Can Tax Cuts Deepen The Recession?

In one of the more ridiculous Keynesian theories to date, Gauti B. Eggertsson at the New York Fed comes to the conclusion Tax Cuts Will Deepen The Recession. Simple logic would dictate that letting people and businesses keep more of their money would be a good thing but amazingly Eggertsson comes to the opposite conclusion.

The belief is based on a bunch of incomprehensible (to the non-economist) equations such as this one.


I am not going to bother to explain what each symbol means because it is all nonsense. The theory in English suggests

1) Tax cuts will increase aggregate supply
2) Tax cuts will reduce wages according to this chart



I am not going to bother explaining that chart either because the number of assumptions that go into the charts and formulas is staggering. Instead let's skip to the conclusion of the paper.

The main problem facing the model economy I have studied in this paper is insufficient demand. In this light, the emphasis should be on policies that stimulate spending. Payroll tax cuts may not be the best way to get there. The model shows that they can even be contractionary. What should be done according to the model? Traditional government spending is one approach. Another is a commitment to inflate. Ideally the two should be put together.

We are in this mess precisely because consumers spent every cent they had and then some. Now Eggertsson wants consumers to spend more. If they don't spend, then Eggertsson wants government to spend on their behalf. Excuse me but common sense alone would suggest that is spending got us into this mess so spending is not going to get us out of it.

Furthermore, never do any of these Keynesian clowns tell us what is going to happen as soon as the stimulus is taken away. Somehow they believe in a free lunch perpetual motion theory of the economy where spending feeds on itself and we all live happily ever after.

In practice Japan tried that for a decade and it did not work and it did not work in the Great Depression either. A more recent example of the idiocy of fiscal stimulus can be found in 2003 when Greenspan slashed interest rates to 1% fueling the biggest property bubble in the history of the world. That bubble has now imploded and the Keynesian clowns did not learn a damn thing from it.

And as soon as the bridges are fixed and the potholes patched and nothing happens, the Keynesian clowns will be back at it wanting government to spend still more taxpayer money. Not one Keynesian ever has said what happens once the stimulus stops.

Triumph Of Faith Over Reason

Caroline Baum takes the Keynesian clowns to task in Fiscal Stimulus Is a Ruse Absent Fed Pixie Dust

It’s a jobs-creation program. No, it’s investment in our future.

It’s a tax-relief plan. Wait, it provides assistance to consumers hardest hit by the economic recession.

It’s legislation to jump-start the economy. No, it’s a recovery program. It’s a life raft for state and local governments. It’s a spending bill.

Which is it? Fiscal stimulus is all things to all people. In other words, it represents the triumph of faith over reason.

When I first learned about fiscal stimulus according to John Maynard Keynes in an introductory economics course, it made a modicum of sense. The idea was that at times when the private sector isn’t pulling its weight, the government can step in and spend instead.

It doesn’t take an inquiring mind very long to find the flaw in the argument. How exactly does the government get the money to pay for its spending? Neither borrowing (today) nor taxing (tomorrow) increases aggregate demand. All they do is transfer the ability to spend from one entity to another and the timing of that spending from the future to today.

“Empirically, nobody can point to a single Keynesian episode that worked,” says Dan Mitchell, senior fellow at the Cato Institute, a libertarian think tank in Washington.

Attempts to spend their way out of a slump by Herbert Hoover, Franklin Roosevelt, George W. Bush, Japan (in the 1990s) and Europe yielded little in the way of results, Mitchell says. “The only thing Keynesians have ever been able to point to that worked was World War II,” which isn’t something we want to repeat.

Left to its own devices, the economy’s natural tendency is to grow. That may sound like a cliche, but it’s true.

Eggertsson proposes tax cuts will reduce wages. I propose tax cuts will keep people employed. Eggertsson proposes rising prices are a good thing. I propose they are not. The more money people have and get to keep, the more money they will eventually spend. That is logic that any eight grader can understand.

The problem with most economists is they put their belief in ridiculous theories and formulas that have failed time and time again. Instead economists might try using one ounce of common sense. Is that too much to ask?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Obama Commits $275 Billion To Slow Foreclosures

Bloomberg is reporting Obama Pledges $275 Billion to Stem U.S. Foreclosures.

U.S. President Barack Obama pledged $275 billion to a program that will cut mortgage payments for as many as 9 million struggling homeowners and expand the role of Fannie Mae and Freddie Mac in curbing record foreclosures.

