Saturday, December 8, 2012

From Good Jobs To Bad Jobs To No Jobs – The Tragic Downfall Of The American Worker

There was a time in America when virtually anyone that wanted a job could go out and get one and the United States boasted the largest and most prosperous middle class in the history of the world.  Sadly, those days are long gone.  Back in 1969, 95 percent of all men between the ages of 25 and 54 had a job.  But now there are millions of Americans in their prime working years that cannot find a job.  Millions of others are working low wage jobs or part-time jobs because that is all they can get.  The other day I went to a large retail store and I got into a conversation with the lady who was checking me out.  She said that she had worked professional jobs all her life, and that she had taken this job to tide her over as she searched for a new job, but now she had been there for two years with no end in sight.  I felt really bad for her, because she was obviously a sharp lady with a lot of skills.  But this is the new reality.  Good paying manufacturing and professional jobs are being replaced by low paying service jobs.  We are transitioning from an economy with plenty of good jobs to an economy with plenty of bad jobs.  The next stage in our transition will be to an economy where it seems like there are no jobs for anyone.  We are witnessing the tragic downfall of the American worker, and it is heartbreaking. Many of our politicians insist that things are getting better for American workers, but that is simply not true.  Just look at the chart below.  Back at the start of 2008, the percentage of working age Americans with a job was sitting at about 63 percent.  Since then it has fallen below 59 percent and it has stayed there for over 3 years.  After every other recession in the post-World War II era the employment-population ratio has always bounced back.  That has not happened this time...



If this number was going to recover, it would have done so by now.  We are rapidly approaching the next major economic crisis and the percentage of working age Americans with a job is going to go even lower.

And our politicians are certainly not helping matters.  Many of the things that they have done are actually going to accelerate the loss of good jobs.  For example, as one small business owner recently pointed out, Obamacare is going to force businesses all over the United States to minimize the number of full-time workers they are using and replace them with part-time workers...

Here is what I am doing for the rest of the year -- working with every manager in my company so that as of January 1, 2013, none of our employees are working more than 28 hours a week.   I think most readers know the reason -- we have got to get our company under 50 full time employees or else I am facing a bill from Obamacare in 2014 that will be several times larger than my annual profit.  I love my workers.  They make me a success.  But most of my competitors are small businesses that are exempt from the Obamacare hammer.  To compete, I must make sure my company is exempt as well.  This means that our 400+ full time employees will have to be less than 50 in 2013, so that when the Feds look at me at the start of 2014, I am exempt.  We will have more employees working fewer hours, with more training costs, but the Obamacare bill looks like about $800,000 a year for us, at least, and I am pretty sure the cost of more training will be less than that.

This will be unpopular but tolerable to most of my employees.  The vast majority of them are retired and our company is merely an excuse to stay busy, work outdoors, and get a little extra money.

But this is going to be an ENORMOUS change in the rest of the service sector.  I have talked to a lot of owners of restaurants and restaurant chains, and the 40-hour work week is a thing of the past in that business.  One of my employees said that in Hawaii, it was all the hotel employees could talk about.   Many chains are working on mutli-team systems where two teams of people working part-time replace the former group of full-time employees.  2013 is going to see a lot of people (who are not paid very well to begin with) getting their hours and pay cut by 25%.  At the same time that they are required, likely for the first time since many are relatively young, to purchase health insurance.
How could we be so foolish?

Unfortunately, this is not something new.  Our economy has been replacing good jobs with bad jobs for quite some time.  If you can believe it, 60 percent of the jobs lost during the last recession were mid-wage jobs, but 58 percent of the jobs created since then have been low wage jobs.

Will nearly all of us eventually be working in fast food restaurants or stocking shelves at retail giants like Wal-Mart?

Amazingly, the United States actually has a higher percentage of workers doing low wage work than any other major industrialized nation does.

No wonder our middle class is being absolutely destroyed.

At this point, wages as a percentage of GDP are at an all-time low in America.  As millions more good jobs are shipped out of the country, the competition for the remaining jobs will become incredibly fierce and that number will get even lower.

Many Americans that actually do have jobs right now find that they simply don't make enough to take care of themselves and their families.  They are called "the working poor", and their ranks are growing steadily.  Today, about one out of every four workers in the United States brings home wages that are at or below the federal poverty level.

American households are getting poorer at a time when prices continue to rise.  Median household income in America has declined for four years in a row.  Overall, it has fallen by over $4000 during that time span.

But have the prices in the stores declined?

Of course not.

No wonder middle class families are feeling more financial stress than ever before.  A survey conducted by the Pew Research Center found that 85 percent of middle class Americans say that it is harder to maintain a middle class standard of living today than it was 10 years ago.

The transition from good jobs to bad jobs in our economy has been taking place for a very long time, and it is not going to be reversed overnight.  Back in 1980, less than 30% of all jobs in the United States were low income jobs.  Today, more than 40% of all jobs in the United States are low income jobs.  There are less tickets to the middle class than there used to be, but neither political party seems interested in stopping the flow of good jobs out of the country.

If we keep doing the same things that we have been doing, we will continue to get the same results.

When I was young, I was told that there would always be "good jobs" available for anyone that got a good education and that worked hard.

What a crock of baloney that turned out to be.

According to a paper that was recently released by the Center for Economic and Policy Research, only 24.6 percent of all jobs in the United States qualify as "good jobs" at this point.

In a previous article, I detailed the three criteria that they used to define what a "good job" is….

#1 The job must pay at least $18.50 an hour.  According to the authors, that is the equivalent of the median hourly pay for American workers back in 1979 after you adjust for inflation.

#2 The job must provide access to employer-sponsored health insurance, and the employer must pay at least some portion of the cost of that insurance.

#3 The job must provide access to an employer-sponsored retirement plan.
More than 75 percent of all jobs in the U.S. today are not "good jobs", and things are not looking promising for the future.

No wonder so many families are barely surviving these days.  Right now, approximately 77 percent of all Americans are living paycheck to paycheck at least some of the time.  That is a dreadful number.

But if you still do have a job, you should consider yourself to be fortunate.

