Mish's Global Economic Trend Analysis

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• Brazil Accuses US, China of Currency Manipulation; Intense Monetary Tightening in China; Iceland Solution Temps Ireland; Unprecedented Hell in Belgium
• California Budget Balancer Interactive Map from LA Times Misses the Mark
• Bernanke Rejects Bailing Out State and Local Governments; A Look at Meredith Whitney's Municipal Bond Call
• Sunday Funnies 2011-01-03 Living With Parents
• France, Germany Pressure Portugal to Take Aid; No Gov't in Belgium for 210 Days; Private Debt Placements in Portugal; Is China the Red Knight Savior?

Brazil Accuses US, China of Currency Manipulation; Intense Monetary Tightening in China; Iceland Solution Temps Ireland; Unprecedented Hell in Belgium Posted: 09 Jan 2011 10:26 PM PST Here are a few of the many stories I am following: The risk of trade wars escalates as Brazil accuses the United States and China of currency manipulation. In turn, the IMF is upset at Brazil for imposing capital controls. In Belgium, the king wants to end the "unprecedented hell" that has left Belgium without a government for 211 days smack in the midst of a budget crisis. China is set for multiple rounds of credit tightening even though China's growth is weakening. Interest rates in Portugal and Spain suggest more bailouts coming up. Ireland is pondering the Iceland Solution and that has the IMF more than a bit upset. Brazil Finance Minister Warns of Trade Wars The Financial Times reports Brazil Warns Trade War Looming Brazil has warned that the world is on course for a full-blown "trade war" as it stepped up its rhetoric against exchange rate manipulation. Guido Mantega, finance minister, told the Financial Times that Brazil was preparing new measures to prevent further appreciation of its currency, the real, and would raise the issue of exchange-rate manipulation at the World Trade Organisation and other global bodies. He said the US and China were among the worst offenders. "This is a currency war that is turning into a trade war," Mr Mantega said in his first exclusive interview since Dilma Rousseff, Brazil's new president, took office on January 1. His comments follow interventions in currency markets by Brazil, Chile and Peru last week and recent sharp rises in the Australian dollar, the Swiss franc and other currencies amid an exodus of investment from the sluggish economies of the US and Europe. Tensions Rise in Currency Wars In related news, the IMF is arguing against Brazil's imposition of capital controls as Tensions rise in currency wars. If the world's shell-shocked investors thought that 2011 might see an outbreak of peace in the currency wars, they were sadly mistaken. Not only did Brazil last week take more action to stem the rise in the real but Chile, one of the most free-market of emerging economies, has also unveiled a campaign of intervention against its currency. With a sense that the battles against destabilising capital inflows are here to stay has come a determination to set new rules of engagement on controlling them. But given the uncertainty and political explosiveness around the issue, any such venture faces a tough future. The International Monetary Fund last week revealed an attempt to put itself at the centre of the debate, releasing a study arguing for global rules to constrain governments' use of capital controls. But observers doubt that it will broker a deal soon. "The IMF has made a pre-emptive grab for power without a clear idea of what it is asking for," says Eswar Prasad, a former senior IMF official now at Cornell University. The case for global rules is that one country's actions can spill over to others. Last year's rash of direct currency market intervention to slow speculative capital inflows, for example, proved self-perpetuating as country after country rushed to stop its own exchange rate being the only one to rise. China's Trade Surplus Weakens The New York Times reports China's December Trade Rises, but Growth Weakens China's December exports rose by double digits, possibly fueling tension with Washington ahead of Chinese President Hu Jintao's U.S. visit next week. Exports rose 17.9 percent, producing a $13.1 billion trade surplus, though growth was down from November's 34.9 percent surge, customs data showed Monday. Imports gained 25.6 percent over a year earlier, down from the previous month's 37.7 percent growth but reflecting China's relatively strong economic growth. December exports of $154.1 billion might be the highest monthly level ever for China, which overtook Germany in 2009 as the world's biggest exporter, according to Cohen. Imports were $141 billion. The trade surplus was the third-lowest monthly level in 2010 and down sharply from November's $22.9 billion. Beijing promised more exchange rate flexibility in June and the yuan has risen by about 3.5 percent against the U.S. dollar since then. Analysts expect the currency to rise by about 5 percent this year, but that is too little for critics who say the yuan is undervalued by up to 40 percent. Beijing also faces criticism that it is hampering access to its finance industries and is improperly supporting its fledgling producers of solar, wind and other renewable energy technology by shutting foreign suppliers out of government-financed projects. Those last two paragraphs also smack of trade wars. Currently, China is on the Congressional back burner, but that will change as soon as the US economy stalls even a bit. China Faces Intense Monetary Tightening Bloomberg reports Reserves Set for $2.8 Trillion Mean Tightening People's Bank of China Governor Zhou Xiaochuan ordered lenders to increase funds on deposit at the authority six times in 2010, as the yuan's interest-rate advantage over the dollar attracted capital that stoked inflation. The yuan may gain the most among currencies in the so-called BRIC nations, rising 5.4 percent by year-end, compared with a 0.8 percent drop for Brazil's real, a 0.3 percent increase for Russia's ruble and 5 percent advance for India's rupee, according to Bloomberg surveys of strategists. "We will probably see a round of pretty intense tightening in the first half," said Ren Xianfang, an economist in Beijing for Lexington, Massachusetts-based research company IHS Global Insight. "The yuan's appreciation in 2011, particularly in the first half, should be faster than last year." The reserves, which exceeded $1 trillion in 2006 and $2 trillion in 2009, will reach $3 trillion by June 30, according to UBS AG estimates. Premier Wen Jiabao is seeking to sustain the economy's growth to create millions of jobs each year, while preventing rising prices for homes and food from fueling social unrest. Benchmark borrowing costs for Chinese banks have risen to a two- year high, fuelling an 11 percent decline in the benchmark Shanghai Composite Index of stocks in the past 12 months. While a stronger currency and higher rates may help tame inflation, they also risk attracting capital from abroad. In November, consumer prices rose 5.1 percent from a year earlier, the most in 28 months, food costs jumped 11.7 percent and property prices gained 7.7 percent, government data show. "The risk of a widening interest-rate gap attracting