Thursday, June 30, 2011

Security Researchers Discover 'Indestructible' Botnet *4.5 million PCs infected in 3 months*



More than four million PCs have been enrolled in a botnet security experts say is almost 'indestructible'. The botnet, known as TDL, targets Windows PCs and tries hard to avoid detection and even harder to shut down. Code that hijacks a PC hides in places security software rarely looks and the botnet is controlled using custom-made encryption. Security researchers said recent botnet shutdowns had made TDL's controllers harden it against investigation. The 4.5 million PCs have become victims over the last three months following the appearance of the fourth version of the TDL virus.

The changes introduced in TDL-4 made it the "most sophisticated threat today," wrote Kaspersky Labs security researchers Sergey Golovanov and Igor Soumenkov in a detailed analysis of the virus. "The owners of TDL are essentially trying to create an 'indestructible' botnet that is protected against attacks, competitors, and anti-virus companies," wrote the researchers. Recent successes by security companies and law enforcement against botnets have led to spam levels dropping to about 75% of all e-mail sent, shows analysis by Symantec.

A botnet is a network of home computers that have been infected by a virus that allows a hi-tech criminal to use them remotely. Often botnet controllers steal data from victims' PCs or use the machines to send out spam or carry out other attacks. The TDL virus spreads via booby-trapped websites and infects a machine by exploiting unpatched vulnerabilities. The virus has been found lurking on sites offering porn and pirated movies as well as those that let people store video and image files. The virus installs itself in a Windows system file known as the master boot record. This file holds the list of instructions to get a computer started and is a good place to hide because it is rarely scanned by standard anti-virus programs.

The majority of victims, 28%, are in the US but significant numbers are in India (7%) and the UK (5%). Smaller numbers, 3%, are found in France, Germany and Canada.

However, wrote the researchers, it is the way the botnet operates that makes it so hard to tackle and shut down. The makers of TDL-4 have cooked up their own encryption system to protect communication between those controlling the botnet. This makes it hard to do any significant analysis of traffic between hijacked PCs and the botnet's controllers. In addition, TDL-4 sends out instructions to infected machines using a public peer-to-peer network rather than centralised command systems. This foils analysis because it removes the need for command servers that regularly communicate with infected machines.

"For all intents and purposes, [TDL-4] is very tough to remove," said Joe Stewart, director of malware research at Dell SecureWorks to Computerworld. "It's definitely one of the most sophisticated botnets out there." However, the sophistication of TDL-4 might aid in its downfall, said the Kaspersky researchers who found bugs in the complex code. This let them pry on databases logging how many infections TDL-4 had racked up and was aiding their investigation into its creators.


BBC News - Security researchers discover 'indestructible' botnet


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Monday, June 27, 2011

U.S. Could Face European-Style Debt Crisis *USA borrows 40 cents of every dollar it spends*



The rapidly growing national debt could soon spark a European-style crisis unless Congress moves forcefully, the Congressional Budget Office warned Wednesday in a study that underscores the stakes for a bipartisan group working on a plan to reduce red ink. The report said the national debt, now $14.3 trillion, is on pace to equal the annual size of the economy within a decade. It warned of a possible "sudden fiscal crisis" if it is left unchecked, with investors losing faith in the U.S. government's ability to manage its fiscal affairs.

Democrats and Republicans have been stepping up budget talks aimed at averting what could be the disastrous first-ever default on U.S. government debt. A bipartisan group led by Vice President Joe Biden tasked with reaching an agreement has not made the politically difficult compromises on the larger issues, such as changes in Medicare, or tax increases.

The study reverberated throughout the Capitol as Biden and negotiators and senior lawmakers spent several hours behind closed doors. The talks are aimed at outlining about $2 trillion in deficit cuts over the next decade, part of an attempt to generate enough support in Congress to allow the Treasury to take on new borrowing. Biden made no comment as he departed, except to say the group would meet again on Thursday and probably Friday as well.

The CBO, the non-partisan agency that calculates the cost and economic impact of legislation and government policy, says the nation's rapidly growing debt burden increases the probability of a fiscal crisis in which investors lose faith in U.S. bonds and force policymakers to make drastic spending cuts or tax increases. "As Congress debates the president's request for an increase in the statutory debt ceiling, the CBO warns of a more ominous credit cliff -- a sudden drop-off in our ability to borrow imposed by credit markets in a state of panic," said Republican House Budget Committee Chairman Paul Ryan.

