Saturday, March 31, 2012

Spiegel Says "Even a 1-Trillion Euro Firewall Wouldn't Be Enough"; Mish Says "The Bigger the Bazooka, the More Money Will be Lost"

Eurozone bureaucrats keep upping the ante as to how big a "firewall" is needed. And at every critical juncture, German Chancellor Angela Merkel has proven she is nothing but a liar. With every demand for additional firepower, comes an inevitable cave-in from Merkel supporting the move, no matter what she says in advance.

Meanwhile, the entire idea that firewalls can accomplish anything is ludicrous, given the key point that currency unions in the absence of fiscal unions cannot and will not work.

I suspect Merkel understands this, merely wanting to get Germany so deep into bailouts step by step, that it will be reluctant to leave the Eurozone.

It is high time the German Supreme court step in and stop this nonsense.

However, nothing can stop Greece, Portugal, and Spain from leaving, and eventually they will. In the meantime, rest assured that every increase in firepower will be additional money of German citizens' pockets. The end-game will be a currency or banking crisis at the worst possible time.

For now, please consider 'Even a 1-Trillion Euro Firewall Wouldn't Be Enough'
European finance ministers meeting in Copenhagen on Friday agreed to boost the euro-zone firewall to over 800 billion euros. The move marks another U-turn on the part of the Merkel administration, which recently dropped its opposition to increasing the fund. German commentators warn that even the new firewall may still be too small.

German Chancellor Angela Merkel and her finance minister, Wolfgang Schäuble, have been accused of crossing many of the "red lines" that they have set for themselves over the course of the euro crisis, making U-turn after U-turn as the crisis escalated. They officially stepped over the latest red line on Friday, when European Union finance ministers meeting in Copenhagen agreed to boost the scope of the euro zone's firewall to over €800 billion ($1 trillion). Berlin had long rejected such an expansion out of hand.

The Nuclear Option

On Thursday evening, in the run-up to Friday's summit, German Finance Minister Wolfgang Schäuble had said he was prepared to combine the existing bailouts with the new permanent mechanism. He said that the €800 billion capacity was "convincing" and "sufficient."
But not everyone shares his view that the sum is enough. On Thursday, French Finance Minister François Baroin called for the permanent euro bailout fund to be increased to €1 trillion, to shore up market confidence and prevent contagion in the euro crisis. "The firewall, it's a little like the nuclear option in military planning, it's there for dissuasion, not to be used," Baroin said in a radio interview.

'Shifting Sand Dunes'

Opposition parties in Germany were quick to make political capital out of the Merkel administration's many U-turns during a debate on the euro rescue fund and the European fiscal pact in the German parliament, the Bundestag, on Thursday. "Your red lines have, in reality, become shifting sand dunes," Frank-Walter Steinmeier, floor leader for the center-left Social Democratic Party (SPD), said to widespread applause.

In December, Merkel argued, entirely convincingly, that boosting the euro bailout fund was the wrong course to take. After all, she said, it would reduce the pressure on crisis-stricken states to push through reforms. There was also the question of whether the creditor countries, including Germany, were in danger of being overwhelmed by ever-higher guarantees." "Now, the fund is indeed being expanded, and the coalition government's former concerns have suddenly disappeared. Instead, the administration is attempting to conceal its own U-turn with highly flawed arguments.

The left-leaning Die Tageszeitung focuses on the calls to boost the ESM to €1 trillion:

"One trillion euros is a lot of money, and yet even this huge sum will not be enough. But again, that's nothing new. For months, calculations have been doing the rounds that show that at least €1.5 trillion will be needed. The only interesting question left is how long it will take France and Germany to acknowledge this reality."
No Amount is Enough

For reasons noted at the top, no amount of money (that can reasonably be provided) would be sufficient. After all, there is a limit to what German citizens and taxpayers can stand. Besides, money alone cannot fix structural problems.

Finally, the "nuclear" option is nothing more than former US treasury Hank Paulson's "Bazooka" theory in disguise.

Bazooka Theory vs. Actual Results

"If you have a bazooka in your pocket and people know it, you probably won't have to use it." Paulson said at a Senate Banking Committee hearing. The reference was in regards to Fannie Mae and Freddie Mac.

Paulson believed that if he had the power to bailout Fannie Mae, the market would react to that possibility and no bailout would be necessary.

Now taxpayers have wasted close to $200 billion bailing out Fannie and Freddie bondholders (mainly PIMCO and foreign banks).

Flashback February 12, 2010: EU Leaders Deploy ‘Bazooka’ to Repel Attack on Greece
German Chancellor Angela Merkel and her counterparts yesterday pledged “determined and coordinated action” to support Greece’s efforts to regain control of its finances. They stopped short of providing taxpayers’ money or diluting their own demands for the country to cut the European Union’s biggest budget deficit.

“It’s like Paulson’s bazooka,” said Nielsen, Goldman Sachs’s chief European economist in London. “It’s a difficult balancing act -- saying something comforting to the market without committing money and hoping the market will take their word for it.”

After a three-month long plunge in Greece’s bonds amid speculation it was facing the threat of default, euro-region leaders yesterday ordered the country to slash its budget deficit and warned investors they would be willing to defend the country from speculative attack if necessary.

“This is not money for free,” said Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro-area finance ministers. “This is a strong commitment imposed on Greece.”
How Well Did That Idiotic Bazooka Move Work Out?

Bazooka theory does not work, nor did threats to investors that the ECB and EMU would be willing to defend the country from speculative attack if necessary.

The same holds true today. The Bigger the Bazooka, the More Money Will be Lost.

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

Friday, March 30, 2012

Violence, Firebombings Erupt as Spain Announces €27 Billion Deficit-Cutting Plan; Spanish Economy Will Implode; Spain Headed for Bond Revolt and Bailouts

My friend Bran who lives in Spain writes ...
Hello Mish

Here are thoughts from the last couple of days on the strikes, protests, and violence in the wake of more austerity plans by Prime Minister Mariano Rajoy.

Pro-government news played down the strike to a virtual non-event, giving much criticism of the unions methods and exaggerations. Reality however, is that there is enough support by strikers to shape future politics, especially as austerity starts to bite.

The unions have promised to step up protests. The Indignado 15 Million Movement also protested, but separately from the unions.

One comment stuck out - German Chancellor Angela Merkel said the protests did not represent Spain. Maybe she was trying to be reassuring, but she is taking sides against maybe a million or so people of a foreign population, not very wise at best and otherwise agitating.
Spain Announces €27 Billion Deficit-Cutting Plan

MarketWatch reports Spain Announces €27 Billion Deficit-Cutting Plan
The Spanish government on Friday delivered what it called the biggest fiscal adjustment in the country’s democratic history, unveiling a 27 billion euro ($36 billion) deficit-reduction plan that includes sharp spending cuts across government ministries and higher taxes for corporations.

With images of nationwide demonstrations and strikes against labor reforms still fresh, the weight of the budget appeared to fall on big companies and government spending. Labor unions said nearly 1 million took part in Madrid’s rally alone Thursday evening.

Corporations will be asked to pay higher taxes this year, and their tax breaks will be reduced while the government said value-added-taxes would not rise. It said tax receipts for VAT would fall 2.6% as a result of weak growth in Spain.

