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The defining book for the current

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Gordon T Long

RESEARCH ANALYTICS for the GLOBAL MACRO

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SULTANS OF SWAP: Explaining $605 Trillion in Derivatives!

 

SULTANS OF SWAP: Fearing the Gearing!

 

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EXTEND & PRETEND: Stage I Comes to an End!

The Dog Ate my Report Card

 

Both came to an end at the same time: the administration’s policy to Extend & Pretend has run out of time as has the patience of the US electorate with the government’s Keynesian economic policy responses. Desperate last gasp attempts are to be fully expected, but any chance of success is rapidly diminishing.

Before we can identify what needs to be done, what the administration is likely to do and how we can preserve and protect our wealth through it, we need to first determine where we are going wrong. Surprisingly, no one has assessed the results of the American Recovery & Reinvestment Act 2009 (ARRA) which was this administration’s cornerstone program to place the US back on the post financial crisis road to recovery.

We can safely conclude either:

1-    The administration completely under estimated the extent of the economic crisis, even though we were well into it when the ARRA was introduced.

2-    The administration was unable to secure the actually required stimulus amount which was likely 4-5 times that approved.

3-    The administration failed to implement the program in a timely manner.

4-    The administration failed to diagnose the problem correctly and that in fact it is a structural problem versus a cyclical and liquidity problem, as they still insist it to be.

I personally believe it is all four of the above.

READ MORE

 

 

SULTANS OF SWAP: BP Potentially More Devastating then Lehman!

 

As horrific as the gulf environmental catastrophe is, an even more intractable and cataclysmic disaster may be looming. The yet unknowable costs associated with clean-up, litigation and compensation damages due to arguably the world’s worst environmental tragedy, may be in the process of triggering a credit event by British Petroleum (BP) that will be equally devastating to global over-the-counter (OTC) derivatives. The potential contagion may eventually show that Lehman Bros. and Bear Stearns were simply early warning signals of the devastation lurking and continuing to grow unchecked in the $615T OTC Derivatives market.

 

What is yet unknowable is what the reality is of BP’s off-balance sheet obligations and leverage positions. How many Special Purpose Entities (SPEs) is it operating? Remember, during the Enron debacle Andrew Fastow, the Enron CFO, asserted in testimony nearly 10 years ago that GE had 2500 such entities already in existence. BP has even more physical assets than Enron and GE. Furthermore, no one knows the true size of BP’s OTC derivative contracts such as Interest Rate Swaps and Currency Swaps. Only the major international banks have visibility to what the collateral obligations associated with these instruments are, their credit trigger events and who the counter parties are. They are obviously not talking, but as I will explain, they are aggressively repositioning trillions of dollars in global currency, swap, derivative, options, debt and equity portfolios.

 

READ MORE


READER ROADMAP -  2010 TIPPING POINTS aid to positioning COMMENTARY

 

 

 

1

         

SOVEREIGN DEBT PIIGS

EU BANKING CRISIS
BOND BUBBLE

STATE & LOCAL GOVERNMENT

CENTRAL & EASTERN EUROPE
BANKING CRISIS II
RISK REVERSAL

COMMERCIAL REAL ESTATE

CREDIT CONTRACTION II

RESIDENTIAL REAL ESTATE - PHASE II
EXPIRATION FINANCIAL CRISIS PROGRAM
US FISCAL IMBALANCES
PENSION CRISIS
CHINA BUBBLE

TODAY'S TIPPING POINTS UPDATE

Last Update: 07/12/2010 03:37 AM

RED ALERT

AMBER ALERT

ACTIVITY

MONITOR

Click to Enlarge

 

 

POSTS:   WEEKEND 07-10/11-10

 

 

GEO-POLITICAL TENSIONS - ISRAEL / KOREA / IRAN

 

IRAN

 

ISRAEL

 

KOREA 

 

SOVEREIGN DEBT & CREDIT CRISIS

 

Baltic Dry Index Now Experiencing Record Slump   BI

 

