Home Refinance Calculator: September 2010

Thursday, September 30, 2010

Posted: 30 Sep 2010 04:38 PM PDT

Here is a quick post from an East coast airport. I am traveling today.

In response to $30 Billion Offer No One Wants - Small Businesses Hit by Deflation I received this email from the owner of an e-commerce business.

Danny writes ...

Mish:

I enjoy your blog very much. I thought I would take a moment and let you know what is happening in the "real world" - and why QE one, two or five hundred and two will not help small businesses like ours.

My partner and I own a successful e-commerce website. We started it in the late 1990's by ourselves and now we have five employees. Our growth came from personal resources, as well as credit card lines. Each year we saw sales increases of at least 10-20%. However, in late 2008/early 2009, we started seeing our sales slipping. As a result (and watching our competitors) we lowered our on-line prices to continue to drive sales. As of today, our prices are 40% below where they were in 2008. However, we have the same number of customers - we just work a heck of a lot harder!

On the negative side, we saw all of our credit card lines cut, so we can no longer use them. Bank financing is completely out as we have no business assets so to speak (our business is online - not manufacturing). We have cut costs by moving to a cheaper office location, letting one employee go and demanding lower prices from our own suppliers (mostly successful). As a result of our cost cutting, our bottom line has only slipped 10%. We feel very fortunate in this regard.

As to what would help our small business grow and hire people again - simple; more sales! We do NOT need to borrow more money as we already owe enough and our capacity is only at 50%. So what would we borrow money for? More production? We don't have the sales.

So QE actions by the Fed have no effect on us. Interest rates could go to zero and it still would not matter. What we are NOT seeing are credit card rates going down - now THAT might help us somewhat. Regardless, it seems that the economists in charge are playing from the old handbook of everyone borrowing money to spend money. Needless to say, it's not working - but you already knew that. Thanks again and keep telling the truth.

Danny
Austin, Texas

Retired Teacher Supports Christie

Joan, a retired teacher writes ...

Hello Mish

I'm a retired teacher, who remembers all too well the teachers who were completely incompetent in math skills. They may have been poor at reading too. I used to fancy an education methods course entitled: "How To Teach Without Knowing Nothing".

Schools of education at the college level were complicit in supporting this scandalous incompetence, at least according to what I experienced. Governor Christie hit the nail on the head, I believe.

Joan

Joan was writing in response to Governor Christie to Test Teachers in Reading and Math

Thanks Joan and Danny.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Huge Flaw in Municipal Bond Assumptions

Posted: 30 Sep 2010 08:52 AM PDT

Everyone plowing into municipal bonds on the assumption the federal government will bail out the states may have another thing coming says Herbert Gold at Institutional Risk Analyst.

Please consider The Great Contraction Coming in State Finances

Back in August, the U.S. House of Representatives took a break from its recess to pass legislation giving $26 billion to the States for education and healthcare. This $26 billion is a stealth bailout for States on the verge of default. As such it is a band-aid that prolongs the crisis while sending a false signal to the markets. In the event of a State default Washington will not rescue the States.

The municipal debt crisis is well known. California by some measures has the world's 8th largest economy, yet it faces the prospect of once again issuing IOUs to its creditors as its government continues to struggle to pay its bills. Illinois, America's fifth most populous state, is running nearly half a year behind on meeting many of its obligations. New York and New Jersey, the latter despite some bold political moves by Governor Chris Christie, are similarly situated. Indeed, according to the Center on Budget and Policy Priorities only four states have avoided budget shortfalls this year.

Despite these conditions the market for State debt remains placid. Municipal securities continue to trade at favorable rates even though the larger economy has shown no solid signs of meaningful growth. The reason for this lies both in the fact that States historically don't default, and the belief that Washington will provide funding in the event of a true crisis.

The market continues to assume the federal government would not let a big issuer like California default. But this theory has a huge flaw: absent a vote from Congress there is no easy mechanism for the federal government to rescue the States. And after the political backlash from the TARP vote it is safe to say Congress will be loathe to issue any more blank checks to bail out the states.

It's unlikely the Fed would be inclined to bailout a State in distress given the political backlash the institution would face after another open-ended program that told the world (yet again) the US was ready to simply print its way out of its problems.

The market remains convinced that, in the worst-case scenario, Congress would not risk the disruption that would follow a State default. But countering this idea is the role federalism plays in our political system as well as an appreciation of the damage done to politicians who supported TARP.

Senator Bob Bennett (R-UT), a highly respected member of the Senate, was unceremoniously dropped from the ballot in the Republican primary in Utah in large part because of his vote on TARP. At least five other sitting officeholders have lost in their own party primary this year for the same reason, to say nothing of the large- scale losses likely to occur this November. Any politician interested in keeping his or her job would be very wary of voting for a State bailout. And this does not account for the role the States play in America's governing system. Ask a citizen of Oregon to bailout California, or a citizen of Michigan to bailout Illinois, and you are likely to get the same cold silence.

Treasury prefers to allow Illinois to borrow at low rates for as long as possible in the hope that somehow they will stumble through this crisis. From Treasury's perspective it is a free option, but the real price of this false confidence will only become clear after it is too late.

The genius of the American system is its flexibility, allowing States to be responsible for their own governance and finances. If some must bear the burden for reckless spending it should be the citizens of those States. Washington won't bail out the States and the market should be prepared for defaults. But just remember that it won't be the first time that an American state has defaulted on its debt.

