be the same - higher premiums.

Specifically, Obamacare mandated acceptance of anyone, provided insufficient penalties for the young and healthy to drop out, and mandated an increase in things that are covered.

The CBO added all of that up and concluded prices would go down by as much as 60 percent.  I wonder what alternate universe the CBO lives in.

How Much of an Increase?

Expected increases depend on existing state rules as well as company size. States foolish enough to already have Obamacare-like mandates will be impacted the least.

Big employers will fare best, small companies and individuals will be hit the hardest. Wasn't Obamacare supposed to fix that?

The Journal notes that residents of New York, New Jersey, and Vermont already pay twice what others pay. Those in Massachusetts (the home of Romneycare) shell out almost as much.

Residents of Arizona, Arkansas, Georgia, Idaho, Iowa, Kentucky, Missouri, Ohio, Oklahoma, Tennessee, Utah, Wyoming and Virginia will likely see the largest increases — somewhere between 65% and 100%. Another 18 states, including Texas and Michigan, could see their rates rise between 35% and 65% says Journal writers Merrill Matthews and Mark Litow.

Mr. Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Mr. Litow is a retired actuary and past chairman of the Social Insurance Public Finance Section of the Society of Actuaries.

Aetna Overstating Increases?

It's possible, if not likely, that Aetna is trumping up the increases so when they do happen,  a mere 35-50% will not seem so large vs. the projected 100% increases. Then again, Aetna may fully intend to hike some rates by 100% over the course of a few years.

It's also possible that some individual policy-holders in high-cost states may benefit slightly, but if so it will be at huge expense to everyone else. 

Thank Obama and Romney

Thanks Obama, and while we're at it, thank you too Romney because Obamacare and Romneycare are for all essential purposes, one and the same.

If you get a raise this year, don't be surprised if all of it (if not more than all of it)  is eaten away in higher health-care premiums.

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

0 Iran Removes Euro and Dollar From Trade Exchanges; More Symptoms of Iranian Hyperinflation

Inquiring minds note that Iran removes euro and dollar from its trade exchanges.

Minister of Economic Affairs and Finance Shamseddin Hosseini said Monday that Iran would no longer use euro and dollar in its trade exchanges according to a decision made by the government's economic working-group. Iranian state news agency IRNA writes about this.

"Iran's government is determined to remove euro and dollar from its foreign trade and is to change its foreign trade pattern," said the minister while speaking to reporters at the end of a meeting with the representatives of the Economic Cooperation Organization (ECO) member countries.

Symptoms of Hyperinflation

Iran removed the Euro and dollar from its foreign trade patterns not because it wished to do so, but rather because it has no euro or dollar reserves it can use.

Regardless of its official statements on trade, euros and dollars are hoarded by Iranian consumers in the black market.

I spoke about the inflation nightmare in Iran on October 4, 2012 in Hyperinflation Hits Iran; Monthly 70% Inflation Rate; Reflections on Economic Warfare. Here are a few snips:

The oil embargo against Iran has worked, assuming one defines "work" as a destruction of the Iranian riall which has fallen 33% in a week, 57% in three months and 75% in a year vs. the US dollar.

On Wednesday, the Tehran bazaar closed in turmoil and police used teargas and batons on demonstrators protesting the currency crisis.

Monthly 70% Inflation Rate

Steve Hanke, Professor of Applied Economics at Johns Hopkins University, has also been following the Iranian currency crisis. He pinged me with these thoughts yesterday.

Hello Mish

For months, I have been following the collapse of the Iranian rial, tracking black-market exchange-rate data from foreign-exchange bazaars in Tehran. Using the most recent data, I now estimate that Iran is experiencing a monthly inflation rate of nearly 70%, indicating that hyperinflation has struck in Iran.

Cordially,
Steve

Iran's Lying Inflation Statistics

As soon as I saw trade exchange news I looked for an update from Steve Hanke. You can find one written January, 9 on Cato: Iran’s Lying Inflation Statistics

Today, the Central Bank of Iran released its inflation statistics for 2012. Remarkably, despite all of the international notoriety surrounding Iran’s outbreak of hyperinflation in October, the Central Bank claims that Iran experienced an annual inflation rate of only 27.4%.

The Central Bank has a habit of failing to release useful economic data, and what it does release often has what I would describe as an “Alice-in-Wonderland” quality. Indeed, the Central Bank’s official annual inflation rate is grossly off from the true rate. Using a well-established methodology, I estimate that Iran experienced an annual inflation rate of 110% during 2012.

The use of lying statistics is not a first for a country with hyperinflation. Indeed, when inflation begins to spiral out of control – such as the most recent cases in Zimbabwe and North Korea – it’s all too common for governments to wrap their statistics in a shroud of secrecy.

Official Exchange Rates and Clouds of Secrecy

One way to hide in a cloud of secrecy is to prohibit trades in other currencies. Iran did just that.

Officially, trade is in the Iranian rial. Unofficially, euros and dollars are precious on the black market.

By the way, anyone remember the silly claims the US went to war with Iraq because it was about to price oil in euros? If not, here is a refresher course.

• October 6, 2009: Ridiculous Hype Over Secret Oil Meetings
• October 13, 2005: Oil Priced in Euros. Would it matter?
• February 28, 2011: US Dollar About to Lose Reserve Currency Status - Fact or Fantasy?

Iranian oil is no longer available for either euros or dollars. Yet hyperinflation hit Iran, not the US, not Europe.

Iran's biggest problem is the embargo, of course. However, it is still humorous to read the silly pontifications regarding the demise of the dollar if oil was not priced in dollars.

Oil priced in euros did not matter then, and it would not matter now, embargo or not.

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

"Wine Country" Economic Conference Hosted By Mish
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0 Obama "No Ransom For Crashing Economy"; Republicans Threaten Default; Things Progressing Right on Cue

I am pleased to report the debt-limit charade is progressing in order, right on cue, perhaps slightly ahead of schedule.

In Trillion Dollar Coin Idea Dies Sudden Death; Treasury, Fed Oppose Using Platinum Coin; Republican Strategy I proposed this seven-stage sequence of events.

Politics of the Debate

1. Obama will chastise Congress with talk of financial Armageddon if Congress does not raise the debt ceiling.
2. Congress will pretend to hold the president hostage
3. The secretary of the Treasury will get into the act with its own version of the default debate
4. Perhaps a few payments on non-critical budget items will be temporarily skipped
5. Wall Street will feign panic
6. Constituents will pressure Congress to approve a new debt ceiling
7. Congress will raise the ceiling with another useless warning about next time

Obama Chastises Congress With Talk of Financial Armageddon

Exhibit 1A: Bloomberg reports Obama: No `Ransom’ for Debt Ceiling

“The issue here is whether or not America pays its bills,” Obama said. “We are not a deadbeat nation.”

He also issued a warning about the potential tactics that House Republicans in particular are discussing, including demanding a new round of spending cuts attached to each incremental increase in the debt ceiling.

“They will not collect a ransom for not crashing the American economy,” Obama said.

Increase the Debt Ceiling or Else

Exhibit 1B: CNBC reports Obama: Congress Must Increase Debt Ceiling or Else

President Barack Obama warned Congress on Monday that it must raise the debt ceiling or risk a "self-inflicted wound on the economy." Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner also delivered ominous calls for action.

"We've got to stop lurching from crisis to crisis to crisis," Obama told reporters at the White House in the last news conference of his first term.

Hours later, Geithner said in a letter to Congress that even a brief default would be "terribly damaging." And Bernanke said "we're not out of the woods yet," despite the deal to avoid the "fiscal cliff."

Congress Pretends to Hold the President Hostage

Exhibit 2: Politico reports House GOP 'Seriously Entertaining' Debt Default Idea

House Republicans are seriously entertaining dramatic steps, including default or shutting down the government, to force President Barack Obama to finally cut spending by the end of March.

