Cost for Doing God's Work Declines from $13.2 Million to $9 Million

Inquiring minds note a stunning drop in the price for doing God's Work. Last year Goldman Sachs CEO Lloyd Blankfein received a salary of a $600,000 as well as a stock bonus worth $12.6 million.

This year the base salary for doing God's work rose to $2 million, however, bonuses fell to a shockingly-low $7 million. The net effect is a decline from $13.2 million to $9 million.

That is a 30% reduction in the overall cost of doing God's work. Said Blankfein "Now I know how those in Greece feel".

For additional details, please see Goldman’s Blankfein Awarded $7 Million in Stock for ’11. Here is one key fact from the article.

The filings don’t include how much any of the executives have been awarded in cash bonuses. Blankfein received a $5.4 million cash bonus for 2010, his first since getting about $27 million in cash bonuses for each of 2007 and 2006.

Mercy!

How can the man survive a cut like that?

Inquiring minds just may be interested in the performance that merited $9 million (plus undisclosed cash compensation, if any).

GS 2011 Stock Market Performance



Said Blankfein when questioned about plunge in share price "This just goes to show you how difficult it is to do God's work. I earned every penny."

Mish note: the quotes of course are fictional, the rest of the story unfortunately is not.

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

Greek Leaders (All 3 Coalition Parties) Oppose New Austerity Measures; Words of the Day: "Hardball", Followed by "Meeting Cancelled" and the Always Popular "Meeting May be Scheduled Later in the Week"

Shortly after Dutch finance minister, said "We want no further delays" came news of further delays. The reason: Greek political parties all refuse to go along with more austerity measures.

Please consider Greece’s leaders oppose new austerity measures

All three party leaders in Greece’s teetering national unity government have opposed new austerity measures demanded by international lenders, forcing eurozone finance ministers to postpone approval of a new €130bn bail-out and moving the country closer to a full-blown default.

Representatives of the so-called “troika” – the European Commission, European Central Bank and International Monetary Fund – have demanded further cuts in government jobs and severe reductions in Greek salaries, including an immediate 25 per cent cut in the €750 minimum monthly wage, before agreeing the new rescue.

But representatives of all three coalition partners, including centre-left Pasok of former prime minister George Papandreou and the centre-right New Democracy of likely successor Antonis Samaras, said they were unwilling to back the government layoffs.

In addition, a Greek government official said the EU and IMF negotiators rejected a counter-proposal that would have frozen Greek wages for three years and cut social security contributions by 10 per cent.

Finance ministers from the four remaining triple As – Germany, the Netherlands, Finland and Luxembourg – met in Berlin on Friday where they agreed that Athens must move quickly or they would withhold assistance.

“We want no further delays,” Jan Kees de Jager, the Dutch finance minister, said after the meeting.

The delays in Athens could give new momentum to officials in Germany, the Netherlands and Finland who have been agitating to abandon the cornerstone of the new bail-out – a €200bn bond swap in which private debt holders would accept losses of 50 per cent in the face value of their holdings. A full-scale default would allow Greece to write off all privately held debt.

The brinkmanship in Athens became so intense on Friday that a government spokesman was forced to deny reports that the acting technocratic prime minister, Lucas Papademos, was considering resigning if governing parties did not agree to the new measures.

Keyword of the Day is "Hardball"

In case you missed it here is the key phrase "EU and IMF negotiators rejected a counter-proposal that would have frozen Greek wages for three years and cut social security contributions by 10 per cent."

That was a pretty significant offer by Greece in the midst of an economic depression. There was no counter-offer, only a take-it-or-leave-it hardball.

For now, Greece said "Leave It" so you can add that to the words of the day as well. As I have said numerous times recently, Germany wants Greece out of the Eurozone. Those actions reinforce my opinion. Germany could easily have said a Greek wage freeze for three years and cut social security contributions by 10 per cent would suffice.

Minimum Wage

I am not a fan of minimum wage laws at all. However, let's ponder Germany's demand. A "25 per cent cut in the €750 minimum monthly wage" would take the minimum wage down to €562.5, roughly $739 a month.

Taxes

According to Wikipedia the following Greece Taxes apply.

