'Discouraged' workers face tough road back to employment

In 2008, Marcey Carver lost her job in the finance department of a Vermont car parts maker that closed its doors after the auto industry went into freefall.

With a degree in molecular biology, an MBA and a master's in accounting, Carver, 58, spent the next year and a half working temporary jobs, landing full-time work in October 2009 as finance director for a small non-profit. After 11 months, she was laid off again.

Since then she’s had temporary jobs, but her search for full-time work has run into a major roadblock.
“You can’t get the job you’re qualified for," she said. “But you can’t get a job you’re overqualified for because they think you’re going to quit as soon as you find something else.”

Carver doubts she'll ever land full-time work and now focuses on just making enough money to pay the bills. Millions of other Americans have come to the same conclusion as the worst economic recovery since World War II has left them sidelined and unable to replace the job they lost to the Great Recession. Read more >>

Study: Middle-class poorer, earn less

For the first time since at least World War II, middle-class families finished the first decade of the 21st century poorer and with lower incomes than they had 10 years earlier. And 85% of those surveyed say that in the 2000s, it was harder than before to maintain a middle-class lifestyle, according to a study out Wednesday by the Pew Research Center for Social and Demographic Trends.

Median household income dropped nearly $3,500 for a three-person household, to $69,487 a year, the Pew study said. The median household's net worth dropped 28% to $93,150. Incomes have dropped since 2000, while wealth rose modestly early in the decade before gains were wiped out by the recession that began in 2007 recession and the financial crisis sparked in 2008, said Paul Taylor, a Pew executive vice president.

"That the middle class always enjoys a rising standard of living is part of America's sense of itself, and it has always been true - until now," Taylor said in an interview, describing the 2000s as a "lost decade" for the middle class. "It's been 11 years since the peak in household incomes, and that covers the early part of the decade as well." Read more >>

US economic recovery weakest since World War II

The recession that ended three years ago this summer has been followed by the feeblest economic recovery since the Great Depression. Since World War II, 10 U.S. recessions have been followed by a recovery that lasted at least three years. An Associated Press analysis shows that by just about any measure, the one that began in June 2009 is the weakest.

The ugliness goes well beyond unemployment, which at 8.3 percent is the highest this long after a recession ended. Economic growth has never been weaker in a postwar recovery. Consumer spending has never been so slack. Only once has job growth been slower.

More than in any other post-World War II recovery, people who have jobs are hurting: Their paychecks have fallen behind inflation. Many economists say the agonizing recovery from the Great Recession, which began in December 2007 and ended in June 2009, is the predictable consequence of a housing bust and a grave financial crisis.

Credit, the fuel that powers economies, evaporated after Lehman Brothers collapsed in September 2008. And a 30 percent drop in housing prices erased trillions in home equity and brought construction to a near-standstill. Read more >>

Congress least productive in over 60 years

Congress is on pace to make history with the least productive legislative year in the post World War II era. Just 61 bills have become law to date in 2012 out of 3,914 bills that have been introduced by lawmakers, or less than 2 percent of all proposed laws, according to a USA TODAY analysis of records since 1947 kept by the U.S. House Clerk's office.

In 2011, after Republicans took control of the U.S. House, Congress passed just 90 bills into law. The only other year in which Congress failed to pass at least 125 laws was 1995. These statistics make the 112th Congress, covering 2011-12, the least productive two-year gathering on Capitol Hill since the end of World War II. Not even the 80th Congress, which President Truman called the "do-nothing Congress" in 1948, passed as few laws as the current one, records show.

The difference between 1995 and now is that Republicans rebounded in the second year of the 104th Congress in 1996, churning out 245 laws with a Democratic president, including a tax cut package, a minimum wage increase, an overhaul of the nation's welfare system, and requiring law enforcement to disclose where sex offenders live. Read more >>

Europe Sees Biggest Decline in Prosperity Since World War II

While Athens emerged as the center of Europe’s debt crisis, cities across the continent are trying to cope with the biggest decline in prosperity since World War II. A report last week showed that euro-area unemployment rose to the highest in more than 15 years in April and the region’s economy is contracting for the second time in three years.

Voters in France elected Francois Hollande as president May 6 after he pledged to soften austerity measures backed by his predecessor Nicolas Sarkozy, while Greece was thrown into another stage of turmoil after elections split parliament between pro- and anti-bailout parties with no clear winner.

“Before people didn’t see any questions and now they don’t see any answers,” said Austin Hughes, an economist at KBC Bank Ireland in Dublin. “There had been an expectation that incomes, employment prospects and asset prices would improve forever. That certainty is now gone.”More...

Home equity sinks to nearly lowest point since World War II

Falling home prices have shrunk the equity Americans have in their homes to nearly the lowest percentage since World War II.

Average home equity plunged from more than 61% at the start of 2001 to 38% in the January-March quarter this year, the Federal Reserve said in a report Thursday. That drop comes as home prices in big metro areas have reached their lowest level since 2002.

Prices fell 33% in 20 cities through March from their 2006 peak, reaching their lowest level since 2003, according to the Standard & Poor's/Case-Shiller index of U.S. home prices on May 31. The decline signaled a "double dip" as the index fell below its previous post-housing-bubble low set in April 2009. Prices more than doubled from 2000 to July 2006.

Further declines in home prices are likely. More...

Awaiting the Storm - All we need is a short Austrian

Image via WikipediaFred On Everything
Flags. These are always a bad sign. Hardly a politician appears on television who doesn’t stand in front of an American flag, sometimes three American flags. A venomous nationalism now poisons the air, and grows. We are off and rolling.

The trappings of fascism spread. General David Petraeus, commander of the Eastern Front, poses with the President in the White House in combat fatigues. The country is now the Homeland, reminiscent of the Nazi Fatherland and the Soviet Motherland. We hear of American Exceptionalism, the ritual self-idolizaton beloved of pathological nationalism. Blood and Soil. The American Dream. Ubermenschen. All we need is a short Austrian.

We may get one. The times ripen for a man on a horse. (Or perhaps a woman: Twitler of Alaska looms.) An ignorant populaton, unread, unfamiliar with the outside world, focuses its anxieties on troubling dark things lurking abroad, the brown hordes from the south, the rising Chinese, inexplicable Moslems who want to kill all Christians. Sooner rather than later such a mob finds solace in an angry unity. From an unhappy lower middle-class spring Brown Shirts. Wait.

Things come together: Falling standards of living across a country in irremediable decline, diminishing expectations, growing anger in search of focus, a sense of a birthright being stolen as preeminence drifts across the Pacific. Here is fertile soil for some strange crop not yet clearly seen.

It will play out against a backdrop of totalitarian watchfulness all too imaginable. A digital world lends itself to tyranny, making it, I think, inescapable. For practical purposes, the capacity to store data is infinite, to network it across the world, to track, to scan, to watch. This is not the place for a disquisition on the technology of surveillance. Just note that the machinery exists for a totalitarian watchfulness beyond Stalin’s wettest dreams. The government wants this, pushes for it daily, and gets it. You can’t spend a dollar, take a flight, or send an email without a federal federal office watching. It is getting worse and cannot be stopped. Surveillance is too easy.

We will be told, are being told, that to be safe we must submit, that enemies within and without are upon us, that terrorists spawn plots everywhere. Where communists once hid in every closet and the House Unamerican Activities Committee, HUAC, hunted them, now we have Islamo-terrorists hunted by Homeland Security.

What matter civil rights when the Moslem is at our throats? The price of liberty is eternal vigilance, and the vigilance ends liberty.

Hysteria darkly flowers. Homeland Security now wants to train us in how to react to a nuclear attack, a la 1950. Scare’m, keep’em scared, tell them you are protecting them, and they will kiss your boots. An Australian publishes embarrasing cable traffic from American embassies, and politicians call for him to be killed by the CIA. The agency is revered as a sort of clandestine Batman and Robin, defending America secretly where evil swirls in the coming night. Kill, kill. On subways we are told to watch each other, to report curious behavior to the authorities. Nothing can stop this.

