Double-Dip, here we come.

Is the financial system stabilizing? and State budget crisis about to become a catastrophe. Economic Populist.
first link has charts galore on the financial system;
second link has commentary on the human economy

More Than a Million in U.S. May Lose Jobless Benefits, Bloomberg.

About 3.4 million Americans -- approximately the population of Connecticut -- have been out of work for more than a year, according to a study by the Pew Fiscal Analysis Initiative....

[Goldman Sachs] projects that more than 400,000 may soon begin losing benefits every month.

“The political climate is not as conducive to additional expansions as it had been last year,”

Whitney Says Banks Face ‘Tough’ Quarter, Housing Dip, Bloomberg.

“A vast majority of last year’s profits for the banks were government-induced,” Whitney said....
“The government is putting a life guard on duty so that people will play in the pool.”...
“I’m steadfast in my belief there’s going to be a double- dip in housing,” she said. “You will see clearly that the banks are under-reserved when housing dips again.”...
“For the consumer, nothing has changed and the large banks are still weighed down by exposure to consumers,” she said.

For what that all means for the future, see Gerald Celente on Bill Meyer.

As he says, "If people lose everything, and they have nothing left to lose, they lose it."

On to Europe:

The Euro Trap, Paul Krugman, NYT.

The fact is that three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble. ... And all of the countries were attracting large inflows of foreign capital, largely because markets believed that membership in the euro zone made Greek, Portuguese and Spanish bonds safe investments.

Then came the global financial crisis. Those inflows of capital dried up; revenues plunged and deficits soared; and membership in the euro ... turned into a trap.

What’s the nature of the trap? During the years of easy money, wages and prices in the crisis countries rose much faster than in the rest of Europe. Now that the money is no longer rolling in, those countries need to get costs back in line. But that’s a much harder thing to do now than it was when each European nation had its own currency. Back then, costs could be brought in line by adjusting exchange rates... Now..., however, the only way to reduce Greek relative costs is through ... deflation.

The problem is that deflation — falling wages and prices — is always and everywhere a deeply painful process. It invariably involves a prolonged slump with high unemployment. And it also aggravates debt problems, both public and private, because incomes fall while the debt burden doesn’t.

A Money Too Far, Paul Krugman, NYT.

So, is Greece the next Lehman? No....

That’s the good news. The bad news is that Greece’s problems are deeper than Europe’s leaders are willing to acknowledge,... and they’re shared, to a lesser degree, by other European countries. Many observers now expect the Greek tragedy to end in default; I’m increasingly convinced that they’re too optimistic, that default will be
accompanied or followed by departure from the euro....

So is a debt restructuring — a polite term for partial default — the answer? It wouldn’t help nearly as much as many people imagine, because interest payments only account for part of Greece’s budget deficit. Even if it completely stopped servicing its debt, the Greek government wouldn’t free up enough money to avoid savage budget cuts.

The only thing that could seriously reduce Greek pain would be an economic recovery... If Greece had its own currency, it could try to engineer such a recovery by devaluing that currency, increasing its export competitiveness. But Greece is on the euro.

So how does this end? Logically, I see three ways Greece could stay on the euro. First, Greek workers could redeem themselves through suffering, accepting large wage cuts that make Greece competitive enough to add jobs again. Second, the European Central Bank could engage in much more expansionary policy, among other things buying lots of government debt, and accepting — indeed welcoming — the resulting inflation; this would make adjustment in Greece and other troubled euro-zone nations much easier. Or third,... fiscally stronger European governments could offer their weaker neighbors enough aid to make the crisis bearable.

The trouble, of course, is that none of these alternatives seem politically plausible. What remains seems unthinkable: Greece leaving the euro. But when you’ve ruled out everything else, that’s what’s left.

Europe finds the old rules still apply, Kenneth Rogoff, FT.

In our book on financial history, Prof Reinhart and I find that international banking crises are almost invariably followed by sovereign debt crises. Will the euro prove to be a firewall against this process, or a debt machine that fuels it? It is going to be extremely difficult for some of the peripheral eurozone economies to escape without large-scale defaults on their massive private external debts, public external debts, or both.

Rogoff Says Greece May Not Be Europe’s Last Bailout, Bloomberg.

“The budget cuts needed in Europe in many countries are profound.”

Can the Euro be Saved? Joseph Stiglitz, Project Syndicate.

The Greek financial crisis has put the very survival of the euro at stake. At the euro’s creation, many worried about its long-run viability. When everything went well, these worries were forgotten. But the question of how adjustments would be made if part of the eurozone were hit by a strong adverse shock lingered. Fixing the exchange rate and delegating monetary policy to the European Central Bank eliminated two primary means by which national governments stimulate their economies to avoid recession....

One proposed solution is for these countries to engineer the equivalent of a devaluation – a uniform decrease in wages. This, I believe, is unachievable, and its distributive consequences are unacceptable. The social tensions would be enormous. It is a fantasy. ...

Batten down the hatches for decade of austerity, Reuters.

The scale of the task facing governments in the United States, Europe and Japan to return debt burdens to pre-crisis levels of 2007 could, by some estimates, usher in a decade of severe austerity through the teen years of the new century....

[According to JPMorgan economists], the United States needed a sustained primary surplus of nearly 4 percent of GDP for 10 years to reduce a 2013 debt ratio of 101 percent back to 2007 levels of 62 percent. That compares to an estimated 2010 U.S. primary deficit of some 7 percent of GDP. ...

... governments have the added problem of an expected explosion of entitlement
spending as the baby boomer generation starts retiring in droves over the next
10 years.

It's not just the United States. JPMorgan's calculations show Britain would need even bigger surpluses of up to 5 percent a year for 10 years to 2023 and Japan would need a whopping primary surplus of almost 7 percent of GDP by the same metrics

And, from one of David Rosenberg's recent missives:

Ever since the Obama team bailed out Citigroup and BoA, not to mention GM and GMAC, the markets has become increasingly complacent that for every problem there is a government bailout plan. However, when the majority of governments are now running fiscal deficits of 10% or more relative to GDP and debt ratios at or about to rise above the 100% threshold, the ability to continue along the bailout path becomes increasingly constrained. So, this post-bubble credit collapse carries with it many dimensions, and it is an entire book with many chapters, and now the problems have morphed into sovereign default risks with attendant geopolitical fallouts and the risk of massive currency depreciations, huge haircuts for banks that own the problem government bonds and very likely a move towards trade protectionism. All of this, by the way, is good news for high-quality bonds where you can find them for entities and governments with reasonably long maturity schedules and little in the way of refunding needs over the next few years, and of course, precious metals....

Once we are through with Euroland and the U.K., perhaps the next problem spot will be China where the government is tightening to combat what well could be a significant property bubble. Then it may come right back to the U.S.A. where we have massively indebted State and local governments. And then … well, take a look at the mania in Toronto and Vancouver real estate as an example. Bubbles will be popping....

The operative theme going forward is quite simple: the best way to make money is not to lose it.....

Relative to labour income, [Canadian] home prices are about 1.5 standard deviations above norm (data going back to 1980). The situation is even more dire when we look at resale home prices versus rental prices — this metric is over 2.5 standard deviations above the average, which is very reminiscent of what we saw in the U.S. in 2004-2006. Our statistical work implies that given current income and rent, we could see a price correction of around 15-35% if these ratios were to mean revert, which would certainly be a U.S.-style correction.