The findings aren't dramatically new, but the budget office's analysis underscores the magnitude of the nation's fiscal problems as negotiators struggle to lift the current $14.3 trillion debt limit and avoid a first-ever, market-rattling default on U.S. obligations. The Biden-led talks have proceeded slowly and are at a critical stage, as Democrats and Republicans remain at loggerheads over revenues and domestic programs like Medicare and Medicaid.

With Republicans insisting that the level of deficit cuts at least equal the amount of any increase in the debt limit, it would take more than $2 trillion in cuts to carry past next year's elections. House Republican leaders have made it plain they only want a single vote before the elections. That $2 trillion-plus goal is proving elusive. And a top Senate Democrat warned Wednesday that it would be insufficient anyway. "While I am encouraged by the bipartisan nature of the leadership negotiations being led by Vice President Biden, I am concerned by reports the group may be focusing on a limited package that will not fundamentally change the fiscal trajectory of the nation," said Senate budget Committee Chairman Kent Conrad, a Democrat. "That would be a mistake."

Democratic leaders, however, held a news conference Wednesday to argue for more economic stimulus measures such as a proposal floated by the White House to extend a payroll tax cut enacted last year. The move demonstrates the continuing appeal of deficit-financed policy solutions - suggested even as warnings of the dangers of mounting debt grow louder and louder. "We absolutely need to reduce our deficit. We know that," said Democratic Senate Majority Leader Harry Reid. "But economists tell us that reducing spending is only half the equation. The other half is measures to create jobs.

President Barack Obama planned to meet with House Democratic leaders Thursday to discuss the status of the deficit reduction talks. The meeting comes as Democrats want the president to rule out Medicare benefit cuts as part of any budget deal. The White House said the meeting will address deficit reduction through a "balanced framework," a term the White House uses to describe cuts in spending coupled with increased tax revenue.

With the fiscal imbalance requiring the government to borrow more than 40 cents of every dollar it spends, the CBO predicts that without a change of course the national debt will rocket from 69 percent of gross domestic product this year to 109 percent of GDP - the record set in World War II - by 2023. The CBO's projections are based on a scenario that anticipates Bush-era tax cuts are extended and other current policies such as maintaining doctors' fees under Medicare are continued as well. The debt would be far more stable under the budget office's official "baseline" that assumes taxes return to Clinton-era rates and that doctors absorb unrealistic fee cuts.

Economists warn that rising debt threatens to devastate the economy by forcing interest rates higher, squeezing domestic investment, and limiting the government's ability to respond to unexpected challenges like an economic downturn.

But most ominously, the CBO report warns of a "sudden fiscal crisis" in which investors would lose faith in the U.S. government's ability to manage its fiscal affairs. In such a fiscal panic, investors might abandon U.S. bonds and force the government to pay unaffordable interest rates. In turn, the report warns, Washington policymakers would have to win back the confidence of the markets by imposing spending cuts and tax increases far more severe than if they were to take action now.

U.S. Could Face European-Style Debt Crisis: Congressional Report - CNBC


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Saturday, June 25, 2011

Why Austerity Doesn't Matter: Greece Is Still Going to Default (Slideshow) *Some European countries can't pay their debt*

Greece Finance Ministry Building
Protesters hung a sign in June calling for a general strike in Athens


This is how quickly the European debt crisis devolves: Austerity, viewed by markets as saving grace for Greece just a day ago, has quickly moved into irrelevance as banks and insurers continue to find a path around default.

No doubt cutbacks are an integral part of the Greek future.

Violent street protests aside, the county’s financial standing simply won’t allow it to continue along the path of bloated government, massive public giveaways and the debt-on-top-of-debt strategy it has employed for too long.

But without some type of structural default on its current obligations, all the austerity in the world won’t make Greece’s problems go away.

“Greece and a number of other European countries cannot repay their debt. In fact they will never be able to repay their debt under current conditions because their economies are not competitive globally,” banking analyst Dick Bove at Rochdale Securities wrote in an analysis. “Therefore, these countries must, and in my judgment will, repudiate their debt.”

Indeed, looking at Greece’s onerous debt maturity schedule, it is almost impossible to imagine another alternative.

Starting with a 2.4 billion-euro repayment on July 15, Greece then has to pay, in euros: 900 million on July 19, 1.5 billion on July 20 and 1.6 billion on July 22. August doesn’t get much better, when the nation has a 1.6 billion-euro payment due on Aug. 19 and 9 billion euros due to the next day.