Financial Reform Act Impacts

There is more in the article including an analysis of how the Dodd-Frank Wall Street Reform and Consumer Protection Act ended the Treasury's authority to bail out the states and how President Obama and Treasury Secretary Tim Geithner may rue this decision.

If so, that revision may be the only worthwhile thing in the entire bill.

Unfortunately, I think Congress will try to "do something", they always do. However, I am equally convinced severe austerity measures are on the way to more than a handful of states. If so, none of this is factored into lofty stock market valuations, and equally absurd valuations of municipal bonds.

Harrisburg, Pennsylvania Explores Bankruptcy

I have commented on this before but it finally appears the bankruptcy writing is on the wall for Harrisburg. Bloomberg reports Harrisburg, Pennsylvania, Council Votes to Explore Bankruptcy

The City Council's 5-2 vote last night rebuked a personal plea from first-year Mayor Linda Thompson. Harrisburg needed state aid two weeks earlier to avoid becoming the second-largest borrower to default on a general-obligation bond this year.

"The whole world is watching Harrisburg," Thompson said in a 40-minute speech to the council, where she had a seat until becoming mayor in January. "Our bondholders are looking to make us the poster child of the world to municipalities in financial difficulties. And they don't plan on losing."

Councilor Brad Koplinski, who proposed considering bankruptcy protection, said it would take a "devastating tax increase" to cover the debts.

"I'm not going to have that $210 million payment on the backs of taxpayers," he said in an interview after the vote. "Bankruptcy, I don't think, would kill our city. I think the tax increases would kill our city."

Certainly Councilor Brad Koplinski understands the situation properly.

In contrast mayor Linda Thompson is beholden to the bondholders. Either she is a complete economic dunce or someone is financing her campaign. Either way, she is unfit for office.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Defending China's Trade Policies; a "What If?" Thought Test

Posted: 30 Sep 2010 02:29 AM PDT

In America's China Bashing: A Compendium of Junk Economics Michael Hudson takes Paul Krugman, protectionists, Congress, and other China bashers to task, citing six economic errors they all make.

The following snip comprises a portion of economic errors 3-6. I encourage you to read the entire article. It's worth a good look.

Michael Hudson: Prof. Krugman describes China as "deliberately keeping its currency artificially weak. … feeding a huge trade surplus," adding that "in a depressed world economy, any country running an artificial trade surplus is depriving other nations of much-needed sales and jobs." In his reading the problem is not that America has let its economy be financialized, or that easy bank credit has bid up housing prices for American workers and loaded down their budgets with debt service that, by itself, exceeds the wage levels of most Asian workers. "An undervalued currency always promotes trade surpluses," he explains.

But this is only true if trade is "price-elastic," with other countries able to produce similar goods of their own at only marginally different prices. This is less and less the case as the United States and Europe de-industrialize and as their capital investment shrinks as a result of their expanding financial overhead ends in a wave of negative equity. To assume that higher exchange rates automatically reduce rather than increase a nation's trade surplus is Junk Economics Error #4. It is a tenet of the free market fundamentalism that Prof. Krugman usually criticizes, except where China is concerned.

Mish Comment: Another Krugman flaw is that he seldom if ever looks at the consequences of what he proposes. Even IF manufacturing jobs returned to the US after tariff hikes, it would be at the expense of dock workers unloading ships, truckers hauling goods from coast to coast, and most importantly higher prices for consumers everywhere. Higher prices are not good thing. Higher prices would benefit the few whose jobs were saved, at the expense of everyone else. Higher prices also benefit governments that take a sales tax bite out of every transaction and squander it on needless projects.

Michael Hudson: Chinese currency appreciation would let speculators and arbitrageurs make a killing on the currency shift. Its exports would cost more – but is it believable that America would rebuild its factories and re-employ the workforce that has been downsized and outsourced? To imagine that long-term investment responds to immediately is Junk Economics Error #5.

Prof. Krugman urges the United States to do what it "normally does" when other countries subsidize their exports: impose a tariff to offset the supposed subsidy. Congress is increasing the drumbeat of accusations that China is violating international trade rules by protecting itself from financialization. "Democrats in Congress are threatening to … slap huge tariffs on Chinese goods to undermine the advantages Beijing has enjoyed from a currency, the renminbi, that experts say is artificially weakened by 20 to 25 percent." The aim is to make China "lift the strict controls on its currency, which keep Chinese exports competitive and more factory workers employed." But such legislation is illegal under world trade rules.

This has not stopped the United States in the past, but the belief that it might succeed internationally is Junk Economics Error #6.

The cover story is that foreign exchange controls and purchases of U.S. securities keep the renminbi's exchange rate low, artificially spurring its exports. The reality, of course, is that these controls protect China from U.S. banks creating free "keyboard credit" to buy out Chinese companies to buy out Chinese companies or load down its economy with loans to be paid off in renminbi whose value will rise against the deficit-ridden dollar. It's the Wall Street arbitrage opportunity of the century that banks are pressing for, not the welfare of American workers.

The House Ways and Means Committee is demanding that China raise its exchange rate by 20%. This would enable speculators to put down 1% equity – say, $1 million to borrow $99 million and buy Chinese renminbi forward. The revaluation being demanded would produce a 20,000% profit, turning the $100 million bet (and just $1 million "serious money") into making $2 billion. It also would bankrupt Chinese exporters who had signed dollarized contracts with U.S. retailers.

Mish Comment: I am not sure how Hudson arrives at $2 billion. 20% of $100 million is $20 million. Making $19 million on $1 million is 1,900% not 20,000%. Otherwise, his point is accurate and well expressed.