Constitutionality becomes a fading memory. Random searches in train stations, genital examinations in airports, the decline of habeas corpus, the evasion of the duty of Congress to declare wars, on and on. The government does what it wants. There is no recourse. We are told that it is to make us safe. I haven’t asked to be made safe.

The genius of American politics is to espouse democracy while keeping political power from the people. The trick is to have barely distinguishable candidates for the presidency who carefully avoid mention of substance—the wars, for example, or affirmative action, guns, abortion. These electioins, if so they be, allow people to wave placards, roar invective about throwing the rascals out and returning to traditional American etc. The dust settles and things remain as they were.

Governance does not rest with the people. Today, decree replaces legislation, and must, for our safety. If Homeland Security says you must go through a CAT scan, naked, and singing the Star Spangled Banner, then you have to do it. There is no recourse. You can unelect an elected official, but there is no way to get at a bureaucrat. If you do not submit, you go to jail.

Shortly we will hear the death rattle of free expression. No government sees an advantage to itself in a free press, though countries with decent governments feel much less threatened. Our government fears nothing more.

America has a carefully controlled press that appears free because it is not explicitly controlled by the government. But the real power in America rests with the big corporations and their lobbies, with Wall Street, whose personnel move in and out of the formal government at will. All of the traditional media, radio, newspapers, and television, are owned by large corporations. How curious that they do not question large corporations.

The only free press in America is the internet, and the government does not like it. Washington now moves to “regulate” it. To promote fairness, you see, to prevent piracy, and to maintain national security. Then it will be found necessary to suppress “hate sites.” Just now you are reading a site that has been blocked on many federal installations for promoting hate. There is no recourse.

How will this play out? America retreats behind its emotional borders, gazes over the ramparts, frightened and hostile. In those outlets of the media than pander to The Heartland, to the manipulable unlettered, the nationalist drumbeat grows apace. That America’s bankrupty results from America’s economic policies, that the country is everywhere hated because of wilfully chosen behavior—this does not occur to people who do not read, who do not so much as know the dates of World War II. They will find someone else to blame. Liberals. Mohammedans. Mexicans.

A danger is that the country will lash out abroad, ever more feebly as the economy declines, at nations that no will longer pay attention to it. Washington says that it “will not tolerate a nuclear Iran,” and Iran ignores the admonition. You cannot not tolerate what you can’t prevent. The Pentagon sends the carriers to steam ferally in circles off North Korea, which ignores them. The consequences of wounded vanity are not trivial in world affairs, as anyone knows who has a familiarity with the Treaty of Versailles. But who does?

It serves nothing to raise alarums, to pen Philippics, to gnash hands and wring teeth. Minor political currents can be diverted by protest, but this one is the torrent subsequent to a broken dam. It will go where it will, as the Thirties went where they would. Hold on tight.

Strikes & Labor Unrest Ignite Across China

Image by Cain and Todd Benson via Flickr

nytimes.com
KEITH BRADSHER
A Labor Movement Stirs in China
Striking workers at a Honda auto parts plant here are demanding the right to form their own labor union, something officially forbidden in China, and held a protest march Friday morning.

Meanwhile, other scattered strikes have begun to ripple into Chinese provinces previously untouched by the labor unrest.

A near doubling of wages is the primary goal of the approximately 1,700 Honda workers on strike here in this southeastern China city, at the third Honda auto parts factory to face a work stoppage in the last two weeks.

A chanting but nonviolent crowd of workers gathered outside the factory gates on Friday morning and held a short protest march before dissolving into a large group of milling young workers who filled the two-lane road for more than a block outside the factory.

They were met by black-clad police with helmets, face masks and small round riot shields. But the workers showed no signs of being intimidated. The police marched off at midmorning, leaving the workers to block the road into the small industrial park next to a eucalyptus-lined muddy canal that runs past the factory.

The workers dispersed about an hour after the police left and remained on strike.

Management helped defuse the march by distributing a flier that essentially offered 50 renminbi, or about $7.30, for each of the eight days that the factory was closed beginning in late May as part of a nationwide shutdown of Honda manufacturing set off by a transmission factory strike. Management previously wanted to treat the shutdown as unpaid leave, workers said.

Only 50 or so striking workers showed up outside the factory after lunch on Friday. Managers distributed a new flier urging them to return to work in the afternoon and saying that all would be forgiven if they did.

But the flier contained no new offer on wages, and there was no sign that any workers were going back into the factory. One worker said that the newly chosen factory council was not holding any negotiations because it could be physically dangerous for all of the representatives to gather in one place with management and the authorities.

The worker, an activist in the labor unrest here, said that the strikers were waiting for a genuinely new offer from management before holding any more talks.

This latest strike, which started Wednesday morning, has taken on political dimensions.

The strikers here have developed a sophisticated, democratic organization, in effect electing shop stewards to represent them in collective bargaining with management. They are also demanding the right to form a trade union separate from the government-controlled national federation of trade unions, which has long focused on maintaining labor peace for foreign investors.

“The trade union is not representing our views; we want our own union that will represent us,” said a striking worker, who insisted on anonymity for fear of retaliation by government authorities or the company.

Geoffrey Crothall, the spokesman for China Labour Bulletin, a labor advocacy group based in Hong Kong that seeks independent labor unions and collective bargaining in mainland China, expressed surprise when told how the Honda workers here in Zhongshan had organized themselves. “It does reflect a new level of organization and sophistication” in Chinese labor relations, he said.

A Honda spokesman declined to comment on the details of the strike. The Chinese government has been relatively lenient in allowing coverage of the labor unrest because Honda is a Japanese company, and some anti-Japanese sentiment lingers in China as a legacy of World War II.

Despite unusual forbearance in allowing the various strikes so far, the Chinese government has shown no interest in tolerating unions with full legal independence from the national union.

Dozens of workers gathered in clumps shortly before sunset on Thursday in front of the sprawling parts factory and outspokenly criticized local authorities for seeming to side with the company.

The workers said that large numbers of police officers had been positioned in the factory on Wednesday and Thursday in an attempt to intimidate them. The two other Honda parts factories shut down by walkouts in recent weeks have reopened after workers were promised large pay increases.

The Chinese government has not allowed unions with full legal independence from the national, state-controlled union. But the government has occasionally finessed the issue by letting workers choose their factories’ representatives of the national union, or by allowing the creation of “employee welfare committees” in parallel with the official local units, said Mary E. Gallagher, a China labor specialist at the University of Michigan.

But these exceptions have tended to be in less prominent industries like shoe and garment manufacturing, and not in bastions of heavy industry like automaking. More...

The Pentagon’s Runaway Budget

Image by Getty Images via Daylife

Carl Conetta
With his decision to boost defense spending, President Obama is continuing the process of re-inflating the Pentagon that began in late 1998 — fully three years before the 9/11 attacks on America. The FY 2011 budget marks a milestone, however: The inflation-adjusted rise in spending since 1998 will probably exceed 100 percent in real terms by the end of the fiscal year. Taking the new budget into account, the Defense Department has been granted about $7.2 trillion since 1998, when the post-Cold War decline in defense spending ended.

The rise in spending since 1998 is unprecedented over a 48-year period. In real percentage terms, it’s as large as the Kennedy-Johnson surge (43 percent) and the Reagan increases (57 percent) combined. Whether one looks at the entire Pentagon budget or just that part not related to the wars, current spending is above the peak years of the Vietnam War era and the Reagan years. And it’s set to remain there. Looking forward, the Obama administration plans to spend more on the Pentagon over the next eight years than any administration since World War II.

Why should the Pentagon budget rise so much, so fast? Why should it be exempted from the recently announced discretionary spending freeze? And why should it be stabilizing at levels above the highest years of the Cold War?

The most ready explanation is that the War on Terrorism, and especially military operations in Iraq and Afghanistan, are the cause. But these activities presently claim less than 20 percent of the Pentagon’s budget. For the period 1998-2011, overseas contingency operations have consumed less than 17 percent of all funding. Take today’s wars out of the picture entirely and the rise since 1998 is still 54 percent in real terms.