“These dates and the respective maturing amounts point to substantial default risks in Greece without the continuation of its IMF-EU program,” Bank of America Merrill Lynch analysts wrote in a research note, referring to the ongoing bailout from the International Monetary Fund and European Union.

Default, for how ugly the connotation is, remains the least painful option in what will be an achingly long path back to prosperity for Greece.

The nation cannot hope to impose the level of Draconian cuts it would take to pay its debts without incurring a full-scale revolution, not to mention the punishing effects it would have on growth.

“It is time for the policymakers to think beyond the next debt repayment cycle and consider the core issues here,” Bove said. “If they do they will recognize that a default is inevitable and actually the best solution to the problem even though it will not seem so in the short run.”

The main problem with default, of course, is that it will lead to a financial crisis.

European banks with exposure to Greek debt will face capital shortfalls and have to go to market to raise money, driving up interest rates. American banks with exposure to the European banks will face the same fate as the US grapples with its own debt and deficit crisis.

The only question is a matter of degree.

Bove posits that there will be a “financial crisis” but not on par with what happened when Lehman Brothers collapsed in 2008.

But Julian Jessop, chief international economist at Capital Economics in London, thinks the Greek crisis could be akin to the collapse of Bear Stearns, the Wall Street bailout that turned public perception against bailouts.

“The upshot is that Greece certainly has the potential to become the sovereign Lehman. Policymakers might therefore conclude from the Lehman episode that Greece cannot be abandoned,” Jessop wrote in a note for clients.

“But the German public in particular is taking some convincing and the Greek people themselves may decide that the price of international support is simply too high. What’s more, even if Greece is rescued, the appetite and resources for another bailout would surely be limited. Greece might therefore end up as the next Bear Stearns – the last to be bailed out before patience runs out.”

Ultimately, then, Greece likely will come down to a political question that revolves around the expediency of a “voluntary rollover” of debt, as discussed Friday, or the reality of a default.

“There are no easy ways out,” Sebastian Mallaby, director of the Maurice R. Greenberg Center for Geoeconomic Studies, wrote in an essay for the Council on Foreign Relations.

“For more than a year, Europe's leaders have pretended otherwise, kicking the can down the road with stopgap measures. But voters in both Greece and the core countries are running out of patience. The euro, intended to unify Europe, is driving it apart. A crunch may be approaching.”

Slideshow
The Greek Dominos: What Happens If Greece Defaults?

Why Austerity Doesn't Matter: Greece Is Still Going to Default - CNBC



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Friday, June 24, 2011

USA Economy on Slippery Slope to Recession (Video) *99% chance of recession next year*

David Rosenberg: 99% chance of USA Recession in 2012


The U.S. economy is "on a slippery slope organically without the ongoing benefits, if you want to call it that, of government intervention and expansion of the Federal Reserve balance sheet," economist David Rosenberg told CNBC Tuesday.

"We have to be honest with ourselves, this has been an absolutely horrible recovery," he said. "It’s just so evident to me two years into this expansion that whenever the fiscal and monetary spigots are turned off we go into a soft patch. This happened last year. I feel like Bill Murray in 'Groundhog Day.'"

Rosenberg, of Gluskin Sheff + Associates, expects the Federal Reserve to "stick to script" and repeat what Chairman Ben Bernanke said at a June 7 speech in Atlanta - the economy has hit a "soft patch" but there will be a second-half pickup.

However, Rosenberg, who predicts a 99 percent chance of recession next year, said things are worse than the Fed acknowledges. He says when the recession comes and is priced into the market there will be a correction of 20 percent.



Without the Fed's quantitative easing program, or QE2, which ends next week, or the Obama administration's fiscal stimulus program, last year's soft patch "would’ve morphed into something harder." Those programs, however, "buy us three or four months of better economic data, the stimulus fades and then, what do you know, we’re left with a soft patch again."

The economist added he doesn't "remember a cycle where you have two soft patches. That’s completely abnormal."

He sees "no more fiscal stimulus" this year after QE2 ends, but an extension, or QE3, "will be next year’s story" because while Bernanke can be aggressive when necessary to fix the economy, he "isn't going to be early."

When the recession comes, investors should be long in "high-quality sectors" and "short the low-quality stuff and the small caps." Hedge fund strategies work very well, he said, including bonds and hybrid securities.

"I've been starting to see more clients putting money into hybrids, which is really income equity. I think that's a very good strategy to be in right now," he said, as is holding gold.