Michael Hudson: This is a compendium of the kind of propaganda Americans are being subjected to these days. There is little acknowledgment that the United States is as guilty of "managing the dollar" by its policy of quantitative easing that depresses the exchange rate below what would be normal for any other economy suffering so gigantic and chronic payments deficits. It is the United States that is out of line with every other economy.

Mish Comment: Does Hudson mean "depresses the exchange rate" or "depresses interest rates"? In context, the latter would seem to fit better. Certainly the goal is to bring back jobs by depressing the exchange rate, but it has not done so, nor will it do so for reasons cited. Otherwise, I agree with what seems to be the central idea of the paragraph, that the US is as guilty of manipulation as China.

Michael Hudson: Wall Street's idea of "equilibrium" is that if only foreign countries would commit financial suicide along the lines that the United States is doing, then global equilibrium could be restored. But the most successful economies have kept their FIRE-sector costs of living and doing business within reasonable bounds, and are not remotely as debt-leveraged as the United States. German workers pay only about 20% of their income for housing – about half the rate of their U.S. counterparts. German practice is not to make 100% mortgage loans, but to require down payments in the range of 30% such as still characterized the United States as recently as the 1980s.

The FIRE sector's business plan has priced U.S. labor out of world markets. There seems little likelihood of making Chinese and German workers pay rents or mortgage interest as high as the United States? How can American economic strategists force them to raise the price of their college and university tuition so that they must take on the enormous student loans of the magnitude that Americans have to take on? How can they be persuaded to follow the high-cost U.S. practice of adding FICA-type wage withholding to the cost of living to save up pensions, Social Security and medical insurance in advance, instead of the pay-as-you-go basis that Germany quite rightly follows?

Mish Comment: The preceding two paragraphs get straight to the heart of the matter. They are consistent with something I have said 100 times. It is not the wage that matters, but rather how far wages go that matters. All this talk about "fair wages" and "fair trade" is nonsense. If the US stopped being the world's policeman, slashed military expenditures by 65%, paid government workers what they were worth, and killed defined benefit pension plans for government employees along the way, the dollar would soar, prices would drop, and we would not be in this big of a mess. Instead, we push the envelope between the "haves" and the "have-nots"

Michael Hudson: China is trying to help by voluntarily cutting back its rare earth exports. It has almost a monopoly, accounting for 97% of global trade in these 17 metallic elements. They are used in military and other high-technology applications, from guided missile steering systems and computer hard drives to hybrid electric automobile batteries. This has prompted China to recently cut back its exports to save its land from depletion (and also environmental pollution), and build up its own stockpile for future use.

I have a modest suggestion. Let China raise the price from a few dollars a pound to a few hundred dollars a pound. According to theory put forth by Mr. Krugman, the U.S. Congress and other China bashers, this should slow Chinese exports. It certainly would help promote world peace and demilitarization, because these rare earths are key elements in military technology. China should build up its national security stockpile of these key metallic minerals for the future – say, the next prospective five years of exportation.

It won't, of course, because these exports are "price inelastic." So are many of its other exports, and this category will rise as Chinese technology increases relative to that of financialized economies cutting back long-term investment, research and development in order to squeeze out returns more rapidly. That is the problem with financial management: its time frame is short-term.

Look on the Bright Side

I have to laugh about Hudson's proposal. I made a similar (but sarcastic) statement along the same lines yesterday in Pentagon Loses Control of Laser Guided Bombs to China; Shades of "Avatar", Rare Earth Metals a Potential "Unobtanium"; The "Bright Side"

The Bright Side

Although "unobtanium" is a cause of concern for warmongers everywhere, being the ever-optimist that I am, I prefer to look at the bright side.

Prices are soaring. Isn't that what Bernanke wants?

Laughter, the Best Medicine

At least one person appreciated the sarcasm. Here is an email from Danny ...

Dear Mish:

My wife came into the computer room, drawn by the unusual noise, to find me rolling on the floor, fearing that I was having a heart attack. Of course eventually she figured out that I was laughing so hard I couldn't get up. In explanation all I could do was point out your quote:

"being the ever-optimist that I am, I prefer to look at the bright side. Prices are soaring. Isn't that what Bernanke wants?"

It took me several minutes to explain to her what caused my uproar and she wasn't amused. She just didn't get it. All I can say is that if laughter is the best medicine, all my ailments were instantly cured. Mish, you and your family are in my prayers, keep up the good works.

I am still chuckling
Danny

Defending Free Trade

Inquiring minds are reading Biography of Frederic Bastiat on Mises.

CLAUDE FREDERIC BASTIAT was a French economist, legislator, and writer who championed private property, free markets, and limited government. Perhaps the main underlying theme of Bastiat's writings was that the free market was inherently a source of "economic harmony" among individuals, as long as government was restricted to the function of protecting the lives, liberties, and property of citizens from theft or aggression. To Bastiat, governmental coercion was only legitimate if it served "to guarantee security of person, liberty, and property rights, to cause justice to reign over all."

Bastiat's greatest contribution to subjective value theory was how he rigorously applied the theory in his essay, "What is Seen and What is Not Seen." In that essay, Bastiat, by relentlessly focusing on the hidden opportunity costs of governmental resource allocation, destroyed the proto-Keynesian notion that government spending can create jobs and wealth.

As with contemporary Austrians, Bastiat viewed economics as "the Theory of Exchange" where the desires of market participants "cannot be weighed or measured. . . . Exchange is necessary in order to determine value." Thus, to Bastiat, as with contemporary Austrians, value is subjective, and the only way of knowing how people value things is through their demonstrated preferences as revealed in market exchanges. Voluntary exchange, therefore, is necessarily mutually advantageous.