The plan also will help as many as 5 million homeowners refinance loans owned or guaranteed by Fannie and Freddie, according to a White House fact sheet. Treasury will buy as much as $200 billion of preferred stock in the two mortgage companies, twice as much as previously promised, the announcement said.

“It will give millions of families resigned to financial ruin a chance to rebuild,” Obama said in remarks prepared for delivery at 10:15 a.m. in Mesa, Arizona. “By bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

The Obama plan will use $75 billion from the $700 billion financial bailout fund to match reductions lenders make in interest payments that lower borrowers’ payments to 31 percent of their monthly income. Under the program, a lender would be responsible for reducing monthly payments to no more than 38 percent of a borrower’s income, with government sharing the cost to further cut the rate to 31 percent.

Companies that service mortgages will get $1,000 for each modified loan, and as much as $1,000 for three years when the borrower stays current, the government said. Homeowners also are eligible for $1,000 annually for five years for remaining current on their loans, according to the plan.

Mortgage servicers will get $500 and loan holders $1,500 to modify agreements as an incentive for the industry to seek out borrowers at risk of falling behind on their payments.

“The Obama team is betting that if they can afford to stay in the home month-to-month, that borrower is not concerned about what today’s value of the home happens to be,” Howard Glaser, former counsel to the secretary of the U.S. Department of Housing and Urban Development, said today in a telephone interview. “I think that’s the right bet.”

Treasury will increase the size of Fannie and Freddie’s retained mortgage portfolios, to $900 billion, allowed under the preferred stock agreement included in the September federal takeover of the two mortgage-finance companies.

Obama said he will support revamping U.S. bankruptcy rules to let judges reduce mortgages on primary residences to fair- market value as long as borrowers pay their debts under a court- ordered plan.

MarketWatch has some interesting quotes to consider in Obama sets aside $75 billion to slow foreclosures.

The Obama administration unveiled a plan Wednesday to help 9 million "at risk" homeowners modify their mortgages, committing $75 billion of taxpayer money to back the initiative.

The plan contains two separate programs. One program is aimed at 4 million to 5 million homeowners struggling with loans owned or guaranteed by Fannie Mae or Freddie Mac to help them refinance their mortgages through the two institutions.
A separate program would potentially help 3 million to 4 million homeowners by allowing them to modify their mortgages to lower monthly interest rates through any participating lender. Under this plan, the lender would voluntarily lower the interest rate, and the government would provide subsidies to the lender.

"The plan I'm announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; by modifying loans for families stuck in sub-prime mortgages they can't afford as a result of skyrocketing interest rates or personal misfortune; and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments," President Barack Obama said in prepared remarks.

I do not buy this "acted responsibly" nonsense. If a person took out a loan greater than 38% of their income they most assuredly did not act responsibly.

Furthermore, the Obama plan increases the size of Fannie and Freddie, rewards servicers for no reason, giving them an incentive actually to waste taxpayer money, and rewards those who acted irresponsibly. Is this a good thing?

Addendum:
One question I have was not answered by either article. I am very concerned for the borrower's sake about loan modifications turning non-recourse loans into recourse loans.

How many people will become unwitting interest slaves for the rest of their lives by signing up for one of these "loan modifications"? That is likely to happen if non-recourse loans become recourse loans.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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The Nationalization Train Has Left The Station

The Financial Times is reporting Alan Greenspan Hops On Board The Nationalization Express and is sitting in the bar car next to Nouriel Roubini. The next stop is D.C.

The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman has told the Financial Times.

In an interview with the FT Mr Greenspan, who for decades was regarded as the high priest of laissez-faire capitalism, said nationalisation could be the least bad option left for policymakers.

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

Those who think Greenspan is the "high priest of laissez-faire capitalism" have holes in their heads. The very existence of the Fed and its micro-mismanagement of interest rates is in direct conflict with capitalism.

The Fed directly setting interest rates is more like the failed policies of the Soviet Central Planners than anything remotely to do with capitalism.

Greenspan's stance on free trade was the only major thing he got right in his entire tenure. So it's ironically fitting that free trade is one of the biggest things he is criticized about.

Nationalize the Banks! We're all Swedes Now

Matthew Richardson and Nouriel Roubini are arguing Nationalize the Banks! We're all Swedes Now.

The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s -- or the United States in the 1930s -- the only way to save it is to nationalize it.

As free-market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner's recent plan to save it has many of the right elements, it's basically too late.

Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end.

Nationalization -- call it "receivership" if that sounds more palatable -- won't be easy, but here is a set of principles for the government to go by ....