hot money inflows may be part of the reason behind the central bank's inclination to use the reserve ratio tool more frequently than interest rates," said Wen Pengyong, an economist at Essence Securities Co., a Shenzhen-based brokerage. Unprecedented Hell In Belgium As Debt Crisis Escalates Bloomberg reports Belgium's King to Tackle Political Deadlock as Debt Woes Mount Belgium's king will make a fresh bid to end the 211-day post-election deadlock that has left the country without a full-time government and fanned concern that Europe's debt crisis will widen. Belgium's 10-year borrowing costs jumped to an almost two-year high last week, prompting business leaders to demand an immediate coalition deal between feuding parties in the Dutch- speaking north and French-speaking south. "Financial markets will be merciless if the country doesn't extricate itself from this unprecedented hell as soon as possible," billionaire financier Albert Frere told Le Soir newspaper. For the first time, investors view western European government bonds as riskier than emerging- market debt, the Markit iTraxx SovX Western Europe Index of credit-default swaps showed last week. European leaders may discuss expanding the 750 billion-euro ($965 billion) financial backstop for indebted nations at their next summit, Handelsblatt reported yesterday, citing German government officials it didn't identify. German Chancellor Angela Merkel has said she opposes increasing government-funded aid for euro countries and her chief spokesman, Steffen Seibert, said yesterday that "no decision has been taken about widening the rescue fund." The extra borrowing cost over German bonds, a gauge of the risk of investing in Belgium, has risen to 126 basis points from 79 basis points on election day June 13. The spotlight shifts later this week to southern Europe for sales of some of the $1.1 trillion that euro-region governments need to borrow on bond markets in 2011. Portugal will auction bonds maturing in 2014 and 2020 on Jan. 12. Spain follows on Jan. 13 with the sale of bonds maturing in 2016. Portugal's 10-year yields rose 50 basis points to 7.10 percent last week, while Spain's rose 6 basis points to 5.51 percent. The market has signaled it's all over for Portugal. Spain is next. Icelandic Way Out The Telegraph reports Iceland offers risky temptation for Ireland as recession ends Iceland has finally emerged from deep recession after allowing its currency to plunge and washing its hands of private bank debt, prompting an intense the debate over whether Ireland might suffer less damage if adopted the same strategy. Iceland's budget deficit will be 6.3pc this year, and soon in surplus: Ireland's will be 12pc (32pc with bank bail-outs) and not much better next year. The pain has been distributed very differently. Irish unemployment has reached 14.1pc, and is still rising. Iceland's peaked at 9.7pc and has since fallen to 7.3pc. Iceland's president, Olafur Grimsson, irritated EU officials last month when he said his country was recovering faster because it had refused to bail out creditors – mostly foreigners. "The difference is that in Iceland we allowed the banks to fail. These were private banks and we didn't pump money into them in order to keep them going; the state should not shoulder the responsibility," he said. The Irish press reported that EU officials "hit the roof" when Irish negotiators talked of broader burden-sharing. The European Central Bank is afraid that any such move would cause instant contagion through the debt markets of southern Europe. Comparisons between the Irish and Icelandic banks must be handled with care. Iceland is tiny. It could walk away from liabilities equal to 900pc of GDP without causing a global systemic crisis. Ireland is 12 times bigger. The balance sheets of Irish banks are $1.3 trillion (£822bn). The interlocking ties with German, Dutch, Belgian, and British banks create a nexus of vulnerability. Bondholder defaults would risk contagion to Spain and Portugal, where the banks rely heavily on foreign capital markets. Of course, banks are only half the story. Nobel economist Paul Krugman said Iceland has been able to eke out recovery sooner because it never joined the euro. "Iceland devalued its currency massively and imposed capital controls. And a strange thing has happened: although it experienced the worst financial crisis (anywhere) in history, its punishment has been substantially less than that of other nations," he said, referring to Baltic states pegged to the euro. Two years later, the krona is down 30pc, aluminum smelters are firing on all chimneys to meet export demand and local produce has displaced imports, including such exotica as vegetables and tomatoes grown in greenhouses. The underlying tale of Ireland and Iceland, and the tale of the 1930s, is that a devaluation shock may cause a violent crisis – that looks and feels terrible while it happens – but the slow-burn of policy austerity and debt deflation does more damage in the end. To Ireland With Love Once again I implore Ireland to tell the IMF and EU to go to hell in response to the IMF's Trojan Horse offering. Flashback November 28, 2010: To Ireland With Love. I believe we have all heard the story and know how it ends. Iceland is No Ireland Inquiring Irish minds just might be interested to see how Iceland fared after they told EU bankers to go to hell. For the answer, please consider Iceland Is No Ireland as State Kept Free of Bank Debt Iceland's President Olafur R. Grimsson said his country is better off than Ireland thanks to the government's decision to allow the banks to fail two years ago and because the krona could be devalued. "The difference is that in Iceland we allowed the banks to fail," Grimsson said in an interview with Bloomberg Television's Mark Barton today. "These were private banks and we didn't pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks." Vote the Bums Out and Tell the EU and IMF to Go to Hell Unfortunately, the idiots running Ireland's government, especially Minister Brian Cowen, don't see it the way Iceland's president does. However, Iceland's government did not see it that way either, but the citizens of Iceland took matters into their own hands and voted the bums out, rejecting "Icesave". Regardless of what deal Cowen signs, I see no reason it need be binding on the next Irish Parliament. Indeed, I recommend to to citizens of Ireland that they firmly tell their representatives that if they vote for Cowen's proposed budget, they will be voted out of office. Just Who The Hell Do You Think You Are? Nigel Farage in a speech before European Parliament says "The Euro Game Is Up… Just Who The Hell Do You Think You Are?" Words alone cannot describe that video. Please play it. Iceland told its creditors to go to hell and is better off for it. Ireland can and should do the same. For still more on the European sovereign debt crisis please see my Sunday post France, Germany Pressure Portugal to Take Aid; No Gov't in Belgium for 210 Days; Private Debt Placements in Portugal; Is China the Red Knight Savior? Also see Friday's post Italy The Invisible Elephant If Italy blows, the currency union has had it. 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.