While establishing the inherent harmony of voluntary trade, Bastiat also explained how governmental resource allocation is necessarily antagonistic and destructive of the free market s natural harmony. Since government produces no wealth of its own, it must necessarily take from some to give to others robbing Peter to pay Paul is the essence of government, as Bastiat described it. Moreover, as special-interest groups seek more and more of other peoples money through the aegis of the state, they undermine the productive capacities of the free market by engaging in politics rather than in productive behavior. "The state," wrote Bastiat, "is the great fictitious entity by which everyone seeks to live at the expense of everyone else."

The slogan, "if goods don t cross borders, armies will," is often attributed to Bastiat because he so forcefully made the case that free trade was perhaps the surest route to peace as well as prosperity. He understood that throughout history, tariffs had been a major cause of war. Protectionism, after all, is an attempt by governments to inflict on their own citizens in peacetime the same kinds of harm their enemies attempt (with naval blockades) during wars.

Proper Perspective

We buy goods from China voluntarily. No one forces us too. If China underprices its exports, consumers in the entire rest of the world benefit, with the possible exception of a tiny number of manufacturers.

Bear in mind I think China should float the Yuan. However, I also think the US should stop monetizing debt and let the market set interest rates. Every country should do the same.

Multiple wrongs by multiple countries do not make a right, and it helps to see things from that perspective.

It also helps to understand what China's fears are. Some of those fears are legitimate. Finally it is important to understand that an undervalued Yuan is the least of our problems.

A "What If?" Thought Test

Here's a thought test. What would happen if China raised prices 20% across the board via an export tax or reevaluation of the Yuan, starting tomorrow?

For starters, the Chinese economy would implode overnight along with collapsing exports. US importers such as Walmart, Target, Best Buy, and Kohls would seek new supply chains from Vietnam, Korea, Singapore, or India, but that would take time. In the meantime, US stores would run out of some goods. US consumers would go on strike until the supply chains were restored. Hundreds of small businesses would go bankrupt. Finally, businesses going bankrupt would pressure the banking system.

Of course, China could raise the export tax 1% a month for 20 months. In that case, instead of an overnight collapse, China would implode in a few months as US importers made other arrangements.

Would any jobs return to the US in either scenario?

In theory, a handful of manufacturing jobs might, but only if US importers could not find another source of supplies. What if every country voluntarily placed a 20% export tax on goods headed for the US, or the US placed 20% tariffs on all allegedly "underpriced" goods.

In that case, global trade would collapse and we would lose manufacturing jobs and millions of other jobs as well. In other words, there would be a global depression if prices rose 20% via export taxes or tariffs, whether overnight or over the course of a year.

Thus, Krugman is simply off his rocker, as is anyone else who think tariffs will solve our problems. For further discussion, please see Pied Piper Politics; Krugman and Candle Makers Complain about the Sun

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mortgage and Loans - Mortgage Refinance, Home Loans

Default on Second Mortgage to Save Home?
Mortgage market and interest rate commentary for Tuesday June 9, 2009
Loans For Students: Even With The Bad State Of The Economy You Can Still Find Funds In A Wide Range Of Places
Credit Repair Services Provide Credit Help When you Need It

Default on Second Mortgage to Save Home?

Posted: 29 Sep 2010 09:34 PM PDT

Depel University Real Estate Professor Rebel Cole explains why it might be a good idea to let your second mortgage default.

Mortgage market and interest rate commentary for Tuesday June 9, 2009

Posted: 29 Sep 2010 10:15 AM PDT

Mortgage market and interest rate commentary from Bruce Brown, CMPS with Pulaski Bank Home Lending and radio host of Dollars and Homes on KCMO Talk Radio 710 in Kansas City.

Loans For Students: Even With The Bad State Of The Economy You Can Still Find Funds In A Wide Range Of Places

Posted: 29 Sep 2010 08:53 AM PDT

The first thing you may be considering if you are thinking about going to a major college or university is whether or not you will have enough money to make it happen. In most cases, there are a number of reasons why you may fear of failing to find loans for students but worries are without merit. There are a lot of different choices for you to make this happen if you are serious about going back to school. If you do a simply search you will find that there are loans for students available in a lot of different places. Regardless of the situation, you can still get loans for students despite this tough economic state. You just need to get the proper resource at your disposal to assist you along the way. OnlineStudentLoansGuide.com is an example of such resource. You can begin your search here and you will find the student loans you need to attend the college or university of your choice.

As you do your search for loans for students, you will find that some of them may be easier to obtain if you fall into a particular economic range. This is where you are required to meet a certain income limit to be eligible for the loan. If you fall under this, you have a wide range of alternatives which are mostly provided by the federal government to ensure you can go back to school. All you need to do is to refer to OnlineStudentLoansGuide.com and get the assistance you need to find these economic hardship types of loan if you are serious about this and feel like you do not know where to look. With the many eligible people qualifying for them, you should not have any problem obtaining them and going back to school.

Sometimes, you will find that the loans for students you are searching for have certain requirements. Once such requirement might be that you be a certain ethnicity. By meeting these criteria, you may gain access to funds that others may not. There are certain groups that have been considered disadvantaged or high risk has been the main reason for this. In order for them to become productive members of society, more steps are required to ensure that they have an equal chance to go to college and obtain an education. Take advantage of these loans for students before they become harder to obtain without letting this be a deterrent to you and visit OnlineStudentLoansGuide.com.

