Schiff vs. Ritholtz: Political Correctness vs. Law of Supply and Demand

PolicyMic says There's a Good Reason Why Everyone's Criticizing Peter Schiff.

Jon Stewart's Daily Show mocked Schiff in an amusing video interview Wage Against the Machine. The video allegedly explores "the devastating economic effects of raising the minimum wage to the poverty level."

Schiff's opponent in the interview was Barry Ritholtz at the Big Picture blog. Before the show aired, Barry explained How I Ended Up On The Daily Show.

The feedback against Schiff was enormous. Ritholtz has the details in Follow Up: Daily Show Blowback.

Political Correctness Points

I am no fan of Schiff. We have radically different views on the inflation-deflation debate. And I do find the way he stated his case to be very distasteful.

That said, it's clear the Daily Show was out to score political points, not explore economic reality.

Given that Schiff was purposely displayed in the worst light possible and Ritholtz the best light possible (Ritholtz admits retake after retake) it is not shocking in the least to see all this blowback.

Merits of the Debate

Political correctness or not, I want a sound discussion of economic principles.

In a Shades of France Socialistic Proposal (my title), Ritholtz states "The most radical idea is bit of pure fantasy: Guarantee every person in America a minimum salary".

Indeed, let's hope that remains a fantasy because it's already proven if you give things away free, people able to work, will stop working.

Here's an important corollary: If you make people work, you end up with work that has no economic justification.

Campaign for a Bigger Paycheck

On January 2, a New York Times editorial, Campaign for a Bigger Paycheck,  stated 'When you raise the price of employment, guess what happens? You get less of it,' said Speaker John Boehner, espousing a party-line theory that most economists agree has been discredited.

Someone Please Help New York Times With Econ 101

Actually, it's the New York Times editorial board that's discredited.

Caroline Baum, in one of her last articles at Bloomberg (she has gone on to other things and I wish her well), blasted that New York Times "discredited" fiction sky high.

Here is the pertinent snip from Someone Please Help New York Times With Econ 101.

This is one of the more outrageous political statements dressed up as economic theory from the editorial board of the New York Times. They should be ashamed of themselves.

If you learned anything from your Econ 101 class in college, hopefully it was the law of supply and demand. Lowering/raising the price of a good or service increases/decreases the quantity demanded. Similarly, producing less/more of something will raise/lower the price.

Isn't it about time opinion writers stopped using economics to justify a moral issue? Our hearts go out to those who can't earn a decent living, find a job, get laid off for no good reason or find themselves in harm's way. If we, as a society, want to provide support to those in need, fine. But the paper of record does a disservice when it makes wild, unsubstantiated claims about basic principles of economics.

Theory vs. Practice

Caroline Baum stated economic theory to perfection.

Let's now look at the economic law of supply and demand in practice as opposed to a biased political correctness in the way things were stated.

Annual Job Growth Rates Minimum Wage States vs. Non-Minimum Wage States

Here is a chart from the Institute for Research on Labor and Employment by UC Berkeley.



The chart shows lower job growth rates in states with higher minimum wages.

Bias Towards Believing Myths

I am sure you can find studies that allegedly prove or disprove anything, but things change over time and wages tend to go up over time so there is an inherent bias towards believing myths.

Europe and Excellent Backdrop for Discussion

Europe provides an even better look at the debate because of wide country-to-country variances.
 
Here is a rock-solid study of actual data by economist Steve Hanke, For Europe’s Youth, Minimum Wages Mean Minimal Employment.

Yesterday, in the wake of Tuesday’s State of the Union address, I poured cold water on President Obama’s claim that a hike in the minimum wage for federal contract workers would benefit the United States’ economy, pointing specifically to unemployment rates in the European Union. The data never lie: EU countries with minimum wage laws suffer higher rates of unemployment than those that do not mandate minimum wages. This point is even more pronounced when we look at rates of unemployment among the EU’s youth – defined as those younger than 25 years of age.



In the twenty-one EU countries where there are minimum wage laws, 27.7% of the youth demographic – more than one in four young adults – was unemployed in 2012. This is considerably higher than the youth unemployment rate in the seven EU countries without minimum wage laws – 19.5% in 2012 – a gap that has only widened since the Lehman Brothers collapse in 2008.

Comedy is Comedy, Reality is Reality

Hanke concluded with a piece of wisdom from Nobelist Milton Friedman: "the minimum wage law is most properly described as a law saying employers must discriminate against people who have low skills. That’s what the law says."

I conclude with: Let's judge an argument based on merits, not on bias against the person stating it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Nigel Farage Video: UKIP Takes Lead in British Polls; Message to Cameron

I am pleased to report some good news today:  UKIP takes lead in British polls ahead of EU parliamentary elections to be held in May.



Nigel Farage Video

Inquiring minds should watch an interesting Video Interview of UKIP leader Nighel Farage. Here's the opening lead "The UK Independence Party has managed to win over the hearts of the British public."




Also consider UKIP Tops Independent Poll as Nation’s Favourite Party

‘The UK Independence Party is the nation’s favourite political party, a poll for The Independent on Sunday reveals today.

Voters regard Nigel Farage’s party more favourably than Labour, the Conservatives or the Liberal Democrats. The surprising finding will underline concerns inside the mainstream Westminster parties that Ukip is on course to come first in May’s European elections and could deny Labour or the Tories an outright victory in next year’s general election.

What is more, Mr Farage is favoured over Ed Miliband and Nick Clegg as a party leader, beaten only by David Cameron, the ComRes survey reveals. Ukip is the favourite choice of 27 per cent of voters, while Labour is favoured by 26 per cent. The Conservatives are next, on 25 per cent, and the Lib Dems last, on 14 per cent. Although the differences in the first three parties are within the margin of error, the findings will fuel unease inside Downing Street that the Prime Minister has failed to close down the question of Europe and that Ukip’s support remains strong.

Message to David Cameron

This shift in voter sentiment is a clear message to prime minister David Cameron: Get your head out from where the sun doesn't shine and announce a referendum on EU membership this year.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Secret" Meetings on Greece? Say It Ain't So; Euro Contagion Coming Up

How long can secret ECB meetings stay secret? Allowing time to write a story, the answer is something like 3 days, if that. The Wall Street Journal today reports on a secret meeting that took place Monday evening regarding Greece finances.

Please consider Greece Creditors, France, Germany Held Secret Meeting Monday.

Top officials peeled away from colleagues after a euro-zone finance ministers meeting in Brussels Monday evening for a secret meeting to discuss mounting concerns over Greece's bailout.

Greek Finance Minister Yiannis Stournaras, who was briefing the press in a building across the street at the time, wasn't invited.

High-level officials from the International Monetary Fund, the European Commission, the European Central Bank, senior euro-zone officials and the German and French finance ministers were present, according to people with direct knowledge of the situation. They spoke on condition of anonymity because they aren't authorized to talk to the press.

They were trying to figure out how to tackle two issues threatening to unsettle the fragile economic recovery in Greece and the broader euro zone.

They discussed how to press the Greek government to forge ahead with unpopular structural reforms; and second, how to scramble together extra cash to cover a shortfall in the country's financing for the second half of the year, estimated at €5 billion-€6 billion ($6.81 billion-$8.17 billion).

The meeting was inconclusive, the people familiar with the situation said.

Creditors Worried

Clearly, creditors are worried over Greece's ability to pay back bailout money (loans). They should be worried because there is no possible way Greece can ever pay back those loans.

The best time to be worried about getting paid back is before stupid loans are made, not now. It's far too late to be worried now about loans already made. There is still time to not compound the mistake of making further loans (something they have done several times already).

Politics

Support for Prime Minister Antonis Samaras’ New Democracy coalition has crumbled to pieces. If an election were held today, opposition party SYRIZA would win without a doubt.

Moreover, SYRIZA leader Alexis Tsipras, who opposes the austerity measures and said his party wouldn’t repay the $325 billion in loans granted by the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) has predicted the Leftists will come to power.

For details, please see SYRIZA Surges in Greek Polls, Would Win Election if Held Today; Message People Want to Hear; Contagion Guarantee.

Tsipras has since backed off on some of his harsh threats, but I suspect only for the purpose of increasing his election chances.

Repeating what I have stated before ...

Default Coming One Way or Another

Whether done properly, or with promises that cannot be met, Greece is going to default on that debt. When that happens, German citizens will discover that Chancellor Angela Merkel's promise that German taxpayers won't be impacted is as hollow as most chocolate Easter bunnies.