California Budget Balancer Interactive Map from LA Times Misses the Mark Posted: 09 Jan 2011 03:32 PM PST I just took the interactive LA Times California Budget Balancer exercise. I vehemently protest. This was a blatant effort to force people into accepting a need to raise taxes. To balance the budget I made every possible program cut offered. It was not enough. To balance the budget I had to raise sin taxes and gas taxes. There are worse solutions of course, like hiking income taxes or corporate income taxes. Exercise Misses the Mark Where was a proposal to privatize the prison system using non-union labor? Where was the proposal to eliminate prevailing wage laws? Where was the proposal to eliminate defined benefit plans for all government workers? Where was the proposal to virtually privatize every conceivable government job to the private sector? What about programs that could be eliminated entirely? California Agencies Look at this disgusting list of California Agencies. I sorted out some but not all of the more ridiculous ones. Does the state need a .... Acupuncture Department Office of AIDs Air Research Board 3 different agencies for alcohol and beverages 2 Apprenticeship Councils Art Council Asian Pacific Islander Legislative Caucus Bureau of Automotive repair Barbering board Biodiversity council Calvet Loan program Climate Change Portal Coastal Commission Cool California 4 Delta agencies Digital Library Bureau of Electronic and Appliance Repair Employment Training Panel Energy Commission Equalization Board 2 Fair Employment agencies Film Commission Flex Your Power Healthy Family Program Hearing Aid Dispensers Bureau Home Furnishings Bureau Humanities Council Independent Living Council Indoor Air Quality Program Economic Development Bank Interagency Ecological Program Labor and Workforce Development Latino Legislative Caucus Learn California Little Hoover Commission Maritime Academy Managed Risk Board Museum for History MyCali Youth Portal Native Heritage Association Natural Community Planning Program Naturopathic Medicine Community Outreach Peace Officer Standards Board Postsecondary Education Commission Prison Industry Authority Privacy Protection Office Psychology Board Railroad Museum Recovery Task Force Refugee Branch Regents of the U of C Save Our Water commission Smart Growth Caucus Status of Women Commission Take Charge California We Connect Wetlands Information System Workforce Investment Board California does not need ANY of those. Moreover I assure you I missed dozens more that could be cut back if not eliminated entirely. What the heck do those cost? And how much can be saved by my suggestions above. I propose the LA Times re-do their preposterous exercise meant to convey the idea that taxes have to be raised. They don't. In fact, I bet they could be lowered. Here is the LA Times Discussion Thread on California Budget Balancer For more ideas on how to Fight California Tax Hikes please visit the Howard Jarvis Taxpayers Association 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.

Bernanke Rejects Bailing Out State and Local Governments; A Look at Meredith Whitney's Municipal Bond Call Posted: 09 Jan 2011 01:24 PM PST It's exceptionally rare I agree with what Bernanke has to say. This is one of those rare times. Please consider Bernanke Rejects Bailouts "We have no expectation or intention to get involved in state and local finance," Mr. Bernanke said in testimony before the Senate Budget Committee. The states, he said later, "should not expect loans from the Fed." The $2.9 trillion municipal-bond market has been stung recently by worries that some cash-strapped cities or states won't be able to pay off or roll over debt. Costs have risen broadly for municipal borrowers. The market also faces challenges from the expiration of the Build America Bonds program, which helped cities and states borrow $165 billion at interest rates held down by federal subsidies. The Fed only has legal authority to buy muni debt with maturities of six months or less that is directly backed by tax or other assured revenue, which makes up less than 2% of the overall market. The Dodd-Frank financial-regulation law enacted last year further tied the Fed's hands, Mr. Bernanke noted, by barring the central bank from lending to insolvent borrowers or pursuing bailouts of individual borrowers. Mr. Bernanke played down the risk of a major municipal-bond crisis, noting that muni markets have been functioning normally, with healthy trading volumes and lots of issuance. But he said that if municipal defaults did become a problem, it would be in Congress's hands, not his. "This is really a political, fiscal issue," he said. Lawmakers also are drawing a line in the sand. Senior House Republicans say they will oppose any state requests for money. "If we bail out one state, then all of the debt of all of the states is almost explicitly put on the books of the federal government," House Budget Committee Chairman Paul Ryan said Thursday. At least three House committees are planning hearings on local budget woes. Rep. Devin Nunes (R., Calif.) plans to introduce a bill to require states to disclose the size of their public-pension obligations in order to keep their federal tax-exempt bonding authority. The bill, the Public Employee Pension Transparency Act, will explicitly bar state and local governments from receiving help from the federal government to cover their pension obligations. "There are 242 Republicans, and I can't imagine one that would be in favor of a bailout," Mr. Nunes said. Many Democrats are wary as well. "We need to be prepared with a plan in case we are approached by one or more states," said Sen. Kent Conrad, (D., N.D.), chairman of the Budget Committee. Neither the House nor the Senate would be "very interested in bailouts to states," he added. On a recent broadcast of CBS's "60 Minutes," Meredith Whitney, a banking analyst who recently turned to analyzing state and local finances, said the U.S. could see "50 to 100 sizable defaults," in 2011 amounting to "hundreds of billions of dollars." Mr. Bernanke described that as a "pessimistic view" that he didn't entirely agree with. Themes For 2011 Municipal bankruptcies, and Cutbacks in US Cities and States themes number 1 and number 3 in Ten Economic and Investment Themes for 2011 1. US Municipal Bankruptcies Head to Center Stage Look for Detroit and at least one other city in Michigan to go bankrupt. Also look for increasing discussions regarding bankruptcy from Los Angeles, Miami, Oakland, Houston, and San Diego. Those cities are definitely bankrupt, they just have not admitted it yet. The first major city to go bankrupt will cause a huge stir in the municipal bond market. Best to avoid Munis completely. 3. Cutbacks in US Cities and States With Republican governors holding a majority of governorships, with Republicans holding a majority in the House, and with a far more conservative Senate, there is going to be little enthusiasm for increasing aid to states. There will be some aid to states of course, but nowhere near as much as needed to prevent cutbacks. Expect to see a huge number of layoffs and/or cutbacks in services. Cutbacks in cities and states will be a good thing, but that will counteract other gains in employment. The unemployment rate will stay stubbornly high. Whitney Overstates and Incorrectly States the Problem In regards to Bernanke's Meredith Whitney's estimate of "50 to 100 sizable defaults in 2011 amounting to hundreds of billions of dollars" I actually agree with Bernanke. The key word is "entirely". Mr. Bernanke described that as a "pessimistic view" that he didn't entirely agree with. I do not entirely agree with it either. A critical point is that by saying "entirely", Bernanke implies he agrees with some of it. While there could be 50 to 100 municipalities taking that action, many cities that take that action will be small. Moreover, as pessimistic as I am, I doubt we hit that total in 2011. Rather, I see this crisis spreading out over a fair number of years, not necessarily a big bang in 2011 specifically. Like Whitney, I do expect to see one or more major bankruptcies such as Detroit. I also see renewed interest by a large number of cities. I suspect Bernanke is bright enough to see the same thing. However, in many instances when cities do declare bankruptcy, one of the major goals will be to shed untenable public union pension plans along with union salaries, not necessarily bond obligations in general. Nonetheless, I expect this to rattle the municipal bond market across the board. The time to invest in munis will be after yields soar and after we get a better handle on which cities may go the bankruptcy route, and why. Whitney's estimate of "hundreds of billions of dollars" is where she is most likely to be wrong. Might hundreds of billions in unfunded pension obligations be shed by the time this crisis is over? Absolutely, and that is a major theme. After all, the state pension deficits are $3 trillion or more, and that does not include city, county, and local obligations. However, defaulting on pension obligations does not appear to be what Whitney meant. Addendum: "Jail4Bail" Writes "We haven't seen the cutbacks in operations that would precede any bankruptcy." Hello Jail, It won't necessarily happen that way. Cutbacks make the plans more solvent, prolonging the agony, while bankruptcies will eliminate the need for many cutbacks. Thus, the correct approach (and some cities will realize this in 2011) is bankruptcy comes first. Working out cutbacks and details come second. I expect this to happen in Michigan in particular. 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.

