The Year of the Great Redistribution

Robert Reich

One of the worst epithets that can be leveled at a politician these days is to call him a “redistributionist.” Yet 2013 marked one of the biggest redistributions in recent American history. It was a redistribution upward, from average working people to the owners of America.
The stock market ended 2013 at an all-time high — giving stockholders their biggest annual gain in almost two decades. Most Americans didn’t share in those gains, however, because most people haven’t been able to save enough to invest in the stock market. More than two-thirds of Americans live from paycheck to paycheck.

Even if you include the value of IRA’s, most shares of stock are owned by the very wealthy. The richest 1 percent of Americans owns 35 percent of the value of American-owned shares. The richest 10 percent owns over 80 percent. So in the bull market of 2013, America’s rich hit the jackpot.

What does this have to do with redistribution? Some might argue the stock market is just a giant casino. Since it’s owned mostly by the wealthy, a rise in stock prices simply reflects a transfer of wealth from some of the rich (who cashed in their shares too early) to others of the rich (who bought shares early enough and held on to them long enough to reap the big gains).

But this neglects the fact that stock prices track corporate profits. The relationship isn’t exact, and price-earnings ratios move up and down in the short term. Yet over the slightly longer term, share prices do correlate with profits. And 2013 was a banner year for profits.

Where did those profits come from? Here’s where redistribution comes in. American corporations didn’t make most of their money from increased sales (although their foreign sales did increase). They made their big bucks mostly by reducing their costs — especially their biggest single cost: wages.

They push wages down because most workers no longer have any bargaining power when it comes to determining pay. The continuing high rate of unemployment — including a record number of long-term jobless, and a large number who have given up looking for work altogether — has allowed employers to set the terms.

For years, the bargaining power of American workers has also been eroding due to ever-more efficient means of outsourcing abroad, new computer software that can replace almost any routine job, and an ongoing shift of full-time to part-time and contract work. And unions have been decimated. In the 1950s, over a third of private-sector workers were members of labor unions. Now, fewer than 7 percent are unionized.

All this helps explain why corporate profits have been increasing throughout this recovery (they grew over 18 percent in 2013 alone) while wages have been dropping. Corporate earnings now represent the largest share of the gross domestic product — and wages the smallest share of GDP — than at any time since records have been kept.

Hence, the Great Redistribution.

Some might say this doesn’t really amount to a “redistribution” as we normally define that term, because government isn’t redistributing anything. By this view, the declining wages, higher profits, and the surging bull market simply reflect the workings of the free market.

But this overlooks the fact that government sets the rules of the game. Federal and state budgets have been cut, for example — thereby reducing overall demand and keeping unemployment higher than otherwise. Congress has repeatedly rejected tax incentives designed to encourage more hiring. States have adopted “right-to-work” laws that undercut unions. And so on.

If all this weren’t enough, the tax system is rigged in favor of the owners of wealth, and against people whose income comes from wages. Wealth is taxed at a lower rate than labor.
Capital gains, dividends, and debt all get favorable treatment in the tax code – which is why Mitt Romney, Warren Buffet, and other billionaires and multimillionaires continue to pay around 12 percent of their income in taxes each year, while most of the rest of us pay at least twice that rate.

Among the biggest winners are top executives and Wall Street traders whose year-end bonuses are tied to the stock market, and hedge-fund and private-equity managers whose special “carried interest” tax loophole allows their income to be treated as capital gains. The wild bull market of 2013 has given them all fabulous after-tax windfalls.

America has been redistributing upward for some time – after all, “trickle-down” economics turned out to be trickle up — but we outdid ourselves in 2013. At a time of record inequality and decreasing mobility, America conducted a Great Redistribution upward.

The Stock Market Bubble

Back to the Future on Wall Street
by MIKE WHITNEY


Wall Street is buzzing, and it’s all about bubbles.

In fact, according to Google Trends, interest in the term “stock bubble” was higher in November 2013 than anytime since October 2008.

And that should be expected given that the Dow Jones just broke through the 16,000-mark while the NASDAQ sailed-past the 4,000 milestone for the first time in 13 years. And did I mention that S&P 500 just closed above 1,800 for an all-time high?

While surging stocks are not proof of a bubble, they do draw attention to the condition of the underlying economy which is still in deep distress 5 years after the recession "ended." With "official" unemployment at 7.2% (and real unemployment twice that figure), GDP barley growing, droopy personal consumption, flagging durable goods, shrinking revenues, flatlining wages, falling incomes, widening inequality, plunging consumer sentiment, 47 million Americans on food stamps, and myriad other signs of persistent economic stagnation; the so called “recovery” is anything but robust. So where are stocks getting the oomph to keep rising?

That’s not a question that bothers the bubble deniers who have started popping up on the business channels like they did prior to the housing and the dot.com busts. These so called “experts” assure the public that all the bubble talk is just scaremongering by disgruntled Cassandras who don’t understand that current valuations are reasonable. They say that soaring prices reflect “strong fundamentals.

Uh huh.

Last week, serial bubblemaker, Alan Greenspan, made an appearance on Bloomberg TV where he scoffed at the idea of a stock bubble saying, “It’s a little on the upside, (But) “This does not have the characteristics, as far as I’m concerned, of a stock market bubble.”

There you have it from Maestro himself. No bubble here. Move along now.

Others, however, are not as confident as Greenspan. They think stock prices have less to do with fundamentals than they do with the Fed’s uber-accommodative policy which has kept short-term rates set below the rate of inflation for 5 years straight, providing a subsidy for risk taking. They also point to Fed chairman Ben Bernanke’s $85 billion per month asset purchase program, called QE, which has expanded the Fed’s balance sheet by $3 trillion lifting stock and bond prices across the board. Stock prices are based on Central Bank intervention. Fundamentals have nothing to do with it, nothing at all.

As for the bubble; judge for yourself:

Margin debt on the New York Stock Exchange is currently at its highest level ever. It’s even higher than before the crash in 2007. When investors borrow a lot of dough to buy stocks, you’re in a bubble, right? Because that’s what a bubble is, tons of credit pushing up prices. And when something bad happens, like the Lehman Brothers default, then all the over-extended borrowers have to dump their stocks pronto, which causes firesales, panics and financial meltdowns. Been there, done that.

So why is there so much margin debt now, you ask?

Because of zero rates. Because of QE. Because speculators think the Fed will keep prices high by pumping more liquidity into the system. It’s called the Bernanke Put, the belief that the Fed will prevent stocks from falling too fast, too far. Margin debt is a reasonable reaction to the Fed’s policy, which is why the Fed is ultimately responsible for the risky behavior.

Now check this out from the New York Times:

“Since the dark days of 2008, the Nasdaq has risen more than 150 percent, twice as much as the old-school Dow industrials. Money has been pouring into social media stocks. As of Friday, Twitter had risen nearly 60 percent since it went public only a few weeks earlier.

Once again, new “metrics” are being applied to justify stratospheric valuations. Twitter is losing money. A price-to-earnings ratio? There is no E in the P/E. But its stock is trading at 20-odd times the company’s annual sales. Good enough….

Eight months ago, Snapchat was valued at $70 million. Today, it is valued at $4 billion, even though it has zero revenue. Six months ago, Pinterest was valued at $2.5 billion. Today, it is valued at $3.8 billion — and no revenue there, either. And last week news broke that Dropbox was said to be seeking a new round of funding that would value the company at $8 billion, up from $4 billion a year ago.” (“Disruptions: If It Looks Like a Bubble and Floats Like a Bubble”, New York Times)

Did you catch that? A company with zero revenue is worth $3 billion more today than it was 8 months ago. So we’re back to the bad old days of the dot.com bust. This is the result of low rates and QE. It has nothing to do with fundamentals. We’re not talking earnings here. We’re talking manipulation, intervention, and central planning.
 
Then there’s this from the Wall Street Journal:

“Investment funds aimed at individual investors are barreling into collateralized loan obligations, a complex and volatile type of security that was shaken by the financial crisis.

Lured by annual returns of as high as 20%, some mutual-fund managers are buying CLOs through investment funds that purchase stakes in loans to companies with low credit ratings…. …

The biggest buyers of these securities usually are hedge funds, insurers and banks. But mutual funds and business-development companies, which pitch themselves to individual, or retail, investors, have collected more than $60 billion in money from clients this year, according to Keefe, Bruyette & Woods, Inc. and fund-data provider Lipper.