Calculating taxpayer responsibility percentages of various countries is simple enough.

Eurozone Financial Stability Contribution Weights

Country	Guarantee Commitments (EUR) Millions	Percentage
Austria	€ 21,639.19	2.78%
Belgium	€ 27,031.99	3.47%
Cyprus	€ 1,525.68	0.20%
Estonia	€ 1,994.86	0.26%
Finland	€ 13,974.03	1.79%
France	€ 158,487.53	20.32%
Germany	€ 211,045.90	27.06%
Greece	€ 21,897.74	2.81%
Ireland	€ 12,378.15	1.59%
Italy	€ 139,267.81	17.86%
Luxembourg	€ 1,946.94	0.25%
Malta	€ 704.33	0.09%
Netherlands	€ 44,446.32	5.70%
Portugal	€ 19,507.26	2.50%
Slovakia	€ 7,727.57	0.99%
Slovenia	€ 3,664.30	0.47%
Spain	€ 92,543.56	11.87%
Eurozone 17	€ 779,783.14	100%

The above table from European Financial Stability Facility

Note that Greece is responsible for 2.81% of Greek defaults. How is that going to work?

It doesn't. So take that percentage and spread it around according by revised weight. And what is Spain supposed to do with it's 12% of €325 billion of defaults?

Contagion Guarantee

Thank the economic illiterates at Troika for this setup.

Greece could have defaulted in 2009 with perhaps a €40-50 billion mess to clean up. In a foolish attempt to prevent contagion, the nannycrats turned a relatively small mess into major €325 billion problem, virtually assuring the contagion they set out to prevent.

Expect to see much use of the word "contagion" in the coming months.

Here is a question I asked in Prisoner's Dilemma Game in Greece; Contagion-Spread Eurozone Breakup More Likely Now; How will Greece NOT pay back €320 billion? So Angela Merkel, when are you going to admit this setup, and what are you going to do about it?

Results "Inconclusive"

Clearly she doesn't know. Results of the meeting were "inconclusive".

If the Troika wants to hold secret meetings on something realistic, they should include Greece, and discuss how best to contain the damage when Greece does default. Instead they focus on the delusional zero percent idea they can somehow prevent default or further writedowns.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

What the Crisis Taught Us: More Bubbles! We Need Bigger Bubbles to Combat Deflation!

The Monetarists are out in full force warning about pending deflation.

First it was Christine Lagarde with her message about the deflation ogre (see Christine Lagarde Warns of Lord Voldemort, Hopes to Put Deflation Ogre in a Bottle).

Next on the list, deflation fighter extraordinaire, Telegraph writer Ambrose Evans-Pritchard, picked up on Lagard's commentary and screamed at the top of his lungs "More Bubbles! We need bigger and bigger bubbles to combat the threat of deflation!"

Of course Pritchard did not state it precisely that way, but it is indeed exactly what he called for, in equally loud, unmistakable tones.

World Risks Deflationary Shocks

I invite you to read World risks deflationary shock as BRICS puncture credit bubbles by Ambrose Evans-Pritchard.

It is a remarkable state of affairs that the G2 monetary superpowers - the US and China - should both be tightening into such a 20pc risk, though no doubt they have concluded that asset bubbles are becoming an even bigger danger.

Tightening? What Tightening?

Pritchard calls a decrease in asset purchases by the Fed from $85 billion a month to $65 billion a month "tightening". The claim is preposterous.

It's very much like telling an obese child you can only have three pieces of cake after dinner, not four.

Correctly viewed, tapering asset purchases is a reduction in stimulus, not tightening.

Actual Tightening in Emerging Markets

Pritchard discussed Turkey, South Africa, India, Brazil, Indonesia, and every other country that actually did tighten recently, but he never addressed the reason they had to: inflation was completely out of control in those countries, with obvious asset bubbles in many of them. Tightening should have started long ago.

Spotlight on Europe

Eurostat data show that Italy, Spain, Holland, Portugal, Greece, Estonia, Slovenia, Slovakia, Latvia, as well as euro-pegged Denmark, Hungary, Bulgaria and Lithuania have all been in outright deflation since May, once tax rises are stripped out. Underlying prices have been dropping in Poland and the Czech Republic since July, and France since August.

Spotlight on Japan

No reputable deflation fighter could possibly leave Japan out of the mix, and there too, Pritchard did not disappoint.

Those who think deflation is harmless should listen to the Bank of Japan's Haruhiko Kuroda, who has lived through 15 years of falling prices. Corporate profits dried up. Investment in technology atrophied. Innovation fizzled out. "It created a very negative mindset in Japan," he said.

Japan had the highest real interest rates in the rich world, leading to a compound interest spiral as the debt burden rose on a base of shrinking nominal GDP.

Cure Worse Than the Disease

The ridiculousness of that last statement should be obvious. Japan has a debt burden because of its deflation fighting actions for three decades.

Before Japan embarked on its deflation-fighting mission, it had no debt at all. Now it has the largest debt-to-GDP ratio in the industrial world.

The cure "deflation fighting" was certainly worse than the disease, yet Pritchard wants central banks to "do more".

Pritchard Wonders "Why?"

Any such outcome in Europe would send Club Med debt trajectories through the roof. It would doom all hope of halting Europe's economic decline or reducing mass unemployment before the democracies of the afflicted countries go into seizure. So why are they letting it happen?

Silly Question of the Day

Here's the silly question of the day: Why are they letting it happen?

Here's a better question: Why did Argentina, Turkey, South Africa, India, Brazil, Indonesia, and every other country that tightened recently wait so long to tighten?

Price inflation was running rampant in every one of those countries. The stock market bubbles in India and Turkey are massive. The housing bubble in India is massive.

But central bankers cannot see bubbles. Pritchard mentions bubbles but chooses to ignore them. Arguably, that's even sillier than not seeing them at all.

Falling Prices a Bad Thing?

Pritchard's only concern is with falling prices, as if falling prices are a bad thing.

Ask anyone in Japan, the US, Europe, or India if they would like to see falling prices. The only people who don't want falling prices are central bankers, economic illiterates, and Wall Street types and banks dependent on ever-growing asset bubbles (because of bad loans made on speculative-priced assets).

Demise of Japan Coming Up

For all the pissing and moaning about Japan, until the revival of GM, Japan's auto and technology sales did quite fine. Technology did not stop.

It's the foolish Abenomics deflation-fighting policies of prime minister Abe (which Pritchard supports) that's going to be the demise of Japan.

Reflections on "Letting it Happen"

It's not a matter of "letting it happen" (it being deflation).

Deflation is actually the natural state of affairs. As a result of increased productivity, prices should drop over time, with more goods available at cheaper prices, to the benefit of everyone!

And in spite of the ridiculous notion that people will hold off on consumer purchases if prices drop, it's actually the other way around. Falling prices and bargains spur sales.

If falling prices stopped sales, there would have been no sales of flat-panel TVs, computers, or any other electronic devices for years.

If the price of healthcare dropped, people would have more money to spend on other things, and spend they would.

It's asset prices, not consumer prices, where people stay away when prices are falling. That makes asset bubbles all the more dangerous.

Obama Irony

Consider the irony of this statement by President Obama in his state of the union address.

"Today, our housing market is finally healing from the collapse of 2007.Home prices are rising at the fastest pace in six years, home purchases are up nearly 50 percent, and construction is expanding again. But even with mortgage rates near a 50-year low, too many families with solid credit who want to buy a home are being rejected."

Pater Tenebrarum at the Acting Man blog accurately summarized the situation in State of the Union or TOTALGOV as follows:

"We gotta blow a new housing bubble somehow! We're already half-way there apparently. It hasn't occurred to the president that the first sentence highlighted above is the main cause of what he bemoans in the second highlighted sentence."

Indeed! Please consider my December 20, 2013 article All-Cash Home Sales Hit Record 42% of Sales.

It's that flood of "all cash" money that has driven up prices. Obama calls it a success. So does Pritchard. Both want more bank credit issuance to complete the bubble reblowing episode.

Do Something!

Pritchard wants central bankers to "Do Something!" He sounds like a child who broke his toy and expects some miracle to fix it.

The fact of the matter is this: Central banks already have done something.  They made matters worse by doing exactly what Pritchard asked for.

However, that does not please Pritchard. He wants central banks to do still more, at the risk of blowing even bigger asset bubbles in the process.

Perfectly Obvious or Obviously Not?

It should be perfectly obvious to Pritchard (and everyone else) that if the Fed could control jobs or get banks to lend, it would have happened long ago.