• Social Security Tax: 16%
• VAT: as high as 23% (Category 2 goods 4.5%)
• Income Tax: Progressive

I cannot find a precise description of Category 2, but eating out is category 1 and taxed at 23%. Minimum wage appears to avoid income tax.

The after SS-tax income at the proposed minimum wage is $621 a month or $7452 per year.

How far will a take-home pay of $7452 per year go?

Living Greece discusses Value-added tax (VAT) rates in Greece

• Greece has the third highest rate of VAT in Europe
• Second highest gas/petrol tax
• Third highest tax on social insurance contributions
• Fifth highest VAT on alcohol
• Highest property tax
• One of the worst corporate tax rates
• Without the quality of living or competitiveness to match

Bear in mind that was from 2010.

On the assumption that everyone earning minimum wage is spending every penny of it, subtract another 10% to 20% in actual purchasing power.

Keep Talking Greece has a humorous (to those not from Greece) article on Greek VAT Insanity: 6.5% for Foreigners, 23% for Greeks

That Greece is an absurd country I knew the moment I decided to return from living abroad over some decades. But it was beyond my vivid imagination that I will have to experience this, day by day – and even moment to moment. With a decision that touches the limits of European constitution because of discrimination against the citizens of this hapless country, the Finance Minister announced that the increased VAT of 23% on catering goods will be paid only by the Greeks -meanwhile known also as money-spewing machines!

Earlier on Monday, Finance Minister Evangelos Venizelos clarified that the increased VAT from 13% to 23% will apply to restaurants, taverns, cafes and hotel restaurants. However if you buy an All-Inclusive package abroad, you will have a 6.5% VAT. Greeks who will buy similar packages in the country will pay 23% VAT.

The new increased VAT regulations are as complicated as they can be: there is a different VAT for consuming sitting or standing (restaurant/cafe), different for take away (but only if you take it yourself, not through delivery boy).

In short a pizza has four different VAT depending on whether you sit, stand, walk or lay (hotel room/all-inclusive).

Tortured to Death

The point of this discussion is not about minimum wage, but about absurd taxes on top of a reduction in minimum wages at a time the Greek economy is already imploding.

I am 100% in favor of work rule changes, pension changes, etc., but the tax hikes and tax structures are insane.

Furthermore, I fail to see how increased taxation and further austerity measures can possibly help Greece in the short-run. And by the way, the short run has now been extended to 2020 from 2013. 

Greece is imploding. It's really too bad Greece did not exit the Eurozone three years ago instead of now smack in the midst of a depression.

Moreover, this is exactly what Spain and Portugal ought to be thinking about as well.

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

Nonfarm Payroll +243,000 ; Unemployment Rate 8.3%; Those Not in Labor Force Rose an Amazing 1,177,000

Quick Notes About the "Falling" Unemployment Rate

• In the last year, the civilian population rose by 3,565,000. Yet the labor force only rose by 1,145,000. Those not in the labor force rose by 2,420,000.
 
• In January, the Civilian Labor Force rose by 508,000.
 
• In January, those "Not in Labor Force" rose by an amazing 1,177,000. If you are not in the labor force, you are not counted as unemployed.
 
• Participation Rate fell .3 to 63.7%, taking out a 1984 low
 
• Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Some of those labor force numbers are due to annual revisions. However, the point remains: People are dropping out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low.

Jobs Report at a Glance

Here is an overview of today's release.

• US Payrolls +243,000 - Establishment Survey
• US Unemployment Rate Declined .2  - Household Survey
• Average workweek for all employees on private nonfarm payrolls was +.1 to 34.4 hours
• The average workweek for production and nonsupervisory employees on private nonfarm payrolls edged higher 0.1 hour to 33.7 hours in November.
• Average hourly earnings for all employees in the private sector rose by 4 cents to $23.24
  

Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data.

January 2012 Jobs Report

Please consider the Bureau of Labor Statistics (BLS) January 2012 Employment Report.

Total nonfarm payroll employment rose by 243,000 in January, and the unemployment rate decreased to 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Job growth was widespread in the private sector, with large employment gains in professional and business services, leisure and hospitality, and manufacturing. Government employment changed little over the month.