There are millions upon millions of Americans out there without any job at all.

Did you know that 53 percent of all Americans with a bachelor's degree under the age of 25 were either unemployed or underemployed during 2011?

Hordes of fresh college graduates are entering the marketplace each year only to find that the good jobs that they were promised simply are not there.

And now it looks like things are getting even worse.  This week Citigroup announced that it plans to eliminate 11,000 jobs in an attempt to reduce costs.  But Citigroup is far from alone.  We have seen dozens of major layoff announcements since the election.  If you doubt this, just see this article and this article.

It is time to wake up and admit that our economy is in an advanced state of decline, that we need to quit shipping our jobs out of the country, and that what we are doing now is clearly not working.

If we are "the greatest economy on earth", then why are approximately 48 percent of all Americans either considered to be "low income" or are living in poverty?

We need to return to the principles that our Founding Fathers founded this country on or else things are going to get a lot worse and people are going to get very, very angry.

Our politicians have been pitting different groups of people against one another and many of them have been blaming the wealthy for all of our problems.  Never before in my lifetime have I seen so much anger directed toward those that have money.  This anger is even being expressed in ways that you would not normally expect.  For example, the California Federation of Teachers recently produced a video that portrays wealthy people peeing on poor people.  That shocked me.

Eventually, all of this anger is going to lead to violence if we are not careful.  When the next major wave of the economic crisis strikes and unemployment gets significantly worse, I fear for what might happen.  I believe that it is very possible that we may see mobs of struggling people storm into wealthy neighborhoods and play "Robin Hood" with their possessions.

Instead of hating one another, we need to return to the principles that once made our economy so great.  Those principles would enable everyone to prosper.

Unfortunately, this country continues to turn away from those principles and hate and anger continue to grow.

If we continue down this path, the end result is going to be a complete and total nightmare.

It is possible to turn this economy around.  But we can't do the same things that we have been doing.  We have to start making better decisions.

Wall Street, Coming to Your Town! (and Destroying It)


The European debt crisis, and the ensuing austerity-fueled chaos, can seem to Americans like a distant battle that portends a dark future. Yet a closer look reveals that the future is already here. American austerity has largely taken the form of municipal budget crises precipitated by predatory Wall Street lending practices. The debt financing of U.S. cities and towns, a neoliberal economic model that long precedes the current recession, has inflicted deep and growing suffering on communities across the country.

In July 2012, Mayor Christopher Doherty of Scranton, Pennsylvania, reduced all city employees’ salaries to the minimum wage. With a stroke of his pen, wages for teachers, firefighters, police, and other municipal workers, many of whom had been on the job for decades, dropped to $7.25 per hour. The city, the mayor explained, simply could not pay them more. Ron Allen, who reported the story for NBC Nightly News, repeated this assessment. Cities like Scranton, he said, “just don’t have the money” to pay city employees more than the minimum wage. Officials blamed the crisis on a declining tax base, on reduced revenue from the state, and on public sector labor contracts that the city could no longer afford.

What does it mean to say that a former steel town in decline “just doesn’t have the money” to pay its bills? It means that it no longer has access to credit markets controlled by the big banks. For years, Scranton officials, like officials across the United States, have been selling municipal bonds to finance everything from basic services to development projects. Scranton’s problems careened out of control when they city’s parking authority threatened to default on its bonds. Wall Street responded aggressively by cutting off its credit line, and city workers paid a steep price. American-style austerity arrived in Scranton under the guise of budget cuts blamed on public employees, whose salaries and pensions had nothing to do with the economic crisis.

Scranton’s problems are hardly unique. Municipalities across the country are grappling with declining local tax revenue and reduced federal funding in an era when growth and development are equated with prosperity. This toxic mix has produced a $3.7 trillion municipal debt market, a revenue juggernaut for Wall Street. Municipal bonds are issued by virtually every city, county, and development agency in the United States. The number of taxpayer-backed bonds in circulation is five times higher than only ten years ago. This means that the world’s largest financial firms now hold the purse strings for everything from essential services like sewage treatment plants to large-scale developments such as sports arenas. Municipal bonds are extremely profitable for investors because they are tax-exempt and, like mortgages, can be packaged into securities.

How Did We Get Here?

Part of the municipal debt story can be traced to New York City’s 1975 fiscal crisis, when the city almost defaulted on its debt. New York was able to avoid bankruptcy at the last moment by issuing guaranteed bonds backed by public pension funds. As a result, the Emergency Financial Control Board, the municipal body that controlled the city’s bank accounts, was in the position of rewriting the social contract, exerting control over labor at every level. Union leadership agreed to the deal because they feared a bankruptcy filing would void labor contracts. Only after the city had disciplined the unions did the federal government move in with rescue loans.

New York City had been debt-financed since the 1960s. But the fiscal crisis of 1975 inaugurated a new funding paradigm for distressed municipalities: taxpayer-backed debt is issued to service the debt already on the books. American municipalities are now increasingly financed not with public money, but with private loans, and the pace of this shift has accelerated since 2008. The Center on Budget Policy and Priorities recently reported that thirty-one states will face unsustainable budget gaps in 2013.

Few public assets are safe from Wall Street’s profit imperative. Public transportation has long been a cash cow for investors. Since 2008, the New York Metropolitan Transportation Authority (MTA) has lost over $600 million as a result of interest rate swaps with JP Morgan Chase, Citigroup, and other big banks. As a result, thousands of transit workers have lost their jobs and hundreds of bus and subway lines have been cut. That is not enough to satisfy the bond market. In March 2013 New York transit riders can expect a new round of fare hikes. Most subway and bus riders are working-class New Yorkers, immigrants, and people of color. They will soon pay even more for the privilege of lining Jamie Dimon’s pockets.

The MTA is not the only municipal organization in the country that runs on debt. The Refund Transit Coalition, a public transportation advocacy group, has uncovered at least 1,100 of these swaps at more than 100 government agencies costing taxpayers $2.5 billion a year. None is more indebted than Boston’s Massachusetts Bay Transportation Authority (MBTA). The story is a familiar one: in 2000 state legislators ended most public subsidies for the MBTA, which was additionally saddled with almost $2 billion in debt, much of it left over from the infamous Big Dig. Wall Street was happy to provide loans so the MBTA could maintain the system’s aging infrastructure and finance expansions.