The idea of allowing the country to default by refusing to increase the debt limit is getting more widespread and serious traction among House Republicans than people realize, though GOP leaders think shutting down the government is the much more likely outcome of the spending fights this winter.

“I think it is possible that we would shut down the government to make sure President Obama understands that we’re serious,” House Republican Conference Chairwoman Cathy McMorris Rodgers of Washington state told us. “We always talk about whether or not we’re going to kick the can down the road. I think the mood is that we’ve come to the end of the road.”

GOP officials said more than half of their members are prepared to allow default unless Obama agrees to dramatic cuts he has repeatedly said he opposes. Many more members, including some party leaders, are prepared to shut down the government to make their point. House Speaker John Boehner “may need a shutdown just to get it out of their system,” said a top GOP leadership adviser. “We might need to do that for member-management purposes — so they have an endgame and can show their constituents they’re fighting.”

Secretary of Treasury Gets Into the Act

Exhibit 3A: Bloomberg reports Geithner Says Debt Limit Measures May Run Out by Mid-February

U.S. Treasury Secretary Timothy F. Geithner said so-called extraordinary measures the Obama administration is taking to avoid breaching the federal debt ceiling would work only until mid-February to early March and warned that a failure by Congress to raise the limit could “impose severe economic hardship” on the country.

“Congress should act as early as possible to extend normal borrowing authority in order to avoid the risk of default and any interruption in payments,” Geithner said in a letter today to House Speaker John Boehner and other congressional leaders. The letter was released by the Treasury Department.

Fed Gets Into the Act

Apologies offered for not explicitly naming the Fed as point 4 of an 8-point scenario. Instead I offer the Fed as exhibit 3B, lumping the Fed and Treasury together.

Exhibit 3B: Bernanke Says 'We're Not Out of the Woods' Despite 'Fiscal Cliff' Deal

Although the "fiscal cliff" deal made "some progress" in resolving the nation's debt problem, "we're not out of the woods yet," Federal Reserve Chairman Ben Bernanke said Monday.

"We are approaching a number of other fiscal critical watersheds," Bernanke told the University of Michigan's Gerald R. Ford School of Public Policy. "We have the funding of the government, we have the so called sequester…and we have the infamous debt ceiling which will come into play."

Echoing comments made earlier in the day by President Barack Obama, Bernanke said raising the debt ceiling merely gives the government the ability to pay its existing bills.

"It doesn't create new deficits, it doesn't create new spending," he said. He said it was like a family deciding that to save money, it won't pay its credit card bill.

Progress or Lies?

Bernanke states that "some progress" has been made. While technically true, it's rather like removing one grain of sand from the Sahara Desert on a mission to remove all the sand, calling the effort "progress".

Clearly we are proceeding along the lines of my 7-point scenario. However, things are a bit ahead of schedule.

What to Expect Next

Allegedly, money will not run out until mid-February. So there is plenty of time for Obama to get back into the act, Republicans to reiterate "we really mean it" when they don't, and for the Treasury, the Fed, and Obama to preach more financial Armageddon talk.

Somewhere along the line, Wall Street will feign panic over the mess. You can also put into the bank another Obama Twitter campaign, with Obama telling everyone to "Tweet" about irresponsible Republicans. Also expect an Obama initiated Email campaign telling constituents to call or Email Congress demanding action.

I do expect Republicans to hold out until pressure from constituents comes in and Wall Street has a hissy fit (which could be as little as 50 points on the S&P).

Eventually, Republicans will cave in with some announced "compromise" to cut some trivial amount from the budget, with promises to negotiate harder next time.

Both sides will declare victory.

Why bother?

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

0 Consumers Cut Back on Toilet Paper, Pampers, Huggies; Payroll Tax Bite to Subtract .8% from GDP

For some reason, many people are surprised to see a drop in their first paycheck of the year.  Yet, everyone should have known the payroll tax deduction was supposed end January 1, 2013.

Perhaps people put faith in the notion that when it comes to politics, "temporary" typically means permanent. Of course, some people were likely oblivious to the whole thing, simply not paying attention to the original proposal and when it was set to expire.

To be fair, a temporary two-year Congressional measure that lasts precisely two years, might easily be considered "unexpected".

Consumers Cut Back on TP, Pampers, Huggies, Purina

Regardless of what people thought or expected, the Payroll Tax Takes a New Bite.

A temporary cut in Social Security withholdings gave Americans hundreds of extra dollars to spend over the past two years. But Congress allowed that break to expire during the wrangling over the fiscal cliff, meaning that Social Security taxes have reverted to 6.2% of salary from the temporary 4.2%.

Kari Barker, an accountant in Salt Lake City, recently received her first 2013 paycheck and realized that she and her husband will take home $250 less every month. "I used to be a diapers snob and would only buy Pampers or Huggies," Ms. Barker said. "Now I buy Target's house brand, because it's two-thirds the cost."

Procter & Gamble Co. (PG), which owns Charmin, Pampers and other brands, declined to comment, citing the company's scheduled earnings report this month. Huggies maker Kimberly-Clark Corp. (KMB) also declined to comment.

Roberton Williams, a tax economist and the Sol Price Fellow at the Tax Policy Center in Washington, said the expiration of the payroll-tax cut will leave the average American household with $18 to $20 less to spend each week, or $900 to $1,000 a year.

For the country's consumers as a whole, Mr. Williams said, that is a decline of $120 billion from last year. The total comes to about 0.8% of U.S. gross domestic product and is nearly equivalent to the most recent full-year sales at P&G, J.C. Penney Co. (JCP) and McDonald's Corp. (MCD) combined.

Edward Riggle, a 61-year-old in Virginia Beach, Va., said he noticed a nearly $40 increase in the amount of Social Security tax withheld on his recent pay stub. Mr. Riggle, a Vietnam War veteran who retired from the Navy in 1991 and now works at a military call center, calculated that he will pay $1,036 more in Social Security tax this year, a large unexpected decrease in his take-home pay.

In response, Mr. Riggle said he changed the withholding amounts for his federal and state taxes to make sure no excess cash is kept from his paychecks and is looking to save money on regular purchases.

On a recent shopping trip, Mr. Riggle and his wife decided not to buy their usual Charmin toilet paper and Purina One dog food, choosing less-expensive versions instead.

Payroll Tax Bite to Subtract .8% from GDP

Bear in mind that analysts at J.P. Morgan reduced 4th quarter GDP estimates to .8% from 1.5%. Analysts at Morgan Stanley cut their forecast to 0.7% from 1.5%.

(For details, please see Global PC Shipments Decline 6.4%; Best Buy Sales Flat; Toys R Us Sales Decline 4.5%; 4th Quarter GDP Estimate Reduced to .8% from 1.5%).

Note that GDP is already well below the stall rate, which economists generally consider to be 2%.  Thus, a .8% hit to GDP may contract growth, especially if consumers pull back hard in the first quarter.

If GDP does go negative, expect to hear ridiculous terms bantered about such as "technical recession".

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

0 Interactive Map: Job Gains and Losses in the Recovery by Job Type (Healthcare, Education, Mining, Construction, Finance, Real Estate, etc)

Inquiring minds are investigating job creation and losses during the economic recovery. Data for following Tableau Software interactive map is courtesy of Economic Modeling Specialists.

The interactive map below may take a while to load. Please give it time on a slow connection.

Map Usage Notes

Hover your cursor over any line to see additional information. You can also select a single category from the drop-down boxes to isolate a particular type of job.