Budget Minister Cristobal Montoro said all ministries would need to reduce their budgets by around 17% this year, which was slightly higher than expected, saving a total of up to €65.8 billion. Salaries for public workers will not be reduced, but will be frozen this year.

Electricity prices will rise 7%, to pay off a €24 billion electricity-tariff deficit that accumulated due to the difference between consumer prices set by the state and producer’s costs. Tariffs paid by electricity companies will rise 5%.
Austerity Measures Prompt Spanish Workers To Strike

NPR reports Austerity Measures Prompt Spanish Workers To Strike
Workers walked off the job in Spain on Thursday, halting public transport, closing schools and leaving hospitals with emergency staff only. The general strike was called by unions in response to the conservative government's labor reforms, which let companies opt out of collective bargaining agreements and fire workers more cheaply. But more punishing austerity could still be to come, as Spain tries to whittle down its budget deficit under pressure from Brussels.
Violence Erupts in Spanish Strikes

The Washington Post has a nice 19-image slideshow Violence Erupts in Spanish Strikes. Here are a few images.



March 29, 2012
A demonstrator throws stones next to a burning Starbucks, which was stormed by demonstrators during clashes with police at the general strike in Barcelona. Spanish workers livid over labor reforms they see as flagrantly pro-business staged a nationwide strike Thursday and tried to bring the country to a halt by blocking traffic, closing factories and clashing with police in rowdy demonstrations.
Emilio Morenatti / AP



March 29, 2012
People attend a demonstration in Valencia, Spain, during a national strike.
Jose Jordan / AFP/Getty Images



March 29, 2012
A woman cries after demonstrators smashed a shop window during heavy clashes with police during a 24-hour strike in Barcelona.
David Ramos / Getty Images

Eurozone crisis live: Violence in Barcelona Amid Spanish General Strike

The Guardian has numerous images and videos in its report Eurozone crisis live: Violence in Barcelona Amid Spanish General Strike



Protesters crowd in Madrid's landmark Puerta del Sol square for a closing rally tonight. Photograph: Paul Hanna/Reuters

As many as 900,000 people took part in the march to Madrid's centre square, Puerta del So.

Spanish Economy Will Implode

Labor reforms are badly needed but electricity price hikes of 7%, higher corporate taxes, increased VAT and other tax hikes are not. Spain needs more time not more tax hikes. With unemployment rate already at 23.3% austerity measures are guaranteed to make matter worse, and tax hikes on top of it all will be the nail in the coffin.

Prime Minister Rajoy forecasts the Spanish economy will contract 1.7% and government GDP targets and budgets are based on that. I bet that 3% contraction minimum is in the works if Rajoy enacts the tax hikes and austerity measures as planned.

Things will be much worse if the violence and strikes stay in an elevated state. Unlike the protests a year ago, these strikes have more serious overtones.

Spain Headed for Bond Revolt and Bailouts

The idea that Rajoy will cut the deficit to 5.3% this year and 3% next year are purely Fantasyland proposals.

For now, the bond market has given Rajoy the benefit of the doubt, assuming you call 5.35% on the 10-year bond any kind of "benefit". With the suspension of the LTRO, and a budget targets that cannot possibly be met, look for a substantial move up in Spanish bond yields.

That will also punish any Spanish banks foolish enough to load up on bonds in a misguided carry-trade play. With Spain, nearly everything is worse than the government reports, and the reports are awful.

A bond market revolt and bailout are in the cards this year. Ultimately, Spain will not survive in the Eurozone.

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

Canada Eliminates The Penny

In a welcome, albeit long overdue attack of common sense, Canada Eliminates Penny Costing Penny-and-a-Half to Make.
Canada will withdraw the penny from circulation this year, saving taxpayers about C$11 million ($11 million) annually and forcing retailers to round prices to the nearest nickel, the government announced in its budget today.

The Royal Canadian Mint, which has produced 35 billion pennies since it began production in 1908, will cease distribution this fall due to the coin’s low purchasing power. Production and handling cost for the one-cent coin are a C$150- million drag on the economy, according to a 2006 study by Desjardins, a Levis, Quebec-based financial institution.

Business groups welcomed the move, which follows other countries such as Australia, Brazil and Sweden, and economists said it would have little impact on inflation.

The penny, with two maple leafs on one side and Queen Elizabeth II on the other, can continue to be used in payments. As they are gradually withdrawn from circulation, price rounding on cash transactions will be required, the government said.

Retailers and other businesses can continue to price goods and services in one-cent increments and there will be no need to reprogram cash registers, according to the government.

Catherine Swift, president and chief executive officer of the Canadian Federation of Independent Business, said the move will increase efficiency.

“It has been a long time coming,” she said. “It’s been a real pain more than anything else. We’ve actually polled our members on this and they’re supportive.”
Economists said there would be "little" impact on inflation. Actually, there will be "no" impact on inflation. The penny has not been discarded as a pricing point, rather final transaction costs will be rounded to the nearest nickel.

The US needs to follow suit. Dealing with pennies is a nuisance.

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

Question on Jobs: How Many Does It Take to Keep Up With Demographics?

John Mauldin pinged me with a question on jobs and demographics from one of his readers.
Hello John.
In past letters you have cited the need to create 125,000 jobs per month to stay even with the growth rate in the labor force. Dick Hokenson of ISI Research has recently published reports suggesting that 75,000 jobs is a more accurate estimate based on his demographic analysis. This difference obviously has profound implications for the pace of recovery and potential improvement in the unemployment rate. Have you seen any of Hokenson's work? Do you have any insights into why his analysis is so different than consensus?
How Many Does It Take to Keep Up With Demographics?

Ben Bernanke has estimated 125,000 jobs a month. That is the number I have been using recently.

However, based on demographics alone, I believe 75,000 is indeed the correct number.

75,000 is a number I arrived at a couple of years ago independently, for the boomer-bust years of 2013-2015.

So why use 125,000 if it only takes 75,000? I do not know Bernanke's rationale, but I can explain mine.

  1. Between January 2008 and February 2010, the U.S. economy lost 8.8 million jobs.
  2. In the last year, the civilian population rose by 3,584,000. Yet the labor force only rose by 1,569,000. 
  3. Millions of people dropped out of the labor force in the last several years and if jobs are available they will start looking again
  4. As soon as people start looking for jobs, the number it will take to hold the unemployment rate steady will rise, perhaps to a number well above 125,000

    Point number 4 above is the key issue.

    Household Survey Data - March 9, 2012



    click on chart for sharper image

    Take a good look at the household survey from the latest BLS jobs report. Recall that the unemployment rate comes from the household survey, and not the headline jobs number.

    Note that 428,000 jobs were allegedly created in February. Also note the unemployment did not change. Why? Because the civilian labor force went up by an even larger 476,000. Thus the unemployment rate actually rose a fractional amount that rounding took away.

    If I would have told you that a rise in 428,000 jobs would not drop the unemployment rate you would have thought I was off my rocker. Yet it happened, assuming of course you believe BLS numbers, complete with amazing seasonal adjustments.

    Back to School Stats

    Let's take a look at some interesting points from Consumer Credit "Demolishes Expectations" Really? No Not Really! The "Non-Bounce" in Non-Revolving Credit
    Non-Revolving credit rose $11.8 billion in December. However, $8.8 billion of that is growth in federal government loans (which just happens to be where student loans are parked).