Twelve years later, Boston’s transit authority spends 33 cents of every dollar it takes in to service its debt. Lawmakers, who have learned the lessons of Scranton all too well, are unwilling to challenge Wall Street. Instead, they have proposed cutting services and raising fares by as much as 43 percent. No one believes this represents a long-term solution. As one Occupy Boston activist noted, “the MBTA has never even asked the banks and bondholders who continue to profit from the [transit system’s] enormous debt to take a similar cut, effectively giving the banks a ‘free ride,’ while forcing T riders—working people, the unemployed, students, seniors, and the disabled—to bear more of the burden.”

Increasing debt loads, along with other neoliberal policies demanding that municipalities do more with less, put cities under enormous pressure to promote private economic growth in lieu of spending public funds on public goods. This imperative is one reason that city officials have pursued controversial development strategies such as declaring a parcel of land “blighted” to allow it to be seized by eminent domain and auctioned to the highest bidder. For example, the Barclays Center, the new arena for the Brooklyn Nets, was built partially on land that was condemned before being transferred to a developer. Cities also generate revenue by leasing public assets to the private sector. In Chicago, for example, the Skyway toll road has been leased to a private company for ninety-nine years. Atlanta even privatized the city water supply, only to cancel the contract years later when residents complained about tainted water.

As the privatization of everything from land to transportation makes clear, taxpayers rarely have a direct say in which bonds are issued and which public assets are sold out from under them. But with municipalities guaranteeing loans by promising that bondholders will be repaid with tax dollars or revenue generated by the debt-funded project, taxpayers are often left footing the bill.


Meanwhile, it remains nearly impossible for municipalities to cancel bond deals. By law, most states cannot declare bankruptcy. And, in many cases, federal bankruptcy codes guarantee that creditors will be repaid. In 1994, Orange County, California declared bankruptcy to repair the damage done when its treasurer took out loans on behalf of the city and then lost $1.6 billion in the securities market. Following what was then the largest bankruptcy filing in U.S. history, the county still paid its bondholders to avoid a tarnished credit rating. Another California city, Stockton, has been implementing severe austerity measures ever since the housing market tanked in 2008 in order to make payments to bondholders. The city cut 25 percent of its police officers, 30 percent of its firefighters, and over 40 percent of all other city employees. The crime rate in Stockton has skyrocketed and unemployment surged, and the city is now considering cutting pension benefits for retirees to pay its debts. The capital of the Golden State, Sacramento, has also cut its police force, by 30 percent, to fill a budget gap, and has seen a similar rise in crime—gun violence, rapes, and robberies have increased dramatically. Communities long ago abandoned by the state are also suffering from austerity. Camden, New Jersey, one of the poorest cities in the United States, recently privatized its police force, laying off officers and canceling union contracts. Today, the Camden police force often does not have the numbers to respond to crimes that don’t involve murder or serious injury.

As cities like Scranton seek to eliminate unsustainable debts, investors grow more demanding. Bond insurers involved in bankruptcy negotiations in Stockton and San Bernardino have even suggested that bondholders have a claim to CalPERS, the retirement fund for California’s public workers. Though the retirement system is constitutionally protected, this is a troubling development because bondholders’ demands are almost always given priority. A recent CBO report noted that “of the 18,400 municipal bond issuers rated by Moody’s Investors Service from 1970 to 2009, only 54 defaulted during that period.” Bonds are bets that banks don’t lose.

Though the debt financing of U.S. cities is not illegal, that doesn’t mean deals are made fairly and transparently. We recently learned that interest rates around the world have been manipulated for years for the benefit of a few firms. Yet the LIBOR scandal is not surprising when one considers that municipal interest rate fraud has been going on for years with no public outcry. In his report on municipal bond rigging in Rolling Stone, Matt Taibbi explained how Wall Street has “skimmed untold billions” from hundreds of municipalities—and how they continued to invest in bonds even after they were caught. “Get busted for welfare fraud even once in America, and good luck getting so much as a food stamp ever again,” Taibbi wrote. “Get caught rigging interest rates in 50 states, and the government goes right on handing you billions of dollars in public contracts.” The debt financing of municipal government is an activity promoted and protected by the regulatory arm of the federal government.

What Can Be Done?

Strike Debt, a group (of which I am a member) inspired by Occupy Wall Street, has begun to address municipal bonds as part of a larger critique of debt as a system of wealth extraction. Strike Debt asserts that debt is a primary mechanism through which the 1 percent profits from the 99 percent. Debt affects everyone, especially those who are too poor to access low-interest credit. And Wall Street is the primary culprit. Framing municipal debt as part of a global system poses significant opportunities for organizers because it connects anti-austerity movements abroad to debt resistance efforts at home. Once we reframe debt as a problem that affects us all—as municipal debt obviously does—it becomes easier to imagine that we have enormous power to withdraw our consent.

Strike Debt’s analysis of debt as a system of wealth extraction is also a critique of capitalism. Municipal debt is more than just another example of Wall Street greed and local corruption. It may be the biggest scandal yet because it is not a scandal it all. U.S. cities, towns, and districts are now increasingly debt financed, which means they cannot operate without access to the credit markets controlled by the big banks. This illustrates that Wall Street’s class war against cities cannot be mitigated with more regulation. In fact, the SEC protects investors, not municipalities, from the consequences of bond deals gone bad. Even renegotiating debt often requires new loans. “When muni bond issuers unwind deals and pay enormous exit fees to Wall Street,” the New York Times recently reported, “they typically issue new debt to do so. In recent years, for example, New York State has paid $243 million to terminate such transactions; $191 million was financed by new debt issuance.” Raiding cities for wealth, which produces a cycle of indebtedness, is not illegal or unusual. It is simply the way Wall Street does business.

