At the center of the current fiscal troubles in Greece, Spain, Portugal and elsewhere in Europe are the promises made by governments to fund union salary increases and pension plans. Unions in Europe are much stronger than they are in North America, and in many of Europe’s less-wealthy countries, governments have chosen over the years to appease union demands even though it meant driving fiscal deficits well beyond the level tolerated by EU rules. Now that these governments are finding it impossible to continue to borrow on global markets without firm evidence that these deficits are going to be brought down, proposals to cut union pay or benefits are being met with strikes by firefighters, police, teachers, farmers, and others.

Do not for a moment think that these problems are not to be found in the United States. The difference here is that the “appeasement”, such as it is, has been concentrated at the state and local level, though the federal government has its share of unfunded promises to workers. The 50 states last year ran up a combined deficit of around $180 billion – coincidentally about the same amount that the US has spent bailing out AIG. The federal government has also helped out the states during this fiscal crisis, by lending them money to continue paying normal as well as emergency employment benefits to laid off citizens. This has averted a real crisis, since states are constitutionally required to plug any annual deficits. The real problems will show up later this year and next when the federal loans run out.

The specter of global deflation returned to the stock market this week, but you wouldn’t know it from reading the news. The business headlines certainly were full of alarm when the Dow Jones index collapsed from 10,300 to 9,800 in one week. The move up from 9,800 to 10,300 last year – and eventually higher to 10,800 – took over three months. But that is what happens when investors get complacent about the stock market – as they certainly were going into this year. Not one of the analysts quoted by Barron’s or similar publications at the New Year felt the Dow would end 2010 down. For that matter, they still aren’t. We are in a “correction”, as far as the received wisdom goes. A new high for the Dow this year is certain to occur once we get through this necessary cleansing of the market. This too is received wisdom. What you will not read in the business press is that anything serious is going on – the markets are not going to be testing the lows of 2009, much less head beneath 6,600 – the March low for this bear market.

It was Illinois senator Everett McKinley Dirksen who once said, back in the 1960s: “A billion here, a billion there, and pretty soon you are talking about real money.” Dirksen was old enough to remember when an appropriation bill in front of Congress for $50,000,000 was a big thing – and that’s exactly how the request would be printed in the bill and how the media would report on it: “$50,000,000”, not “$50 million”.

The era of billions quickly put a stop to that practice. Newspapers didn’t want to waste space writing out all the zeroes, and anyway the eye glazed over at a certain point and couldn’t easily digest the amounts involved. And that’s been a problem ever since during the Age of Billions – we could not digest the enormity of the amounts involved.

One day after the loss of Ted Kennedy’s senatorial seat to the Republican Party, President Obama has turned his administration upside down. Thrust into the background on economic and financial matters are his Secretary of the Treasury and chief economic adviser – Timothy Geithner and Larry Summers. Resurrected from policy limbo is Paul Volcker, who has been counseling a completely different approach to the banks.

Obama has a reputation for a cool demeanor and deliberate, consultative decision making. Unless he is acting out of character, this change is not a panicky reaction to the Massachusetts election. He’s thought it over, discussed it at length with his advisers, and used the loss in Massachusetts as an opportunity to announce this about-face. On the other hand, senior Democratic leaders in Congress seem not to have been aware of this policy shift, and there are many critical details not yet thought through or announced by the Administration, making it difficult to judge whether Congress will even pass enabling legislation.

An interesting observation was made today by the pollster for Martha Coakley, the hapless Democratic candidate for the Massachusetts senate seat held almost forever by Ted Kennedy. It appears polls are showing that the voters, especially independents who would normally vote Democratic in a liberal blue state like Massachusetts, have instead run to support the Republican candidate as the agent of change. Wasn’t that supposed to be Barack Obama’s signature tune?

Massachusetts voters have given up on President Obama as an agent for anything but the status quo, and this is most evident in his willingness to dole out trillions of dollars in direct and indirect support to the banks. The Massachusetts polls show this issue to be foremost on the minds of the voters.

Last August I wrote about Solar Cycle 24, and I continue to get requests for an update on what is happening with sunspots and the geomagnetic cycle of the sun. The original August 3 post on The Agonist can be found here: http://tiny.cc/A3M40.