CLO returns are higher than on corporate bonds and other loans, but CLO prices could plunge if the risk rises that companies will run into trouble repaying their loans. That happened in 2011, and some fund managers say retail investors are mostly unaware that the firms they invest in are buying CLOs…” (“Volatile Loan Securities Are Luring Fund Managers Again”, Wall Street Journal)

So the big boys are climbing further out the risk curve to scratch out a higher rate of return on their investments; investments which–by the way– will eventually cost ”retail investors” (you and me) a bundle. 

 

And the reason these financial institutions are engaging in such risky behavior is because rates have been stuck at zero for 5 years, forcing them to look for higher yield wherever they can find it. It’s all part of the Fed’s Pavlovian conditioning. First you turn the interest rate dial to zero, then you juice stock’s prices with QE. And then you wait for the suckers (Mom and Pop) to reenter the market so you can cut them down like corn stalks in a combine. Works every time, just take a look:

“One development that has experts concerned is the return of individual investors, who are known for getting into the stock market near peaks…One way to measure their activity is to look at net inflows into stock mutual funds (excluding exchange-traded funds). When investors put more into stock funds than they take out, it’s called a net inflow. When they withdraw more than they invest, it’s a net outflow.

This year, net inflows totaled $176 billion through Nov. 20, according to Lipper…Most of that money is coming from bank accounts and money market funds…”

So the sheeple are about to get sheared again, right? Just like Bernanke and his Wall Street buddies planned from the get go. But, guess what? Just as Mom and Pop are getting back into stocks again, the big boys are getting out. Take a look at this report from BofAML from the Macronomics blogsite:

”BofAML clients were net sellers of US stocks for the fifth consecutive week, in the amount of $2.3bn. Net sales were led by institutional clients, who returned to net selling following a week of muted buying.

Institutional clients remain the biggest net sellers year-to-date, with cumulative net sales of over $23bn—larger than in either 2008 or 2010. …..Hedge funds were also net sellers for the second consecutive week, while private clients returned to net buying after a week of selling. This group has been a net buyer for 23 of the past 26 weeks.” (“Credit: All that glitters, ain’t gold”, Macronomics)

How do you like that? So once the chickens get lured back into the henhouse, the door slams shut and the fox fires up the stove for another big feed. Isn’t this how it always works out?

Now check this out in Forbes about ”cov lite” loans:

“Covenant-lite loan activity in 2013 is smashing all records, and appears to be picking up speed. Through Aug. 8 there has been $162 billion of covenant-lite loan issuance in the U.S., more than five times the amount seen at this point in 2012, and easily topping the $86 billion of cov-lite deals logged all of last year.” (“Cov lites” soar to new record”, Forbes)

Unfortunately, cov lites are a particularly lethal form of lending which strips “typical lender protections” from credit agreements. Here’s the scoop from the New York Times:

“Leveraged loans became popular before the 2008 collapse but nearly disappeared afterward, regarded as a symbol of unbridled lending. But they started to return in 2010 and are now back in force, with volumes of $548.4 billion this year through Nov. 14, already exceeding the precrisis level of $535.2 billion in 2007.

The type of leveraged loans that Learfield took out are known as covenant-lite, financial lingo for loans that lack the tripwires that could alert investors to any potential financial troubles at the company that could affect repayment. More than half of all leveraged loans issued this year have been the so-called cov-lite types, double the level seen in 2007 on the eve of the credit crash.” (“New Boom in Subprime Loans, for Smaller Businesses”, New York Times)

So, let’s recap: The Fed has managed to spark another surge in risky lending (that “exceeds precrisis levels”) that threatens to blow up in investors faces leaving them less prepared for retirement than they are today.

Check.

And there’s more. Take a look at the recent stock buyback frenzy, which is where companies buy their own stock to goose the price instead of investing in plants, equipment, hiring, or any other type of useful, productive activity. This is from Bloomberg:

“Multiple expansion through share buybacks have been driving indeed the stock market higher greater than earnings have. …. Buybacks rose by 18% Quarter-over-quarter to $118 billion in 2013, up 11% year-over-year to $218 billion.”  (Bloomberg)

Even so, Greenspan sees no bubble. Stock prices are based on good old fundamentals, like earnings. What could be more fundamental than earnings, right?

Take a look at this from the Testosterone Pit:

“Corporate earnings will grow this year at their lowest level since 2009. Revenue growth at public companies is almost non-existent. Companies are buying back stock at a record pace to boost per-share earnings.”  (“What Really Bothers Me About this Stock Market”,  Michael Lombardi, Testosterone Pit)

Huh? So earnings aren’t so hot either?

Apparently not. And that means the fundamentals are actually weak, which makes sense since the economy is in the crapper.

Then we ARE in a bubble, after all?

Yep. And when it bursts it’s going to cost a lot of people a lot of money.  Just like last time.

Three Fallacies the Super-Rich (through their media outlets) Continue to Sell

Being in the Highest Class Doesn't Mean You're a High Class Person

by PAUL BUCHHEIT

 

When it comes to the economy, too many Americans continue to be numbed by the soothing sounds of conservative spin in the media. Here are three of their more inventive claims:

1. Higher taxes on the rich will hurt small businesses and discourage job creators

A recent Treasury analysis found that only 2.5% of small businesses would face higher taxes from the expiration of the Bush tax cuts.

As for job creation, it’s not coming from the people with money. Over 90% of the assets owned by millionaires are held in a combination of low-risk investments (bonds and cash), the stock market, real estate, and personal business accounts. Angel investing (capital provided by affluent individuals for business start-ups) accounted for less than 1% of the investable assets of high net worth individuals in North America in 2011. The Mendelsohn Affluent Survey agreed that the very rich spend less than two percent of their money on new business startups.

The Wall Street Journal noted, in way of confirmation, that the extra wealth created by the Bush tax cuts led to the “worst track record for jobs in recorded history.”

2. Individual initiative is all you need for success.

President Obama was criticized for a speech which included these words: “If you’ve been successful, you didn’t get there on your own…when we succeed, we succeed because of our individual initiative, but also because we do things together.”

‘Together’ is the word that winner-take-all conservatives seem to forget. Even the richest and arguably most successful American, Bill Gates, owes most of his good fortune to the thousands of software and hardware designers who shaped the technological industry over a half-century or more. A careful analysis of his rise shows that he had luck, networking skills, and a timely sense of opportunism, even to the point of taking the work of competitors and adapting it as his own.

Gates was preceded by numerous illustrious Americans who are considered individual innovators when in fact they used their skills to build upon the work of others. On the day that Alexander Graham Bell filed for a patent for his telephone, electrical engineer Elisha Gray was filing an intent to patent a similar device. Both had built upon the work of Antonio Meucci, who didn’t have the fee to file for a patent. Thomas Edison’s incandescent light bulb was the culmination of almost 40 years of work by other fellow light bulb developers. Samuel Morse, Eli Whitney, the Wright brothers, and Edison had, as eloquently stated by Jared Diamond, “capable predecessors…and made their improvements at a time when society was capable of using their product.”

If anything, it’s harder than ever today to ascend through the ranks on one’s own. As summarized in the Pew research report ”Pursuing the American Dream,” only 4% of those starting out in the bottom quintile make it to the top quintile as adults, “confirming that the ‘rags-to-riches’ story is more often found in Hollywood than in reality.”

3. A booming stock market is good for all of us

The news reports would have us believe that happy days are here again when the stock market goes up. But as the market rises, most Americans are getting a smaller slice of the pie.

In a recent Newsweek article, author Daniel Gross gushed that “The stock market has doubled since March 2009, while corporate profits and exports have surged to records.”

But the richest 10% of Americans own over 80% of the stock market. What Mr. Gross referred to as the “democratization of the stock market” is actually, as demonstrated by economist Edward Wolff, a distribution of financial wealth among just the richest 5% of Americans, those earning an average of $500,000 per year.

Thanks in good part to a meager 15% capital gains tax, the richest 400 taxpayers DOUBLED their income and nearly HALVED their tax rates in just seven years (2001-2007). So dramatic is the effect that anyone making more than $34,500 a year in salary and wages is taxed at a higher rate than an individual with millions in capital gains.

There’s yet more to the madness. The stock market has grown much faster than the GDP over the past century, which means that this special tax rate is being given to people who already own most of the unearned income that keeps expanding faster than the productiveness of real workers.

And one fading illusion: People in the highest class are people of high class.

Scientific American and Psychological Science have both reported that wealthier people are more focused on self, and have less empathy for people unlike themselves.

This sense of self-interest, according to a study published in the Proceedings of the National Academy of Sciences and other sources, promotes wrongdoing and unethical behavior.

Can’t help but think about bankers and hedge fund managers.