The idea that some debts cannot and should not be paid is gaining traction. In 2011, for example, Jefferson County, Alabama declared bankruptcy (the largest in U.S. history) to rid itself of $4 billion in debt, much of it issued by corrupt officials to finance a sewer project that left people in a predominantly low-income, African-American community without a functioning sewer. Some do not want to renegotiate the debt. Instead, they reject it outright. As one Occupy activist in Birmingham noted, “[the debt] shouldn’t ever have been issued, and therefore it shouldn’t exist. It shouldn’t have been spent. Since it shouldn’t have existed, we’re not going to pay it.” This statement could become a slogan for debt resistance movements across the country because it insists that debtors are a class, a collective “we” that can decide when enough is enough.

Some municipalities are fighting back, too. After their pay was cut to minimum wage, Scranton’s municipal unions sued the city, and their wages were restored. Baltimore, a city where more than 80 percent of school children qualify for free- or reduced-price lunch, is suing more than a dozen big banks for manipulating LIBOR, the benchmark for interest rates on many financial products. In July, a group called Boston Fare Strike declared a Free Fare Day and held turnstiles open for subway riders to protest fare hikes that enrich the 1 percent. Activists in Chicago are organizing community debt audits with the goal of identifying illegitimate debts that must be abolished. And finally, in a case that has gained national attention, Oakland, CA is trying to sever its relationship with Goldman Sachs for good. In the late 1990s, Oakland issued $187 million in bonds as part of an interest-rate swap. After the credit markets froze in 2008, Oakland could no longer make its payments to Goldman. The city council voted to cancel the deal, though Goldman insists the city must pay. CEO Lloyd Blankfein explained his firm’s unwillingness to let Oakland out of its contract. “The fact of the matter is,” he said, “we’re a bank.”

Blankfein is not wrong. Plundering U.S. cities is what large financial firms do. This is a troubling reality. A bankruptcy attorney featured on the NBC News report about Scranton offered this grim assessment: cutting worker pay is necessary to avoid “more drastic measures.” The reporter didn’t explain this statement, leaving viewers to imagine what terrible fate awaits those who don’t accept the reigning neoliberal orthodoxy that city budgets must be balanced by cutting worker pay, gutting public services, and issuing more debt to profit the 1 percent.

In fact, it is Wall Street that should be afraid of any disruption to business as usual. The cycle of debt illustrates that we cannot fix the problem through austerity. This tactic only deepens the devastation, since low wages further erode the tax base for cities, leaving them vulnerable to predatory lenders. It’s difficult to imagine how the debt financing of American cities could be scaled back without completely rethinking our economic system. Strike Debt is making the case that, in the United States as in Europe, the solution lies not in austerity but in investing in a genuine commons and in providing equitable access to public resources. These are precisely the “drastic measures” alluded to on NBC News. The question we must ask is, drastic for whom?

The Coming Derivatives Panic That Will Destroy Global Financial Markets

When financial markets in the United States crash, so does the U.S. economy.  Just remember what happened back in 2008.  The financial markets crashed, the credit markets froze up, and suddenly the economy went into cardiac arrest.  Well, there are very few things that could cause the financial markets to crash harder or farther than a derivatives panic.  Sadly, most Americans don't even understand what derivatives are.  Unlike stocks and bonds, a derivative is not an investment in anything real.  Rather, a derivative is a legal bet on the future value or performance of something else.  Just like you can go to Las Vegas and bet on who will win the football games this weekend, bankers on Wall Street make trillions of dollars of bets about how interest rates will perform in the future and about what credit instruments are likely to default.  Wall Street has been transformed into a gigantic casino where people are betting on just about anything that you can imagine.  This works fine as long as there are not any wild swings in the economy and risk is managed with strict discipline, but as we have seen, there have been times when derivatives have caused massive problems in recent years.  For example, do you know why the largest insurance company in the world, AIG, crashed back in 2008 and required a government bailout?  It was because of derivatives.  Bad derivatives trades also caused the failure of MF Global, and the 6 billion dollar loss that JPMorgan Chase recently suffered because of derivatives made headlines all over the globe.  But all of those incidents were just warm up acts for the coming derivatives panic that will destroy global financial markets.  The largest casino in the history of the world is going to go "bust" and the economic fallout from the financial crash that will happen as a result will be absolutely horrific. There is a reason why Warren Buffett once referred to derivatives as "financial weapons of mass destruction".  Nobody really knows the total value of all the derivatives that are floating around out there, but estimates place the notional value of the global derivatives market anywhere from 600 trillion dollars all the way up to 1.5 quadrillion dollars.

Keep in mind that global GDP is somewhere around 70 trillion dollars for an entire year.  So we are talking about an amount of money that is absolutely mind blowing.

So who is buying and selling all of these derivatives?

Well, would it surprise you to learn that it is mostly the biggest banks?

According to the federal government, four very large U.S. banks "represent 93% of the total banking industry notional amounts and 81% of industry net current credit exposure."

These four banks have an overwhelming share of the derivatives market in the United States.  You might not be very fond of "the too big to fail banks", but keep in mind that if a derivatives crisis were to cause them to crash and burn it would almost certainly cause the entire U.S. economy to crash and burn.  Just remember what we saw back in 2008.  What is coming is going to be even worse.

It would have been really nice if we had not allowed these banks to get so large and if we had not allowed them to make trillions of dollars of reckless bets.  But we stood aside and let it happen.  Now these banks are so important to our economic system that their destruction would also destroy the U.S. economy.  It is kind of like when cancer becomes so advanced that killing the cancer would also kill the patient.  That is essentially the situation that we are facing with these banks.

It would be hard to overstate the recklessness of these banks.  The numbers that you are about to see are absolutely jaw-dropping.  According to the Comptroller of the Currency, four of the largest U.S. banks are walking a tightrope of risk, leverage and debt when it comes to derivatives.  Just check out how exposed they are...