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Tuesday, June 21, 2011

Fitch Sees Risk of Greece & USA Debt Defaults *U.S. Treasury securities could be downgraded*

Fitch is first major ratings agency to say U.S. Treasury securities could be downgraded, even for a short period


Fitch Ratings said on Tuesday that it would regard a voluntary rollover of Greece's sovereign bond maturities as a default and would cut the credit rating appropriately, keeping pressure on Athens ahead of a confidence vote in parliament.

The definitive comments weighed on the euro and underscored how much is at stake for Greece, which is struggling to implement a deeply unpopular fiscal austerity plan necessary to win the next tranche of emergency aid from the European Union and International Monetary Fund.

Fractious euro zone finance ministers are trying to patch together a second aid package for Greece, with more official loans and, for the first time, some sort of contribution by private investors who hold Greek government bonds.

"Fitch would regard such a debt exchange or voluntary debt rollover as a default event and would lead to the assignment of a default rating to Greece," Andrew Colquhoun, head of Asia-Pacific sovereign ratings with Fitch, said at a conference in Singapore.

A month ago Fitch downgraded Greece's credit rating three notches to "B+" and warned it could cut the rating further into junk territory. At the time, the rating agency said an extension of the maturity of existing bonds would be considered a default.

Standard & Poor's cut Greece's rating to "CCC" from "B" on June 13, and warned that any attempt to restructure the country's debt would be considered a default.

Moody's has a Caa1 rating to Greece's sovereign debt, which implies a 50 percent chance of a default within three to five years.

Fitch's Colquhoun also reiterated that the rating agency would place the U.S. sovereign rating on watch negative if Congress did not raise the federal government's borrowing ceiling by August 2, and said if the U.S. government misses an Aug. 15 coupon payment, then Fitch would place the rating on restricted default.

But it added it believed it was very likely that the debt ceiling would be raised and default would be avoided.

Fitch had made similar comments earlier this month and Moody's and S&P have issued warnings along the same lines. But Fitch was the first major ratings agency to say U.S. Treasury securities could be downgraded, even for a short period.

U.S. lawmakers working to rein in rising debt said on Monday they will have to make substantial progress this week to ensure the country retains its top-notch credit rating.

Fitch Sees Risk of Greece, US Debt Defaults - CNBC


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Monday, June 20, 2011

Italy's Credit Rating May Be Downgraded by Moody's *Crisis could affect Spain, Portugal, Belgium*



(Reuters, June 17, 2011) Moody's Investor's Service said on Friday it may cut Italy's sovereign credit rating from AA2, citing challenges ahead for economic growth due to structural weaknesses and a likely rise in interest rates.

COMMENTS:

GIANLUIGI MANDRUZZATO, SENIOR ECONOMIST, BANCA BSI, MILAN: "I was surprised after Standard & Poor's and I'm surprised again now, especially as Moody's has been much more supportive of Italy in the past. "This puts extra pressure on the government to present a convincing deficit cutting package before the summer break and paradoxically I think the one who'll be happiest about it will be (Economy Minister Giulio) Tremonti because it will help him to resist the calls to open the purse strings. "Italy's public finances this year have actually been going rather well, and the deficit trend has even been positive since the S & P move, but the agencies are clearly not judging Italy on the current management of public accounts, they are looking at the lack of political will and ability to make it a more competitive, flexible, efficient economy that can grow and therefore bring down the debt in the medium term. "I think market reaction on Monday will still be driven by sentiment over Greece, but this decision by Moody's may mean Italy will fare worse than it would have done vis a vis the other peripherals."

KEITH SPRINGER, PRESIDENT, CAPITAL FINANCIAL ADVISORY SERVICES, SACRAMENTO, CALIFORNIA: "The only news seems to be bad news, but the stock market and investors are brushing it off. The EU is not going to let Italy go and is keeping Greece from defaulting. Italy would be pretty devastated if Greece defaults. If Greece is going to fall, what is the next country to go?"

CARY LEAHEY, ECONOMIST AND MANAGING DIRECTOR, DECISION ECONOMICS, NEW YORK: "You are seeing a bit of the domino effect. A number of European countries, now including Italy, are considered suspect by the ratings agency. It's a game of dominoes that you could extend to Belgium and, perhaps, to Spain. But Italy would be the largest country, at least at the moment, deemed suspect in the eyes of the rating agency."

