Trillions of Dollars Are Invested in "Socially Responsible Investing" . . . Why Not Invest in Freedom, Justice, 9/11 Truth, and Other Key Battles?

There are many good people spreading a lot of good messages of liberty and justice.

But trillions of dollars of investment capital is working against us and powering efforts to undermine freedom and justice. Specifically, trillions are invested into defense companies who push for new wars, and companies that torture on behalf of the U.S., and companies that spy on us, and companies that drive up food prices, destroy food safety, kill bees, and otherwise mess with our food supply.

In other words, all of the talk in the world won't turn things around if all of the money is working against what we're demanding.

Millions of us raised our voices and demanded that the U.S. not launch the Iraq war. Millions of us wrote to Congress and demanded that Bush and Cheney be impeached. But Congress listened to the large defense contractors and other well-financed companies (and flush lobbying groups, such as AIPAC), not to the American people. Actions speak louder than words, and money is

The Good News

The good news is that not all of the people investing the trillions of dollars are bad people. In fact, as of 2003, $2.16 trillion dollars - or 1 out of 9 dollars invested - was invested with the intent to be "socially responsible". That is 240% more than in 1997, when attempts at socially responsible investing totaled $529 billion dollars. The numbers are still increasing.

There are now numerous large mutual funds and other investment vehicles focusing on socially responsible investing (many of them get returns comparable to mainstream investments).

Some of the trillions invested through "socially responsible investing" (SRI) programs focus on big-picture issues like not investing in defense industry (others focus on things like tobacco, or wages). The motto of socially responsible investing is "doing well by doing good".

Indeed, the father of modern capitalism - Adam Smith - "argued that the benefits of the free market should accrue not just to individuals but to society as a whole."

There are also some banks that hold themselves out as "socially responsible banks".

And many companies are starting to understand that they will be more profitable if they "place social responsibility at the core of their business strategy". As one social investment manager notes:

"Thanks in part to the work of concerned investors, thousands of companies worldwide are publishing corporate social responsibility reports that lay out their codes of conduct, describe their progress on various issues and reveal where their products originate and who makes them. "

So there is a lot of money and a lot of interest flowing into investments which will do no harm, and maybe some good.

The Bad News

A lot of the social responsibility movement is a scam. A 2004 study found that the SRI industry has no standards or definitions, is unregulated and too often invests in the same companies as non-SRI mutual funds. Indeed, the study concludes that:

"The screening methodologies and exceptions employed by most SRI mutual funds allow practically any publicly-held company to be considered as an SRI portfolio company."

For example, one SRI mutual fund invests in "hiqh-quality growth stocks with no investments in the tobacco, alcohol, gambling, or pharmaceutical companies". That doesn't necessarily mean they don't invest in Halliburton. Another may stay away from defense companies, but that doesn't mean that they don't invest in companies that spy on Americans.

In fact:

"As of December 30, 2003, 23 SRI funds are invested in Haliburton . . . weapons manufacturer Raytheon was held by 12 funds; ExxonMobil was held by 40 SRI funds; and Monsanto, maker of genetically modified seeds and Round Up weed killer, was held by 19 SRI funds."

As entrepreneur and activist Paul Hawken notes, 'The term socially responsible investing is so broad it is meaningless. If a fund doesn't own companies involved with gambling and pornography, it can be called socially responsible."

(You can research what criteria or "screens" self-proclaimed SRI companies use here.)

And as for corporate social responsibility reporting by corporations, this is obviously largely motivated by acting like the company is doing good so as to attract customers and employees.

Harnessing Investments for Good

The important thing to note is the trend for people to want to do the right thing, and the trillions of dollars which investors are willing to put towards that goal. In other words, the fact that most of the social responsibility professionals are scammers (although there are some good ones) does not mean that the desire among investors to do good isn't there. It only means that unscrupulous people are trying to take advantage of the gullible (surprise surprise).

If we can harness the desire among trillion dollar investors to do good, it could go a long way towards supporting our struggle for liberty and justice. Specifically, if financial experts within the 9/11 truth, anti-war, impeachment, anti-torture and other patriotic movements set up socially responsible investment companies which can get reasonable returns for investors investing in things which promote our causes, then things could dramatically change for the better . . . since huge amounts of money would be working for our causes, instead of against them.

Don't tell me why this won't work. I can myself punch holes in the idea of harnessing huge investment sums to effect deep systemic change.

Instead, we need experts, visionaries and passionate activists to figure out how it can work and to make it happen.

My initial thoughts (I'm not an expert in any relevant area) are that we need a focused and coordinated effort to get this off the ground, including:

• Seasoned investment advisors, mutual fund managers, stock screeners and like experts starting new socially responsible investment companies which focus on the real and important issues, like liberty and justice. Or else taking over established companies to get them back on the straight and narrow, and focusing them on the most important issues of liberty, justice and truth. (There should also be a requirement that some leading activists in the relevant fields be on the board of directors, so that the money people don't get off track)
  

• Those who can get the word out (owners of popular websites, widely-read writers, etc.) spreading the word about the power of socially responsible investing to put wind in the sails of activist efforts

• Those who have squirreled away some savings should invest a little bit of our money in these programs (they'll hopefully pay a good return; even if they don't, we can take a little of the money we were going to invest in gold or other allegedly safe investments to promote liberty, justice and truth)

• Activists for freedom, justice and truth should be supported. For example, if a 9/11 activist can make enough money with his website, video, or books to quit his day job and focus on activism full-time, more power to him. Anyone who criticizes an activist for being able to support herself in that role is either a disinfo shill (it is usually apologists for the tyrants who raise such criticism) or out of touch with reality. Personally, I have a day job, and I don't get paid a dime for my activism. But I support people who do.
  

Catherine Austin Fitts (managing director and director of the Wall Street investment bank Dillon, Read & Co. Inc., Assistant Secretary of Housing/Federal Housing Commissioner at the US Department of Housing and Urban Development, and president of Hamilton Securities Group, Inc., an investment bank) has written along these lines (see this, this and this). Fitts knows a lot more about investing than I do, but so far she has not been very direct in how to set up investment systems which will help promote liberty and justice. Fitts claims that the government has put a gag order on her, so that she can't say what she knows. If that is true, it becomes even more important for a wide group of experts on money and investing - who aren't gagged - to get active with creating systems of social investment which can improve our country.

Congress Should Rescind the State of Emergency Declared by Bush

The White House suspended the Constitution and implemented Continuity of Government Plans on 9/11, based upon a declared state of national emergency. Bush has continually renewed the declared state of emergency up to and including today. See this.

The White House has done everything it could to scare people and convince them that America is under attack, as a way to justify the yearly renewal of the declared state of emergency and the continuing unconstitutional seizure of power by the executive branch.

In other words, the ongoing state of emergency is both the result of fearmongering and the justification for tyranny.

But Congress has the power to revoke the state of emergency.

Specifically, the National Emergencies Act, 50 U.S.C. Sections 1601-1651 (passed in 1976), gives Congress the power to countermand a presidential declaration of national emergency. Indeed, in 1976, Congress rescinded all of the declarations of national emergency made since World War II, as many of them had been on the books for years and were giving the executive unrestricted powers which were undermining the Constitution.

So in addition to impeachment, contempt for ignoring subpoenas, and a host of other powers, Congress can countermand Bush's declarations of national emergency since 2001.

With the declared state of emergency over, Continuity of Government Plans cannot remain in effect, and Congress is suddenly in a much stronger position to reign in Bush and Cheney.

Note to legal scholars: In 1983, the Supreme Court struck down a portion of Congress' power to countermand a declaration of national emergency. But Congress got around that ruling by amending the National Emergencies Act in 1985 to confirm Congress' power to countermand - through a joint resolution between the House and Senate - a declaration of emergency by the president (see this).