JPMorgan Chase

Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)

Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars)

Citibank

Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $52,150,970,000,000 (more than 52 trillion dollars)

Bank Of America

Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $44,405,372,000,000 (more than 44 trillion dollars)

Goldman Sachs

Total Assets: $114,693,000,000 (a bit more than 114 billion dollars - yes, you read that correctly)

Total Exposure To Derivatives: $41,580,395,000,000 (more than 41 trillion dollars)

That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 362 times greater than their total assets.

To get a better idea of the massive amounts of money that we are talking about, just check out this excellent infographic.

How in the world could we let this happen?

And what is our financial system going to look like when this pyramid of risk comes falling down?

Our politicians put in a few new rules for derivatives, but as usual they only made things even worse.

According to Nasdaq.com, beginning next year new regulations will require derivatives traders to put up trillions of dollars to satisfy new margin requirements.

Swaps that will be allowed to remain outside clearinghouses when new rules take effect in 2013 will require traders to post $1.7 trillion to $10.2 trillion in margin, according to a report by an industry group.

The analysis from the International Swaps and Derivatives Association, using data sent in anonymously by banks, says the trillions of dollars in cash or securities will be needed in the form of so-called "initial margin." Margin is the collateral that traders need to put up to back their positions, and initial margin is money backing trades on day one, as opposed to variation margin posted over the life of a trade as it fluctuates in value.
So where in the world will all of this money come from?

Total U.S. GDP was just a shade over 15 trillion dollars last year.

Could these rules cause a sudden mass exodus that would destabilize the marketplace?

Let's hope not.

But things are definitely changing.  According to Reuters, some of the big banks are actually urging their clients to avoid new U.S. rules by funneling trades through the overseas divisions of their banks...

Wall Street banks are looking to help offshore clients sidestep new U.S. rules designed to safeguard the world's $640 trillion over-the-counter derivatives market, taking advantage of an exemption that risks undermining U.S. regulators' efforts.

U.S. banks such as Morgan Stanley (MS.N) and Goldman Sachs (GS.N) have been explaining to their foreign customers that they can for now avoid the new rules, due to take effect next month, by routing trades via the banks' overseas units, according to industry sources and presentation materials obtained by Reuters.
Unfortunately, no matter how banks respond to the new rules, it isn't going to prevent the coming derivatives panic.  At some point the music is going to stop and some big financial players are going to be completely and totally exposed.

When that happens, it might not be just the big banks that lose money.  Just take a look at what happened with MF Global.

MF Global has confessed that it "diverted money" from customer accounts that were supposed to be segregated.  A lot of customers may never get back any of the money that they invested with those crooks.  The following comes from a Huffington Post article about the MF Global debacle, and it might just be a preview of what other investors will go through in the future when a derivatives crash destroys the firms that they had their money parked with...

Last week when customers asked for excess cash from their accounts, MF Global stalled. According to a commodity fund manager I spoke with, MF Global's first stall tactic was to claim it lost wire transfer instructions. Then instead of sending an overnight check, it sent the money snail mail, including checks for hundreds of thousands of dollars. The checks bounced. After the checks bounced, the amounts were still debited from customer accounts and no one at MF Global could or would reverse the check entries. The manager has had to intervene to get MF Global to correct this.
How would you respond if your investment account suddenly went to "zero" because the firm you were investing with "diverted" customer funds for company use and now you have no way of recovering your money?

Keep an eye on the large Wall Street banks.  In a previous article, I quoted a New York Times article entitled "A Secretive Banking Elite Rules Trading in Derivatives" which described how these banks dominate the trading of derivatives...

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.
According to the article, the following large banks are represented at these meetings: JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.

When the casino finally goes "bust", you will know who to blame.

Without a doubt, a derivatives panic is coming.

It will cause the financial markets to crash.

Several of the "too big to fail" banks will likely crash and burn and require bailouts.

As a result of all this, credit markets will become paralyzed by fear and freeze up.

Once again, we will see the U.S. economy go into cardiac arrest, only this time it will not be so easy to fix.

Derivatives: The Unregulated Global Casino for Banks


SHORT STORY: Pick something of value, make bets on the future value of " you="you">Banks make massive profits on derivatives, and when the bubble bursts chances are the tax payer will end up with the bill. This visualizes the total coverage for derivatives (notional). Similar to insurance company's total coverage for all cars.

LONG STORY: A derivative is a legal bet (contract) that derives its value from another asset, such as the future or current value of oil, government bonds or anything else. Ex- A derivative buys you the option (but not obligation) to buy oil in 6 months for today's price/any agreed price, hoping that oil will cost more in future. (I'll bet you it'll cost more in 6 months). Derivative can also be used as insurance, betting that a loan will or won't default before a given date. So its a big betting system, like a Casino, but instead of betting on cards and roulette, you bet on future values and performance of practically anything that holds value. The system is not regulated what-so-ever, and you can buy a derivative on an existing derivative.

Most large banks try to prevent smaller investors from gaining access to the derivative market on the basis of there being too much risk. Deriv. market has blown a galactic bubble, just like the real estate bubble or stock market bubble (that's going on right now). Since there is literally no economist in the world that knows exactly how the derivative money flows or how the system works, while derivatives are traded in microseconds by computers, we really don't know what will trigger the crash, or when it will happen, but considering the global financial crisis this system is in for tough times, that will be catastrophic for the world financial system since the 9 largest banks shown below hold a total of $228.72 trillion in Derivatives - Approximately 3 times the entire world economy. No government in world has money for this bailout. Lets take a look at what banks have the biggest Derivative Exposures and what scandals they've been lately involved in. Derivative Data Source: ZeroHedge.




One Hundred Dollars
$100 - Most counterfeited money denomination in the world.

Keeps the world moving.
Ten Thousand Dollars
$10,000 - Enough for a great vacation or to buy a used car.

Approximately one year of work for the average human on earth.
100 Million Dollars
$100,000,000 - Plenty to go around for

everyone. Fits nicely on an ISO / Military

standard sized pallet.



$1 Million is the cash square on the floor.
1 Billion Dollars
$1,000,000,000 - This is how a billion dollars looks like.

