joi, 13 ianuarie 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Business Owners Blast IL Tax Hikes;Quinn's Blatant Lies;Neighboring States Gleeful, Mayor Daley Whines;Escape to Wisconsin; Arrogance,Greed,Corruption

Posted: 13 Jan 2011 08:21 PM PST

Tax insanity in Illinois is now official. Governor Pat Quinn signed off on a 67% hike in personal income taxes and a 46% hike in corporate taxes the moment the bill hit his desk.

The personal income tax rate immediately rises to 5 percent, up from 3 percent. The corporate income tax rate rises immediately to 7 percent, up from 4.8 percent. The Chicago Tribune reports Quinn, House Speaker Michael Madigan and Senate President John Cullerton — all Chicago Democrats — muscled the tax hike through in the eleventh hour of the lame-duck legislature. Only Democrats voted for the bills.

In contrast to virtually every other state in the nation, Quinn has made no mention of any cuts in services or any givebacks by public unions. Mayor Daley is largely responsible. Any comments from Daley regarding tax hikes would have cost Quinn the election. Instead, Mayor Daley is whining now.

Quinn's Blatant Lies

The Daily Herald notes that On the campaign trail, Gov. Pat Quinn told voters he'd veto any income tax hike that would raise Illinois' rate over 4 percent.

I believe this is one of the fastest proven lies political history.

Escape to Wisconsin

Newly elected Wisconsin Governor Scott Walker makes some hay of Illinois' 66% income tax hike with a succinct message 'Escape to Wisconsin'
Wisconsin is open for business. In these challenging economic times while Illinois is raising taxes, we are lowering them. On my first day in office I called a special session of the legislature, not in order to raise taxes, but to open Wisconsin for business. Already the legislature is taking up bills to provide tax relief to small businesses, to create a job-friendly legal environment, to lessen the regulations that stifle growth and to expand tax credits for companies that relocate here and grow here. Years ago Wisconsin had a tourism advertising campaign targeted to Illinois with the motto, 'Escape to Wisconsin.' Today we renew that call to Illinois businesses, 'Escape to Wisconsin.' You are welcome here. Our talented workforce stands ready to help you grow and prosper.
Neighboring States Gleeful, Mayor Daley Whines

The LA Times reports Neighboring states gleeful over Ill. tax increase
While many states consider boosting their economies with tax cuts, Illinois officials are betting on the opposite tactic: dramatically raising taxes to resolve a budget crisis that threatened to cripple state government.

"It's like living next door to 'The Simpsons' -- you know, the dysfunctional family down the block," Indiana Gov. Mitch Daniels said in an interview on Chicago's WLS-AM.

Illinois state Sen. Dan Duffy, a Republican, labeled the tax increase "the nuclear bomb of jobs bills."

There was even some carping from Illinois Democrats. Chicago Mayor Richard Daley predicted jobs will start trickling out of Illinois with little fanfare.

"Businesses don't have press conferences like this and announce they're moving 50 people out, 60 people out, 70 people," Daley said at an event in Chicago.
Oak Lawn Business Owners on Edge

The OakLawnPatch reports Business Owners on Edge About New Tax Hikes
As state lawmakers prayed, celebrated a new gubernatorial inauguration and passed historic tax increases this week, Oak Lawn entrepreneurs and independent businesses prayed that they can keep their doors open another month in dismal economic landscape.

"Personally, I am only days, weeks away from closing the business as it is," said Chad Reno, owner of Cornerstone Café at 5177 W. 95th St. "I'm hanging on by a thread. I can't see finding more money to pay out."

Glen Kato, a board member of the Oak Lawn Chamber of Commerce and web designer, watched his business "virtually dry up" as clients tightened their belts.

John Crivellone, another chamber board member and owner of Security Associates, feels there is more that Quinn can be doing to bring the state's $15 billion deficit in check besides hiking taxes.

"It's so excessive, it's comical," Crivellone said. "We're in the middle of a recession right now. Any expert on economics will tell you this will be so detrimental to the economy that it would be like putting nails in a coffin for the small businessman.

For George Rock, co-owner of Every Good Gift at 10336 S. Cicero Ave., the new tax hikes are a surefire way to kill job growth.

"To me, it's just so counterproductive it's ridiculous," Rock said. "I characterize it as a very lazy way to approach this. It's uninventive and they should be looking for ways to increase efficiency and they're not bothering."
Quincy Business Leader Cites "Arrogance, Greed and Corruption"

In Quincy, Illinois Business Leaders Sound Off On Tax Hike
At Knapheide Manufacturing, Bo Knapheide, the company's vice president of fleet, held a news conference which blasted the state's actions.

"The past three years have been very difficult for Knapheide Manufacturing and our people," Knapheide said. "We have undergone significant layoffs, wage freezes, elimination of performance bonuses and numerous cost cutting measures."