Moreover, in 2007, the Bush Administration tried to ignore the National Emergencies Act by issuing National Security and Homeland Security Presidential Directive 51. But that dog won't hunt. The Constitution does not allow the president to unilaterally cut Congress out of the picture.

Foolproof Recession Indicators

Economist Paul Kasriel at the Northern Trust has come up with a recession indicator that has called six consecutive recessions with no misses and no false positives dating back to 1962. It does however, have a single miss in 1960. The condition is an inverted yield curve as measured by the 10-yr treasury yield minus the Fed funds rate, in conjunction with an annual rate of change falling below zero on the CPI adjusted monetary base. With a small tweak in methodology as described below we can pick up that isolated miss in 1960.

Paul discussed his idea with me in an Interview with Paul Kasriel and I mentioned it in January in Leading Economic Indicators.

Comments from Paul Kasriel

• The "real" unadjusted monetary base (bank reserves plus currency) seems to provide fewer false recession signals than does real M2 growth. That does not necessarily mean that the real base does a better overall job of forecasting real GDP, just that it does a better job of forecasting official recessions. Mish notes: "Real" in this case means inflation adjusted via the PCE price deflator, and "unadjusted monetary base" means a non-seasonally adjusted monetary base.
• I have used the PCE price deflator to get "real" rather than the CPI for purely arbitrary reasons here, not theoretical -- I don't have time to explain now, but it is not a big issue. Mish note: There is a potentially confusing mix of terminology here but none of the charts in this post were seasonally adjusted (except perhaps for consumer sentiment and on that I am unsure). Our inflation adjustments used the CPI, and any references to "real" in what I wrote (as opposed to what Kasriel wrote) means CPI adjusted. As Kasriel suggests there is little difference between the two. We tried both and settled on using the CPI because that that is what Shostak did as explained in Money Supply and Recessions.
• Starting with the recession of 1970, a negative spread on the 10-yr Treasury minus the fed funds rate in conjunction with a contracting year-over-year change in monetary base/CPI has predicted recessions with no false signals. In Q3 and Q4 of 2005, the real monetary base contracted but the interest rate spread still was positive. Now, the interest rate spread has turned negative, but the real monetary base is no longer contracting -- just barely.
  

Kasriel fully explains his theory in the March 22 article Recession Imminent? Both the LEI and the KRWI are Flashing Warning.

I have found that every recession starting with the 1970 recession has been immediately preceded by the following combination - a negative spread between the yield on the Treasury 10-year security and the federal funds rate (hereafter referred to as "the spread) on a four-quarter moving average basis and a year-over-year contraction in the quarterly average of the CPI-adjusted monetary base.

The monetary base is the sum of bank reserves and coin/currency, both of which have been created out of thin air, as it were, by the Fed.

The following chart shows the historical behavior of the "Kasriel Recession-Warning Indicator" (KRWI).



The KRWI has given no false signals in that when it has warned of a recession, there has been one. Unlike the LEI, which signaled a recession for 1967, the KRWI did not. However the 1960 recession was not signaled by the KRWI because the spread remained positive, although it did narrow. As of the fourth quarter of last year, the spread moved into negative territory, but the year-over-year change in the real monetary base remained positive. So, like the LEI, as of the fourth quarter of last year, the KRWI had not signaled that a recession was imminent.

Barring upward revisions in the LEI and KRWI and sharp increases in the immediate months ahead, both of these indicators will be sending a signal that a recession is on the horizon. Perhaps this will be the first time in over 45 years that the KRWI will emit a false signal and only the second time that the LEI emits a false signal. Perhaps.

10 Yr Treasury Minus 3 Mo Treasury

For comparison purposes I asked Bart at NowAndFutures put together a chart showing the 10 year treasury yield minus the 3 month treasury yield (as opposed to the FF rate) just to see what we could find.



Bingo! A perfect seven of seven with no misses and no false positives. The two blue-grey ovals are conditions where only one of two conditions were met.

Note: The above chart was formulated by subtracting $IRX (the 3 month treasury discount) from $TNX (the 10 year treasury yield). The former is a discount not a yield so the chart is slightly off the stated intent but it is extremely close. I had Bart look at the actual data and the numbers did go negative intra-month even if it does not show it on the chart. Using a true yield instead of a discount would make the spread more negative, so the signal was definitely given (even if ever so slightly).

Interestingly enough the 10 year minus the 3 month spread by itself has no misses since 1960 (seven for seven) but it did have a single false positive in 1967. The CPI adjusted monetary base was also seven for seven but with a false positive in 2005. False positives in isolation are shown in blue-grey ovals. Together they are perfect.

Thus by using Kasriel's idea of a paired set of indicators but substituting the 3 month yield for the Fed Funds rate we achieve a perfect seven of seven dating back to 1960, picking up the single miss of the Kasriel's KRWI in 1960.

M Prime Update

M' is an Austrian money supply indicator that I have been following for some time and started charting (with help from Bart) back in January. See Money Supply and Recessions for the theoretical justification of M'.

M Prime and Recessions



An annual rate of change in M' dipping below the 0% line is a pretty rate event but does not necessarily lead to a recession. On the other hand in each of the last six recessions M' did have a significant dip (though not as severe as the one we see now).

Notes:

• The sweeps data is notoriously late. I am not sure why. The latest data we have is for January. We extrapolated that data forward for two months. That is the best we can come up with at this time.
• The biggest difference between M' and M1 is in sweeps data. M' properly picks up sweeps data while M1 has been distorted since 1995 by the lack of it.
  
• Kasriel mentioned to me in the interview that he felt the Fed includes sweeps data in their M1 analysis. We get the data from an obscure Fed publication that is not updated very frequently. Why isn't sweeps data part of the mainstream data and more up to date?
• We took this series back as far as we could find data. Unfortunately that is no further than 1968.
  

Real M Prime (CPI adjusted) and Recessions



As far as predicting recessions goes, M' CPI adjusted is clearly an improvement over M' straight up. The CPI adjusted M' gives off very strong but not perfect recession warning on a cross of the 0% line on an annual rate of change basis. In conjunction with an inverted yield curve M' is a perfect six of six with no false positives.

Unless it's different this time, another recession is headed our way. Depending on whether one uses M' or the monetary base as a starting point (either will do in conjunction with the 10yr-3mo treasury spread), we are headed for a perfect seven of seven or eight of eight in recession predictive ability (with the difference being how far back the data series goes). Both sets have no misses and no false positives. None of this even takes into consideration the mess in housing which is a pretty good leading indicator in and of itself.

Those looking at M2 or M3 alone as proof of economic expansion or as some sort of inflation picture are missing the big picture. The economy is slowing far faster than most think by the three best leading indicators once can find (the yield curve, rates of change in M' or Monetary Base, and housing). Financial speculation as evidenced by growth in M3 and the final buildout of retail stores already under construction are all that is keeping the good ship Credit Bubble afloat.

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

Italy Consumer Price Inflation June 2008

Italy's inflation rate was up agin in June to the highest in over 11 years as food and energy costs continued to rise. Consumer prices calculated using the European Union Harmonised methodology were up 4 percent from a year earlier, the most since the index was created in January 1997, and up from 3.7 percent last month, accodring to the national statistics office (ISTAT) today. Consumer prices in Italy rose 0.5 percent in June from the previous month,



Consumer prices are rising all across Europe even as economic growth slows. Oil prices have almost doubled in the past year and are near a record high today. European Central Bank President Jean-Claude Trichet and his team at the ECB will probably raise the bank's benchmark interest rates this week by a quarter-point to 4.25 percent. This will mean that economic activity in Italy will be under pressure from rising interest rates, fiscal spending reductions and the high euro all at the same time, and at the very moment when the Italian economy is showing considerable weakness.