10 pallets of $100 bills.
1 Trillion Dollars
$1,000,000,000,000 - When they throw around the word "Trillion" like it is nothing, this is the reality of $1 trillion dollars. The square of pallets to the right is $10 billion dollars. 100x that and you have the tower of $1 trillion that is 465 feet tall (142 meters).
1 Million, 100 Million, 1 Billion, 1 Trillion

$2 Billion on Truck


$100 Million Dollars = 1 year of work for 3500 average Americans
It takes 3500 Americans 1 year of work to make $100 Million dollars. The 155 million Americans who worked with earnings in 2005 on average made $28,567 / year.



In front of the 3500 people is the $100 Million pallet that they all have to work for 1 year to earn.

Look carefully to see a stack of $1 Million and the 35 average Americans required to earn that $1 Million in 1 year.


Demonocracy.info - $100,000,000 - One Hundred Million Dollars





Bank of New York Mellon
BNY has a derivative exposure of $1.375 Trillion dollars.

Considered a too big to fail (TBTF) bank. It is currently facing (among others) lawsuits fraud and contract breach suits by a Los Angeles pension fund and New York pension funds, where BNY Mellon allegedly overcharged the funds on many millions of dollars and concealed it.
Bank of New York Mellon - Derivative Exposure
State Street Financial
State Street has a derivative exposure of $1.390 Trillion dollars.

Too big to fail (TBTF) bank. It has been charged by California Attorney General (among other) lawsuits for massive fraud on California's CalPERS and CalSTRS pension funds - similar to BNY (above).
Bank of New York Mellon - Derivative Exposure
Morgan Stanley
Morgan Stanley has a derivative exposure of $1.722 Trilion dollars.

Its a too big to fail (TBTF) bank. It recently settled a lawsuit for over-paying its employees while accepting the

tax payer funded bailout. Vice Chairman of Morgan Stanley had a license plate that said "2BG2FAIL" on his Porsche Cayenne Turbo. All this while $250 million of bailout money ended up in the hands of Waterfall TALF Opportunity, run by the Morgan Stanley's owners' wives-- Marry a banker for a $250M tax-payer cash injection.

The bank also got a SECRET $2.041 Trillion bailout from the Federal Reserve during the crisis, beyond the tax payer bailout.
Bank of New York Mellon - Derivative Exposure
Wells Fargo
Wells Fargo has a derivative exposure of $3.332 Trillion dollars.

Its a too big to fail (TBTF) bank. WF has been charged for its role in allegedly pursuing illegal foreclosures and deceptive loan servicing. Wells Fargo was just slapped with a $85 million fine by Federal Reserve for putting good credit borrowers into bad-credit rating (high rate) loans.

In March 2010, Wachovia (owned by Wells Fargo) paid $110 million fine for allowing transactions connected to drug smuggling and a $50 million fine for failing to monitor cash used to ship 22 tons of cocaine. It also failed to monitor $378.4 billion (that's $378400 millions dollars) worth of transactions to Mexican "casas de cambio" (think WesternUnion, anonymous cash transfer) usually linked to drug cartels. Beyond that, WF lets its' VIP employees live in foreclosed mansions. WF knows how to cash your legit check, then claim "fraud" and close your account. WF also re-orders your transactions to create more overdraft fees. Wells Fargo's Wachovia also got a SECRET $159 billion bailout from the Federal Reserve.

Wells Fargo paid NO taxes in 2008-2010 and had a tax rate of NEGATIVE 1.4% while making

$49 billion in profit during the same time.
Bank of New York Mellon - Derivative Exposure
HSBC
HSBC has a derivative exposure of $4.321 Trilion dollars.

HSBC is a Hong Kong based bank and its original name is

The Hongkong and Shanghai Banking Corporation Limited.



You will find HSBC working a lot with JP Morgan Chase.

Both HSBC and JP Morgan Chase have strong interest in gold & precious metals. HSBC and JP Morgan Chase are often involved together in financial scandals.

Lately HSBC has been sued for allegedly funneling more than $8.9 billion to the largest ponzi-scheme in history - Bernie Maddof's investment business.

HSBC (along w/ JP Morgan Chase) has been sued for alleged conspiracy suppressing the price of silver and gold, partially through precious metal DERIVATIVES and making billions of dollars on it. State of Hawaii is suing HSBC (and other banks) for deceptive credit card lending practices.

DZ Bank in Germany is suing HSBC (and JP Morgan) for deceptive (lying) practices when selling home-loan-backed securities.

HSBC is also under investigation for laundering billions of dollars.
Bank of New York Mellon - Derivative Exposure
Goldman Sachs
Goldman Sachs has a derivative exposure of $44.192 Trillion dollars.

The $1 Trillion pillars towers are double-stacked @ 930 feet (248 m).

The White House is standing next to the Statue of Liberty.



Goldman Sachs has advantage over other banks because it has awesome

connections in US Government. A lot of former Goldman employees hold high-level

US Government positions (chart)
.



Mitt Romney's top donor is Goldman Sachs, and one of Obama's best donors.

Ex-CEO of Goldman Sachs, Hank Paulson became the Secretary of Treasury under Bush and

during the 2008 financial crisis authored the TARP bill demanding $700 billion bail-out.

In UK, Goldman Sachs escaped £10 million bill on a failed tax avoidance scheme with help of good connections.

The bank is the largest player in the food commodities market, earned $955m from food speculation in 2009" - That's your $$$.

Goldman Sachs employees are arming themselves with guns in case there is a populist uprising against the bank.

Goldman Sachs calls their investors "muppets". and use clients to make money for themselves, disregarding the clients.

The bank was fined $22 million for sharing valuable nonpublic information with top clients (Think insider trading with best clients).

Goldman Sachs was part-owner America's leading website for prostitution ads until the ownership stake was exposed.

Goldman Sachs helped Greece conceal its debt with secret loans, while simultaneously taking advantage of Greece.

Goldman Sachs got a $814 billion SECRET bailout from the Federal Reserve during the 2008 crisis.

Goldman Sachs got $10 billion of the 2008 TARP bailout, and in the same year paid $10.9 billion in employee compensation and "benefits", while paying a tax rate of 1%. That means an average of $327,000 to each Goldman Sach's employee.
Bank of New York Mellon - Derivative Exposure
Bank of America
Bank of America has a derivative exposure of $50.135 Trillion dollars.