The quick answer is that the sun remains in an unusually extended solar minimum. The sun's geomagnetic field reverses polarity roughly every 11 years. At the peak of this solar cycle, the field is very active, represented by the frequency with which the field breaks through the sun's surface, causing sunspots, solar flares, and an active solar wind which brings electromagnetic radiation to the earth. This radiation interferes with satellite transmissions, causes brilliant displays of the aurora around the earth's poles, and can pose risks to passengers on airplanes flying above a certain altitude. During the solar minimum all of this activity is much reduced or disappears completely for awhile until the new cycle kicks in.

Karl Denninger has been following a story in the markets for over a week now that, as he rightly points out, has not and probably will not get any press. It is, therefore, highly worthy of your consideration, and it may be a bit difficult to follow what Mr. Denninger is talking about. So here is the layman's summary.

On December 30 the PIMCO High Income Bond Fund took an 8% beating in the stock market. This fund trades like any stock would on the NYSE, so it is easy to follow its public value. Since the March low in the stock market, the fund, like almost all high yield bond funds, has been on a tear, gaining as much as the Dow or the S&P 500. This makes sense because high yield bonds are considered the closest thing to equity a company has to offer. If you buy a high yield bond - often called a junk bond because the debt rating from Moody's or S&P for this paper is well below investment grade, or safe grade - you stand last in line behind all the other creditors should the company go bankrupt. In such situations these bondholders rarely get more than pennies on the dollar for their bonds, so they are tantamount to being stockholders holding on to equity. High yield bonds are considered highly risky, which is why they return high yields. The PIMCO fund has an average yield over 11%, and in a world of 0% interest rates courtesy of Ben Bernanke, you can see why your average mutual and hedge fund was flocking to this paper. You may even own some of this fund in your 401k, and not even know it. So why the sudden collapse on the market?

Courtesy of the US Treasury, Americans were informed on Christmas Day that they had added a whopping big gift under their Christmas tree for Fannie Mae and Freddie Mac, the mortgage giants that are now wards of the state. The gift is truly one that keeps on giving: it has no price tag because the Treasury defines it as an "unlimited" promise to cover any losses these two companies may experience.

How big could this gift be? Fannie and Freddie have issued or guaranteed over $6 trillion worth of mortgage securities. If the losses were this big next year, we would have to fork over about 40% of the wealth built up in the US in 2010 to keep Fannie and Freddie solvent. Fortunately, most of the mortgage securities guaranteed by these mortgage companies are the pre-2004, fixed rate varieties that are still performing as required. That is, assuming these homeowners still have a home value greater than the mortgage due. If not, they may be tempted in the next few years to walk away - to "strategically default" - to do a Morgan Stanley - and turn the losses back on to Fannie and Freddie.

That headline got your attention, didn't it? Bloggishly irresponsible of me, I know, to alarm people about Morgan Stanley defaulting. The responsible, grown up media handle these things much more professionally. They talk about Morgan Stanley having to "Give Up" five San Francisco office buildings to their lender, because they were bought at the peak of the market and have lost about half of their value. The bank that holds the mortgage on these properties, and which lent the money to Morgan Stanley to buy them in 2007, has been in "negotiations" with Morgan Stanley for months on the "orderly transfer" of these properties to the bank.

As an Agonist contributor I have had an opportunity to add many of the different tags available under the Topics column. I noticed one recently that I've never used: Unproven Stories. What's an Unproven Story?

Sasquatch came to mind. This is the tall, hairy human-like creature that is said to roam the woods of the Northwest United States. Sasquatch is the American yeti, probably invented when someone wondered why the Himalayas should have a monopoly on abominable snowmen.

Sasquatch used to be quite popular up to ten years ago, and you could always count on a one hour special on the History Channel or maybe Animal Planet, asking the rhetorical question: Is Sasquatch Real? Well, of course he was real, since they always showed this fifteen second footage of Sasquatch walking rather agilely through the Northwest forest. Then one day we learned that this footage was fake: the man who created it left a confession in his last will and testament.

I wrote a few months ago about the remarkable performance of Tiger Woods during one of the PGA tournaments – the BMW Open – in which he played nearly perfect golf in order to tie the course record for an 18 hole round. He went on two days later to win that tournament, followed as he was hole by hole by about 20,000 people hoping to get close for just a moment to such sports splendor.