At the same time Italian producer prices rose to their highest in at least eight years in May to 7.5 percent, according to additional data from the statistics office today. Energy costs for manufacturers are 21.5 percent over the last year, according to the report.

College Degrees Overvalued?

Are college degrees overvalued? According to researches with PayScale, the answer is yes, at least for the average student and relative to what most of us were promised by our high school counselors. Rather than the oft quoted return on investment (ROI) of around $1 million over 30 years, PayScale estimates that number to be less than $400,000. Indeed, some schools such as MIT have much higher ROIs, $1.7 million in MIT's case. As might be expected, traditional liberal arts schools lag behind--art, history, and education simply don't pay as well as engineering, the sciences, and mathematics.

I am amused by the common complaint by those schools with lower ROIs that their estimate would be much higher if PayScale would have accounted for financial aid. Firstly, it likely doesn't make much of a difference and certainly did not in the case of Philadelphia University (218,000 vs. 276,000--a gain, but still well below the average). More importantly, though, those grants and subsidized loans are not free. That money could have been used elsewhere where it may have garnered a greater return. Subtracting the financial aid awards from the cost of the education would be to ignore a substantial part of the cost and bias the estimates in favor of higher ROI.

By the way, Richard Vedder is quoted in the article linked above, explaining that the ROI for the college education in general is falling over time due to the increase in supply of people with college degrees.

EU Confidence Indicator

Confidence among European executives and consumers dropped again in June as inflation accelerated and the European Central Bank signaled it may increase interest rates to a seven-year high.

The index measuring sentiment in the euro area fell to 94.9, the lowest level since May 2005, from 97.6 the previous month. Europe's manufacturing, services and retail industries have all shrunk this month as the euro's increase reduced export competitiveness and soaring food and energy prices undermined purchasing power. Oil reached a record above $143 a barrel today. Even as economic growth eases, ECB President Jean-Claude Trichet has said the bank may raise the benchmark rate on Thursday by a quarter point to 4.25 percent to tame inflation.


The sub index of confidence among manufacturers across the 15 nation eurozone fell to minus 5 in June from minus 2 in May, while consumer sentiment dropped to minus 17 from minus 15, according to today's report. Confidence in the construction and retail industries also declined.



The euro has increased 17 percent against the dollar in the last 12 months. A measure of companies' selling-price expectations rose to 16 in June from 13 in May, which compares with an average reading of 6 over the last 18 years, according to the commission report. Consumers also expect prices to rise more sharply than they did last month.


Separate figures released last Friday showed France's economy expanded less than initially estimated in the first quarter as household spending, the driving force of growth, stagnated.




Recent data show few signs that the situation is going to get any better. The June purchasing managers index for the eurozone fell in June, dropping further below the 50-point level that signals contraction. In the services industry, new business also declined this month.

Is the Fed really "pumping money"?

I had a very interesting email exchange with three Minyanville professors about whether or not the Fed is "pumping money". The three professors are Fil Zucchi, John Succo, and Scott Reamer.

The discussion started off with an email to Fil Zucchi so let's start there.

Mish to Professor Zucchi

Fil, I would like to discuss a comment you made about the “Fed pumping money”. I am not trying to nitpick but "pumping money" doesn't seem to be the best description of what is really happening. Here is how I look at things:

This Fed has chosen to defend an interest rate target. The Fed must supply all demand for credit at that target. If the Fed failed to do so the interest rate target would not be hit and interest rates would either rise or drop accordingly.

Now I am a big fan of abolishing the Fed and letting the market set rates, but as long as the Fed has an interest rate target (as opposed to a money supply target) the Fed is not pumping money per se, the Fed is defending an arbitrary target that it has established, no more no less. Thus it is not the Fed initiating anything, the Fed is merely meeting demand for money at the arbitrary target they set.

Now if the Fed instead set money supply targets instead of interest rate targets then interest rates would float day to day and money supply policy would be known. Yet every day I hear the same comments every day “The Fed is pumping to save housing” or “The Fed is pumping to save the stock market” or “The Fed is pumping the PPT”. All of this kind of talk seems ass backwards to me. The Fed is meeting money supply demands at its target. Period. Typically the Fed has been meeting demand for money with repos. Repos are short term loans, not part of permanent money supply.

But people take these ideas about “pumping” as well as conspiracy theories about M3 and draw still more inaccurate conclusions as to what is going on. I can and will make a case that looking at M3 in isolation is missing the big picture (at least from an Austrian perspective) as to what is really going on with money supply. But that is another issue for Friday or early next week in my blog.

Right now, it’s time to clear up this “pumping money” issue. Claims that the “Fed is pumping money” is putting the cart before the horse because by defending an interest rate target instead of a money supply target the Fed does NOT have a choice as to what the demand for money will be at its designated (and arbitrary) target currently set at 5.25%.

In essence I feel that "pumping money" statements only serve to reinforce various conspiracy theories that are now running rampant. If I am mistaken then perhaps you or John Succo or Scott Reamer can clear up my misconceptions and I welcome the opportunity to learn.

Response from Professor Zucchi

HI Mish – great points and I understand what your saying, but I am not sure I agree entirely with it. A response will require me to wear my thinking cap for a while, but I’ll certainly post one. Meanwhile I’m gonna send this on to Succo, Reamer and Sedacca as I imagine they may wanna give a crack at it as well. Hear u soon, Fil

Response from Professor Succo

Both are right…we are picking over semantics.

The Fed has set an artificially low interest rate. The market wants higher rates because it sees the problems these low rates are causing: that money is getting into speculation and very low grade credit. The Fed must supply enough new credit (repo) in order to keep rates from rising. The recent steepening of the yield curve is telling us that this is hard to do: they are doing too many repos trying to keep rates low.

If the Fed wants to stop pumping money they would admit that rates are too low and would raise them.

In fact the recent steepening is very alarming. It is due to defaults/foreclosures/ where lenders are saying they cannot continue to pass on to speculators/low quality borrowers all that new credit the fed is trying to force into the market.

An inverted yield curve normally predicts a recession. That recession comes home to roost when the yield curve suddenly steepens our of that inversion: the market is tightening out of necessity just as the fed is trying to make it not to.

Response from Professor Reamer

There is another operational element here that very few folks appreciate and it is this: In setting the fed funds target rate and defending it, the Fed’s open market operations take the form of either pumping liquidity into or out of the banking system (via Fed Funds) in an effort to keep the target rate at (for now) 5.25%.

Let’s say that economic activity is heating up; there is more manufacturing activity, more employment, more lending by banks and as a result of all of those, more demand for short term monies by commercial banks. Bank lending activity goes up and their demand for short term money (the cost of which is set by the Fed) increases commensurate with their need to keep capital/coverage ratios at whatever bare minimum regulations demand they be. So, net/net greater economic activity implies more money demand by commercial banks. If money demand by commercial banks increased, in the absence of the Fed, we would see the ‘cost’ of the money (the interest rate) do what?

Like all goods, when the demand for something goes up, the price increases in the short run. So in the case of short term (Fed) funds, increased economic activity generates greater demand for short term funds by commercial banks and that increases the cost of those monies – increases the interest rate of these monies. But the rate – cost – of Fed Funds is 5.25% and the good boys at the NY Fed have pledged that it will defend the FOMC’s Fed Funds target – neither letting it rise nor fall. But if increased economic activity is driving up the Fed Funds rate, then the Fed must increase the supply of credit in an attempt to keep the rate at 5.25%. This is of course a basic law of economics: in the face of increased demand, prices rise. The only thing that can keep prices the SAME would be an immediate increase in supply. And that is what the NY Fed does when economic activity increases – they increase the supply of monies in the system (via repos and other means) in order to defend that Fed Funds target.