    Here are some charts I put together stripping out federal government loans.

    Non-Revolving Loans Minus Government Loans



    Non-Revolving Loans Minus Government Loans Detail



    True Bounce in Percentage Terms



    Note that the year-over-year "bounce" has not even gotten back to the zero-line in spite of exceptionally easy comparisons.

    Middle-Aged Borrowers Pile on Student Debt

    Reuters reports Middle-Aged Borrowers Pile on Student Debt
    Educational borrowing is up for every age group over the past three years, but it has grown far more quickly among those between 35 and 49, according to the analysis of more than 3 million credit reports provided to Reuters by the credit score tracking site CreditKarma (CreditKarma.com). That group saw its school debt burden increase by a staggering 47 percent, according to the analysis.

    The average student loan debt for those aged 38 to 41 was the biggest of that group -- about $12,000, up from just under $9,000 in 2009. Young people still carry the biggest student loan burdens; those aged 26 to 29 have an average of $14,000 in student debt. But the increased levels in middle-aged student debt is a new phenomenon.
    Negative Payback on Retraining

    The benefit of going back to school at age 49 is likely negative.

    My friend "BC" comments:
    The payoff for 40- and 50-somethings taking on debt to change occupations or trying to find jobs in "health care" or "education" and compete with Millennials trying to secure similar positions is low or negative.

    Statistically, the benefit to "education" occurs between ages 14 and 22, where one goes to high school and university. Obtaining an MBA, law degree, or another graduate degree after age 26-28 historically has not resulted in a net benefit in terms of job/career prospects or wage/salary income; and this has become particularly the case since the late '90s.

    In other words, the vast majority of people running up debt at universities, community colleges, and for-profit technical schools are wasting their time and money, as well as directing scarce resources to the "health care" and "education" sectors that don't need more misallocation further driving up costs.

    Needless to say, there is no precedent in US history for middle-aged unemployed, underemployed, or unemployable Americans running up debt in an economy that has not created a net new private sector full-time job per capita in at least 10 years.
    Fewer Nonfarm Employees Now Than December 2000

    Here is one key chart (of many) from Fewer Nonfarm Employees Now Than December 2000; Unemployment Rate: Some Things Still Don't Add Up; Obamanomics?

    Total Nonfarm Employees



    There are currently 132,409,000 nonfarm employees. In December of 2000 there were 132,481,000 employees. How's that for job growth?

    Retraining Scam

    Job retraining is scam perpetrated by for-profit universities, fueled by statements from Obama regarding re-training people for new jobs.

    Brick-layers are told they can be "chefs", take $10,000 courses and the universities call it a "success" if they land a job "in their field" at McDonald's. Unemployed roofers are led to believe they can become Java programmers, and they waste collective $billions trying. Meanwhile out of work Java programmers are told to take up a trade like roofing or auto mechanics.

    The cost of education keeps rising because Obama (like Bush before him), keeps adding to the student loan program when the entire student loan scam really needs to be shut down.

    Why Does the Scam Roll On and On?

    1. No politician wants to stand up and tell the truth: Retraining is a waste of money and the odds of launching a new career in other than a low-paying job requiring few skills is simply not likely.
    2. For-Profit universities pad politicians' pockets

    One can always find success stories, but in aggregate, retraining middle-aged workers is a net waste of money.

    To Paraphrase Joe Weisenthal

    Now, to paraphrase Joe Weisenthal: "It's hard to think that the economy is NOT going back into a recession with numbers like these." The difference in viewpoint is understanding what the underlying numbers really represent.
    Hiding Out In School

    All those hiding out in school, including those going back to school for retraining are not counted in the ranks of the unemployed. Nor are discouraged workers, who stopped looking for a job.

    As soon as those folks think there are jobs, they will start looking. Economically speaking, that would be a good thing if it happened, but it would also increase the number of jobs it will take to hold the unemployment rate steady.

    In a vacuum, all things being equal, it would take about 75,000 jobs a month demographically speaking. But things are not equal. Millions of workers want back in the labor force and they will start looking, especially students who at some point will have no choice. It may take 150,000 jobs a month or even 175,000 jobs a month, if those workers come back into the labor force in a 2-year  surge.

    That is still not the end of the story. What if we slip back into recession and people stop looking? How many will it take then? The answer may be closer to 100,000. The middle of the road approach is to stick with the number I have been using recently which is 125,000 a month.

    The irony is, the better the economy is, the more jobs it will take. One way or another, headwinds on lowering the unemployment rate are very strong.

    All things considered, I see no reason to deviate from my "Structurally High Unemployment For a Decade" call made years ago and reiterated in January in Fundamental and Mathematical Case for Structurally High Unemployment for a Decade; Shrinking Job Opportunities and the Jobs Gap; The Real Employment Situation.

    For further discussion please see Where is the Unemployment Rate Headed? Interactive Mapping Lets "You" Set the Parameters, and Plot a Graph

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

    Thursday, March 29, 2012

    The Dating Game: Michael Pettis Challenges The Economist to a Bet on China

    The Economist says "China’s GDP, measured in nominal dollars, will be the world’s largest by 2018". Michael Pettis at China Financial Markets disagrees and says I would like to make a bet with The Economist.
    I recently read in The Guardian an article by enthusiastic orientalist Martin Jacques in which he says that The Economist has just predicted that China’s GDP, measured in nominal dollars, will be the world’s largest by 2018. Earlier estimates, he says had China becoming the largest economy in the world by 2027.

    I have always been a little skeptical about the 2027 claim ... given how much we would have to assume about the sustainability of Chinese growth, about the likelihood of current GDP numbers not having been vastly inflated by an over-investment boom, and about the unstable range of political outcomes. It seemed to me to be a prediction about as valuable as the world-beating predictions about the USSR in the 1960s or Japan in the 1980s.

    Still, this 2018 prediction deserves I think more than a little questioning — it requires that nominal Chinese GDP growth in dollars outpace nominal US GDP growth by 12% a year.

    So I am wondering whether we could set up a friendly bet — not for too large stakes. I would like to bet that by the end of 2018 China will not be the largest economy in the world.

    If I win, perhaps The Economist could invite a very cool underground Chinese band of my choice to perform at their next big conference, whereas if I lose I could buy four-year subscriptions (student rates, please) to a group of Peking University freshmen. Everybody would end up feeling pretty pleased with themselves no matter who wins, right? So?
    The Dating Game

    Inquiring minds are looking at an interactive chart on The Economist in an article called The Dating Game.
    AMERICA'S GDP is still roughly twice as big as China’s (using market exchange rates). To predict when the gap might be closed, The Economist has updated its interactive chart below with the latest GDP numbers. This allows you to plug in your own assumptions about real GDP growth in China and America, inflation rates and the yuan’s exchange rate against the dollar. Over the past ten years, real GDP growth averaged 10.5% a year in China and 1.6% in America; inflation (as measured by the GDP deflator) averaged 4.3% and 2.2% respectively. Since Beijing scrapped its dollar peg in 2005, the yuan has risen by an annual average of just over 4%. Our best guess for the next decade is that annual GDP growth averages 7.75% in China and 2.5% in America, inflation rates average 4% and 1.5%, and the yuan appreciates by 3% a year. Plug in these numbers and China will overtake America in 2018. Alternatively, if China’s real growth rate slows to an average of only 5%, then (leaving the other assumptions unchanged) it would not become number one until 2021. What do you think?
    Snapshot of The Economist Baseline Assumptions



    The interactive graph is too large for my blog, but the above screen snapshot shows The Economist baseline assumptions. To play around with the numbers, click on the above link.