Why More Than the Cold War?

Our recent study of the post-1998 defense spending surge, An Undisciplined Defense, set out to identify the factors driving Pentagon costs upward. Much of the post-1998 surge can be attributed to a mix of policy choices and policy failures. And this belies the notion that today’s high level of spending simply reflects hard and fast security “requirements.” In short: If America’s leaders can find the will, then there is a way to substantial savings.

Four features of post-Cold War U.S. security policy have been especially important in driving putative “requirements” upward — and all admit alternative action.

• Beginning in the 1990s, successive U.S. administrations have adopted goals and missions for the armed forces that are vaguer and more ambitious than those of the Cold War period.

• Military modernization efforts have suffered from especially weak prioritization and poor integration. They have been distinctly undisciplined, leading to higher research, development, and equipment procurement costs.

• Planned efforts at defense reform have been insufficient and weakly prosecuted. Thus, the savings they achieved fell far short of what was needed and possible.

• The United States has undertaken and persevered in protracted wars of a type for which the U.S. military was ill-suited and improperly equipped.

Goal Inflation and Discordant Modernization

Following the collapse of Soviet power, America’s leaders set more ambitious goals for the U.S. military, despite its smaller size. This entailed requiring the armed services to sustain and extend their continuous global presence, improving their readiness and speed, increasing peacetime engagement activities, and preparing to conduct more types of missions quickly and in more areas. Recent U.S. strategy has looked beyond the traditional goals of defense and deterrence, seeking to use military power to actually prevent the emergence of threats and to “shape” the international environment. U.S. defense planners also elevated the importance of lesser and hypothetical threats, thus requiring the military to prepare for many more lower-probability contingencies.

These ambitions have led to the rise in Pentagon operations and maintenance (O&M) expenditures, as well as a larger-than-necessary force structure and greater equipment requirements.

One ongoing goal of the Pentagon has been to modernize forces. This ambitious modernization between 1990 and today has reflected three different imperatives or directions, and these have been poorly integrated.

1. Big-ticket “legacy” programs conceived during the Cold War and enjoying considerable institutional momentum;
2. New programs, like Predator drones, reflecting the potential of information and other emerging technologies; and
3. “Adaptive” programs like mine-resistant armored vehicles, which correspond to new mission requirements, such as counterinsurgency.

The Pentagon has failed to adequately integrate these trends or prioritize among them. Instead, they have all gone forward in parallel, competing for funds. This situation puts unrelenting upward pressure on the budget. Legacy programs, which tend to be backward-looking, have predominated. Thus, despite the Pentagon’s spending $2.5 trillion on modernization between 1989 and 2003, there was a lack of preparedness for counterinsurgency and counterterrorism tasks after 2001. Notably, the decisions to pacify Iraq and Afghanistan by military means entailed a new wave of equipment purchases.

Defense Secretary Robert Gates has promised to impose stricter priorities on defense acquisition. But this isn’t the first time an administration announced a “get tough” policy in this area. For instance, former Defense Secretary Donald Rumsfeld also vowed to tackle the dysfunctional acquisition process, lopping off the Army’s Crusader artillery system and Comanche helicopter program along the way. This latest reform cycle will not likely accomplish more than swapping out a few disfavored systems for a few favored ones. No actual savings will leave the Pentagon orbit.

Shortfalls in Defense Reform

Reforming the post-Cold War military was supposed to enable it to “do more for less.” Preserving the “peace dividend” — a reduction in the military budget and the application of the savings to other pressing needs — depended on it. Structural reform also was necessary because the military suffered a decrease in efficiency when it got smaller. This was due to some loss in economies of scale in support and acquisition activities.

Options for reform were plentiful. These included reducing service redundancies, streamlining command structures, and consolidating a range of support and training functions. Other worthwhile targets of reform were the Pentagon’s acquisition, logistics, and financial management systems.

But reform efforts fell short of their promise, due to institutional resistance and bureaucratic inertia. Only two initiatives — competitive sourcing and military base closures — were pursued vigorously enough to yield significant annual savings. And these savings have amounted to less than 4 percent of the current defense budget — clearly not enough to save the “peace dividend.”

The difficulty of defense reform goes to the heart of governance problems in the defense area. There is an imbalance between effective civilian and military authority, between “joint” and individual service authority, and between public and special interests. In some respects, the system is a feudalistic one. Its functioning normally depends on largesse and a fair amount of deference to “subordinate” offices. Civilian authorities might challenge and alter this configuration, but that would entail considerable political risk.

Increased Labor Costs

Why have today’s wars been so inordinately expensive in relative terms? Measured in 2010 dollars, the Korean War cost $393,000 per year for every person deployed. And the Vietnam conflict cost $256,000. By contrast, the Iraq and Afghanistan commitments have cost $792,000 per year per person.

This is due partly to America’s reliance on high-cost “volunteer” (professional) military labor, which began after the Vietnam War. This type of military is susceptible to steep increases in personnel costs if it gets bogged down in large-scale, protracted, labor-intensive wars of occupation and counterinsurgency. Combat pay, retention bonuses, and recruitment costs soar.

Overall, military personnel costs rose 50 percent in real terms between 2001 and 2010, although the military labor pool grew by less than 2 percent. This dramatic increase in labor costs calls into question any potential large-scale counterinsurgency operations, which require more, not fewer boots on the ground — unless, of course, cost is no object.

Because of the costs involved, the Pentagon has been reluctant to permanently increase the number of full-time military personnel, despite high levels of activity even before the current wars. Thus, increases in ground troops have been largely counterbalanced by reductions in Navy and Air Force personnel. Instead, the Pentagon has turned increasingly to private contractors, whose employees have assumed many of the support functions previously performed by Pentagon personnel. Since 1989, the pool of Pentagon military and civilian employees has shrunk by more than 30 percent, while the number of contract workers has probably grown by 40 percent. As a result, the total Pentagon workforce may have been re-inflated to its Cold War size, but with contract labor playing a much bigger role.

Contract labor is generally cheaper than Pentagon in-house labor, military or civilian. However, a problem routinely noted by the Government Accountability Office is that Pentagon’s financial management of contracts is weak. At any rate, whatever savings have been realized by replacing in-house labor with contract labor has been overshadowed by the overall increase in the Pentagon’s total workforce.

The re-inflation of the workforce partly registers in the budget as an unusually steep increase in operations and maintenance spending, because this account covers much of contract labor. Calculated in inflation-adjusted per person terms, operations and maintenance expenditures are 2.5 times higher today than in 1989. In absolute terms (also corrected for inflation), O&M spending has risen 75 percent since the Reagan years.

The Primacy of U.S. Military Spending

The factors outlined above have converged to give America a historically unique predominance in military spending. The United States today is responsible for nearly half of all military expenditure worldwide. In 1986, it claimed only 28 percent.

Especially notable is the changed balance between U.S. spending and the total amount spent by potential adversary states. The United States has gone from spending one-third less than its adversaries in 1986 to spending 150 percent more than potential adversary states in 1986. Had Ronald Reagan sought to achieve the ratio between U.S. and adversary spending that existed in 2006, he would have had to nearly quadruple his defense budgets. And, of course, the 2006 Pentagon’s budget hasn’t receded but instead grown by another 20 percent in real terms.

These calculations suggest that the United States’ recent levels of defense expenditure are largely detached from other nation’s efforts to build military power. And the wars explain only a small part of the difference. Instead, the divergence points to a change in what the US defense establishment hopes to accomplish by means of military power, how fast, and how far afield.

Can We Roll Back Pentagon Spending?

America’s singular investment in the means of war hasn’t purchased clear and sure progress toward a more secure and stable world. Nor has it purchased an efficient military closely adapted to the current security environment. That the nation should persist down this road for more than a decade suggests a lapse in attention to the strategic costs and benefits associated with its chosen defense posture. It’s as though the nation had trillions to burn.