Sunday Funnies 2011-01-03 Living With Parents Posted: 09 Jan 2011 12:23 PM PST This Clarke and Dawe video on PIIGS bailouts and the European sovereign debt crisis went around long ago but is even more pertinent today. 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.

France, Germany Pressure Portugal to Take Aid; No Gov't in Belgium for 210 Days; Private Debt Placements in Portugal; Is China the Red Knight Savior? Posted: 09 Jan 2011 12:39 AM PST Portugal is the spotlight du jour in the sovereign debt crisis. Belgium is not far behind. On Saturday Reuters claimed Germany and France want Portugal to accept aid, citing Der Spiegel. Germany and France want Portugal to accept an international bailout as soon as possible in order to prevent its debt crisis spreading to other countries, German magazine Der Spiegel reported on Saturday. Without citing its sources, the magazine said government experts from both European heavyweights were concerned Lisbon will soon not be able to finance its debt at reasonable rates, after its borrowing costs rose at the end of last year. Berlin and Paris also want euro zone countries to publicly commit to do whatever it takes to protect the bloc's single currency, including topping up a 750 billion euro ($968 billion) rescue fund if necessary. Absurdity of "Stopping the Spread" Statement This headline is making the rounds but nearly a day later I still cannot find anything about it in Der Spiegel. Mish Note: See Addendum for Der Spiegel German reference and a reader's comments I do have a few quick comments. Note the absurdity of the statement "Germany and France want Portugal to accept an international bailout as soon as possible in order to prevent its debt crisis spreading". The fact that Portugal needs a bailout is 100% proof the crisis has spread. So are rising sovereign debt yields across the board relative to Germany. The only exception now is France. Is this another Maginot line? Private Debt Placements Please consider Portugal making private placement of bonds Portugal is in the process of making a private placement of bonds to diversify its investor base, the finance ministry said on Friday without giving any details of the operation. "I can confirm that an operation is taking place but we will make no comment about the buyer," a spokeswoman at the finance ministry told Reuters when asked about market talk that China could be buying Portuguese bonds. Assuming the story is true (once again I have no reason to doubt it in spite of a lack of details), the only conceivable private placement at this moment is China. The lack of details this weekend suggests an attempt to paper over the crisis with bullsweet, hoping something will stick. It won't. Is Belgium next? Belgium Without Government For 210 Days Inquiring minds note 200 days on and still Belgium has no government 30/12/10 16:35 CET [Belgium has] been without a full-time government for 200 days. It overshadows the 194 days it took to resolve a 2007 political deadlock. The world record is currently held by Iraq, which had no permanent government for 290 days. The New Flemish Alliance won the most seats in June's elections. Party leader Bart De Wever wants greater autonomy for Dutch-speaking Flanders. But the head of Wallonia's French-speaking Socialists, Elio Di Rupo, opposes any such move. As the two struggle to strike a deal, Prime Minister Yves Leterme has stayed on as the head of a caretaker government. No Government In Sight The Atlantic Sentinel reports In Belgium, Still No Government in Sight After numerous rounds of negotiations between the victors of this summer's federal elections, Belgium is still without a government. The two major parties, the Flemish nationalists and the French speaking socialists, have been gridlocked for months. Unless they manage to find common ground in the weeks ahead, the country may have to call another election. No one likes the prospect of new elections as they are likely to strengthen each of the largest parties in the two language areas of Belgium, rendering future compromise nigh impossible. The New Flemish Alliance, which favors gradual secession of the Dutch speaking part of the country, has been adamant so far in demanding increased autonomy for the region. Walloon socialist leader Elio Di Rupo previously offered the Flemish financial reform, including a transfer of competences from federal to regional governments worth some €15 billion. But the nationalist balked at parallel requests to give Brussels—an independent, bilingual region within Flanders of which the population is largely French speaking—a fixed subsidy of €250 million to alleviate part of its massive debt burden. Whereas Flanders is the economic powerhouse of Belgium, the south remains impoverished and subject to high unemployment rates. With the socialists in power, the Walloons nevertheless enjoy a welfare state for which the Flemish say they are footing the bill. The lack of political stability may well harm Belgium's credit rating in the near future. As one of the most highly indebted countries in Europe with government spending equaling almost 50 percent of GDP, Belgium's ability to borrow is pivotal. Belgium's CD&V Rejects Interim Government Proposal Bloomberg reports Belgium's CD&V Rejects Interim Government Proposal The CD&V, Belgium's Flemish Christian Democratic party, rejected a proposal from Didier Reynders, the country's finance minister, for a short-term government to address the country's budget deficit, the Belga news agency said, without saying where it got the information. The party wants negotiations to continue on forming a government that is "endowed with full responsibilities," Belga said. Belgium cannot put aside its differences to tackle the debt crisis. Will the debt crisis wait? I think you know the answer to that. Link in case above video does not play: 200 days and still no government No Red Knight to the Rescue The International Business Times asks and answers an important question: Can China save euro? Answer is 'no' China has been shopping for European sovereign debt for some time. The so-called 'red knight' for the struggling Eurozone periphery has come in with timely aid for Greece, and offered support to Ireland and Spain. On Thursday Spanish daily El Pais reported that China has offered to purchase Spanish sovereign debt worth about $7.89 billion. There is euphoric expectation that China, armed with its $2.6 trillion reserves, will emerge as the ultimate white knight for Europe. Is that belief founded on facts and substantiated by strategic thinking? Analysts at Capital Economics have said "China is unlikely to be able or willing to do much to solve the debt crisis in the euro-zone," even though the popular perception is that it will. "China's leaders naturally want to be polite to foreign hosts and visitors, but their actions frequently fall short of the expectations raised by their words," write Julian Jessop, chief international economist and Mark Williams, senior China economist, in a note. Significantly, the analysts also point out that eurozone's difficulties go beyond finding investors to buy sovereign