    I share a viewpoint with Pettis that The Economist is way too generous in their estimate of real GDP growth for China.

    Pettis thinks China will average 3% growth and I already posted I found that number reasonable. As far as Yuan appreciation is concerned, I am not at all convinced the Yuan is undervalued at all, yet I plugged in a nominal 2% annual appreciation.

    Assuming a "Real GDP growth" of 3% and Inflation at 4% yields a chart that looks like this.

    Snapshot of Mish Baseline Assumptions



    Even still, I wonder if the year 2030 is still far too optimistic from the standpoint of China.

    I strongly believe peak oil and energy consumption is going to put a serious damper on Chinese growth, and that is on top a necessary and very painful shift away from an entirely unsustainable growth model based on exports, housing, and fixed investment.

    I share Pettis' view regarding "inflated GDP numbers, an over-investment boom, and the unstable range of political outcomes" adding my own energy concerns and yuan valuation concerns on top of it all.

    Thoughts on Chinese Growth


    I find the arguments by Pettis, the ECRI, and Chanos compelling. Add to that the restraint of peak oil coupled with potential political instability and the proper conclusion is that long-term Chinese growth of 7.5% is Fantasyland material.

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

    Obama Budget Defeated 414-0; Obama vs. Ryan Budget Showdown Revisited

    Not a single Democrat endorsed the budget proposed by president Obama. The scorecards reads as follows Obama budget defeated 414-0.
    President Obama's budget was defeated 414-0 in the House late Wednesday, in a vote Republicans arranged to try to embarrass him and shelve his plan for the rest of the year.

    The vote came as the House worked its way through its own fiscal year 2013 budget proposal, written by Budget Committee Chairman Paul D. Ryan. Republicans wrote an amendment that contained Mr. Obama's budget and offered it on the floor, daring Democrats to back the plan, which calls for major tax increases and yet still adds trillions of dollars to the deficit over the next decade.

    But no Democrats accepted the challenge.

    Senate Democrats have said they will not bring a budget to the floor this year, though Republicans in the chamber have talked about trying to at least force a vote on Mr. Obama's plan there as well.

    Last year, when they forced a vote on his 2012 budget, it was defeated 97-0.
    National Debt vs. Public Debt

    In my post Obama vs. Ryan: Budget Showdown - Deficit and Total Debt Projections Through 2021 - Interactive map one reader caught a mislabeling of public debt as national debt.

    Mislabeling is corrected. Here is the Budget Showdown once again, this time with the corrected word change.



    Note: Tableau has a server issue right now and the interactive buttons may not be working properly. This should be corrected shortly.

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

    Geithner Wants to Throw Still More Taxpayer Dollars Down the Fannie & Freddie Toilet

    Not satisfied with wasting close to $200 billion of taxpayer dollars bailing out holders of Fannie and Freddie Bonds (notably PIMCO and China), Geithner is back at it with another proposal sure to cost US taxpayers plenty if adopted.

    The proposal this time is for taxpayers to pick up 63% of the cost of mortgage principal reductions. Geithner made the offer to Edward J. DeMarco, Fannie Mae and Freddie Mac’s overseer.

    Bloomberg reports Geithner’s Math Puzzle Beyond Numbers for DeMarco
    Geithner, the U.S. Treasury secretary, is offering new incentive payments to the two government-supported mortgage financiers if DeMarco drops his opposition to principal reductions for homeowners whose loans are backed by the companies.

    It’s not just a question of whether the numbers add up, DeMarco said in an interview at Bloomberg’s headquarters in New York yesterday.

    “We’ve got to consider all of the ramifications of principal forgiveness relative to other tools.”

    Proponents from Martin Feldstein, a chief economic adviser to the late President Ronald Reagan, to activist groups such as MoveOn.org have called on DeMarco to allow writedowns. Congressional Democrats including Rep. Elijah Cummings of Maryland have accused him of blocking a recovery and called on him to resign.

    FHFA is not yet convinced principal reductions are the best answer, DeMarco said, in part because the agency still must examine how offering loan writedowns would affect the behavior of underwater borrowers who are still making their payments on time. Until now, the agency hasn’t specifically focused on the issue of whether loan forgiveness would create a moral hazard by providing an incentive for borrowers to default. That’s because without the extra incentives offered by the government this year, debt forgiveness was more costly than forbearance as most underwater borrowers would stay in their homes if given a low enough payment, according to its analysis.

    Violating Legal Responsibility

    The U.S. government has spent $190 billion to shore up the companies since they were taken into federal conservatorship in 2008 after their investments in risky loans soured. DeMarco said adding to the firms’ costs would be a violation of his legal responsibility to restore them to financial health.

    Using principal forbearance instead of forgiveness so far has been better for taxpayers, DeMarco said. Forbearance reduces monthly payments while requiring borrowers to pay back the full amount of the loan when they sell the house.

    “If the borrower is successful on the modification, allows them to stay in their house and they stay in their house and start making mortgage payments, the taxpayer gets to share in the upside of that borrower’s success,” DeMarco said in the Bloomberg Television interview. “If we forgive the principal up front and the borrower is successful, that upside all goes to the borrower and is not shared with the taxpayer.”
    Vote Buying

    This is not about doing what's right for taxpayers. It's about doing what's right to help Obama's reelection chances. Of course Hedge Funds and PIMCO like the buyback idea because it immediately puts a bid in for Fannie and Freddie bonds they hold.

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

    Eurozone Retail Sales Contract 5th Consecutive Month, Year-on-Year Sales Decline 10th Month

    Eurozone retail sales fell only slightly this month, but it was the 5th consecutive month, and the worst quarter since the 1st quarter of 2010.

    Please consider Markit Eurozone Retail PMI® March 2012.
    Retail sales in the Eurozone fell only marginally at the end of the first quarter, according to Markit’s latest PMI® surveys. The average rate of decline over the first quarter matched that seen over the final three months of 2011, which was the worst quarter since Q1 2010. The survey data again highlighted marked disparity between growth in Germany and falling sales at Italian retailers, while sales in France were again broadly flat.



    The Eurozone Retail PMI is a single-figure indicator of changes in the value of sales at retailers. The PMI is adjusted for seasonal factors, and any figure greater than 50.0 signals growth compared with one month earlier. The PMI remained below 50.0 in March, signalling a fifth successive monthly drop in sales revenues. Sales have fallen ten times in the past 11 months. But the index rose for the second successive survey, recovering further ground from January’s 35-month low of 42.9 to post 49.1. The latest figure signalled only a marginal decline in sales revenues. The latest PMI figure suggested that the pace of decline in retail sales as measured by the EU’s statistical office Eurostat (on a three-month-on-three-month basis) will ease in the coming months.



    Eurozone retail PMI figures are based on responses from the three largest euro area economies. March data signalled that the Italian retail sector remained mired in a steep downturn, posting a thirteenth successive monthly drop in retail sales. The rate of contraction was slower than January’s record low, but still marked nonetheless.

    German retail sales continued to rise in March, extending the current sequence of growth to 18 months. This is the longest period of expansion since monthly sales data were first collected in January 2004. The rate of growth slowed since February, but was broadly in line with the average for 2011.