The road not taken during the past 15 years would have involved a more forceful and thorough-going approach to defense reform. A more sensible Pentagon strategy would take a more disciplined approach to equipment acquisition that better integrated the various trends and service plans, and tailored them more closely to new conditions. And the United States as a whole would have demonstrated greater restraint and greater specificity in defining post-Cold War military goals and missions.

A permissive spending environment has been a necessary precondition for Pentagon bloat, which several political realities have helped generate and sustain. First, and obviously, the September 2001 attacks overrode any tendencies to suggest economizing on defense. Curiously, though, Gallup polls show that public support for increased defense spending was higher in the two years prior to the attacks than in the two years after. Support has receded significantly since then, but this hasn’t spurred a serious re-evaluation of the budget.

At present, both Democratic and Republican leaders are disinclined — each for their own reasons — to press for Pentagon budget reform and restraint. There is little political gain in it, and much political risk. In this calculation, the balance of raw public opinion is less important than the capacity of the contending parties to excite and mobilize it.

Emerging fiscal realities may soon focus more critical attention on how the nation allocates its resources among competing goals, military and non-military. And the recent freeze on most discretionary spending suggests the contours of the coming battle: It will be the Pentagon versus everything else. In this light, our most important finding is that much of the surge in Pentagon spending since 1998 has been a matter of choice and will, not a matter of national security “requirements.” This puts the ball back in the political court, where it belongs. If there is to be progress in rebalancing our budget, it will depend on pressuring the administration and Congress to deliver real change that matters.

This article is an updated summary of An Undisciplined Defense: Understanding the $2 Trillion Surge in US Defense Spending. The report, with complete citations, is available at the project’s website.

Carl Conetta is co-director of the Project on Defense Alternatives at the Commonwealth Institute and a contributor to Foreign Policy In Focus.

Greece Retaliation Against Germany Escalates

Have we just crossed the historic Rubicon when a photoshopped classical statue is about to lead to a collapse in a monetary and customs union, and possibly something a tad more serious?

Also, is the KFW bailout rumor too little too late? It appears the Greeks are two minutes away from saying "take you bailout and shove it." The reason: The Focus cover which shows a status of Venus de Milo flipping off the Greeks, who were characterized as the "cheats of the eurozone."

After recent Greek media outbursts have recalled the Nazi wartime occupation of the country, as well as demands for WWII reparations, today's action by the Federation of Greek Consumers, calling for a boycott of products made by "banana-eating" Germans, is a direct response to the airbrushed statue of Venus expressing the communal German sentiment. Oh, and that whole KfW rumor? Don't buy it: "[KfW bond purchasing] considerations have been presented because it's seen as the only way of avoiding accusations of...direct aid," the lawmaker said. But he stressed that no decisions have yet been taken. I.e., More posturing. More...

Morgan Stanley Strategist: Head for the Hills!

Image by Getty Images via Daylife

James Pressley

Bloomberg reported earlier this week that the former chief global strategist for Morgan Stanley is telling people to prepare for the worst. One more time folks, this is no conspiracy theorist. Barton Biggs, MORGAN STANLEY'S FORMER CHIEF GLOBAL STRATEGIST is telling you there is going to be an economic collapse. Read the article below.

Barton Biggs has some offbeat advice for the rich: Insure yourself against war and disaster by buying a remote farm or ranch and stocking it with ``seed, fertilizer, canned food, wine, medicine, clothes, etc.''

The ``etc.'' must mean guns.

``A few rounds over the approaching brigands' heads would probably be a compelling persuader that there are easier farms to pillage,'' he writes in his new book, ``Wealth, War and Wisdom.''

Biggs is no paranoid survivalist. He was chief global strategist at Morgan Stanley before leaving in 2003 to form hedge fund Traxis Partners. He doesn't lock and load until the last page of this smart look at how World War II warped share prices, gutted wealth and remains a warning to investors. His message: Listen to markets, learn from history and prepare for the worst.

``Wealth, War and Wisdom'' fills a void. Library shelves are packed with volumes on World War II. The history of stock markets also has been ably recorded, notably in Robert Sobel's ``The Big Board.'' Yet how many books track the intersection of the two?

The ``wisdom'' in the alliterative title refers to the spooky way markets can foreshadow the future. Biggs became fascinated with this phenomenon after discovering by chance that equity markets sensed major turning points in the war.

The British stock market bottomed out in late June 1940 and started rising again before the truly grim days of the Battle of Britain in July to October, when the Germans were splintering London with bombs and preparing to invade the U.K.

`Epic Bottom'

The Dow Jones Industrial Average plumbed ``an epic bottom'' in late April and early May of 1942, then began climbing well before the U.S. victory in the Battle of Midway in June turned the tide against the Japanese.

Berlin shares ``peaked at the high-water mark of the German attack on Russia just before the advance German patrols actually saw the spires of Moscow in early December of 1941.''

``Those were the three great momentum changes of World War II -- although at the time, no one except the stock markets recognized them as such.''

Biggs isn't suggesting that Mr. Market is infallible: He can get ``panicky and crazy in the heat of the moment,'' he says. Over the long haul, though, markets display what James Surowiecki calls ``the wisdom of crowds.''

Like giant voting machines, they aggregate the judgments of individuals acting independently into a collective assessment. Biggs stress-tests this theory against events that shook nations from the Depression through the Korean War, which he calls ``the last battle of World War II.''

Refresher Course

Biggs has read widely and thought deeply. He has a pleasing conversational style, an eye for memorable anecdotes and a weakness for Winston Churchill's quips. His book works as a brisk refresher course.

What really packs a wallop, though, is his combination of military history, market action, maps and charts. It's one thing to say that the London market scraped bottom before the Battle of Britain. It's another to show it.

In May and June 1940, some 338,000 British and French troops had been evacuated from Dunkirk by a flotilla of fishing boats, tugs, barges, yachts and river steamers. The French and Belgian armies had collapsed; the Dutch had surrendered. Britain stood alone, as bombs shattered London and the Nazis prepared to invade. Yet stocks rallied.

Mankind endures ``an episode of great wealth destruction'' at least once every century, Biggs reminds us. So the wealthy should prepare to ride out a disaster, be it a tsunami, a market meltdown or Islamic terrorists with a dirty bomb.

The rich get complacent, assuming they will have time ``to extricate themselves and their wealth'' when trouble comes, Biggs says. The rich are mistaken, as the Holocaust proves.

``Events move much faster than anyone expects,'' he says, ``and the barbarians are on top of you before you can escape.''

If we get hit with a once-in-a-century solar storm, we’re history

Cover of One Second After

Clifford D. May
The Sun Also Flares
Had the earthquake that hit Haiti shaken Florida instead, the death toll would not have been so tragically high — over 150,000 at last count. In Haiti, as in other impoverished countries, buildings are often shoddily constructed, infrastructure is weak, and governance is incompetent. The primary response to disaster: Wait for help from abroad.

It’s a well established rule: Rich nations endure natural disasters better than poor nations. But there may be an exception. Stay with me for a moment and you’ll see what I mean.

In recent years, Americans have become dependent not just on electricity but on computers, microchips, and satellites. The infrastructure that supports all this has become increasingly sophisticated — but not more resilient. On the contrary, as this infrastructure has become more complex, it also has become more fragile and therefore more vulnerable — an Achilles’ heel.

That is why, in 2001, the U.S. government established a commission to “assess the threat to the United States from Electromagnetic Pulse (EMP) attack.” Such an attack would involve the detonation of a nuclear warhead at high altitude over the American mainland, producing a shockwave powerful enough to knock out electrical power, electronics, communications, transportation, refrigeration, water-pumping stations, sewage systems, and much more. Think of a blackout, but one of indefinite duration — because we have no plan for recovery and could expect little or no help from abroad.

Historian William R. Forstchen researched what America would be like in the aftermath of an EMP attack for his novel One Second After. I don’t think I’m spoiling the experience for prospective readers by telling you that Forstchen is convinced the result would be millions of deaths from starvation and disease, a catastrophe from which America would never fully recover.