bonds each month. The willingness of China or anyone else to buy sovereign bonds will not alone see the region through its more complicated systemic difficulties. Ever since the peripheral debt crisis began to threaten the common currency and the union, China has offered support to efforts to stabilize the eurozone. China reiterated the commitment on Tuesday saying it supported Europe's efforts to deal with the peripheral debt crisis and said Beijing will not cut down its holdings of European sovereign bonds "EU members have taken a number of steps to actively respond to the sovereign-debt crisis," Chinese Vice-Premier Wang Qishan said at the two-day EU-China High Level Economic and Trade Dialogue which concluded in the Chinese capital on Tuesday. "We hope these measures will quickly produce results and lead to a steady recovery of the EU economies," Wang added. Five-Day Euro Chart click on chart for sharper image What's China going to do? Buy it all? Then what? Addendum: Reader Moritz comments ... Hi Guys The original "Der Spiegel" article (in German) is here: http://www.spiegel.de/wirtschaft/soziales/0,1518,738457,00.html The big impact is Germany and France are thinking about raising the EU debt guarantee from 750 billion Euro to basically "unlimited". Germans are raging in the comments section, since it seems unthinkable that we might guarantee our neighbours' debts in an unlimited way. What's even more disturbing is that at the moment around 70% of the Germans want to leave the Euro. But, this is not being represented by the parties in parliament. From far right conservative CSU to far left semi-communist LINKE *every* party in parliament is pro Euro. People are very angry and upset because they feel ignored by the politicians. Now we have a few votes coming up on state level in the next months. It seems that Merkel's conservative party will fail at these elections. Liberal democrats have a high probability of failing to get into the parliaments at all. It might be very well the case that Merkel will be overthrown by June. This is not a conspiracy theory, it's mainstream media thought. Actually that comment is slightly inaccurate in one respect. Only 30% would get into the Euro today if they had to do it over again. I cannot speak for the rest of the translation. I assume it is accurate. For a look at German court cases and the German sentiment numbers against the Euro, please see EU Commission Plans Haircuts on Bank Debt; Greek Yields Hit New Record; China Buys Spanish Debt; German Courts to Decide Bailout Constitutionality 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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Mish's Global Economic Trend Analysis

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• Janet Yellen Says Fed Asset Purchases Will Create 3 Million Private Jobs By 2012
• Republican Introduce Bill to Eliminate Presidential Czars; How Many Czars are There? Obama on Czars Then vs. Now; Vanity of Barack Obama
• Kern County CA to Impose Contract on Unions; Time for a CA Reality Check; Half Moon Bay, Bell Face Bankruptcy; Brown Seeks Voter Approval for Tax Hike

Janet Yellen Says Fed Asset Purchases Will Create 3 Million Private Jobs By 2012 Posted: 08 Jan 2011 05:37 PM PST Fed Governor Janet Yellen is bragging about the number of jobs the Fed is going to create because of its Quantitative Easing programs. Please consider Yellen Says Fed Asset Purchases Create 3 Million Private Jobs The Federal Reserve's two rounds of asset purchases totaling $2.3 trillion will have helped boost private payrolls by about 3 million jobs by 2012, said Fed Vice Chairman Janet Yellen, citing research by four central bank economists. Policy makers' November decision to start a second round of asset purchases of $600 billion through June "is intended to support economic recovery from an exceptionally deep recession," the 64-year-old central banker said in the text of a speech today in Denver. "I believe it will be effective in fostering maximum employment and price stability." 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? I am glad you asked. I was going to figure it out, but a quick search led me to Tracking the 3.5 million jobs President Obama will save or create This post will track the 3.5 million jobs. There are a number of ways to measure jobs in the US. Some people work several different jobs at a time while others change employers frequently, so measuring jobs is not as simple as it might seem. Obama's economic team define jobs as use the payroll data (see The Job Impact Of The American Recovery And Investment Plan for their original report). Just before the stimulus bill passed, the Department of Labor [Employment Situation Report For January 2009 Table B1] shows the number of people working was 134,580,000. Using the Obama team methodology, without the stimulus bill employment would be expected to fall by around 1,613,000 jobs during the next two years so that without the stimulus bill we would expect employment to be 132,967,000 in January 2011. With the revised estimate of 3,500,000 jobs "saved or created", employment should be 136,467,000, creating 1,887,000 in addition to the 1,613,000 jobs saved. Here is a table from the above link. Tracking Jobs Created or Saved Date Number of Jobs Change in Jobs After Stimulus Number of Jobs needed to reach target by Jan 2011 January 2009 134,333,000 — 1,887,000 February 2009 133,652,000 -681,000 2,568,000 March 2009 133,000,000 -1,333,000 3,220,000 April 2009 132,481,000 -1,852,000 3,739,000 May 2009 132,178,000 -2,155,000 4,042,000 June 2009 131,715,000 -2,618,000 4,505,000 July 2009 131,411,000 -2,922,000 4,809,000 August 2009 131,257,000 -3,076,000 4,963,000 Sept. 2009 131,118,000 -3,215,000 5,102,000 October 2009 130,991,000 -3,342,000 5.229,000 November 2009 130,995,000 -3,338,000 5.225,000 December 2009 130,910,000 -3,423,000 5.310,000 Some of the data in the table has been revised. For example, the BLS Employment Situation Report for December 2010 (see Table B1) shows that December 2009 has now been revised down to 129,588,000. The key number however, is December 2010. Drum roll please....... The just released report shows 130,710,000 jobs. Let's do the math. 130,710,000 - 134,580,000 = -3,870,000. The president expected to create or save 3.5 million jobs. Instead he lost 3.87 million jobs. That is a whopping deficit of 7.37 million jobs. Now 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? Should we add that total to the current deficit of 7.37 million jobs? If by some miracle we do create 250,000 jobs a month does the Fed get credit for them, President Obama, or the man in the moon? More importantly where does she start? A year ago? It really does not matter because there is technically no way to prove her wrong. No matter what happens to jobs, she can say it would have been 3 million jobs worse without QE. President Obama can twist his words and say the same thing "It would have been 3 million worse". That is the problem with bullsweet statements pulled out of one's ass, like Yellen made and Obama before her. 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.