How the Ultra-Rich Betray America

Monday, May 21, 2012 by Common Dreams

by Paul Buchheit

 

The betrayals come in many forms. Here are a few of the more outrageous, and destructive, examples:

Evasion: Corporations suddenly stopped meeting their tax responsibilities

While corporate profits have doubled to $1.9 trillion in less than ten years, the corporate income tax rate, which for thirty years hovered around the 20-25% level, suddenly dropped to 10% after the recession. It has remained there for three years.

We are seeing a manifestation of the Shock Doctrine. Corporations are using the national emergency of the financial collapse to make a statement about taxes, and a traumatized nation is too preoccupied to do anything about it.

Delusion: Technology companies won't admit that much of their 'innovation' is due to public assistance

According to the report Funding a Revolution, government provided almost half of basic research funds into the 1980s. Federal funding still accounted for half of research in the communications industry as late as 1990. Even today, the federal government supports about 60 percent of the research performed at universities.

Apple's first computer was introduced in the late 1970s. Apple still does most of its product and research development in the United States, with US-educated engineers and computer scientists.

Google's business is based on the Internet, which started as ARPANET, the Defense Department's Advanced Research Projects Agency computer network from the 1960s. The National Science Foundation funded the Digital Library Initiative research at Stanford University that was adopted as the Google model.

Apple got its tax bill down to 9.8% last year. About 2/3 of its profits remain overseas for tax avoidance purposes. Google, like Apple, avoids taxes by moving most of its foreign profits through Ireland and the Netherlands to Bermuda. Both Apple and Google, along with Microsoft and Cisco, are lobbying for a repatriation tax holiday to allow billions of overseas dollars to come home at a greatly reduced tax rate.

An Apple executive said: "We don't have an obligation to solve America's problems." That may be true, but they do have an obligation to pay the taxes that help America solve its problems. (Apple is nothing but a bunch of greedy cunts! Fuck Apple!--jef)
Desertion: The people who benefit most from government are renouncing their citizenships to avoid taxes

Perhaps the ultimate insult to America is to just quit on your country after making a fortune off of it. In 2011 almost 1,800 Americans gave up their citizenship to avoid taxes. (Good riddance, bastards.--jef) The wealthy benefit disproportionately from property and inheritance laws, contracts, stock exchanges, favorable SEC regulations, the Small Business Administration, patent and copyright and intellectual property laws, estate planning, trust funds, Internet marketing, communications infrastructure, highway maintenance, air traffic control, local and national security, and 60 years of research in technology and other industries.

A recent outrageous example is Facebook part-owner Eduardo Saverin, whose family came to America from Brazil partly for safety reasons, and who happened to land Mark Zuckerberg as a roommate at Harvard. Now after falling into billions, he's decided to renounce his U.S. citizenship to avoid taxes. (Well, stick his ass in Gitmo, then!--jef)

Denial: Traders feel it's inappropriate to pay even a tiny tax on a quadrillion dollars in sales

A quadrillion dollars sounds like a fake amount. But it's all too real. That's a thousand trillion dollars of derivatives transactions which, along with the high-frequency computer-generated transactions (5,000 per second) that make up over half of U.S. stock trades, contributed to a financial meltdown and a $3 trillion bailout for reckless trading.

But there's no tax on these transactions.

While average Americans pay a 10% sales tax on necessities, millionaire investors pay just a .00002% SEC fee (2 cents for every thousand dollars) for a financial instrument. And their supporters claim, inexplicably after the disastrous trading frenzy in 2008, that a tax would increase volatility.

Illusion: The media leads us to believe we should all be cheering when the stock market is booming

Conservatives insultingly assure us that the "democratization of stock ownership" is gradually making America more equal, as evidenced by the flattening of wealth ownership among the richest 1% in recent years. So we should all be excited about a rising stock market.

Here are the facts. Data from Edward Wolff confirms that from 1983 to 2007 the percentages of net worth and financial wealth for the top 1% remained steady. But the percentages for the rest of the richest 5% increased by almost 20%, while the percentages for the lowest 80% of the population DECREASED by almost 20%.

In other words, the share of wealth owned by the top 1% leveled off because the "democratization of stock ownership" spread the wealth among just 5% of the population, those earning an average of $500,000 per year. A few people -- 5 out of 100 -- got very rich, but everyone else lost ground.
Conclusion

The issues are difficult to address with Congress largely on the side of the wealthy. At the very least:

(1) Eliminate the tax break on unearned income (capital gains). The richest Americans, who own most of the stocks, should not pay a smaller tax than everyone else.

(2) Implement a small financial transactions tax. It would be easy to administer on computer trades, it would generate hundreds of billions of dollars in revenue, and it would help guard against the reckless speculation that devastated the financial markets and our country.

Stocks on long losing streak as economy weakens (2 articles)

(Oh, but the stock market was doing so well, people saw it as a sure sign of recovery...there isn't going to be a recovery folks, not for a decade or longer. We are financially fucked for the foreseeable future--pardon my language, but dig the alliteration!.--jef)

By MARTIN CRUTSINGER - Aug 2, 2011

WASHINGTON (AP) - The stock market is on its longest losing streak since the financial meltdown of 2008, confronted almost every day by fresh evidence that the economy is in serious trouble again.

The Dow Jones industrials declined more than 265 points Wednesday, their worst day in more than two months, and closed below 12,000 for the first time since June 24.

Investors sold all day after a report that the economy, which is barely growing and straining to produce jobs, is getting almost no help from consumer spending. Americans saved more in June and spent less for the first time in almost two years.

The big declines in the stock market came despite the formal end of weeks of uncertainty over whether Congress would raise the federal government's borrowing limit.

President Barack Obama signed into a law a bill that raises the debt ceiling and promises more than $2 trillion in cuts to government spending over the next decade. The bill was passed by the House on Monday and by the Senate earlier Tuesday, 74-26.

But investors were more worried about the economy, and the sell-off only accelerated. It was the eighth consecutive daily drop for the Dow and seventh for the Standard & Poor's 500 index, in both cases the longest since October 2008.

During its eight-day decline, the Dow has lost 858 points, or 6.7 percent. The average closed at 11,866.62. The S&P 500 closed at 1,254.05, and is now down slightly for the year.

"The market is starting to wonder where the growth is going to come from," said Nick Kalivas, a vice president of financial research at MF Global. "It hasn't hit the panic button yet, but that's where we're drifting."

The spending decline in June came after a report last week that the economy grew at an annual rate of less than 1 percent in the first six months of the year - the slowest since the end of the Great Recession in June 2009.

Tuesday's report showed that by June, Americans had only grown more cautious. They are faced with high unemployment, stagnant pay, sliding home values and other challenges.

"With gasoline prices high, incomes not growing and the craziness in Washington creating uncertainty, is it any surprise that people stopped spending?" asked Joel Naroff, chief economist at Naroff Economic Advisors.

The government said consumer spending dropped 0.2 percent in June. It was the first decline since September 2009. Consumer spending fuels about 70 percent of economic growth.

Part of the drop was because food and energy prices have declined a little after sharp increases earlier this year. Gasoline, for example, costs about $3.70 a gallon after the national average flirted with $4 earlier this year.

But Americans also cut back on major goods, such as cars, furniture and appliances. Those purchases help drive growth.

Incomes, which include Social Security checks and other government benefit payments, rose just 0.1 percent. That was the smallest gain since September. Wages and salaries fell.

People socked away more of their payments, perhaps because of increasing worries about the economy and job security. The personal savings rate rose to 5.4 percent of after-tax incomes, the highest since August 2010.

Automakers reported Tuesday that a lack of discounts and a continuing shortage of Japanese cars kept many buyers away and caused sales to sputter for a third straight month.

The only good news for the economy was that the government won't default on its debt. But even the debt could ultimately slow the economy.

The legislation Obama signed Tuesday didn't include an extension of a Social Security tax cut or long-term unemployment benefits. Both are set to expire by year's end. And the deal reduces government spending at a time when the economy is growing too slowly to keep the unemployment rate from rising.

For now, most of the spending cuts begin in 2014 or later, so the damage to the economy will be limited.

Obama has pledged to fight to extend the Social Security tax cut and emergency unemployment benefits. But in Washington's atmosphere of fiscal restraint, that may be difficult.

"We believe the economy will continue to struggle for some time, especially since there has been a move by the federal government toward fiscal consolidation," said Paul Dales, senior U.S. economist at Capital Economics.

The economy added just 18,000 jobs in June, the fewest in nine months, and the unemployment rate is 9.2%(U3) 16.2% (U6), the highest all year. The government will issue the July figures Friday.