Lord knows they tried. Three rounds of QE did not spur lending or hiring in the US. LTRO and near-zero interest rates did not spur lending in Europe.

But QE sure did spawn asset bubbles in the US and elsewhere.

Pritchad, Lagarde, Janet Yellen, Ben Bernanke, and others want to ignore massive asset bubbles in equities and bonds. Instead they worry consumer prices are not rising fast enough.

Deflation is a Good Thing!

Many countries desperately need falling prices to have a chance. Government spending in France is a ridiculous 56% of GDP. Does Pritchard want it to hit 100%?

Deflation spurred a welcome revival of Spanish construction companies. In the process, competition lowered costs in France (and that is not just a good thing, but a very needed thing).

For further discussion, please see Deflation Will Return: Europe First, Then US; Global Supply Arbitrage

Asset Bubbles the Biggest Threat to Banking

The only possible context in which deflation can be considered bad is the effect it has on banks and bank lending. Yet, that puts the cart before the horse.

It's not deflation that causes the problem, it's increasing loose monetary standards that create asset bubbles (on which much lending is based) that is the real problem. The bigger the asset bubble, the bigger the ultimate threat to banking!

Yet Pritchard wants to ignore all that. He wants more of the same "do something" actions of central bankers that created the very problems we have now.

Deflation Fighting (Inflation Promotion) Does Five Things

1. It increases government debt (as Japan found out)
2. It promotes asset bubbles
3. It delays the inevitable bust, making matters worse in the mean time
4. It creates moral hazards
5. It is a major factor in rising income inequality

What the Crisis Taught Us

Lagarde warns "What the crisis has taught us is that we need to be extremely vigilant and expect bubbles from places that we don’t anticipate."

Apropos Warning

Lagarde warns about the failure to anticipate bubbles. Her warning is very apropos!

Central banks never anticipate bubbles. Lagarde cannot even see the huge bubbles that are about ready to explode in her face.

Meanwhile, Pritchard wants to ignore bubbles in order to prevent deflation, and Obama complains about income inequality when the source of rising income inequality is Fed policies that create asset bubbles.

Lessons Not Learned

It's central bank inflationary policies, proposed by Pritchard, Yellen, Bernanke, and many others, that cause bubbles of increasing amplitude over time.

Ultimately, all bubbles burst, and the bursting of economic bubbles is the very asset-deflation they  need to prevent. And the only way to prevent asset bubbles from bursting is to not blow them in the first place.

Clearly the crisis did not teach any of them, anything at all.

Wine Country Conference II

The deflation debate continues. Want a live discussion of the issues and forces? Want to learn something?

Then come to the second annual Wine Country Conference which will be held May 1st & 2nd, 2014.

We have an exciting lineup of speakers for this year's conference.

• John Hussman: Founder of Hussman Funds, Director of the John P. Hussman Foundation which is dedicated to providing life-changing assistance through medical research
• Steen Jakobsen: Chief Economist of Saxo Bank
• Stephanie Pomboy: Founder of MacroMavens macroeconomic research
• David Stockman: Ronald Reagan's budget director, best-selling author, former Managing Director of The Blackstone Group 
• Mebane Faber: Co-founder and the Chief Investment Officer of Cambria Investment Management
• Jim Bruce: Producer, Director, and Writer of Money For Nothing: Inside the Federal Reserve 
• Chris Martenson: Reknown speaker and founder of Peak Prosperity
• Mike “Mish” Shedlock: Investment advisor for Sitka Pacific and Founder of Mish’s Global Economic Trend Analysis

In addition, we expect confirmation from a number of other highly respected fund managers and speakers. This year's event is two days and will include additional "break-out" groups.

For speaker bios, please check out Wine Country Conference Speakers.

This Year's Cause: Autism

$100,000 of the money raised last year came from a generous matching grant from the John P. Hussman Foundation.

Some of us in the industry who have done well are making an effort to help others. John Hussman is at the very top of that list.

One of John's kids has severe autism. This year, all net proceeds will go to support autism programs.

Conference Details

For further details about the 2014 conference, please see Wine Country Conference May 1st & 2nd, 2014

Nothing Like It!

This event is not just another "come and hear someone talk" kind of thing. Attendees and their significant others can expect an educational, fun, and relaxed time.

Last conference, we arranged wine tours. They were a big hit. We will do so again. One of the wine estates we visited had a Bocce Ball court. On a couple of miracle shots, I won both games I played.

Stay an extra day and golf or travel. I did. The conference hotel is a fun place in and of itself.

Unlike many other conferences, you will have easy access to speakers.

Want to chat with me, Steen, John, or anyone else at the conference? You will have an easy chance.

Not only do we have an excellent lineup of speakers, you will have an opportunity to meet with them, have intimate discussions on important investment topics, with a lot of fun on the side, including wine tours and great wine.

There's nothing like it in the investment business. And your money goes to a great cause! What can be better?



Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Harris v. Quinn: A Mother Petitions the Supreme Court in Fight Against Parasitic Unions

I have tried to steer clear of inflaming names like "parasite" when speaking about public unions. In this case, no other word comes close to describing the setup.

Making Millions Off the Disabled

One brave mother, Pam Harris, has resisted forced unionization of herself (as a sole home-caretaker, in her own home, for her disabled son Josh). She resisted all the way to the Supreme Court.

An email from Diana Rickert at Illinois Policy Institute describes the setup. You can also find her article on the Chicago Tribune.

With immense disgust, I present Making Millions Off the Disabled

Josh, the youngest child in the Harris family, was born with a rare genetic disorder. He lives with severe physical, cognitive and emotional struggles. This means the day-to-day tasks most of us take for granted — waking up, splashing water on his face, eating — require a lot of help.

But Josh is blessed to have a family that loves him. They always have been there for him.

In fact, his mother, Pam, has stayed home full time to take care of Josh for the past 25 years. Josh is her primary focus. Not her career. Not vacations. Not social outings with other moms. The truth is, Pam is doing what any mom would do: fighting to give her son the very best care she can.

Josh's care is expensive. The Harris family is fortunate enough to receive a modest Medicaid benefit administered by Illinois state government. Josh is eligible to receive up to $2,130 per month, or roughly $25,000 a year.

But here is where the Harris family's story takes a disgusting turn.

Henry Bayer wants some of Josh's money. In fact, he feels entitled to it.

Who is Henry Bayer?

Bayer is the executive director of the American Federation of State, County and Municipal Employees Council 31, one of the state's largest government unions.

Bayer's salary — approximately $145,000 in 2012, according to public records — is paid for by union dues from government workers. Compulsory union dues, from government workers who must pay money to Bayer and his union whether they want to or not.

Illinois politicians have a dangerously cozy relationship with government unions. In 2009, these close ties paid off: Gov. Pat Quinn issued an executive order to unionize the people in Josh's program.

Imagine having to pay union dues to collect food stamps or unemployment. That's what the executive order meant for Josh. For him to continue receiving his Medicaid support and his mother to be his primary caretaker, the Harris family would be forced to give part of their benefit check to either the AFSCME or another union, the Service Employees International Union.

The Harris family wouldn't stand for it. They alerted other families in the program, and when it came time to vote on which union would represent them, the vote was clear: 220 votes for AFSCME, 293 votes for SEIU, and 1,018 votes with an emphatic "no union!"

Pam Harris and others took their fight all the way to the U.S. Supreme Court.

Oral arguments in Josh's case were heard Jan. 21, and a decision is expected this summer. Josh's story has garnered national attention.

In the aftermath of the Supreme Court hearing, here is what AFSCME's Bayer had to say in response to a Chicago Tribune editorial in favor of Pam Harris: If you don't want to pay union dues, you shouldn't be eligible for state aid.

A few years before the executive order to unionize the program that the Harris family participates in, Quinn's predecessor, former Gov. Rod Blagojevich, unionized another, similar program for the disabled. The unions didn't even bother taking a vote that time; they conducted a questionable card-check operation to claim a slim majority of people in this program wanted to pay dues to SEIU.

According to documents obtained through the Freedom of Information Act, since 2009 the SEIU has siphoned more than $52 million in union dues from the families in this program.

Pam Harris Video

Here is an interesting video by Pam Harris.


Forced Association

The Illinois Policy Institute was overly polite.

Pam Harris and others are forced against their will to join unions. Those unions do absolutely nothing for Harris except suck like giant parasites, money that should go to the disabled.

It would be fitting if the Supreme Court ruled the SEIU and AFSCME parasites not only have to stop the practice, but also have to pay back the $52 million they stole, plus interest.