The EMP commission also reported that Iran — which is feverishly working to acquire nuclear weapons — has conducted tests in which it launched missiles and exploded warheads at high altitudes. The CIA has translated Iranian military journals in which EMP attacks against the U.S. are explicitly discussed.

Might Iran’s rulers orchestrate such an attack if and when they acquire nuclear capability? That is a heated debate among defense experts. But what is almost never discussed is the threat of a naturally occurring EMP event.

I first learned about this possibility a few months ago at a conference organized by Empact America, a bipartisan, non-profit organization concerned exclusively with the EMP challenge. Scientists there explained “severe space weather” — in particular, storms on the surface of the sun that could trigger an EMP event.

The strongest solar storm on record is the Carrington Event of 1859, named after Richard Carrington, an astronomer who witnessed the super solar flare that set off the event as he was projecting an image of the sun onto a white screen. In those days, of course, there was nothing much to damage. A high-intensity burst of electromagnetic energy shot through telegraph lines, disrupting communications, shocking technicians, and setting their papers on fire. Northern Lights were visible as far south as Cuba and Hawaii. But otherwise life went on as normal.

The same would not be true were a solar storm of similar magnitude to erupt today. Instead, the infrastructure we depend on would be wiped out. Most of us would not adapt well to this sudden return to a pre-industrial age.

How likely is a repeat of the Carrington Event? Scientists say it is not only possible — it is inevitable. What they don’t know is when. The best estimates suggest that super solar storms occur once every 100 years — which means we are 50 years overdue.

Both the EMP Commission and a 2008 study by the National Academy of Sciences (NAS) call for a response: hardening the electrical grid and other components of the infrastructure to increase the chances they would survive, as well as pre-positioning spares of essential, complex components of the electrical grid and other infrastructure critical to communications and emergency public services.

And it would certainly help if scientists could learn to forecast solar storms reliably. If we know one is coming, there are steps that can be taken to reduce the destruction. In particular, the electrical grid could be shut down; planes could be grounded (Air Force One is designed to withstand an EMP attack, but other planes would fall from the sky); citizens could be instructed not to leave home — in particular, to stay out of their cars, which would stop working — until the storm subsided.

President Obama has pledged $100 million to help Haiti recover from its recent earthquake. By coincidence, that’s precisely the amount that the NAS recommends be spent on measures that could limit by 60 to 70 percent the damage resulting from an EMP event. When you consider that such an event — whether naturally occurring or a “man-caused disaster” — could cause trillions of dollars in damage and claim more lives than were lost in World War II, that sounds like a reasonably priced investment.

— Clifford D. May, a former New York Times foreign correspondent, is president of the Foundation for Defense of Democracies, a policy institute focusing on terrorism and Islamism.

Ron Paul: CIA has carried out "coup" against US govt

Raw Story
US House Rep. Ron Paul says the CIA has in effect carried out a "coup" against the US government, and the intelligence agency needs to be "taken out."

Speaking to an audience of like-minded libertarians at a Campaign for Liberty regional conference in Atlanta this past weekend, the Texas Republican said:

There's been a coup, have you heard? It's the CIA coup. The CIA runs everything, they run the military. They're the ones who are over there lobbing missiles and bombs on countries. ... And of course the CIA is every bit as secretive as the Federal Reserve. ... And yet think of the harm they have done since they were established [after] World War II. They are a government unto themselves. They're in businesses, in drug businesses, they take out dictators ... We need to take out the CIA.

Paul's comments, made last weekend, were met with a loud round of applause, but they didn't gather attention until bloggers noticed a clip of the event at YouTube.

Paul appeared to be referring to news reports that the CIA is deeply involved in air strikes against Al Qaeda targets in Afghanistan and Pakistan. A suicide bombing late last year against Forward Operating Base Chapman in Afghanistan took the lives of seven of CIA operatives, including two contracted from Blackwater. The event highlighted the CIA's deep involvement in the war effort.

Paul's reference to the CIA being "in the drug business" refers to long-running allegations that the CIA has funded some of its covert operations with proceeds from drug-running. That claim was most famously made in a 1996 investigative report from the San Jose Mercury-News, which alleged that cocaine from the Contra-Sandinista civil war in Nicaragua was making its way to the streets of L.A. via the CIA.

French bank warns clients to prepare for global collapse

Société Générale has advised clients to be ready for a possible "global economic collapse" over the next two years, mapping a strategy of defensive investments to avoid wealth destruction.

Ambrose Evans-Pritchard
In a report entitled "Worst-case debt scenario", the bank's asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.

Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of "deleveraging", for years.

"As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse," said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.

Under the French bank's "Bear Case" scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.

Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.

(UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130pc of GDP by 2015 under the bear case).

The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. "High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt," it said.

Inflating debt away might be seen by some governments as a lesser of evils.

If so, gold would go "up, and up, and up" as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.

The bank said the current crisis displays "compelling similarities" with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time.

SocGen advises bears to sell the dollar and to "short" cyclical equities such as technology, auto, and travel to avoid being caught in the "inherent deflationary spiral". Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar.

Mr Fermon said junk bonds would lose 31pc of their value in 2010 alone. However, sovereign bonds would "generate turbo-charged returns" mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan's 10-year yield dropped to 0.40pc. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons.

SocGen's case for buying sovereign bonds is controversial. A number of funds doubt whether the Japan scenario will be repeated, not least because Tokyo itself may be on the cusp of a debt compound crisis.

Mr Fermon said his report had electrified clients on both sides of the Atlantic. "Everybody wants to know what the impact will be. A lot of hedge funds and bankers are worried," he said.

True Lies, Lies, Lies, Lies

Lee Adler
Lies Lies Lies

Boobberg- Fewer Americans than anticipated filed claims for jobless benefits last week, signaling the worst employment slump in the post-World War II era is easing as the economy expands.

Marketwretch- The number of people filing initial claims for state unemployment benefits fell by 12,000 to a seasonally adjusted 502,000 in the week ended Nov. 7, the Labor Department reported Thursday.

That’s the fewest initial claims since early January. Initial jobless claims have hovered above 500,000 for 52 straight weeks, as the unemployment rate has climbed to a 26-year high of 10.2%.

AP — New claims for unemployment insurance fell more than expected last week, evidence the job market is slowly healing as the economy recovers.

Rhoiders- The number of U.S. workers filing new claims for jobless benefits last week fell to the lowest level since January, the government said on Thursday, showing the hard-hit labor market may be slowly improving.

Initial claims for state unemployment insurance dropped to 502,000 in the week ended November 7 from a revised 514,000 the prior week. Analysts polled by Reuters had expected claims to slip to 510,000 from an initially reported 512,000.

“It shows that companies are cutting jobs at a slower pace than during the financial crisis,” said Gary Thayer, chief macrostrategist for Wells Fargo Advisors in St. Louis. “We’re trending in the right direction, but we are probably several months away from (rising) monthly payrolls numbers.”

The truth is that claims rose by 47,000 to 529,000 last week. Over the last two months, claims have risen by 130,000. Over the same period last year, in the midst of a calamitous financial collapse that brought the economy down with it, claims rose by 110,000. That’s not improvement. It’s a catastrophe.

The media is only reporting seasonally adjusted figures, which is hogwash, plain and simple.

Also, continuing claims did not drop in the previous week. They rose by 28,000. This was in spite of the fact that 2.7 million people lost their eligibility to collect benefits. The number eligible for unemployment is now the lowest since December 2007.

The way they report this is criminal. Here’s what the data looks like before all their statistical hocus pocus CRAP. We’re still uptrending on initial claims, and continuing claims are only downtrending because eligibility has collapsed. Millions are falling out of the safety net.

10 states face financial peril

CNN reports:
Dropping tax revenue, rising unemployment and yawning budget gaps are wreaking havoc in states from Arizona to Wisconsin, a new report shows.

The same economic pressures that pushed California to the brink of insolvency are wreaking havoc on other states, a new report has found.

And how state officials deal with their fiscal problems could reverberate across the United States, according to the Pew Center on the States' analysis released Wednesday.

