The Kowalski Constitution

As I'm rather over-caffeinated this morning and have an hour or so to blow, I've decided to let my mind wander a bit on what would solve the longer term ills of our nation, which are many: deep political and racial divisions within our nation, a broken financial system designed to rob the people on behalf of bankers, and the monstrous debt levels we find ourselves in. The current economic and political system is clearly not up to snuff, and nothing short of a new constitution is needed in order to solve these very serious problems. Therefore, I humbly present the Kowalski Constitution:

Federal Government


1. The Federal Government's spending would be limited to 3% of the nation's GDP.
2. The Federal Government would be able to borrow money only by a vote of 4/5ths of the people.
3. The Federal Government may raise income taxes only by a vote of 2/3rds of the people.
4. Income Taxes would be set at the following levels: the top 1% would have a 27% income tax; the next 19% would have a 22% income tax; the next 20% would have a 16% income tax, the next 20% a 10% tax, the next 20% a 5% tax and the bottom 20% would have no income tax at all. Excess revenues collected {after the Federal Government spends their 3%} shall be used firstly to pay off the national debt and after that remaining revenues will be given to the states on a per person basis (those states with larger populations will recieve more money).
5. The Federal Government may institute trade tariffs and service fees for the regulatory bodies that are needed such as SEC, the FDA, FDIC, Corps of Engineers, INS, Coast Guard etc.
6. As per the 10th Amendment, the Federal Government will not interfere in states rights or abilities in any manner save that of the currency, national defense and treaties with foreign nations.
7. There shall be only one legislative body, called the Senate. Each State shall elect one Senator for every 650,000 people for a total initially of 435 senators. From amongst themselves the Senate shall elect a President.
8. Immigration: There will be two types of visas: Family {spouse & child}, Technical {1,500 issued per annum, to be auctioned off}. Of those currently in the US illegally, women and children under 18 may stay and will be able to apply for citizenship. Males who are both currently employed full time, in college, or the military and have no felonies on their record may also apply for citizenship. Going forward, there shall be 1,000 family visas sold each month at auction to the highest bidders.

State Governments

1. There shall be 435 states, now called US Congressional Districts. Each state will have complete control of all matters not relating to national defense, treaties with foreign nations and the issuance of currency {as per the 10th Amendment}as well as the responsibility to funding of programs they see fit to employ, with the exception that states will not be able to borrow money without a 4/5th vote of the people.

2. Each state will have five wards, in which each ward shall elect a State Assemblyman {the state's legislative body}. The Assemblymen will elect a Governor from amongst themselves. The Governor will propose each year's budget to the State Assembly.

3. Every ten years there will be redistricting as follows: Given that each of these five wards needs to have roughly equal population, the ward map might need to be adjusted as population moves. When a state gets to 1,240,000 in population, it may then elect two senators to the federal level Senate and would then need to divide itself into two Senatorial districts for this purpose.

4. States are forbidden from enacting an income tax.

The idea here is to empower small states and limit the power and scope of the Federal Government. Each state will have the powers to enable {or ban} programs such as Medicare, Social Security, Welfare, Education, Criminal Justice, Affirmative Action, Abortion, Gay Rights, Taxation-- pretty much everything so long as it does not cross the Bill of Rights. Each state will essentially be a little country save the currency, treaties and war powers.

Federal Financial Regulations

1. Immediately ban all forms of leveraged trading in all markets, including equities and commodities.
2. Immediately re-enact Glass Steagel.
3. The Federal Reserve shall, each quarter, determine if there is a need to print more money. If money does need to be printed, it shall be distributed evenly to the people. Banks will need to then compete for capital from the citizenry. This will be the world's first bottom-up credit based monetary system.
4. No Institution in the US shall exceed 2% of GDP in size. If it does, it shall be broken up into at least five smaller companies, with each being no more then 20% the size of the parent company.
5. No loans shall be given to individuals without a 1/3 down payment.

So let it be written.. so let it be done !!


Now on to a couple of updates: Debtmageddon and Euromageddon.