More interesting than that is what happens when economic decreases. The opposite situation arrives: when economic activity decreases the demand from commercial banks for short term funds decreases and thus the price (rate) falls. In order to maintain and defend that fed funds target in a scenario where economic activity is decreasing and lending activity is slowing, the Fed has to decrease the supply of monies available to the system. Thus, the Fed will be taking money from the system once economic activity decreases unless and until they change the Fed Funds rate target.

That period of time between a slowdown in economic activity and an eventual decrease in the Fed Funds rate can take months or quarters. If the size and severity of the misallocation of investments in the economy are significant, that period where the NY Fed open market desk is defending the FOMC’s rate by decreasing monies in the system, need not be lengthy at all to create the kind of tightening of monies that is so anathema to a credit-driven, asset-based economy. A few months of taking money out of the system in order to defend a Fed funds target is all that is theoretically needed to create the type of tail event that we believe it highly probable in the credit and stock markets, not to mention the real economy.

The conditions of decreasing economic activity are present; the malinvestments are both huge and pervasive; the Fed could easily start to take money out of the system to keep the Fed Funds rate at 5.25%; and commercial bank lending declined last week more than it has at any time since February 1960. Those are the conditions – sufficient but perhaps necessary – for a credit-based contagion event. And few times in history have markets been implying the odds of this are so low.

I took the liberty of passing on Professor Succo's comments to my Austrian minded friend who goes by the name of Trotsky.

Trotsky Chimes In

• You are right - Since the Fed has abandoned 'money supply targeting' it merely supplies WHATEVER the market demands at the prevailing set target. Note however, that lately, the Fed has supplied funds quite often well BELOW target, so the idea that it is busy 'pumping' right here and now is not totally off the wall. Nonetheless I agree with the general thrust of your argument.
• Succo is also right - When the curve begins to steepen out of an inversion, the recession alarm bells go off. This is due to the nature of the whole thing - Why is the curve inverted? It is not because the Fed has deliberately inverted it - After all, in setting the FF rate, the Fed actually tends to follow rather than lead the short term market interest rate. In other words there is a feedback loop - when the market expects them to tighten, it will raise t-bill yields before they actually tighten, and vice-versa. So what creates inversions? It is mostly enormous demand for short term speculative credit.
  
• The previous episode of money pumping (examine money supply growth charts for 2001-2002 when they dropped rates to 1%, and you will see they went off the charts) begins to percolate through the markets setting off asset bubbles (stocks, housing, commodities - what have you), that produce returns that far exceed the rate charged by the Fed. Consequently, demand for credit based speculation heats up, as the bulk of traders, hedge funds, etc. are simply trend followers. This eventually inverts the curve. Thus, when the curve begins to steepen out of an inversion, it signals a growing loss of liquidity, as speculative demand for credit wanes (for whatever reason - it could well be that lenders become reluctant to supply more credit, such as is the case in housing now).
• The 'market is tightening out of necessity' just as Succo has put it. Since the boom was entirely artificial and credit driven, the sudden loss of credit intermediation support shows up as a steepening curve and morphs into a recession/bear market.
• The Fed IS or HAS BEEN pumping in the sense that the rate it has set is still lower than the one the market would have set if rates were completely free in the face of such overwhelming demand for credit. In short, the housing bubble would have been stopped in its tracks much sooner in a truly free market, as the demand for mortgage credit would have pressured rates higher much earlier. Of course, in a truly free market, the entire rate term structure would look different - there would be scant difference between short and long rates most of the time, and rates overall would be far lower in an honest money system.

Discussion Points

• As Professor Reamer points out the big risk is for a "credit-based contagion event" especially if the Fed artificially tries to hold the Fed Funds Rate higher than where the market thinks rates should on the way back down. Such actions would require various monetary draining operations by the Fed that perhaps the market is not prepared for.
• If the Fed has indeed been supplying money at rates below the Fed Funds Rate as Trotsky pointed out, then the word "pumping" in and of itself seems appropriate.
• If the Fed was targeting money supply instead of defending an arbitrary interest rate target it would be easier to defend claims one way or another whether or not the Fed was "pumping money".
  
• In a free market economy where the market set interest rates instead of the Fed, the housing bubble never would have gotten as big as it did because interest rates would have been driven higher faster and may not have gotten as low as they did in the first place.
  

Outside of the Fed supplying money below their targeted rate, this may be a debate over semantics as Professor Succo suggests. Nonetheless I am sticking with my cart/horse scenario simply because defending an interest rate target while claiming to be fighting inflation (as the Fed is doing now) is putting the cart before the horse.

When it comes to inflation fighting discussions, talk about the CPI, PPI, capacity utilization, as well as the price of oil, copper and cotton is in reality nothing but a sideshow. Inflation starts with an expansion of money and credit. It is striking (as well as absurd) that we have a monetary policy where the Fed discusses everything but money.

By arbitrarily defending interest rates targets that the market never would have set, the Fed put itself in a box and started chasing its own tail inside that box. The Fed is now wondering what to do next when there simply is no right solution at this point other than to abolish the Fed and let the market fix the problem over time. Since that is not about to happen any time soon, the best we can do is watch for conditions that might signal the beginning of a "credit-based contagion event".

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

Top Advisor to U.S. Military Confirms The War on Terror Is a Hoax: "There is No Battlefield Solution to Terrorism"

A leading advisor to the U.S. military, the Rand Corporation, just released a new study called "How Terrorist Groups End: Lessons for Countering al Qa'ida".

The report confirms what we have been saying for years: the war on terror is a hoax which is actually weakening national security (see this, this and this).

As today's press release about the study states:

"Terrorists should be perceived and described as criminals, not holy warriors, and our analysis suggests that there is no battlefield solution to terrorism."

Can we drop the "war on terror" charade now?

Time Inconsistency Overcome: What happens to your pets during the Rapture?

I wonder if Tyler Cowen realizes how right he is when he says that there are markets in everything. I'm sure you've been concerned about what will become of your pets during the Rapture. Sure you're saved and will ascend to heaven directly. But what about poor fluffy?

Fluffy doesn't ascend with you, but you still love her don't you. Don't you want her to spend the rest of her days in comfort? If only there was a company that promised to look after your pets after you ascend to heaven? There is at least one http://eternal-earthbound-pets.com/

It's easy to make fun of this, but it is impressive that people have apparently solved the time inconsistency problem. You pay up front but they take care of your pet after you die. They have every incentive to let your poor pooch suffer while they spend their money on wickedness.

Perhaps you think that this isn't so different from regular life insurance. You pay premiums year after year hoping that the life insurance company will pay your beneficiaries. (Companies don't always look very hard for your beneficiaries.). But life insurance before the Rapture is different than life insurance afterwards. Without the Rapture insurance companies want to pay claims so that they can build an honest reputation and continue to get business. And of course the beneficiaries of most insurance policies can sue. Poor fluffy can't sue, and who knows what will happen to the legal system after the Rapture.

Apparently the companies spend resources making believers believe that the non-raptured are actually moral enough to take care of the pets once you've ascended. I think that's a great private sector response to a market failure.

Externalities solved by bees, Private Lighthouses providing public goods, Rapture Insurance; what can't markets solve?

Italy Retail Sales April 2008 and June PMI

Italian retail sales were stationary in April on March in seasonally adjusted current price terms (ie without allowing for inflation) according to the latest data from ISTAT, and were down 2.3% year on year. When allowing for inflation (3.6% in March) they were down a total of 5.9% in real terms.

And by June the situation had deteriorated even further according to the latest Purchasing Managers Index (PMI) reading. Italian retail sales declined for the 16th consecutive month as rising oil and food costs eroded consumers' disposable income, the Bloomberg purchasing managers index showed. The seasonally adjusted retail sales index fell to 36.3 from 38.8 in May. The index is based on a survey of 440 executives compiled for Bloomberg LP by Markit Economics. A reading below 50 indicates a contraction.