The sour news on incomes, spending and auto sales followed a report earlier this week that manufacturing in July grew at its weakest pace in two years.

Dales said he doesn't foresee another recession but expects the economy to remain bumpy.

That's a fine line for most Americans. Many of them still feel as if the economy remains in recession. At the same time, corporations have continued to report strong earnings and amassed huge cash stockpiles.

"What worries me is that businesses are deriving their strong earnings growth through productivity gains, limited wage increases and foreign activities," Naroff said. "While that may be good for an individual firm, when most companies do that, income gains become so limited that spending and ultimately growth fades."

+++++++++

Stocks now down for year as economic concerns grow
By DAVID K. RANDALL - Aug 2, 2011

NEW YORK (AP) - A sell-off erased this year's gains in the stock market Tuesday as investors grew increasingly concerned about the economy.

The Standard & Poor's 500 - the benchmark for most U.S. mutual funds - lost 2.6 percent and fell to its lowest point of the year. It is down 0.3 percent for the year and is off nearly 8 percent since reaching a high for the year of 1,363 on April 29.

A series of weak economic reports and poor earnings reports from several big companies spurred the decline.

The Commerce Department reported that consumers cut their spending in June for the first time in nearly two years. Analysts had predicted a slight increase. Incomes also rose by the smallest amount since September, reflecting a weak job market.

The report came one day after a weak manufacturing report. And on Friday the government said that in the first half of the year, the economy grew at its slowest pace since the recession ended in June 2009.

"The market is starting to wonder where the growth is going to come from," said Nick Kalivas, a vice president of financial research at MF Global. "It hasn't hit the panic button yet, but that's where we're drifting."

The S&P 500 lost 32.89 points, or 2.6 percent, to 1,254.05. It has fallen for seven straight days, losing 6.8 percent in that time. That's the S&P's longest string of losses since the height of the financial crisis in October 2008.

The Dow Jones industrial average lost 265.87 points, or 2.2 percent, to 11,866.62. The Dow has lost 858 points, or 6.7 percent, in the last eight trading days.

The Nasdaq composite fell 75.37, or 2.7 percent, to 2,669.24. And the Russell 2000, an index of smaller companies that many investors look to as a sign of market optimism about growth, fell 3.3 percent. It is now down 2.2 percent for the year.

All 30 stocks in the Dow lost ground. General Electric Co. (GE), Pfizer Inc. (PFE) and Home Depot Inc. led the index lower with losses of 4 percent or more. All but 13 of the 500 companies in the S&P index fell.

Archer Daniels Midland Co. dropped 6 percent after the agricultural conglomerate said it missed Wall Street's profit forecasts. High-end retailer Coach Inc. lost nearly 7 percent after the company said margins declined, cutting into profits. A pullback in spending could threaten profits at the company; it is making less from each purchase because of higher costs.

The yield on the 10-year Treasury fell to a low for the year of 2.61 percent from 2.75 percent Monday. Yields fall when bond prices rise. Gold, another asset investors buy when they're worried about the direction of the economy, gained 1.4 percent to $1,645 an ounce.

Even with the current streak of losses, the S&P and Dow are near the same levels as they were at the end of June. But some investors say that there's a strong likelihood both indexes will decline further this year because the economy is not as strong as they thought it was in June. At that time, investors still believed the economy was growing at a quicker pace.

And last year when the economy slowed sharply, the Federal Reserve began a bond-buying stimulus program, known as quantitative easing. That was credited with helping the U.S. economy avoid another recession.

Now, the Fed has indicated it does not have plans to implement another round of stimulus. And the new focus on deficit reduction in Washington makes it even less likely that more help could come, analysts said.

"With this debt debate going on, there is not an expectation for more fiscal or monetary stimulus and that's a real concern," said Jim Peters, the head of Tactical Allocation Group, a money manager in Michigan with $1.5 billion under management.

The S&P index fell through its long-term moving average, a measure that technical traders look at to determine whether the market is moving up or down longer term. Many investors use these averages as a sign of when to sell while they can still take some profits.

"The market broke through some pretty critical support levels," said Richard Ross, the global technical strategist at Auerbach Grayson, and dampened market optimism. He said that investors will wait for the market to settle before they buy again.

The S&P, down 8 percent since reaching its highs for the year on April 29, is more than half of the way towards a 10 percent drop that signals a market correction. A drop of more than 20 percent would put an end to the bull market that started in March of 2009.

In 2008, the S&P had a much steeper decline. Over eight straight days of declines, the index lost 22.9 percent when it closed on Oct. 8, 2008. It fell even further over the next six months. Since March 2009, the S&P is up 85 percent, not including dividends.

The consumer spending pullback was the latest indication that the U.S. economy may be slowing. Many economists, including Federal Reserve Chairman Ben Bernanke, have said the U.S. economy would gain momentum in the second half of the year as gas prices fall and Japan's factories recover from the earthquake disaster in March. Slow U.S. manufacturing growth, a weak job market and concerns about spending cuts in the debt deal have cast doubt on those predictions.

The growth of China's and India economies have also slowed recently after their respective central banks raised interest rates. American corporations have counted on increasing profits in China as a way to make up for slower revenue growth in the U.S. As a whole, companies in the S&P 500 index are expected to make nearly half of their profits overseas in 2011.

President Barack Obama signed a compromise bill Tuesday to raise the country's borrowing limit, hours ahead of a midnight deadline after which the U.S. government wouldn't have enough money to pay all its bills. The passage of the bill averted the possibility of a default on U.S. debt.

Four stocks fell for every one that rose on the New York Stock Exchange. Volume was higher than average at 5.3 billion shares.

How To Fake An Economic Recovery

By Giordano Bruno - Neithercorp Press
Published on 02-16-2011
 
This may be a highly distasteful proposition, but just for a moment, I want you to sit back, and imagine that you are a member of the corporate banking elite. You are a walking talking disease ridden power mad pustule who naively believes himself intellectually superior to the vast majority of humanity and above the inherent laws of conscience, honor, and general good taste. You are a villain in the purest sense, in that you not only do great harm to the world, you actually SEEK to do great harm to the world, if only to benefit yourself and your exclusive circle of “friends”; a clan of degenerate blood thirsty sociopaths with delusions of omnipotence that stalk the night like Armani wearing Chupacabra exsanguinating the joy from poor unsuspecting cultures. You are capable of anything, and sadly, you take “pride” in this fact…

You aren’t “rich” in the traditional sense. You aren’t a “Bill Gates” or a “Donald Trump” (I’m beginning to wonder if Donald Trump is even solvent, or if his entire fortune is a special-effect courtesy of NBC). No, you don’t “make” money, you MAKE the money. You are a global financier. You are a central banker. You create the fiat that the rest of the country uses to sustain its fantasy economy. You dominate trade through monopoly and corporate fraud. You control the flow of currency through an economic system using fractional reserve banking, artificially pegged interest rates, and your ever trusty printing press. You put your substantial monetary clout behind BOTH major political parties, and groom presidential candidates to your globalist standards.

Any politician who desires to climb the ladder of power turns to you for assistance, not the voting public. You have a tremendous financial stake in every corporate news provider in the country, if not own them outright. You invite their top reporters to posh banquets, give them unlimited access to prominent social figures and high rollers, and fly them to private alcohol addled orgies in the middle of the California Redwoods (I wish this was all made up). Forget responsible journalism, they love hanging out with you, and would probably write whatever you tell them to.

Now that you have placed yourself in the tight fitting shoes of the “enlightened few”, I want you to imagine that you have engineered an implosion in national credit sectors using ultra-low interest rates to fuel mortgage and derivatives bubbles that would contract at an unprecedented pace once it is revealed to the wider investment world that those equities which they prized only days before are now “toxic”, essentially worthless, due to mass debt defaults on loans which never should have been made in the first place. Yeah, you’re a real dirtbag.

Of course, you aren’t finished yet! Your ultimate goal is centralization, and the key to centralization is to remove all options available to the masses but one; the option which garners you the greatest amount of dominance. A global economic system based on a single world currency and a single unaccountable governing body would be ideal. What would you call this world currency? I don’t know, how about something innocuous sounding like….Special Drawing Rights (SDRs), which you can then label as a mere “basket of currencies” when it is really a parasitic financial instrumeunent meant to absorb currencies until it replaces them completely:
http://money.cnn.com/2011/02/10/markets/dollar/index.htm

http://www.rte.ie/news/2011/0214/g20-business.html

In order to begin instituting this world currency, you would first need to remove the standing world reserve currency from its exalted position, that currency being the U.S. dollar. This seems rather impossible to many mainstream analysts who cannot fathom the possibility of a breakdown in the mighty Greenback, but you have already set the stage. You have created a progressive debt singularity so immense that no amount of fiat, no amount of taxation, no amount of austerity could ever satiate its hunger. You now have the perfect excuse to print the dollar with wild abandon until its withered, corpsified remains are six feet underground, leaving the door wide open for the tap dancing fast-talking SDR to take its place.