Number and Types of Jobs Since 2007

Description	2007 Jobs	2008 Jobs	2009 Jobs	2010 Jobs	2011 Jobs	2012 Jobs
Agriculture, Forestry, Fishing and Hunting	1,922,790	1,869,078	1,839,432	1,834,643	1,859,107	1,857,019
Mining, Quarrying, and Oil and Gas Extraction	677,207	729,813	658,373	667,226	745,595	784,070
Utilities	549,539	557,983	560,714	551,287	549,921	556,529
Construction	9,954,961	9,423,176	8,214,435	7,633,863	7,607,315	7,594,530
Manufacturing	14,093,901	13,629,742	12,051,829	11,712,063	11,920,262	12,116,646
Wholesale Trade	6,180,035	6,133,949	5,738,315	5,634,236	5,711,683	5,817,036
Retail Trade	16,279,661	16,040,307	15,262,809	15,158,575	15,338,727	15,427,475
Transportation and Warehousing	4,942,074	4,904,568	4,601,110	4,544,128	4,664,351	4,763,272
Information	3,181,035	3,129,245	2,949,820	2,838,954	2,808,734	2,801,533
Finance and Insurance	6,462,141	6,308,789	6,058,519	5,976,245	6,042,862	6,081,019
Real Estate and Rental and Leasing	2,767,868	2,699,430	2,553,130	2,477,330	2,439,220	2,467,061
Professional, Scientific, and Technical Services	8,970,748	9,110,964	8,789,436	8,744,022	8,951,222	9,202,138
Management of Companies and Enterprises	1,839,616	1,895,417	1,855,139	1,854,778	1,914,543	1,949,283
Admin and Support and Waste Management	9,301,860	8,892,117	8,081,998	8,311,872	8,626,800	8,934,731
Educational Services (Private)	3,317,313	3,413,586	3,504,764	3,575,972	3,666,851	3,760,523
Health Care and Social Assistance	16,304,386	16,716,857	17,036,693	17,301,036	17,506,396	17,848,232
Arts, Entertainment, and Recreation	2,375,489	2,389,692	2,337,992	2,313,773	2,336,448	2,342,772
Accommodation and Food Services	11,615,709	11,643,560	11,306,013	11,322,307	11,588,412	11,875,069
Other Services (except Public Administration)	7,502,059	7,522,620	7,451,832	7,398,326	7,478,030	7,525,044
Government	24,187,207	24,510,271	24,568,231	24,561,911	24,253,390	24,152,210
Unclassified Industry	216,926	208,532	173,872	152,667	173,741	186,339
Total	152,642,524	151,729,695	145,594,456	144,565,212	146,183,610	148,042,530

Gains and Losses Since End of 2007

Description	2012 - 2007
Agriculture, Forestry, Fishing and Hunting	-65,771
Mining, Quarrying, and Oil and Gas Extraction	106,863
Utilities	6,990
Construction	-2,360,431
Manufacturing	-1,977,255
Wholesale Trade	-362,999
Retail Trade	-852,186
Transportation and Warehousing	-178,802
Information	-379,502
Finance and Insurance	-381,122
Real Estate and Rental and Leasing	-300,807
Professional, Scientific, and Technical Services	231,390
Management of Companies and Enterprises	109,667
Administrative and Support and Waste Management and Remediation Services	-367,129
Educational Services (Private)	443,210
Health Care and Social Assistance	1,543,846
Arts, Entertainment, and Recreation	-32,717
Accommodation and Food Services	259,360
Other Services (except Public Administration)	22,985
Government	-34,997
Unclassified Industry	-30,587
Total	-4,599,994

Job Winners

• Healthcare gained jobs every year since 2007, a total of  1,543,846
• Private Education Services gained every year since 2007, a total of 443,210
• Mining and Quarrying gained every year since 2007, a total of 106,863 

Job Losers

• Construction lost jobs every year since 2007, a total of -2,360,431
• Information lost jobs every year since 2007, a total of  -379,502
• Government lost jobs every year since 200, a total of -34,997
• Real Estate lost jobs every year from 2007-2011, a total of -300,807 since 2007
• Manufacturing has gained jobs two consecutive years but the 2007-2012 total is -1,977,255
• Retail Trade has gained jobs two consecutive years but the 2007-2012 total is -852,186

Lost and Gone Forever

The three largest net losers (construction, manufacturing, retail trade) have a net combined total of -5,189,872 since 2007. Most of those jobs are lost and gone forever.

Another 300,807 real estate jobs are lost and gone forever, as are 381,122 Finance and Insurance jobs, and  379,502 Information jobs.

Economic Modeling Data Notes

Data is yearly, so the period 2007-2012 is from the beginning of 2007 to the end of 2012. Snapshots below are from end-of year numbers.

Data is from multiple sources as explained below so it will not exactly match BLS reported numbers.

Comments from Economic Modeling Specialists

“Our data is used by many to research and understand regional employment trends and dynamics. It’s composed of comprehensive information on industries, occupations, demographics — as well as things like occupational skills, education, training, and even the names and size of companies in your region broken down by industry.

To do this we link nearly 90 data sources — from federal sources like the Bureau of Labor Statistics to state and private sources.

If you’ve ever worked with this sort of information, you know it can be hard to collect and present. It’s also often incomplete and outdated. So we organize the data, bring it up to date, and build software and reports around it so you can put it to use more quickly and effectively”

Thanks to Economic Modeling Specialists and Mike Klaczynski at Tableau Software for this post.

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

"Wine Country" Economic Conference Hosted By Mish
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0 Global PC Shipments Decline 6.4%; Best Buy Sales Flat; Toys R Us Sales Decline 4.5%; 4th Quarter GDP Estimate Reduced to .8% from 1.5%

Holiday sales of electronics and toys plunged this past Christmas season. Also of note, JPMorgan lowered its annualized 4th quarter GDP estimates down to .8% from 1.5%. Nonetheless, analysts see a silver lining to the data. They always do.

Toys R Us Sales Decline 4.5%

MSN Money reports Gloomy Holiday Sales at Toys R Us

Toys R Us reported a key sales figure declined in November and December, hurt by weak demand for videogames, electronics and toys and shoppers who pulled back because of Superstorm Sandy.

"We believe our December sales were impacted by softness in the overall markets for videogames, electronics and toys, and by the uncertain economic environment in the U.S. and abroad," said CEO Jerry Storch.

The privately held toy store owner said revenue from domestic stores open at least one year fell 4.5 percent in the U.S. in November and December combined. In December alone, that figure fell 1.8 percent. The company operates more than 800 namesake and Babies R Us stores in the U.S. and another 600-plus stores overseas.

Best Buy Sales Flat to Down

USA Today reports Best Buy sales flat or down during holidays

Struggling consumer electronics chain Best Buy said Friday that a key revenue metric declined during the critical holiday season.

But its flat performance in the U.S. was better than the past several quarters, and online revenue showed strong growth.

The chain said revenue at stores open at least a year fell 1.4% for the nine weeks ended Jan. 5. This figure is a key gauge of a retailer's health because it excludes results from stores recently opened or closed.

The company's U.S. performance was flat. While this was a hair below the 0.3% increase Best Buy reported in the prior-year period, President and CEO Hubert Joly said in a statement that it was an improvement over the past several quarters.

Revenue at stores open at least a year declined 6.4% internationally, stung by softness in China and Canada.

Total revenue for the holiday period fell slightly to $12.8 billion from $12.9 billion.

Global PC Shipments Decline 6.4%

USA Today reports Global PC shipments fall 6.4% to 89.8 million in 4Q

Desktop and laptop sales in the fourth quarter fell 6.4% from a year earlier to 89.8 million, affirming the PC market's gradual decline throughout 2012, according to an industry report released Friday.

With consumers steering more of their tech budgets to tablets and smartphones, "the PC market continued to take a back seat to competing devices and sustained economic woes," says the IDC, which compiles the data via its Worldwide Quarterly PC Tracker.

The 4th-quarter tumble also exceeded IDC's forecast of a 4.4% decline for the October-December period, and marks the first time in more than five years that the PC market has seen a year-on-year decline during the holiday season, its report noted.

Underscoring the PC's market's sustained weakness for much of last year, IDC also said 2012 sales worldwide fell 3.2% to 352.4 million.

In the U.S., PC sales were 4.5% lower in the fourth quarter, contributing to a decline of 7% in 2012.