These disgusting, parasitic practices occur in many other states as well.

Freedom of Association

I am all in favor of freedom of association. People who want to join the Boy Scouts can. People who want to join the NRA can. People who want to form any kind of work union can. I am happy to let those unions exist.

However, the reverse should be true as well. No one should be forced into an association (or forced into dealing with associations) if they don't want to.

Imagine the outrage if liberals were forced to join the NRA to get jobs as teachers! 

Yet, somehow it's OK if conservatives have to join the SEIU to take certain jobs. In the case of Harris and other caretakers, the jobs don't even exist, except for the parasitic collection of union dues!

Forced membership into organizations is nothing more than a form of slavery. And "collective bargaining" is a euphemism for the slavery of forced membership.

Yes, it is indeed that simple, no matter how nice the union slave-masters try to make it sound.

I propose, and hope, that the Supreme Court issues a broad ruling on the matter, ending the slavery of forced collective bargaining once and for all.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Spain Misses Watered-Down Budget Deficit Targets Yet Again

When you are about to miss budget targets, the easy thing to do is lower the bar, again and again until you can hit them. Spain did just that, and still missed.

Via translation from Libre Mercaado, please consider Spain Misses Budget Deficit Target for 2013.

Treasury announced a deficit of 5.44% of GDP in November, but official data elevate that number to 5.96%. Taking a December shortfall estimate into consideration, the deficit estimate is around 6.9% for 2013.

Economy Minister Luis de Guindos, chose his words are very careful in this regard. Guindos said yesterday that the 2013 deficit would "converge towards the target of 6.5%", through improved tax collection and lower cost of debt (interest payments).

The defict is not the only accounting chicanery. Tax data used to estimate GDP has little or nothing to do with reality.

Accurately stated, the deficit would be around 5.96% of GDP to November, instead of the 5.44% announced by the Treasury, which is a deviation of 0.52% of GDP.

Also remember that until last June, the general government deficit target for 2013 was 4.5% of GDP and not 6.5%. The Government of Mariano Rajoy managed to smooth the path of fiscal consolidation after pressing insistently to Brussels.

In any case, the final deficit figure will not be known, quite possibly until the end of 2014, after the successive and traditional budget and GDP revisions specific to the Spanish authorities, as usual.

For grins, let's take a look at a progression of events in 2013.

March 12, 2013 - Mish: Spain's Budget Deficit Grew by 35.4% in January to 1.2% of GDP; Spain's Tax Revenue Drops 20% in Face of VAT Hikes

Summary

• Spain's budget deficit for the month of January was 0.89% not counting regional deficits.
• The target for the entire year is 3.8% of GDP.
• On that basis, Spain went through 23.42% of its annual budget in a single month.
• Spain's deficit target including regions and transfer payment is 4.5% of GDP.
• The deficit including regions and transfer payments was 1.2% of GDP.
• On that basis, Spain blew 26.67 % of its budget in a single month.
• Territorial government revenues declined 29.1%
• Income Tax revenue (corporate + personal) fell 18.2%
• Social Security payments grew by 40.2%
• Overall transfer payments increased 23.3%

Odds of Success Zero Percent

Odds Spain hits its budget target of 4.5% in 2013 is precisely 0.00%.

In June, after begging Brussels for relief, the target was revised to 6.5% of GDP.

September 16, 2013 - New York Times: Spain's economy minister, Luis de Guindos, said Spain on Track to Meet Budget.

"Spain is on track to meet the 2013 budget deficit target it agreed on with its European Union partners and should emerge from recession before the end of the year," the economy minister said on Monday.

After the financial crisis burst Spain’s construction bubble in 2008, "no doubt 2014 will be the first year when Spain will have some recovery," the minister said.

September 18, 2013 - Mish (commenting on the NYT article): Spain on Track to Meet Budget Targets Says Economy Minister; Data Strongly Suggests Otherwise

How many lies and distortions can one man present in a few short paragraphs?

If by some miracle Spain meets this year's target, it is only because the target changed 4 times in the past two years.

Yet, I still have to ask: how likely is that?

December 5, 2013 - Mish: Spain Raids Social Security Reserve Fund to Meet Deficit Targets

Monetary magic of borrowing money from trust funds allegedly helps Spain come closer to meeting its budget deficit targets reports Eurointelligence.

If Spain meets it budget deficit target this year, it will likely do so by some sort of accounting gimmickry or purposeful under-reporting of regional debt.

Expect the same thing multiple times in 2014, because Spain will have to not only catch up with its 2013 revised deficit shortfalls, but also comply with new rules that likely take away some sleight of hand budget gimmickry.

By the way, it's important to note that 97% of what's left of the reserve fund is invested in Spanish government debt. Think that investment won't ever take a haircut?

And so here we are, with yet another miss of a four times watered down budget deficit target.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

China Manufacturing Back in Contraction, Staffing Declines at Sharpest Pace Since March 2009.

The HSBC China Manufacturing PMI shows China manufacturing is back in contraction, following six months of barely positive growth.

Key points

• Growth of output eases to marginal pace
• Quickest rate of job shedding since March 2009
• Marked falls in input costs and output charge

January data signalled a deterioration of operating conditions in China’s manufacturing sector for the first time in six months. The deterioration of the headline PMI largely reflected weaker expansions of both output and new business over the month. Firms also cut their staffing levels at the quickest pace since March 2009. On the price front, average production costs declined at a marked rate, while firms lowered their output charges for the second successive month.



After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) posted at 49.5 in January, down fractionally from the earlier flash reading of 49.6, and down from 50.5 in December. This signaled the first deterioration of operating conditions in China’s manufacturing sector since July.

Production levels continued to increase in January, extending the current sequence of expansion to six months. However, the rate of growth eased to a marginal pace.

Employment levels at Chinese manufacturers fell for the third consecutive month in January. Moreover, it was the quickest reduction of payroll numbers since March 2009. Job shedding was generally attributed by panelists to the non-replacement of voluntary leavers as well as reduced output requirements. Despite the marked reduction of headcounts, the level of unfinished business at goods producers rose only fractionally over the month.

This is yet another sign of a global slowing economy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

California Students File Constitutional Challenge to Teacher Firing Practices; Unions are the Child Molester's Best Friend

Three cheers for a group of nine California students who are fed up with tenure rules that protect not only incompetent teachers, but also sexual predators.

Reuters reports California students challenge teacher employment rules in lawsuit.

A group of nine California students will challenge employment rules they complain force public schools in the most populous U.S. state to retain low performing teachers, as opening arguments kick off on Monday in a lawsuit over education policy.

The lawsuit seeks to overturn five California statutes that set guidelines for permanent employment, firing and layoff practices for K-12 public school teachers, saying the rules violate the constitutional rights of students by denying them effective teachers.

Among the rules targeted by the lawsuit is one that requires school administrators to either grant or deny tenure status to teachers after the first 18 months of their employment, which they complain causes administrators to hastily give permanent employment to potentially problematic teachers.

"The system is dysfunctional and arbitrary due to these outdated laws that handcuff school administrators from operating in a fashion that protects children and their right to quality education," attorney Theodore Boutrous of the education advocacy group Students Matter said in a media call.

The plaintiffs are also challenging three laws they say make it difficult to fire low-performing tenured teachers by requiring years of documentation, dozens of procedural steps and hundreds of thousands in public funds before a dismissal.

Lastly, the plaintiffs want to abolish the so-called "last-in first-out" statute, which requires administrators to lay off teachers based on reverse seniority.

The group says that the layoff policy disproportionately affects minority and low-income students, who are more likely to have entry-level teachers and poor quality senior teachers assigned to their district.

"When the layoffs come, the more junior teachers are laid off first, which ends up leaving a higher proportion what we call the ‘grossly ineffective' teachers," Boutrous said. "It's really a vicious cycle."

Teachers' Union Response

"We don't think stripping teachers of their workplace professional rights will help students," said California Federation of Teachers President Joshua Pechthalt."

Mish Translation of Teachers' Union Response

1. Teachers first.
2. We don't give a damn about the kids.
3. We protect the incompetents and the molesters alike.
4. Molesters pay dues, kids don't.
5. Those dues pad our pockets.
6. Padding our pockets allows us to bribe legislators for more rules we want.

Testimony Started Monday

The lawsuit was filed by the nonprofit advocacy group Students Matter, which contends education laws are a violation of the Constitution's equal protection guarantee because they do not ensure all students have access to an adequate education.

The LA Times reports Testimony begins in trial over California teachers' job protections.