Full chart with detailed statistics after the jump (click chart) -- Bookmark as your quick reference

 

GREECE

 

ITALY

 

SPAIN / PORTUGAL

 

FRANCE

 

GERMANY

 

UK

Arts told to adopt US-style funding  FT

Search intensifies for spending cuts of up to 40%

 

JAPAN

 

CHINA

 

Chinese authorities have a completely different approach in dealing with maters of asset bubbles, credit bubbles…they are preemptive, the U.S. is reactive. China wants to build firewalls between the asset markets and the real economy so they certain do have, or they did have, I should say, a high-end property bubble…in April they took extremely tough actions to curtail multiple purchases by speculators and they stopped! And they did that before the housing bubble got bigger and ended up distorting the real economy, so they’ve done a good job. […] I think it’s really wrong to view China as an enormous macro property-bubble story.

 

 

 

USA

How All 'Consumer' Spending Since Lehman Was Actually Government Money By Another Name  BI

If you subtract out government transfer payments to Americans (such as unemployment checks) and lower taxes paid by Americans (due to breaks or lack of income), then you can wipe out all of the consumer spending growth since Lehman went bust in 2008.

Sans government support, there wouldn't have been any new spending, Econompic astutely highlights.

Own a small business dependent on the U.S. consumer right now? You might just have discovered yourself as a die-hard Keynesian. Not receiving much of the spending support shown below? Then here's your charitable donation for the decade:

Chart

(See Econompic for more, chart uses BEA and Federal Reserve Data)



EU BANKING CRISIS

 

ECB set for rethink on bond purchases   FT

 

 

BOND BUBBLEBOND BUBBLE

 

Betting on hard times for the U.S. CTV
The idea of the U.S. facing serious solvency worries may seem far-fetched...But there are people out there who think Treasuries don’t deserve their status as the ultimate risk-free investment.

 

Household Misery Index Shows We're Leveling Off Near An All Time High  BI

The household misery index is leveling off. Unfortunately, that leveling is somewhere just beneath the all time high experienced in December of 1982.

Formerly, the misery index was calculated by adding the rate of inflation to that of unemployment. The blog Paper Economy says that that no longer explains reality, considering CPI's inability to factor in the real rising costs households are experiencing.

Instead, Paper Economy includes these factors:

  • The U-3 unemployment rate
  • YOY percent change of the 10-Year moving average of total nonfarm payrolls
  • YOY percent change of the 10-Year moving average of “real” personal income
  • YOY percent change of the 10-year moving average of “real” S&P 500

The blue line, representing the household misery index, shows our leveling off, from Paper Economy:

Household Misery 79

 

 

ECRI INDEX HITS A NEW LOW   BI

The ECRI’s leading index continues to hit new lows this week despite the equity market rally (via Reuters):

“A measure of future U.S. economic growth fell to the lowest since July 2009, indicating that the economy will continue to slow, a research group saiD on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 121.5 for the week ended July 2, down from 122.3 in the prior week.  That was the lowest level since July 24, 2009 when it stood at 120.3. The index’s annualized growth rate fell to -8.3 percent after a -7.6 percent growth rate a week earlier.”

ECRI1 ECRI INDEX HITS A NEW LOW

 

 

STATE & LOCAL GOVERNMENT


California to workers: It's minimum wage for you CNN

States Shift to Hybrid Pensions   WSJ

Illinois Readies Debt Sale Amid Fiscal Woes   WSJ
Illinois is expected to sell $900 million in taxable municipal bonds in the coming week, just days after its comptroller said the state finished its fiscal year on June 30 in the worst cash position in its nearly 200-year history.

CENTRAL & EASTERN EUROPE

 

 

HUNGARYY

 

BANKING CRISIS III

 

ITS STILL NEGATIVE!!

 

Media would say, in describing this chart: "Things are getting better"

But when it is NEGATIVE it should be described: "Things are getting worse at a slower rate"

The difference begs the question: " How long can it go on before another crisis is triggered?"

