Posted at 2:07 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

You have to be really impressed by gold’s performance today. It had three, no, make that four, strikes against it. First, the equity markets dropped sharply. Second, bonds ran strongly higher in a flight to safety. Thirdly, the Dollar was marginally higher. Fourthly, crude oil dropped nearly $3.00 barrel while copper was hit hard. In other words, all of the usual deflation trades were back on today with investors/traders moving towards the risk aversion plays. Yet, gold refused to break down and around mid morning began climbing back into positive territory. At the same time, the mining shares also moved well of their lows helping to further confirm the strength at the Comex. As the session wore on, gold gained more upside momentum closing the pit session trade just off its best level of the day.

The price action in gold indicates that it is trading on its own merits for at least today and acting like the proverbial safe haven that it has always been historically. The fund algorithms have seriously distorted this role recently because those computer generated trades just jettison nearly everything in sight when their set of various inputs signal sells. The notion that gold is a “risky” asset that should get sold during such times when risk is being avoided contradicts history yet that is exactly what has tended to occur with the metal particularly when equities were being sold off. Remember, these computer generated trades are just that, “computer generated”. As such they are generally not selective but are rather quite indiscriminate as there is no human thinking or analysis involved. All that these infernal things are designed to do is to front run other orders coming in or jam prices higher or lower in the pursuit of ultra short term profits. That is what makes today’s move higher in gold so telling. Someone is buying in sufficient size to absorb any algorithm selling along with the usual bullion bank price capping efforts.

That brings me to the Dollar – it continues to gain at the expense of the Euro, the Swiss Franc, and the British Pound (read that as Europe land) as it is winning by default rather than any bullish scenario. Even at that, I keep mentioning its deteriorating price chart. The bearish divergence continues to show itself and momentum is waning but the bears just cannot seem to break it down technically. We will need to watch the 80 level on the USDX to see if the shorts can knock it below there. If so, they have a legitimate shot at taking it down to 79.75 where a large number of technical sell stop orders are waiting. With the kind of strength gold has been demonstrating by its refusal to break down, a technical sell off in the Dollar should easily allow gold to break through the barrier erected at $1,130. We will have to wait and see how things develop.

I mentioned yesterday that the bulls in the mining sector need to hold the line near the 390 level in the HUI to prevent a move down towards the 375 level. They are digging in admirably this morning but will still need to push the shares high enough to move the index back above the 405 level to generate increased nervousness among the shorts, who have got to be disappointed that they could not build on yesterday’s downside momentum. They were certainly running to cover this morning once price took out yesterday’s high. Support in the HUI lies at today’s low near 380 with stronger support at 375.

The long bond is back above the major moving averages climbing above the resistance barrier corresponding to the 20 day moving average having flipped the technical indicators back to the buy side. We will need to see how they act the next few sessions to see if they too are ranging. As you can probably tell by now, there are not a lot of these major markets that are trending right now in the short term but are rather bouncing back and forth in a range trade as players try to figure out what is next (inflation or deflation).

Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini

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Posted at 1:49 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

The big chatter of the day was Fed Chairman Bernanke’s comments up on Capitol Hill where he admitted the obvious – interest rates would need to stay low for an “extended period”. He also remarked that inflation would remain subdued. Couple that with new home sales data that was abysmal and that was enough to send the Dollar lower, the Euro higher and feed back into inflation trade although that home sales number also brought out some risk aversion trades. Yesterday was the deflation trade; today we are back to the inflation trade with a sprinkling of the deflation trade mixed in. Tomorrow who knows, just pick one…

By the way, that new home sales number was the lowest level since they began keeping records on that sort of thing way back in 1963. Even that did not keep copper from rising today as the inflation trade buying was sufficient to overcome the negative news from the US construction front. Perhaps the strength in the crude oil market was a factor as it appeared that index fund buying was active in both markets.