I was able to watch him up close on the 18th green, and have never seen a professional golfer put on such a display of concentration and iron determination. There was barely any recognition of the existence of the crowd or other players – just the ball and the next shot were all that mattered. His body carried a strange combination of relaxed military stiffness, if you can imagine a man who never untensed his back except to pick up a ball, and who kept a mask over his face at all times. I thought to myself – “Nobody can be this devoid of emotion. I wonder what Tiger Woods is like when he lets his emotions run free?”

What’s the difference between the United States and Dubai? The US is a playground for the wealthy just like Dubai, but at least America hasn’t declared bankruptcy – yet.

Yesterday Dubai World, which is the investment arm of the Dubai emirate, asked its creditors to accept a six month freeze on interest due on its debt. That’s an admission Dubai is out of cash to make payments on its debt, and that it is de facto defaulting on this debt. It just isn’t using that word because it doesn’t want to trigger lots of nasty court claims from its creditors grabbing on to any collateral they can.

My wife and I are taking care of a new grandson, age 4-1/2 months. It's been awhile since we've handled an infant, but one reminder came through immediately after he was born: babies operate on their own schedule. When they are hungry, they cry and need to be fed. When they are tired, they cry too, and need to be quieted down for sleep. This cycle happens on and off during the day.

We also know something about special needs children, because our second child was born with severe heart defects and eventually died at age two.

Which brings me to Trig Palin. I've been watching Sarah Palin get off her bus during her book signing tour, always with her 19 month old child in her arms. She carries Trig on stage with her and holds him while she answers questions from the crowd. One thing seems to be clear: whatever mood Trig seems to be in, whatever special needs he may have at the moment, when the Sarah Palin tour bus pulls into that Borders, it's Show Time! He is dressed and ready to go meet the adoring crowds, like some prop in a vaudeville program.

In Catholic school, every so often the nuns would want to gauge our religious purity by challenging us with “The Test”. Sister Rita Agnes, or whoever that year was in charge of our catechistic upbringing, would ask: “If the Communists came this minute into our classroom and demanded that ten students be selected to be shot on the playground so that all the others could live, who would volunteer?” The Test could only be passed if you were quicker than all the other students to volunteer for martyrdom and instant passage into heaven.

It was always the Communists who were going to invade our school – this was the middle of the Cold War – and The Test was always administered after we just studied the Lives of the Saints, especially the early martyrs who went through grisly tortures in order to receive a palm branch from an angel (at least that’s what the pictures showed –it seemed rather sad recompense considering the dreadful tortures the Romans devised).

By now most people who follow Goldman Sachs in the news know that it received $13 billion from the Federal Reserve to liquidate its portfolio of derivatives with AIG. Because the Fed was willing to pay Goldman par value on these derivatives, even though the market valued them at about 48 cents on the dollar, Goldman walked away with no loss whatever from the AIG collapse. This has been described as a great gift for Goldman and all the other banks who dealt with AIG and who were treated the same way. Many others have described this as a colossal rip-off of the taxpayers.

How did this come about? We know a lot more this week about these transactions because of a report that has been issued by Neil Barofsky, the Special Inspector General for the bank bailout programs. The press has described this report as particularly damning of the NY Federal Reserve which negotiated these deals with the banks, and which was led at the time by Timothy Geithner, the current Treasury Secretary. These press reports, however, have mischaracterized what happened and what went wrong. The NY Fed acted properly and entirely as one would expect under the circumstances when they negotiated these contract abrogations. To see what really went wrong, follow along on the details below.

Everything in Rev. Sun Myung Moon’s sprawling religious enterprise is about family.

His Divine Principle, the core of his religious teachings, posits that Rev. Moon and his wife Hak Ja Han Moon are humanity’s True Parents. They were placed on earth by God to rescue humanity from war and want by creating exemplary families that will through behavior and example show the way to world peace and unification. Rev. Moon claims that Jesus did not succeed in his mission to save humanity, because he did not marry. Jesus has therefore anointed Rev. Sun Myung Moon as the true Messiah. In the heavenly realm, Rev. Moon asserts that evil men like Adolf Hitler and Joseph Stalin have repented and have now declared Rev. Moon as the true Messiah. Rev. Moon’s Unification Church’s proper name is the Family Federation for World Peace and Unification.