Arguments begin Monday in a lawsuit challenging the constitutionality of laws that govern California’s teacher tenure rules, seniority policies and the dismissal process -- an overhaul of which could upend controversial job security for instructors.

The lawsuit, filed by the nonprofit advocacy group Students Matter, contends these education laws are a violation of the Constitution's equal protection guarantee because they do not ensure all students have access to an adequate education.

Vergara vs. California, filed on behalf of nine students and their families in Los Angeles County Superior Court, seeks to revamp a dismissal process the plaintiffs say is too costly and time consuming, lengthen the time period for instructors to gain tenure and dismantle the "last hired, first fired" policies that fail to consider teacher effectiveness.

The lawsuit aims to protect the rights of students, teachers and school districts against a "gross disparity" in educational opportunity, lawyers for the plaintiffs said.

Many students — overwhelmingly those who are minority and low-income — are destined to suffer from ineffective and unequal instruction because administrators are unable to remove ineffective teachers from schools, attorneys said.

Students Matter was founded by Silicon Valley entrepreneur David F. Welch, a research scientist who went on to co-found Infinera, a manufacturer of optical telecommunications systems based in Sunnyvale, Calif. The group is partly funded by organizations known for battling teachers unions. The foundation of Los Angeles philanthropist Eli Broad, which has backed numerous education initiatives, also supports it.

Gross Lie of the Day

In the gross lie of the day category, "The California Department of Education contends districts have the opportunity and discretion to remove ineffective teachers from classrooms and decide whether to grant tenure."

In contrast, L.A. schools Supt. John Deasy, is a supporter of the effort to repeal the statutes. He declined to comment because he is a witness in the case.

Lay it on them John!

Unions are the Child Molester's Best Friend

I am quite sure Deasy can testify how hard it is to get rid of incompetent teachers, even child molesters.

If you think I am making this up, sadly, I am not.

I highly recommend reading the LA Times report: Failure Gets a Pass L.A. Unified Pays Teachers Not to Teach.

You can find similar articles about New York, in fact, anywhere unions rule.

Every time I write something like this I get a ton of emails from teachers. Surprisingly, about a third of them are in support of what I say.

In Praise of Teachers

I have said this before and I say it again: I have nothing against teachers. Most of them are dedicated, hard-working professionals.

I do have everything against public unions whose sole mission is to collect dues and coerce legislators into laws written for the union at the expense of the kids.


Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Humorous Reporting Regarding Effect of Tapering on US Treasuries; Robotic "Righting"

I happen to like US treasuries on the basis the economy is slowing much more than anyone thinks.

Short-term, who knows? Certainly not those who intend to call every uptick or downtick as if it's meaningful, especially on days of economic news, like today.

Here is an image that shows what I mean.



I did not stitch that together. The items were back-to-back on a news feed site I follow.

Which is it?

At 2:20 PM Bloomberg reported Treasuries Rise
At 2:20 PM MarketWatch reported Treasuries Fall

Here is another MarketWatch image.



Click on the MarketWatch "Treasuries Fall" link and this is what you see.



Robotic "Righting"

This kind of nonsense happens all the time. Headlines change from Bonds Fall Because of Tapering to Bonds Rise Because of Tapering. Very few notice how ridiculous this reporting is, or how headline stories change 180 degrees in seconds.

May as well have a robot "write" these stories. Perhaps I mean "right" these stories. Or is that what's happening already?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Disgusting Compromise on $956B Farm Bill; In Spite of Massive Howls, No Actual Cuts in Food Stamps

Proving that neither party really wants to do anything about escalating costs of anything, in typical D.C. compromise action, the House Passes $956B Farm Bill in a bipartisan vote.

Speaker John Boehner (R-Ohio), and Majority Leader Eric Cantor (R-Va.), and Minority Leader Nancy Pelosi (D-Calif.) all voted for the bill.

Democrats are howling over miniscule cuts in SNAP (food stamps). For example, an inane headline on the Daily Koz reads House passes food stamp-slashing farm bill.

Supposedly there will be $8.6 billion in devastating food stamp cuts. Even if that happens it is less than a 1% cut in an economy that is supposedly in recovery.

Contrary to Popular Belief, No Cuts in Food Stamps

Will there be any cuts? I rather doubt it. In the "too stupid to make up category", this is how they determined the cuts.

The bill finds $8.6 billion in savings by requiring households to receive at least $20 per year in home heating assistance before they automatically qualify for food stamps, instead of the $1 threshold now in place in some states.

Amazing!

Now what do you think will happen? If you can't figure it out, I will tell you. States will give $20 per year in home heating assistance to everyone currently getting $1 per year in annual home heating assistance.

There will be miniscule (if any) savings at all at the federal level, and small increases at the state level.

Crop Subsidies Preserved

Next consider House passes farm bill, crop subsidies preserved.

After more than two years of partisan squabbles over food and farm policy, the House passed and sent to the Senate Wednesday an almost $100 billion-a-year, compromise farm bill containing a small cut in food stamps and preserving most crop subsidies.

The measure, which the House approved 251-166, had solid backing from the Republican leadership team, even though it makes smaller cuts to food stamps than they would have liked. The bill would cut about $800 million a year from the $80 billion-a-year program, or around 1 percent. The House had sought a 5 percent cut.

The legislation also would continue to heavily subsidize major crops for the nation’s farmers while eliminating some subsidies and shifting them toward more politically defensible insurance programs.

House Agriculture Chairman Frank Lucas, R-Okla., who has been working on the bill since 2011, called the compromise a “miracle” after years of setbacks.

For those seeking reform of farm programs, the legislation would eliminate a $4.5 billion-a-year farm subsidy called direct payments, which are paid to farmers whether they farm or not. But the bill nonetheless would continue to heavily subsidize major crops — corn, soybeans, wheat, rice and cotton — while shifting many of those subsidies toward more politically defensible insurance programs. That means farmers would have to incur losses before they could get a payout.

Miracle Not

It is beyond idiotic to call this do-nothing compromise a "miracle". It's a do-nothing bill for which D.C. is famous.

It would have been a miracle had there been any real cuts.

Actual CBO Estimated Savings

The facts speak for themselves.

In spite of the trumped up $8.6 billion in savings in food stamps and smaller savings on farm subsidies, "The bill would save around $1.65 billion annually overall, according to the Congressional Budget Office."

Assuming the CBO is correct, the actual savings on the bill is $1.65 billion out of $956 billion. In percentage terms (drum roll please) .... the devastating cutbacks amount to 0.17%!

Oh! The Horror!

Republicans and Democrats alike should both be ashamed, not only for doing virtually nothing, but also for howling at the moon as if they did.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

California Water Synopsis: Water Woes Just Beginning or About to End? Good News for California?

Leaving aside religious debates on global warming, UC Berkeley professor B. Lynn Ingram says California water woes could be just beginning.

As 2013 came to a close, the media dutifully reported that the year had been the driest in California since records began to be kept in the 1840s. UC Berkeley paleoclimatologist B. Lynn Ingram didn’t think the news stories captured the seriousness of the situation.

“This could potentially be the driest water year in 500 years,” says Ingram, a professor of earth and planetary science and geography.

“These extremely dry years are very rare,” she says.

But soon, perhaps, they won’t be as rare as they used to be. The state is facing its third drought year in a row, and Ingram wouldn’t be surprised if that dry stretch continues.

The NewsCenter spoke to Ingram about the lessons to be drawn from her research as California heads into what could be its worst drought in half a millennium.

Q: California is in its third dry year in a row. How long could that continue?

A: If you go back thousands of years, you see that droughts can go on for years if not decades, and there were some dry periods that lasted over a century, like during the Medieval period and the middle Holocene. The 20th century was unusually mild here, in the sense that the droughts weren’t as severe as in the past. It was a wetter century, and a lot of our development has been based on that.

The late 1930s to the early 1950s were when a lot of our dams and aqueducts were built, and those were wetter decades. I think there’s an assumption that we’ll go back to that, and that’s not necessarily the case. We might be heading into a drier period now. It’s hard for us to predict, but that’s a possibility, especially with global warming.

Magic Words

With that, Ingram, just mentioned the unmagic words "global warming". Is that a contrary indicator?

Perhaps.

Here is another one: Ingram is the author of The West without Water What Past Floods, Droughts, and Other Climatic Clues Tell Us about Tomorrow.

Typically, such books mark extreme sentiment and the end of such trends. 

Hundred Years of Dry

Want a third contrary indicator?