    Year-on-Year Sales Decline 10th Month

    Retail sales in the Eurozone continued to fall on an annual basis in March. Year-on-year sales have fallen for the past ten months, the longest sequence since that registered from June 2008 to March 2009. Moreover, the rate of decline accelerated since February, reflecting a sharp reversal in the year-on-year sales trend in France. German retail sales registered the fourth-fastest annual increase in sales since the series started, but Italy posted another substantial decline.

    Other indicators from the latest surveys underlined the ongoing weakness of market conditions in the retail sector. The value of purchasing activity fell for the eighth month running, while retail employment was broadly flat for the second successive month. Retailers’ gross margins remained under substantial downward pressure, and original sales plans were missed again.

    Commenting on the retail PMI data, Trevor Balchin, senior economist at Markit and author of the Eurozone Retail PMI, said:

    “Across the Eurozone, retail sales fell only marginally during the month but were down sharply compared with one year ago. Compounding retailers’ difficulties, wholesales prices continued to rise at a steep rate, squeezing margins which have already been under intense pressure from the need to offer discounts to stimulate sales."
    Markit Clings to Hope

    Once again Markit clings to every bit of hope that things are about to get better. Here is the key sentence: "The latest PMI figure suggested that the pace of decline in retail sales as measured by the EU’s statistical office Eurostat (on a three-month-on-three-month basis) will ease in the coming months."

    Why?

    Why are sales in Europe going to get better? Once again I propose it is far more likely for German sales to slip as its vaunted export machine takes a hard tumble.

    I said the same thing two months ago regarding Manufacturing PMI when Markit was hoping Germany could keep Europe out of recession.

    The no-recession idea bit the dust on March 22 as noted in "Eurozone Slides Back Into Recession" Says Markit PMI News Release; Sharp Decline in German Export Business; Misguided Decoupling Theories.

    Markit then shifted its stance from hoping for no recession in the Eurozone, to hoping for no recession in Germany and I responded with:
    What's with the Markit "Pollyanna" Forecasts?

    This month Markit is talking about Germany avoiding a recession. Even more amazingly, just last month Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said:

    “A retreat back below the 50.0 no-change level for the Eurozone PMI is a disappointment, and highlights the ongoing risk that the region may be sliding back into recession.
    That "risk of recession" became a sure thing as Markit threw in the towel on non-recession hopes as noted above.

    On February 22, in Eurozone PMI "Worse Than Expected" and Back in Contraction; Expect German-Periphery Divergence to Resolve to the Downside for Germany I stated:
    Expect German-Periphery Divergence to Resolve to the Downside for Germany

    The idea that Europe can avoid a recession is complete silliness. Europe is clearly in a recession already.

    The amazing thing is things have not deteriorated more than they have. Unlike the Chief Economist at Markit, I expect the divergence to resolve to the downside for Germany, not for the divergence to continue for some time. Given conditions in Europe and Asia, the odds that Germany is immune from the global slowdown are essentially zero.
    Sure enough, German exports took a dive in March, and it's reasonable to assume another dive in April.

    Conditions in Europe are deteriorating badly, and a general strike looms in Italy. Spain, Greece, and Portugal are basket cases.  The odds that weakness does not spill over into Germany are near-zero.

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

    Egyptian Opposition to US Aid Hits 82%; So Why Did Obama Restore Aid, and Why Did Hillary Insist Upon It?

    A Gallup Poll in Egypt shows 82% of Egyptians Do Not Want US Aid.
    Egyptians' opposition to U.S. economic aid continued to climb in early 2012. More than eight in 10 Egyptians in February said they opposed U.S. economic aid, up 11 percentage points since December and up 30 points since April 2011 when Gallup first posed the question.
    Poll Question



    So Why Did Obama Restore Aid?

    The New York Times reports Once Imperiled, U.S. Aid to Egypt Is Restored.
    An intense debate within the Obama administration over resuming military assistance to Egypt, which in the end was approved Friday by Secretary of State Hillary Rodham Clinton, turned in part on a question that had nothing to do with democratic progress in Egypt but rather with American jobs at home.

    A delay or a cut in $1.3 billion in military aid to Egypt risked breaking existing contracts with American arms manufacturers that could have shut down production lines in the middle of President Obama’s re-election campaign and involved significant financial penalties, according to officials involved in the debate.

    Since the Pentagon buys weapons for foreign armed forces like Egypt’s, the cost of those penalties — which one senior official said could have reached $2 billion if all sales had been halted — would have been borne by the American taxpayer, not Egypt’s ruling generals.

    The companies involved include Lockheed Martin, which is scheduled to ship the first of a batch of 20 new F-16 fighter jets next month, and General Dynamics, which last year signed a $395 million contract to deliver component parts for 125 Abrams M1A1 tanks that are being assembled at a plant in Egypt.

    Mrs. Clinton’s decision to resume military assistance, which has been a foundation of United States-Egyptian relations for over three decades, sidestepped a new Congressional requirement that for the first time directly links arms sales to Egypt’s protection of basic freedoms. No new military aid had been delivered since the fiscal year began last October, and Egypt’s military has all but exhausted funds approved in previous years.

    Mrs. Clinton’s decision provoked sharp criticism from lawmakers across the political spectrum, as well as human rights organizations. Senator Rand Paul, Republican of Kentucky, criticized it as “beyond the pale.”

    Referring to Egypt’s recent decision to prosecute four American-financed international advocacy organizations, Mr. Paul added, “It sets a precedent that America will not punish its aggressors but instead give them billions of our taxpayers’ dollars.”

    The M1A1 components are built in factories in Alabama, Florida, Michigan, Ohio and Pennsylvania, several of them battleground states in an election that has largely focused on jobs. Because the United States Army plans to stop buying new tanks by 2014, continued production relies on foreign contracts, often paid for by American taxpayers as military assistance.

    Senator Patrick J. Leahy, Democrat of Vermont, who added the certification requirements to legislation authorizing military aid to Egypt, called the decision to waive them regrettable, and the resumption of aid “business as usual.”
    Let's piss away billions of dollars on aid to countries that don't even want it.

    Note that Mrs. Clinton waived a requirement that she certify Egypt’s protection of human rights as a condition of aid.

    Yes indeed, this is "business as usual", so much so that even Democrat senators are complaining about it.

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

    Question of the Day: What is the Commodities Sector Seeing that the Stock Market Doesn't?

    Please consider a series of chart my friend "BC" put together of various indices vs. the Morgan Stanley Commodity Related Equity Index ($CRX).

    $SPX vs. $CRX


    click on any chart for a sharper image

    $CYC vs. $CRX



    $TRAN vs. $CRX



    $DJUSRR vs. $CRX



    What is the Commodities Sector Seeing that the Stock Market Doesn't?

    The answer from my friend Pater Tenebrarum who also saw these charts is "the coming economic bust in China - which has likely already begun."

    That idea is in-line with several of my recent posts ...



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

    Wednesday, March 28, 2012

    "Healthwreck": Obamacare May Go Down Entirely; Medicaid Funding in Question; Justice Scalia Joked Reading Entire Bill Would be "Cruel and Unusual Punishment"; Wrecking Operation or Salvage Job?