While the current economic conditions that drive consumers' penny-pinching plays a role in sluggish PC demand, companies are also stretching their resources to design and market newly emerging portable devices, including tablets, smartphones that function like tablets, and ultrabooks.

Windows 8, a new operating system by Microsoft released late last year, stirred some new interest in PCs as it allowed PC makers to design and introduce computers with a touch display. But lingering questions about the use of touch on Windows PCs and the lack of applications that can fully utilize the function slowed consumer spending, says the IDC report.

"Although the third quarter was focused on the clearing of Windows 7 inventory, preliminary research indicates the clearance did not significantly boost the uptake of Windows 8 systems in the fourth quarter," said IDC analyst Jay Chou. "Lost in the shuffle to promote a touch-centric PC, vendors have not forcefully stressed other features that promote a more secure, reliable and efficient user experience."

People have decided the PC they already own is quite fine. Indeed, there is no reason to upgrade and some good reasons not to.

4th Quarter GDP Estimate Reduced to .8% from 1.5%

MarketWatch reports GDP forecasts cut on wider trade deficit.

J.P.Morgan analysts cut their estimate for fourth-quarter GDP growth to an annualized 0.8% from a prior forecast of 1.5%.

“The trade deficit for the month was much wider than expected, and it now looks like net exports will subtract a few tenths from GDP growth in the fourth quarter,” according to a J.P. Morgan research note. Elsewhere, Barclays analysts cut their estimate for fourth-quarter GDP growth to 1.3% from 2.0%, while analysts with Morgan Stanley cut their forecast to 0.7% from 1.5%.

According to the U.S. Department of Commerce, the U.S. trade deficit widened in November to the highest point since April. The trade gap widened 15.8% to $48.7 billion in November.

Imports rose 3.8% to $231.3 billion, the highest level since April, while exports increased 1% to $182.6 billion. Government analysts revised the deficit in October to $42.1 billion.

Economists surveyed by MarketWatch had expected the trade deficit to narrow to $41.3 billion in November from a prior October estimate of $42.2 billion.

Silver lining

Some analysts saw a silver lining in Friday’s trade report.

While trade deficits cut economic growth, the pickup in both imports and exports could also be a positive signal, according to Millan Mulraine, a macro strategist at TD Securities.

“While from a GDP perspective the surge in the real deficit is a net negative for growth, the strong gains in consumer goods could be a signal in improving domestic growth momentum — even though some of the rise could be attributed to the rebound from Sandy,” Mulraine wrote in a research note.

Meanwhile, Harm Bandholz, chief U.S. economist at UniCredit Research, said the widening trade deficit indicates the relative strength of the U.S.

You have to be a real economic illiterate to see silver linings due to a hurricane and rising trade deficits, but such ignorance is unfortunately commonplace.

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

0 Catalonia Drafts Declaration of Sovereignty, Announces Vote of Independence, Seeks Self-Determination in 2014

Via Google translate from El Pais, please consider Catalonia proclaimed "sovereign subject"

The Catalan Parliament proclaimed that Catalonia is "legal and sovereign political subject" in the vote will mark the formal start of the independence process and solemnly opened by the President of the Generalitat, Artur Mas . The Catalan House will vote on the first floor of the legislature, scheduled for the 23th, the statement called sovereignty of Catalonia, first step to call the query for self-determination in 2014.

Convergence and Union and Republican Left (ERC) yesterday closed a first draft of the text, they sent groups to a greater or lesser extent, defending the right to decide: Partit dels Socialistes (PSC), Initiative for Catalonia (ICV-EUiA ) , and d'Unitat Popular Bid (CUP ). The text is open to nuances, but CiU and ERC, a parliamentary majority, will not accept major changes.

The resolution does not set the date of the consultation, although both parties in the legislature signed agreement, have signed a commitment to hold the vote in 2014. Without the permission of the Government, the referendum is unconstitutional, so the claims and makes clear that it will look for any possible legal formula to perform: "They used all existing legal frameworks to implement the strengthening of democracy and the right to decide. "

The statement, a text of six points with a long preamble emphasizes that the Catalan government will dialogue with the state, but also makes clear that no agreement will be asked to help "the European institutions and the international community as a whole." From the query performed, CiU and ERC agree to be "scrupulously democratic" pluralism and ensuring citizens' access to all information.

This will be the fourth time that the Parliament proclaims the right to self-determination of Catalonia. But it will be the first to clearly set this right is specified in a query to proclaim independence. It is the first step in the process sovereigntist, to continue in the first half of this year with the creation of the Catalan Council of National Transition , designed to protect the process, and the opening of negotiations with the Spanish government to convene a referendum.

Declaration of Independence

Here is a translated version of the Declaration of Independence as listed in El Pais.

"Declaration of Sovereignty of the Catalan people"

"According to the democratically expressed will of the people of Catalonia, the Catalan Parliament agrees to declare the democratic sovereignty of the people of Catalonia as a political and legal, initiating the process to make the exercise of the right to decide how implementation of the right to self-determination of peoples, and to enforce the will of Catalonia form a new state within the European framework in accordance with the following principles:

1. Sovereignty. The people of Catalonia have, for reasons of democratic legitimacy, political subject matter of legal and sovereign.

2. Democratic legitimacy. The process of exercising the right to decide will scrupulously democratic, especially ensuring the plurality of choices and respect for all, through deliberation and dialogue within Catalan society with the aim that the pronouncement where the end result is the majority expression of the popular will.

3. Transparency. Shall be provided all the tools necessary for the whole population and Catalan society has all the information and knowledge necessary for the exercise of the right to decide and encourage its participation in the process.

4. Dialogue. Was bet on dialogue and negotiation with the Spanish government, the European institutions and the international community as a whole.

5. Europe. Was defend and promote the founding principles of the European Union, particularly the fundamental rights of citizens, democracy, commitment to the welfare state, solidarity between the different territories of the Union and the commitment to economic progress, social and cultural.

6. Legality. Was used all existing legal frameworks to implement the strengthening of democracy and the right to choose. "

Commitment to the Welfare State

Not sure if this is a translation issue but I could not help but laugh at the phrase in point number 5 promising a "commitment to the welfare state".

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

0 Trillion Dollar Coin Idea Dies Sudden Death; Treasury, Fed Oppose Using Platinum Coin; Republican Strategy

At long last, a stupid, as well as illegal idea dies on the vine. Bloomberg reports
Treasury, Fed Oppose Using Platinum Coin to Avoid Debt Limit

The U.S. Treasury Department and Federal Reserve oppose the idea of minting platinum coins as a way to avoid the U.S. debt ceiling, according to a statement from Treasury spokesman Anthony Coley.

“Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit,” Coley said in an e-mailed statement.

“There are only two options to deal with the debt limit: Congress can pay its bills or it can fail to act and put the nation into default,” according to a statement today from the White House.

“When Congressional Republicans played politics with this issue last time, putting us at the edge of default, it was a blow to our economic recovery, causing our nation’s credit rating to be downgraded,” the e-mailed White House statement says. “The President and the American people won’t tolerate Congressional Republicans holding the American economy hostage again simply so they can force disastrous cuts to Medicare and other programs the middle class depend on while protecting the wealthy. Congress needs to do its job.”

Hopefully that will stop the downright silly, if not idiotic commentary regarding the coin, but don't count on it.

I suggest this seven-step charade is what we will see.

Politics of the Debate

1. Obama will chastise Congress with talk of financial Armageddon if Congress does not raise the debt ceiling.
2. Congress will pretend to hold the president hostage
3. The secretary of the Treasury will get into the act with its own version of the default debate
4. Perhaps a few payments on non-critical budget items will be temporarily skipped
5. Wall Street will feign panic
6. Constituents will pressure Congress to approve a new debt ceiling
7. Congress will raise the ceiling with another useless warning about next time

To understand why a default is completely out of the question, please see Silly Worry of the Day: US Will Default; Politics of the Debate

Republican Strategy

As far as Republican strategy goes, I am in favor of shutting down the government unless there are significant budget cuts. Unfortunately, that will not happen. Republicans will cave in once heat from Wall Street begins.