If you do not fall into the low-income scale or the disadvantaged scale you still have plenty of options as well. You will be able to obtain credit-based loans. Unless you are old enough to have this used as a measuring stick, they will not be based on credit. Most of the times, it may be based on the credit of another person and will be a private loan.Because of the economy, it is becoming harder for people to obtain financing and for those who actually qualify have more options than ever. Do not be afraid to take advantage of these loans for students whatever category you fit into. By using the right guide, you can walk your way to getting the financing you need. Student Loans Online

Credit Repair Services Provide Credit Help When you Need It

Posted: 29 Sep 2010 08:48 AM PDT

A few years ago, if you had negative credit history or have been in debt, you have been virtually on your own. You wouldn’t had been able to get any credit ratings help. Bad credit repair counseling and credit history had been essentially unknown to most borrowers. Besides, unfavorable credit and debt have been not issues most individuals talked openly about back then. Fast forward to today. Persons are no longer hesitant to openly talk about their debt case and you’ll find literally thousands of companies today offering credit rating help, credit rating counseling, and credit history repair.

It is comforting to know that you have no shortage of services available to help you remove charge offs, late payments, liens and judgments. However, not all businesses offering credit history counseling and credit score repair services are legitimate. In fact, for every legitimate credit ratings counseling service, you can bet there is at least a dozen shady ones. And if you are 1 with the millions of People in the usa who have a poor credit or have an out-of-control bank card debt, you are able to be simply lured by credit score counseling organizations running credit rating repair scams.

So how do you avoid falling victim to credit score repair scams? Your very best defense is knowledge. Realize that credit score repair isn’t an overnight thing; it takes time. If a credit business is promising instant credit ratings repair, run another way. Chances are great that business is running a scam. Again, you can not increase your poor credit overnight. Should you wish to raise your credit score, you need to be patient since it takes time. You’ll need to try and do a few things, just like employ a few credit rating techniques to get your credit history up.

For instance, in case you have credit card debt, you would like to start paying on time and keep working using a very good credit ratings company. Lots of men and women realize they’re in serious financial dilemma as soon as it’s already as well late for them. This really is in which a good credit history counseling assistance can help. If your debt is out of control, a debt counselor can talk with you and allow you to assume control over your credit. Credit organizations also have contacts with charge card companies. So in case you have a huge bank card debt, a credit rating company can talk for ones credit card corporations and try to work dipsute equifax, transunion, and experians reports. They are able to persuade your charge card companies to lower your monthly payments so you are able to pay on time and control your debt.

Most credit firms have an educational dimension. After all, what great will it do you if you are in a position to get your modern-day debt under control but you still have zero knowledge on how to retain your debt that way? A good credit ratings company will show you how to make a budget, along with teach you ways by that you can avoid the favorite credit mistakes most folks make. Any legitimate credit ratings repair business will get you going on the appropriate path so you’ll be able to be debt-free and also a a lot wiser borrower from the end.

Wednesday, September 29, 2010

Mish's Global Economic Trend Analysis

Pentagon Loses Control of Laser Guided Bombs to China; Shades of "Avatar", Rare Earth Metals a Potential "Unobtanium"; The "Bright Side"
Cheap, (I Mean Really Cheap) Stores
Open Dissent at the Fed: Charles Plosser (Philly Fed) Opposes QE2; Thomas Hoenig (Kansas City) attends Tea Party
Why the Statistical "Recovery" Feels Bad

Pentagon Loses Control of Laser Guided Bombs to China; Shades of "Avatar", Rare Earth Metals a Potential "Unobtanium"; The "Bright Side"

Posted: 29 Sep 2010 06:37 PM PDT

Last Sunday in Prepare for Currency/Trade Wars; How Might China Respond to US Tariffs? I mentioned the possibility China might shut off exports of rare earth metals used in making glass for solar panels, motors that help propel hybrid cars like the Toyota Prius, and laser guided bombs.

Indeed, it was the shutoff of rare earth metals to Japan that caused Japan to "cry uncle" and release a Chinese boat captain detained by the Japanese in disputed waters.

For details, please see Rare Earth Diplomacy: Japan Holds Chinese Boat Captain;China Blocks Rare Earth Exports to Japan;China Holds 4 Japanese on Spy Charges;Captain Set Free

Rare Earth Metals a Potential "Unobtanium"

In light of the above, it should be no surprise to see Bloomberg report about the sudden growing concern Pentagon Losing Control of Bombs to China's Monopoly

"It's a seller's market now," says Bai Baosheng, 43, puffing a cigarette in his office in Baotou, China, where his company sells bags of powder containing a metallic element known as neodymium, vital in tiny magnets that direct the fins of bombs dropped by U.S. Air Force jets in Afghanistan.

The U.S. handed its main economic rival power to dictate access to these building blocks of modern weapons by ceding control of prices and supply, according to dozens of interviews with industry executives, congressional leaders and policy experts. China in July reduced rare-earth export quotas for the rest of the year by 72 percent, sending prices up more than sixfold for some elements.

Military officials are only now conducting an inventory of where and how U.S. suppliers use the obscure but essential substances -- including those that silence the whoosh of Boeing Co. helicopter blades, direct Raytheon Co. missiles and target guns in General Dynamics Corp. tanks.

"The Pentagon has been incredibly negligent," said Peter Leitner, who was a senior strategic trade adviser at the Defense Department from 1986 to 2007. "There are plenty of early warning signs that China will use its leverage over these materials as a weapon."