DAN DORROW, HEAD OF RESEARCH, FAROS TRADING, STAMFORD, CONNECTICUT: "This reflects a Mediterranean or neighborhood effect that is going on right now. The state of California has greater problems and it is hard to see why Italy is the focus. Certainly Italy is in a challenging situation, but nothing really changed to warrant this announcement as growth has not turned down significantly. "This is clearly precautionary. If there is a credit event in Greece clearly it could probably reach Spain, Italy, Portugal and Belgium. "Moody's was behind the curve with the subprime mortgage debacle and they are trying to relay to the market what could happen. Having said that. We are confident that this summer things will hold together and there will not be a credit type event."

PERRY PIAZZA, DIRECTOR OF INVESTMENT STRATEGIES, CONTANGO CAPITAL ADVISORS, SAN FRANCISCO: "The rating agencies are in a little catch-up mode here in order to protect themselves because everything is going down to the 11th hour. If there is a problem with the Greece situation, there is definitely a contagion issue because some of the European banks have exposure to Greek debt. There is a lot of cross-bank exposure. It could slow European growth. "What is priced into the market is a lot of bad news. The inclination right now is to sell first and ask questions later, but stocks and the euro have held up pretty well."

DAVID KELLY, CHIEF MARKET STRATEGIST, J.P. MORGAN FUNDS, NEW YORK: "The rating agencies throughout the European debt crisis have played not too helpful a role. Unfortunately, the news flows of European downgrades will only increase the volatility the markets. "Greece is in the most financial trouble in Europe. Clearing other countries including Italy clearly have budget issues. This shows that Europe can't wash its hand of the Greece situation. It must isolate the problem with Greece and help other countries to deal with their fiscal issues. "The big picture is that there continues to be an overhang of negative economic news and the European debt situation."

GREG SALVAGGIO, SENIOR VICE PRESIDENT, TEMPUS CONSULTING, WASHINGTON: "The Moody's news on Italy reinforces the ECB's concern about the prospect of contagion. And contagion should not happen. As a result, I think there's a going to be a package put together over the weekend, which is going to effectively offer Greece another a lifeline. No one, however, is going to deal with the issue and (they will) simply kick the can down the road."

MICHAEL WOOLFOLK, SENIOR CURRENCY STRATEGIST AT BNY MELLON IN NEW YORK: Moody's Investors Service on Friday said it may cut Italy's sovereign credit rating from AA2, citing challenges ahead for economic growth due to structural weaknesses and a likely rise in interest rates. "This cannot be a positive for the euro with market players already concerned about the potential contagion effect that the Greek debt crisis could have."

(CNBC, June 17, 2011)  The review for a possible downgrade of the rating comes amid rising concerns the country will face difficulties in implementing fiscal consolidation plans required to reduce the nation's debt stock and keep it at affordable levels.

Moody's review of Italy's sovereign rating will focus on the growth prospects for the Italian economy in coming years, and particularly the prospects for a removal of important structural bottlenecks that could hinder a stronger economic recovery in the medium term," the firm said in a statement.

Standard & Poor's has Italy's long-term sovereign foreign currency credit rating two notches lower at A-plus with a negative outlook.

Fitch ratings is in between S&P and Moody's with a AA-minus rating and stable outlook.

European Economy: Moody's-Italy's Rating May Be Downgraded - CNBC

Instant view: Moody's says may cut Italy's credit rating | Reuters



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Sunday, June 19, 2011

Ten Signs the Double-Dip Recession Has Begun *USA faces high hurdles*




1. Inflation

There is almost nothing that damages consumer confidence as badly as a rapid rise in prices. Starbucks recently increased the price of a bag of coffee by 17% because wholesale prices have risen by almost twice that rate in the last year. Cotton prices nearly doubled in 2010 but has fallen this year. But, apparel is made months in advance of when they reach store shelves. Summer clothing prices are up as much as 20%. That may change in the fall, but for the time being, the consumer’s ability to buy even the most basic clothing has been undermined. Consumers today pay more for sugar, meat, and corn-based products as well.

2. Investments Have Begun to Yield Less

Part of the recovery was driven by the stock market surge which began when the DJIA bottomed below 7,000 in March 2009. The index has risen above 12,000 and the prices of many stocks have doubled from their lows.  As result, American household nest eggs that were decimated by the collapse of the market have rebounded and enabled people to splurge on themselves. However, the market has stumbled in the last quarter. The DJIA is up only 1% during the last three months and the S&P 500 is down slightly. Americans, though, have have few other places to put their money.. Ten-year Treasuries yield about 3%. Gold was a good investment over the last year, but it has begun to falter as well.  The market may not be a friend to investors for quite some time.