The issue is, how do you convince the general public that all is well until you are ready to unleash hyperinflation and fiscal Armageddon? How do you make them believe with all their hearts that they are not in the midst of a debt meltdown and the end of their financial sovereignty, but basking in a full-on economic recovery?!

You can’t stop wealth destruction now that the avalanche has been set in motion. You can’t stop inflation and dollar devaluation (nor would you want to. Hey, you’re evil incarnate, remember?). The effects on mainstreet are beyond your ability to hide, but, what you CAN manipulate, are the statistics and indices that Americans rely on for psychological comfort. You give everyone a blindfold and a cigarette and you do what you do best; lie!

Here is a step by step guide to fabricating an economic recovery out of thin air….

Don’t Count The Unemployed, Discount Them: Jobless people are a real downer and a pesky nuisance because they represent living breathing proof that a recovery is not taking place. By most standards, a recovery in jobs markets can be claimed if meaningful evidence shows a return to unemployment standards (normal unemployment) set before the recession / depression was triggered. If you are a global banker today, however, this will not do. Instead, you simply change the definition of “normal unemployment”. Thus, the debilitating jobless rate which was originally thought of as “bad”, is now thought of as “natural”. You must then publish long-winded white papers using more subjective statistics devoid of common sense while feigning a logical pretense:
http://www.frbsf.org/publications/economics/letter/2011/el2011-05.html

This only satisfies a small portion of the populace, though. Next, you must rig the manner in which unemployment is calculated to always overlook certain subsections of jobless. Never count those people who have been unemployed so long that they no longer receive benefits. Always count people who are underemployed as fully employed, even if they are only able to scrape together ten hours a week through part time McSlavery. After this, change the manner in which raw data on unemployment is actually collected.

First, the Labor Department derives most of its raw data on unemployment not through any traditional mathematical means, but through two separate surveys which are open to wide interpretation; an establishment survey, and a household survey. The establishment survey is what we hear about at the beginning of every month, while the household survey tends to float under the mainstream radar. In 2009 and 2010, the Labor Department deemed the household survey data (a phone driven survey of 60,000 households) “more reliable” for indicating job growth, because it was supposedly accurate in counting small business hiring and self-employment. So, you have two separate surveys (unscientific indicators of employment) combined together to produce a job growth rate number, and an unemployment percentage, both of which represent, at the most, a GUESS on the current state of jobs in this country.

While the establishment survey showed only 36,000 jobs created, the household survey somehow showed around 600,000 new jobs created!?:
http://www.bls.gov/news.release/pdf/empsit.pdf

Basically, the BLS is asking you to believe that over 600,000 people either started their own businesses, or were hired by home based businesses in the month of January alone. I’m curious as to where all the capital inflows are coming from to launch such a revolution in home entrepreneurship in the middle of the greatest credit crisis in history. Oh well, if the Labor Department says it’s true, it must be…

The juxtaposition of odd data collection methods is the reason why the government was able to claim a drop from 9.4% to 9% in the jobless rate while announcing only 36,000 jobs created! The household survey has become an incredibly useful tool for generating arbitrary employment data which can be molded to say whatever government officials and central bankers want it to say. Anyone who controls the source data for a calculation controls the outcome of that calculation. It’s that simple.

What I wouldn’t want, if I was the Labor Department, is for some outside independent citizens group to monitor my survey methods while in progress. That would make life for a statistical huckster very difficult indeed.

As Long As Stocks Are Green, The World Is Golden: Near zero interest rates can be very useful if a central bank wishes to throw a tidal wave of fiat into a particular index in order to make it appear healthy. Certainly, the Fed has avoided admitting to any manipulation of the stock market. QE measures are all “above the board”, and all is well in Bernanke’s Mayberry. A question arises here though that desperately begs to be answered; if the stock market’s meteoric rise from near destruction to the 12,000 point mark is “real”, and completely in tune with a legitimate recovery, then why is the Fed still keeping interest rates at near zero after almost three years, and why are they continuing quantitative easing measures? Could it be that without constant liquidity injections from the Fed, the stock market would once again collapse like a wet paper sack? We know that in 2009, it was revealed that bailout funds which were supposed to go towards muting the effects of toxic bank assets were actually being pumped into the equities of healthy banks instead, meaning,the money has not been allocated to the areas promised:
http://www.associatedcontent.com/article/143606/more_shocking_news_on_2009_bailout.html

We also know that top hedge fund managers have openly stated that stocks will remain bullish because QE funds are propping up the market:
http://www.marketwatch.com/story/tepper-tells-cnbc-fed-will-prop-up-market-2010-09-24

And, frankly, if you are a global banking cartel intent on keeping the American people in the dark, it makes perfect sense to prop up stocks. A Dow in the green is like a mass dose of fiscal lithium; it calms investors into a stupor. Even people who are otherwise unconcerned about economics will keep track of the Dow as if it is a solid indicator of their personal financial safety. A great test would be to observe market reactions to a Federal Reserve interest rate hike and a freezing of QE in order to counter inflation. Will the Dow stand on its own two feet then? I seriously doubt it, but then again, I don’t know that the Fed will ever raise interest rates again…

Inflation? What Inflation?: Unmitigated inflation spells doom for any society. It’s like some monetary based animal instinct deep down in our collective unconscious. The moment we hear the word “inflation” or see prices rise dramatically, we revert to survival mode and begin honing our mammoth bone battle mallets. Governments and central banks throughout history have made it their top priority to hide the effects of inflation from the citizenry at all costs.

To mask inflation is nearly impossible, especially where commodities and base goods are concerned. That’s why our government and private central bank calculate the Consumer Price Index (CPI) without counting food or energy. Most grains and crude oil have doubled in price over the past year alone, and this does not reflect well on the safety of the dollar, or the effectiveness of liquidity measures by the Fed. China, whose inflation is but a prequel to our own, is also distancing food and energy price surges from its CPI numbers, giving the false impression of leveling markets:
http://www.zerohedge.com/article/china-lowers-weighting-surging-food-prices-cpi

Corporate retail chains have a tendency to absorb rising prices of base goods to avoid alienating their customer foundation, hoping that the increases are temporary. When retailers realize that prices are not going to drop back down, they eventually relent, and shelf costs skyrocket. The bottom line is clear; overall worldwide food averages were up over 28% in 2010:
http://www.fao.org/worldfoodsituation/FoodPricesIndex/en/

Crude oil prices continue to hover near the $90 mark even though inventories are at a 20 year high:
http://www.zerohedge.com/article/gasoline-inventories-jump-20-year-high-gas-price-surges

The World Bank is now warning of possible disasters (which they helped create) in the wake of “dangerous price levels”:
http://www.reuters.com/article/2011/02/15/us-worldbank-food-idUSTRE71E5H720110215

Our government’s response? Complete denial that there is any significant threat of inflation. Denial that overprinting of the dollar and its subsequent devaluation has anything to do with rising prices. Scapegoating everything from weather, to speculators, to the fake “recovery” itself for price spikes. The longer they keep the terminology of inflation out of the mainstream, the less Americans are likely to prepare for an onslaught of the dollar.

Create Debt To Pay Off Debt: This is pretty self explanatory. If foreign investors want nothing to do with you, your explosive national debt, or your depreciating currency, where is your government going to get the money to continue spending like a drunken trophy wife at Macy’s? If you default, the jig is up, and no one will buy your recovery yarns. Instead, print even more fiat and use it to purchase your own Treasury bonds! This serves two purposes; first, it props up the federal bureaucracy which gives the impression of stability (at least for a time), and, it furthers your goal of squeezing the dollar like a grape.

Remove All Checks And Balances: If you plan on decimating an economy, you can’t very well have people pointing fingers at you while you do it. That would be inconvenient. It’s funny, but for years, ratings agencies like Moodys helped global banks facilitate the mortgage and derivatives crisis by categorizing worthless assets as AAA securities. Without them, no one would have invested in such garbage in the first place, and the banking fraud would have been immediately exposed. Now that ratings agencies are finally doing their job and downgrading the creditworthiness of banks and countries that possess extreme liabilities, the SEC is moving to marginalize them:
http://www.reuters.com/article/2011/02/09/us-financial-regulation-creditraters-idUSTRE7180OD20110209

Interesting that as the U.S. nears a possible credit downgrade, we suddenly no longer care what ratings agencies have to say.