Nationalizing banks is not without precedent. In 1992, the Swedish government took over its insolvent banks, cleaned them up and reprivatized them. Obviously, the Swedish system was much smaller than the U.S. system. Moreover, some of the current U.S. financial institutions are significantly larger and more complex, making analysis difficult. And today's global capital markets make gaming the system easier than in 1992. But we believe that, if applied correctly, the Swedish solution will work here.

Sweden's restructuring agency was not an out-of-control bureaucracy; it delegated all the details of the cleanup to private bankers and managers hired by the government. The process was remarkably smooth.

Basically, we're all Swedes now. We have used all our bullets, and the boogeyman is still coming. Let's pull out the bazooka and be done with it.

Bến Tre Logic

"As free-market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system."

Roubini, Richardson, and Greenspan are using Bến Tre Logic.

One of the most famous quotes of the Vietnam War was a statement attributed to an unnamed U.S. Air Force Major by AP correspondent Peter Arnett. Writing about the provincial capital, Ben Tre, on February 7, 1968, Arnett said: "'it became necessary to destroy the town to save it,' a U.S. major says."

To this day, "Ben Tre logic" is a common saying for whenever a "logical" conclusion is to destroy something out of the perceived best interests of everyone involved.

Roubini is a fantastic economist when it comes to analyzing current data and seeing the problems coming down the road. I hold him in high regard. However, Roubini is simply not a free market economist. Please read Roubini Misses the Boat on Regulation for more evidence.

Roubini blames lack of regulation for the problems we face when the real problem is misguided regulation, micromanagement of interest rates by the Fed, and indeed the very existent of the Fed itself.

It is impossible to save a free market by abandoning it. Unfortunately, many try.

Bush Abandons Free Market Principles To Save Free Market

Dec 16, 2008


George W. Bush’s political epitaph

This picture from Michelle Malkin sums up how I feel.



What Roubnini, Greenspan or any other proponent of bail-outs, nationalization, etc. fails to explain, or even mention is this: Why can we not just let them fail? Let them go bankrupt! Why not?

This is not the first time in history that banks are keeling over, and won't be the last time, especially if we have a Fed attempting to micromanage the economy. Sure, it's going to be painful, but it's only going to be painful ONCE.

Banks who were prudent and foresaw the collapse are waiting in the wings to take over already. Why should they be forced to compete with state-owned zombies? The argument that we cannot afford to let the big banks fail is nonsense. In Russia in 1998, 95% of all banks failed. What happened afterwards? A big economic boom.

When Russia had the opportunity to start with a clean slate , things quickly came right again. Of course, the Russian government also instituted a 13% flat tax, an important contributor to the economy's rebirth.

Everyone proclaims the Swedish nationalization "worked". However, correlation is not causation. The miracle Swedish recovery is more likely to have stemmed from a global economy that was starting to boom and strengthened by an internet and productivity revolution in its early stages, than a brilliantly executed nationalization plan.

Here's the deal....

1. You cannot save a village by destroying it.
2. You cannot save capitalism by destroying it.
3. You cannot save a free market when you don't have one in the first place.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Sales Tax Time Bomb Explodes

Inquiring minds are reading Holiday Blues: Weakness Unmatched In 35 Years

Consumption: From Excess to Freefall

What's happened to consumption since the middle of 2008 is nothing short of stunning, both in speed and magnitude. Several examples will make this point.

Let's start with one of the mainstays of this report, sales taxes. Graphed below is the yearly change in state and local government (SLG) sales tax receipts adjusted for inflation from the national income accounts. (The price index is that for SLG purchases.)



The last entry on the graph is our projection, based on the results of our January survey -- a 10% nominal decline with a 2-point inflation adjustment, or a 12% estimated decline.

(The estimate of 2% inflation is rough; it was about 3% in the fourth quarter, down from around 6% at midyear.) The actual result for the fourth quarter of 2008 was -6.3%, a little worse than the previous two quarters, which came in at -5.9%. That -6% neighborhood for late 2008 is the worst in the history of the series; its closest rival is the -5.1% hit during the sharp 1980 consumer recession, when Jimmy Carter got on TV and told people that it was their patriotic duty to stop using their credit cards -- which they actually did for a while, though not for long. This quarter should shape up to be a record-breaker.

OK, moving on to auto sales. Graphed below are monthly unit sales at a seasonally adjusted annual rate per 1,000 people. Adjusting for population really brings home the weakness. January's 9.5 million rate (for autos plus light trucks) is one of the lowest in history, but its earlier rivals were at times when the U.S. population was considerably lower than it is today.