In regards to the debacle in Wash DC's raising of the debt ceiling, as of this writing, the US House has passed a Republican plan to extend the borrowing for another six months or so {about $1 trillion} and it includes a provision that requires a Balanced Budget Amendment to be in passed in the US House and Senate and it be sent to the states for ratification. The US Senate, within hours of it's passage, defeated it. The Repubs have a stronger hand here, having passed not one but two bills to avert debtmageddon. Obama has proposed nothing and seems MIA; the Democratic Senate has passed nothing and has said no to everything. The ball is now in the Senate's court to come up with something that everyone can agree to pass. I still believe a deal gets done; it'll look something like this:

* There will be more in spending cuts than debt increases
* The Senate will allow a vote on a balanced budget amendment (which will not pass)
* The cuts will include some sort of capping on either Social Security or Medicare
* The extension will get us past the next election.

It will result in a downgrade of the US credit rating by one of the agencies, likely Moodys-- and rightfully so. Politically, any cuts to either Social Security or Medicare will be Barack Obama's Waterloo, who already lists high unemployment, a failed and unpopular health care bill, and out of control borrowing followed by a credit downgrade  amongst his "accomplishments". Any cuts in either of these entitlement programs will cost him the senior vote. My guess is that $4.50/gal gasoline will also be added to his legacy by election day.

Onto Euromageddon, where the rot and bad news continue unabated. Spain's PM Zapatera has called for early elections in September due to the unpopularity of further austerity measures required to safeguard their {deteriorating} credit rating and thus their ability to borrow more money. One of the ratings agencies downgraded Spain anyways.. and this was before Zapatera's announcement. Ominously, Italy's situation is also deteriorating as the rates on their debt also goes up. A week ago, there was an agreement which allowed the EFSF to proactively intervene in the secondary markets and thus stop the slide in Spanish and Italian bond rates. So far, the EFSF is missing in action and remains woefully underfunded. Expect the market to test their resolve, and soon. If the EFSF does step up and 1. Increases it's size, and 2. Intervenes to help Spain and Italy, then a crisis can be averted. But if either of these components are missing, expect Spain to slide into insolvency by Halloween.

Update 10pm 7/30: According to ABC news, the GOP and Obama have reached an agreement, pretty much like what I outlined above: http://www.zerohedge.com/news/abc-reports-tentative-debt-ceiling-deal-reached-between-gop-and-obama#comment-1508875 ..... if this is true {rumor so far} then there is a high probability that when the automatic cuts are triggered in December, Medicare will be cut. If this happens, expect the seniors to stay home. As for the bigger picture, since at the end of it no entitlement was cut, much of the cuts take place in later years {and so cannot be truly enforced}, this was-- after all the drama-- just a big smelly show. Expect at least one of the credit rating agencies to downgrade the US by fall. What a joke.

America's Three Choices

On July 19th, the Congressional Budget Office {CBO}, which is a non political budget organization, came out with a quite important report, which was largely ignored what with the Euro crisis and budget ceiling talks. In this report, which was unusually blunt, it came out and said what we all know is the truth-- which is that America cannot continue to borrow at the current rate it is doing and that in the long run we must do one (or a combination) of three things:

1. Raise revenues {taxes} significantly.
2. Make considerable cuts to the benefits provided to the elderly: Social Security and Medicare
3. Substantially reduce other parts of federal spending: Defense, Food Stamps & Unemployment

My first comment is that while it is true that at some point these choices will need to be made, we are still able to borrow obscene amounts of money-- and its my view that until the day arrives when we are forced to make these painful decisions, we'll just keep borrowing and avoiding.

But at some point, we will arrive at the Day of Reckoning. What happens at that point really depends on how the government looks-- if we have a strongly Democratic government, higher taxes and defense cuts will happen. If we have a strongly Republican government, the elderly programs will suffer. Social Security, MediCare and Medicaid expenses are set to explode.. this is by far the biggest part of the problem, along with the ever growing payments on our national debt.