BofA is sticking the tax-payers with a MASSIVE bill, by moving derivatives to

accounts insured by the federal government @ total of $53.7 trillion as of 06/2011.

During 2011-12 BofA has been in need of cash, so Warren Buffett gave BofA $5 billion.

Same year BofA sold its stake in China Construction Bank to raise $1.8 billion in cash.


Bank of America paid $22 million to settle charges of improperly foreclosing on active-duty troops

BofA recruited 3 cyber attack firms to attack WikiLeaks. but the Anonymous hacker group hacked the security firms first.

BofA was sued for $31 billion in home-loan losses in 2011, the bank is involved in many lawsuits, too many to document.

BofA also received a SECRET $1.344 trillion dollar bailout from the Federal Reserve.



Bank of New York Mellon - Derivative Exposure
Citibank
Citibank has a derivative exposure of $52.102 Trillion dollars.

The $1 Trillion dollar towers are double-stacked @ 930 feet (248 m).


Citibank customers have been arrested for trying to close their accounts, while in in Indonesia a man was interrogated to death in Citibank's special "questioning room". In 2011 Citibank paid a fine of $285 million for selling home-loan backed bonds to investors, while betting they would lose value (think derivatives/insurance). The man in charge of the unit at Citibank became Obama's Chief of Staff. 2 weeks before getting hired by Obama he got $900,000 from Citibank for great performance. This was after Citigroup took out $45 billion in bailout money.

Citibank knowingly passed over bad loans to the Federal Housing Administration to insure.

Citigroup also received a SECRET $2.513 trillion dollar bailout from the Federal Reserve.



Bank of New York Mellon - Derivative Exposure
JP Morgan Chase (JPM)
JP Morgan Chase has a derivative exposure of $70.151 Trillion dollars.

$70 Trillion is roughly the size of the entire world's economy.

The $1 Trillion dollar towers are double-stacked @ 930 feet (248 m).

JP Morgan is rumored to hold 50->80% of the copper market, and manipulated the market by massive purchases. JP Morgan (JPM) is also guilty of manipulating the silver market to make billions. In 2010 JP Morgan had 3 perfect trading quarters and only lost money on 8 days. Lawsuits on home foreclosures have been filed against JP Morgan. Aluminum price is manipulated by JP Morgan through large physical ownership of material and creating bottlenecks during transport. JP Morgan was among the banks involved in the seizure of $620 million in assets for alleged fraud linked to derivatives. JP Morgan got $25 billion taxpayer in bailout money. It has no intention of using the money to lend to customers, but instead will use it to drive out competition. The bank is also the largest owner of BP - the oil spill company. During the oil spill the bank said that the oil spill is good for the economy.

JP Morgan Chase also received a SECRET $391 billion dollar bailout from the Federal Reserve.

In 2012, JP Morgan (JPM) took a $2 billion loss on "Poorly Executed" Derivative Bets.
Bank of New York Mellon - Derivative Exposure
9 Biggest Banks' Derivative Exposure - $228.72 Trillion
Note the little man standing in front of white house. The little worm next to lastfootball field is a truck with $2 billion dollars.

There is no government in the world that has this kind of money. This is roughly 3 times the entire world economy. The unregulated market presents a massive financial risk. The corruption and immorality of the banks makes the situation worse.

If you don't want to bank with these banks, but want to have access to free ATM's anywhere-- most Credit Unions in USA are in the CO-OP ATM network, where all ATM's are free to any COOP CU member and most support depositing checks. The Credit Unions are like banks, but invest all their profits to give members lower rates and better service. They don't have shareholders to worry about or have derivatives to purchase and sell.

Keep an eye out in the news for "derivative crisis", as the crisis is inevitable with current falling value of most real assets.

Derivative Data Source: ZeroHedge

More Data Pointing To Slowdown In US Economy


Following a dismal report last week on retail sales for November, the first month of the holiday shopping season, manufacturing data released Monday confirmed that the US economy is weakening.

The Institute for Supply Management (ISM) issued its purchasing managers’ index (PMI) for November, showing an unexpected contraction in manufacturing to the lowest level in three years (since July 2009). The index fell to 49.5 from 51.7 in October. Any number below 50 indicates a contraction of factory output. Most analysts had predicted a figure well above 51.

The report registered a return to negative growth after two months of tepid expansion. The PMI has been below 50 for four of the last six months. The scale of the decline is indicated by the fact that the ISM’s factory index averaged 55.2 in 2011 and 57.3 in 2010.

The fall in manufacturing coincides with slumping consumer spending. On Friday, the Commerce Department reported that consumer spending fell in October for the first time in five months and income growth stalled, with wages and salaries actually dropping 0.2 percent.

Last Thursday, Thomson Reuters reported that four major US retail chains—Kohl’s, Target, Macy’s and Nordstrom—reported declines in November sales, including the post-Thanksgiving “Black Friday” super-sales events, as compared to November of 2011. Overall, the 16 retailers tracked by Thomson Reuters recorded an overall increase of 1.6 percent, less than half the 3.3 percent jump predicted by analysts.

The statistics on both consumption and production give the lie to the illusion being promoted by the government and the media that economic conditions in the United States are steadily improving, even if the “recovery” is proceeding slowly.

One component of the PMI, the employment index, showed a sharp drop in factory employment. That index come in at 48.4 for November, a decline of 3.7 percentage points and the lowest reading in more than three years (since September 2009).

The Institute for Supply Management’s report was consistent with the business survey released last week by the Federal Reserve Board. The Fed’s Beige Book report said that seven of the central bank’s districts reported “either slowing or outright contraction in manufacturing.”

Ironically, a positive report on construction spending issued Monday by the Commerce Department suggests the degree to which the US economy is on life support, dependent on massive injections of cheap credit from the Federal Reserve. Commerce said US builders increased spending on construction projects in October by the biggest amount in five months, led by a surge in housing.