If so, I have one: Ecocentric, "all things green from capital hill" reports Hundred Years of Dry: How California’s Drought Could Get Much, Much Worse.

Good News Coming?

I delayed commenting on the California water crisis recently, rather expecting something like this January 28, 2014 report: El Nino May Return as Models Signal Warming of Pacific Ocean.

An El Nino weather pattern, which can parch Australia and parts of Asia while bringing rains to South America, may occur in the coming months as the Pacific Ocean warms, according to Australia’s Bureau of Meteorology.

Most climate models suggest the tropical Pacific will warm through the southern autumn and winter, the bureau said in a statement today. Some models predict this warming may approach El Nino thresholds by early winter, it said. Australia’s autumn runs from March to May and winter is from June to August.

El Ninos, which are caused by the warming of the Pacific, affect weather worldwide and can roil agricultural markets as farmers contend with drought or too much rain. An El Nino trend is likely to develop this year, Gavin Schmidt, deputy director of NASA’s Goddard Institute for Space Studies in New York, said this month. It’s been almost five years since the last event, which typically occurs every two to seven years, according to Indonesia’s Meteorological, Climatology and Geophysics Agency.

“Less spring rainfall for the east coast would be the major concern” for Australia, said Paul Deane, an analyst at Australia & New Zealand Banking Group Ltd. in Melbourne. “It increases the chance that we’re not going to get trend wheat yields, that would be one of the risks. The other one would be on livestock, where you’d have lower pasture growth.”

OK But What About California?

That's a good question.

Wikipedia has this to say about El Niño conditions in North America.

"Winters, during the El Niño effect, are warmer and drier than average in the Northwest, northern Midwest, and northern Mideast United States, so those regions experience reduced snowfalls. Meanwhile, significantly wetter winters are present in northwest Mexico and the southwest United States, including central and southern California, while both cooler and wetter than average winters in northeast Mexico and the southeast United States."

Personally Speaking

Living in Illinois, Northwest of Chicago, I certainly can use less snow and less cold. We have had numerous days of negative temperatures this month, coupled with plenty of snow.

Enough!

Global Warning

My global "warning" about global "warming" follows.

Cyclically-speaking, I tend to believe another El Niño effect is on the way. If so, it will bring relief to Southern California.

Thus, short-term I suspect Lynn Ingram is off the mark. Books and hysteria mark tops and bottoms. Besides, we have strongly presented viewpoints about pending cyclical changes.

However, Ingram could easily be correct on a long-term basis.

Either way, none of this has anything to do with global warming. For a detailed explanation, please see Europe Dumps Global Warming Efforts; Good Idea?

Addendum:

The California Weather Blog has an interesting article some inquiring minds may wish to read: Ridiculously Resilient Ridge continues to shatter records, but pattern shift may be approaching

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Give America a Raise: Fire Obama, Eliminate the Fed; State of the Union Sap

In one of the sappiest, platitude-ridden state of the union addresses in history, president Obama said "Give America a Raise".

I agree with the idea, not the implementation. President Obama pledged an Executive Order requiring federal contractors to pay their federally-funded employees a fair wage of at least $10.10 an hour "because if you cook our troops’ meals or wash their dishes, you shouldn’t have to live in poverty."

Obama stated "Today, the federal minimum wage is worth about twenty percent less than it was when Ronald Reagan first stood here."

While true, not once did Obama even hint at the source of the problem: Real wages have declined because government spends more than it takes in, and the Fed is happy to oblige by forcing interest rates lower, allowing just that.

Rather than fight the real problem, Obama wants to attack the symptom: falling real wages. Mathematically his proposed solution cannot possibly work.

The president even wants to expand on what clearly doesn't work, dragging Senator Mario Rubio into the picture.

"I agree with Republicans like Senator Rubio that it doesn’t do enough for single workers who don’t have kids. So let’s work together to strengthen the credit, reward work, and help more Americans get ahead," said Obama.

Regarding the right to vote, Obama stated, "It should be the power of our vote, not the size of our bank account, that drives our democracy."

On that, I could hardly agree more. So let's have genuine campaign finance reform, for both parties, including union sponsorship of candidates.

Given that no one in either party wants that, it won't happen. Is it any wonder that for the first time in history, a majority of people in congress are millionaires!

Regarding terrorist activities, Obama stated "We are clear-eyed about Iran’s support for terrorist organizations like Hezbollah."

OK so where the hell are the prosecutions for Money Laundering, and Outright Criminal Activity by major banks?

In the sappiest part of his speech, president Obama referred to Sergeant First Class Cory Remsburg, who on his tenth deployment, was nearly killed by a massive roadside bomb in Afghanistan.

I have nothing against those serving this country. However, I do have something against those who put our armed forces in harm's way for no good reason at all.

Instead of praising Cory Remsburg, president Obama should have admitted he personally, and needlessly, put Remsburg's life in jeopardy on a fool's mission.

Sap and Platitudes

As sappy as all that was (and it was the sappiest state of the union address ever), the official republican response was even worse. Here is full text of the Republican response to State of the Union.

Not only did Representative Cathy McMorris Rodgers praise Cory Remsburg, she offered the same tired, far-right platitudes bound to please the extreme-right, religious-wrong voters, while offending the crucial political independents.

Republicans desperately need to throw warmongering and right-to-life policies in the gutter for more pragmatic approaches.

Instead, Cathy McMorris Rodgers waved them in our face with subtleties regarding her child's Down Syndrome.

If this was in response to Obama's platitude "women make up about half our workforce, but they still make 77 cents for every dollar a man earns". It was a serious mistake.

Four Key Hints

1. The conservative political base will never vote Democratic, so there is no need to appease them.
2. The critical battleground is moderates and independents
3. The middle and independents support abortion
4. The middle and independents want to reduce military spending

I commend Rodgers for her care, but not everyone has the means to do anything other than dump their kids into the system or choose an abortion upfront.

As an independent ready and willing to criticize both political parties, Rodgers response was far worse than Obama's sap and platitudes delivery.

The saving grace is few bothered to watch it. At least I hope so.

Addendum:

My friend Adam Taggart at Peak Prosperity wrote an equally scathing, yet widely different attack on Obama's state of the union speech. I highly recommend "The Government Comes Up With The Money" A mindset that's killing our economy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Hollande Plays "Mother May I"; Mish's 5 Giant Scissor Steps Proposal; Foreign Investment in France Falls 77%

With bloated labor costs, pension requirements, labor rules, strikes, CEOs held hostage (literally), and overall union inefficiencies, it's no wonder Foreign Investment in France Fell 77% in 2013.

Releasing its first estimates for 2013 Tuesday, the United Nations Conference on Trade and Development said that while foreign investment in the European Union increased from 2012, inflows to France fell by 77% to $5.7 billion, extending a decline that began with the 2008 financial crisis and was briefly interrupted in 2011. Foreign investment was last lower in 1987, and as recently as 2007, it peaked at $96 billion.

By contrast, foreign investment in Germany almost quadrupled to $32.3 billion, while in Spain it rose by 37% to $37.1 billion. Foreign investment in Italy, Belgium, the Netherlands and Ireland also rose.

Seeking to revive growth, Mr. Hollande earlier this month launched a "responsibility pact," which includes cuts to chronically high payroll taxes, seeking to repair relations with France's business community, which has voiced anger about climbing costs and alarm that it is losing ground to Germany.

Responsibility Pact Short Synopsis

• Corporations need to hire more workers
• If corporations hire more workers, Hollande will consider cutting taxes
• Hollande will monitor companies that add workers
• Hollande will pressure companies that don't

Mother May I?

No business in its right mind would accept that proposal.

In the "Mother May I" game that Hollande appears to be playing, the best one can say is Hollande granted corporations a baby step in the right direction (yet coupled with "no you may not" restrictions).

What's really needed is a vast array of giant scissor steps.

Mish's Five Giant Scissor Steps Proposal

1. Eliminate rules that prohibit firing
2. Raise the pension age
3. Lower corporate taxes
4. Lower individual taxes
5. Eliminate union work rules

Unfortunately, that's just a start of the scissor actions needed.

Please recall French government spending accounts for 56% of French GDP, highest in the EU. Unfortunately, France Minister of Industrial renewal has pledged to make matters worse (see France Minister of Industrial Renewal has New Target in his Sights).

Regarding my opening comment on CEOs held hostage (literally), here's something from earlier this month that I have not commented on: French workers hold Goodyear execs hostage. A day later, Bloomberg commented In France, Kidnapping the Boss Usually Pays Off.