Obviously the continuing inflation and negative consumer sentiment are affecting sales. Italian consumer confidence fell more than economists expected in June to near a two-year low, because of rising prices, according to a June 24 report.



More than 55 percent of the Italian retailers surveyed said they missed their June sales target, and profit margins tightened as they tried to lure customers with discounts. About 38 percent reported paying higher wholesale prices for the goods, they sell, according to the report.

The decline in Italy was mirrored by falling sales in France and Germany, pushing down the European retail sales index to 44 from 53.1. That was the second-biggest drop in the survey's four 1/2-year history.

Beyond "Right-Wing" and "Left-Wing"

The murder of liberal unitarian churchgoers by a right-wing nut is truly horrible. The killer - Jim Adkisson - apparently was influenced by such right-wing talking heads as Michael Savage, Bill O'Reilly, and Sean Hannity.

But let's put this in perspective . . .

• The Unabomber, Ted Kaczynski, was liberal. He killed people because he thought they were harming the environment. He was a left-wing nut.

• Both liberal and conservative administrations have engaged in false flag attacks

Moreover, Savage, O'Reilly and Hannity are not true conservatives. They are stooges for the neocons and other criminals running our government. True conservatives like Ron Paul oppose the fascist and militant stands of the neocons and their media lapdogs.

Instead of cheering the destruction of the Constitution and the rule of law like Savage, O'Reilly and Hannity do, true conservatives like Ron Paul are working with liberals in order to save our constitution (just like many true conservatives endorse Dennis Kucinich's battle to impeach Bush and Cheney).

I'm frankly sick of all this right-wing versus left-wing talk. The labels "right-wing" and "left-wing" are largely outdated. Neoconservatives are not conservative, and neoliberals are not liberal. Some of the biggest war hawks call themselves "liberal", and some of the biggest hypocrites and liars call themselves "conservative".

Frankly, I don't care what you call yourself. America is in real trouble, and the hour is much too late to focus on peripheral issues. The only thing I care about is whether you are working for liberty, justice, truth, peace and sustainable prosperity or against them.

Even if you hate the people on the other side of the political divide, can't you put off that debate for a little while? You can't even play the game if you don't have a playing field to play on.

The people who are turning the world against America, weakening our national defenses, bankrupting our country, and trampling on our liberties are not "right-wing" or "left-wing", but simply unAmerican.

Until the rule of law and a stable economy are restored to America, why don't we focus our passion on getting the traitors and economy-wreckers out of power and into jail, where they belong. Let's unite - at least for now - to protect America itself.

Europe's Retail PMI

Euro area retail business conditions continued to deteriorate in June, with sales, employment, purchasing of stock and margins all falling when compared with May. The Bloomberg Euro-Zone Retail Purchasing Managers' Index did however rise from 47.1 to 47.5 in June. On the other hand, the reading remained below 50.0, meaning that activity was still lower in June than in May.

So, despite reasonable consumer confidence readings, consumption in Europe remains weak. German retail sales fell for a 13th month in June as households continued to curb spending, according to the latest Bloomberg/Markit purchasing managers’ index survey. The PMI was down to 46 from 46.3 in May. Any reading below 50 signals contraction.



German retail sales have now been falling since 2006, according to data from the Federal Statistics Office.




But if you thought the German retail sales performance lacklustre, you should try using the Italian one as a benchmark. Italy saw sales drop for the twenty-eighth consecutive month in May. The retail PMI rose from 46.5 to 47.0. Well, let's be positive, this was the smallest monthly decline since October 2007. The rate of contraction has now moderated constantly since last November's record drop.




Which brings me to one of the themes I will be looking at in more depth over time: France. In my opinion it is the French economy, and not the UK one, which is currently the most robust in Europe, and the big question will be, why is this? Meantime, retail sales fell in France for the fifth successive month, but the rate of decline was only 49.4, just below the expansion mark. And the best performance this month.

The Disposable Workforce

The myth is that jobs are plentiful, the economy is geared for growth, and capital spending will pick up where real estate left off. The reality is something else on all accounts.

In Detroit 26,000 apply for 1,000 casino jobs.

About 300 lined up outside MGM's new staffing center on Tuesday in Detroit to apply for 1,000 positions. Those without computer access can use one of the center's 25 workstations to apply for one of the jobs at the permanent gaming complex, which will open this year.



More than 26,000 people have applied online for the 1,000 jobs MGM Grand Detroit intends to fill with the opening of its permanent $765 million hotel and casino complex later this year.

The deluge of applicants -- a reflection of the region's sagging economy -- has come in the nearly three weeks since MGM Grand announced its hiring goals for the new entertainment complex at Third and Bagley streets.

MGM's hiring has been a bright spot in an otherwise dour job market. Michigan has the nation's highest unemployment rate, with the region reeling from the loss of thousands of manufacturing jobs in the automotive industry. The region, too, has been stung by drug giant Pfizer Inc.'s plans to close its Ann Arbor compound and pull more than 2,000 jobs out of the area, and by Comerica Inc.'s decision to relocate its headquarters and 200 workers from Detroit to Dallas.

Many in line at MGM on Tuesday weren't concerned about the per-hour wage. They just want work and a paycheck.

"I'll take anything that is available," said Sharika Haywood, 21, of Detroit, one of the job-seekers in line Tuesday. "I've looked for a job every day. I've filled out applications but never get a call back. I'm hoping that something comes through here."

'I need a job'

MGM's hiring efforts couldn't come at a better time for Terry Pardon, a 45-year-old father of three who lives in Harrison Township and was laid off from a construction job a week ago. "I need a job that pays and has benefits," he said. "I'm going to apply for a maintenance job. It's tough finding a job anywhere in Michigan."

Veneisha Boyce, 23, of Detroit was looking for a housekeeping or security position.
"But I'm looking for anything," said the single mother of a 3-year-old daughter. "It's tough finding a job. I need a job with benefits."

Guy Janicki, 64, of Grosse Pointe Woods said he can't afford to retire and would like a job as a dealer or cashier. For the past 10 years, he has been a cashier at a downtown parking structure.

"I've been looking for work, but I just can't find any," he said. "It's pretty rough in the job world."

Detroit Summary

1. I've been looking for work but can't find any.
2. I need a job with benefits.
3. I'm looking for anything.
4. I can't afford to retire.

Unfortunately this is not just Detroit I am talking about. Nor is this is a manufacturing thing. Areas where housing has been booming and jobs were more plentiful are going to get hit hard as well. Retail stores followed the home expansion and that provided additional sources for jobs. But few are looking ahead to see what happens when that retail expansion stops. Fewer still see the actual jobs contraction that is coming.

Pay close attention to point number 4 as well. We are going to hear more and more about it. Too many baby boomers are simply not prepared for retirement. Any number of things can happen even to those who think they are prepared: rising property taxes, insurance or medical costs may force some back out of retirement. Others may be hit hard in the next stock market decline. Penson plans that are under funded may renig on benefits. And far too many are dependent on their houses for a source of income.

Grim Reality

With that backdrop it is fitting that Bill Gross at Pimco is talking about the Grim Reality.

It will not be loan losses that threaten future economic growth, however, but the tightening of credit conditions that are in part a result of those losses. To a certain extent this reluctance to extend credit is a typical response to end-of-cycle exuberance run amok. And if one had to measure this cycle’s exuberance on a scale of 1-10, double-digits would be the overwhelming vote.