    Weak arguments presented by "team Obama" lawyers supporting Obama's healthcare legislation took a beating yesterday, and the beating continued even more so today.

    Please consider Day 3: ObamaCare at the Supreme Court by the Illinois Policy Institute.
    Today was the final marathon session of oral arguments over ObamaCare. It began this morning with the question of what to do with the rest of the law if the individual mandate is struck down, a very real possibility after yesterday's hearing.

    On this issue, both sides agree that if the mandate falls, at least some of the other provisions must fall with it. Most of the Justices seemed skeptical that the entire law should be thrown out, but where to draw the line was a question the Court was clearly struggling with.

    Some of the justices hinted that the difficulty in drawing that line could mean disaster for the whole law. Others noted that the Court has never struck down the heart of a statute but left an empty shell. At one point, Justice Kennedy expressed his concern that it might be worse to pick and choose which parts to strike down than to just overturn the whole law. Justice Scalia joked that forcing the Court to go through the law's thousands of pages and provisions one by one would be cruel and unusual punishment.

    The day ended with the question of whether the President can force states to expand their Medicaid programs to millions of new enrollees. As I explained earlier this week, Medicaid expansions have already failed the most vulnerable populations in Illinois, and ObamaCare is only going to make the problem worse.

    The four liberal justices appeared highly critical of the state's argument that conditioning pre-existing Medicaid funding on new expansions is too coercive. The conservative justices also expressed some skepticism that the forced expansion was unconstitutional, though they did press the administration to define the outer limits of that power.
    Justices Ask if Health Law Is Viable Without Mandate

    The New York Times reports Justices Ask if Health Law Is Viable Without Mandate.
    On the third and final day of Supreme Court arguments over President Obama’s health care overhaul law, several justices on Wednesday indicated a reluctance to pick and choose among the law's other provisions should the requirement that most Americans have health insurance be struck down.

    The questions from the justices indicated that at least some of them were considering either striking down just the requirement, often called the individual mandate, or the entire law.

    Paul D. Clement, representing 26 states challenging the law, urged the court to overturn the entire law. Edwin S. Kneedler, a deputy solicitor general, took a middle ground, suggesting that the court remove the mandate and only a couple of other provisions.

    The court separated the day’s arguments into two sessions. After the morning session, which focused on the effect of overturning the mandate, the afternoon's hearing dealt with the law’s expansion of Medicaid, part of its attempt to reduce the number of Americans without health insurance.

    In the second argument, the court’s more conservative justices expressed concern that the law’s Medicaid expansion was unduly coercive to states.

    “My approach would be to say that if you take the heart out of this statute,” Justice Antonin Scalia said, “the statute’s gone.”

    Justice Scalia, who suggested that the whole law would have to go, appeared to go further than some of the other justices, but many of them expressed skepticism that the rest of the law could remain intact if the court ruled the mandate to be unconstitutional.

    Justice Ruth Bader Ginsburg called the court’s task, should the key provision fall, a choice between “a wrecking operation” and “a salvage job.”
    Wrecking Operation or Salvage Job?

    There is nothing of merit to salvage in Obamacare. Even if there was, the Supreme Court should not have to read through thousands of pages to find it.

    The only things to "salvage" if key provisions are struck down, are Obama's inflated ego and his ability to say he passed healthcare legislation.

    Memo to Nancy Pelosi

    Hello Nancy: It seems the Supreme Court does not want to read the bill to find out what's in it.

    Sorry Team Obama, your bill was more like "Healthwreck" than "Healthcare".

    By the way, I have to ask: If the Supreme court strikes Obamacare, does it strike any provisions of Romneycare that passed in Massachusetts?

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

    Bill Gross Predicts QE3 and Operation Mortgage Twist

    PIMCO founder and co-CIO Bill Gross spoke with Bloomberg Television's Margaret Brennan today, telling Bloomberg TV that the Fed will likely shift focus to mortgage securities to keep borrowing rates low when Operation Twist ends in June.



    Link of video does not play: Bill Gross on Pimco ETF Ticker Change, Bonds, Fed

    Partial Transcript
    On Gross’s view that we may see a sign from Bernanke in April that QE3 will be rolled out:

    "I think [Chairman Bernanke] is very satisfied…I think the Fed is outcomes-oriented. They want an outcome in terms of a higher stock market, in terms of housing starts and lower unemployment. What [Bernanke] said on Monday, in terms of the employment, he suggested that up until now, we've done very well in terms of reducing unemployment but it’ll be tougher going forward if only because of structural impediments that he outlined. Going forward, he's looking at jobs, at unemployment and the housing markets. You know, future QEs will the outcome-oriented type of strategy which seeks to provide jobs and provide higher housing prices and housing starts to continue on."

    On the tool that Gross thinks the Fed might deploy in April:

    "I have a sense that they'll continue with the Operation Twist, but not necessarily in terms of buying longer-term bonds and selling shorter dated Treasuries. I think that's basically been played out and the pension market itself in terms of liability structure has been damaged to some extent by lower 30-year yields. I think [Bernanke] will try to do is Twist in the mortgage market. Basically, buy current coupon mortgages in agency spaces and then basically Twist by repo-ing out the Treasuries that they currently own in short-term space. So, you know, a twist on another Twist I suppose, going forward."

    On the ticker change for PIMCO’s new ETF (to BOND):

    "It is easy to recognize. I told my wife about it last night and in the middle of the night she started saying something about James. I hope she was referring to the ETF but you get the point… It's more easily recognizable. In this business you want to go with a ticker and a sticker that people can recognize and pass on to their neighbors."

    On Gross’s warnings to investors about management fees:

    "We've noted that for a long time. This is simply a cautionary element that suggests that when interest rates come down close to zero and when the discounting of those interest rates and equity prices and other financial assets produce a perspective of 4-5% total return for the combined asset class is in our view, then it's incumbent upon a manager to keep expenses low and to alert investors as to the importance of expenses relative to lower returns in this new financial world that we speak to."

    On investor appetite for PIMCO’s new ETF:

    "We wanted to be able to give investors a choice. We recognized the tremendous importance of the retail distribution network for PIMCO and for the Total Return Fund, which is now $253 billion. Thank you very much, we don't to discourage that. But there are investors in the $10,000-$20,000 category, who find it difficult to buy PIMCO Total Return. We thought this would be a good way to do this in the actively managed ETF space. By the way, we're outperforming the market in the first month or so by a good 200 basis points."

    On PIMCO's appetite for Treasuries:

    "We have an average appetite in terms of duration space. And to the extent that five-year Treasuries, which are being issued today and seven-year Treasuries tomorrow - they reflect a relatively firm commitment on the part of PIMCO, which reflects a relatively firm commitment on the part of the Fed that they'll keep interest rates firm until late 2014. Bernanke mentioned yesterday that that wasn't a commitment in total but it's subject to a relatively slow economy and contained inflation, which is what we see now. A five-year security at slightly above 1%, to our way of thinking, as it rolls down the yield curve and becomes a four-year, produces close to a 2% return and is that a super, deeper attractive type of return? Well it's up to history. No, it's not….but it's certainly better than nothing."

    "We have reduced our Treasury commitment slightly. From the standpoint of duration, we have average duration of an average maturity across the board but we have been reducing Treasuries and investing in shorter duration corporates and rather heavily in the agency mortgage market. You can get, with a Fanny or a Freddie coupon that is a 4% coupon, you can realize 3% as opposed to the 2% or 1% - I mentioned in terms of five-year space. We're really focusing on spread and the lack of volatility going forward for the next two to three years which is really the domain of 30-year and 15-year mortgages."