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

0 France, the Hidden Zombie in Europe

Via Google Translate from Spanish, GurusBlog asks and answers the question Is France the zombie hidden in Europe?

Although still quite outside the focus of the media and investors as its risk premium relative to German bonds remains relatively low, for me, leaving aside the PIIGS, which are marked by blood and fire, France, is really the real zombie Europe, an economy that has been losing competitiveness rather quickly. Here are some data for me is the great Zombie in Europe and also on the legacy of Sarkozy Hollande mandate goes straight to the precipice.

In 1999 France sold 7% of world exports. Today only sells 3% and the figure continues to deteriorate.

In 2005 the trade balance was positive in France +0.5% of GDP today is negative -2.7% of GDP. Ie imports far exceed exports. The French economy is becoming less competitive, for example in cars and machinery equipment sales to China are seven times lower than the annual sales volume of these products from Germany.

High labor costs, which combine high wages, little flexibility to fire and high taxes. French workers are uq emenos hours work in the developed world and 86% of the contracts are fixed. 42 of every 100 euros of wage costs of a company are social charges or taxes in Germany are 34 out of 100 €, in UK 26 out of 100.

Since 2005, unit labor costs in France have not only increased, and the cost to produce a car in France have incrmeentado 17%, Germany 10%, Spain 5.8% and 2% in Ireland . In France a worker earns on average € 35.3 per hour worked, in Italy the average is 25.8 € and 22 € in UK and Spain.

The most immediate results: The results of French companies have fallen to 6.5% of GDP, a level that puts them at 60% of the European average. The reason is simple, French exports lost market share and the only way for companies to survive is to lower margins. But less margins means less money to invest in new plants or technology. So the R & D of French companies has fallen 50% in the last four years.

To top off the circle, Hollande government has decided that the state must suck more companies and limited part of the tax deductions they had. The result will be less profit and less investment.

Against this background, it seems difficult that economic growth sneaks by France in the coming years. In 2012, French GDP grew a measly 0.2%, the average increase of French GDP in the last 3 years was 1.2%, in Germany 2.7%. By 2013 it is expected that France into technical recession. Unemployment is highest in the last 14 years at a rate of 10.9% verus the German rate of 6.7% and is expected to Public Debt to GDP reached 97% in 2013, higher than the debt Spanish public.

Currently the French economy is the French state. The French state spending accounts for 57% of GDP. In the last eight years France's GDP has increased by a sad 7.3% (inflation adjusted). All growth has come through increased public spending and not the development of the private economy.

And with all the monster Papa French State refuses to stop growing. In 2011 and 2012 has presented a budget deficit of 5% of GDP, a level likely to be repeated in 2013

That is a very well presented set of statistics by Guru Huky, founder of GurusBlog. Indeed, French president Francois Hollande has made matters so much worse for France, as I have commented many times.

The remaining question at this point is how much longer France will remain a "hidden" zombie. It will be interesting to see the results (and the panic) once the bond market turns on France.

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

0 Making Social Security Actuarially Sound in a Business-Friendly Manner

In Social Security Payouts Per Worker; Accrued Interest on Accrued Promises; Imagination I posted numerous charts showing the unsustainable nature of the system.

First let's review the background, then I will address what can be done to make the system Actuarially Sound.

Here is one key chart from reader Tim Wallace followed by commentary.

Social Security Burden on Non-Farm Workers



Accrued Interest on Accrued Promises

Social Security assets are nothing but IOUs, and interest income is actually interest on money long since spent.

The entire "Trust Fund" is nothing but a promise to pay. There are no real assets (other than the ability to raise taxes to meet current expenses). Everything else is just a promise, and even more absurdly, accrued interest on accrued promises.

The chart provided by Wallace should give everyone second thoughts about the ability to raise taxes to meet expenses.

Imagination

The key point is Social Security is now cash flow negative although imaginary assets have increased in value, based on imaginary interest, and imaginary ability of taxpayers to forever keep meeting escalating payouts.

Here is another chart from my earlier post Social Security Trends: Beneficiaries, Total Costs, Number of Workers, Ratio of Workers to Beneficiaries

Total Annual Cost of Social Security 1967-Present



Social Security Beneficiaries vs. Total Non-Farm Employment



Here is the chart from the Social Security Administration that shows the system is cash-flow negative even though alleged assets have increased in value.

Trust Fund Data



Payroll Tax Cut

The system turned cash flow negative in Fiscal Year 2012, far earlier than anyone expected, primarily because of the payroll tax cut. However, that cut was rescinded in the Fiscal Cliff agreement so the system will temporarily be back in the green this year.

Looking ahead, and ignoring accrued interest on imaginary assets what can be done to make the system solvent?

Actually, Social Security is not that difficult a problem (at least in comparison to Medicare), except for the politics of it all. Numerous things could be done to put the system in the green.

Possible Ways to Make Social Security Actuarially Sound

1. Raise retirement age
2. Raise or eliminate the cap on payroll taxes
3. Cut benefits
4. Collect Social Security on personal income
5. Implement a Tiered Cap structure
6. Means Testing

Democrats would oppose 1 and 3. Republicans might oppose all but 3. Pragmatists might want to do all of them.

Business Point of View

Let's leave politics aside and discuss this from a business point of view. Is it possible to decrease the burden on businesses while not hurting those making less than $250,000 a year?

There is no free lunch of course, but think about the possibility of a tiered cap structure.

• Leave the existing tax cap as it is, but after a gap (at say $250,000 or $500,000) start collecting taxes again. 
• No business contribution on amounts collected on the highest tier.
• Reduce business contributions across the board by 33% of the additional revenues collected on the highest tier

This would get revenue Democrats desperately want, while also reducing burden on businesses that Republicans desperately want. Businesses would benefit, and the only cost would be to those making above the gap.

Who Benefits?

• Large and medium-sized businesses would easily benefit from lower payroll taxes.
• Small business owners making less than the top cap would benefit from reduced payroll taxes.
• Small businesses owners making more than the top tier might still benefit more from reduced corporate taxes than they lose in personal taxes (provided they have enough employees).

The only losers in this proposal are those making more than the top gap, while not hiring enough employees to make up the difference.

In Return

In return for agreeing to this hike in revenues, Republicans could and should demand benefit cuts, a raise in retirement age, cuts in Medicare, or some other incentive.

Means Testing

Social Security was meant to be an insurance program for those unable to take cared of themselves after retirement. As such, should anyone with hundreds of thousands of dollars in annual interest income or millions of dollars in liquid assets collect social security payments after retirement?

If not, those disbursements not paid out can also be used to reduce taxes on businesses or to increase survivor benefits.

One of the blatant flaws in the system happens to married couples where one person dies leaving a spouse with only one check instead of two. When this happens, especially if both checks are small, the survivor is often placed in a situation where he or she can no longer afford their house and other expenses.

It should be possible to rectify the above situation as part of Social Security restructuring.

Pragmatism vs. Beliefs

In general, I am against tax hikes.

As a pragmatist, I believe tax hikes are coming regardless of whether or not they should. My proposal has the advantage of offering something to Republicans, something to Democrats, and a lot to businesses, only impacting those making more than the top cap (which of course should be inflation-adjusted).

By the way, this line of thinking can be applied to things other than just social security. A portion of all tax hikes can go to reduced payroll tax burdens on businesses.

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

0 Yen Falls to Lowest Level Since 2010; Japan Promises 10.3 Trillion Yen Stimulus; BOJ to Adopt 2% Inflation Target; Where to From Here?

Bank of Japan to Adopt 2% Inflation Target

Bloomberg reports Yen Falls to Lowest Since 2010 on Stimulus

The yen reached the weakest since June 2010 versus the dollar after Japanese Prime Minister Shinzo Abe’s government said it will spend 10.3 trillion yen ($116 billion) in new stimulus efforts that tend to weaken a currency.