Unemployment Rate - Seasonally Adjusted



Nonfarm Employment - Payroll Survey - Annual Look - Seasonally Adjusted



Actual employment is about where it was in 2001.

Nonfarm Employment - Payroll Survey - Monthly Look - Seasonally Adjusted



click on chart for sharper image

Between January 2008 and February 2010, the U.S. economy lost 8.8 million jobs.

The January employment gained in total nonfarm brings the number of net jobs recovered since a trough in February 2010 to 3.2 million jobs, or 36 percent of the 8.8 million jobs lost between January 2008 and February 2010.

Statistically, 127,000 jobs a month is enough to keep the unemployment rate flat. The average increase in 2011 was of 152,000 per month, barely enough make a dent in the unemployment rate.

Nonfarm Employment - Payroll Survey Monthly Details - Seasonally Adjusted


Average Weekly Hours


Index of Aggregate Weekly Hours


In January 2012 the index of aggregate weekly hours stood 4.8 percent below its peak in January 2008.

Average Hourly Earnings vs. CPI


"Success" of QE2 and Operation Twist

• Over the past 12 months, average hourly earnings has increased by 1.9 percent; while in December, the CPI-U had a 12-month percent change of 3.0 percent.
 
• Not only are wages rising slower than the CPI, there is also a concern as to how those wage gains are distributed.

BLS Birth-Death Model Black Box

The BLS Birth/Death Model is an estimation by the BLS as to how many jobs the economy created that were not picked up in the payroll survey.

The Birth-Death numbers are not seasonally adjusted while the reported headline number is. In the black box the BLS combines the two coming out with a total.

The Birth Death number influences the overall totals, but the math is not as simple as it appears. Moreover, the effect is nowhere near as big as it might logically appear at first glance.

Do not add or subtract the Birth-Death numbers from the reported headline totals. It does not work that way.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Birth Death Model Adjustments For 2011



Birth Death Model Adjustments For 2012



Birth-Death Notes

Once again: Do NOT subtract the Birth-Death number from the reported headline number. That is statistically invalid.

Household Survey Data



click on chart for sharper image

In the last year, the civilian population rose by 3,565,000. Yet the labor force only rose by 1,145,000. Those not in the labor force rose by 2,420,000.

That is an amazing "achievement" to say the least.

Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Table A-8 Part Time Status



click on chart for sharper image

Part-time status shows little improvement vs. a year ago.

Table A-15

Table A-15 is where one can find a better approximation of what the unemployment rate really is.



click on chart for sharper image

The official unemployment rate is 8.3%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 15.1%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Grossly Distorted Statistics

Given the complete distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is easy to misrepresent the headline numbers. Digging under the surface, the drop in the unemployment rate is nothing but a statistical mirage.

In January, those "Not in Labor Force" rose by a staggering 1,177,000. Things are much worse than the reported numbers indicate.

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

Providence Rhode Island Faces "Bankruptcy by June" says Mayor; Pension Plan 32% Funded (and About to Get Worse)

Untenable pension promises made by corrupt politicians to corrupt unions in an unholy alliance is about to sink another city. Please consider Providence is facing bankruptcy

Rhode Island's capital city will be in bankruptcy by June if it doesn't get help resolving its financial crisis.

That was the dire warning from Providence Mayor Angel Taveras during a Thursday morning news conference at City Hall. With five months left before the end of the fiscal year and the capital set to run out of cash by the start of summer, the city still faces a $22.5 million deficit in its budget for the current fiscal year, which ends June 30.

The budget shortfall was projected at $110 million last March, when Taveras declared a "category five" financial emergency in Providence. It was reduced after he negotiated new contracts with unions, laid off workers, cut spending and won increased state aid.

"Our firefighters, police officers, teachers and taxpayers have all sacrificed in the last year and helped Providence avoid catastrophe," the mayor said. "However, not everyone has sacrificed. The failure of our tax-exempts to sacrifice has left a $7.1 million hole in our budget."

Taveras said the city's retirees must accept reduced pension and health care benefits to save the city from financial ruin. A decree signed in 1991 by Mayor Buddy Cianci pushed the city's pension liability "into the stratosphere" by giving annual cost-of-living increases of 5% and 6% to more than 600 retirees, he said.