3. The Auto Industry

The auto industry has staged an impressive comeback, although its profitability is based as much on the layoffs it has made over the last five years as generating new sales. GM and Chrysler have emerged from bankruptcy. Year-over-year monthly sales improved late last year and through April. May sales stalled.  GM’s revenue dropped by 1% compared to May of 2010. Ford’s sales were down about as much.  There are many reasons for this trend including high gas prices and the constrained manufacturing capacity of the Japanese automakers because of the earthquake. Consumers also may be deferring big purchases because they are worried about their economic prospects.  Slow car sales are not just a sign of lagging consumer confidence. They also may be a harbinger of tougher times ahead. These companies shed several hundreds thousand jobs before and during the last recession. Car firms have only just begun to hire again, but that trend will die with a plateau in sales.

4. Oil Prices

Oil prices are supposed to drop as the economy slows as they did in 2008 and early 2009 when crude fell from over $140 to under $50. That drop at least allowed consumers and businesses like airlines to more easily afford fuel. Recently, crude has moved back above $100 and appears to be stuck there regardless of the economic situation. American budgets have been hurt by the rising cost of gas. Americans of more modest means have been particularly affected. A slowdown in driving usually also leads to a decline in the retail sector as consumers reduce unnecessary travel to stores. The impact on other businesses is just as great. Airlines suffer and so do firms which rely on petrochemicals. OPEC, for now,  has signaled it will not increase production.

5. The Federal Budget

The federal budget deficit has decimated any chance for another economic stimulus package which many prominent economists like Nobel Prize winner Paul Krugman say is essential to create a full recovery. His theory has become more of an issue as GDP growth slows to a rate of 2%. The first $787 billion Obama stimulus package may have saved some American jobs, but it is long over and did not work if a drop in unemployment and a sharp improvement in GDP were its primary goals. The deficit has caused a call for severe austerity measures which have already become  part of the economics policies of countries from Greece to the UK to Japan. Job cuts in the U.S. will not be restricted to the federal level. A recent UBS Investment Research analysis predicted that state and local governments will cut 450,000 jobs this year and next. That process is already well underway. States like California and New York currently run massive deficits and the rates they must pay on bonds has risen accordingly. Newspaper headlines almost daily report on battles between state unions and governors over employment and benefits.

6. China Economy Slows

A slowdown in the Chinese economy is usually seen as a cause of global commodity price inflation, but the effects cut two ways. China’s appetite for energy and raw materials may fall. But, the demand for goods and services by its very large and growing middle class drops as well. Chinese purchaser manufacturing and export numbers have fallen as the central government has tightened the ability to borrow money. US exports to China are key to the health of many American businesses. John Frisbie, the president of The US-China Business Council, recently said, “Over the last decade we have seen exports to China rise from $16.2 billion to $91.9 billion – a 468 percent increase.” As that rate slows, it has a profound effect on tens of thousands of American companies and their employees. US firms with large operations in China are also effected. GM is one of the two largest car firms in China along with VW. Large US corporations like Wal-mart and Yum! Brands rely significantly on China to boost global sales.  Without vibrant consumer spending in China, American companies will suffer.

7. Unemployment

Unemployment creates two immediate problems. People without jobs drastically curtail their spending, which will ultimately affect GDP growth. The second is the need for tens of billions of dollars every year in government aid to keep the unemployed from becoming destitute. That support has increased deficits and the domino effect is that cash-strapped governments need to make more spending cuts. It may be the biggest challenge the economy faces. Unemployment has worsened because people over 65 to continue to work because the values of their homes – which they once counted on as the financial basis of their retirements – have dropped so sharply. Older Americans also fear that cuts in Medicare and perhaps Social Security are inevitable which increases the cost of their golden years.  The jobs that older Americans have taken are often ones that younger Americans might have. People in their 20s must accept low wages to enter the workforce.  This has delayed their prime consuming years well into their 30s which will damage GDP recovery now and for another decade. The worst of the unemployment problem is the roughly 5 million Americans who have been unemployed for over a year. Their unemployment benefits have run out in many cases.  The burden of their care falls to their families, friends, community organizations, and non-profits. A family which has to support an unemployed person may be a family which cannot spend beyond its basic needs. To the extent that the federal or state governments can support the unemployed, the cost to run support programs increases.