Mr. Moon and his wife have 14 children. As you may expect, they are described on the Unification Church website as having raised exemplary families. They are accomplished religious leaders (many of them are referred to as “reverend”), business executives, community organizers, artists, and of course, peace advocates – though no mention is made of Moon Young-jin, who died of suicide in 1999.

Naturally, with so many talented children, many of them have found their way into employment in the family business. In fact, all the critical management positions in the Moon conglomerate are held by his children – an arrangement as nepotistic as it could possibly be, though conceivably justifiable since the companies are privately owned by Moon.

More after the jump.

American cowboy capitalism at its finest is on display today as Kohlberg, Kravis & Roberts (KKR), one of the country’s largest leveraged buy-out firms, is proposing to bring the Dollar General company back on to the public market. You – yes you, oh innocent investor – can buy a piece of this company for just $22 a share! Any why not? Dollar General is one of those stores where everything is on sale for $1, and cash-poor, recession plagued Americans have been flocking to stores just like these.

This is the only part of the retail sector that has been doing well. Wal-Mart, Dollar General and similar low cost vendors have been holding their heads above water while everyone else has been sinking. But before you plunk down your $22/share, come along with me on a ride through the fine print of the prospectus, to learn just what is going on here. You’ll understand better that the role the Wall Street boys want you to play is that of the sucker – the person who gets them out of a tight jam for a mistake they made.

A most revealing comment was made today by The Maestro, Alan Greenspan, speaking at a conference in Alberta on energy and the global economy:

We have been very fortunate that the stock markets moved back and are re-liquifying the whole process.

He pointed to the “wealth effect” created by a rising stock market, especially when investors cash in their capital gains.

In olden times, before Alan Greenspan spent over a decade as Federal Reserve Chairman, Fed officials worried about the growth in money supply, the level of prices in the economy, unemployment, and the strength of the dollar overseas. In fact, if you read the enabling legislation for the Fed, these are the things the Board of Governors should be concentrating on.

If Wall Street bankers are so smart, how can they be so dumb when it comes to paying out bonuses?

Don’t these people read newspapers? Don’t they watch Dylan Ratigan on CNBC or Glenn Beck on FOX News, castigating bankers for their greed and ingratitude to the taxpayers who saved their firms? Haven’t they sat through one speech too many by President Obama insisting that they stop giving million dollar and multi-million dollar bonuses? Have they no idea what it means for the average worker to struggle in an economy with 10% unemployment and another 8% underemployed?

And yet Goldman Sachs is on schedule to give out record bonuses this year totaling nearly $20 billion, or half a million dollars on average per employee. Morgan Stanley is not far behind, and the investment bankers and traders at Merrill Lynch (now wholly owned by Bank of America) and Bear Stearns (now wholly owned by JP Morgan Chase) are going to be treated royally as well. What is it about these people who are supposedly so smart in figuring out the markets but dumb as posts when it comes to judging the larger world in which they operate?

During this decade the global economic and financial dynamic that mattered most was the United States - China relationship. China sold cheap manufactured goods to American consumers desperate to maintain their standard of living in the face of a shrinking job market and declining real wages. Americans borrowed money to pay for the essentials of its lifestyle - college education, premium health care, two or more cars, etc. The Chinese were the major lenders to American consumers, financing the purchases of the goods China was selling.

What this dynamic was doing was forestalling the inevitable decline in the American standard of living that began when Deng Hsiao Ping first unleashed China's capitalist spirits. The West looked on this development greedily - 800 million new consumers ready to buy Western products! This was a great misconception, because it assumed somehow that China was going to make its way up the economic ladder by making Westerners richer. In fact the reverse began to happen. Hundreds of thousands of entrepreneurial manufacturers arose in China, with access to labor willing to work for pitiful wages and no benefits, and with no governmental regulation on working conditions or environmental degradation. The result has been an economic catastrophe for the West, which has seen its manufacturing sector whittled down, its trade deficits soar, and its debt levels skyrocket.

The Nobel Committee awarded the Peace Prize to an unexpected choice - President Barack Obama. The committee cited his work in restoring diplomacy to the center of international relations, relying more on the United Nations for multilateral peace efforts, and accelerating the nuclear disarmament talks among nuclear powers.