Republican Introduce Bill to Eliminate Presidential Czars; How Many Czars are There? Obama on Czars Then vs. Now; Vanity of Barack Obama Posted: 08 Jan 2011 12:05 PM PST President Obama has an army of Czars. Counts vary from 32 to 45 (with 7 more planned). The interesting thing about Czars is Obama's blatant hypocrisy about them. Let's start with a look at Obama and his 32 czars "The biggest problems that we're facing right now have to do with George Bush trying to bring more and more power into the executive branch and not go through Congress at all. And that's what I intend to reverse when I'm president of the United States." - Sen. Barack Obama, March 31, 2008 To say President Obama failed to follow through on this promise is an understatement. By appointing a virtual army of "czars" - each wholly unaccountable to Congress yet tasked with spearheading major policy efforts for the White House - the president has made an end-run around the legislative branch of historic proportions. The Imperial Court Please consider The Compleat List of Czars Afghanistan-Pakistan (Af-Pak) czar, Richard Holbrooke AIDS czar, Jeffrey Crowley Auto recovery czar, Ed Montgomery Behavioral science czar, position not yet filled Bailout czar, Herbert Allison Jr., [replaced Bush bailout czar Neel Kashkari, Assistant Secretary of the Treasury for Financial Stability confirmed by Senate] Border czar, Alan Bersin Car czar, Ron Bloom [Counselor to the Secretary of the Treasury , under Senate oversight] UPDATE, 9/07/09: Obama announced his appointment of Ron Bloom as "senior counselor for manufacturing policy," a move that will eliminate Senate oversight. This position has been dubbed "manufacturing czar" and so this listing moves to a different alphabetical location. UPDATE, 9/08/09: My bad. Ron Bloom continues as car czar and takes the appointment as manufacturing czar. He will be double dipping. Climate change czar, Todd Stern Copyright czar, not appointed yet Counterterrorism czar, John Brennan Cybersecurity czar, position will be vacant on August 21st [upon the departure of Melissa Hathaway] Disinformation czar, Linda Douglass [This is a new media buzz since our earlier list, a response by pundits to the White House request for informants: see Glenn Beck and Lew Rockwell] Domestic violence czar, Lynn Rosenthal Drug czar, Gil Kerlikowske Economic czar, Larry Summers Economic czar number two, Paul Volcker Education czar, Arne Duncan Energy czar, Carol Browner Food czar, Michael Taylor [a former Monsanto executive, or, the fox in charge of the henhouse] Government performance czar, Jeffrey Zients Great Lakes czar, Cameron Davis Green jobs czar, Van Jones [who has a communist background] UPDATE, 9/06/09, Van Jones resigned after an exposé by Glenn Beck. Guantanamo closure czar, Daniel Fried Health czar, Nancy-Ann DeParle Infotech czar, Vivek Kundra [Shoplifted four shirts, worth $33.50 each, from J.C. Penney in 1996 (source). His last day in DC government was March 4 but on March 12 the FBI raided his office and arrested two staffers.] Intelligence czar, Dennis Blair [Director of National Intelligence, a Senate confirmed position. He is a retired United States Navy four-star admiral] Latin-American czar, Arturo Valenzuela (nominee) [although this post is referred to as a czar, he is nominatied to be Assistant Secretary of State for Western Hemisphere Affairs and so is subject to Senate confirmation. Voting on his confirmation was delayed to clarify his position on Honduras. Watch WaPo's Head Count to track status of confirmation.] Manufacturing czar, Ron Bloom, formerly a "car czar" under Senate oversight, now reporting directly to the President. UPDATE from Labor Day. Mideast peace czar, George Mitchell Mideast policy czar, Dennis Ross Pay czar, Kenneth Feinberg Regulatory czar, Cass Sunstein Religion czar, aka God czar Joshua DuBois Safe schools czar, Kevin Jennings [appointed to be Assistant Deputy Secretary of the Office of Safe and Drug-Free Schools, a newly created post (that does not require Senate confirmation); openly gay founder of an organization dedicated to promoting pro-homosexual clubs and curricula in public schools] Science czar, John Holdren Stimulus oversight czar, Earl Devaney Sudan czar, J. Scott Gration TARP czar, Elizabeth Warren [chair of the [Congressional Oversight Panel for the Trouble Assets Relief Program; note that Herb Allison is frequently called the TARP czar] Technology czar, Aneesh Chopra Trade czar, Ron Kirk Urban affairs czar, Adolfo Carrion War czar, Douglas Lute [retained from Bush administration, married to Jane Holl Lute, currently a Deputy Secretary of Homeland Security] Water czar, David J. Hayes [a Deputy Interior Secretary and therefore subject to Senate oversight] Weapons czar, Ashton Carter [actually Under Secretary of Defense for Acquisition, Technology, and Logistics and so subject to Senate confirmation] Weapons of mass destruction czar, Gary Samore Positions being planned: Income redistribution czar Land-use czar Mortgage czar, formally "consumer financial protection czar" (source) Radio-internet fairness czar UPDATE, 7/29/09: Mark Lloyd was appointed FCC diversity czar. Student loan czar, to oversee a program of mandatory service in return for college money (source) Voter list czar Zoning czar Enough is Enough (and Too Much is Too Much) Republicans have had enough of this nonsense. The Hill reports Republicans introduce bill to eliminate presidential 'czars' Rep. Steve Scalise (R-La.) and 28 other House Republicans introduced legislation to do away with the informal, paid advisers President Obama has employed over the past two years. The legislation, which was introduced in the last Congress but was not allowed to advance under Democratic control, would do away with the 39 czars Obama has employed during his administration. The bill defines a czar as "a head of any task force, council, policy office within the Executive Office of the President, or similar office established by or at the direction of the President" who is appointed to a position that would otherwise require Senate confirmation. Republicans had complained about the president's use of czars to help advance his agenda in Congress. In particular, the GOP had harped about the personal history of Van Jones, the president's czar for "green jobs," over past comments Jones had made about Fox News came to light. Jones eventually resigned. Another prominent czar over the past year was Carol Browner, the president's energy and environmental adviser. She helped head up efforts in response to the Gulf of Mexico oil spill, and the ultimately unsuccessful effort for an energy and climate bill from Congress. The vanity of Barack Obama Inquiring minds are reading American Narcissus regarding the vanity of Barack Obama. Obama's vanity is even more jarring when paraded in the foreign arena. In April, Poland suffered a national tragedy when its president, first lady, and a good portion of the government were killed in a plane crash. Obama decided not to go to the funeral. He played golf instead. Though maybe it's best that he didn't make the trip. When he journeyed to Great Britain to meet with the queen he gave her an amazing gift: an iPod loaded with recordings of his speeches and pictures from his inauguration. On November 9, 2009, Europe celebrated the 20th anniversary of the fall of the Berlin Wall. It was kind of a big deal. When the leaders of Europe got together to commemorate it, he decided not to go to that, either. But he did find time to record a video message, which he graciously allowed the Europeans to air during the ceremony. In his video, Obama ruminated for a few minutes on the grand events of the 20th century, the Cold War itself, and the great lesson we all should take from this historic passing: "Few would have foreseen .  .  . that a united Germany would be led by a woman from Brandenburg or that their American ally would be led by a man of African descent. But human destiny is what human beings make of it." The fall of the Berlin Wall, the end of the Cold War, and the freedom of all humanity—it's great stuff. Right up there with the election of Barack Obama. In the presidential race in 2012. As he said to Harry Reid after the majority leader congratulated him on one particularly fine oration, "I have a gift, Harry." But Obama's faith in his abilities extends beyond mere vote-getting. Buried in a 2008 New Yorker piece by Ryan Lizza about the Obama campaign was this gob-smacking passage: I know more about policies on any particular issue than my policy directors. And I'll tell you right now that I'm gonna think I'm a better political director than my political director." After Obama's first debate with McCain, on September 26th, [campaign political director Patrick] Gaspard sent him an e-mail. "You are more clutch than Michael Jordan," he wrote. Obama replied, "Just give me the ball." It's important to remember that our presidents aren't always this way. When he accepted command of the Revolutionary forces, George Washington said "I feel great distress, from a consciousness that my abilities and military experience may not be equal to the extensive and important Trust. .  .  . I beg it may be remembered, by every Gentleman in the room, that I, this day, declare with the utmost sincerity, I do not think myself equal to the Command I am honored with." We need to reduce the deficit. We can make a tiny contribution by getting rid of 49 unneeded czars. 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.