But I want my readers to consider this: what we are seeing is one of the greatest inter-generational wealth transfers in all of history. Lets start with the current generation's borrowing-- and handing the bill to their children's generation. Combine this with the exploding cost of Social Security and Medicare-- a cost to be paid by our children. From where I sit, the current generation stands condemned of the worst of all crimes-- greed to the point of impoverishing your children, which will be a mathematic certainty given the promises made via Social Security, Medicare and the monstrous debt. Shamefully, I'm part of this Generation of Greed. If I were Emperor, I'd cap Social Security, Medicare and Medicaid combined at it's current level of 9% of GDP and I'd limit Defense spending to 2.5% of GDP from it's current 4% {I'm not a fan of foreign wars.. we can easily reach the 2.5% by withdrawing our forces based in other nations}. I'd also return tax rates to Clinton-era levels. If this means that the amount I get when I hit retirement age is slimmer and the government refuses to pay for a ridiculously expensive surgery to save my old arse, so be it, and would plead with my fellow grey tigers to join me in accepting a slimmer future so that our children might have a brighter one. I doubt any will. Shame. Here's another article on just how much Soc Sec was promised: http://www.zerohedge.com/contributed/inflation-%E2%80%9Cbend%E2%80%9D-points

The Euro Bailout v3.0

Well today was the big meeting in Brussels. Big things were expected-- and they delivered, especially when it came to expanding the EFSF {Europe's Bailout Fund}. Here's a quickie list of the major bulletpoints:


* Greece will partially default and be recieving another €110 billion rescue package
* EFSF loans to Greece will be extended to 15 years from it's current 7 years.
* EFSF loans to Greece will have the interest rates reduced on them.
* The EFSF will now be able to help recapitalize troubled EU banks (much like TARP)
* The EFSF will now be able to purchase EU government debt in the secondary markets (much like QE2)


In my humble opinion, there are two points that come up here. First is that the size of the EFSF will need to be dramatically expanded, perhaps to €2 Trillion. This is up from it's current €440 billion. Second is that there appears to be no real incentive for other nations to get their house in order when the EFSF will backstop their borrowing and guarantee low interest rates on that borrowing. That said, this does quite a bit for Greece and the last two bullet points looks like a winner to halt the bleeding of other nations' debts, including Spain and Italy this week. I'm surprised Germany and Finland went along with these last two points. Even Ambrose Pritchard, a noted Euro skeptic and gloom and doomer, was impressed:  

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8653579/Europe-steps-up-to-the-plate.html

Debt Ceilings & Europe's Mini Crisis

This week was an interesting one. First here in America, there were a series of political theatres and scare tactics prepared for the masses by the media. Warnings of economic armageddon abounded on MSNBS, with Democratic blowhards Chris Matthews and Rachel Maddow telling us that the Repubs were "playing chicken with the economy" and that the only possible solution is more taxes. Obama stormed out of one budget session. As I've said before, all of this is political theatre, folks. Over the next week, there will be a series of votes in the House next week on proposals put forth by Republicans-- which might well pass in the House, but they know full well will never make it thru the Senate. It's pure theatre, folks. There will be a deal, likely right around the end of July or first days in August. For those interested enough, my guess is that something very small {$1.5 trillion over 10 years} will be the result. Americans would do better to worry about Casey Anthony's release date. Here's Calculated Risk's assessment: http://www.calculatedriskblog.com/2011/07/debt-ceiling-charade-almost-over.html

Here in the great state of Minnesnowta, our fearless political leaders apparently have the the outlines of a deal after 2-3 weeks of doing battle in the media. The liberal media here has shamelessly put in vast amounts of propaganda to convince the people to support the Democratic position that the only answer is tax hikes. At both the national and state levels, the media bias and propaganda blitz really annoyed me. But in the end, it was Democratic Gov.Dayton that buckled; there will be spending cuts and no tax hikes. Most people here were not even remotely affected by the shutdown and openly began wondering what the 22,000 people who were laid off were actually doing. This public sentiment shift is what caused Dayton to buckle, though he can claim a few small victories in the spending priorities arena.