 

 

THE STRATEGIC THINKING BEHIND

"EXTEND & PRETEND"

 

 

 

DODD FRANK ACT

 

RATING AGENCIESRATING AGENCIES

 

RISK REVERSAL

 

Euro pares gains as risk rally slows   FT

 

 

COMMERCIAL REAL ESTATE

 

 

 

RRESIDENTIAL REAL ESTATE - PHASE II

 

Jumbo Mortgage Rates Plunge  WSJ

 

EXPIRATION FINANCIAL CRISIS PROGRAM

 

 

PENSION & ENTITLEMENTS CRISIS



CHRONIC UNEMPLOYMENT

 


GOVERNMENT BACKSTOP INSURANCE

 

 

CORPORATE BANKRUPTCIES

 

BBP - British Petroleum

 


BP pins hopes on new cap for well  FT
BP chief puts on brave face in e-mail to staff   FT
No relief for BP  FT
BP – the inside story   FT
 
BP Shares Slump Despite Hope Of Ending The Leak Monday  BI
Wait, Was The Stock Market's Fall Simply A Reaction To The Oil Spill  BI

Just curious: was the swoon in the stock market just a function of the oil spill?  Note that the peak came just after the April 20th oil spill. And considering that it took several days for people to catch on that this was A BIG DEAL, would make sense.  And now the market is rebounding, and there are reports that on Monday the well could be capped.  What, you thought this fall had something to do with double-dip fears?

chart, market oil spill, march-july 2010



 

OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE

 

  

FLASH CRASH - HFT - DARK POOLS

 

MARKET WARNINGS

Big inflows into money market funds  FT

Investors worry about risk of another slide in share prices

Get Ready for a Cataclysmic Market Crash! (Or Maybe Not)  WSJ

 

OMG, The Death Cross Is Broken  BI

Debating the merits of technical traders' 'death cross' seems about as dangerous as debating the merits of gold right now, especially since the S&P500 just formed a feared death cross, as shown to the right.

As a quick background, a 'death cross' happens when a chart's 50-day moving average drops below the 200-day moving average.

Many consider it a reason to be bearish right now towards U.S. equities, with even CNBC picking up the story.

Chart

 

Even Lab Rats Have Become Habituated To Expect The Last 15 Minute Meltup On No Volume  ZH

No volume melt ups have become the norm under the Bernanke regime - everyone is forced to expect the most ridiculous, manipulated excreta possible from the primary dealers. When people realize, soon enough, that the fair value of their 401k are about 95% lower, maybe, just maybe, something will change about this broken record. Until then, just bet on the chopper - Benny will make it all good until everything ultimately blows up.

 

GOLD MANIPULATION

$600 Sale? Get Ready for Tax Form Numismatic News

 

VIDEO TO WATCH

 

George Carlin -"Who Really Controls America"

 

INTERESTING ARTICLES - GENERAL

Presenting The Wall Of Worry- The 50 Ugliest Facts About The US Economy  ZH

As we close on another week replete with ugly economic data and the usual bizarro counterintuitive market, here is a summary of the 50 most underreported facts about the state of the US economy, courtesy of the Coto report. After reading these it almost makes sense that the market has become completely desensitized to the sad reality now pervasive in this country. Readers are encouraged to add their own observations to this list. Surely if the list is doubled, the market will go up to 72,000 instead of just 36,000.

#50) In 2010 the U.S. government is projected to issue almost as much new debt as the rest of the governments of the world combined.

#49) It is being projected that the U.S. government will have a budget deficit of approximately 1.6 trillion dollars in 2010.

#48) If you went out and spent one dollar every single second, it would take you more than 31,000 years to spend a trillion dollars.

#47) In fact, if you spent one million dollars every single day since the birth of Christ, you still would not have spent one trillion dollars by now.

#46) Total U.S. government debt is now up to 90 percent of gross domestic product.

#45) Total credit market debt in the United States, including government, corporate and personal debt, has reached 360 percent of GDP.

#44) U.S. corporate income tax receipts were down 55% (to $138 billion) for the year ending September 30th, 2009.