January's rate translates into 31.1 units per 1,000 people, which is 3.5 standard deviations below the mean, and well below November 1970's 36.1, a dismal performance created not by economic weakness, but by a two-month strike at GM. It's also worse than the lowest levels of the 1973-75 and 1981-82 recessions (40.8 and 38.3 respectively). It comes after a 17-year period when there was basically no auto recession. But the contraction has hit suddenly and hard: sales were 50.3 per 1,000 in February 2008. The yearly drop-off is the worst since the numbers begin in 1968.

Impact On State Budgets

The above shows what is happening let's now take a look at how that is impacting states. Please consider State Budget Troubles Worsen.

States are facing a great fiscal crisis. At least 46 states faced or are facing shortfalls in their budgets for this and/or next year, and severe fiscal problems are highly likely to continue into the following year as well. Combined budget gaps for the remainder of this fiscal year and state fiscal years 2010 and 2011 are estimated to total more than $350 billion.

States are currently at the mid-point of fiscal year 2009 — which started July 1 in most states — and are in the process of preparing their budgets for the next year. Over half the states had already cut spending, used reserves, or raised revenues in order to adopt a balanced budget for the current fiscal year — which started July 1 in most states. Now, their budgets have fallen out of balance again. New gaps of $51 billion (over 10% of state budgets) have opened up in the budgets of at least 42 states plus the District of Columbia. These budget gaps are in addition to the $48 billion shortfalls that these and other states faced as they adopted their budgets for the current fiscal year, bringing total gaps for the year to 15 percent of budgets.

Unemployment, which peaked after the last recession at 6.3 percent, has already hit 7.6 percent, and many economists expect it to rise to 9 percent or higher, which will reduce state income taxes and increase demand for Medicaid and other services.

With consumers’ reduced access to home equity loans and other sources of credit, sales taxes are also likely to fall more steeply than they did in the last recession.

These factors suggest that state budget gaps will be significantly larger than in the last recession. Based on past experience and the depth of this recession, it appears likely that all but a handful of states will face shortfalls in fiscal year 2010 and these deficits will end up totaling about $145 billion. If, as is widely expected, the economy does not begin to significantly recover until the end of calendar year 2009, state deficits are likely to be even larger in state fiscal year 2011 (which begins in July 2010 in most states). The deficits over the next two-and-a half years are likely to be in the $350 billion to $370 billion range.



The vast majority of states cannot run a deficit or borrow to cover their operating expenditures. As a result, states have three primary actions they can take during a fiscal crisis: they can draw down available reserves, they can cut expenditures, or they can raise taxes. States already have begun drawing down reserves; the remaining reserves are not sufficient to allow states to weather a significant downturn or recession. The other alternatives — spending cuts and tax increases — can.

Showdown In California and Kansas

California and Kansas are scrambling like mad right now to do something about shortfalls. Both states have delayed income tax refunds over the budget crisis.

Republicans in California are refusing to hike taxes while Republicans in Kansas refuse to allow the checks to be issued until the budget is balanced, somehow. Please see Kansas Suspends Income Tax Refunds; California One Vote Shy On Budget Impasse for more details.

Bring A Toothbrush

The California Impasse Continues today, still one vote shy of passage.

California lawmakers failed to reach agreement on how to eliminate a $42 billion budget shortfall as Governor Arnold Schwarzenegger prepares to shut down hundreds of public works projects and fire thousands of state workers.

Senate President Darrell Steinberg, a Democrat, plans to lock lawmakers in the capitol unless they pass a $40 billion package of tax increases, spending cuts and bond sales today. The bills, backed by the Republican governor and by Democrats, remain one Republican vote short.

Steinberg said he will put the tax increases up for a vote at 10 a.m. in Sacramento. If the measure doesn’t pass, he said he will lock senators in the capitol until an agreement is reached. “Bring a toothbrush,” he said in a speech on the Senate floor late yesterday.

“Our state has been spending beyond its means for many years now,” said Assemblyman Chuck DeVore, an Orange County Republican. “We’re asking the taxpayers of California for too much of their own money to cover over a problem of our own making.”

Without a new budget in place, Schwarzenegger will notify 20,000 state employees today that they could lose their jobs, a step he put off taking last week as a deal seemed imminent.