8. Debt Ceiling

The United States debt ceiling,currently at $14.294 trillion, will probably be raised before the government has to cut back essential services on August 2. It might seem that the economic and employment effects of the debt cap are the same as the deficit, but they are actually more insidious and longer term. The first by-product of debt reduction, or at least a slowdown in its growth, is a combination of higher taxes and a lower level of government services. Higher taxes usually slow economic improvements, particularly when they are not couple with stimulus measures. A number of economists have pointed out the expense reduction alone will not sharply improve the United States balance sheet. The increase in Medicare and Social Securities costs, brought on  by an aging population, are also likely to trigger a need for higher taxes. Tax increases could keep the economic growth of the US on hold for years. The taxation of companies decreases and often eliminates profits, particularly during an already troubled economic period. Profits which disappear usually cause cuts in purchasing and jobs. Taxes on wages and inheritance undermines consumer spending. And, a growth in national debt from already all-time highs will increase the borrowing costs of the US. That, in turn, drives up interest rates for everything from mortgages to credit cards.

9. Access to Credit

The lack of access to credit has hurt the economic activity or both individuals and small businesses. Many very large companies can borrow money at rates as low as 2% because of their strong cash flows and balance sheets. Banks have been much less willing to loan money to companies with under 100 workers because these firms often rely on a few customers for revenue and usually have very little money on hand. Early in June, the House Small Business Committee held hearings and among its findings were that concerns about risk and a slow economy has made financial institutions reluctant to lend to small businesses, the main driver of economic growth. Committee Chairman Sam Graves (R-MO)  said Congress will need to “bridge the gap” between the two sides. There is no plan to accomplish that. Individual borrowers find themselves in a similar position. The cost of credit cards debt is still above 20% in many cases although the Federal Reserve loans money to large financial firms for interest rates close to zero. Potential home buyers, who might help break the gridlock of slow house sales, often find that banks want down payments as high as 20%. The median down payment in nine major U.S. cities rose to 22% last year on properties purchased through conventional mortgages, according to an analysis done for The Wall Street Journal by real-estate portal Zillow.com. That percentage doubled in three years and represents the highest median down payment since the data were first tracked in 1997. Home which are not sold often put such great burdens on owners that they are barely consumers of the goods and services that drive GDP. Home builders have continued to struggle. Construction jobs, which were a huge amount of the employment base in states like Florida, have not returned.

10. Housing

Housing is considered by many economists to be the single largest drag on the American economy, and the housing market has gotten much worse in the last two months. A report from The New York Federal Reserve published early this year said that “When home prices began to fall in 2007, owners’ equity in household real estate began to fall rapidly from almost $13.5 trillion in 1Q 2006 to a little under $5.3 trillion in 1Q 2009, a decline in total home equity of over 60%.” Real estate research firm Zillow reported on more recent developments. “Negative equity in the first quarter reached new highs with 28.4 percent of all single-family homes with mortgages underwater, from 27 percent in Q4.” Many homeowners who want to sell their homes cannot do so because they cannot afford to pay their banks at closing. Whether for good or ill, the American home was the primary source for money used for retirements, college educations, and the purchases of many expensive items such as cars. Economists point out the this leverage helped contribute to the credit crisis as people could not cover the costs of home equity loans as real estate values collapsed. This may be true, but the drop in value happened so quickly that the balance sheets of millions of Americans were destroyed. Their ability to consume was severely damaged, further harming GDP. High mortgage payments bankrupted or nearly bankrupted people who have lost jobs or have found that their incomes had stagnated. The building industry became a shambles overnight. And, whatever the effects have been over the last three years, they are getting progressively worse as home values drop to decade lows. There is no relief in sight because potential buyers worry that price erosion has not ended.

Ten Signs The Double-Dip Recession Has Begun - 24/7 Wall St.


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Wednesday, June 15, 2011

Big Oil Receives $4.4 Billion a Year in Tax Breaks *2011 pre-tax profits could reach $200 billion*


Why is Big Oil receiving tax breaks?
Motorists are paying nearly $4 for a gallon of gasoline as the oil industry reaps pre-tax profits that could hit $200 billion this year. This makes another big number hard to take: $4.4 billion. That's how much the industry saves every year through special tax breaks intended to promote domestic drilling.
President Barack Obama is increasing pressure on Congress to eliminate these tax breaks — including one that is nearly a century old — at a time of record budget deficits. The President and congressional Democrats say eliminating the tax breaks will also lower gas prices by making alternative energy sources more competitive.
Oil industry advocates, a group that includes most Republicans in Congress, argue just the opposite. They say oil companies reinvest tax breaks into exploration and production, which ultimately generates more tax dollars and increases the supply of oil. They say eliminating tax breaks will raise the cost of doing business and lead to higher gas prices.