"These retirees have refused to sacrifice and are costing Providence taxpayers tens of millions of dollars a year," Taveras said, calling the increases "raises," not adjustments to keep up with the cost of living. The mayor will hold a meeting with retirees on March 3 where they will be asked for concessions.

Taveras's office released a list showing that the city's highest-paid pensioner, former Fire Chief Gilbert McLaughlin, now receives an annual pension of $196,813 a year. He retired with an annual salary of $63,510. At the current rate of growth, McLaughlin's pension will total roughly $796,871 if he lives to the age of 100.

Specter of Central Falls

The tiny city of Central Falls became the first Rhode Island municipality ever to file for bankruptcy last August. East Providence's finances were also placed under formal state oversight in November. Woonsocket and Pawtucket recently disclosed surprise deficits, and two-thirds of local pension plans in the state are "at risk."

Retired police officers and firefighters in Central Falls recently reached a tentative agreement with former R.I. Supreme Court Justice Robert Flanders, the city's receiver, that would see their pension payments reduced by as much as 55% if state lawmakers agree to augment that with supplemental payments over the next five years.

Taveras urged Providence's retirees to learn a lesson from what happened in Central Falls, warning he would find a way to reduce the cost of their pension benefits "one way or another."

As of June 30, Providence's city pension system was 32% funded with a shortfall of $901 million, and the city also had a $1.2 billion unfunded liability for retiree health benefits, according to its most recent audit. The entire city budget is roughly $619 million this year.

Unions, Politicians to Blame

Check that out: The entire budget is $619 million, and the city has a shortfall of over $2 billion.

Taveras is barking up the wrong tree arguing "Our firefighters, police officers, teachers and taxpayers have all sacrificed in the last year and helped Providence avoid catastrophe".

It is the firefighters, police officers, and teachers unions (and of course corrupt politicians willing to buy votes) that are responsible for this mess. The only group that can claim to have sacrificed is non-union taxpayers. However, much of the rest of Taveras' comments ring true. 

Absurd Benefits

This statement says it all "Fire Chief Gilbert McLaughlin, now receives an annual pension of $196,813 a year. He retired with an annual salary of $63,510. At the current rate of growth, McLaughlin's pension will total roughly $796,871 [annually!] if he lives to the age of 100.

To double-check my $796,871 annually claim, I used this Compound Interest Calculator.

At 6% per year, it would take about 24 years to grow to a benefit of $196,813 a year to $796,882.97. Thus I conclude McLaughlin is 76 years old. If he lives another 10 years, his annual pension would be $352,462.11 based on an career ending salary of a mere $63,510.

With this kind of absurdity, it is foolish to attempt to resolve this mess outside of bankruptcy. Those pension contracts should be declared null and void.

Restoring Equity

I would like to see a bankruptcy judge reduce McLaughlin's pension to the average of his last 10 years' salary. Teachers and others on the low end of the benefit scale should be the hit the least. That would be reasonably equitable.

Spare me the sap about legal contacts and promises. Those contracts and pension benefits were bought with bribes and dishonesty with no one looking out for the taxpayer. Fraudulent, self-serving contracts with no one representing the taxpayer should not be legally enforceable (and indeed they weren't for Central Falls).

More Cities, Major Cities Will Follow

Without even looking at the details, it's easy to speculate East Providence, Woonsocket, and Pawtucket are going to follow Central Falls and Providence into the bankruptcy gutter.

Moreover, it's only a matter of time before Oakland, Huston, LA, San Diego, Newark, Cincinnati, etc, go under. Bankruptcy is the only way to wipe out preposterous pension benefits, so expect to see more of them.

As with Detroit, Michigan (see Deal Reached to Prevent Michigan Takeover of Detroit; Really? No, Not Really; What's Best for Bankrupt Detroit?) bankruptcy would be the best possible outcome for taxpayers.

Bankruptcy is the only way to shed absurd union contracts and pension benefits.

Thus, taxpayers should be rooting for Taveras to ask for concessions so big the unions say "no deal". It is taxpayers' best hope of settling the mess in one shot without devastating tax hikes.