Anyone could get a loan because shabby credits were ultimately being camouflaged within CDOs that in turn were being sold to unsophisticated foreign lenders in need of yield as opposed to ¼% bank deposits (read Japan/Yen carry trade). But there is something else in play now that resembles in part the Carter Administration’s Depository Institutions and Monetary Control Act of 1980. Lender fears of potential new regulations can do nothing but begin to restrict additional lending at the margin, as will headlines heralding alleged predatory lending practices in recent years. After doubling over 18 months between 2005 and the first half of 2006, non-traditional loan growth has recently turned negative, and lenders’ attitudes are turning decidedly conservative as shown in Chart 1. [Annotations by Mish]



Bulls and bears argue over websites as to the percentage of all lending that subprime and alternative mortgage loans provide but while important, the argument obscures the critical conclusion that tighter lending standards and increased regulation will change the housing outlook for some years to come. As past marginal buyers are forced to sell their home to prevent foreclosures, so too will future marginal buyers be restricted from buying them.

Looking forward I see little chance that housing has bottomed. Not only are credit standards tightening significantly but the process has barely started timewise. Between 1991 and 1994 we saw a 45 point drop in roughly 3.5 years. We are only half a year in the credit tightening process and we still have not see the effects of mortgage ARMs resets. This was the biggest housing bubble in history. Can credit standards tighten or stay high for another 3 years? 6 years? Why not? Better yet, why shouldn't they?

There has never been a national housing (credit/debt) bubble as big as this one. Indeed, because of the carry trade and loose economic policy everywhere, this is an international fiasco. We are in uncharted territory and the good ship "Credit Bubble" is taking on water fast. It can capsize at any time.

Capital Spending

The ongoing myth is that capital spending will pick up where housing left off. The theory is truly inane as I have stated many times. Why should businesses expand when consumers are pulling back. It makes no sense.

Two years ago there was nothing but denial culminating with Time Magazine's cover "Why we are gaga over real estate". Is anyone of merit denying the housing bubble anymore? The capital spending myth will likely perpetuate as well until it shatters just as various housing myths were shattered one by one.

The Disposable Workforce

There was an interesting article in Bloomberg today Circuit City to Fire 3,400, Hire Less Costly Workers.

Circuit City Stores Inc., the second-largest U.S. electronics retailer after Best Buy Co., fired 3,400 of its highest-paid hourly workers and will hire replacements willing to work for less.

The company said its eliminating jobs that paid "well above" market rates. Those who were fired can apply for the lower pay, company spokesman Bill Cimino said today. He declined to give the wages of the fired workers or the new hires.

"Firing 3,400 of arguably the most successful sales people in the company could prove terrible for morale," Colin McGranahan, an analyst with Sanford Bernstein & Co., wrote in a note today. "The question remains as to whether Circuit City can rebuild in time for the all-important holiday season."

The fired employees will get severance pay. Today's job cuts, as well as plans announced last month to close 600 stores and cut 400 jobs, will result in a $145 million pretax charge in the fiscal 2007's fourth quarter.

Circuit City pays about $10 to $11 an hour, on average, said Rick Weinhart, an analyst with BMO Capital Markets Corp. in New York. Entry level pay probably is close to $8 for inexperienced workers, he said.

Chief Executive Officer Philip Schoonover was paid $8.52 million in fiscal 2006, including a salary of $975,000. Best Buy CEO Brad Anderson received $3.85 million, including a $1.17 million salary.

Circuit City, along with Best Buy, was forced to slash TV prices during the 2006 holiday season after Wal-Mart Stores Inc., Home Depot Inc. and CostCo Wholesale Corp. began selling flat panels for less.

The job cuts are "one of the most brazen examples of corporate America run amuck," said Greg Tarpinian, executive director of Change to Win, which represents seven unions and about 6 million workers. "It's workers as disposable commodities, put in and put out based on whatever happens to the stock price."

Key Points

• Workers are being fired simply because they make too much money not because they are no longer needed. While this has happened before, typically under the guise of some sort of "rightsizing" effort, this is the first explicit massive public disclosure of this nature on this scale that I can think of.
• There are price wars on retail goods involving Walmart, Circuit City, Costco, Home Depot and Best Buy. So much for the idea that input costs are rising so prices on stuff will follow suit.
• There is unrelenting pressure on wages. That pressure has now expanded outside the automotive/manufacturing sectors to jobs paying as little as $11 an hour. Think raising the minimum wage will do any good? If so, think again. An increase in the minimum wage is going to cost jobs, 100% guaranteed.
  
• The second largest electronics retailer is closing 600 stores. Can anyone say "overexpansion"?
• Kiss those capital spending savior thoughts goodbye.

Unemployment is going to skyrocket and the fuse is already lit. I have been asking for months what exactly we need more of that is going to cause corporations to expand capital spending. That's now the wrong question. The right question is "How big are the cutbacks going to be?"

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

Speculators Trying to Buy Control of Food Supply

According to the New York Times, Financial Times, and others, hedge funds and other investors are buying up farms, farmland, fertilizer, grain elevators, shipping equipment and other necessities for producing food.

Given the meltdown in the housing and financial sectors and the weakness in the U.S. economy, large investors figure that everyone has to eat, and so investing in food production is a sure thing.

That means that speculators will drive up food prices.

As Jim Hightower puts it:

"By 'owning structure,' they mean centralizing control of food in the hands of financial manipulators who have only one crop in mind: fat profits.

***

Price? Aha! That’s what consolidation of farms and storage facilities is all about. If you can lock down production and stockpile the supply – you can control price. If corn prices are lower than what investors want them to be, simply store the corn and force prices up. Or, if corn prices are down in the U.S., ship it to Japan or wherever else might be more profitable. And if these distortments cause a food crash? Hey, the speculators will already have sucked out billions in profits, and they will just move to the next hot investment.

Hedge funds bring nothing but greed and grief to the farm economy and our food supply, and they should be banned from 'owning structure.'"

Hightower may be right: we should demand that Congress prevent speculators from buying up one of the main necessities.

Moreover, this just strengthens my conviction that we should guarantee our access to inexpensive and healthy food. See this and this.

U.S. Constitution Under Siege

The most recent issue of Time Magazine has an article U.S. Constitution Under Siege over Libya, Taxes, Health Care. The article goes on to examine four issues that are raising constitutional questions: Libya, Obamacare, the debt ceiling and immigration. "Today's debates represent conflict, not crisis. Conflict is at the core of our politics, and the Constitution is designed to manage it. There have been few conflicts in American history greater than the internal debates the framers had about the Constitution. For better or for worse — and I would argue that it is for better — the Constitution allows and even encourages deep arguments about the most basic democratic issues. A crisis is when the Constitution breaks down. We're not in danger of that."


What is the origin of the constitution? Andréa Ford claims that the constitution was not established to limit government.  "If the Constitution was intended to limit the federal government, it sure doesn't say so. Article I, Section 8, the longest section of the longest article of the Constitution, is a drumroll of congressional power. And it ends with the "necessary and proper" clause, which delegates to Congress the power "to make all laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof." Limited government indeed."


James Buchanan in his contribution to the economic discipline examines the issue of constitutional political economy.  As Ed Younkins writes, "Buchanan distinguishes between two levels of public choice—the initial or first level sets the rules of the game through the choice of a constitution and the second or post-constitutional level involves playing the game within the rules. Different rules have different distributional consequences and the rules chosen are applicable into the future. Constitutional politics thus places boundaries over what ordinary politics is permitted to do. Ordinary political decisions are made often based on majority voting. One of Buchanan’s major contributions is bringing attention to the two-level structure of collective decision making.

Two types of analysis fall under the taxonomy of public choice—constitutional economics and operational public choice analysis. The purpose of constitutional economics is to legitimize the existence of a constitutionally circumscribed state and to discuss what type of constitutional rules could reasonably reach unanimous consent at the stage of constitutional choice. Buchanan’s primary interest lies in constitutional choice and constitutional reform. Operational public choice analysis deals with political processes within existing constitutional structures. Operational public choice analysis involves the study of a nexus of evolving exchanges, bargains, trades, agreements, contracts, and side payments."