The SEC in itself is one enormous joke, and in no way a practical overseer of banking activity. The organization has shown itself to be either fantastically incompetent, or deliberately indifferent to ongoing financial fraud. I never thought I would find myself agreeing with a cretin like Bernie Madoff, but according to the middle-weight Ponzi artist, global banks he dealt with, like JP Morgan and HSBC, had to be perfectly aware of the scam he was undertaking, otherwise, it could not have been possible:
http://www.reuters.com/article/2011/02/16/us-madoff-interview-idUSTRE71F0QD20110216

Likewise, the SEC’s complete lack of proper investigation into such activities turned Wall Street into a globalist playground where much bigger conmen than Madoff have nested and bred like fleas. It’s not that the system needs more regulation, or more legal wrangling; this would accomplish nothing, because the system is regulated by the criminals! Therefore, new laws can be enacted in concert, and the government can deem the system reformed and recovered, all while the underlying corruption remains untouched. If the poison that instigated the fall of the markets is not uprooted, treachery will continue to reign supreme, and healthy markets a childish illusion.

The Creeping Terror

Two years ago I was in my local Borders bookstore and noticed that they had downsized their stock selection by what looked to be nearly a third. I made a point to ask if this was a chain wide phenomenon. Most employees I talked with said yes. I then asked if they had begun cutting employee hours by significant margins and specifically laying off longtime workers that had built up substantial pay increases. Again, the consensus was yes. Finally, and most importantly, did Borders discuss these changes with their staff in a manner that was informative and open, or, was there a lot of confusion amongst employees as to what exactly was going on? The response was that they were overwhelmingly bewildered by Borders’ lack of clear communication as to the direction of the corporation.

My suggestion to them was to start looking for another job, because their company was about to declare bankruptcy. They, of course, denied this was remotely likely:
http://online.wsj.com/article/SB10001424052748704329104576138353865644420.html

It may sound like a stretch, but the reason I bring up Borders’ impending chapter 11 is because, to me, it represents a microcosm of the creeping nature of economic collapse, especially when that collapse is being wielded and delegated.

Borders has been on the verge of default for quite a while. Did they refuse to relay this information openly to their employees because they selfishly wanted to maintain profit margins just a little longer until they were ready to pull the plug? Of course! Do global bankers with aspirations of a centralized currency keep the true destabilization of the market spectrum and the coming international dollar dump to themselves because in the end they will benefit from our shock and awe? Of course!

Whether a person loses everything all at once, or a piece at a time, the end result is the same, however, there is something especially cruel in the idea of fiscal theater; the act of inspiring false hope that a financial environment is sound when it has, in truth, already suffocated. Why would our modern day robber barons put so much energy into constructing a fake recovery? There are many reasons, but first and foremost, to create apathy. To lure us towards inaction. To swindle us into assuming the storm will blow over, and all will return as it was. Unfortunately, recovery without intense restructuring of our economic system is impossible. The fundamentals do not support the suggestion in the slightest. The question is, who will be at the helm when the dust settles and this restructuring does eventually occur? Will the American people take the lead, as they should, and commit to a concrete free market rejuvenation of our financial environment? Or, will we sit back yet again, and let the banksters set us up for the next grand disaster?

Companies Using Piles Of Cash To Buy Back Stock, Not Generate Jobs

by Jia Lynn Yang - Thursday, October 7, 2010 by the Washington Post

For months, companies have been sitting on the sidelines with record piles of cash, too nervous to spend. Now they're starting to deploy some of that money - not to hire workers or build factories, but to prop up their share prices.

Sitting on these unprecedented levels of cash, U.S. companies are buying back their own stock in droves. So far this year, firms have announced they will purchase $273 billion of their own shares, more than five times as much compared with this time last year, according to Birinyi Associates, a stock market research firm. But the rise in buybacks signals that many companies are still hesitant to spend their cash on the job-generating activities that could produce economic growth.

Some companies are buying back shares partly because they don't want to invest in developing new products or services while consumer demand remains weak, analysts said.

"They don't know what they want to do with all the cash they're sitting on," said Zachary Karabell, president of RiverTwice Research.

Historically low interest rates are also prompting some companies to borrow to repurchase shares.

Microsoft, for instance, borrowed $4.75 billion last month by issuing new bonds at rock-bottom interest rates and announced it would use some of that money to buy back shares. The company already has nearly $37 billion in cash, but much of that money is being held by its operations overseas. The tech company is reluctant to repatriate the money, because it would get hit with a huge corporate tax bill.

A share buyback is a quick way to make a stock more attractive to Wall Street. It improves a closely watched metric known as earnings per share, which divides a company's profit by the total number of shares on the market.

Such a move can produce a sudden burst of interest in a stock, improving its price.

Among the biggest buybacks so far this year: Hewlett-Packard, the world's biggest maker of personal computers, said in August it would spend $10 billion buying its shares. Its shares rose 1.5 percent after the announcement.

In March, the giant snack-food maker Pepsico announced it would raise its dividend and buy back as much as $15 billion in common stock over the next three years. The company's shares rose 1.6 percent that day.

Last month, the board of The Washington Post Co. authorized executives to buy back as much as 750,000 of the company's Class B shares. Its stock went up 4.3 percent on the day of the announcement.

Hewlett-Packard, for one, said it is doing buybacks to maintain the number of shares outstanding after employees cash in their stock options.

But critics say buybacks are a shortsighted way for companies to offload cash when they would be better off investing for the future.

"It's totally wasted money," said William Lazonick, a professor at the University of Massachusetts at Lowell and director of its Center for Industrial Competitiveness. "It does not do anything long-term for companies."

Lazonick added that executives like buybacks because they boost their own stock options.

Defenders of the practice say companies are better off buying back shares if they don't see opportunities to spend while demand remains weak.

"There are times when the best thing to do might well be to buy back your stock and issue it back again at higher prices," said Jim Paulsen, chief investment strategist at Wells Capital Management. "There's nothing wrong with that."

Buybacks have become more popular in recent months as companies look for ways to spend the massive cash piles.

Nonfinancial companies held $1.8 trillion in cash and short-term assets at the end of the second quarter, according to the Federal Reserve. That is just slightly lower than in the first quarter, when corporate America set a record for cash holdings.

A third-quarter survey of nearly 1,000 chief financial officers by Duke University and CFO Magazine found that the executives' optimism about the U.S. economy had dropped by more than 15 percent compared with the previous three months. That is nearly as low as survey results from the first quarter of 2009, when the economic turmoil was in full swing. Half of the CFOs said their companies will keep clinging to their cash, and only 0.7 percent said they expect to hire more full-time employees.

Why Lessons From The First Great Depression Mean The Next Four Months Will Be Very Painful For Stockholders

Source: Zero Hedge

Published on 09-03-2010

Scott Minerd, CIO of Guggenheim Partners, parses through the years of the Great Depression, and focuses on the pivotal 1936, which contained in it the seeds for the destruction of the period of relative economic growth and stability from 1932 to 1936, and resulted in a plunge in the economy in the second great recession of the Depressionary period: that of 1937 and 1938. While the first period saw “GNP grow at an annualized rate of 10 percent, the Dow rose approximately 20 percent per annum, and unemployment declined from as high as 25 percent in 1933 to as low as 11 percent in 1937″ the second and much more dire phase of 1937-1938 . saw a unprecedented plunge in economic data: “national output declined by 5.4 percent, unemployment skyrocketed from 11 percent back to 20 percent, the Dow Jones Industrial Average declined 49 percent, and four years of healthy price recovery receded into 3 percent annual deflation.” What precipitated the second collapse? “The short answer is that it was a confluence of factors, a perfect storm of monetary and fiscal policy mistakes” yet the immediate catalyst, if one can be defined was “the fiscal policy missteps of the Roosevelt Administration, who, in an effort to balance the budget after six years of deficits, implemented a series of tax increases in 1936 and 1937 that caused output, prices, and income to fall and sent unemployment skyrocketing.” We are currently faced with precisely the same juncture, and unfortunately for America, things now have a far lower probability of occurring “just as they should” in order for the country to emerge in one piece on the other side of the tunnel. Here is why.