The 10 most troubled states are: Arizona, California, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin.

Other states -- including Colorado, Georgia, Kentucky, New York and Hawaii -- were not far behind.

The list is based on several factors, including the loss of state revenue, size of budget gaps, unemployment and foreclosure rates, poor money management practices, and state laws governing the passage of budgets.

These troubles have forced these states -- as well as many others -- to raise taxes, lay off or furlough state workers and slash services. These actions can slow down the nation's recovery, especially since these 10 states account for one-third of the country's population and economic output.

"Decisions these states make as they try to navigate the recession will play a role in how quickly the entire nation recovers," said Susan Urahn, managing director of Pew Center on the States.

In a separate study released Wednesday, the Center on Budget and Policy Priorities found that states will likely have to make steep cuts in their fiscal 2011 budgets, which start next July 1 in most states. That's because the critical federal stimulus dollars will run out by the end of 2010.

These cuts could take nearly a percentage point off the national gross domestic product and cost the nation 900,000 jobs, the study found.

10 troubled states

Strapped cities lay off workers, cancel projects

Here's a summary of what Pew found is plaguing each of the states:

California: The Golden State's housing collapse -- and resulting unemployment surge -- has plagued the state's economy. The weakening economy prompted revenue to fall by nearly a sixth between the first quarters of 2008 and 2009. State lawmakers have limited ability to deal with California's massive budget gap due to several voter-imposed restrictions, including requirements that all budgets and tax increases pass the legislature by a two-thirds majority.

Arizona: The state depends heavily on a growing economy to bring in tax revenue, and lawmakers don't have a lot of leeway to address budget deficits thanks to voter-imposed spending constraints. Lawmakers relied on one-time fixes to balance its budget instead of making long-term changes.

Rhode Island: The Ocean State has among the highest unemployment rates in the nation and among the highest foreclosure rates in New England. High tax rates, big budget deficits and a lack of high tech jobs are hurting its chances to pull out of the doldrums. State government has a poor record of managing its finances

Michigan: The state never climbed out of the recession that started in 2001, and matters only became worse during the Great Recession. Two of the Big Three Detroit-based automakers went bankrupt in 2009, sending shockwaves through a state on track to lose a quarter of its jobs this decade. The recession accelerated drops in state revenue, and has left Michigan's government trying to deal with today's problems on a 1960s-sized budget.

Nevada: Nevada is one of the recession's big losers as its gaming-based economy suffered. Year-over-year revenue has fallen for two consecutive years, a record. But changing tax laws is tough because some are written into the state constitution.

Oregon: Oregon's leading industries, such as timber and computer-chip manufacturing, have been hit hard in the recession. Lawmakers have approved more than $1 billion in new taxes to keep it afloat. But voters in January will have the final say on another $733 million in new income taxes.

Florida: For the first time since World War II, Florida's population is shrinking -- bad news for an budget built on new residents flocking to the Sunshine State. Lawmakers raised $2 billion in new revenue this year, but could face a similar shortfall next year.

New Jersey: The Garden State, which has been plagued by years of fiscal mismanagement, spends more than it collects in revenue. The collapse of Wall Street, which supports about one-third of New Jersey's economy, has only made matters worse.

Illinois: Since the last recession earlier this decade, the state piled up huge backlogs of Medicaid bills and borrowed money to pay its pension obligations. The state's current budget still relies heavily on borrowing and paying bills late.

Wisconsin: Wisconsin has a long history of budget shortfalls. It also borrows frequently to cover operating expenses, among other measures. Unemployment is climbing as manufacturing, the state's largest sector, sputters.

More...

California Unemployment at 22 Percent

Image by Getty Images via Daylife

Tom Abate, Chronicle
San Francisco resident Elena Duran represents an unfortunate job trend that isn't reflected in the unemployment rate.

For years, Duran has been a full-time server at a downtown hotel. But the recession has cut so deeply into business that her hours were cut to half time in July.

"It's better than a layoff, but it still requires a lot of sacrifices," said Duran, who, along with her working husband, supports three sons.

Because she works, Duran doesn't count in California's 12.2 percent unemployment rate.

But her situation is captured by a broader measure, the underemployment rate, which, in addition to the jobless, includes people who could get only part-time work as well as those who want jobs but were too discouraged to look.

The state Employment Development Department estimates that this underemployment rate hit 21.9 percent in September.

That figure includes 1.9 million jobless Californians, 1.4 million people who had to work part time, and 865,000 adults loosely described as discouraged.

"Underemployment is at the highest level since we started keeping these records in 1994," said economist Sylvia Allegretto of the Institute for Research on Labor and Employment at UC Berkeley.

The Employment Development Department, which publishes the state's jobless rate, has not typically calculated underemployment.

Dynamics of jobless recoveries

Paul Wessen, an economist with the department, said one reason is that the broader measure tends to rise and fall in concert with the traditional jobless rate, so both indicators provide the same signal.

"All the data tell us that this is the worst economic downturn since World War II," Wessen said.

But Allegretto said the underemployment rate is worth tracking because it helps explain the dynamics of so-called jobless recoveries - times when growing economic output does not bring a strong rebound in hiring.

Recessions since the early 1990s have been followed by relatively sluggish job recoveries.

Economist Amar Mann of the Bureau of Labor Statistics in San Francisco said the agency started to publish a national underemployment rate after the 1990s recession.

"A lot of researchers were asking for this data," he said.

Fuller picture of market

San Francisco labor attorney Michael Bernick, a former head of the state Employment Development Department, said the underemployment rate offers a fuller picture of the modern labor market primarily because it captures how many workers are cut to part time when the economy is in recession.

Bernick said employers who need to cut costs often choose to reduce hours as an alternative to layoffs, which can be better for employees and presumably for the business because it retains trained workers.

But he said the practice may mean that the unemployment rate won't drop quickly as the economy recovers, because employers tend to bring part-timers back to full time before they make new hires.

Wessen said the department is considering putting more emphasis on the underemployment rate. "This measure has hit the radar more of late," he said.

Californians' challenges

Meanwhile, Californians face difficulties that the statistics only begin to describe.

Santa Rosa resident Lori Houston used to put in 40 to 60 hours a week as a self-employed communications specialist. But since January, she has been working half as much because her clients have cut back in the face of their own financial woes.

Houston said she has been seeking contract or full-time work for months, to no avail.

"I've been turning over every stone," she said. "It's a tough market out there."
Adding skills during search

Mark Gutierrez of San Jose, who has been looking for work in sales and distribution for more than a year, has fended off discouragement by adding new skills, such as Web design, while actively job hunting.

Gutierrez said he has a promising lead while he keeps an eye on his dwindling finances.

"Something has to break my way soon," he said.

Government Reports Point to Fiscal Doomsday

Martin D Weiss
When our leaders have no awareness of the disastrous consequences of their actions, they can claim ignorance and take no action.

Or when our leaders have no hard evidence as to what might happen in the future, they can at least claim uncertainty.

But when they have full knowledge of an impending disaster ... they have proof of its inevitability in ANY scenario ... and they so declare in their official reports ... but STILL don’t lift a finger to change course ... then they have only one remaining claim:

INSANITY!

And, unfortunately, that’s precisely the situation we’re in today: Three recently released government reports now point to fiscal doomsday for America; and one of the reports, issued by the Congressional Budget Office (CBO), says so explicitly:

• The CBO paints two future scenarios for the U.S. budget deficit and the national debt. But it plainly declares that fiscal disaster will strike in EITHER scenario. Furthermore ...
• The CBO states that its fiscal disaster scenarios could cause severe economic declines for decades to come, including hyperinflation and destruction of retirement savings.
• The CBO then proceeds to admit that even its worse-case scenario could be understated by a wide margin due to panic in the financial markets or vicious cycles that are beyond control.
• Separately, in its Flow of Funds Report for the second quarter, the Federal Reserve provides irrefutable data that we are already beginning to witness the first of these consequences in the United States: an unprecedented cut-off of credit to businesses and consumers.
• Meanwhile, the Treasury Department shows that America’s fate remains, as before, in the hands of foreigners, with the U.S. still owing them $7.9 trillion!
• And despite all this, neither Congress nor the Obama Administration have proposed a plan or a timetable for averting these doomsday scenarios. Their sole solution is to issue more bonds, borrow more, and print more without restraint.