For Buchanan the issues is one of pre and post constitutional political economy.  The pre-constitutional idea was a contractual arrangement where individuals set and agreed on the rules.  The post-constitutional world is one that each of us has an obligation to participate in the constitutional dialogue to insure that we maintain this contract.  This a powerful idea and Public Choice theory provides us the tools to examine the political decision making in this post constitutional world, and can explain why we will violate the constitutional rules.

Buchanan also addressed the issue of anarchy and decided it could not work, but a group of young public choice scholars such as Edward Stringham, Benjamin Powell, Chis Coyne, and Peter Leeson are returning to this question.  They argue that constitutional constraint cannot work as long as government is both rule maker and umpire.

The issues of constitutional crisis, reform, and anarchy are all ones we should be thinking about and participating in a dialogue about today.

Three Clowns

In one of the most blatant cheerleading fluff interviews in history, Bloomberg touted a "Housing Panel Discussion Like No Other". Indeed it was. Click on the link for an audio of what can best be described as a three ring circus act.

Meet The Clowns

1. Chris Kelly (CGK Construction)
2. John Sauro (North Atlantic Mortgage Corp.)
3. Conrad DeQuadros (Bear Stearns)

Clown Excepts

Chris Kelly (CGK Construction)

• Lower home prices are because builders are building smaller homes not because of price cuts.
• On existing home sales, if people drop their prices they are still going to come out ahead.
• It's not like you are going to get a 3000 square foot house for cheaper price. You will get a 2000 square foot house for cheaper price than a 3000 square foot house.
• Land still costs and materials have not dropped in price.
• The only savings is in the size of the house.
• Looking forward to a strong season.
• The FHA was not giving out enough money to buy a house.
• FHA raising limits would help things out a lot.
• If someone can get $425,000 from the FHA they can buy a home from me.

John Sauro (North Atlantic Mortgage Corp.)

• Chris Kelly is right about home prices.
• People selling existing homes are still making money.
• The market was "very healthy" over the last 3-5 years.
• People pricing their home to sell will still make money.
• Delinquencies will peak in 2007 well below past peaks.
• A lot of subprime lending concerns are very overblown.
• We do not want to see subprime programs go by the wayside.
• Now is an excellent time to buy as home.
• The subprime market helped the first time homebuyer to get a home.
• Rate hikes have gotten the Fed into trouble.

Conrad DeQuadros – Senior Economist - Bear Stearns

• Unusual weather patterns created volatility in housing.
• We are probably near the bottom here.
• Homebuilder sentiment index shows increases in sales are expected this year.
• OTHEO has it right and saw a 6% increase in prices by Q4.
• The economy is on a firm footing.
• The labor market is strong and that will support the consumer.
• We may see a modest moves up in interest rates second half of 2007.

Totally Lame Excuses

• Blaming the FHA for not making enough loans.
• The weather.
• Rate hikes got the Fed in trouble.
  

Totally Lame Statements

• Home prices are not dropping, rather homes are getting smaller.
• The economy is on a firm footing.
• Subprime concerns are overblown.
• The labor market is strong.

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

Jerry O'Driscoll Sums up the Situation in Financial Markets

Bob Higgs has a post on why hyperinflation hasn't occurred in the US.

Pete Boettke has a post on Bob Higg's post.

Jerry O'Driscoll made a comment on Pete's post.

Though two degrees removed from the initial commentary, Jerry's observations are spot-on and wonderfully succinct. I thought that they were worth repeating here.

Some of the reserve creation has supported lending overseas. And asset bubbles.

Banks are capital-constrained, which works on the supply side of credit. Individuals and companies are still deleveraging, which curtails demand for credit.

For two years, I have heard the same refrain from bankers. They have two types of customers: (1) those flush with cash who do not want to borrow; and (2) those who want to borrow, but who are poor credit risks.

The prime lending rate is not really a market rate. LIBOR is much more market-sensitive. Business loans are priced over LIBOR. That rate is still pretty low. Getting 25bp on reserves is a risk-free alternative to lending.

The near-zero Federal funds rate has torpedoed the interbank market. There is not enough return for the risk of lending to other banks.

For interested parties, going back to Higg's initial post is well worth the while.

Eurozone Retail PMI June 2008

European retail sales dropped sharply in June as rising fuel and food prices hit consumers' budgets, prompting stores to cut employment and become more pessimistic about future prospects, according to the latest readings on the Bloomberg purchasing managers index. The measure of sales activity in the euro region declined to 44 from 53.1 in May. A reading below 50 indicates contraction. The reading is the second- lowest registered by the index since its introduction in January 2004. Sales also fell from a year earlier.

Sales fell in Germany, France and Italy - the largest economies in the eurozone - led by Italy, where retail spending dropped again sharply. A measure of employment in the euro region fell to 48.6 in June from 49.9 in May, the report showed, staying below 50 for a third month.

The PMI provides data one month ahead of government issued figures and the steep drop to well below the 50.0 no-change level indicates that European retail sales fell-off sharply at the end of Q2.

Data have been volatile in recent months, in part reflecting strong swings in sales of clothing & footwear, food & drink and seasonal household goods due to a combination of weather conditions and the timing of Easter and Whitsun. However, a guide to the underlying weakness in the retail sector is provided by the average of the PMI data for Q2 (46.3), which signaled the greatest decline over any quarter covered by the survey to date (since Q1 2004).

Sales fell in all three of the largest euro countries in June.


Italian sales showed by far the strongest rate of decline of the three countries and have underperformed the Eurozone average throughout the first half of 2008 by a wide margin. The month-on-month sales index fell from 38.8 in May to 36.3, signaling the second-steepest decline in the survey's history. Falling sales were linked to low consumer confidence and reduced spending power due to the economic slump and high fuel and food prices.

German sales also fell markedly, a reverse from the sharp rise posted in May. The index slumped from May's eighteen-month peak of 56.6 to 44.9.



French retail sales showed the slowest rate of decline among the three countries covered, but this was still in marked contrast to the substantial increase recorded in May. The index fell sharply from May's twenty-three month high of 59.6 to 48.7.





Eurozone retail sales also fell sharply on a year-on-year basis in June, posting the second-steepest fall in the past twenty-seven months and representing a marked contrast to the thirteen-month peak in growth seen in May. The year-on-year sales index dropped from 56.1 to 43.6. On average, year-on-year sales over Q2 as a whole showed the steepest fall for three years. Lower sales than a year ago were seen in all three countries in June, led by a particularly sharp fall in Italy. This was tempered by a fairly marginal decline in Germany.

Sales by sector


Food & drink retailers again reported the strongest year-on-year increase in sales revenues, following May's record rise, largely reflecting higher prices. The other sector to see any growth in sales was pharmaceuticals, which saw a very marginal increase. Sales of clothing & footwear, household goods and autos & fuel all fell well below levels of a year ago, with the latter seeing the sharpest decline.

The rate of increase in prices paid for goods by retailers eased slightly from May's recent peak in June, but nevertheless posted one of the strongest monthly rises seen over the survey history. The prices index fell from 68.3 to 67.1, remaining well above the 50.0 no-change level. Germany saw the strongest rate of inflation, which hit a nine-month high and was the second-sharpest rise indicated ever in the survey history. Meanwhile, purchase price inflation eased in both Italy and France with the latter seeing the weakest rise of all three countries as the rate slowed to a nine-month low.


Purchase prices rose in all sectors except clothing & footwear, where a slight decline was recorded as suppliers offered discounts to stimulate sales. Inflation softened for all other product categories but remained relatively steep, especially for food & drink and household goods.

Retailers' margins showed the second-largest deterioration in the survey history in June, linked again in many cases to rising wholesale costs. The margins index fell from 43.0 to 39.9. Italian retailers continued to report by far the sharpest deterioration in margins, although profit margins were also squeezed in both France and Germany.