The yen headed for a ninth weekly decline, the longest losing streak since 1989, on speculation the Bank of Japan (8301) is also preparing measures to spur growth.

Japan’s government will spend about 3.8 trillion yen on disaster prevention and reconstruction, and 3.1 trillion yen on stimulating private investment and other measures, the Cabinet Office said in a statement.

The Bank of Japan is set to adopt the 2 percent inflation target advocated by Abe, doubling its existing goal of 1 percent, without setting a deadline for achieving it, according to people familiar with discussions within the central bank. They requested anonymity because the talks are private. The BOJ meets on Jan. 21-22.

Yen Monthly Chart



click on chart for sharper image

Where to From Here?

From a technical standpoint, there is support at 1.10, at 1.05, and again at 1.00. Short-term, I would expect it to bounce at one of those levels, perhaps all three, as anti-yen sentiment is extreme.

Bear in mind, the ultimate fate of the Yen depends on what Japan does, not what Japan says.

Advocating a 2% inflation target and actually taking measures to achieve that target are two different things. From my perspective, prime minister Shinzo Abe seems determined to do just that.

Moreover, there will be changes at the central bank, and you can expect those changes to be more dovish, weakening the Yen. The counterpoint is that  the Japanese central bank has actually been far more conservative than the Fed, ECB, and the Central bank of China.

Certainly, the Fed and ECB have pulled some pretty dramatic stunts, but speculation now is the Fed may be concerned about the growing size of its balance sheet. (For a discussion, please see Yield Curve: Where To From Here? Extreme Complacency in Face of Bernanke Shift).

Japan is in serious trouble in regards to demographics and balance of trade issues. Here are a couple of posts that layout the case in detail.

Coming Devaluation of the Yen

• End of the Debt Supercycle and a Coming Massive Devaluation of the Yen; Most Difficult Time to Invest; The Belief Bubble
 
• Interview with Kyle Bass on Gold, Hugely Profitable Asymmetric Bets on US Subprime and Europe, and his next Asymmetric Bet on Japan

The counter-argument, proposed by my friend Pater Tenebrarum, is The Yen – What Everybody Knows Probably Isn’t Worth Knowing.

The question is: what does "everybody" know (or even believe)?

I happen to believe Shinzo Abe is serious. Perhaps he isn't. Perhaps the Bank of Japan remains more sensible than Western-world counterparts. Again, I have my doubts.

Any indication (even if incorrect), that Japan is talking but won't really act could send the Yen higher.

Moreover, anti-yen sentiment is so extreme now, that there could be a short-term bounce for technical reasons, even if Japan follows through on its threats.

Long-term, I see no reason to change my belief the Yen is in serious trouble.

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

"Wine Country" Economic Conference Hosted By Mish
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0 Social Security Payouts Per Worker; Accrued Interest on Accrued Promises; Imagination

Inquiring minds are digging still further into social security trends and costs.

Here is a chart from Tim Wallace in response to my post Social Security Trends: Beneficiaries, Total Costs, Number of Workers, Ratio of Workers to Beneficiaries.

Social Security Burden on Non-Farm Workers



The line in red shows the expected trend if payouts had increased at the rate of inflation. Instead, escalating costs and the shrinking number of workers per beneficiary, has placed tremendous  stress on workers ability to support beneficiaries.

Here are a few of charts from the top link to highlight the reason for this trend.

Average Monthly Social Security Benefit



Social Security Beneficiaries vs. Total Non-Farm Employment



Ratio of Workers to Social Security Beneficiaries



Social Security Benefits Analysis

• The ratio of workers to beneficiaries peaked in 1999 at 2.927 to 1.
• The ratio of workers to beneficiaries was 2.361 to 1 at the end of 2012.
• The ratio of workers to beneficiaries is falling fast and will continue to fall fast for a decade as the baby boomer population ages.
• The average payout and the number of payouts are both rising fast
• Total Social Security payouts (a multiplication of two rising numbers) are on an unsustainable exponential growth path.

Social Security Deficit?

In my first post I cited a CNS News article that made this claim Social Security Ran $47.8B Deficit in FY 2012.

Reader David White objected, noting an increase in assets. Here is the chart from the Social Security Administration.



White protests "The "$47.8 billion deficit" mentioned in the post does not include interest income. This omission blatantly misrepresents the Social Security Trust Fund data."

Blatant Misrepresentation

If anything, the above chart highlights the sheer absurdity of the alleged "Trust Fund".

The blatant misrepresentation is the notion there is a trust "fund" at all.

In reality there is no fund, and if there is any trust in the system, there shouldn't be.

Accrued Interest on Accrued Promises

The assets are nothing but IOUs, and interest income is actually interest on money long since spent.

The entire "Trust Fund" is nothing but a promise to pay. There are no real assets (other than the ability to raise taxes to meet current expenses). Everything else is just a promise, and even more absurdly, accrued interest on accrued promises.

The chart provided by Wallace should give everyone second thoughts about the ability to raise taxes to meet expenses.

Imagination

The key point is Social Security is now cash flow negative (just as the chart provided by White shows), not that imaginary assets have increased in value, based on imaginary interest, and imaginary ability of taxpayers to forever keep meeting escalating payouts.

I offer this musical tribute to those who actually believe there is a trust fund, as well as to those who believe imaginary interest on imaginary assets represents the true state of affairs.



Link if video does not play: The Temptations - Just My Imagination

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

"Wine Country" Economic Conference Hosted By Mish
Click on Image to Learn More

0 Silly Worry of the Day: US Will Default; Politics of the Debate

Of all the over-dramatized nonexistent threats, the silly worry of the day is the US is at risk of default if Congress does not raise the debt ceiling.

Earlier today, I saw a couple of articles outlining how and why a US default could happen. Well, it won't, and there is no need for all the surrounding drama either.

Ending the Debate Drama

The best rebuttal to the default idea comes from Bloomberg columnist Caroline Baum in her article Obama’s Default Drama Is No Way to Run a Country.

The United States of America isn’t going to default on its debt, even if Congress doesn’t increase the statutory borrowing authority in the next couple of months. Everyone in Washington knows, or should know, this. Any assertions to the contrary are tantamount to playing politics with the debt ceiling.

A shutdown is certainly possible. A debt default? Not gonna happen.

Why? Because the income taxes withheld from most of our paychecks each month exceed the interest the Treasury owes on its debt outstanding. In November, for example, the Treasury’s interest expense totaled $25 billion. That compares with tax receipts of $161.7 billion. The ratio of receipts to interest expense varies from month to month, but what comes in more than covers what goes out in debt service.

Without an increase in the $16.394 trillion debt limit, the federal government can’t pay all of its bills: It borrows 40 cents of every dollar it spends. Still, “debt service would come first,” said Lou Crandall, chief economist at Wrightson Icap LLC in Jersey City, New Jersey.

Politics of the Debate

The idea of a default should end right there, but it won't. Here is a likely seven-point scenario.

1. Obama will chastise Congress with talk of financial Armageddon if Congress does not raise the debt ceiling.
2. Congress will pretend to hold the president hostage
3. The secretary of the Treasury will get into the act with its own version of the default debate
4. Perhaps a few payments on non-critical budget items will be temporarily skipped
5. Wall Street will feign panic
6. Constituents will pressure Congress to approve a new debt ceiling
7. Congress will raise the ceiling with another useless warning about next time

What's Wrong With the Debt Ceiling?

Yesterday Baum wrote Only Thing Wrong With the Debt Ceiling Is the Lag.

Lots of people want to get rid of the debt ceiling, the federal government's statutory borrowing limit. When one considers that it enables the Treasury to borrow money Congress has already spent, it seems like a silly relic. Even worse, the vote to increase the debt limit has become a political football, with each party using it as an opportunity to extract concessions from the other. No wonder some folks say it's time for it to go.