#43) There are now 8 counties in the state of California that have unemployment rates of over 20 percent.

#42) In the area around Sacramento, California there is one closed business for every six that are still open.

#41) In February, there were 5.5 unemployed Americans for every job opening.

#40) According to a Pew Research Center study, approximately 37% of all Americans between the ages of 18 and 29 have either been unemployed or underemployed at some point during the recession.

#39) More than 40% of those employed in the United States are now working in low-wage service jobs.

#38) According to one new survey, 24% of American workers say that they have postponed their planned retirement age in the past year.

#37) Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32 percent increase over 2008.  Not only that, more Americans filed for bankruptcy in March 2010 than during any month since U.S. bankruptcy law was tightened in October 2005.

#36) Mortgage purchase applications in the United States are down nearly 40 percent from a month ago to their lowest level since April of 1997.

#35) RealtyTrac has announced that foreclosure filings in the U.S. established an all time record for the second consecutive year in 2009.

#34) According to RealtyTrac, foreclosure filings were reported on 367,056 properties in March 2010, an increase of nearly 19 percent from February, an increase of nearly 8 percent from March 2009 and the highest monthly total since RealtyTrac began issuing its report in January 2005.

#33) In Pinellas and Pasco counties, which include St. Petersburg, Florida and the suburbs to the north, there are 34,000 open foreclosure cases.  Ten years ago, there were only about 4,000.

#32) In California’s Central Valley, 1 out of every 16 homes is in some phase of foreclosure.

#31) The Mortgage Bankers Association recently announced that more than 10 percent of all U.S. homeowners with a mortgage had missed at least one payment during the January to March time period.  That was a record high and up from 9.1 percent a year ago.

#30) U.S. banks repossessed nearly 258,000 homes nationwide in the first quarter of 2010, a 35 percent jump from the first quarter of 2009.

#29) For the first time in U.S. history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together.

#28) More than 24% of all homes with mortgages in the United States were underwater as of the end of 2009.

#27) U.S. commercial property values are down approximately 40 percent since 2007 and currently 18 percent of all office space in the United States is sitting vacant.

#26) Defaults on apartment building mortgages held by U.S. banks climbed to a record 4.6 percent in the first quarter of 2010.  That was almost twice the level of a year earlier.

#25) In 2009, U.S. banks posted their sharpest decline in private lending since 1942.

#24) New York state has delayed paying bills totalling $2.5 billion as a short-term way of staying solvent but officials are warning that its cash crunch could soon get even worse.

#23) To make up for a projected 2010 budget shortfall of $280 million, Detroit issued $250 million of 20-year municipal notes in March. The bond issuance followed on the heels of a warning from Detroit officials that if its financial state didn’t improve, it could be forced to declare bankruptcy.

#22) The National League of Cities says that municipal governments will probably come up between $56 billion and $83 billion short between now and 2012.

#21) Half a dozen cash-poor U.S. states have announced that they are delaying their tax refund checks.

#20) Two university professors recently calculated that the combined unfunded pension liability for all 50 U.S. states is 3.2 trillion dollars

#19) According to EconomicPolicyJournal.com, 32 U.S. states have already run out of funds to make unemployment benefit payments and so the federal government has been supplying these states with funds so that they can make their  payments to the unemployed.

#18) This most recession has erased 8 million private sector jobs in the United States.

#17) Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of 2010.

#16) U.S. government-provided benefits (including Social Security, unemployment insurance, food stamps and other programs) rose to a record high during the first three months of 2010.

#15) 39.68 million Americans are now on food stamps, which represents a new all-time record.  But things look like they are going to get even worse.  The U.S. Department of Agriculture is forecasting that enrollment in the food stamp program will exceed 43 million Americans in 2011.

#14) Phoenix, Arizona features an astounding annual car theft rate of 57,000 vehicles and has become the new “Car Theft Capital of the World”.