Kern County CA to Impose Contract on Unions; Time for a CA Reality Check; Half Moon Bay, Bell Face Bankruptcy; Brown Seeks Voter Approval for Tax Hike Posted: 08 Jan 2011 09:24 AM PST News has been flying in California the past few weeks over more budget concerns. Those budget problems will not go away until structural problems are fixed. That mean serious concessions across the board by public unions. Instead, Governor Brown may seek a referendum to raise taxes. Rounding out the news, a couple of California cities face immediate bankruptcy, University of California executives have made outrageous pension demands, and Kern County California is playing hardball with public unions. Kern County to Impose Contract on Public Unions Please consider County-union mediation fails Kern County government and its largest union have failed to reach an agreement during contract mediation, setting up a final decision by county supervisors about how to handle negotiations with thousands of their employees. Negotiators with the Service Employees International Union, Local 521 notified union members Thursday that the mediation process had broken down and they should expect supervisors to impose the contract they want. That contract does two things -- makes all employees in the union pay 20 percent of their health-care premiums and require thousands of workers who currently do not pay into to their pensions to begin making contributions from each paycheck. Regina Kane, president of the Kern County chapter of SEIU 521, said supervisors have followed a firm course toward this date, failing to budge an inch when the unions proposed other ways to cut costs and save money that supervisors argued was critical to balance county budgets. Kane said her members -- especially the most modest workers who handle the county's front-line public services -- will be devastated by the pay reductions. "Many of our employees will be losing cars and losing homes," she said. She said many of the county employees who are eligible for retirement will seize the opportunity and leave. Even if, Kane said, some of those jobs are filled, it will take months to bring new workers on board and train them. "The public service system will be overloaded," she said. A "Start" I commend Kern County. Standing up to the unions is a start. However, 50% to their health-care costs would be a better start, and I do not see anything being done about pension benefits. Nonetheless, not bargaining with unions is the correct approach. I suggest a 1 year imposition then next year attacking pension benefits. Regina Kane whines "many of the county employees who are eligible for retirement will seize the opportunity and leave". To that I say hooray! Let's hope 100% of them leave. New employees should be put into defined contribution plans. Better yet, the county should simply outsource every job and be done with it. The correct way to deal with the SEIU is to not deal with them at all. Kern County Map Now, if only Los Angeles or Orange County would do the same thing. It is time for serious hardball. Complete elimination of every union should be the goal. Bell California on Brink of Insolvency The Los Angeles Times reports Bell nearly broke, faces drastic cuts, audit finds Scandal-plagued Bell is hovering on the brink of insolvency and drastic cuts in city services — including disbanding the Police Department — probably will be necessary to fix its finances, according to a review of the city's books that Los Angeles County officials plan to release next month. The report by the Los Angeles County auditor-controller paints the most dire financial picture yet of the southeast Los Angeles County city, where eight current and former city officials have been charged in a sweeping public corruption case. The findings were discussed with The Times by officials familiar with its contents who spoke on condition of anonymity because the document remains under wraps. The review found that Bell has been running a deficit totaling several million dollars over at least the last three years under former Chief Administrative Officer Robert Rizzo. The red ink is the result of hefty salaries and pensions for top Bell officials and extensive city-run programs, the review found. To cover part of the deficit, city officials took money raised by the sale of bonds for specific projects and diverted it to the general fund, a likely violation of the law, according to experts on municipal finance. Easy Decision in Bell There is nothing for Bell to even think about here. The city is bankrupt. The correct solution is to declare bankruptcy, disband the police union, and outsource 100% of city services eliminating 100% of public union contracts. Half Moon Bay Faces Financial Brink The Wall Street Journal reports Half Moon Bay Faces Financial Brink This coastal city next month will begin an aggressive campaign to warn residents of severe budget cuts that lie ahead, as the cash-strapped town tries to avert insolvency. Laura Snideman, appointed earlier this month as Half Moon Bay's city manager, says she and the five-member city council and top managers will meet in the next few weeks with residents to alert them about impending changes, such as potentially outsourcing the town's 15-person police department to an outside agency. "The choices are no longer hard, they're painful," says Ms. Snideman, formerly an economic development manager in the city of San Mateo. She adds that she hopes by making the case for cuts, some residents will offer ideas or even volunteer to save some services and programs. The campaign is the latest development in Half Moon Bay's long and winding financial descent, which has made it a poster child of the problems plaguing Bay Area municipalities. While many towns face budget gaps, Half Moon Bay is in especially tough straits. The city already has outsourced some public-works services, including trash, building inspection and health-code enforcement to independent contractors and private companies. The city of 13,000 is essentially "turning into a functionally unincorporated locale," says Christopher Thornberg, a principal at consultancy Beacon Economics in San Rafael. "They're pretty much a city in name only, having turned over or outsourced most of their essential services." Easy Decision in Half Moon Bay There is nothing for Half Moon Bay to even think about here. The city is bankrupt. The correct solution is to declare bankruptcy, disband the police union, and outsource 100% of city services eliminating 100% of public union contracts. Outrageous Benefits Demands by University of California Executives More people sent me an email on regarding this article than any other news story ever. The San Francisco Chronicle reports Highest-paid UC execs demand millions in benefits Three dozen of the University of California's highest-paid executives are threatening to sue unless UC agrees to spend tens of millions of dollars to dramatically increase retirement benefits for employees earning more than $245,000. "We believe it is the University's legal, moral and ethical obligation" to increase the benefits, the executives wrote the Board of Regents in a Dec. 9 letter and position paper obtained by The Chronicle. "Failure to do so will likely result in a costly and unsuccessful legal confrontation," they wrote, using capital letters to emphasize that they were writing "URGENTLY." The 36 executives who signed the letter include Mark Laret, chief executive officer of UCSF Medical Center; Christopher Edley Jr., dean of the UC Berkeley law school; and Marie Berggren, chief investment officer for the UC system. They want UC to calculate retirement benefits as a percentage of their entire salaries, instead of the federally instituted limit of $245,000. The difference would be significant for the more than 200 UC employees who currently earn more than $245,000. Amazing Arrogance Of all the stories regarding public workers that I have seen, this ranks among the most galling and disgusting of them. How any public employees can think they deserve those demands just shows how outrageous the sense of entitlement of public workers is from top to bottom. Tuition costs are obscene and it is because of contracts like these. Benefits need to be cut dramatically, not increased. Fortunately, there is some good news to report: High-paid UC executives denied retirement benefits increase by UC Regents The issue may be headed to