That is the epitome of insanity.

Yes, the great government bailouts of 2008 and 2009 have bought us some time ... but they have promptly proceeded to sell us into bondage.

Yes, they have given us safe passage over tough seas ... but only to throw our assets onto the global auction block for the highest bidders.

The one bright spot: Unlike some governments, ours does not conceal the evidence of its folly. Quite the contrary, the proof pours forth from these three government reports in relatively blunt language and unmistakably blatant numbers ...

Report #1 Congressional Budget Office (CBO): The Long-Term Budget Outlook

The CBO opens with a chart predicting the most dramatic surge in government debt of all time.

It shows that even in proportion to the larger size of the U.S. economy today, the government debt has ALREADY surpassed the massive debt loads accumulated during World War I and the Great Depression ... and will soon surpass even the massive debt load of World War II.

“Large budget deficits,” write the authors of the CBO report, would ...

• “Reduce national saving,” leading to ...
• “More borrowing from abroad” and ...
• “Less domestic investment,” which in turn would ...
• “Depress income growth in the United States,” and ...
• “Seriously harm the economy.”

Worse, on page 14, the CBO warns that:

• “Lenders may become concerned about the financial solvency of the government and ...
• “Demand higher interest rates to compensate for the increasing riskiness of holding government debt.” Plus ...
• “Both foreign and domestic lenders may not provide enough funds for the government to meet its obligations.”

The magnitude of the problem cannot be underestimated. The CBO declares on page 15 that:

• “The systematic widening of budget shortfalls projected under CBO’s long-term scenarios has never been observed in U.S. history” and ...
• It will also be larger than the debt accumulations of any other industrialized nation in the post-World War II period, including Belgium and Italy, the two worst cases of all.

But the CBO admits that even these frightening projections may be grossly understated because:

• “The analysis omitted the pressures that a rising ratio of debt to GDP would have on real interest rates and economic growth.”
• “The growth of debt would lead to a vicious cycle in which the government had to issue ever-larger amounts of debt in order to pay ever-higher interest charges.”
• “More government borrowing would drain the nation’s pool of savings, reducing investment” and ...
• “Capital would probably flee the United States, further reducing investment.”

But none of these are factored into the analysis. On page 17 of its report, the CBO writes ...

“The analysis ... does not incorporate the financial markets’ reactions to a fiscal crisis and the actions that the government would adopt to resolve such a crisis. Because [our] textbook growth model is not forward-looking, the analysis assumes that people will not anticipate the sustainability issues facing the federal budget; as a result, the model predicts only a gradual change in the economy as federal debt rises.

“In actuality, the economic effects of rapidly growing debt would probably be much more disorderly as investors’ confidence in the nation’s fiscal solvency began to erode. If foreign investors anticipated an economic crisis, they might significantly reduce their purchases of U.S. securities, causing the exchange value of the dollar to plunge, interest rates to climb, and consumer prices to shoot up.(Bolding is mine.)

Report #2 U.S. Federal Reserve: Flow of Funds Accounts of the United States

The Fed’s data on page 12 tells it all: The impact on the U.S. credit markets is not just a future scenario. It’s happening right now.

Yes, the government is getting its money to finance its exploding deficits (for now). But it’s hogging all the available supplies, while American businesses and average consumers are getting shut out or even shoved out.

Specifically ...

• In the first half of last year, the U.S. Treasury raised funds at the annual pace of $411 billion in the first quarter and $310 billion in the second quarter.
• But if you think that was a lot, consider this: THIS year, the Treasury has stepped up its pace of borrowing to annual rates of $1.443 TRILLION in the first quarter and $1.896 TRILLION in the second quarter. That’s 3.5 times and over SIX TIMES MORE than last year’s, respectively.

Meanwhile, the private sector is getting killed ...

• Last year, banks provided new credit at the annual pace of $472.4 billion in the first quarter and $86.7 billion in the second. This year, they’re not providing ANY new credit — they’re actually LIQUIDATING loans at the rate of $857.2 billion in the first quarter and $931.3 billion in the second. So if you’re running a business, you may want to think twice before asking your bank for more money. Instead, they may decide to TAKE BACK the money they’ve already loaned you!
• Ditto for mortgages. Last year, mortgages were being created at the annual clip of $522.5 billion and $124 billion in the first and second quarters, respectively. This year, on a net basis, mortgages haven’t been created at all. Quite the contrary, the Fed reports that, on a net basis, they’ve been liquidated at an annual pace of $39.3 billion in the first quarter and $239.5 billion in the second.
• Getting cash out of credit cards and other consumer credit is even tougher. Last year, folks were able to add to their consumer credit at annual rates of $115 billion and $105 billion in the first two quarters. This year, in contrast, they’ve been forced to CUT back on their credit at annual rates of $95.3 billion in the first quarter ... and at an even faster pace in the second quarter — $166.8 billion.

Never before in my lifetime have I witnessed a more severe case of crowding out in the credit markets!

And never before has the CBO been so right in its forecasts of fiscal doomsday: One of its dire forecasts was already coming true even before it issued its report.

Report #3 U.S. Treasury Department: Treasury Bulletin

Each and every month, the Treasury reminds us of the single fact that no one in the Treasury wants to face:

The U.S. is deep in debt to the rest of the world, and on page 48, it provides the evidence: total liabilities to foreigners of $7,898,435 million (nearly $7.9 trillion)!

This isn’t a new record. It was actually slightly more last year. But the fact is NOTHING has been done to reduce our debt to foreigners. Quite the contrary, it is the deliberate policy of our government to pile up more — to sell foreign investors and central banks on the idea that they must continue to lend us money.

The fact that this could potentially put our nation into deeper jeopardy is overlooked. And the dire forecast by the CBO that foreign investors might pull the plug is pooh-poohed.

Unemployed Rate for Young Explodes to 52%

Richard Wilner with the NYPost:

The unemployment rate for young Americans has exploded to 52.2 percent -- a post-World War II high, according to the Labor Dept. -- meaning millions of Americans are staring at the likelihood that their lifetime earning potential will be diminished and, combined with the predicted slow economic recovery, their transition into productive members of society could be put on hold for an extended period of time.

And worse, without a clear economic recovery plan aimed at creating entry-level jobs, the odds of many of these young adults -- aged 16 to 24, excluding students -- getting a job and moving out of their parents' houses are long. Young workers have been among the hardest hit during the current recession -- in which a total of 9.5 million jobs have been lost.

Al Angrisani, the former assistant Labor Department secretary under President Reagan, doesn't see a turnaround in the jobs picture for entry-level workers and places the blame squarely on the Obama administration and the construction of its stimulus bill.

"There is no assistance provided for the development of job growth through small businesses, which create 70 percent of the jobs in the country," Angrisani said in an interview last week. "All those [unemployed young people] should be getting hired by small businesses."

There are six million small businesses in the country, those that employ less than 100 people, and a jobs stimulus bill should include tax credits to give incentives to those businesses to hire people, the former Labor official said.

"If each of the businesses hired just one person, we would go a long way in growing ourselves back to where we were before the recession," Angrisani noted.

A study from the National Longitudinal Survey of Youth, a government database, said the damage to a new career by a recession can last 15 years. And if young Americans are not working and becoming productive members of society, they are less likely to make major purchases -- from cars to homes -- thus putting the US economy further behind the eight ball.

Total Collapse is Near - All Paper Money Will Fail

Image via Wikipedia

ZeroHedge makes a strong argument for the physical possession of precious metals:

Gold and Systemic Crisis
Presently many otherwise intelligent and capable individuals in America do not seem to understand the origins of the present financial crisis -- and the multiple aspects (or shall we say 'tentacles'?) of its origination. These tentacles stretch far back in history: from the present demoralization and fragmentation of American society, to the demonetization of gold in 1971, stretching to the forces behind World War I and World War II, and ultimately, in terms of the 20th century, to the creation the Federal Reserve in 1913.