#13) U.S. law enforcement authorities claim that there are now over 1 million members of criminal gangs inside the country. These 1 million gang members are responsible for up to 80% of the crimes committed in the United States each year.

#12) The U.S. health care system was already facing a shortage of approximately 150,000 doctors in the next decade or so, but thanks to the health care “reform” bill passed by Congress, that number could swell by several hundred thousand more.

#11) According to an analysis by the Congressional Joint Committee on Taxation the health care “reform” bill will generate $409.2 billion in additional taxes on the American people by 2019.

#10) The Dow Jones Industrial Average just experienced the worst May it has seen since 1940.

#9) In 1950, the ratio of the average executive’s paycheck to the average worker’s paycheck was about 30 to 1.  Since the year 2000, that ratio has exploded to between 300 to 500 to one.

#8) Approximately 40% of all retail spending currently comes from the 20% of American households that have the highest incomes.

#7) According to economists Thomas Piketty and Emmanuel Saez, two-thirds of income increases in the U.S. between 2002 and 2007 went to the wealthiest 1% of all Americans.

#6) The bottom 40 percent of income earners in the United States now collectively own less than 1 percent of the nation’s wealth.

#5) If you only make the minimum payment each and every time, a $6,000 credit card bill can end up costing you over $30,000 (depending on the interest rate).

#4) According to a new report based on U.S. Census Bureau data, only 26 percent of American teens between the ages of 16 and 19 had jobs in late 2009 which represents a record low since statistics began to be kept back in 1948.

#3) According to a National Foundation for Credit Counseling survey, only 58% of those in “Generation Y” pay their monthly bills on time.

#2) During the first quarter of 2010, the total number of loans that are at least three months past due in the United States increased for the 16th consecutive quarter.

#1) According to the Tax Foundation’s Microsimulation Model, to erase the 2010 U.S. budget deficit, the U.S. Congress would have to multiply each tax rate by 2.4.  Thus, the 10 percent rate would be 24 percent, the 15 percent rate would be 36 percent, and the 35 percent rate would have to be 85 percent.

 

 

QUOTE OF THE WEEKQUOTE OF THE WEEK

Rick Santelli Uncut (And GE Turbofan Commercial Free)  Zero Hedge

Having rapidly become the only person worth listening to on CNBC, Rick Santelli's insights on the economy are now far more valuable than any other guest's on the Jeff Immelt propaganda station. Which is why we were very happy to find that Eric King's latest interview was with none other than Mr. Santelli. The topics discussed are numerous, varied and and very critical to our economy, covering such concepts as deflation, deficit spending, bailouts, government spending multipliers, Fed transparency, spending cuts, austerity, the folly of Keynesianism, strategic defaults, direct bidders and treasury auctions, and lastly, tea party dynamics, making this a must hear interview for anyone still on either side of the economic fence, and who enjoys listening to Rick for longer than the 45 second segments the CNBC producers will allow.