Early this week in Europe, there were some very serious problems which might've quickly gotten out of hand. At the end of the day, it was the Peoples Bank of China in combination with the ECB that forcefully stepped in to halt the rout on Tuesday morning by purchasing nearly a hundred billion euro's worth of Spanish and Italian Gov't Bonds. Nonetheless, the problems continue to mount there as the week progressed. Greece, Ireland and Portugal's Govt Bonds were all downgraded by the ratings agencies to junk after the ECB said it would continue to accept these bonds as collateral for loans. The EU, in response to a crisis of debt, decided that one of the ways forward was to muzzle the ratings agencies (as opposed to actually dealing with the problem at hand) and introduced legislation to do just that. From Wednesday thru Friday, however, the bond markets gave their answer back by punishing Italian, Spanish and Portuguese Govt debt; Friday was a particularly sharp deterioration, though not nearly as sharp as the mini-crisis on Monday. Italy did pass an austerity package, yet rates on their bonds continued northward. The crisis is actually continuing, but not at the same pace as Monday. If the deterioration continues into next week at the same pace, the EU might need another Chinese bailout by month's end. RBS said the eurozone storm is far from over. "We expect the crisis to continue deteriorating, and threaten to undermine the entire euro area as European policy-makers still misunderstand market dynamics. They show no sign of catching up with reality," said Jacques Cailloux, the bank's Europe economist.

The ECB conducted yet another "stress test", which was {much like the first such effort} a complete joke. Only eight banks failed out of ninty they tested. In actuality, perhaps 1/4th should be shut down immediately and another 1/4th put on notice. I'm not going to bother typing their names or anything else on this subject as it's not worth my effort to type it.

The problem in the Europe is the obscene levels of debt-- bank, household and government debt-- and the astonishing level to which all of these institutions are interconnected, which has the effect of making one big failure a failure for all of the other dominos. Europe's situation is, because of it's complexity and debt levels, much worse than our own. One day soon enough, all of the kings horses and all of the king's men will not be enough. The Chinese will not forever bail out the Europeans.

Update 7/18 7pm: The EuroCrisis is back. Just like last monday, Italian bank stocks were halted, Spanish & Italian bonds tanked. The EUrocrats have an important meeting on Thursday. "This is a key meeting. If there is no agreement on how to proceed, the markets could really panic" http://www.calculatedriskblog.com/2011/07/europe-update-next-key-meeting-on.html
Here's another terrific article: http://ftalphaville.ft.com/blog/2011/07/19/626916/fiddling-while-rome-and-madrid-burn/?updatedcontent=1

Europe: Yellow Alert

Today was a bad day for European markets, particularly Italian. Italy's largest bank, UniCredit, fell off the cliff from the outset and the Italian stock market had to halt trading. It reopened a tad later, and investors welcomed this with another tsunami of sell orders. Italy's 2nd largest bank, Intesa San Paulo, fell 7% on the day. It was'nt just Italian banks, either. ING, a Dutch insurance giant, fell 10%. Deutsche Bank lost 6%. Barclays lost 6%. These are serious losses, folks. On most days, a stock will move perhaps 1% or even 2% if something big happened. It went downhill from there.

Later in the day, Germany's Chancellor Angela Merkel refused to expand the EFSF, the European fund they set up to bail out problem children like Greece. The EFSF is not anywhere close to being able to handle Italy. Another stake to the heart came from the ECB itself, which refused to purchase Italian or Spanish debt. It also appeared that the second Greek bailout was having problems. As a result, the government bonds of Spain, Italy and a whole host of other EU nations tanked, with Spain passing the important 6% level on the 10 Year bond and Italy's nearing this level. After the close of the markets, one of Spain's states-- Castilla La Mancha-- announced that their deficit was more than twice what they said it was. This was not the day for this to say the least.

As all of this was happening, the Euro currency itself began tanking, especially against the Swiss Franc {see above chart}. it lost two cents versus the Swissy-- this is a MAJOR move in a single day.