Gold could not quite figure out what it wanted to trade today – the former part of Bernanke’s comments detailing the extended period of low interest rates (read that as weakness in the Dollar) or the latter part, namely, inflation remaining subdued (weak economy and risk aversion trades especially with the stunning new home sales number). It was caught in a violent tug of war for most of the session as a result settling down about $5.00 at the close of pit session trading.

Based on what I can see of the gold price action compared to the mining shares (HUI), it appears that there was rather heavy unwinding of the ratio spreads in today’s sessions. There was also a significant amount of gold/silver spread unwinding.

The HUI is thus far having an inside day and is trading above yesterday’s session low, but just barely. Any faltering here and the index will have a good chance of testing the 375 level. Resistance remains first at yesterday’s high near 406. Some of the shorter term technical price charts are showing the index rolling over. Bulls will have to step up and perform soon or they will cede their hard-fought gains to the shorts. So far, they are attempting to do just that.

I know some of our readers are disappointed with the action of gold but I do want to remind you that considering the fact that this is not a seasonally strong period for gold, its continued refusal to break down technically is impressive.

Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini

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Posted at 12:40 PM (CST) by & filed under Jim's Mailbox.

5 Year Auction Results
CIGA Eric

The percentage of competitive tenders coming from direct bidders continues to rise not only in the 5-year but also across the yield curve. This only raise the question of who and why now? It would be naive to think that credit problems are limited to Greece and the EU.

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Source: treasurydirect.gov

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New home sales hit record low in January
CIGA Eric

The Commerce Department reported Wednesday that new home sales dropped 11.2 percent last month to a seasonally adjusted annual sales pace of 309,000 units, the lowest level on records going back nearly a half century. The big drop was a surprise to economists who had expected sales would rise about 5 percent over December’s pace.

The housing market remains weak. The breakout of the power up trend line in lumber after the bearish setup is not encouraging.

Lumber Futures Continuous Contract and the Commercial Traders COT Futures and Options Stochastic Weighted Average of Net Long As A % of Open Interest:
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Source: finance.yahoo.com

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US Long Bonds
CIGA Eric

The dark glove‘s increased long positions, marked on double inverse TBT chart below, hits the price rally like brick wall. This is standard operating procedure (SOP) for many of today’s markets. Despite this setback, 1/12 overhead gap was filled on increasing volume. This is a sign that the upside force is increasing and suggests that the overhead resistance will counter-attacked once the selling ebbs.

As long as upside energy continues to increase, the dark glove has two options in the bond market. Either lay down more paper to protect critical support (neckline of large head and shoulders formation), increase the number of cannons on the battlefield, or execute a defensive retreat to fight at a lower price.

These options sounds quite familiar to those that follow the money flows in the gold market. As it should. The bond market/dollar market is closely related to gold.

US Long Bonds Double Inverse ETF (TBT)
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Posted at 11:36 AM (CST) by & filed under General Editorial.

Dear CIGAs,

Good Morning from Toronto!

For those that think the Greek situation is a typical slow motion process of the European debating society, you need to focus on the fact that Greece will be out of money most likely in the next six weeks. Since there was a failure to float a debt offering last week, it might in fact be sooner.

This situation is not going to drag on for a long time. It will reach crisis levels in weeks.

The Greek state of the EU, like any major state of the US, will be bailed out as it reaches crisis levels. The only question where Greece is concerned is the means of and principle to the bailout mechanism.

QE to infinity is the only way out of this Western world financial crisis.

The US economy is not recovering but is in fact rolling over again. Forget any mope out of Bernanke today.

Stay focused and do not be confused by day to day noise.

Respectfully,
Jim

Posted at 12:57 AM (CST) by & filed under Trader Dan Norcini.

Dear Friends,

The following article, compliments of our friend and ever vigilant internet researcher, JB Slear, is yet another ugly fact that the spinmeisters and “jobless recovery” gang would ignore. The numbers in the story are a sobering dose of reality and this only deals with the residential real estate market – the commercial real estate sector is another sword ready to descend.