First a question – what caused Rooselvelt to flip out and commence on a series of disastrous economic policies? Minerd explains:

In response to such Republican criticism of his fiscal policies, Roosevelt fired back by issuing the following points in the Democratic Party platform of 1936 (my paraphrase, followed by direct excerpts originally published June 23, 1936):

1. Deficit spending was a result of the crisis inherited from the previous Administration: “We hold this truth to be self-evident – that 12 years of Republican leadership left our Nation sorely stricken in body, mind, and spirit; and that three years of Democratic leadership have put it back on the road to restored health and prosperity.”

2. The Democratic Party restored confidence in America, thus the cost of deficit borrowing had declined to extremely low levels: “We have raised the public credit to a position of unsurpassed security. The interest rate on government bonds has been reduced to the lowest level in 28 years.”

3. The Democratic Party would still balance the budget through the austerity of limited growth in government and by higher taxes: “We are determined to reduce the expenses of government…Our retrenchment, tax, and recovery programs thus reflect our firm determination to achieve a balanced budget and the reduction of the national debt at the earliest possible moment.”

Does any of this seem familiar? It shoud, as should the fact that in his several years in office the budget deficit had soared, and the attempt to balance it resulted first and foremost in an explosion in unemployment, as the chart below demonstrates:

What specifically went wrong to cause the 1937-1938 episode?

Someone once asked me what Roosevelt did that was so bad leading up to the recession of 1937-38. The answer I give is simple: “He attempted to balance the budget at the wrong time.” More specifically, he attempted to balance thebudget by increasing tax revenues at a time when the economy was still finding its footing and the Federal Reserve was attempting to reverse policy. Even after the four years of recovery following the Great Depression, when Roosevelt began his series of tax increases unemployment remained over 12 percent, which on its own would be considered the worst labor market in modern U.S. economic history.

If the Roosevelt Administration’s driving purpose was to prove to the world that it could balance the budget, it was successful. In 1937, the budget deficit declined by 1.9 percentage points in relation to GNP. In 1938, that trend continued with the deficit declining another 1.4 percentage points in relation to GNP. By December of 1938 the Roosevelt Administration had essentially achieved its goal of a balanced budget.

But what was the cost of such actions? According to data from BCA Research, the unemployment rate went from 11.2 percent in May of 1937 to 20.0 percent just 14 months later. Data from the Federal Reserve Bank of Minneapolis shows the overall economy contracted 5.4 percent in 1938. The Dow Jones Industrial Average fell 49 percent from March 1937 to March 1938. Two years later, in March of 1939, the equity market remained depressed, still 30 percent below its March 1937 levels. The U.S. economy, which had whipped unemployment down from 25 percent in 1933 to 11 percent in 1937, limped into the 1940s with unemployment hovering just over 15 percent. The silver lining of all this economic carnage? For one month in 1938 the budget deficit was reduced to just $89 billion dollars – nearly, but not quite balanced.

So have we learned anything from the past? And even if we have, will the imminent expiration of the tax cuts be the equivalent of the tax hike the rapidly plunged America into the biggest economic deterioration at the tail end of the Great Depression? Alas, the answer is probably yes.But not before the Fed embarks on a proper QE strategy, one that has the potential to not only spike asset prices as the Primary Dealers bid up everything that is not nailed down, but this would happen in a time of surging unemployment. With the true unemployment rate already in the 20% ballpark as calculated by objective, non-governmental estimates, will the outcome of the tax changes of 2011 result in the biggest economic catastrophe in US history? We should look back in time for the answer…

It’s evident from Chairman Ben Bernanke’s speech in Jackson Hole last week that the Fed stands ready to continue to provide quantitative easing if necessary. I believe it will be necessary since the economic data in the next few months is likely to be pretty ugly and the rhetoric out of Washington is likely to devolve into a nightly news highlight reel of partisan feuding.

Yet despite the Fed’s commitments, some of the same issues that occurred in 1937 loom on the horizon today. For instance, in the first quarter of 2011 the United States faces massive tax increases. Similar to the mid-1930s, many have argued that deficits must be tamed now and that the economy is healthy enough to sustain austerity measures. Under such political pressure, it appears unlikely that even a portion of the Bush tax cuts will be extended.

There are a host of economic forecasts about the potential size of the fiscal drag that would result from a full expiration of the Bush tax cuts. Macroeconomic Advisers, for instance, believes it will subtract 0.9 percentage points off GDP. ISI Consulting thinks it could be even larger, around 1.2 percentage points. Arthur Laffer, the famed supply-side economist, prefers a number significantly larger, predicting as much as 6 percentage points of fiscal drag. Any way you slice it, if estimates for economic growth in 2011 range from 2 to 3 percent, these tax increases could result in flat to anemic growth and elevate the risk of recession due to the slightest bit of economic turbulence.

In addition to the expiration of the Bush tax cuts, there is the additional cost of healthcare reform. While some would argue that healthcare reform is just a transfer payment program, the fact remains that there will be no incremental healthcare benefits available in the next three years. Therefore, the transfer payments, which are intended to be revenue neutral over the next 10 years, actually create a fiscal drag between 2011 and 2013 before becoming modestly stimulative when the benefits become available from 2014 to 2020.

So what does this imminent change to tax expectations mean for investors in practical terms? Very bad things, especially for those who anticipate a run up in stocks into the mid-term elections: “One clear consequence of the repeal of the Bush tax cuts will be an urgency to accelerate taxable income into 2010. This will have a number of impacts on the market, the most direct being a desire to liquidate positions in equities and other financial assets to realize capital gains before the New Year. This will continue to put downward pressure on equities and increase volatility.”

That’s right: equity liquidations, meaning the long expected second major leg down in stocks is at most 4 months away.

There’s more:

Last week, Bernanke also referenced the importance of a “baton pass” from the economic boosts of government spending and inventory replenishing to the more sustainable support of consumer spending. If equity prices decline in conjunction with the renewed pressure on the housing market as tax incentives are removed, the net effect is likely to be an adverse impact to already fragile consumer sentiment and spending. In essence, the economy is in danger of a fumbled baton pass from 2010 to 2011.

In the face of this uncertainty, and in light of the Jackson Hole remarks, it appears Chairman Bernanke and the FOMC will find it necessary to increase their holdings in long-term securities and increase the size of their balance sheet. This will ultimately lead to lower interest rates and a need to maintain low long-term rates for several years in a hope to prop up the housing market by maintaining record low mortgage rates (see my recent commentary on “The Story in Housing”). What remains to be seen is how severe the economic headwinds will be as a result of the fiscal tightening going into 2011, and how dramatically the Fed will move once it reaches the decision to continue to grow its balance sheet.

In the short run, given the amount of purchases that the Fed will have to make, quantitative easing will most likely swamp the amount of incremental borrowing required by the government, which means that financing the deficit won’t be a problem. Ultimately, however, the U.S. economy will come to the end of the road and inflation concerns will reemerge.

Once the market collapse has transpired, then, and only then, once we enter the proverbial revulsion stage in equities, will the stage be set for an actual bull market:

I believe further quantitative easing is likely to take place in the near term. I also believe there is a strong probability that there will be some form of additional fiscal stimulus passed by the government as it yields to mounting pressure to address the nation’s historically high unemployment rate. After these two events take place, the stage should be set for the green shoots of recovery to reappear in 2011. Once these harbingers of economic health appear, the Fed will come under pressure to convince the market that it has a sound exit strategy to unwind its massive balance sheet. Simultaneously, pressure will reemerge for fiscal austerity and deficit reduction.

As we approach the presidential election of 2012, monetary and fiscal policymakers will be faced with their greatest challenge: whether to reverse the emergency policies applied up to that point, and if so, at what pace and timing to conduct such measures. The risks surrounding these decisions are even greater than the risks that surround the near-term policy decisions about further fiscal stimulus and quantitative easing – taking away support is always more difficult than giving it. The dangers will be strikingly similar to the risks that faced the economy in 1936. Remember, it was Roosevelt’s dash to fiscal discipline in 1936 – combined with the Fed’s misguided decision to tighten monetary policy by doubling the required reserve ratio for banks – that resulted in the severe fiscal drag on aggregate demand and economic output that pulled the economy back into a deep recession.

While I remain optimistic that the current economic “soft patch” will not unravel into a full-blown recession, my concern increases when I look ahead to the challenges the economy will face once it regains its footing. The parallels to 1936 grow increasingly striking the closer one looks to 2012, especially if the green shoots of economic recovery take hold between now and then, which I believe they will thanks to additional policy actions later this year and in early 2011. Oddly enough, the foundation for the recession of 1937-1938 was laid in the election year of 1936. The question remains, will the presidential election of 2012 lay the foundation for a parallel series of events? Given the unprecedented monetary and fiscal policies enacted in recent months, as well as those that are likely to be enacted in the near term, the opportunities for future errors of policy judgment loom large. In light of this, whether it’s in relation to 2010 or 2012, the lessons of 1936 are stark and disturbing.