So, to recap: Big EU banks crashing, Gov't Bonds crashing, currency crashing. Tonite's action in the LIBOR and EURIBOR markets will be telling; if the rates soar as I expect, there is a fair chance we're watching the EU version of 2008 beginning. "We've painted ourselves into a corner. At some point, someone-- either Germany or the ECB-- must fundamentally shift position, or it all blows up" an EU official told Reuters. There is a chance all of this just blows over without any serious drama, but I highly doubt it. I'm thinking a very large bailout {or the EuroBond} is coming. If there is no bailout and things continue southward, the entire EU banking and financial system is in trouble.

update Tues 4pm: Well it seems that the "powers that be".. ie.. the People's Bank of China and the ECB.. rode in this morning on white horses and stopped the bleeding. UniCredit's stock ended the day up; Spanish and Italian Gov'tBond rates went down (after opening the morning very much higher). So much for that crisis. I'm honestly surprised at how quickly the bond vigilantes caved in. The PBoC is rumored to have tossed in a very large sum, which I believe to be the case given how drastic today's turnaround was.

U.S. Unemployment & What Happens Next

Every month on about the 7th or so the Bureau of Labor Statistics {BLS} releases it's unemployment report. For economists and politicians, this is probably the most watched of all economic reports. We as a nation need to create about 175,000 per month to keep up with the natural population increase. Last month's report, which was for May, was expected to show an increase of about 150,000 - 170,000 jobs gained. It came in at only 54,000. It was ugly. The political spinmeisters told us that the supply chain disruptions caused by the Fukushima earthquake was the primary cause-- and there was some truth in this. Most wrote this off as a one time stumble; the stock market continued on it's merry way upwards. I myself did'nt make a lot of noise about this here on the blog.

So when the 7th of this month approached, most financial analysts were expecting an increase of about 120,00 jobs in the report, which was for June. Some optimists were whispering numbers like 160,000; the pessimists were talking about 90,000. The report came in at a gain of only 18,000 jobs-- an unmitigated disaster. Worse, the report from last month showing 54,000 was revised downwards to 25,000. It was so bad that President Obama felt it necessary to treat us to a teleprompter news conference, where he reminded us that since he took over there had been over 2 million jobs created. He gave no explanation, but did suggest that raising the debt limit would be helpful as he said it was creating a lot of uncertainty. He understands that if this ship does'nt turn around quickly, his chances of being re-elected are slim and none, and he's right.

There are lots of opinions here as to what's going on. Mine is that a number of factors are at work here. First and foremost is that our economy is largely built on consumer spending, and that with over ten million unemployed or underemployed people, our consumer driven economy simply can't grow. The debt levels of most people who are working is another big factor. Some smaller ones included the price of gas in June, which ensures that those who are actually inclined to spend have less money to do it. Another is that millions of people are beginning to run out of unemployment benefits, thus further hamstringing a consumer driven economy. I fully believe that what recovery we were going to have is now done and gone due to the above listed factors. It seems that borrowing trillions of dollars has not helped. As more and more people lose their unemployment checks and the economy stalls, the chances of some miraculous recovery is fading fast. I'm actually stunned by the numbers; I was expecting a much slower slowdown. It gets better; QE2 ended last month, and because of this there will be less money circulating in the economy when this next report is due.

So the question becomes-- what now ? In Washington, the next big event is the Debt Limit talks between Democrats and Republicans which I alluded to in last week's post. The "drop dead" date-- ie the day when the US Government can no longer borrow money-- is August 2nd. It seems that both sides have been moving towards a deal. Obama's spokesman last week came out and said that Democrats may agree to slow the rate at which Social Security and Medicare grow. Repubs came out and said they might see their way to closing some "tax loopholes". There is a big meeting tomorrow at the White House on this. The problem is, the BLS unemployment report just threw another dynamic into the equation. For the Obama Administration, they need to somehow not piss off seniors by cutting Social Security or Medicare and they need to somehow get the economy moving forward. If they fail at either of these twin goals, Obama will lose the election. This puts the Democrats in a very weak position for this weekend's talks, which are aimed at reducing the amount of money the US Government has to borrow each month to meet it's obligations.