The Nobel Committee had already telegraphed its intention to seek a candidate who emphasized the peace process, and not necessarily someone who had a significant peace accomplishment next to their name. Obama fits that criterion as he has not yet accomplished a break-through on his efforts in the Middle East, or in the nuclear disarmament arena, for example. Others will look on this award as an "Anybody but Bush" statement, or possibly a recognition to the American electorate that it purposely moved away from eight years of unilateral military action and towards diplomacy in its decision to elect Obama.

Personally, knowing how much goes on in diplomatic circles behind the scenes, if I were Obama I would state publicly that he considers the award to be shared with Hillary Clinton and her national security team. On the other hand, as an award winner, down the road when real accomplishments are achieved, he can now nominate Hillary Clinton for her own Peace Prize.

Read the Nobel committee citation for the US president in full here

Over a quarter of American homeowners owe more on their mortgage than their home is worth. In some bubbly markets like California, three out of four homeowners are underwater. Should these homeowners deliberately default, rather than continue to pay on a mortgage when it may take 20 years or longer for market values to equal mortgage values?

Eighty-one percent of Americans think no, according to a survey done this summer by the University of Chicago and Northwestern University business schools. Most American homeowners think it is “immoral” to deliberately default on a mortgage when it is possible to make continuing payments. Yet the numbers of American homeowners doing just that is growing. It is estimated that four percent of all defaults on mortgages are “strategic defaults” according to a phrase used by the financial industry: the homeowner can pay the mortgage but makes a strategic decision to suffer foreclosure rather than continue to make payments on a wasting asset.

The Obama administration quietly announced today it had a "new attitude" toward one of the hallmark foreign policy initiatives of the Bush administration - a missile defense system in Central Europe.

The United States spent eight years during the Bush administration selling this project to various European countries, and finally got the Czech Republic and Poland to agree to install the defense towers in their countries. The purpose of the shield was to protect these countries from an Iranian or North Korean nuclear attack.

Ellen Tauscher, Undersecretary of Defense for Arms Control, is scheduled to meet with Polish and Czech officials today. Last night she was reported to have talked to President Obama by phone to work out the details of the "new attitude", which includes the conviction that Iran has not come anywhere near to developing a nuclear weapon and is far behind the schedule assumed by the Bush administration. Two other considerations in this policy change are said to be the fact that the missile defense system didn't work, and the entire project antagonized Russia unnecessarily.

We live in an age of sports immortals. Men like Michael Jordan, Tiger Woods, and Roger Federer, and women like Serena Williams, have not only thoroughly dominated their sport, they have set records which will last for a very long time – possibly forever. What they have in common is a rare combination of athletic grace and unwavering determination to win. These are athletes who are noted for making everything look easy, when in fact they put in hours of work each day to accomplish just this illusion.

Three of the four are still performing and gave wonderful examples this week of what makes them so extraordinary. Tiger Woods completely dominated the field in a victory at the BMW Championship, part of the playoffs for the FedEx Cup that caps off the PGA Tour. Roger Federer displayed some unusual brilliance at the US Open this week, and then in the finals failed to show anything of his normal form as he lost to a newcomer, Juan Martin del Potro. Still, people will be talking about this tournament as the one Federer lost, just as they will be discussing the mental collapse of Serena Williams in her pursuit of yet another US Open title.

Michael Jordan is retired from basketball but was in the news this week with some illuminating comments, so let’s begin with him.

Courtesy of Glenn Beck, America’s #1 Teabag Gasbag, around 60,000 protestors marched on Capitol Hill today, and a more motley crowd you never saw. I use the word motley in the sense of incongruous or nonsensical, as evidenced by the protest signs they were carrying. Barack Obama can be many things to many people, but he cannot be a Marxist, Nazi, Socialist, Fascist, Kenyan Muslim Jew all at the same time.

You can’t have a protest if the crowd can’t agree on what it is protesting. By caricaturing Obama as the embodiment of all evil (quite a few signs depicted him as Satan), the protestors lost not only cohesion, but also coherence. So maybe the way to describe what this Teabag party had in common was “anger.” Also, they were virtually all white people, most of them baby boomers, no doubt a few of them carrying concealed weapons, and the overwhelming number of them seriously overweight. But here again, we get back to incongruity. How can anyone take your protest against socialized medicine seriously when you are marching in your motorized scooter, bought for you by Medicare?