Knapheide said the tax increase does not help the company compete in what is already a tough business environment.

"Price competition in our depressed markets is fierce," he said. "It is impossible to full cover increase in material costs, energy costs, the added expense of Obamacare and now the added cost of the waste and corruption in Illinois government."

Knapheide said downstate businesses are expected to pay for "the Chicago political machine" that is "destroying not only Chicago and Cook County, but the economy of the entire state of Illinois. The machine carefully takes care of their political cronies at the expense of the Illinois taxpayer. Their arrogance, greed and corruption leave the people of Illinois with high income taxes, high property taxes and high unemployment."

Mike Nobis of JK Creative Printers and head of the Quincy Area Action Council issued a statement via e-mail.

"The new tax increase will be really hard on this state and Illinois businesses will be under extreme pressures once the tax increases take affect which will be immediate once Quinn signs the new taxes into law," Nobis said.

Jeff Mays of the Illinois Business Roundtable said his analysis shows the Legislature's action will make the problem worse with a continual annual operating deficit that will hit $4 billion in 2016 and lead to an overall deficit of $14.2 billion.
New Illinois Constitutional Amendment Allows Gubernatorial Recall

Last November, Illinois voters were presented a chance to vote on a constitutional amendment allowing governors to be recalled. I am pleased to report the amendment passed by a wide margin and is now law.

Campaign To Recall Illinois Governor Pat Quinn Underway

My Campaign To Recall Illinois Governor Pat Quinn Is Underway
I have exciting news this morning. I am launching a campaign to recall Illinois governor Pat Quinn.

This is not a frivolous effort. It is a serious undertaking and one in which I intend to see to the end. It will take hard work and lots of volunteers but we will be successful.

I need volunteers to ...

  • Gather signatures
  • Talk to state legislative representatives to get them on board
  • Provide legal help
  • Design a website
  • Help with advertising

I will pay for website hosting and domain names.

We need to be successful because Governor Quinn has plans that will destroy Illinois.

Will You Stand Up To The Injustice?

There are many tasks to be performed and I will need volunteers from every county to gather signatures. I estimate we need about 520,000 signatures. My goal is to get 700,000.

If you can volunteer, time, web design, advertising, legal help, or any kind of general assistance, I would appreciate it. We need to put a stop to Quinn's proposals that will drive businesses and jobs out of the state and massively raise your taxes as part of the bargain.
Call To Action

I wrote the above call to action post on Sunday. Since then I have had over 100 volunteers including 10 web designers, a lawyer, and numerous business owners. Work on a website is underway. I have secured the appropriate domain names. One business owner who employs about 100 people graciously volunteered services of his legal department.

This is going to be a long slug, no doubt about it. Yet other than leave the state, there is little else we can do. I do need business owners to contact their legislative representatives and pressure them to sign the petition to Recall Quinn.

There are 118 state representatives and 59 state senators. To get started, all we need are 20 reps (10 each party), and 10 senators (5 each party), before we start the signature gathering process.

Please contact your representatives and get them on board. In the meantime, please email Recall Governor Pat Quinn Today (RecallQuinnToday@gmail.com) and lend your support to the effort to save the state of Illinois from Quinn's fiscal recklessness.

Please state in the email what you can do to help.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Hallucinations on Curing Unemployment; Modeling the Model

Posted: 13 Jan 2011 12:32 PM PST

In Get a Model, Plug in Guesses, Cure Unemployment Caroline Baum takes a look at Janet Yellen's statements regarding the alleged creation of 3.5 million jobs. Here are a few snips.
Just when you thought you'd heard the last of "jobs created or saved," the Obama administration's quarterly report card on its $814 billion fiscal stimulus, along comes the Federal Reserve with its own model-derived guesstimates.

The Fed's full menu of securities purchases, starting with $1.7 trillion of Treasuries, agency and mortgage-backed bonds in late 2008 and 2009 and including the current $600 billion of intermediate- and long-term Treasuries, "will have raised private payroll employment by about 3 million jobs," said Fed Vice Chairman Janet Yellen.

Yellen's projections, presented at the Allied Social Science Association's annual meeting in Denver last weekend, are based on simulations performed by the Fed's macroeconomic model, known as FRB/US, not real jobs.

That would be the same model that failed to grasp that mortgage loans made during a period of exceptionally low interest rates by lenders with no skin in the game might not be repaid, putting major financial institutions on the brink of insolvency; the same model that failed to understand how new and exotic derivatives based on these mortgages would perform; the same model that failed to see the millions of jobs that would be lost if housing and credit bubbles were allowed to inflate until they burst; and the same model that predicted an unemployment rate of 8.8 percent in the fourth quarter of 2010 without the enactment of a fiscal stimulus. (It was 9.6 percent with it.)
Fantasy Models

Baum asks "Why do policy makers persist in perpetrating this fantasy, in asserting something that can't be proven?"