Trader Dan

Underwater Mortgages Hit 11.3 Million
Posted: February 23, 2010 at 7:25 pm

There is a reason that 702 American banks, nearly one in ten, were on the FDIC “problem list” as of the end of 2009. A large number of small and mid-sized banks are burdened with home and commercial mortgages that are in default and may even go into foreclosure.

New data from First American CoreLogic shows why the solution to the problem banks face is so difficult to find. Eleven million, three hundreds thousand homes had underwater mortgages as of the fourth quarter of last year. That number represent 24% of all residential homes loans in America.The mortgage numbers are much worse when homes with equity of less than 5% are included. First American reports that ”an additional 2.3 million mortgages were approaching negative equity at the end of last year, meaning they had less than five percent equity.” That means that three out of ten homes have virtually no financial value to their owners.

The pressure that the home value trouble puts on banks is clear. The aggregate dollar value of negative equity was $801 billion at the end of last year, up $55 billion from $746 billion in Q3 2009. People who believe there is no hope of their homes ever having any economic value are more likely to default on mortgages, especially in an environment where unemployed and under-employed people make up 17% of the total available workforce nationwide. Many homeowners are as concerned about their employment future as they are about the value of their houses.

Problem home loans are concentrated in the regions where real estate values have fallen the most–Arizona, Florida, Nevada, Michigan, and California.  First American says that “among the top five states, the average negative equity share was 42 percent, compared to 15 percent for the remaining 45 states.” In other words, the odds are relatively high that some of the home owners in those states will never sell their houses for more than the amount of their mortgages. That creates a vicious cycle in which high numbers of people with underwater loans default in the states where real estate values have dropped the most. There is no easy way to create a foundation under home prices.

The FDIC has closed 20 banks this year, Five of those were in the five states where mortgage equity problems are at their worst. The agency closed 15 banks in December. Of those, five were in Arizona, Florida, Nevada, Michigan, or California. The bank failure and mortgage failure problems area inextricably linked.

The First American numbers do not leave much hope for a home price rebound this year. It is too hard to sell a house with an underwater mortgage because the bank has to be paid the balance of the loan in cash at closing. Many people do not even try make home payments or cannot afford to under those circumstances.  The Mortgage Bankers Association reported that a record 15% of American mortgage holders are either in foreclosure or at least one payment behind.

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Posted at 9:09 PM (CST) by & filed under In The News.

Dear CIGAs,

The media can play all the games they wish. Just keep firmly in mind that:

1. Towns are broke.
2. Cities are broke.
3. States are broke.
4. Main Street is in dire pain.
5. The apparent improvement in the financial industry is accounting smoke and mirrors.
6. Most corporate improvements are not sales driven but cost cutting based. You can also call that "firing the help."

Greece or any state of the United States that goes under must be supported by QE to infinity as a country bankruptcy of the Iceland type will sweep across the Western World faster than Lehman Brothers locked up the credit markets.

This is no time to be swept up in the short term noise. Keep your eye on the ball.

All Fiat money is in a race to worth-less-ness. Only gold will protect your financial position.

Dear Friends,

The following links, courtesy of CIGA Craig, serve to reinforce the folly of the term, “jobless recovery”. Pay close attention to the number of “problem” banks on the FDIC’s list. It is evident where the FDIC is going to obtain the funding necessary to come in and deal with these banks in the future.

On the payroll front, the article also reinforces why the Confidence numbers are so poor.

Trader Dan

Mass Layoffs Surge In January, Highest Since July 2009
Submitted by Tyler Durden on 02/23/2010 10:45 -0500

The BLS has reported Mass Layoff Statistics for January 2010 – the result is plain ugly, and kills any hope for sustained improvement in unemployment data. Not seasonally adjusted Mass Layoff Events (defined as at least 50 persons being laid off from a single employer) surged in January to 2,860, from 2,310 in January, from a 12 month low of 1,371 in September 2009. This is the biggest monthly surge since July when the Mass Layoff Events hit a 12 month high of 3,054. In terms of actual workers, January saw 278,679 initially laid off people. The deterioration was mirrored in the much less credible seasonally adjusted data. Obviously companies were waiting for the end of the year to dump as many people as they could.