Here's one solution: if there's anything Republicans love, it's a tax cut. It's also one of the fastest ways to put money into the hands of working folk. I can see Obama making a play to cut the taxes of low and middle income people. He's already done it once: there was a 2% reduction in the FICA tax employees pay, which is actually scheduled to end here rather soon. Not only can they extend this tax cut, but in a desperate gamble to create jobs, double down on this by expanding it to 4%. The tax that employers pay to FICA might also see a cut.

The problem you ask ? This would cut back on the tax income the US Government takes in every month, with the result being that the government will need to borrow even more money each month to meet it's expenses. The concept of this whole Debt Limit farce was to limit the amount the government has to borrow. If these tax cuts go thru, I look for the government to be borrowing close to 50 cents out of each dollar it spends. It's already at 42 cents for every dollar spent as we speak. Oh yes-- and since foreign nations are no longer really loaning us money, we're going to have to print it up. There is a chance that the interest rates the markets charge the US Government to borrow shoot up sharply because the markets will (rightly) see this as complete madness. It might also lead to QE3 being announced by Ben Bernanke because of some ugly calls from the Obama Administration. $5.29/gal gasoline anybody ?

You tell me-- how long can anybody spend twice their monthly income and pass those debts onto their children ? If this tax cut is passed, this is what the US Government will be doing. Complete insanity. This is no way to run a country, folks. Our Founding Fathers are spinning in their graves. An ugly fate awaits us all for this tragi-comedy..

update Saturday 6pm: "Senator Charles Schumer of New York, the chamber’s third-ranking Democrat, called for an “immediate jolt” to the economy by extending and enlarging a one-year payroll-tax cut that’s set to expire Dec. 31. He asked for action “as quickly as possible by including it in the final debt-limit agreement.” 
update Sunday 11am: It appears that Italy might be in trouble. More to the point, a couple of their biggest banks look to be in serious trouble-- the stocks of UniCredit, Italy's largest bank, collapsed on Friday and trading was halted on their stock. A few other Italian banks also fell of the cliff. I did'nt mention this as I thought this was going to be "handled". Their Finance Minister Tremonti also is involved in some sort of scandal. It appears the EU/ECB has scheduled an emergency meeting tomorrow to deal with Italy. An Italian collapse would catastrophic. Here's the Reuters link: http://www.reuters.com/article/2011/07/10/us-eurozone-idUSTRE7691HM20110710

Government Shutdowns

Of late there has been a large number of people in my family and at work coming to me and asking if these government shutdowns are the beginning of the economic meltdown I warn them about. In short, the answer is absolutely not. There are nations in the world which are able to borrow money if they need to (the US is in this category) and then there are nations that nobody will loan money to because they're already too far in debt (Greece, Ireland, et al). In the US, Congress actually has to authorize our government to borrow money. We have nearly reached the limit of the last borrowing authorization they passed. The Republicans are now threatening to stop the next borrowing authorization (it's called "raising the debt limit" by the media), which means that the US Government would immediately be forced to live within it's means. In late July or early August, the US Government will reach the previous debt limit and will no longer be able to borrow money.

The Federal Government is borrowing $42 out of every $100 it spends.. this simply cannot continue, and both the Democrats and Republicans know this. Worse, out of that $42 our government has to borrow, about $35 of it isn't even loaned to us-- the Federal Reserve (Ben Bernanke) simply prints up some money and "loans" it to the government. The effect of this is the weakening of the US Dollar-- notice the price of things going up ? The US Government needs to raise taxes and/or cut spending in order to stop this speeding trainwreck. If Congress fails to reauthorize the ability to borrow (raise the debt limit) the effects would be profound. The military would immediately be recalled from every nation on earth and entire divisions released. Navy ships recently built would rust in dry docks. Medicare and Medicaid would stop covering nearly all expensive surgical procedures and hospital stays over 3 days.. these people would simply be referred to hospice. Social Security would be "means tested", meaning that anybody getting Social Security who already makes $36,000 or more would be cut off. Several federal departments would simply cease to exist-- the Dept of Energy, Dept of Education and other non-necessary ones. They would cap Soc Sec to $1,200/mo. The effect on the economy at large would be profound as well; there would be a very serious chance of deflation and Depression. Deflation will strangle small businesses' ability to get loans and keep themselves solvent. Unemployment would likely double within six months; and unemployment insurance would likely not be extended. But-- we would begin to finally address the debt problem. But this will never happen.