Tomorrow he will shut down $3.8 billion of public works projects, including many already under construction, because the state doesn’t have enough money left to pay for them. That could jeopardize 32,000 jobs, Will Kempton, state director of transportation, said at a hearing today.

California is, like many states simply spending beyond its means. Promises have been made than cannot be kept. Raising taxes is not the answer in California or anywhere else.

Eventually someone will give in. Will it be the one needed Republican or a group of Democrats who agree to cut more spending?

Either way the point is moot except for an initial cheer of exhaustion. Falling sales tax revenue and falling property tax collections ensures another budget crisis is coming up in a few more months, not just in California but 46 states.

Think Obama's stimulus plan will counteract this on top of everything else that is going wrong? Think again.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Kansas Suspends Income Tax Refunds; California One Vote Shy On Budget Impasse

The Witchita Eagle is reporting Kansas suspends income tax refunds, may miss payroll.

Income tax refunds and state employee paychecks could be late after Republican leaders and the Democratic governor clashed Monday over how to solve a cash-flow problem.

Payments to Medicaid providers and schools also could be delayed.

"We are out of cash, in essence," state budget director Duane Goossen said.

Republicans, who hold majorities in both chambers, blocked Gov. Kathleen Sebelius’ proposal to borrow $225 million from healthy state funds to cover shortages in accounts used to meet the state’s payroll and issue tax refunds.

GOP leaders said they won’t approve the IOUs until Sebelius either cuts the current budget herself or signs the bill they passed last week slashing $326 million — including $32 million for education — to balance the budget.

Republican leaders said they had no choice, that by law the state can’t borrow any more money from itself.

Kansas’ cash-flow problem stems in part from the worsening recession and lower-than-expected tax revenue.

As a result, the state had only $10 million in its checking account Monday morning.

Most immediately, that means the state does not have $24 million to cover payroll for the state's 42,000 employees and about $20 million for payments to Medicaid providers such as doctors, hospitals and nursing homes, Goossen said. Usually the state processes the payments on Wednesday and sends the checks out Friday.

"State employees simply have no more to give. Paychecks shouldn’t be held hostage for political maneuvering," said Lisa Ochs, president of the Kansas Organization of State Employees.

Kansas taxpayers also are due about $12 million in income tax returns. The state stopped payments on the refunds Friday.

I commend the Republican leadership in Kansas for their efforts. However, I condemn the entire Kansas legislature for failure to slash their own wages to help out.

One Vote Shy

Meanwhile, California Lawmakers Reconvene, Remain Apart on Solving Budget.

California’s Legislature reconvened today, after a marathon budget session ended last night with a $40 billion package of tax increases, spending cuts and borrowing falling one vote short amid a record deficit.

Bleary-eyed lawmakers were sent home at 9 p.m. Sacramento time after spending 28 hours in a session that ended with the proposal’s prospects in doubt. Republican Governor Arnold Schwarzenegger and legislative leaders worked through the day and night without success to secure an additional Republican vote in the Senate.

The draft bills include plans to raise the state sales-tax rate to 8.25 percent from 7.25 percent; boost vehicle license fees to 1.15 percent from 0.65 percent of the value of an automobile; add 12 cents to the per-gallon gasoline tax; reduce the dependant-care tax credit to $100 from $300 and impose a surcharge on income taxes of up to 5 percent.

Combined, the measures would raise taxes and fees by $14 billion, cut spending $16 billion and add $10 billion to the state’s debt. Another $2 billion in reserves would be created from funds moved on balance sheets.

[My Comment: Excuse me but what are billions of dollars doing off the balance sheet? Pray tell what else is off the balance sheet?]

“It’s counter-intuitive to think that you can solve this budget problem in this economy with tax increases,” said Senator Dave Cox, a Sacramento-area Republican who Democrats had counted on to vote for the package. Democrats control both legislative chambers.

Schwarzenegger Threatens To Send Out 20,000 pink slips

I expect that sometime soon one Republican will give in, thus Schwarzenegger's Threat To Send Out 20,000 Pink Slips will remain in the closet.

In an apparent effort to increase pressure on lawmakers negotiating an end to California's fiscal crisis, Gov. Arnold Schwarzenegger is preparing to send pink slips to 20,000 state workers.

The governor had delayed sending the layoff notices since Friday, hoping lawmakers would soon approve a package to close a nearly $41-billion budget gap. But despite intense negotiations since Saturday, Schwarzenegger and the Senate Democratic majority have been unable to secure a third Republican vote for a plan that includes more than $14 billion in new taxes.