The BLS data is charted below:

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FDIC Hits Record "Default" Level As Deposit Insurance Fund Plunges By $12.7 Billion To NEGATIVE 20.9 Billion
Submitted by Tyler Durden on 02/23/2010 10:13 -0500

From Dow Jones:

The U.S. banking industry continued to struggle in the fourth quarter, as the number of banks on the brink of failure continued
to rise and the government’s fund to protect deposits fell sharply into the red.

The Federal Deposit Insurance Corp. said Tuesday that its deposit-insurance fund fell to $20.9 billion at the end of 2009, a $12.6 billion drop in the final three months of the year, as bank failures continued at a pace not seen since the savings and loan crisis. The fund’s reserve ratio was -0.39% at the end of the quarter, the lowest on record for the combined bank and thrift fund.

The deposit insurance fund is unlikely to soon see a respite from a decline in the number of failing banks: The FDIC said the number of banks on its "problem" list climbed to 702 at the end of 2009 from 552 at the end of September and 252 at the end of 2008. The number of banks on the list, which have combined assets of $402.8 billion, is the highest since June 1993.

"The continued rise in loan losses and troubled assets points to further pressure on earnings," FDIC Chairman Sheila Bair said in a statement. "The growth in the numbers and assets of institutions on our ‘Problem List’ points to a likely rise in the number of failures."

Industry indicators deteriorated nearly across the board. The FDIC said loan losses for U.S. banks climbed for the 12th straight quarter, while the total loan balances for U.S. banks continued to fall. The agency said the quarterly net charge-off rate and the total number of loans at least three months past due both were at the highest level ever recorded in the 26 years the data have been collected.

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Jim Sinclair’s Commentary

A picture says a thousand words.

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Jim Sinclair’s Commentary

Most US states are broke. In fact, most governments are or will be broke.

No currency will sustain buying power. The entire Western world is compromised.

This leaves gold as the only viable vehicle to function as a storehouse of buying power.

Consumer Confidence in U.S. Falls More Than Forecast (Update2)
By Bob Willis

Feb. 23 (Bloomberg) — Confidence among U.S. consumers fell more than anticipated in February to the lowest level since April 2009 as the outlook for jobs diminished, a sign spending may be slow to gain traction as the economy recovers.

The Conference Board?s confidence index declined to 46, below the lowest forecast in a Bloomberg News survey of economists, from a revised 56.5 in January, a report from the New York-based private research group showed today. Concerns about the economy and the labor market pushed an index of current conditions to its lowest in 27 years.

Stocks extended losses and Treasuries gained after the report indicated a lack of job growth and impaired household finances threaten to restrain consumer spending. Without sustained growth in the biggest part of the economy, the expansion may be slow to gain momentum.

The economy ?may not be out of the woods,? said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York. Most of the deterioration ?is labor market related. Consumer spending is going to disappoint throughout most of the year,? he said.

The Standard & Poor?s 500 Index dropped 0.9 percent to 1,098.26 at 10:47 a.m. in New York. The 10-year Treasury note rose, pushing down the yield seven basis points to 3.73 percent.

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Jim Sinclair’s Commentary

No one will say it but here is your answer. The OTC derivative manufacturers have destroyed more of the world than most wars have

Secret AIG Document Shows Goldman Sachs Minted Most Toxic CDOs
By Richard Teitelbaum

Feb. 23 (Bloomberg) — When a congressional panel convened a hearing on the government rescue of American International Group Inc. in January, the public scolding of Treasury Secretary Timothy F. Geithner got the most attention.

Lawmakers said the former head of the New York Federal Reserve Bank had presided over a backdoor bailout of Wall Street firms and a coverup. Geithner countered that he had acted properly to avert the collapse of the financial system.

A potentially more important development slipped by with less notice, Bloomberg Markets reports in its April issue. Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.