Construction spending rose 1.4 percent in October from the previous month, rising to the highest annual rate in more than three years. Housing construction jumped 3 percent. Even with the gain, however, the level of construction spending remained at about half of what is considered healthy.

The rise in housing construction is largely due to extremely low mortgage interest rates, by historical standards. These, in turn, are the result of the Fed’s policy of keeping benchmark interest rates near zero and pumping billions of dollars a month into the financial system through a new round of so-called “quantitative easing”—a euphemism for printing dollars.

The resulting fragile and halting recovery in housing is a major factor keeping the US economy from plunging into a new recession. Meanwhile, the policies of the Fed and the Obama administration, designed to inflate stocks and other financial assets while driving wages ever lower, benefit the financial-corporate elite and the wealthiest social layers at the expense of the working class majority of the population.

The slump in US manufacturing is directly related to the worsening global economic situation, particularly the mounting crisis in Europe, which is impacting US export markets. Along with its measure of employment, the ISM’s gauge of export orders for November showed a contraction, the sixth straight month of negative growth.

The data firm Markit released its purchasing managers’ index for the 17-nation euro zone Monday, showing that manufacturing activity in the region contracted in November for the ninth consecutive month. Every country using the euro, with the exception of Ireland, showed a decline in factory output. This includes Germany, Europe’s largest and most powerful economy.

Last week, the European Union reported that unemployment in the euro zone reached a new record high of 11.7 percent in October. In a statement accompanying its Annual Growth Survey Report, the executive body of the EU, the European Commission, said: “The economic and employment outlook is bleak and has worsened in recent months and is not expected to improve in 2013.”

New Study Details Growth Of Income Inequality Across US


A new study by the Center on Budget and Policy Priorities details the explosive growth in income inequality throughout the United States over the past three decades. The report, entitled Pulling Apart, is unique in that it breaks down data regarding inequality to the state level, demonstrating that “the growth in income inequality since the late 1970s has not been a geographically isolated phenomenon.”

“Nationwide, income gaps between the richest households and both the poorest households and middle-income households have widened significantly since the late 1970s,” the study’s authors conclude. “The incomes of the country’s richest households have climbed substantially over the past three decades, but middle- and lower-income households have seen only modest increases or actual declines after adjusting for inflation.”

“In no state did inequality fall by a statistically significant amount,” the report emphasizes.

The study uses US Census Bureau data to compare income inequality between the richest fifth, the middle fifth, and the poorest fifth of households at four periods in time: 1977-1979, 1998-2000, 2005-2007, 2008-2010, allowing three-year averages to be taken at each point. The first three time periods were chosen as “peaks” in the economic cycle while the latter point is the last for which full data is available. All data is adjusted for inflation to represent values in 2009 dollars.

The study did not include realized capital gains, which form a substantial portion of the income of the wealthy, due to data limitations. “As a result,” the authors warn, “our results show somewhat less inequality than would be the case were we to include realized capital gains.”

Even so, the findings are staggering: “Nationally, the richest fifth of households enjoyed larger average income gains in dollar terms each year ($2,550, after adjusting for inflation) than the poorest fifth experienced during the entire three decades ($1,330).”

When the trend is viewed from the state level, it shows that in the late 1970s, the richest fifth of households had 5.2 times the income of the poorest fifth. But by the mid-2000s this ratio had grown to 8.3. The authors note that “in seven states—Arizona, Connecticut, Indiana, Kentucky, Michigan, West Virginia, and Wyoming—the average income of the bottom fifth fell” over this period.

The report shows that the growth of inequality was accelerating between the late 1990s and the mid-2000s, before the eruption of the economic crisis in 2008. The greatest jump in inequality over this period occurred in President Obama’s home state of Illinois, where the top 5 percent saw a 23 percent increase ($58,687) in income compared to a decline among the bottom fifth of 15 percent ($3,539).

While the study did not attempt to analyze the effects of the current economic crisis on inequality due to data limitations, it did point out that the current data suggests income inequality is deepening. They note that in 2011, “each of the bottom three income quintiles had its smallest share of national income on record, while the top quintile had its largest share on record.”

The most recent data available shows that the top fifth of households earn on average eight times that of the bottom fifth, or $164,490 compared to $20,510. At the same time, the average income of the top income quintile was 13.3 times the average income of the bottom fifth.

In New Mexico, which has the highest income inequality of any state, the ratio between the top fifth and the bottom fifth is 9.9. Tellingly, the richest households in the nation’s capital earn 14.6 times the poorest.




According to the report, three major factors have contributed to the growth of inequality: the growth in wage inequality, government policies, and the expansion of investment income. The growth in wage inequality was identified as the biggest factor, as wages at the bottom and middle of the wage scale have remained stagnant or grown very little.

The decline in the real value of the federal minimum wage since its peak in the 1960s has played a role in this process. The study notes that the “impact of this reduction in the minimum wage since 1979 on wage inequality has been, by many accounts, very substantial, especially for low-wage women workers.”

The role played by globalization and technological advances in the depression of wages is also noted. The study demonstrates that under capitalism, where the productive forces are privately held, the tremendous advances made in production and technique over the past decades have been monopolized by the wealthy at the expense of the majority of the working population.

The authors highlight the role played by government policy in promoting inequality, such as changes to the tax code favoring the wealthy and extended periods of high unemployment over the past three decades. Since taking office, the Obama administration has continued the most recent tax breaks, encouraging this inequality, and has failed to introduce any serious measures to address the nation’s high unemployment rate. The administration is strategically using the persistent levels of high unemployment as a means of lowering the wages of workers to enable American business to better compete on the world market.

Finally, the report points to the shift in sources of income over the past three decades away from labor and towards investment-based sources, which tend to benefit the wealthiest households. This process is bound up with the long-term decline of American capitalism and its turn away from industrial production in favor of speculation and evermore parasitic forms of wealth accumulation.

Data compiled by the study shows not only that the growth of inequality has its source in the protracted decline of American capitalism, but that it is also a process that has been encouraged and exacerbated by the deliberate policies of Democratic and Republican administrations alike.