That's a good question. I had questions of my own regarding Yellen's preposterous statements in Janet Yellen Says Fed Asset Purchases Will Create 3 Million Private Jobs By 2012
Should we add those three million jobs to the 3.5 million jobs Obama wanted to create or save? By the way what happened to those 3.5 million jobs anyway?

Janet Yellen thinks the Fed is going to create 3 million jobs by the end of this year. Let's do that math, too. 3 million divided by 12 is 250,000 jobs a month. Does anyone believe that?
I posted a graph in that article that shows we lost 3.87 million jobs in the very timeframe Obama pledged to create or save 3.5 million jobs. That's a whopping deficit of 7.37 million jobs.

Mathematical Models

As long as we are discussing models, let's look at the math behind them. The Fed bloated its balance sheet by $2.3 trillion to allegedly create 3.5 million jobs. My math suggests it takes $657,142.86 in balance sheet additions to create a single job.

Note the mistake by Yellen. She should have claimed the Fed created 10 million jobs, dropping the needed balance sheet expansion to a mere $230,000 per job.

Labor Force Models

Last year, the reported unemployment rate fell from 9.9% to 9.4%. In that time, those "not in the labor force" rose by 1,447,000 while those in the labor force rose by a mere 518,000.

If we factored that into the unemployment rate calculation, it would have risen. However, Yellen's model ignores such discrepancies so we must march on as if the drop in unemployment rate is real.

Forward Projections

Let's model what it would take to reach "full employment" (assuming that such a preposterous concept exists, even though I assure you it doesn't).

Economists love to project forever into the future the conditions we see today. It is one of their favorite pastimes, so I want to show you what the math suggests.

Currently it takes $2.3 trillion to cause a .5 point drop in the rate. To obtain a "full employment" unemployment rate of 5.9%, the Fed's balance sheet will need to expand by an additional $16.1 trillion to a total of $18.4 trillion.

To be fair, I most certainly ignored the fact that Yellen believes all we need to do is "prime the pump" and the economy skyrockets onward. Then again, it appears that $2.3 trillion did not do much pump priming judging from the pathetic performance so far. How much pump priming does it take?

The correct answer is pump priming does not work at all, but let's ignore that little factoid as well.

Marching on, it's fair to point out there is a significant risk of an economic relapse for numerous reasons including a tax hikes by states, layoffs and cutbacks at the city and state level, an implosion in Europe, a slowdown in China, a slowdown in consumer spending.

But hey, let's ignore those risks too, while we continue to "model away". Here is a summary of what will happen based on projections of Yellen's model.

Modeling The Model

  • The Fed created 3.5 million jobs.
  • The Fed bloated it's balance sheet by $2.3 trillion to do so.
  • It takes $657,142.86 in balance sheet additions to create a single job.
  • It takes the same $2.3 trillion to lower the unemployment rate .5%
  • The Fed's balance sheet will reach $18.4 trillion by the time the unemployment rate drops to 5.9%
  • It will take another 3.5 years to get to a "full employment" situation with an unemployment rate of 5.9%.

Don't blame me, I'm just modeling Yellen's model.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Amazing Footage of Australian Flood

Posted: 13 Jan 2011 10:14 AM PST

Best wishes to my friends down under, many of whom have been hit hard by flooding. Following is a spectacular video of a the "Toowoomba Flood"
Amazing footage of East Creek near Chalk Drive / Chalk Lane rising and washing away lots of cars during Flash Flood in Toowoomba on Monday 10 January 2011. This is some of the best footage I have seen of the Flood and was taken from the second floor of our office which backs onto Chalk Lane.



It shows just how fast the creek turned into a torrent and quickly flooded Chalk Drive and Chalk Lane.

With the incredible exposure that my video is receiving all over the internet and media worldwide I would like to encourage you to donate to the relief appeals.

Flood Relief Donations


Please pray for us. There are many people who are suffering through this.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

No Such Thing as Cost-Push Inflation; Demographics and the "Demand for Money"

Posted: 13 Jan 2011 04:55 AM PST

In China's Foreign Exchange Reserves Jump by Record $199 Billion; Cost Push Inflation from China? Don't Count On It! I stated ....
Strangely, nearly everyone insists inflation is roaring in the US instead of where it is roaring, China and India. The alleged proof of US inflation is a series of widely circulated charts of various commodity prices even though there has been little-to-no passthrough on any consumer prices except gasoline, and home prices are once again falling like a rock.
In response my friend "HB" wrote ....
There actually is no such thing as 'cost push inflation'. Think about it - if the money supply were to remain stable (which isn't the case, but hypothetically), then a rise in price of some goods automatically would lead to a fall in prices of some other goods.