These were the deals that pushed the insurer to the brink of insolvency — and were eventually paid in full at taxpayer expense. The New York Fed, which secretly engineered the bailout, prevented the full publication of the document for more than a year, even when AIG wanted it released.

That lack of disclosure shows how the government has obstructed a proper accounting of what went wrong in the financial crisis, author and former investment banker William Cohan says. “This secrecy is one more example of how the whole bailout has been done in such a slithering manner,” says Cohan, who wrote “House of Cards” (Doubleday, 2009), about the unraveling of Bear Stearns Cos. “There’s been no accountability.”

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Posted at 2:44 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

The Conference Board released its index on US Consumer Confidence this morning and that sent a shot across the bow of the equity bulls’ parade boat. The index plunged more than 10 points to 46.0. The expectation had been closer to 55.5. That was all that was needed to send the “risk aversion” trades into high gear with algorithm selling hitting the broad equity markets and the commodity sector. On the Forex front, that means the Euro gets sold, and the Dollar and the Japanese Yen get bought. Bonds then get a bid and move higher.

This is the “deflation” trade which whenever it occurs, serves to bring pressure on the gold market. Additional proof that the deflation trade was on today was the sell off that hit copper and then crude oil. About the only commodities that I could see that were higher today were the beans. In such an environment, it is difficult for the bulls to keep gold levitating.

As confidence is such an ephemeral substance, it is challenging trying to get a read on it, but it is not hard to understand that when jobs are relatively scarce and consumers are worried about bills, confidence is going to evaporate like the morning mist. Needless to say, folks who are worried about the future do not spend as freely as those who are not. This is also the reason that so much of today’s financial “news” is spun by the official sector and many of the talking heads on GET-TV– they cannot lay things out as they are lest they create more fear, concerns or worries on the part of the consumer. It is also the reason for the volatility in the markets – you are witnessing a clash between reality and spin in the pits.

The HUI was on the receiving end of more of those ratio spreads again. The fact that the HUI could not push through the 40 and 50 day moving averages generated technical selling. It was smashed lower violating both the 10 day and the 20 day moving averages which had been turning higher. The sell off gives the bears the short term advantage again. There is some chart support near the 390 level which is pretty much where the session low has been thus far. If that cannot entice some buyers to come back in, the miners could move back down towards the 375 region to test that strong buying region. We will have to wait and see how the chart shapes up in the next couple of sessions. A ranging trade would be a moral victory for the bulls but the HUI will need to bounce soon to set up that possibility.

The bond market obliterated the recent shorts as it soared up through the 40 and 50 day moving averages all the way to last week’s high. We will keep an eye on this market to see what bond traders are voting for next, lower or higher rates. It still appears to me like the bonds are worried about supply issues but also concerned about the moribund economy. Generally this sort of thing leads to a range trade with neither side gaining a clear cut advantage.

Back to gold for a bit – the $1,100 level is serving as buying support and is thus far attracting dip buyers. I would like to see it climb back above the $1,110 level to feel a bit more comfortable with a potential range trade rather than a move down towards $1,080.

Open interest was down yesterday. Fresh longs were obviously quite fickle and decided not to challenge the sellers up at yesterday’s highs. We will need to see the bulls continue to move into gold rather than liquidating to generate enough force to push price through the bullion banks’ line of defense near the $1,130 level.

As a side note, both Euro-gold continues to hold above the 800 level and British Pound-gold is not far off its all time high coming in at 716 at today’s PM Fix.

Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini

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Posted at 1:56 PM (CST) by & filed under Jim's Mailbox.