While two rare-earth projects are scheduled to ramp up production by the end of 2012 -- one owned by Molycorp Inc. in California and another by Lynas Corp. in Australia -- the GAO says it may take 15 years to rebuild a U.S. manufacturing supply chain. China makes virtually all the metals refined from rare earths, the agency says. The elements are also needed for hybrid-electric cars and wind turbines, one reason supply may fall short of demand in 2014 even with the new mines, according to Kingsnorth of Imcoa.

Just how far U.S. manufacturing has waned is apparent at a factory in Valparaiso, Indiana, where dogs skitter across a bare concrete shop floor, their nails clicking. This brick plant on Elm Street once made 80 percent of the rare-earth magnets in laser-guided U.S. smart bombs, according to U.S. Senator Evan Bayh, a Democrat from Indiana. In 2003, the plant's owner shifted work to China, costing 230 jobs.

Now the plant houses Coco's Canine Cabana, a doggy day care the current tenants started to supplement sagging income from their machine shop.

It's taking as long as 10 weeks to get neodymium magnets, double the previous wait time, said Joe Schrantz, group supply chain manager at Moog Inc. in East Aurora, New York.

For Western companies, China's policies are creating the real "unobtanium," the fictional mineral fought over in James Cameron's 2009 film "Avatar."

Rising neodymium prices are forcing up the price of magnets, which typically cost between $2 and $30 apiece. That's having a "significant" effect on profit, and suppliers say costs will keep going up, Schrantz said. The company is considering buying blocks of raw material and storing it.

"If everybody does that, then it's going to get really crazy," he said.

There is much more in the article. Please give it a look.

The Bright Side

Although "unobtanium" is a cause of concern for warmongers everywhere, being the ever-optimist that I am, I prefer to look at the bright side.

Prices are soaring. Isn't that what Bernanke wants?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Cheap, (I Mean Really Cheap) Stores

Posted: 29 Sep 2010 02:05 PM PDT

Reader Jed writes ....

Hello Mish,
Here is a humorous image of a sign I took yesterday at the Southdale Mall in Edina.

Jed

Thanks Jed but that store has a long, long way to compete with stores in Japan that sell things for 10 Yen (about 12 cents by current calculation).

Here is a Forex Currency Conversion Link.

¥10 Shops in Japan

Mike in Tokyo Rogers reports ¥10 Yen Shops in Japan! Proof of Deflation!

The Asia Times Online shows what 20 years of Japan's economic policies have brought us: Severe deflation.

We have ¥10 yen shops selling daily items and doing brisk business in Japan.

The ¥10 yen shops sell loss leader items to attract the customers but the other items sell for about ¥88 each, so they even beat out the ¥100 yen shops.

The store that accomplishes all of this is called the Recycle Garden.

Deflation Dilemma

The article Mike Rogers referred to is Ten-yen stores capture deflation dilemma

With many worrying that the United States economy headed towards a painful Japanese-style deflation, the concept of "Japanization" is increasingly being bandied around the world. But what is "Japanization"?

One answer is found in Kawasaki City, about 20 kilometers southwest of downtown Tokyo. There, a 10 yen-shop called Recycle Garden (equivalent to a 10 cent store in the US) is attracting large numbers of customers by word of mouth. The outlet is one of nine Recycle Garden branches operated in the Kanto region centered on Tokyo and including Yokohama, Kawasaki and Atsugi.

At Recycle Garden, 10 yen buys the customer everyday items such as chopsticks, kitchen goods, nail-scissors, hand sanitizers, or air fresheners. A colored plastic hair clasp is also 10 yen. In the Kawasaki shop alone, the product lineup consists of about 1,000 items at 10 yen, with the number of goods totaling around 30,000. It's all there.

Surprisingly, most of those products are made in Japan, not in China, Vietnam or Cambodia, from where usually cheaper and lower-quality goods flow into Japan.

"Everything is incredibly cheap," said Kyoko Yamada, 52, a careworker, who lives in Tsurumi Ward adjoining Kawasaki, who on a recent visit to Recycle Garden bought 10 items such bath agents.

How is such unprecedented price-slashing possible?

The mechanism is this: amid an increasingly fierce pricing war among neighborhood retail shops such as 100-yen convenience stores, Recycle Garden makes bulk purchases of those goods from bankrupt shops and firms as from deceased manufacturing and wholesale merchants. In most cases, on hearing the news about a bankruptcy, Recycle Garden workers dash to the failed firms with large dump trucks, and buy up and take away immediately to their chain store a vast amount of goods.

"We are cutting prices to the bone," said Tadafumi Fukuda, 41, manager at Recycle Garden's Kawasaki outlet. "Since we also sell other items at 88 yen and above, 10-yen goods serve as a crowd puller." The number of customers visiting the shop has increased 20% from a year ago, when the shop started to sell 10-yen goods, he said.

Can this happen in the US? I think it can, no matter what Bernanke thinks.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Open Dissent at the Fed: Charles Plosser (Philly Fed) Opposes QE2; Thomas Hoenig (Kansas City) attends Tea Party

Posted: 29 Sep 2010 11:58 AM PDT

An open battle exists at the Fed concerning Bernanke's second round of Quantitative Easing (QE2).

Hoenig Attends Tea Party

Bloomberg reports Fed Dissenter Hoenig Wages Lonely Campaign Against Easy Credit

Thomas M. Hoenig, dressed in a gray suit, white shirt with French cuffs, and baby-blue tie, faces an edgy crowd of 150 people in a hotel meeting room in suburban Lenexa, Kan. A large "Kansas City Tea Party" banner covers a table at the door. Attendees wear anti-tax stickers on their lapels. This is not an after-dinner speech for which most central bankers would volunteer.