Not so fast. The problem with the debt ceiling isn't the concept: the president and 535 members of Congress need a symbol to remind them just how much they spend each and every day. Rather, the problem is the lag relative to decisions on spending.

Then I thought of my friend Bob Laurent, economist extraordinaire, who died in 2005. Bob spent most of his career at the Chicago Fed. When the Fed was having trouble hitting its money supply targets in 1979, Bob came up with a simple solution (it was considered controversial at the time). Instead of the existing system of lagged reserve accounting -- banks' required reserves were determined by the level of deposits two weeks earlier -- Bob proposed a lead, or "reverse lag," method wherein the Fed would set the level of required reserves today and the banks would have to adjust deposits accordingly.

Therein lies the answer to the debt-ceiling dilemma: adopt Bob's lead, or "reverse lag," system. For those who say they want to cut spending, here's their chance. Right now, the sky's the limit. Congress needs to set the borrowing limit first and work within those confines. At minimum it will separate the real, limited-government advocates from the false prophets.

No platinum coins needed, no test of the president's powers under the 14th Amendment. Just reverse the lag. Bob thought of that a long time ago.

Not Quite

The problem with the reverse lag theory is the deficit is a function of two items: revenue and spending. Even if Congress gets a grip on spending (rather doubtful to say the least) revenues are all but guaranteed to fall short of CBO expectations.

Deficits will be above expectations and the debt ceiling will need to rise as a result.

More Coin Silliness

Yesterday someone emailed me proposing to use the platinum coin as a trust fund for Medicare. Good grief.

That proposal is exactly the kind of blatant free-lunch stupidity Pater Tenebrarum at the Acting Man mentioned to me in an email.

I added Pater's email as an addendum to my article Reader Questions on the 1 Trillion Coin Proposal: Where's the Money Come From? Will It Cause Inflation?

Addendum

Here are a few thoughts from Pater Tenebrarum at Acting Man

"I would point out though that whether it is inflationary depends on the precise mechanics of the operation. Congress could limit spending according to whatever it decides, so it need not be inflationary. But that depends on an unknowable future. As a rule, once government bureaucrats discover "innovative" financing methods, they try to make use of them to the hilt. The whole debate is actually a great illustration of the utter absurdity of our monetary system."

When I suggested minting a quadrillion dollar coin would not be inflationary, it was under my stated provision that Congress would still limit spending to amounts authorized. Of course, monetizing a trillion dollars every year is in itself an inflationary practice in isolation (with or without mind games involving platinum coins). The coin is irrelevant in that regard.

Pater catches the key point of both my articles in his concluding sentence "The whole debate is actually a great illustration of the utter absurdity of our monetary system." And that is precisely why I proposed Alfred E. Neuman on the coin.

Former Head of US Mint Chimes In

Philip Diehl, Former Head of the US Mint made a comment on Pragmatic Capitalism, reposted as an article that Addresses Confusion Over the Platinum Coin Idea. Here is the key section.

* What is unusual about the law (Sec. 5112 of title 31, United States Code) is that it gives the Secretary complete discretion regarding all specifications of the coin, including denominations.

* Moreover, the accounting treatment of the coin is identical to the treatment of all other coins. The Mint strikes the coin, ships it to the Fed, books $1 trillion, and transfers $1 trillion to the treasury’s general fund where it is available to finance government operations just like with proceeds of bond sales or additional tax revenues. The same applies for a quarter dollar.

* Once the debt limit is raised, the Fed ships the coin back to the Mint, the accounting treatment is reversed, and the coin is melted. The coin would never be “issued” or circulated and bonds would not be needed to back the coin.

* There are no negative macroeconomic effects. This works just like additional tax revenue or borrowing under a higher debt limit. In fact, when the debt limit is raised, Treasury would sell more bonds, the $1 trillion dollars would be taken off the books, and the coin would be melted.

* This does not raise the debt limit so it can’t be characterized as circumventing congressional authority over the debt limit. Rather, it delays when the debt limit is reached.

* Yes, this is an unintended consequence of the platinum coin bill, but how many other pieces of legislation have had unintended consequences? Most, I’d guess.

Philip N. Diehl
35th Director
United States Mint

Accounting Gimmick

As I stated, the proposal is nothing more than an accounting gimmick. Even Krugman realized as much, specifically stating at the end of Debt in a Time of Zero "not everything is a free lunch, even now. Sorry."

To that I would reply, nothing is a free lunch ever, unless you count sunshine and rain as free lunches.

Benefit of the Debate

In spite of the silliness of it all, there is still a benefit of sorts to the debate. The benefit is that the American public gets to see what fools they have elected to Congress.

Since some might not find that much a benefit, I have another idea. Stop paying Congress, the President, Vice President, and all their staffs, followed by everyone in a federal office, the second the debt ceiling is reached.

That would probably light a fire under the whole lot of them immediately.

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

0 Municipal Bonds: Where to in 2013? Is There a Muni Bubble? Will it Pop?

On Wednesday, I posted a chart of US Treasury Yields asking the question Yield Curve: Where To From Here? Extreme Complacency in Face of Bernanke Shift.

Today's focus is on municipal bonds, but first let's take a look at a chart from the above link.

Treasury Yield Curve



click on chart for sharper image

Certainly Bernanke is not hiking rates any time soon. However, that does not preclude upward pressure on long-term rates.

And if there is sustained upward pressure on interest rates (see the above link for why that may be the case), treasuries, corporates, and municipal bonds will all likely suffer.

With that thought in mind, please consider the following chart from Bloomberg on municipal bond yields.

US Municipal Bond Yields



click on chart for sharper image

Problematic Action

If I was a municipal bond investor, that chart would scare the hell out of me.

Yield on 30-year bonds plunged 90 basis points in the last year to 2.51% in what may have been a blow-off top of the muni market. Yields are sharply higher now, across the board.

Government debt is problematic enough, but at least there is no realistic default risk on treasuries.

So far, municipals have escaped the wave of defaults that Meredith Whitney announced, but even if the 30-year yield just goes back up to where it was, long-term municipals will not be a safe hiding spot.

Moreover, action across the entire muni-curve looks problematic. Yield on 10-year munis is up 33 basis points, yet still only at 1.75%.


Four Questions

1. Is there any reason the yield on 10-year munis can't climb to 3%? 
2. Is there any reason the yield on 10-year munis shouldn't climb to 3%?
3. If the yield on 10-year munis does rise to 3%, do you want to be in munis?
4. Where's the value? 

One can hide out in 5-year munis, but the yield is a mere .85% on those. Action is likewise very problematic. In the last month, yield on 5-year munis rose 25 basis points.

Here are a couple additional questions to consider.

Just another Scare?

Of course this month's selloff might be just another inflation scare. It might be another valuation scare. It might be another Fed hike scare. It might be another QE is ending scare.

However, this selloff might be the real deal: Recognition that the Fed is out of bullets, the Fed is getting nervous about its balance sheet, or the simple fact there is no conceivable value in holding 5-year munis for a lousy .61%, 10-year munis for a lousy 1.42%, or 30-year munis for a lousy 2.51% (where yields were a month ago).

Bubble in Munis?

I think any rational person would see there is no real value in 10-year yields at 1.42% . Yet, investors are wedded to them. In fact, to get the yields that low, investors had to be chasing them.

So yes, there is a bubble! Can the bubble get bigger? Certainly! Why can't it? Will it? That I cannot say, but for those in munis, that appears to be the bet.

In a way, this is not much different than people chasing technology stocks in 1999 or houses in 2006. In another way it's different. There is rightful aversion to stocks, and for most investors, bonds are the only other game in town.

Moreover, some people are in bonds just because they will not accept 0% in cash, and they simply have not pondered valuations, inflation, the effects of QE, or any other factors.

Bill Gross Chimes In

Researching this article, I came across Wisdom from the Bond King, an interview on US News and World Report. Emphasis in italics is mine.