Dear Jim,

Now that it has some breathing room under the debt ceiling, the government is boosting the Supplementary Financing Program back up to $200 billion from $5 billion in order to shore up the Fed’s balance sheet, at least for now:

CIGA John

Treasury to expand Supplementary Financing program
Feb. 23, 2010, 12:01 p.m. EST
By Greg Robb

WASHINGTON (MarketWatch) — The Treasury Department announced Tuesday that it is expanding its Supplementary Financing Program to help the Federal Reserve manage its enormous balance sheet. In a statement, Treasury said it will boost the SFA to $200 billion from its current level of $5 billion. The fund had been up to $200 billion but was scaled back when Congress delayed passage of an increase in the debt limit. Now that an expansion of the debt limit has been signed into law, the department is able to resume the program. Starting on Wednesday, Treasury will conduct the first of eight weekly $25 billion 56-day SFP bills to restore the program. The department said it will then roll the bills over. "We are committed to work with the Fed to ensure they have the flexibility to manage their balance sheet," a Treasury official said.

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Dear Jim,

From this morning’s quarterly refunding announcement:

"Despite the recent decision to reduce the size of the program, Treasury retains the flexibility to increase the SFP in the future.  Such a decision will be made in coordination with the Federal Reserve."

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That is to say, it looks as though the Fed, despite its much-vaunted independence, is at least temporarily replacing most of this sterilized funding with QE in order to let the Treasury avoid the debt ceiling for a while longer.

Regards,
CIGA John

 

NYSE Composite
CIGA Eric

About this time last week I suggested that the upside force of the tape was weakening. Today, the up trend line broke. What cannot go up with force will reverse and attempt to go down with force. The 2/16 gap is pulling hard. A sharp increase or decrease in volume during test of support will be bearish and bullish, respectively.

The retest of the 10/28 swing on 2/05 occurred on shrinking volume. This suggests decreasing downside force. If the 10/28 and 2/05 swing low is tested again on decreasing volume, it will generate another bullish setup that should coincide with another slide in the dollar and rise in gold.

It’s basically a watch and wait now.

NYSE Composite ETF and NYSE Volume:
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China Isn’t a ‘Realistic Candidate’ for IMF Gold, Council Says
CIGA Eric

Classic stuff.

China, the world’s biggest gold producer, isn’t a “realistic candidate” to buy bullion from the International Monetary Fund, the World Gold Council said.

“There has been some ill-informed comment that this move tarnished the notion that governments are adding to reserves,” Milling-Stanley said. “There are a lot of central banks out there that are buying local production in local currency. The IMF would have no interest in that local currency. The IMF is looking for dollars.”

(1) Either gold cannot pass from west to east,
(2) Gold is either not available or available in a form China wants, i.e. paper rather than bullion.
(3) The gold counsil is a mouthpiece for the bullion banks.

Source: businessweek.com

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Stocks retreat after disappointing consumer report
CIGA Eric

The stock market pulled back Tuesday after a surprising drop in consumer confidence reminded investors of the fragility of the economic recovery.

The Dow Jones industrials were off about 70 points. Interest rates also fell as investors moved money out of stocks and into the safety of Treasuries.

This could have been rewritten as stocks tank, again, during treasury auction week. Coincidence? Beat the grass to startle the snakes.

We need to save more, but doing so causing current spending to drop. Any drop in consumption is a big deal when it accounts for more than 70% of GDP. Maybe we can save and consume more simultaneously, thereby, proving that pesky little economic axiom -"there is no such thing as a free lunch" wrong.

Source: finance.yahoo.com

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States had to borrow $31B for jobless pay
CIGA Eric

South Carolina and other cash-strapped states borrowed a total of about $31 billion from the federal government over the last two years to provide their unemployed workers with benefit checks, and now as the country climbs out of recession the states must find a way to pay it back.

"First, even discussing this possibility of federal debt forgiveness is yet another indication of the severity of the problem we’ve talked about for a year and a half now — a mismanaged agency in the ESC that lacks real accountability, that has run up a near billion-dollar deficit in the Unemployment Trust Fund," Fox said.

States, like Greece, are in trouble. Unlike Greece, that states have access to the printing press. Whether they can pay them back is questionable. As the article states towards the bottom, "there’s no free money, not in government." There is no free money anywhere. If the perception that free money exists through debt forgiveness or other government programs, the market will take notice and exploit confidence. This means the dark pools of money will attack for profit, as they are doing in Europe right now.

Source: postandcourier.com

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