The Mess That Greenspan Made - Part 415

Wednesday Morning Links

Ireland Debt Rating Cut to Junk – Bloomberg
EC says Ireland downgrade ‘incomprehensible’ – Irish Times
Draghi: New Phase Has Opened in European Debt Crisis – Bloomberg
Bernanke to face grilling on jobs, debt, Europe – Reuters
Fed Weighed More Stimulus—As Well as an Exit Strategy – CNBC
Forget deficit reduction: Here comes more stimulus – CNN/Money
Ben Bernanke Won’t Have to Face Ron Paul Much Longer – The State Column
Obama’s Smorgasbord Is Missing a Few Main Courses – Bloomberg
California State hikes tuition by another 12% – CNN/Money
The Link Between Peak Oil and Peak Debt – The Oil Drum
Is This the Beginning of the End for Euro? – CNBC
Why Taxes Will Rise in the End – NY Times

Oil hovers below $98 as US crude supplies jump – AP
Gold hits record high on euro zone debt fears – Reuters
Don’t Shed A Tear For John Paulson Just Yet – Dealbreaker
Pimco’s Gross Bought Treasuries in June, Pared Cash – Bloomberg
Going long with David Rosenberg – Financial Post
Indian investors jump into gold ETFs – Mineweb
How high can Japan’s yen go? – MarketWatch

Report: Cisco may cut 10,000 workers – McClatchy
Most Americans still feel we’re in a recession – MarketWatch
Three Reasons Why the Recovery is a Long Way Off – Fiscal Times
Economic growth in China slows to 9.5% in 2nd Quarter – MarketWatch
Buiter: ECB to Revive Bond-Buying to Protect Italian Auction – Bloomberg
Age of austerity to continue for decades, warns OBR – Guardian
SoCal home prices, sales at 2011 high – O.C. Register
Why the Housing Tax Credit Failed – Wall Street Journal
Blaming Fannie for Crash Gives Banks Free Pass – Bloomberg
DeLong: Fed Needs QE3 to Boost Economic Growth – BusinessWeek
A Divided FOMC – Fed Watch


Twenty Tonnes Added to the GLD Trust

It’s been almost six months since the holdings of the SPDR Gold Shares ETF (NYSE:GLD) have risen by 20 or more tonnes in a single day, but that’s what happened today. As shown below, since George Soros sold most of his GLD holdings earlier in the year, the stockpile of gold bars held by the fund have about flatlined, some 100 tonnes below the peak last year.

During that time, the gold price has risen a couple hundred dollars, implying that the GLD ETF is now a relative bit player in the gold market, wealthy investors and big pension funds alike opting to store their own metal while India and China act like gold magnets for the rest of the world where ETFs are the exception and physical possession is the rule.

Oh well… twenty tonnes is twenty tonnes.

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Coming to a Pension Fund Near You?

The current woes and future course of public finances in Central Falls, Rhode Island could be a sign of things to come in other parts of the U.S., that is, unless the overly optimistic assumptions about pension fund returns actually come to pass (another argument for why higher rates of inflation and a commensurate surge in asset prices could be seen as a blessing in disguise for policy makers). Details are in this New York Times story today.

A Small City’s Depleted Pension Fund Rattles Rhode Island

The small city of Central Falls, R.I., appears headed for a rare municipal bankruptcy filing, and state officials are rushing to keep its woes from overwhelming the struggling state.

The impoverished city, operating under a receiver for a year, has promised $80 million worth of retirement benefits to 214 police officers and firefighters, far more than it can afford. Those workers’ pension fund will probably run out of money in October, giving Central Falls the distinction of becoming the second municipality in the United States to exhaust its pension fund, after Prichard, Ala.

The last American state to default on its bonds, Arkansas in 1933, got in over its head by trying to help struggling municipalities.More recently, when local governments have veered toward bankruptcy — Orange County, Calif., in 1994; Cleveland in 1978 — neighboring municipalities have found it harder to sell their own debt. During the New York City fiscal crisis of 1975, New Jersey suddenly found its bonds harder to sell.

“That type of contagion is what you’re trying to avoid,” said James E. Spiotto, a bankruptcy specialist at the law firm Chapman & Cutler, who is not involved in Rhode Island’s problems.

The word “contagion” is one that we might be hearing a lot more of here in the U.S…

There are lots of details in this report and it seems that all municipalities and states are going to face their own unique set of financing troubles. But, more likely than not, areas like Central Falls, where public sector workers are promised generous disability pensions and early retirement during which they get free health care will be the first to have problems.

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They’re talking about “enhancing the flexibility and the scope” of the European Financial Stability Facility (their massive bailout fund) in the wake of soaring interest rates for Italian debt and the realization that contagion is now more than just a risk.

It’s hard to say what, if any, impact these developments will have on the debt ceiling/budget deficit debate in the U.S. No doubt, some elected officials are saying, “That could soon be us”, while others are looking at the safe haven bit that is pushing bond prices higher and U.S. interest rates sharply lower, quipping, “Look at how low our interest rates are – investors love U.S. debt”. As the Italians now know, love doesn’t always last.

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