If you have $100 to spend per week, and you've spent $40 on say gas up until now and the gas price rose to increase your gas bill to $50, your demand for non-gas goods - assuming your gas consumption remains unchanged - would fall by $10. This decrease in demand would pressure the prices of non-gas goods.

Economy-wide , a rise in general prices is only possible if the money supply increases. of course there is non uniformity in such effects on prices and a lag effect as well. furthermore, the effect of the increase in the supply of money is mitigated by productivity increases. In any case, there can be no 'cost-push' inflation, unless the rise in the price of some goods is 'accommodated' by monetary pumping.
No Such Thing as Cost-Push Inflation

My Austrian-minded friend is correct. I should have been more explicit. However, I did state that the idea of cost-push inflation is "silly" once before in "Money's Already Quite Cheap"
Cost-Push Inflation?

Someone sent me an email stating that I do not understand push-through inflation and that is why I don't understand hyperinflation.

Well for starters hyperinflation is not caused by rising prices, hyperinflation is a loss of faith of currency (typically caused by some political event). The result (not the cause of hyperinflation) is rising prices. For a further discussion of hyperinflation please see "Straight Talk" with Economic Bloggers

Second the whole idea of cost-push inflation is silly. An excerpt from $30 Billion Offer No One Wants - Small Businesses Hit by Deflation will prove it. ...
By the way, there is a subtle error in what "HB" said. Did you catch it?

"Economy-wide , a rise in general prices is only possible if the money supply increases."

An increase in money supply is by far the most likely way there is a general price rise, but it is not the "only" way, even if we assume that "money supply" includes credit.

Prices Affected by the "Demand for Money"

In a general sense, if the demand for money drops for any reason, prices will rise. Conversely, if the demand for money rises for any reason, prices will fall.

The demand for money (the desire to hold on to it vs. consume) can change as consumer preferences change. Demographics is one such reason consumer preferences may change.

For example, someone at retirement age and barely scraping by has a far greater demand for money than a young person at age 30 with a decent job.

Here is another way of phrasing the same thing: A person aged 30 with a good job is far more likely to have high demand for the latest and greatest electronic gadget than someone aged 62 scared half-to-death about running out of money in the near future.

Changing demographics is a very powerful "price deflationary" card at this stage of the game. Indeed, Bernanke is doing his best to counteract the increased demand for money associated with boomer dynamics by pumping up actual money supply.

The result so far has not been the expansion of credit that Bernanke wants, but rather a massive increase in the amount of "excess reserves" held with Fed. (Please see Fictional Reserve Lending for further discussion).

In short, banks have no real desire to lend except to a small pool of creditworthy borrowers who have no desire to borrow.

In the real economy, demand for money is high (as evidenced by unprecedented drops in consumer credit). However, Bernanke (with much help from the Bank of China) did manage to ignite more recklessness in numerous speculative ventures including equities, leveraged buyouts, and commodities.

Thus, the Fed can increase money supply, but it cannot easily dictate where that money goes or even if it goes anywhere at all.

Frugality Revisited

The "Demand for Money" construct forms the basis for many "frugality arguments" I have presented over the years.

It is a topic much in need of discussion and understanding, especially by various inflationistas calling for hyperinflation later this year. The good news is we only have 11 more months to see them proven wrong. The bad news is they will simply bump up their target by a year or two.

Cliff Event In Japan

Meanwhile, Japan is the perfect example of strong demand for money in spite of amazingly low interest rates and in spite of all efforts by the Japanese central bank to cause inflation.

Nonetheless, Japan is at a state in its economy where it has consumed all of its savings and then some just as its retirees need to drawn down on savings that the government spent building bridges to nowhere in foolish attempts to fight deflation.

Please see Japan's Finances "Approaching Edge of Cliff" for details.

As a result of that "cliff event", strongly rising import prices in conjunction with a rapidly falling currency will likely hit Japan before the same thing hits the US.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Frisby's Bulls and Bears 2011 Predictions from James Turk, Bob Hoye, Mish, Others

Posted: 13 Jan 2011 01:28 AM PST

Last week I did an interview with Dominic Frisby at Frisby's Bulls and Bears. The interview was part of a series of podcasts with James Turk, Mike Hampton, Bob Hoye and others. I was Part V: Predictions For 2011 with Mike 'Mish' Shedlock

Click on the above link for the podcast.

In the one hour podcast I expanded on the ideas presented in Ten Economic and Investment Themes for 2011.

We also discussed a "bonus 11th" theme regarding Japan. You will need an hour to play the podcast but I put a link on the right sidebar so you can easily find it and play at your leisure.

For a quick review please see Mish Interview on Frisby's Bulls & Bears

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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