    On finding investing opportunities in developing countries:

    "Where is that attractive growth? Countries like Brazil, countries in Asia, China-related of course. These countries don't come without risk. They don't come without a rather volatile situation in terms of inflation or potential currency disorder. If an equity investor is looking for growth, you want to go developing as opposed to developed. Even a bond investor, if you are looking for higher real rates such as in Brazil, you want to go to developing as opposed to developed."

    On buying hedges against fat tail possibilities:

    "What we're suggesting now is not an extremely negative possibility. That would be the fat left tail. But also the fat right tail, we've had a fat right tail in equity markets for the past 3-6 months…On the left-hand side, you know, the bi-model possibility in terms of a downturn are simply a reflection of the high degree of leverage, the high degree of debt and the policy coordination which may or may not be helpful in terms of producing this smooth, rather bell-shaped mode or median we're all used to."
    No Real-World Point to Mortgage Twist

    Note that Bill Gross' call on QE3 is not what he thinks the Fed should do, rather his take on what the Fed will do.



    click on chart for sharper image

    Mortgage-rate table from Bloomberg.

    30-year mortgages are below 4% and 15-year fixed mortgage rates are near 3%. Other than goosing financial markets that are already back to nose-bleed level (if not outright bubble territory), there is no real-world point to an "Operation Twist" for mortgages.