Schwarzenegger's move is the second in which state workers have felt the impact of the crisis, following his decision forcing them to take two days a month off without pay. He has since reached a contract deal with a union representing 95,000 employees to cut the furlough days to once a month, although the workers have yet to ratify it.

With his layoff plan, Schwarzenegger hopes to eliminate 10,000 jobs, but is sending out more notices in case the state meets with obstacles, legal or otherwise, in laying off certain workers.

Key Words Missing

Lost in the spat over this budget impasse are two key words ... "And Counting" as in the following sentence: The California budget gap is $41 billion and counting.

Three months from now the budget gap will be $47-47 billion and counting assuming nothing passes now, or $6-7 billion if they do. Please feel free to come up with your own estimate. Thus, no matter what budget passes now, the California legislature will be back at it three or four months down the road unless the sugar daddies in Congress start passing out more candy to the states.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Lower the Rent or Else

If you are stuck in a lease on bad terms, you might consider what Pier 1 Imports is doing: issue an ultimatum and threaten to leave. CoStar is discussing how Retailers Pressure Landlords Publicly for Rent Cuts, With Varying Results.

Faced with a deepening recession and declining shopper spending, retail chains are increasingly exerting public pressure on landlords to renegotiate leases to achieve rent cuts and other concessions, warning they could be forced to join the growing list of retailers closing stores unless their contracts are amended.

For example, Pier 1 Imports, Inc. (PIR) on Feb. 3 announced a plan it described as designed to "meet the challenges of the current environment and to position itself for optimum performance in a post-recession economy." The furniture and home accessories retailer said it has already begun, via the services of Melville, NY-based DJM Realty, to open talks with landlords to "achieve rental reductions across the chain." The company then warned that if such rental reduction negotiations were unsuccessful, it would terminate the leases of up to 125 stores.

[My Comment: Pier 1 Imports is sitting on about $117 million in cash and is burning up that cash at a rate of about $31 million per quarter. Its share price is 32 cents. I doubt Pier 1 survives the year no matter how much lower it negotiates is leases.]

Pier 1 isn’t alone. Following is just a sampling of retailers that have made their lease renegotiation efforts public, along with some commentary from retailers and their landlords -- and their property disposition, tenant rep and lease restructuing specialists -- on the degree of success they’ve have had in reducing occupancy costs.

GAP
Gap isn't just trying to reduce rent paid for its stores, it's trying to do so by reducing its store square footage by 10% to 15%, which also results in additional vacant space for landlords. In its most recent quarterly conference call with analysts, Gap Chairman and CEO Glenn Murphy, commented on the casual apparel retailer's progress in negotiating with landlords.

CHICOS
In a Jan. 15 management presentation, women's apparel retailer Chico's FAS announced a formal real estate strategy to "pursue occupancy cost reductions" in order to increase profitability and productivity. Management is conducting a store-by-store review of the chain’s lease portfolio, ranking opportunities based on the level of success it expects it could have in rent relief.

FINISH LINE
Sports footwear and apparel retailer, The Finish Line, issued a warning in its January conference call that it is "willing to close unprofitable stores in cases where it can't mutually agree" on terms with its landlords. Like others, Finish Line has commenced negotiations with landlords to downsize some larger stores, as well as "negotiate terms that work for both us and our landlord," said Steve Schneider, president and COO. The retailer said 40% of its stores have leases that are either expiring or hitting "kick-out" provision dates in the next 12 to 15 months.

Schneider said that where kick-out clauses exist, Finish Line has even more leverage. "In those cases, we’ve been batting a pretty high percentage...of getting the landlord to come up with the minimal lease terms that make sense for both of us. In many of these cases, what may happen is that we push the kick out clause one, two or three years and go to some kind of alternative rent," -- usually percentage rent or a lower number, he said.

Schneider said that Finish Line planned to close 20 to 30 stores over the next five quarters, but warned, "If the landlords get really difficult then that number could go up some."

Office Depot and Christopher and Banks were also in the report along with commentary from various industry consultants, most claiming that no one has the upper hand.

I believe landlords fall into one of two categories.

Landlord Categories

1. Those who are scared to death
2. Those who are not scared to death but should be

Mike "Mish" Shedlock
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US, UK, Eurozone Banks Face Meltdown

With all the hype from various US dollar bears about the crisis with US banks, few on this side of the Atlantic are paying any attention to happenings in Europe.

For those who look, a strong case can be made that European banks are as bad off if not much worse off than their US counterparts.