Hoenig smiles at his audience and begins: "This is a support-the-Fed rally, right?"

Dead silence. Then the room erupts in laughter. Disarmed, the Tea Partiers listen politely as Hoenig defends the Federal Reserve as an indispensible institution, even if at the moment, he says, it happens to be heading in the wrong direction.

And, by the way, if it were up to him (though it's not, really) he would break up the biggest Wall Street banks.

This is Tom Hoenig's moment, and it's a strange one. In Washington, he is the burr in Fed Chairman Bernanke's saddle: the rogue heartland banker who keeps dissenting alone -- for the sixth straight time on Sept. 21 -- to protest the Fed's rock- bottom interest-rate policy. Hoenig warns that the Bernanke majority is setting the country up for an as-yet-unknown asset bubble: the next dot-com or subprime craze. He can't tell yet where the boom-and-bust will materialize, but he can feel it coming, like a Missouri wheat farmer senses in his bones the storm that's just over the horizon.

In abundant speeches and articles, Hoenig has condemned the political influence of the financial elite. "We've had a Treasury Secretary from Goldman Sachs under a Democratic President and a Treasury Secretary from Goldman Sachs under a Republican President. The outcomes were not good," Hoenig says while being driven to a luncheon talk at an affordable housing conference in Topeka, Kan.

Hoenig harbors powerful misgivings over not dissenting more often and more forcefully during the Greenspan years. "He regrets going along with the votes when Alan Greenspan was chairman to get rates so low and keeping them so low so long," says his friend Fisher.

There is much more in the article including a discussion of the open debate between Krugman and Hoenig.

Philadelphia Fed president Charles Plosser joins Hoenig

Please consider Economic Outlook Charles I. Plosser's speech to The Greater Vineland Chamber of Commerce September 29, 2010.

My basic message is this: I believe we are in the midst of an economic recovery – a modest one, but a recovery nonetheless. Over the last few months, we have experienced something like the summer doldrums. The tail winds that helped propel the economy earlier in the year have waned. Yet such a slowdown is not unusual in the early phases of recovery, and we should not overreact to data that can be volatile and may be revised over time. My assessment of the recent data leads me to expect that the recovery will continue at a moderate pace over the next several quarters.

Inflation and Monetary Policy

On the inflation front, recent data indicate some deceleration, which has led some observers to voice concerns about sustained deflation – that is, a prolonged decline in the level of prices. In my view, inflation will remain subdued in the near term, but I do not see a significant risk of sustained deflation. I anticipate that inflation expectations will remain relatively stable and core inflation will run in the 1 to 1-1/2 percent range this year and accelerate toward 2 percent in 2011.

Inflation in this range is not a problem – indeed, low inflation is desirable. Most people forget, or are too young to know, that from 1953 to 1965, the average inflation rate measured by the consumer price index (CPI) was just 1.3 percent. For the last 15 years, Switzerland's average inflation rate has been less than 1 percent. In neither of these episodes did low inflation lead to economic stagnation or fears of deflation.

Were deflationary expectations to materialize – and let me repeat, I do not see much risk of this – I would support appropriate steps to raise expectations of inflation, including, perhaps, aggressive asset purchases coupled with clear communication that our goal is to combat deflationary expectations. But for such a strategy to be successful, the public must believe that the Fed can and will act to combat those expectations.

The Fed must be credible. Protecting that credibility is why, based on my current outlook, I do not support further asset purchases of any size at this time. As I said earlier, asset purchases in our current economic environment can do little if anything to speed up the return to full employment. But if the public believes that they can and is disappointed, it may have less confidence that the Fed will act to raise inflationary expectations if needed. Because I see little gain at this point, and some costs, I would prefer not to engage in further asset purchases at this time.

There is much to blast Plosser for. For starters, Quantitative Easing does not work as noted in Sure Thing?!

Moreover, inflation targeting is pure idiocy. For some explanations as to why please see Fallacy of Inflation Targeting.

For further discussion, please see Does Inflation Targeting Make Any Sense?

Finally, it is perfectly clear that Plosser does not even know what inflation is. Yet, even if one did think inflation was about prices, the idea that the Fed can control prices in a global economy is sheer lunacy.

Nonetheless, it is interesting to see multiple dissents regarding Fed policy. Hopefully that dissent continues to mount.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Why the Statistical "Recovery" Feels Bad

Posted: 29 Sep 2010 02:26 AM PDT

Inquiring minds might be interested in charts of GDP minus the effect of increased government spending. The charts are from reader Tim Wallace who writes ...

Dear Mish -

Take a look at the following spreadsheets of GDP from 2001 to 2010, in chained 2005 dollars to account for [price] inflation.

U.S. GDP and Net GDP (subtracting government spending)

click on chart for sharper image

The above chart clearly demonstrates that there really is no recovery, just increased federal spending and debt.

Here are the GDP numbers chained to 2005 dollars (Millions):

Year	GDP	Gov't Spending	Net GDP
2001	11,371.3	2,056.4	9,314.9
2002	11,538.8	2,188.6	9,350.2
2003	11,738.7	2,303.3	9,435.4
2004	12,213.8	2,377.7	9,836.1
2005	12,587.5	2,486.0	10,101.5
2006	12,962.5	2,578.5	10,384.0
2007	13,194.1	2,570.1	10,624.0
2008	13,359.0	2,753.3	10,605.7
2009	12,810.0	3,210.8	9,599.2
2010	13,191.5	3,470.0	9,721.5

Note that the chained GDP number less the federal spending nets out to a number less than the GDP of 2004. So basically, our economy is back where it was seven years ago.