Executives from the five biggest oil companies were asked about these tax breaks at a Senate finance committee meeting Thursday. Senate Democrats accused the oil companies of not paying their share to help the country emerge from economic hard times. Republicans derided the hearing as a dog-and-pony show staged to score political points with angry drivers.

The industry executives said eliminating the tax breaks would reduce investment in the U.S. Exxon Mobil CEO Rex Tillerson said the tax proposal "Would discourage future investment in energy projects in the United States and therefore undercut job creation and economic growth." He said it would do nothing to reduce gasoline prices.

The 41 U.S. oil and gas companies that break out their federal taxes said they paid Uncle Sam $5.7 billion in 2010, according to data compiled by Compustat. That's more than any other industry. Exxon alone paid $1.3 billion. (The company's total tax bill was $21.5 billion, but most of that was paid to foreign governments and states.)

But at a time when motorists are fuming about $4 gas, Obama and Democrats sees a huge political opportunity. "When you see profits that include the word billions, people automatically think someone is getting screwed," says Christine Tezak, Senior Energy and Environmental Policy Analyst at Robert W. Baird & Co. "The fact that the (oil industry) is getting any breaks at all has become a sore spot."

The price of oil is so high that removing these tax breaks would likely have little to no effect on domestic oil production. There are other factors that make the U.S. a highly attractive place to drill: it's politically stable, it has good roads and pipelines, and it's the world's biggest energy consumer. And the industry would remain hugely profitable even though eliminating the tax breaks would increase its U.S. tax bill by nearly 70 percent.

The tax breaks that Obama wants to eliminate will cost the U.S. Treasury $44 billion over the next decade. A Senate proposal targets many of the same rules, but would eliminate them only for the five biggest oil companies: ExxonMobil, Chevron, BP, Royal Dutch Shell and ConocoPhillips.

Here is a look at the main tax breaks:

Domestic Manufacturing Deduction

The biggest is what's called the Domestic Manufacturing Deduction. It's a 2004 tax change meant to encourage companies to manufacture in the U.S. It allows companies of almost any type to deduct from their taxable income up to 9 percent of profits from domestic manufacturing. Under the rule, oil and gas companies were classified as manufacturers, but their deduction was capped at 6 percent. This provision alone is expected to save the oil and gas industry $18.2 billion over the next ten years, or 42 percent of the $44 billion total. The oil industry feels unfairly singled out. "It can't be good for some and not for others or it is just a punishment," says Stephen Comstock, the tax policy manager at the American Petroleum Institute, an oil industry lobbying group.

Intangible Costs

Another subsidy, established in 1913 to encourage domestic drilling, allows oil companies to deduct more quickly all of the so-called intangible costs of preparing a site for drilling. To accountants, intangible costs are costs for things that have no salvage value when the well runs dry, including clearing land and pouring concrete. Ordinarily, a business would have to deduct these costs over the life of the drilling site. Instead, small, independent drillers are allowed to deduct all of these expenses in the first year; major, so-called integrated companies like ExxonMobil can deduct 70 percent in the first year. The break is worth $12.5 billion over the next ten years. Comstock compares the oil industry's ability to write off the cost of preparing a well to other companies' ability to write off research and development costs. Other tax experts say this is clearly a subsidy.

1926 Rule

A rule dating from 1926 that establishes how oil companies can depreciate the value of their wells allows drillers to deduct 15 percent of the well's revenue from its taxable income per year. This is instead of a more traditional depreciation scheme in which the cost of the well is depreciated over the well's life. The tax break was created in part to simplify accounting, so companies wouldn't have to guess how long an oil or gas field would produce in order to calculate how to depreciate it. It can be a boon: The total of the deductions over the life of the well can sometimes be bigger than what the company actually spent on the well. This provision was eliminated for major oil companies in 1975, but it continues for independent producers. The break is worth $11 billion over 10 years.

Royalties

Royalties that companies pay foreign governments for the oil they extract are not deductible from U.S taxes. But often the industry is allowed to claim royalties as foreign taxes, which are deductible. Obama and Senate Democrats call this a loophole, and want to close it. Obama doesn't include this in his $44 billion proposal, but Whitney Stanco, an analyst at MF Global, calculates that removing this benefit could cost the industry $8.5 billion over ten years.