  • Deflation: "deflation is the most disingenuous argument especially in the current conditions. [When the bubble process ends prices have to come down to reality] the process really is deleveraging, but what happens when prices go down you get the economists call it deflation. Deflation is always the biggest bogeyman in a central banker's closet. It also allows them to use the only tool in their toolbox, which is to spend money, and usually money they haven't collected yet, so it's usually a deficit form of spending. Think about what economists are trying to do: we go up too high in leverage, prices are too high, we try to correct that process, it's called deflation, and they try to put money in to prop it up at an artificial price-deleveraging is the word we should stick to"
  • Deficit spending: "the only thing that works is across the board tax cuts because it fuels the type of small business that does the bulk of the hiring"
  • Bailouts: "the only regulation that will ever work is failure. If you don't allow failure what you end up with is regulators trying to serve when it's time to take punch bowls away. Regulators never go against the grain. Back in 03-04 many in the fixed income markets saw it coming but nobody wants to pull that punch bowl away. Businesses should fail, that's the way the system was designed"
  • The Multiplier of Government spending: "Larry Summers on many occasions has said that the multiplier of government spending is greater than 1. If that was true, we'd never have another recession ever again, and I would be advocating to spend a trillion dollars every hour. It would be like a perpetual motion machine and all physicists know those are impossible. Every dollar the government spends comes from somebody's pocket"
  • Fed Transparency: "It seems to me we are making some progress on the financial audit. I absolutely agree that on all of the issues that take taxpayers' money and end up being distributed or put on the balance sheet and in any way used by the Fed, there should be an audit that should be fully transparent. I am worried about the financial accounting"
  • On Spending Cuts: "Listeners, this is going to be the most important thing I am going to say: we need to maintain the focus on spending, the politicians in my lifetime always spend. If we end up spending way more than we can take in, in essence the deficit panel becomes a tax panel. We must stop spending before we talk about VAT taxes or taxing Americans more, we need to get spending under control. The retings of congress are the lowest they have been in history." 
  • On Austerity: "Nobody wants that. But there is a silver lining - the UK have conditions in their economy worse than the US, but they came up with an austerity plan, and we see that their currency has been rewarded. The GBP has risen about 10% in a very short period of time."
  • On Keynesianism: "The Keynesians are both right and wrong. I don't think Keynes advocated the kind of helicopter-Ben spending  that many say he promoted. He promoted the kind of stimulus that created jobs, that's more the medicine for a cyclical downturn, we have a structural issue because of the bubble credit scenario."
  • On the ECB's Debt Monetization: "I think that the ECB has a huge issue and they are behind the ball. They don't have a constitution in the eurozone, they have cultural and monetary cultural issues to deal with. I think that buying securities or monetizing or QE is always a bad idea. Once there is a subsidy in the marketplace, it becomes the normal pricing mechanism. For the Fed or the ECB to unload these securities, becomes a destabilizing force and in the long run does more harm than good."
  • On Strategic Defaults: "I have feelings on this that go both ways. I think morally I would have an issue doing that, but people who did the mortgage, or the second mortgage, or took a HELOC to pay for cars, pay for the vacations, I think it is reprehensible that we end up reshuffling wealth to pay some of that off. But I think the dynamic is from the government side - I think contracts between banks and homeowners - if it's unsecured, it's unsecured, I don't have an issue with that."
  • On Direct Bidders being a proxy for the Fed (a much debated topic on Zero Hedge) and Treasury Auctions in general: "That's the best question anyone has asked me in a long time. I think there is a recycling quid pro quo going on: the Fed is making banking obsolete because a lot of the programs that they have is to take the cheap end of the curve and invest it in Treasuries. Well the Treasury needs as many buyers as it can get. I think the financial institutions are recycling easy money that should be going into John Q Public's pocket, to those that deserve credit, all this money is ending up in the forms of purchases of 10, 7, and 5-Year Notes, and I don't like that way that's working. That's why I think that raising rates would be a good thing. Why? Because it would take some of the easy ways the banks recycle the Fed's cheap money and put it back in the hands of the public and actually make banking a relationship between banks and Americans that need it whether it is for funding a mortgage or funding a small business."
  • And on Tea Party dynamics: "I think November 2 is going to be a watershed of Americans letting Washington know they're the boss."


ZH - Zero Hedge - Business Insider, WSJ - Wall Street Journal, BL - Bloomberg, FT - Financial Times

 

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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

 

© Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.

 

         

TODAY'S NEWS

WEEKEND

07-10/11-10

JULY
S M T W T F S
        1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18
19 20 21 22 23 24
25 26 27 28 29 30 31

ARCHIVAL

SOVEREIGN DEBT PIIGS

EU BANKING CRISIS
BOND BUBBLE

STATE & LOCAL GOVERNMENT

CENTRAL & EASTERN EUROPE
BANKING CRISIS II
RISK REVERSAL

COMMERCIAL REAL ESTATE

CREDIT CONTRACTION II

RESIDENTIAL REAL ESTATE - PHASE II
EXPIRATION FINANCIAL CRISIS PROGRAM
US FISCAL IMBALANCES
PENSION CRISIS
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