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

    Guns and Drugs from Washington to The Wire


    By Robert E. Wright for Augustana College’s chapter of Phi Alpha Theta, 28 March 2012.
    Strangely enough, I became an historian of the Early Republic in order to better understand current public policy debates. Politicians and pundits have long been pretty good at putting words into the mouth’s of the Founding Fathers. I don’t think that all our policy decisions need to be based on the thought of the Founders but when they are, they should be based on plausible historical interpretations.
    After having studied the thoughts and deeds of numerous Founders for almost two decades now, I’ve concluded that sometimes the words that policy wonks put into the Founders’ mouths ring true. But too often they are a load of specious bull puckey. One particularly laughable claim is that the Founders believed that roads should be forever free. Some Founders favored local government roads but realized that even those had to be paid for, with labor and materials if not cash. Other Founders -- including George Clinton and Philip Schuyler of New York, Fisher Ames and Henry Knox of Massachusetts, and Stephen Girard and George Logan of Pennsylvania -- chartered for-profit turnpike companies that built long distance roads and then charged tolls to travel them.
    Speaking of early corporations, the majority opinion in Citizens Unitedis pure bunk that should undermine any remaining confidence in SCOTUS as it is currently constituted. To a man, the Founders would have shuddered at the thought of business corporations influencing American political processes and explicitly said so on numerous occasions. See my forthcoming book Corporation Nation for details. The Founders considered corporations a quote unquote person only analogically. For them, corporations were economic entities endowed with several privileges not accorded to traditional business partnerships. For example, corporations enjoyed perpetual succession, or in other words the right to change owners without having to dissolve the enterprise, and the right to sue and be sued in name of the corporation, rather than in the names of their often numerous owners. But to grant corporations civil rights like freedom of speech would have been viewed as preposterous because corporations were created by the government, initially literally by statute. Natural people, by contrast, were the creators of government under John Locke’s widely held theory of governance.
    And of course there can be no doubt that the Founders would oppose Bank of America, Citibank, Goldman Sachs, JP Morgan Chase, Wells Fargo, and the other megabanks that fomented the financial crisis of 2008. Not only don’t I exclude Alexander Hamilton from that claim, I assert that he would lead the charge against them, not because they are banks, which would be sufficient justification for Thomas Jefferson and many of his followers, but because they threaten the government’s ability to repay its debts as promised. Hamilton would also stress how horrifically inefficient they are, while Jefferson would point to their uncanny ability to influence public policies in their favor.
    The Founders’ views on the political dangers posed by banks and other corporations remained widespread throughout the 19th century and into the twentieth. In 1906, New York governor Frank W. Higgins told the New York Times: quote Political contributions by business corporations are illegal and ultra vires. ... The practice is morally as well as legally wrong. ... I recommend that the making of political payments by corporations be made a penal offense. Unquote. Ultra vires, by the way, was a legal doctrine that allowed the dissolution of companies that overstepped the very clear boundaries placed on their activities in their corporate charters.
    I’ve also done a little work on the Second Amendment and here the progress over the last decade or so has been palpable. Historian and peace scholar Michael Bahleel [Bellesiles] inadvertently helped gun right’s scholars like myself by publishing a book called Arming America that claimed that the Founding Fathers owned few guns and most of the weapons they did own were broken and unwanted. Let me repeat that: Bahleel claimed that the Founding Fathers owned few guns and most of their weapons were broken and unwanted. It turns out that Bahleel engaged in some very shady practices to quote unquote prove his thesis. So shady, in fact, that it cost him his job at Emory University. The flurry of research that went into debunking his outrageous claims, however, greatly strengthened our understanding of the Second Amendment and that played a big role in recent advances in gun rights, tentative though they are.
    Discussions of gun rights often turn into debates about drug policies because illicit drugs and gun violence are intimately linked. Some discussants claim that the Founders would support the suppression of marijuana, heroin, and cocaine while others have portrayed the Founders as literal potheads. The latter view is apparently due to the fact that some of the Founders grew hemp for industrial purposes and most drank copious quantities of alcohol on a daily basis. So they must have toked up, right? Somebody with the screen name of capital letter D actually wrote on one blog and I quote: Our country was basically started by Marijuana. I have to repeat that. According to D, which I hope was his or her grade in history class, Our country was basically started by Marijuana.
    The former view, that the Founders would support the so-called War on Drugs, appears to rest on the conviction that the Founders were good Christians – and don’t even get me started on that claim -- and as good Christians would never do drugs, because drugs are bad, mmmm… kay. Again I quote: I think Jefferson or George Washington would have rather strongly discouraged you from growing marijuana and their techniques with dealing with it would have been rather more violent than our current government. Unquote That comes right out of the mouth of a former history professor you may have heard of … Newt Gingrich. I did not attend the New Hampshire town meeting in January where he said it because I had to teach interim … but I have seen a video of the event that does not appear to have been doctored or edited in any way. Unlike the videos on Finding Bigfoot, it was not grainy or jumpy and the sound was good, at least when Newt was speaking. Finding Bigfoot airs on Animal Planet, a rival of The History Channel, which produced a show in which an historian, the curator of the Hemp Museum, swears that the Founders were hooked on the chronic.
    That unassailable tertiary source to the contrary notwithstanding, it is a little silly to argue that the Founders had strong views on marijuana, much less crack or meth. Perhaps the easiest way to establish that point is to read a newspaper article that I discovered in the 20 May 1803 Charleston Courier while working at the American Antiquarian Society about 15 years ago. I call it “Bowls, Bongs, and Blunts But Not Quite Brownies” but the original title was “Intoxicating Quality of Hemp.” Listen carefully:
         HEMP is cultivated in the plains of upper Egypt, but it is not spun into thread as in Europe, although it might probably answer for that purpose. It is, nevertheless, a plant very much in use. For want of intoxicating liquors, the Arabs and Egyptians compose from it different preparations, which throw them into a sort of pleasing inebreity, a state of reverie
    that inspires gaiety and occasions agreeable dreams. This kind of annihilation of the faculty of thinking, this kind of slumber of the
    soul, bears no resemblance to the intoxication produced by wine or strong liquors, and the French language affords no terms by which it can
    be expressed. The Arabs give the name of keif to this voluptuous vacuity of mind, this sort of fascinating stupor.
         The preparation most in use from this hemp is made by pounding the fruits with their membranous capsules; the paste resulting there from is baked, with honey, pepper, and nutmeg, and this sweetmeat is then swallowed in pieces of the size of a nut. The poor, who sooth their misery by the stupefaction produced by hemp, content themselves with bruising the capsules of the seeds in water, and eating the paste. The Egyptians also eat the capsules without any preparation, and they likewise mix them with tobacco for smoking. At other times they reduce only the capsules and pistils to a fine powder, and throw away the seeds. This powder they mix with an equal quantity of tobacco, and smoke the mixture in a sort of pipe, a very simple, but coarse imitation of the Persian pipe. It is nothing more than the shell of a cocoanut hollowed and filled with water, through which a pungent and intoxicating smoke is inhaled. This manner of smoking is one of the most ordinary pastimes of the women in the southern part of Egypt.
         As well these preparations, as well as the parts of the plant that serve to make them, are known under the Arabic name of haschish which properly signifies herb, or plant of plants. The haschisch, the consumption of which is very considerable, is to be met with in all the markets. When it is meant to designate the plant itself, unconnected with its virtues and its use, it is called [illegible].
         Although the hemp of Egypt has much resemblance to ours, it, nevertheless, differs from it in some characters which appear to constitute a particular species. On an attentive comparison of this hemp with that of Europe, it may be remarked, that its stalk is not near so
    high; that it acquires in thickness what it wants in height; that the port or habit of the plant is rather that of a shrub, the stem of which is frequently more than two inches in circumference, with numerous and alternate branches adorning it down to the very root. Its leaves are also not so narrow, and less dentated or toothed. The whole plant exhales a stronger smell, and its fruitification is smaller, and at the same time more numerous than in the European species.
    What this source tells me is that early Americans were not conversant with the quote unquote intoxicating quality of hemp or the editor would have not used up valuable space in his newspaper to describe it in such detail. Contrast the article with the treatment of America’s current drug culture on three popular and critically acclaimed television programs, AMC’s Breaking Bad, HBO’s The Wire, and Showtime’s Weeds.
    In Weeds, which is initially set in suburban southern California but later ranges throughout the West before landing in Manhattan, seemingly everyone knows about marijuana. All the major characters smoke or eat it and know how to score it. Or they deal it, sometimes by the dime bag and sometimes by the kilo. A few even know how to grow the stuff, inside, outside, in vans, bathtubs, the backrooms of front businesses, in ditches, and even in national parks. The main character, erstwhile suburban housewife and mother Nancy Botwin, initially has qualms about selling it to kids but eventually will sell a potent form of hash that she makes in her employer’s commercial clothes dryer to anyone with the cash. She does draw the line, however, at harder drugs like black tar heroin and will not brook involuntary prostitution. But the message of the show is that weed is cool even if it turns you into jailbait and your son into a cold blooded murderer.
    Walter White, a former high school chemistry teacher, has no qualms about manufacturing and selling methamphetamine, so long as it meets his high standards and he gets a cut of the proceeds. In Breaking Bad, meth is not quite as ubiquitous as pot in Weedsbut the unmistakable conclusion, for viewers today and presumably 200 years hence, is that early Third Millennium America had a pretty pronounced illicit drug culture. Nobody has to be told what drugs are, how to use them, or even what they cost in the street. While both Weedsand Breaking Bad become a little far fetched at times, nobody seriously questions the main premise that middle class Americans can become drug kingpins if they get cancer or their spouses die suddenly, apparently without life insurance. Weeds and Breaking are dark comedies to be sure but clearly millions of Americans find that premise amusing … and maybe even alluring, as several bored housewives admit to Nancy in Weeds. Interestingly, about a dozen college professors have been caught distributing illegal drugs in the last few years, though alas none here at Augustana. … To my knowledge.
    Although it contains numerous humorous scenes, The Wire is a much more serious show that reveals just how deeply heroin and cocaine have permeated our society, from addicts like Bubbles, Johnny Weeks, and Sherrod to Baltimore’s political power structure, especially in the form of corrupt politician Clay likes to say Shiiiiiiiiiiiiit Davis. The series, which ran for 5 seasons in the mid-20 aughts, was so realistic that several real life drug gangs actually began to use some of the distribution and communication techniques it detailed. Two centuries hence, historians will use The Wire to outline America’s urban drug culture much the way they currently use the 1931 flick The Public Enemy or the 1922 and 1924 novels Babbitt and The Great Gatsbyto unmask some of the intricacies of Prohibition.
    The city of Baltimore felt compelled to officially blast The Wire, the realism of which threatened to cut into its tourism trade. The Port of Baltimore doesn’t attract as many ships as it used to and the water still smells a little funky, but it is pretty to look at and it’s treated enough so it doesn’t kill the sea critters in Baltimore’s amazing National Aquarium or the dinner patrons in nearby Lil Italy … at least not immediately. The Wire’s depiction of the drug infested areas of the city, some within Glock range of the Inner Harbor tourist zone, were just too accurate, a conclusion that I draw from personal experience having again visited the outskirts of some of the drug neighborhoods while attending a conference and conducting some research in Balmer last fall.
    I think it safe to say that the Founders would not like modern Baltimore but that would not necessarily equate into a policy stance on drugs as other issues were rather more salient two centuries ago. In fact, I’m pretty sure that Jefferson, Madison, and Monroe, if not Washington himself, would point to modern Baltimore as evidence for the necessity of slavery, a fallacious conclusion to be sure but an irresistible one for anyone with a material interest in the peculiar institution. Calhoun, who came a little later of course, certainly would have used conditions in today’s Baltimore to advance a pro-slavery, anti-tariff, and anti-urbanization agenda because, heck, he used the condition of the Baltimore of his time to support those views.
    On the other hand, every Founding Father would see that the promises laid out in the preamble of the Constitution were not being met in a city devoid of justice, domestic tranquility, or the blessings of liberty. And The Wire’s message about political corruption would have surely further aroused the Founders’ against the Citizens Uniteddecision because it shows so clearly how money corrupts absolutely. But a pro- or anti- drug message? I just don’t see it because drug use was not very high on the Founder’s agenda. Americans would of course eventually remonstrate against the abuse, some even the use, of tobacco, alcohol, and later opium. But the Founders were pretty quiet on the issue. That might have been because they were civil libertarians content to allow people to make their own life choices, as Ron Paul might argue, but it could also be that they simply had no widespread experience with addiction to substances other than tobacco, alcohol, sugar, and caffeine. If members of the Founding generation weren’t consuming pot, coke, or heroin, how could the Founders have held a view about their legality, at least one that we are bound to respect? I say that when it comes to drug policy, we allow the Founders to remain fast asleep, dutifully pointing their muskets and cannon at large corporations, especially inefficient, political system corrupting megabanks.


    Thank you!