Inquiring minds might also be interested in American Airlines Went Bankrupt in November; Are Taxpayers on the Hook for Pension Benefits? What is the Equitable Solution?

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

EU says "Strict Application of Budget Rules Doesn't Make Sense"; Spain Kicks Off the Year Destroying 9,000+ Jobs a Day, 283,700 for Month; Impossible Dream

On January 30, 25 of 27 nations signed the Merkozy accord calling for strict budget discipline and "quasi-automatic sanctions" for nations that violate budget rules. Only the UK and Czech Republic refused to sign.

Following that ceremonious signing it took precisely two days for European bureaucrats to propose "Application of the rules in a strict manner in the face of a downturn doesn’t make sense".

Spain Poses Six-Pack Rules Challenge

Please laugh along with Spain poses six-pack rules challenge

Spain’s deteriorating economy poses the first challenge to Brussels’ commitment to enforce tough new budget rules intended to repair credibility with financial markets and ease the debt crisis.

“Application of the rules in a strict manner in the face of a downturn doesn’t make sense,” said Andre Sapir, a senior fellow at Bruegel, a Brussels think-tank. “One has to find a compromise.”

Olli Rehn, the economics commissioner, threatened to “fully use this powerful set of new tools from day one”.

But the EU’s executive arm is also sympathetic to Spain’s plight. Following a meeting in Brussels on Monday with Mariano Rajoy, the Spanish prime minister, José Manuel Barroso, the European Commission president, suggested that a debate was now under way on whether to make some accommodation for Madrid.

“Efforts should be made to contain the deficits for 2012,” Mr Barroso told reporters. “However, it would be convenient now to have a discussion ... about this situation.”

It also risks drawing the ire of fellow member states, which have already been exposed to tough consequences because of the six pack.

Belgium, for example, earlier this month cut more than €1bn from this year’s budget in a frantic weekend exercise in order to avoid fines – an experience that led a top minister to lash out at Mr Rehn. Meanwhile, Hungary was threatened last week with a freeze on its EU development funds for next year if it does not comply with the rules.

But such considerations may be overwhelmed by the severity of Spain’s situation. Even local business leaders who favour harsh curbs on public spending now say that sticking to the original 2012 deficit target of 4.4 per cent of gross domestic product is almost impossible and risks plunging the economy into depression.

Precise Targets Go Out the Window Already

Mr Rajoy’s ministers have recently been careful not to reaffirm their commitment to the precise 2012 deficit target of 4.4 per cent of GDP – although they reiterate their austerity pledges in general terms – and are evidently hoping that the Commission and Angela Merkel, the German chancellor, will accept the need for softer targets provided Spain launches its promised economic reforms.

“Once Merkel has the certainty that these [southern European] countries are doing the right thing, the stance of Europe may be relaxed,” says the banker. The head of another leading Spanish business said: “The important thing is that the path to a lower deficit should be credible and coherent.”

It should not take too long for Portugal and Ireland to find it "convenient" to also request a variance in the "Application of the rules in a strict manner".

Spain Kicks Off the Year Destroying 9,000+ Jobs a Day

Courtesy of Google Translate from El Pais, please consider The economy started the year destroying more than 9,000 jobs a day

As reported to the Ministry of Employment, Social Security membership fell by 283,700 people in January, about 9,000 jobs a day. The average number of employed fell below 17 million (16,946,237) for the first time since the beginning in 2005.

Courtesy of Google Translate from Libre Mercado, please consider Employment has Worst Start Since Fateful Year of 2009

Spain Social Security Membership



[Mish comment: Judging from the January numbers (all negative), the data is not seasonally adjusted.]

The total number of employed fell below 17 million (16,946,237) for the first time since 2004.



Very negative balance

According to the Foundation for Applied Economic Research (FEDEA), "after four years of crisis, employment continues to be destroyed, and what is worse, the intensity of this destruction increases."

Meanwhile, according to the Association of Large Temporary Work (Agettes), the January data show that "we continue down the wrong path. We are witnessing a dramatic scene again that, unfortunately, is unknown to us because we have four years assisting new negative record. The global economic situation continues to drown our perspective, while our own labor market tightens further the bit oxygen that remains."