Our topic here is gold, and unfortunately we will have to save the analysis of totalitarianism's final forms for another paper. But what must be understood is that ultimately we are witnessing a 'failure of imagination' on the part of the general public -- a similar failure to what always permits radical evil to spread. This moral failure was characterized by both Hannah Arendt in Eichmann in Jerusalem , and Alexander Solzhenitsyn in The Gulag Archipelago. Because in our society people do not understand history nor human nature, and are saturated with lies and propaganda 24/7 via the CNBS broadcast media, they cannot imagine the moral consequences of their actions or inactions -- let alone the consequences of systemic failure. So to remedy this situation, let us take a quick glance at history, but try to avoid the pitfalls of the gold bug crowd. As someone mentioned, here at ZeroHedge, we are 'truth bugs'.

"If only it were all so simple! If only there were evil people somewhere insidiously committing evil deeds, and it were necessary only to separate them from the rest of us and destroy them. But the line dividing good and evil cuts through the heart of every human being. And who is willing to destroy a piece of his own heart?"
-Aleksandr Solzhenitsyn

History is a great teacher. One thing it shows us is that all systems of paper money fail. And they usually fail very quickly, not outlasting a man's lifetime. Gold and silver have been used as money for over 6000 years, including for extended periods of time, such as during the 1000 years of the Eastern Roman Empire. There are mathematical reasons why humans historically use precious metals as money, but we will not go into them here. Our present system is curious and almost astonishing that it has managed to last so long, given the lessons of history. Dr. Antal Fekete wrote in his latest paper that the mean time to failure of a non-gold backed system is approximately 18 years. Our present system has lasted over twice as long -- 38 years at last count, measured since the U.S.'s surreptitious default on it's foreign gold obligations under the Nixon administration in 1971 and currencies began to 'float'.

We have a fractional-reserve credit based system, where our money is mostly hallucinated computer pixels. The system is highly leveraged, but is almost entirely electronic. We now have multiple generations which have grown up without using money in its historic forms. For example, even the new Monopoly game uses electronic cards rather than paper money. Let me summarize these changes -- for simplicity sake, here we use gold to mean gold and/or silver. The global monetary system has changed three times: first, from gold to gold IOUs, then from gold IOUs to debt IOUs, and finally from debt IOUs to electronic-debt IOUs. But are these IOU's really 'unbacked', as claimed by the gold bugs? Actually , they *are* backed. They are backed as long as the IOUs can be exchanged for oil and gold at some realistic price metric.

According to Dr. Fekete, the reason our unmoored system has continued so long, past the usual 18 year lifespan of fiat currency experiments, is that we have invented a system of gold futures clearing and gold derivatives trading -- an innovation that did not exist in the past. In other words, we have created a gold 'price horizon' in electronic-debt IOUs, with the tendency to converge to the gold spot price. (Is the tail wagging the dog?) Additionally we have gold leasing, forward hedging, and all sorts of other trickery that has been going on for quite some time now. The electronic debt-IOU remains linked to gold via various Ponzi-like paper innovations.

The author FOFOA adds that additionally, what has characterized our system since 1971 is gold/oil flows between the various Petro States of the Middle East and the New York and London banking centers. These implicit deals allowed the United States to continue to purchase oil directly in dollars -- despite having defaulted on its international obligations. This 'innovation' somewhat resembles a US military-led protection racket. Remember that the second oil crisis of 1979-1980 coincided with price explosions in both gold and oil, yet catastrophe was avoided. This will not be the case the second time around.

There are also of course the lesser but nonetheless important details such as hedging which was done via large gold producers, the gold price suppression by the central banks, the geometric growth of OTC interest rate swaps, and so on. For those interested in these technical details, we highly recommend reading all the posts at FOFOA and the work of Rob Kirby. But here, the goal is a summary 'big picture' overview regarding the main points. What we can surmise though, is that our present system is a historical anomaly despite its technological innovations. And that should make us cautious of issuing blanket proclamations about the U.S. dollar's future stability over the next 8 weeks -- let alone the next 80 years. Have the pure dollar deflationistas skipped the Taleb? Sometimes we wonder.

The U.S. has a unique and deep relationship with Saudi Arabia, historically the world's largest oil producer. This relationship that goes back almost a century, to the foundation of Saudi Aramco by Rockefeller oil interests (specifically Standard Oil of California) in 1933. From 1933 to 1971 the payment system was somewhat stable, characterized by gold clearing on the international level at a fixed price of dollars for gold. This continued until the French under de Gaulle began draining the US Treasury of its gold, due to the expense of America's involvment in the Vietnam war. The French gold redemptions ultimately lead to the unilateral default of the United States on its gold obligations and the death of Bretton Woods I, which had been created post World War II with the dollar as gold-backed world reserve currency.

What has characterized our international system since 1971, or "Bretton Woods II" as it is sometimes called, is this: 1) the gold futures clearing system, and related paper markets and 2) the ability to swap oil for gold via these markets using exclusively US Dollars. This has given implicit support to the U.S. dollar far beyond what could be reasonably imagined considering the U.S. fiscal situation -- in the sense that the dollar is supported as long as 1) oil is for sale in dollars and 2) gold is for sale in dollars. This does not always have to be the case, and this is the core of the issue. If gold goes into permanent backwardation it will no longer be for sale in dollars on COMEX. Period. This will implicitly cut off oil flows to a trickle until payment is re-linked to gold via the IMF SDR or another mechanism.

To many of us, it is obvious the US equity markets will soon crash, but the real crisis will come with the failure of our currency -- a currency which is IMPLICITLY and historically linked with trading of both dollars for oil, and dollars for gold. Thus, these spot markets are the ones to watch. Some may be aware Russia recently surpassed Saudi Arabia as the world's number 1 oil producer -- and last week , number 2 oil producer Saudi Arabia has signed a $2bn weapons deal with Moscow. The final strategic alignment of Saudia Arabia and the rest of the Middle East remains up for debate, but we have certainly witnessed the tentative steps of the BRIC nations and their affiliated satellites to build their own international clearing system, based in Hong Kong and Moscow, rather than New York and London. Ultimately this will probably involve some form of the IMF SDR -- rebalanced with new currencies and possibly a gold component. Remember Medvedev at the G8?

Minus the political shifts towards a 'multipolar' world (prior to the onset of the final bloody form of the Hegelian dielectic), the weakest point in the present system is certainly the U.S. Dollar. Indeed there are many angles for speculative currency attack. And there are many weak points at which this may simply happen by accident. Assuming we see such an external speculative attack, what can we expect?

1) A currency failure will happen rapidly (likely overnight to 8-12weeks). The dollar will devalue against gold and oil. We are talking 50% decline or more.
2) Gold will go into backwardation (aka Spot Price above Near-Futures Price). This is the single most important indicator.
3) The Gold price will vault upwards -- and ultimately trading will halt in USD.
4) Oil will likely vault upwards as well, but this analysis is difficult. The gold:oil ratio is a useful indicator.

Where will capital flow during a time of a systemic crisis? Since 1971, capital has moved up this chart. Now it is reversing. Capital will flow into government bonds, treasury bills, physical cash, and ultimately its final home, gold.

There are all sorts of other things that may occur under conditions of currency failure, but you can find these sorts of analysis elsewhere. Use your imagination, as Hannah Arendt might suggest. Or google teotwawki and crack open a beer. The point here is that our present system is very fragile and cannot last much longer in its present form. It is far too unstable. There will be a collapse , and out of this a new system will emerge. The only guarantee of your purchasing power is in physical gold coins which you have in your possession. This is why the Zerohedge Dog, Scooby, keeps 20% or more of his assets in physical gold coins, and at least another 10-20% in physical cash with which to pay his bills. The world is changing, and to cope with the new reality requires both discernment and imagination.