The Democrats and Republicans have very different ideas on how to solve this problem. The Democrats say that the US Government needs to raise taxes on the rich and corporations. The Republicans say we need to slow down spending and not raise taxes. Neither side is budging as I write this. Obama "challenged" Republicans to raise taxes-- a challenge they'll decline.

Don't worry people-- just before this debt limit is reached in August, there will be a deal. There will be small spending cuts for the Republicans (most of which are likely to take place in 2016 or later) and a few small fee hikes for the Democrats (again most of which are likely after 2016). In short, the US Government will simply continue to do what it's been doing all along-- print, borrow and spend-- but at least the politicians look like they're actually doing something about it. Yes folks-- this is "kicking the can down the road" at it's best. The politicians will give themselves high fives and speak of "painful decisions"-- but it will be nothing of the sort. Painful is what I described above. None of our political leaders want to be responsible for another Depression and so will never really deal with the reality of our debt-- they'll just continue to borrow.

The problem is that, one day soon enough, the US is going to become Greece unless we figure out a way to stop borrowing. But it's my guess that before we reach our Day of Reckoning, others will get there first-- Spain and Italy come to mind. Given the size and complexity of Spanish and Italian debt, I have serious doubts the world's financial system will survive these nations' implosions. On this blog I tend to concentrate on those nations who cannot borrow any more money like Greece because to me it's far more serious to the world's financial system as a whole than a group of politicians in the US who will solve the political problem on the back nine of a golf course in late July.

Here in Minnesota, our own state government shut down yesterday-- and the story is pretty much the same as outlined above.. our Governor, a Democrat, wants to increase spending by $3 billion/yr and wants to tax the rich to pay for it. The Republicans want to increase spending by only $1 billion/yr and keep taxes the same. Nothing serious is getting shut down, however-- welfare checks and food stamps will continue as before, there will be plenty of state troopers this holiday weekend cruising around, medical facilities will continue as before. You can even renew your drivers licence. Courts will continue. The only thing shutting down is highway rest stops, parks and rec, the Minnesota Zoo, a few horse racing tracks and most of the Dept of Transportation, although emergerncy road repairs are still available. Whats absolutely amazing is that despite most essential services remaining intact, 22,000 of our state's 34,000 employees will be laid off. My question is-- what good are these 22,000 people doing anyways ? My idea here is that we have an amazing number of office workers pushing paper around to each other. Anyways, there will be another round of golf, a deal made on the 15th hole, and both sides claiming victory; look for it to happen within 2-3 weeks. In a few months, nobody will remember this charade, and rightly so. It's a joke-- and it's you that's paying for it.

Speaking of Greece, the Greek parliament passed the necessary austerity measures. The Greek Unions (mobs, really) celebrated by taking over the Acropolis and setting the Ministry of Finance on fire. In a few weeks, the Troika (the ECB, EU and IMF) will come to a consensus on how to best to pile more debt onto an already insolvent country. Ultimately, those who cannot pay off their debts will not pay their debts. But they have indeed bought time here; this will likely not be a problem until next year sometime when Greece will need their third bailout in as many years. Next up on the dock will be Portugal, which at this time actually has no government and is also insolvent.

There have been some tremors of late in the credit and bond markets; it seems that credit is getting harder to come by. The US government was to have an auction to sell off some Fannie Mae "assets", but halted the sale. The US Ten Year Bond's interest rate rocketed upwards in the last few days, proving Bill Gross right. I'm not all too sure what's happening here (I'm thinking the end of QE2 has a lot to do with this) but if it gets out of hand it we might see serious deflation. Here's a link to Bruce's article on this matter for those who might be interested: http://brucekrasting.blogspot.com/2011/07/are-credit-markets-getting-unstable.html