court. By the way, I have had many people who work for the University of California writing to complain about how outrageous those demands were. Time for a Reality Check - California is Broken Assemblywoman Diane Harkey, Republican 73rd Assembly District, and Vice-Chair of the Appropriations Committee says it's Time for a Reality Check – California is Broken Noted "straight talker," State Treasurer Bill Lockyer, must be living in another California. In a recent Los Angeles Times editorial ("California Isn't Broken"), he suggests that criticisms of California's fiscal and economic problems are overblown. While I agree that the state will repay its bond debt, I strongly disagree that we are helpless victims of the recession. Our 12.4 percent unemployment, unfriendly business climate and runaway state spending must be addressed if we are to pull out of our financial abyss. It's time for straight talk and a reality check. Blaming the recent economic downturn for California's woes ignores many of the deeper underlying problems. Treasurer Lockyer quickly passes over the fact that California's unemployment rate is the second highest in the country. Our state lost 1.2 million private sector jobs from October 2007 to October 2010. More than 141,000 people left California during a twelve month period in 2008-09 because they could not find work. Jobs and opportunity continue to disappear because of high taxes, costly regulations and job-killer policies. For the fifth year in a row, Chief Executive magazine rated California as the worst state in the country to do business. According to CNBC's 2010 ranking of "America's Top States for Business," California ranked 48th amongst the 50 states for the cost of doing business. The nonpartisan Tax Foundation found that California has the nation's second-worst business tax climate. California taxpayers pay the highest sales and gas taxes in the nation, and some of the highest top personal income taxes. Straight talking, state government has been spending more than it receives in revenues for over 10 years. 70 percent of our General Fund spending is locked-in due to big-government program growth and auto-pilot appropriations. Our accumulating debt to fund operations consumes an increasingly larger portion of the revenue pie, as our state annually maxes out its credit cards and pays higher risk adjusted interest rates on its debt. Despite Mr. Lockyer's assertions that California isn't broken, ignoring reality will only further jeopardize our state's fiscal stability. California will remain broken until we get government out of the way of job growth and come together behind a long-term plan to streamline and restructure the way the state does business. Only then will we be able to balance our budget once-and-for all. Solution Far More Difficult than Harkey Lays Out Harkey wants the state to "stop borrowing and live within our means." One line soundbites make things seem far easier than they are. To live within means will require huge structural changes including properly addressing public worker wages and benefits, not just public union wages and benefits. It will also require an overhaul of the prison system, public worker pensions, health services, immigration, the universities, and education in general. It is by no means as simple as the phrase "stop borrowing and live within our means" makes it sound. Governor Brown's Day of Reckoning Bloomberg reports Brown May Cut Aid, Ask Voters to Extend Tax Increases Jerry Brown returns as California governor today after an absence of almost three decades, facing a "day of reckoning" over a $28 billion budget gap that promises battles with lawmakers, unions and investors threatening to shun the bonds of the most-indebted state. Brown, 72, a Democrat who served two terms as governor from 1975 to 1983, has pledged an austerity budget, due Jan. 10, that will be free from gimmicks and that will skirt the gridlock that forced the state to pay bills with IOUs two years ago. He's told Californians they'll face painful choices to restore fiscal health. Whether that will mean higher taxes, he hasn't said. "Please sit down if you're reading the stories on the budget on Jan. 10," Brown told educators in Los Angeles last month. "If you're driving, fasten your seat belt, because it's going to be a rough ride." Brown has said he wants a budget to erase the nation's largest state deficit approved within 60 days. That task was eased by voters' decision in November to allow lawmakers to authorize spending plans with a simple majority, doing away with a 77-year-old rule requiring a two-thirds vote. "The day of reckoning is upon us and I'm determined to bite the bullet and get it done," Brown said in Los Angeles last month. Brown is likely to propose even more cuts and call for a special election to ask voters for money, said Jaime Regalado, executive director of the Edmund G. Brown Institute of Public Affairs -- named for Jerry Brown's father, himself a former governor -- at California State University, Los Angeles. Options include extending temporary tax increases on income, retail sales and vehicle registrations put in place in 2009. They are set to expire this year. The governor inherits the nation's third-highest unemployment rate at 12.4 percent, what the treasurer's office says is $88.3 billion of bond debt and as much as $500 billion of pension liabilities following the longest recession since World War II. While Democrats control both Senate and Assembly, they lack a so-called supermajority of 60 percent. Starting a ballot measure that would extend temporary levies, or increase taxes and fees, would need the assent of two-thirds of lawmakers or a citizen initiative drive. Curbing the cost of state workers' salaries and their pensions may put Brown at odds with the labor unions that supported his campaign, such as the 120,000-member California Federation of Teachers. The state will spend $9.2 billion on payroll this year, according to the Finance Department. Payments to the two public-employee pensions, the largest in the U.S., will consume 5 percent of the general fund. Brown signed legislation during his first term that gave teachers and state workers the right to bargain collectively, which Schwarzenegger and other Republicans repeatedly criticized. Brown Helped Create This Mess Governor Brown is largely responsible for this mess. The last paragraph above says much of what you need to know: "Brown signed legislation during his first term that gave teachers and state workers the right to bargain collectively" It is time for Brown to put an end to collective bargaining. California Republicans pressed to honor no-tax pledge Reuters reports California Republicans pressed to honor no-tax pledge A prominent Washington activist is calling on Republican lawmakers in California to stick to an anti-tax pledge, a risk to a special election for raising revenue that Governor Jerry Brown is widely expected to ask the legislature to support. The pressure came in the form of a letter sent on Thursday by Grover Norquist, head of Americans for Tax Reform, a heavyweight conservative advocacy group. In it he told Republicans that "Voting to send tax increases to the ballot would violate the Taxpayer Protection Pledge, a written commitment that you made to your constituents to 'oppose any and all efforts to raise taxes'." "I urge you to stand up for California taxpayers by opposing Governor Brown's efforts to refer higher taxes to the ballot, and in doing so, uphold your central campaign commitment to oppose any and all efforts to raise taxes in the already over-taxed Golden State," Norquist added. Patrick Gleason, state affairs director at Americans for Tax Reform, said the letter marks the start of a broader campaign against efforts to raise taxes in California. "This is the opening salvo," Gleason said. With 12.4 percent unemployment, among the worst in the nation, coupled with a business environment that is the worst in the nation, the last thing California needs is a tax hike. What California does needs is an end of public union collective bargaining, scrapping of prevailing wage laws, an end of defined benefit packages for public workers, and a complete overhaul of the prison system. That is nowhere close to everything that needs to be done, but that would be a very good start. 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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