I see these kinds of stories every day. It is difficult if not impossible to keep up with economic idiocies in France. I even have my own personal stories to report.

• December 24, 2013: Lawyer Advises Me "Don't Go to France"
• January 20, 2014: Mish French Fine Update

Looking for a roundup of economic ineptitude in France?

I just happen to have 24 examples from 2013 alone: France in Review: Perfect Track Record of Economic Ineptitude.

Rest assured the above 24-point list is woefully incomplete. Apologies offered.

Hollande Off and Running

Hollande has a fresh start in 2014. How is he doing? Please consider France Unemployment Hits New Record High; Hollande's November Pledge Reviewed.

Finally, France is a major focus of my European deflation thesis as described in Deflation Will Return: Europe First, Then US; Global Supply Arbitrage.

Looking for a global economic outlook? If so, please read the above link.

All things considered, France was lucky foreign direct investment only declined 77%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Tactical Rabbit, Money Laundering, and Outright Criminal Activity by Major Banks

An interesting Video Interview With Whistleblower Everett Stern just came my way.

In case you don't recognize the name, Stern disclosed the money laundering activities of HSBC, for which the bank was fined $1.9 billion. Chump change says Stern, who claims he was placed in the fraud detection unit (along with everyone else) precisely because they knew nothing about money laundering.

So how did Stern catch the activity? He read a couple of books and a few weeks later discovered money laundering activity, lots of it.

Moreover, Stern had proof it was purposeful, organized fraud as opposed to transactions just slipping through the cracks.

Partial Transcript

Here is a key snip of the transcript and interview of Everett Stern by Sophie Shevardnadze.

SS: But, technically, how did you detect it technically? How does it happen? How did you detect suspicious transaction that could be linked to terrorism or drug cartels?

ES: It was so obvious. It’s because I have two brain cells in my brain and can do simple internet Google searches. This was not rocket science. For instance OFEC has a list of companies that the US cannot do business with, an OFEC sanction list, and so, for instance, Caribe Supermarkets, Tajco, the Tajideen Brothers, which were all linked to Hezbollah. Caribe Supermarkets is a supermarket chain based out in Gambia, and they are owned by Tajco, which is owned by Tajideen Brothers, which are based out in Beirut, and are financiers of Hezbollah. There were transactions going through HSBC and I saw it.

ES: What’s interesting is that it’s not that it was hard to find the transactions, it was very easy. The real disturbing part is how they were doing it because these transactions, that were supposed to be stopped in the wire filter, were actually going through. They were going through because what HSBC employees were doing was adding dots and dashes and different numeric codings to the actual payments. The FBI later called it “stripping the payments”. So the computer system…there wasn’t a match with the transactions and they would go through. It was just blatantly obvious what they were doing, it just took me I guess just little extra effort to see how they were criminally allowing the terrorist funds to go through.

Mish Comment: No one went to jail over this. I am not even aware that anyone was criminally charged. Here is another snip to consider. Subsequent emphasis in italics is mine.

SS: If we abstract from the HSBC case, who is ultimately in charge of preventing money laundering in the US? Are they doing their job or does it have to be individuals like you who would actually step up?

ES: The Department of Justice is not doing their job. Eric Holder specifically said during Senate hearings that prosecuting these banks criminally could cause a financial crisis. My argument to Eric Holder is that if we allow this terrorist financing to continue, and then the next 9/11 gets financed, I guarantee the next 9/11 will cause a financial crisis. What’s happening now is that these bankers and management of large banks such as JP Morgan, HSBC – they’re not being criminally accountable, so they can do whatever they want and they’ll just be fined. HSBC was fined $1.9 billion, which seems like a lot of money, but that’s actually only five weeks’ profit for them and their stock actually went up when the announcement came out. It’s really disgusting that the Department of Justice is not doing their job. If I were to donate $1 to Hamas or Hezbollah I would go to jail for life, and yet they’re donating billions and that’s okay. It doesn’t make any sense.

SS: You’re saying that no one was held responsible or criminally charged, the FBI and the CIA didn’t really follow up this case that you presented to them, governments are afraid to criminally prosecute banks like HSBC because of reasons linked to economic crisis – so could it be that they are complicit?

ES: Yeah. Believe me, I’m banging my head against the wall with this one. I have risked everything and tried my hardest to get these people in jail. Right now the former managers that were my bosses who were subsequently fired from HSBC are now the heads. One of them is the head of compliance for TD bank, the other one is the head for the Chinese bank. There’s no consequence there, these people are still doing the same thing in multiple organizations and that’s not what America is about and that’s not what justice is about.  

SS: So it seems like a country that’s fighting a War on Terror is also financing it at the same time.

ES: Yes.

SS: I’ve read that this whole case with HSBC left you emotionally drained, financially devastated. How are you now? How are you doing?

ES: I’m doing great; I’ve started my own company, Tactical Rabbit, which is an intelligence company. We became profitable five months ago, but it was extremely hard. I was working at PF Chang’s restaurant as a waiter after I left HSBC, because I had no money, I had nothing left, and I literately walked into PF Chang’s with the Rolling Stone article when I was featured in Rolling Stone, and I said to them “Look, I’m a whistleblower and I can’t get work. I need a job, I never waited tables before. I’ll do a good job for you guys,” and they hired me. They said “Look, we’ll give you a chance,” and I took all of that PF Chang’s money and I put it into Tactical Rabbit and that’s how I launched this very, very successful company now. We’re going to be a multimillion dollar company.

Mish Thoughts

Congratulations to Everett Stern who ought to sue HSBC and the justice department as well for his share of the money laundering fine collected.

More importantly, the justice department ought to start criminal prosecution of anyone adding dots and dashes i.e. “stripping the payments”.

How high up would this go if those at the bottom of the rung were given reduced sentences for implicating those above them? I suspect nearly to the top, if not the top.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Credit Equals Gold No.1

Interesting details have emerged regarding the Chinese trust fund that was on the verge of default a few days ago. In fitting irony, the name of the fund is Credit Equals Gold No.1.

On January 15, Reuters reported China's ICBC says won't compensate investors in troubled shadow bank product.

"Industrial and Commercial Bank of China, the world's largest bank by assets, said on Thursday that it has no plans to use its own money to repay investors in a troubled off-balance-sheet investment product that it helped to market."

Investors should have taken a hit. Certainly the promised 10% yield was too good to be true. Heck, the name of the product itself was a likely indication of trouble.

Tough Luck?

Yesterday morning, the South China Morning Post commented It's tough, but China must let trust company products fail.

The 700 investors in China's "Credit Equals Gold No1 Trust" are hoping that Industrial and Commercial Bank of China will bail them out.

Unfortunately, what would be good for individual investors would be very bad for China's financial system as a whole. It's harsh, but the troubled 3 billion yuan (HK$3.85 billion) investment scheme should be allowed to fail.

Come the end of the month, the Credit Equals Gold1 product was supposed to mature, returning investors their capital plus a 10 per cent yield.

That's not now going to happen. China Credit Trust, which structured the product, has warned it will have difficulty making its payout.

Meanwhile, the coal miner whose loans underpinned the scheme has ceased production after its vice-chairman was arrested for taking deposits without a banking license.

Failed Trusts
 
Did you catch the error in the headline "China must let trust products fail"?

It's not a question of "letting the trust fail". The trust did fail. The assets backing the trust failed. The question at hand is not failure of the trust, but whether or not losses would be recognized.

Without a bailout investors would have taken huge losses, and most likely totally wiped out.

Moral Hazard Bailout in Progress

Later yesterday a decision to do the wrong thing was made. Where the money came from is uncertain, but the bottom line isn't ICBC Offers Clients Option to Recoup Funds From Trust.

Industrial & Commercial Bank of China Ltd. said investors in a troubled high-yield trust can recoup their funds, averting a threatened default that underscored concern over the shadow-banking system and helped spur a selloff in emerging-market currencies and stocks.

Rights in the 3 billion-yuan ($496 million) product issued by China Credit Trust Co. can be sold to unidentified buyers at a price equal to the value of the principal invested, according to one investor who cited an offer presented by ICBC and asked to be identified only by his surname Chen. China Credit Trust earlier said it reached an agreement for a potential investment and asked clients of ICBC, China’s biggest bank, to contact their financial advisers.

Getting it Wrong

“A default was bound to lead to systemic risks that China is unable to cope with, so in that sense a bailout is a positive step to stabilize the market,” said Xu Gao, the Beijing-based chief economist at Everbright Securities Co. Still, implicit guarantees distort the market and “delaying the first default means risks are snowballing,” he said.