Sales targets were missed to a striking degree in June. The index of actual sales relative to planned sales fell sharply from 45.2 in May to 35.1. Italy saw the greatest shortfall against targets for the eighth straight month, followed by France and then Germany. By sector across all countries, targets were missed for all sales categories, though the shortfall for food & drink was marginal. Targets were again missed to the greatest extent in the autos & fuel sector, followed closely by clothing & footwear and household goods.



Retailers' optimism about beating targets in the coming month moderated in June. The expectations index eased down from 56.9 to 52.4. French retailers were again by far the most confident about beating targets while, in Italy, expectations were for targets to be exceeded by a narrow margin. In contrast, German retailers expect to miss targets for the first time in five months. Sales are expected to beat targets across all product sectors in June except household goods. By far the greatest optimism was again seen in the food & drink sector.


The employment index fell from 49.9 to 48.6 in June, signaling a drop in staffing levels at Eurozone retailers for the third successive month and the largest monthly decline since February 2006. Headcounts were cut due to concerns over the fragility of demand in coming months and the need to reduce costs in the face of rising wholesale prices. Retail employment fell for the sixth month running in Italy, the first time in six months in France and for the first time in two months in Germany.

The amount of goods purchased for resale by Eurozone retailers fell marginally in June as companies sought to keep stock levels to a minimum as a result of cost considerations. The index of purchases dropped from 50.7 to 49.8. Higher levels of purchasing in France and Germany were countered by a marked decline in Italy. Across the Eurozone, the level of unsold retail stock continued to rise despite the overall fall in purchases. The stocks index registered 54.5, down from 55.6 in May. Similar rates of growth were indicated across all three countries, with Germany slightly higher.

Eat Cheaper and Healthier (While Saving the Bees)

You can cut out the middle man and get food for less. You can also eat healthier, while saving the bees.

How?

Well, for one thing, regulation of the U.S. food supply has become worthless, with hundreds of cases of mad cow and salmonella poisoning a year. Growing your own food ensures your safety, and may even save money in the long run by preventing expensive medical bills. But there's a lot more to it than that . . .

Buy for Less

Here are some tips for buying cheaper, healthier food:

• Join a buying club for food (start here or here to see if there is an established one near you; if not, find a food coop here or here, and then ask them where you can find a buying club). As one website puts it:

  "A buying club is a great way to get the organic food you want on the cheap. In a buying club, you may be able to get 30 percent to 40 percent off the retail price. Buying-club members purchase food and other organic products in bulk and then split the stash.

  "These buying clubs are the best-kept secrets in America" . . .
  

  Ask a co-op near you about starting a buying club with your friends and neighbors. Some co-op grocers will let you order right from their store. Ask a local natural food store where they get their stuff and then contact the distributor directly.

  "Some distributors deliver to individuals or groups of individuals who have a minimum amount of an order," says Katherine DiMatteo, a senior adviser with the Organic Trade Association.

• You can do the same thing with meat. Find a ranch here (you can type in the kind of meat you're looking for - "beef", for example - under "Name/Description/Product" and your zip code under "Where"?). Then form a buying club to buy the meat at a discount

• Buy a share in a community-supported agricultural program. That buys you weekly boxes of fresh produce delivered to your door. To locate a program near you, see this, this and this

• If there is a farmer's market near you, go there right before closing . . . the vendors will likely give you a discount. Also, ask about produce that doesn't look perfect, but still tastes good

• Buy a large freezer. That way, when you find a good deal on meat or produce, you can buy in bulk (food keeps almost all of its nutritional value even when frozen). If you find a good deal on beef or pork, for example, buy a huge chunk of the animal

• Buy produce in-season. It is usually cheaper

• See below for information on canned foods and discount stores

Growing Food in the City

You can also grow some of your own food. But what do you if you live in a city, or far from land or water sources? Here are some tips:

• A gardening table like this one allows you to grow over 22 pounds of tomatoes, 55 pounds of lettuce and 33 pounds of cucumber per season in just one square meter of space

• You can grow vegetable gardens vertically
  

• You can grow food hydroponically even if you're short on space and sunlight

• Even easier, you can grow food "aeroponically"

• Mushrooms will grow just about anywhere, and you can buy kits to make growing easy (see this, this, this and this)

• Potatoes will grow like mad
  

• You can raise rabbits, chickens and other small animals for meat.

Farming and Ranching

If you have a little land, you can grow food on a larger scale.

You'll need water to do it. If you don't have ready access to water, consider collecting rainwater. This brochure from the University of Idaho tells you how (look here for more info).

Also consider using some "dried distillers grain" in the soil, which can dramatically reduce insect damage and increase the health of your plants (without pesticides).

You can raise cows, sheep, or other large animals.

For further information, see this resource for raising animals and this one for growing plants.

Get Wild

It turns out that wild game animals have much higher levels of essential Omega 3 fatty acids than domesticated animals. Indeed, leading nutritionalists say that humans evolved to consume alot of Omega 3 fatty acids in the wild game and fish which they ate (more), and that a low Omega 3 diet is a very new trend within the last 100 years or so (my wife, who is an expert on Omega 3's, believes that some of the short attention span, stupidity, violence and other cognitive problems we're seeing in the general population is due to a low Omega 3 diet. the brain is mainly made up of fat, and having too little good Omega 3 fats can cause all sorts of problems in thinking straight. Is that one reason why the American public has been so complacent about its loss of liberty?).

If you have access to wild game which you can hunt, it is actually healthier for you. (Wild plants, seeds and nuts can also be very high in nutrients.) If you don't, you can buy grass-fed beef, wild salmon, or other high Omega 3 sources.

So if you live near wild food sources, your meals can be both free and healthy (Don't eat your own lead buckshot or shoot yourself in the foot - get trained in the firearm safety before hunting. And don't poison yourself - check a local field guide first for plants. )

How is Doing this Going to Save the Bees?

But how is doing this going to save the bees?

Well, many people argue that genetically modified crops or pesticides are causing the collapse of the bee colonies.

In addition, large-scale agriculture uses bees in a crazy fashion:

• Bees spend most of their lives being trucked all around the country in boxes
  

• While being trucked around, bees are fed a diet of high-fructose corn syrup (and soy protein), not real pollen (see also this).

• According to reports from beekeepers who don't truck their bees around or feed them high-fructose junk food, their bees stay much healthier those used in commercial agriculture. And see this essay.

Many people who work with bees claim that giant agriculture's beekeeping and transportation harms the bees. The more we grow or hunt/gather our own food, or buy from small, local sources, the less demand there's going to be for food grown by the agri-giants, and so the less bees will be exposed to gmo crops, pesticides, and industrial agribusiness practices. In other words, eating cheaper and healthier also means less bees will die due to colony collapse disorder and other problems.

In addition, a new "study finds a healthier diet and a return to traditional farming can help reduce energy consumption in US food system by 50 percent". In other words, staying away from mega-agriculture will result in less use of oil, which will lessen energy costs (less demand equals lower costs), and will help take the wind out of the tyrants' sails.

You can buy canned foods in bulk at wholesale prices, and there are often good deals to be had at discount stores like Costco and Sam's Club. However, because these sources do not stress local food sources or sustainable agricultural practices, buying their won't necessary help the bees or your own health. In other words, the only thing that is certain is that you can buy for good prices.

A note on organic foods. If you desire to reduce your exposure to pesticides, antibiotics and hormones, but can't afford to buy everything organically, then buy conventional foods in general, but make the following foods organic: apples, bell peppers, celery, cherries, spinach, strawberries, imported grapes, nectarines, peaches, pears, potatoes, raspberries, meat, poultry, eggs and dairy products.

Why?

Because these foods tend to have the highest pesticide levels (or - in the case of meat, poultry, eggs and dairy - hormones and antibiotics).