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June’s Punch List, a drumbeat toward failure

June 20, 2011

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Today on the podcast, information outside the echo chamber, but inside the sound bite. June’s punch list of things you need to know that were not reported or are older than the six-day focus of mainstream media.


The protests in Greece against new bailout conditions are closer to the Arab Spring than anything else. It’s a mass action by a very broad cross-section of the population. The austerity camp promised recovery and produced economic failure. Protesters are saying nothing more complicated than, “No,” to more lies. “Let’s find another road.”


Michael Hudson has pointed out that there is a history of financial crises. Previously they have all had the same characteristics – overleverage, fraudulent or foolish lending, unsustainable debt overhang, and cleansing by bankruptcy and restructuring. No longer. More debt is the solution to bad debt in the current crisis, at least by the lights of the banks and their facilitators in the central banks in the U.S. and Europe.


The commodities bubble has resumed its downward leg after several weeks of floating on some foam from somewhere. This is not what we promised here at Demand Side. Bubbles don’t plateau, we said. If they do, they’re not bubbles, and this is a bubble. We suspect computerized algorithms designed to protect Morgan Stanley and Goldman Sachs from the big losses they deserve. We’ll check back on that when the smoke clears.

Commodity prices are now the province of the financial players. With 70 percent of activity being financial speculation and 30 percent being legitimate hedging against price fluctuations. The Commodity Futures Trading Commission recently filed suit against market manipulators, but firms like Morgan Stanley and Goldman Sachs still play their games virtually unchallenged.


For all the happy talk about falling oil prices, we note that it was the first of July 2008 when oil prices collapsed from $147, the last bubble. Major economic collapse was not avoided.


Simon Johnson reacted to a speech by Treasury Secretary Tim Geithner to the American Bankers Association in which he said, among other things, “The U.S. banking system today is less concentrated than that of any other major country.” Johnson’s take, “[Geithner’s] history is completely wrong, his logic is deeply flawed, and his interpretation of the Dodd-Frank reforms does not mesh with the legal facts regarding how the failure of a global megabank could be handled. Together, these mistakes suggest that one of our most powerful policy makers is headed very much in the wrong direction.”


Mark Thoma turns on voodoo economics. Noting that Republicans cannot resist claiming that tax cuts pay for themselves. Had they done so, of course, the Bush tax cuts would have produced growth rather than revenue losses that dwarf any entitlement cost. Thoma observes that deficits can more than pay for themselves. A key piece of infrastructure produces incomes in construction and increases private sector growth for as long as the infrastructure remains in place. Not hard to see how a bridge to somewhere, for example, can actually save taxpayers money.


Calculated Risk observed that the string of unemployment claims over 400,000 reached ten weeks, unusual outside recessions.


The venerable Financial Times is bailing on its support of the austerity camp. Under the title, “Apologies, we need a toxic rethink on the economy,” Robin Harding writes that we must hold our noses and go back to the same bailouts, timid stimulus and monetary policy voodoo that have done so little at such great cost.

The revulsion caused by talk of stimulus is understandable. The tax cuts, spending increases and bank bail-outs used to fight the recession of 2007-09 have left behind huge budget deficits and sovereign debt crises in countries such as Ireland; in the US, UK and Japan interest rates are still at or close to zero. People want to fix these problems and get back to normal, not take more crisis measures.”

He calls it “crisis fatigue.” Well, neither austerity, nor financial sector bailouts, nor timidity have worked. I’m getting tired of it.


The Stanford Center for the Study of Poverty and Inequality (as opposed to Standord’s Hoover Institute) posted Twenty Facts About U.S. Inequality that Everyone Should Know.
One is over the last 30 years, wage inequality in the United States has increased substantially, with the overall level of inequality now approaching the extreme level that prevailed prior to the Great Depression. though the trend at the top of the income distribution (the “upper tail”) is not exactly the same as the trend at the bottom of the distribution (the “lower tail”). They found that lower-tail inequality rose sharply in the 1980s and contracted somewhat thereafter, while upper-tail inequality has increased steadily since 1980. Chart online at

Source: Economic Policy Institute. 2011. “Upper Tail” inequality growing steadily: Men’s wage inequality, 1973-2009. Washington, D.C.: Economic Policy Institute. May 11, 2011. .


The University of Michigan’s Survey of Consumers asks, “By about what percent do you expect your (family) income to increase during the next 12 months?” The respondents’ answer has hit the floor, yes, zero, far below any reading since the question began to be asked in the early 1980s, and that’s been the response since the end of 2008.


Another of the twenty facts from the Stanford Center. We are a richer country overall because of a spectacular rise in labor productivity. But who has profited from this rise? Although the growth of labor productivity has expanded total national income, the real income and wages of the median worker have at the same time stagnated.

Labor productivity and income of the median worker

Source: Bureau of Economic Analysis and U.S. Census Bureau


Is that overstating the conclusions? Not really. Quoting from the executive summary of the report:

The global war on drugs has failed, with devastating consequences for individuals and societies around the world. Fifty years after the initiation of the UN Single Convention on Narcotic Drugs, and 40 years after President Nixon launched the US government’s war on drugs, fundamental reforms in national and global drug control policies are urgently needed.

Vast expenditures on criminalization and repressive measures directed at producers, traffickers and consumers of illegal drugs have clearly failed to effectively curtail supply or consumption. Apparent victories in eliminating one source or trafficking organization are negated almost instantly by the emergence of other sources and traffickers. Repressive efforts directed at consumers impede public health measures to reduce HIV/AIDS, overdose fatalities and other harmful consequences of drug use. Government expenditures on futile supply reduction strategies and incarceration displace more cost-effective and evidence-based investments in demand and harm reduction.


From Kash at the Street Light Blog, some interesting data from the Bank for International Settlements regarding the exposure of various parties to debt issued by the PIGs (Portugal, Ireland, and Greece).

Observation #1. Default Insurance Matters. approximately 30% of total potential exposures to debt from the PIGs are covered by default insurance. Demand Side mea culpa: We suggested in earlier posts that this figure was much higher. Still, it is not a trivial amount

Observation #2. Direct Exposure in Europe, Indirect in the US. If Greece were to default, for example, approximately 94% of the direct losses would fall on European creditors, and only 5% would fall on US creditors. However, US banks and insurance companies would have to make about 56% of the default insurance payouts triggered by such an event, while European agents would make only 43% of those payouts.

Observation #3. Similar Overall Exposures in Europe and the US.
Once you account for the substantial payouts that US agents will have to make to European creditors in the case of a default by one of the PIGs, financial institutions in the US have roughly as much to lose from default as those in France and Germany. The apparent eagerness of US banks and insurance companies to sell default insurance to European creditors means that they will now have to substantially share in the pain inflicted by a PIG default.

That’s June’s punch list.

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