Spain Unveils EUR 50bn Bank Sector Clean-Up

EU Business reports Spain Unveils EUR 50bn Bank Sector Clean-Up

Spain's government unveiled reforms Thursday that will oblige banks to clean up their bad loans by building up provisions and capital reserves totalling 50 billion euros ($65 billion).

The banking sector is weighed down by a mountain of soured loans and property assets that are losing their value after the collapse of the Spanish property market in 2008.

According to the Bank of Spain, the sector had 176 billion euros in problem loans and seized real estate in June 2011 -- a figure which has probably increased since, as the economy has weakened.

The sector has undergone a major restructuring since 2008 but the government considers it still to be at risk despite banks putting aside a third of this amount to cushion the blow when they sell off the bad assets.

The new reform aims to "generate mergers to form viable entities" out of struggling ones so that "the clean-up will be quick and deep", De Guindos said.

Impossible Dream

There was 176 billion euros in problem loans last summer. What is total now, 250 billion?

Banks are somehow supposed to come up with $50 billion in capital (when? how?) after which they merge struggling banks and via some undisclosed magic process  "the clean-up will be quick and deep" forming viable banks.

This is an easy call, especially in light of employment trends: That plan is doomed and Spain is in deep trouble.

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

American Airlines Went Bankrupt in November; Are Taxpayers on the Hook for Pension Benefits? What is the Equitable Solution?

American Airlines filed for bankruptcy in November 2011. Here is the question at hand: Will Taxpayers Be On The Hook For American Airlines' Pensions?

American Airlines needs $18.5 billion to cover its pension promises to current and former employees, but it has only set aside $8.3 billion.

American Airlines is asking the bankruptcy court for permission to drop its pension plans. If the court allows that, the plans will be taken over by the Pension Benefit Guaranty Corp, a government agency that takes over pension plans for failed companies.

The PBGC works like an insurance company. Firms that are backed by the PBGC pay premiums to the agency. Those premiums are supposed to pay for the agency's costs, so taxpayers don't have to pay. But in recent years the premiums haven't been enough — the agency's funding shortfall is currently $26 billion.

The PBGC, for its part, is pushing back against American's request. Here's a statement from PBGC Director Josh Gotbaum:

"Before American takes such a drastic action as killing the pension plans of 130,000 employees and retirees, it needs to show there is no better alternative. Thus far, they have failed to provide even the most basic information to decide that."

If the PBGC does wind up on the hook for American Airlines pensions, it would be the largest single claim on the agency since it took over United Airlines pensions plans in 2005.

Three Simple Questions

1. Why should taxpayers be on the hook for private pension plans?
2. Why are airlines bankrupt?
3. What is the equitable solution?

1A. Clearly taxpayers should not be on the hook.
2A. Airlines are bankrupt because of over-regulation and absurd contracts and benefits negotiated with unions
3A. The key to answering question 3 is contained in the answer to question 2. Unions negotiated pension befits that bankrupted the companies. Thus it is unions who are largely responsible and it is unions, not taxpayers nor other corporations who should pay the price.

Equitable Solution Details

With the above guiding principles, the equitable solution is straight-forward.

American Airlines needs $18.5 billion to cover its pension promises but it has only set aside $8.3 billion. That is a shortfall of $10.2 billion on $18.5 billion. In other words, a haircut of 55% on pension benefits will fix the problem.

Interestingly, that is nearly the same percentage haircut as just as happened in the Central Falls, Rhode Island Bankruptcy.

Some might protest that airlines should have been setting aside more money for their pensions all along. True enough. But the result would have been bankruptcy sooner, and it does not change who is to blame.

It's best to look on the bright side. A 55% haircut is far less than is going to happen to Greece.

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

Jim Grant is Ron Paul's Pick to Head Fed, Gingrich's Pick to Study Return to Gold Standard; Grant Waits for Call from Mitt Romney; One Fundamental Mistake by Grant

MarketWatch comments on the politics of Getting Back to the Gold Standard

The legendary Wall Street writer, publisher of Grant’s Interest Rate Observer, has been mentioned by two of the rivals for the Republican presidential nomination. Newt Gingrich said if elected president, he’d name Grant to help run a commission looking at a possible return to the gold standard. And Ron Paul said, if elected president, he’d go all-in and name Grant — one of Wall Street’s best-known gold bugs — as the new chairman of the Federal Reserve.