"The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point" says Ambrose Evans-Pritchard in Failure to save East Europe will lead to worldwide meltdown.

Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

"This is the largest run on a currency in history," said Mr Jen.

In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.

They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.

Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.

East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system.

Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.

The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.

Its $16bn rescue of Ukraine has unravelled. The country – facing a 12pc contraction in GDP after the collapse of steel prices – is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament.

Somehow the myth persists that the Euro will be the world's reserve currency. The "somehow" usually stems from those who believe in the tooth fairy and global decoupling while staring straight into a magic mirror that only highlights the problems in the US. Here is a better question....

Can The Euro Survive?

John Mauldin explores that question in his latest Outside The Box: Can The Euro Survive?

Milton Friedman famously predicted that the euro would not last past their first economic crisis. This week we look at commentary by Niels Jensen that explores the news from Euroland. Can the euro survive? He explores a number of options which are most definitely not on the radar screen for most investors. It is good to get a perspective from those outside of our own back yard. Note that when he says "our country" he is referring to Great Britain.

Do BRICs (and Germans) Eat PIGS?

When the euro was introduced about ten years ago, the pessimists didn't give it much chance of reaching its tenth anniversary. The euro, or so the argument went, was doomed from the outset because of the wide spread in economic performance and discipline amongst the member countries. At one end you had, and still have, the highly disciplined, but also slow growing, economies of Germany and the Netherlands. At the other end you find the faster growing but poorly disciplined countries such as Spain and Greece. As icing on the cake, you also had, and still have, countries that lack in both departments, such as Italy, making it difficult for the union to 'gel' - well, according to sceptics.

What they [the sceptics] failed to realise was that Europe, together with the rest of the world, was about to enter a period of unprecedented prosperity. The good times would not only gloss over the deeper problems, but the euro would actually go from strength to strength to a point where it now threatens to unseat the US dollar as the premier reserve currency of the world. It is therefore perhaps a mystery to some of you, why one should question the longer term viability of the euro. That is nevertheless what I intend to do.

The problem, as I have already alluded to, is poor discipline amongst several of the member states. Ever heard of the four PIGS? This less than flattering acronym stands for Portugal, Italy, Greece and Spain, four members of the euro zone which are all in much deeper trouble than they are prepared to admit.

Let's take a closer look at the unit labour cost index for various countries

2007 Unit Labour Cost Index (2000=100)



Since the introduction of the euro, the PIGS have failed miserably to keep up with Germany on this measure of competitiveness. So has Ireland by the way, hence its current predicament.

Another issue, which is potentially even more destabilising for the euro longer term, is the massive liabilities facing Europe as its population ages.



Greece is clearly facing the biggest challenge. Public debt, which currently stands at about 95% of GDP, will grow to a whopping 555% of GDP by 2050 if the current pension and social security programme is left unchanged. The Greek government is painfully aware of this and have been working on several new initiatives. It was the passing of one of those new laws which caused the riots in Athens before Christmas.

A third problem facing Europe is the sheer scale of the banking crisis. Although this is not just a European problem, European countries are probably worse off than the US because a larger part of European debt has to be financed externally. As you can see from chart 1, more than $2 trillion of European and U.S. bank debt needs to be re-financed before the end of next year. Unless there is a material improvement in market conditions, re-financing at such a massive scale is simply not doable.

Maturing Bank Securities in 2009/10 (USD)



Carmen Reinhart and Kenneth Rogoff published a research paper about a month ago which should be mandatory reading for all investors2. They have studied every single banking crisis of the past 100 years and reach some rather unsettling conclusions. As they point out: "Broadly speaking, financial crises are protracted affairs".

Following a banking crisis, asset prices fall more and for longer than most investors realise. So do output and unemployment. Most importantly, though, the real value of government debt explodes but not for the reasons you might think. Yes, the bailout costs are significant, but the main driver of rising government debt is actually the subsequent collapse of tax income. [Mish note: See article for charts]

So when we are told that the bailout cost, although large, is still manageable, it is only half the story. The loss of tax revenue is another nail in the coffin and could lead to a dramatic - and unpredicted - rise in public debt. Have you heard any mention of that from your government?

In Frankfurt, the 'eurocrats' are currently congratulating themselves that they, through strict monetary discipline, killed inflation in the aftermath of last year's explosion in commodity prices. The reality, however, is that the credit crunch killed inflation - they didn't - and Europe is now at a junction where even the smallest policy mistake could be very expensive indeed.