And while America in 1938 and onward was a different country, whose manufacturing industry and thus real economic output potential, was only starting to stretch its wings, further having the rather tragic benefit of World War II as an unprecedented attractor for record economic activity, the current outlook is far more bleak. The US consumer is on average far older, the pension system is on the verge of bankruptcy, the US’ chief export (at least on a relative basis) is services, and the spectre of a war at this juncture would have far more dire ramifications: a small regional conflict that avoids the participation of the superpowers may have a marginal boost to the economy, but likely nowhere near enough. A full blown collapse into another world war leads to consequences too dire to even imagine. Which is why we agree with Minerd, that while the intermediate steps that occurred in the immediately preceding 1937 period are all in line, and which the government will only have itself to blame if it screws up on the transition to a smooth glide slope, the events on the other end of the tunnel look far bleaker.

Markets CRUSHED: Here's What You Need To know

Joe Weisenthal | Aug. 11, 2010, 4:00 PM |

A day after the Fed made its first steps down the path of quantitative easing 2.0, the market woke up with a huge hangover, and never got over it.

But first, the scoreboard:

Dow: -260
NASDAQ: -67
S&P 500: -31

And now, the top stories of the day:

• The "day" actually started around 8:00 PM ET on Tuesday. That's when a selloff on the Nikkei quickly turned into a rout. We wrote about it just as it happened here. Coinciding with that was a severe selloff in US futures that would not slow down.

• That pain continued to Europe, which bizarrely experienced a relapse of the sovereign debt panic we haven't seen in several weeks. This time Ireland was the source of the worries, and the euro plunged all night. Of course, the huge winner in currency-land was the Japanese yen, which surged to a 15-year high today. That currency surge is catching the attention of the Japanese finance minister, who has been jawboning more and more about intervention.

• US economic news was minimal today. A wide expansion in the trade deficit didn't help things, however, as it prompted analysts to revise downward already ugly looking GDP numbers.

• The selloff continued to rumble on throughout the day, with nary a bounce at any point. Markets ended basically at the lows of the day.

• Not surprisingly, all of the big industrial commodities were down. Gold had an eerily quiet day, and remains moored at $1200.

• Tomorrow comes the weekly initial claims report, which is a reason to be nervous.

Baffling Market Plunge

Is There a Shady Game of Market Manipulation At Work?
By Danny Schechter, MediaChannel.org
May 10, 2010

The Wall Street Journal headline on the day after we almost lost the U.S. stock market reported that the wise men on the Street were “baffled” by the big drop Thursday. The Financial Times called the event “Shambolic” as if only a shaman can decode it.

A week after CNBC assured its high-net-worth viewers that Greece would no longer be a problem, there was an uprising there followed by a volcanic market cliff dive that the White House, NASDAQ and every regulator is now investigating.

There is still a lot of head-scratching, as if to say, how come our casino went batty? It all happened in a couple of minutes, about the time it took for that fail-safe, top-of-the-line, ultra-secure, and unsinkable oil platform to sink.

The whole world of finance couldn’t believe what was happening before its eyes and so quickly.

--2:38 PM: Dow down 360.
--2:48 PM: Dow down 600.
--2:51 PM: Dow down 900.

Help! We still don’t know how the plunge was arrested. I am sure the Treasury Department’s Plunge Protection Team and the Fed and every Central Bank in the world hit their red buttons to pump more money in before the balloon popped.

You are not going to believe it but no one really knows what happened yet. Should we blame a trader who made a typo or were there others playing a shadier and covert game of market manipulation which may soon officially be listed as a psychiatric condition?

Floyd Norris in the New York Times just about suggested the market was an insane asylum. Just read his lead paragraph and realize we are being dominated by financial maniacs with rationality is out the window.

“Combine: One part nervous traders; one part Greek crisis; and one part trader error. Stir in one part central bank complacency. Bring to boil. Panic.”

“That combination,” Norris "explained," “produced one of the wildest days ever in financial markets.”

On display were the usual twin towers of market self-abuse: Greed and Fear.

Angela Merkel, Germany’s chancellor, likened the wider crisis to “a battle of the politicians against the markets” and attacked the role played by credit-rating agencies.

She declared: “The speculators are our adversaries” suggesting there is a financial war underway that no one in the media seemed to get. Financial analyst Max Keyser sees an outbreak of “financial terrorism.”

The Web site, Gaming the Market, all but argues that this market drop was a calculated maneuver which may be why it’s being investigated. I am not financially savvy enough to understand all of the evidence but for those of you are, here’s part of what they say, including the idea of a “holy crap” moment, writing:

“These moves typically occur after 2:30pm Eastern while the market is near a new low or breaking point, with a relatively high VIX [which gauges “volatility”]. Another characteristic is a large NYSE Adv/Decl negative ratio. One that is negative 10:1 going into lunchtime typically assures a weak close. Ratios of 3:1 negative aren’t what you want. They are easier to manipulate by weak bulls.

“You want a big scary ratio. It is these negative internals that can clue you into the probability of a PPT push. A big push on a big negative internal is the tell. To instantaneously swing the market around on these days takes a massive amount of concerted capital.

“If you watched the market every day last year you know what this looks like. Using 5min candles on your favorite index you will see an immediate and massive full body candle, sometimes eclipsing the entire day’s range in minutes. There is no mistaking this move. It’s a wide-eyed holy crap moment! After this massive push the market will typically close near the high of the day.”

Again, I am not sure how accurate this is, but I do know that the truth in the world of finance is elusive, and, yes “baffling.”

“In many ways, money making is more an art as a science,” I wrote two years ago in my book, PLUNDER: Investigating Our Economic Calamity, reporting on the meltdown in 2007. It was published a week before Lehman collapsed.

Despite all the rules that govern the markets or regulations designed to assure transparency and accountability, crooks, swindlers, and even gangsters are commonplace.

Corrupt practices are pervasive; regulation is behind the curve; lightening fast computers now do the heavy lifting. When professionals in the field were asked how they define criminal conduct, the majority surveyed said crimes only occur when you are caught.

Clearly some of our “market makers” know what they are doing. There is also extensive posturing in the industry to mask the often-fuzzy line between risk and uncertainty.

In many instances, major decisions are made on the basis of fragmentary knowledge, even ignorance, despite professions of careful reviews and “due diligence.” Even “sophisticated investors, can be bamboozled, as we saw in the unmaking of Goldman Sachs and Bernie Madoff.

The Financial Times cites a supposedly knowledgeable market economist at Lehman who said: “We are in a minefield. No one knows where the mines are planted and we are just trying to stumble through it.”

Another market participant put it this way: “It is not the corpses at the surface that are scary, it is the unknown corpses below the surface that may pop up unexpectedly.”

This sounds like a horror movie.

I was talking about this after the last collapse:

“Many of the ‘experts’ whom I read or see on TV seem clueless, full of hot air. Many of their predictions turn out wrong even when they seem so self-assured and well-informed in making them. Jim Hightower warns against believing them, writing: ‘Don’t be deterred by the finance industry’s jargon (which is intended to numb your brain and keep regular folks from even trying to figure out what’s going on).’”

How does one make sense of what is going on? You have to burrow in the business pages and read articles from the bottom up because the most revealing facts are often buried.

You have to break dependence on mainstream media and check out specialized Web sites, blogs, and alternative sources.

After the New York stock market took a 340-point drop in 2007, only to quickly recover, I went to the business pages of the New York Times. I figured that they would explain it.

But they didn’t know the reason for it either, reporting “emotion and psychology, not financial fundamentals were mostly at work.” They quoted the chief U.S. equity strategist for Citibank: “I don’t think anybody can make sense of it.”

Part of the problem here is that the traders and brokers have come up with all sorts of highly esoteric and complex financial instruments – ways of securitizing debt and raising capital – that outsiders, even experienced financial journalists, have a hard time understanding, much less explaining.

Ditto for regulators (and the laws they theoretically enforce), who are hard pressed to keep up with the pace of change. Market traditionalists are also lost.” It seems deliberate.

The scammers are winning.

Two years later after we have read so much about what went wrong, after months of wrangling over financial reforms that Wall Street is beating back like the demand to audit the Fed or break up the big banks, we are back in a big inexplicable mess with a swamp of contradictory information.

Wall Street has gone short on the American people. Their pump-and-dump games have to be controlled or it’s not just whether there will be a massive depression, but when?