Bubblicious Questions

Bailouts and guarantees (implicit or explicit), coupled with loose money and manipulated interest rates are what causes these credit bubbles in the first place.

Bailouts do nothing but encourage more of the same moral hazard investment behavior, all but ensuring still bigger bailouts down the road.

There is an enormous credit bubble in China, guaranteed to come crashing down.

Mystery Money

The Financial Times reports China trust deal raises thorny questions.

For global markets, the troubled product became emblematic of the risks that have built up in China’s growing shadow banking sector. Non-bank institutions such as trusts now play a crucial role in providing funds to companies deemed too risky by regulators to borrow from the country’s banks. Financing outside the formal banking system accounted for more than a third of the Rmb17tn total new credit issued in 2013.

With roughly Rmb4tn ($661bn) in trusts maturing this year amid tight monetary conditions, many expect more repayment problems. “The market already perceives a higher risk and is in the process of pricing higher risk,” says Wang Tao, an economist with UBS.

In the case of Credit Equals Gold No. 1, ICBC clients invested a total of Rmb3bn in a product sold by China Credit Trust, one of the country’s biggest “shadow banks”. The product, a mere sliver of China’s $1.2tn trust market, was underpinned entirely by loans to and equity in coal miner Shanxi Zhenfu Energy Group. It was a rotten investment: the price of coal plummeted and Zhenfu collapsed under the weight of heavy debts.

Nevertheless, on Monday, four days before the product matured, ICBC told investors a deal had been reached that would allow them to recoup their full principal, although they would miss out on about a quarter of the interest they had expected to earn.

There was little detail about where the money came from, but Chinese media have reported in recent days that a bailout was likely to involve ICBC, China Credit and the local government.

The last-minute rescue raises a thorny question for the future of the Chinese economy. Has the deal confirmed the widespread belief that the government will do whatever it can to stave off trouble, hence fuelling more risk-taking? Or has the near-default taught investors that high yields come with high risks?

Bubblicious Refresher Course

Shen Jianguang, an analyst with Mizuho Securities commented "This will help regulators push through these rules. It teaches everyone a lesson about the expansion of shadow banking"

Shen is completely wrong.

It's not the lack of regulations that caused this mess. It is central bank manipulation of money and interest rates that fostered shadow banking schemes.

Indeed there is little difference between the credit bubble in China, and the housing and credit bubbles in the US that blew sky high in 2008 and 2009.

Shen Jianguang seriously needs a Bubblicious Refresher Course: What Causes Economic Bubbles? When Do Bubbles Burst? Can the Fed Prevent Bubbles?

Credit is Never Gold

The Financial Times noted that investors were not happy to get their money back. "This is a war of attrition. We have gained the biggest mountain and now we must attack and seize the smaller hills," says one Shanghai-based investor who declined to give his name.

Good grief.

Investors in a coal mine that does not even exist (and won't due to plunging price of coal) ought to lose everything.

Credit implies risk. There is no such thing as a 10% risk-free investment. The higher the promise, the greater the risk.

Don't Want Credit Risk?

Looking for something with no credit risk? Then buy physical gold and hold it.

There is a risk of decline in the purchasing power of gold as the plunge from over $1900 an ounce to under $1200 an ounce shows, but there is no risk of default.

Start of a Global Currency Crisis?

With every passing day, odds of global currency crisis increase. Emerging markets, Latin America, Japan, Europe, and China are all in the mix.

For further discussion, please see Start of a Global Currency Crisis?

Looking for something that's not in the mix? Buy gold. 

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

China's Fake Export Numbers Under Close Scrutiny

China's export numbers are so unbelievable that even mainstream media doesn't believe them. Bloomberg has the story correct, but its title could use a bit more punch.

Please consider China Trade Puzzle Revived as Hong Kong Data Diverge

China’s trade numbers, distorted by fake exports last year, are set to come under renewed scrutiny after a discrepancy between Hong Kong and Chinese figures for bilateral trade widened to the largest in eight months.

Hong Kong’s December imports from China fell 1.9 percent from a year earlier to HK$176 billion ($22.7 billion), the city’s statistics department said yesterday. That compares with $38.5 billion in exports to Hong Kong reported earlier this month by China’s customs administration, up 2.3 percent, based on data compiled by Bloomberg.

Economists split on how to interpret the latest numbers, which follow reports earlier last year that invoices for fake exports were used to disguise capital inflows, inflating China’s trade data before regulators in May cracked down on the practice. Exaggerated overseas shipments would mean that global demand is weaker than China’s statistics indicate.

“From the last few months’ data, we have seen hints that some Chinese exports are fake and in fact that reflects hot money inflows,” said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong.

China’s exports to Hong Kong in December exceeded the city’s reported imports from the mainland by about 70 percent, the biggest difference since April.

Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said the gap between China’s reported increase in exports to Hong Kong and the city’s reported decline in imports isn’t big enough to raise any red flags when compared to the difference earlier in 2013.

That’s because China records exports when goods leave, while Hong Kong waits 14 days after items arrive in port to record them as imports, Shen said.

Round Tripping

Another possible explanation for the discrepancy is “round tripping” of goods that are exported from China to Hong Kong and then back to the mainland, Australia & New Zealand Banking Group Ltd. said in a report yesterday.

“The round-tripping trade has become an avenue to fuel China’s capital inflows,” as the current account may have been “improperly used as an alternative way of liquidity injection,” economists Liu Li-Gang and Raymond Yeung wrote. The gap in interest rates fuels the practice and policy makers in China and Hong Kong “need to closely watch the potential risks such activities present to the financial system.”

Place your bets. But I suggest no data from China is likely to be very reliable, especially export and GDP numbers.

Moreover, if export numbers are inflated, then GDP numbers are inflated by definition.

Of course, GDP is already overinflated for two other reasons:

1. GDP is not adjusted for various shadow banking schemes and other malinvestments that will eventually be written off.
2. GDP is not adjusted for massive amounts of air and water pollution that will at some point have to be cleaned up. 

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

Europe Dumps Global Warming Efforts; Good Idea?

Regarding the religious debate over global warming, I am pleased to report Green Fade-Out: Europe to Ditch Climate Protection Goals.

The EU's reputation as a model of environmental responsibility may soon be history. The European Commission wants to forgo ambitious climate protection goals and pave the way for fracking -- jeopardizing Germany's touted energy revolution in the process.

The climate between Brussels and Berlin is polluted, something European Commission officials attribute, among other things, to the "reckless" way German Chancellor Angela Merkel blocked stricter exhaust emissions during her re-election campaign to placate domestic automotive manufacturers like Daimler and BMW. This kind of blatant self-interest, officials complained at the time, is poisoning the climate.

At the request of Commission President José Manuel Barroso, EU member states are no longer to receive specific guidelines for the development of renewable energy. The stated aim of increasing the share of green energy across the EU to up to 27 percent will hold. But how seriously countries tackle this project will no longer be regulated within the plan. As of 2020 at the latest -- when the current commitment to further increase the share of green energy expires -- climate protection in the EU will apparently be pursued on a voluntary basis.

Global Warming Hysteria

I am certainly not against improving the quality of the air we breathe.

Without a doubt, China needs a massive breath of fresh air and a flood of unpolluted water as well. So do emerging market countries in general.

Rather, I am against carbon trading schemes, taxpayer funding of green energy, and other silliness based on global warming hysteria.

• In contrast to what the global warming advocates have predicted, a UN report shows the Earth has cooled for 15 years.  
• In spite of hysteria over the melting of ice caps that theoretically would put the entire state of Florida underwater, Antarctic ice has been growing for decades, reaching a 35-year high in 2013.
• Humorously, a research ship attempting to prove global warming got trapped in unusually thick ice this January and had to be rescued by icebreakers.

Does any of that matter? Realistically, not one bit. More importantly, it does not matter one bit if the earth has been warming for the previous 100 years.

The simple facts of the matter are as follows:

1. The earth has gone through periods of cooling and warming that have lasted tens of thousands of years.
2. Random fluctuations in nature, lasting decades or longer happen all the time.
3. It is preposterous to make any kind of realistic assessment regarding the last 100 years or even the last 1000 years.
4. Even if it was possible to make a realistic assessment as to what is happening and why, carbon trading schemes and taxpayer subsidies are a ridiculous way to solve the problem.

Gratefully, Europe appears to be abandoning the mass hysteria. It's probably the only smart thing European Commission president José Manuel Barroso has ever done while in that role.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com