So, could all this lead to the destruction of the euro? Could the currency union actually break up? It is not that the risk to the PIGS has not been recognised by bond investors. As you can see from chart 3 below, investors in long dated Greek government bonds now earn about 2.5% more than they do by investing in correspondent German bunds.

PIGS Sovereign Debt Spreads over Germany



On the other hand, I may disappoint one or two readers (I will certainly disappoint Ambrose Evans-Pritchard of the Daily Telegraph who appears to have declared war on the euro), but I firmly believe that the euro will almost certainly survive the current crisis. I am much more worried about some of the member countries.

There is nothing in the Maastricht treaty which prevents a member country from leaving the euro, yet the decision to join is effectively irreversible. There are a number of reasons for this, the most important being economic costs. Take Italy which has a history of compensating for lost competitiveness through regular devaluations. If Berlusconi did the unthinkable tomorrow (sorry - nothing is unthinkable in Berlusconi's world), Italy's borrowing costs would explode. My guess is that bond investors would demand double digit returns on a Lira denominated bond to compensate for the dramatically increased devaluation risk. Already in a precarious fiscal position, Italy could quite simply not afford that.

So, if any country were to leave the euro, it would more likely be from a position of strength, and only one country possesses enough strength to pull that off in the current environment. That country is Germany. And, although the euro is not particularly popular in Germany, I believe it is extremely unlikely for Germany to make such a move unilaterally.

At the same time, the fact that the euro has saved the bacon of more than one country in recent months - Ireland being the most obvious example - should not be ignored. For this very reason, the euro membership is actually far more likely to grow than to shrink as a result of the financial and economic crisis engulfing the world. The issue the EU has to deal with is whether the new applicants should actually be welcomed. Most of those who would want to join will bring plenty of baggage.

Another possible outcome, which you hear almost no mention of, is the possibility of a new Transatlantic currency. When I mention this possibility, everyone laughs, but think about it for a second. The economic crisis on both sides of the Atlantic is enormous. Both are resorting to the same formulas - large fiscal stimulus and quantitative easing (a word invented by central bankers because 'printing money' smacks too much of Zimbabwe). There is a real risk that the entire financial and monetary system on either side of the pond needs to be re-designed. If that were to happen, I am pretty confident that the Fed and the ECB would at least sit down and discuss the possibility of a joint currency. That would also allow the UK to join a currency union without too much egg on its battered face.

In the short to medium term, though, there is no such bailout on the horizon. D-day is now firmly on the horizon. As I see things, it is not inconceivable that a member country could be forced to default on its sovereign debt.

Another, and more likely, outcome is the possibility of one or more member countries coming under EU administration. The recent crowd trouble in Greece could very well turn out to be the dry run for much bigger and more organised labour market unrest across Europe as reality begins to bite.

For the time being, though, European governments continue to be in denial. When the IMF recently recommended that Spain implement various structural reforms, the idea was flatly rejected by Prime Minister Zapatero. In the meantime, you can sit back and prepare for the drama to unfold. Very simplistically, it is a choice between Zimbabwe and Japan. Our central bankers can choose to monetize their way out of the current slump and run the risk of much higher interest rates and a rapidly deteriorating currency like Zimbabwe or they can show fiscal discipline and accept perhaps ten years of below par growth a la Japan. Or they can find the delicate balance in between the two and everyone will live happily thereafter. But that requires both skill and luck.

Those are long snips from a very long article that is worth a read in entirety. In aggregate, my take is that the Eurozone, the UK, and the US all face similar problems, and many countries are in far worse shape than the US. And while Italy is likely to do a lot of sabre rattling, none of the PIGS are apt to be so foolish as to leave the European Union.

However, there is going to be increasing pressure on Germany to bailout the other Eurozone countries yet there is no reason to think they will (or should) oblige.

One of the consequences of the Mad Race to ZIRP (Zero Interest Rate Policy) is that Japan, the UK, US, and EU all have interest rates at or approaching zero. Thus a big reason to enter various carry trades has gone up in smoke.

On the plate now is a meltdown possibility in US banks, UK banks, and Eurozone banks as the entire global banking system is insolvent. Conceivably a framework for a new transatlantic or even global currency could come out of such a meltdown.

However, it is impossible to agree to a solution when Central Bankers do not even understand the problem. The problem is micromanagement of interests rates and currencies by central bankers in conjunction with fractional reserve lending and deficit spending everywhere. Right now, president Obama, Bernanke, and nearly every politician and central bank in the world is focused on curing symptoms instead of curing the disease.

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