Private Sector GDP

click on chart for sharper image

Private sector GDP continues to shrink as the above chart and following table shows.

Year	Private GDP%
2001	81.9%
2002	81.0%
2003	80.4%
2004	80.5%
2005	80.3%
2006	80.1%
2007	80.5%
2008	79.4%
2009	74.9%
2010	73.7%

Moreover, over 40% of government spending is deficit spending. That increase in deficit spending accounts for the alleged rebound in GDP. Clearly that deficit spending is unsustainable.

How much of that increased government spending made it into your pocket or benefited you in any way? While your are pondering that, remember that all government spending adds to GDP whether or not anything is actually produced.

The "Feels Bad" Recovery

These charts help explain Good News: The Great Recession is Over; Bad News: It Doesn't Feel Like It.

So far, we do not even have an admission by the President, by Congress, or by most economists as to what the problems are. Instead everyone wants to "stimulate" something, typically by throwing money at problems.

This is why the problems are unlikely to be fixed, and this is why we are likely to remain in a stagnant economy that produces few jobs for the remainder of the decade.

While the recession is over, it certainly does not feel like it. Moreover, because we fail to address the structural issues, the odds of slipping back into another recession are exceptionally high.

Keynesian and Monetarist Stimulus Both Failures

Neither Keynesian stimulus (deficit spending) nor monetary stimulus (Quantitative Easing) have done anything to speed up the recovery. In regards to the latter, the QE Engine Revs, but the Car Goes Nowhere.

Just as happened in Japan, all we have to show for our stimulus is bigger and bigger deficits with a corresponding increase in the percentage of revenues needed to finance that debt.

All this talk of a "recovery" is nonsensical. Careful analysis shows the alleged recovery is nothing more than an illusion caused by unsustainable deficit spending. Meanwhile, the real economy is mired at the 2004 level. Simply put, the recovery "feels bad" because there is no recovery in the first place, only a statistical illusion of one.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mortgage and Loans - Mortgage Refinance, Home Loans

What type of insurance should I get on a vacation home / rental?
Airbus Says To Be Seeking State Loans – Bloomberg
Ways To Release Collateral From Your Spanish Home
Insurance Spiking Due to Obamacare?
How much of life insurance company profit results from beneficiaries not knowing that a company sold a policy?
QL TV Behind the Commercials Interview: Cora Cowles

What type of insurance should I get on a vacation home / rental?

Posted: 29 Sep 2010 07:27 AM PDT

I am purchasing a second home near Canyon Lake, Texas. This house will be occupied by me or my immediate family approximately 50% of the year. The other half, I plan on short term rentals (3-5 days at a time). What would be the appropriate insurance(s) for this? I also plan to live in this second house full time in approximately 5 years, if that makes any difference.

Airbus Says To Be Seeking State Loans – Bloomberg

Posted: 29 Sep 2010 07:09 AM PDT

Airbus is seeking billion in state loans to fund its A-350. This may revive the feud with Boeing and the US government. (Bloomberg News)

Ways To Release Collateral From Your Spanish Home

Posted: 29 Sep 2010 04:13 AM PDT

In Spain, contrary to in the UK market, it’s harder to unlock the value in a real estate property that’s paid for in cash or unencumbered should the possessor wishes to secure equity release loan later . Numerous cash buyers in UK have much more options in regards to getting mortgage later on due to the flexible type mortgage procedure supplied in lots of financial institutions and also loan companies.

When cash is spent for a property in Spain use of the equity later on is going to be much more of a difficulty.

Nearly all lenders will not facilitate equity to be available by any means. Of lenders that do a large number of will certainly demand that the money become exclusively applied for the objective of betterments to the property the funds are being produced against.

Seldom loan companies will permit the finances acquired from the property or home to be applied for any objective the borrower might desire. Acquisition mortgages have lower interest levels when compared to the ones for equity release which will cost around twenty-five percent more.

When obtaining finance for purchase mortgage loan the expenses are going to be around 4% of the amount took out, normally the similar costs when establishing a release equity mortgage. All costs with regards to the Spanish equity release are generally taken off out of whole loan amount and it is not likely to add the costs to the equity release loan when the valuation amount has been totally applied.

Should you be looking for great, honest and impartial advice on Spanish Mortgages then consider contacting IMS Spanish Mortgages situated in the Costa Del Sol. It is important to get hold of expert advice through a reliable independent advisor to know costs along with availability before entering into any contracts.

Insurance Spiking Due to Obamacare?

Posted: 28 Sep 2010 11:59 AM PDT

Provider blames rate hike on health care law

How much of life insurance company profit results from beneficiaries not knowing that a company sold a policy?

Posted: 28 Sep 2010 09:51 AM PDT

I have seen many questions here along the lines of either (a) a person died and had life insurance, but I do not have the policy and do not know what company sold the policy, or (b) a person died and I do not know if that person had life insurance.

How much of the profit that life insurance companies make is because the company does not receive a claim when an insured person dies, either because the beneficiary did not know that there was a life insurance policy, or because the beneficiary does not know what company issued the policy?

QL TV Behind the Commercials Interview: Cora Cowles

Posted: 28 Sep 2010 09:34 AM PDT

QL TV reporter Abby Pougnet gives viewers a behind the scenes look into the faces of the Quicken Loans TV commercials. This interview is with Cora Cowles, who is on the Quicken Loans marketing team. Watch the video to get to know Cora a little better and hear her thoughts about her TV experience!