Since 1971, Gross, 68, has deftly steered PIMCO, the Newport Beach, Calif., investment firm that he cofounded and where he is currently co-chief investment officer, overseeing some $1.8 trillion in assets. He manages PIMCO Total Return Fund, the world's largest mutual fund and a stalwart of the fixed-income world that has returned more than 7.3 percent annually over the past 15 years, helping to earn Gross the unofficial title of "bond king." Gross recently spoke with U.S. News about what he sees as a "new normal" for the markets and for investors. Edited excerpts:

What have you done that has accounted for the Total Return Fund's impressive and continued success?

To be fair, the near double-digit returns are a function of falling interest rates more than anything else. It's sort of like a teeter-totter; when interest rates go down, prices go up. So the Total Return Fund, [just] as all bond funds, has done well in part because interest rates have gone down, down, down. We've also outperformed the [investment-grade bond] market by close to 2 percentage points a year. Individual strategies in terms of trading hopefully account for the track record. That leads, I guess, to another question: Can those returns be duplicated going forward?

I imagine that's on a lot of investors' minds. What should they expect?

You start with the obvious: The Federal Reserve has lowered short rates to close to zero. The investment-grade bond market, which includes treasuries and corporates and mortgages, all in one big pot, yields 1¾ percent. It's hard to manufacture near double-digit returns from that. It's the metaphorical concept of squeezing juice out of an orange; almost all of the juice has been extracted, so to speak.

So investors looking for a repeat of historical performance are bound to be disappointed, and that's why I wrote several months ago—which caused a ruckus in the market—about the [dying] cult of equity. It was the same thing with the cult of bonds, the "cult" meaning that there was a belief that historical returns could be projected into the future. They can't. They can't for bonds and they can't for stocks either, in my opinion.

What's your economic forecast for the months and year ahead?

An investor probably has to look forward to higher inflation. Slower growth and higher inflation—that's not a positive, by any means. Individuals would want it to be just the reverse. The de-levering and the check-writing on the part of central banks, that's really what produces the situation.

Are you worried about debt in the United States and Europe?

Slow growth and inflation have a tendency to accompany large deficits and increasing debt as a percentage of GDP. Unless we begin to reverse that course, we could resemble Greece within a decade.

Final Thoughts

I do not foresee the inflation Gross does, at least not yet (and my track record on that score has been quite good).  However, my definition of inflation involves credit, not prices.

Regardless of definitions, even if this action is nothing more than another inflation scare, I would not want to sit through the scare for the simple reason yields have a long way to rise before there is any conceivable value in them.

Readers will note that I had generally been bullish on treasuries, but I do not like them now either. There simply is no value, even if the US is back in recession, and especially if the end of QE awaits.

Thus, there is a lot of merit in saying to hell with it all and sitting in cash. Of course I would have said the same thing about munis a year ago. And I would have been overly-cautious then. Am I overly-cautious now?

Regardless, we are currently at a point where being wrong can be extremely costly. And with each drop in yield, the more likely sitting on the sidelines earning nothing is likely to be right.

From my perspective, earning 1.42% on 10-year munis is not worth the risk of being on the wrong side of a major move, whether or not bonds are the only game in town.

Mike "Mish" Shedlock
http://economic-trends.blogspot.com

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0 We Want to Have Our Cake And Eat It Too; Another Hotel California Setup; One Million Tiny Miseries

UK prime minister David Cameron has promised to renegotiate terms of its membership in the EU and put the measure to a popular referendum.

In response, Business leaders warn UK’s David Cameron that leaving the EU would be bad for economy.

Top business executives have warned U.K. Prime Minister David Cameron that he could damage Britain’s economy if he seeks to renegotiate the terms of its membership in the 27-country European Union.

In a letter published in the Financial Times on Wednesday, Virgin Group’s Richard Branson, London Stock Exchange head Chris Gibson-Smith and eight other business leaders challenged Cameron’s plan to renegotiate the U.K.’s EU membership terms and put the matter to a referendum.

However, popular distrust of the EU has grown in Britain — one of the 10 countries in the region that doesn’t use the euro. The British public shows no interest in the EU’s plans to move closer together. Most can’t even seem to stomach the current level of power of the EU, which many Britons see as meddlesome and inefficient.

Though the business leaders urged EU reform in their letter, they argued “we must be very careful not to call for a wholesale renegotiation of our EU membership, which would almost certainly be rejected.”

“To call for such a move in these circumstances would be to put our membership of the EU at risk and create damaging uncertainty for British business, which are the last things the prime minister would want to do,” they said.

But while Cameron wants Britain to remain in the EU and to retain influence in the body, he is also resisting a push by many member states, like France and Germany, to grant central authorities in Brussels greater powers over financial and legal affairs for the whole of the EU.

In the long run, many EU countries want to turn the bloc into a United States of Europe, an idea British politicians, particularly among Cameron’s Conservatives, abhor.

We Want Our Cake And Eat It Too

Note that it is not just UK businesses that want their cake and eat it too. So does Cameron.

The irony is that everyone is tired of the nonsensical nannycrat rules of the EU, and those rules will only get worse as time goes on.

For example, the nannycrats in Brussels are hell-bent on financial transaction taxes, high VATs, and onerous corporate income taxes. The bureaucrats also have gone along with absurd crop subsidies demanded by France. The result is everyone in Europe overpays for food (and nearly everything else) on account of tariffs that have not saved a single job. 

For now, the EU has backed down on a ridiculous airline carbon tax scheme, but rest assured the subject will come up again. Indeed, all the nannycrats did in November was suspend the proposal for a year, hoping for less opposition next time.

One Million Tiny Miseries

Bureaucrats never give up on stupid ideas, they just set them aside for a while. Proof is in the pudding. In the EU, inane rules, regulations, and fees are everywhere you look.

In case you think I am exaggerating, Pater Tenebrarum has an excellent writeup in his post One Million Tiny Miseries Inflicted by Government Policy

Hotel California Setup

Cameron sees some of those things and wants to renegotiate special rules for the UK. In effect, he wants to have his cake and eat it too, just like the business leaders. His hope is to keep the nannyrules he likes, and toss out a plethora of rules he doesn't like.

The problem with his approach is this is a Hotel California setup. As with the Euro, you can check in anytime you like, but it is damn hard to leave.

If Cameron commits (or the referendum passes), sometime down the road, after he is gone as Prime Minister (which could be rather soon), some other prime minister is likely to agree to god-knows-what, and without a referendum giving UK citizens any say in the matter.

Note that had it not been for that absurd transaction tax idea last December, Cameron may have signed on the dotted line already.

US Voices Concern

The Telegraph reports US publicly voices concerns over Britain leaving EU

Philip Gordon, the US assistant secretary responsible for European affairs, said that Britain's membership of the EU was "in the American interest".

His remarks came as David Cameron prepares to deliver a speech on Europe later this month. The Prime Minister is expected to promise to renegotiate Britain’s membership and then put the new terms to a referendum. Many Conservatives, including some Cabinet ministers, believe that a ‘No’ vote would mean Britain leaving the EU, although Mr Cameron says he opposes an exit.

One Last Chance to Get this Right

The UK has one last chance to get this right. The way to get this right is simple: Ignore pleas from the US, put the matter to a vote (including an option to leave the EU as opposed to renegotiate terms), openly campaign to exit, then politely tell the EU to go to hell when the result comes in.

Simply put, it is preposterous to expect one nation out of 27 to have significant leverage over a group of dedicated nannycrats, all wanting some inane rule, regulation, or tax.

In the meantime, expect nannycrat proponents to pound the airwaves with threats of Armageddon sometime before the vote.

It will be interesting to see if common sense secures a victory over the nannycrats, the socialists, and the half-baked conservatives expecting to have their cake and eat it too. Don't count on it.

Mike "Mish" Shedlock
http://economic-trends.blogspot.com