As Paul wants to abolish the Fed, it would doubtless be a temporary post. But Grant says he found the offer — which came out of the blue — very flattering.

Alas, both men are trailing in the race to front-runner Mitt Romney. “Unfortunately, I haven’t heard from Mr. Romney yet,” joked Grant when I called on him in his offices down on Wall Street. “I’m sitting by the phone, I’m ready.”

He may have to wait some time. Romney, a conventional Wall Street figure, is unlikely to tap him anytime soon.

Jim Grant is a paradox: A legendary, well-established figure on Wall Street who is not part of the Wall Street “establishment.” He is a raging contrarian. A writer from a more elegant age, Grant is also a scathing critic of “too big to fail” banks and the whole Wall Street racket — with its privatized profits and socialized losses.

He is best known these days — to Gingrich and Paul, among others — for his long-standing support for the gold standard. The world has moved in his direction. In 12 years, gold has risen from a derided relic trading at $250 an ounce to a hot investment at $1,750. Everywhere paper currency systems are under challenge. In 2008, the world discovered that you can’t just manufacture endless wealth out of thin air, as the gold bugs had long argued, and it is still struggling with the realization.

Many people will think of the gold standard as a relic of a bygone era, something as old-fashioned as bow-ties and stuffed animals. Grant, when we met, argued the reverse. He says paper currencies and our current monetary system are the ones that are out of date.

“The anachronism is today’s system,” he says. We have a “command and control, top down” system whereby the Federal Reserve imposes an interest rate on society. The Fed, in other words, tells us what the price of money should be. It is, Grant says, oddly at odds with the modern age. “We live in a world of collaborative social networks” of the Internet and Facebook, of Wikipedia instead of the old World Book, and so on. And yet when it comes to the price of money, we wait for a committee that sits in private to tell us what it should be.

I asked him, whimsically, what he’d do if he actually were to be named chairman of the Fed. He said he’d begin by communicating to the public why the present system was so wrong, and needed to be changed. He’d make the case for the gold standard.

“I would then lay out a timeline for the conversion to a constitutional dollar, a dollar as envisaged by the Founding Fathers. “ A dollar, he says, is supposed to be a fixed measure, “like a foot, or a pound,” not something that can be redefined every few weeks by the Fed.

In his ideal world, says Grant, he would lay out a three-year program to convert back to the gold standard, probably at around $2,500 per ounce of gold. He adds that he would take great care to avoid the notorious blunder made by Winston Churchill and the British back in 1925, when they went back on the gold standard at too high a price, and imposed brutal deflation on the economy. Alas, he admits, this would need an act of Congress.

For good measure, he’d also push for a repeal of a 1935 New Deal law that protected bank investors from runs on their financial institutions. Before the law, he notes, if a bank got into trouble, the investors were on the hook to bail it out: After all, it was their bank. The same was true of the partners in a Wall Street brokerage. The system of taxpayer bailouts, like that of paper money, is a modern innovation.

One Fundamental Mistake by Grant

Grant is certainly correct about the need to return to constitutional money. He is also correct about killing the FDIC.

However it is a mistake to think one can fix the price of gold. It cannot be done and should not be attempted. The irony is Grant correctly criticizes the Fed for fixing interest rates, then thinks he can correctly divine the correct price of gold at $2,500 an ounce.

Only the free market can determine the price of gold and what gold buys. If the US went to a 100% gold-back dollar, with guaranteed convertibility of paper to ounces of gold, the price of gold would be much higher than $2,500 an ounce.

Grant cites an error in 1925 in which the Bank of England set the price of gold too high. The opposite side of the coin is that if the price is set too low, is market participants will redeem all their paper dollars for gold, hoarding it.

Simply put, the Fed does not know the correct interest rate and Grant does not know the correct price of gold.

For the benefits of returning to a gold standard, please see

Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited

Premature Dollar Obituaries and Mainstream Economists' Monetary Insanity; Keynes-Inspired Great Depression; Lessons Not Learned

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