Eclipsing the rather disappointing retail sales data for Black Friday was another rerun of “officials worked over the weekend to reach agreement before the markets opened on Monday.” This weekend officials agreed to plunder the Irish pension funds as well as an assortment of other taxpayer monies in order to avoid any hint of trouble for the senior bondholders of the Irish banks. Of course, these said bondholders are just more banks, only not Irish.

This is political and financial theater. Market reaction was, to say the least, muted. Perhaps people have seen this show too many times before and they know how the plot comes out.

What I want for Christmas is for someone to start dealing with these problems, not just kicking the can down the road. Perhaps markets will want the same thing.

Every year we are subjected to breathless descriptions and photos of shopping lines, parking lots and eager shoppers as yet another orgy of consumption is ballyhooed. Each year, this overstated and over-rated bout of retail therapy is claimed to be saving the U.S. economy from – well, who knows what. The strength of the U.S. economy is founded, it is said, on the determination of the U.S. consumer to snap up gewgaws of every ilk, ignoring all damage to their credit scores and other painful future consequences. That willingness to consume through thick and thin, says CNBC and the rest of the mainstream media, is what makes the U.S. an economic powerhouse. And of course the annual demonstration of that true grit makes it – guess what – a good time to buy stocks (and houses and cars and, well, you know the rest).

What crap. No amount of propaganda can change the brutal reality that 1+1=2. Or in this case, income=savings+consumption. This week, we have seen a sequence of European countries become re-acquainted with that brutal reality. Earlier this year, it was the Greeks. Last week it started with the Irish and then moved on to the Portuguese and Spanish. Like the U.S., these countries have been running at a negative savings rate (on an economy-wide basis, including government deficits) for many years. They have enjoyed both relatively. low taxes and a big-government welfare state, courtesy of steadily increasing private and government debts. This doesn’t work. Sure, you can have a lot of government, but it is only sustainable if you tax accordingly as the Scandinavians do. People are only willing to pay confiscatory taxes and keep working if they trust that their tax money is being well spent. That consensus of trust depends on a high degree of social cohesion which most countries have long since lost.

In a fractional reserve system, when debt isn’t paid it is the banks who created the credit money that end up with the losses. But their retained capital is totally insufficient to absorb the losses, and so they must be bailed out by the government (or governments). The government really has little choice, because otherwise the financial system will break down. (Which doesn’t mean the government should let the bankers pillage the bailout for mega-bonus payouts, but that’s another story). The cost of the bailout then falls on the tax receivers as well as the tax payers, because the government will have little choice but to cut other expenditures as well as raise taxes. This, in itself, will drive consumption down. But in addition, credit availability will inevitably tighten and people will have to save for their future needs, rather than borrow today and repay (or not) tomorrow. The good news is that this will act to increase savings and thence the investment that is needed to re-establish a functioning economy that does not rely on a limitless credit card.

“Germany cannot keep paying for bail-outs without going bankrupt itself,” said Professor Wilhelm Hankel, of Frankfurt University. “This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings.”

The refrain was picked up this week by German finance minister Wolfgang Schäuble. “We’re not swimming in money, we’re drowning in debts,” he told the Bundestag.

This annual orgy of consumption goes only to show that reality has not yet impinged on the U.S. consciousness, and that politicians continue to willfully deny the reality that they have made commitments that they simply cannot keep.

I saw a piece today berating the bears (like me) for clinging to the belief that the economy is not getting better.

Even after all this, these reflexive Bears refuse to flip. They will not admit the economy is getting better, albeit slowly. They insist the recession was a depression; they insist it never ended. These are the bears who cannot be killed. They will stay bearish, regardless of the data that all but insists otherwise.

Yup, that’s basically me right there. But that’s because “data” is only a piece of the picture. Unfortunately the eponymous blog is missing the big picture. To be specific:

• The debt bubble is still there. Liquidation and default have simply been offset by fresh government borrowing, which is supporting consumption. The problem has been pushed along, but once sovereign credit is used up, there are no more options. As the PIIGS have discovered, to their dismay.
• The banks are not fixed. The problems have been papered over by permitting shady accounting, but again this only defers the problem. Real estate is the big issue, both residential and commercial. The banking system and the shadow banking system are bankrupt if honest accounting is used. In a fractional reserve banking system, that is where the losses from defaults are taken.
• There are still no savings and no investment. Every day the U.S. economy loses competitiveness to economies – such as China’s and India’s – that are investing in skills, infrastructure and technology. The government continues to encourage consumption, which trades smiles (and votes from the simple-minded) today for frowns tomorrow when the bills come in.
• Unemployment remains high and is set to increase further as state and local governments start much-needed staff reductions. At some point in time, hopefully these people can be re-deployed into productive work. Of course, that implies job-creating rather than the current job-destroying policies.
• Yes, GDP is slowly rising. But that simply reflects the impact of unsustainable borrowing (and monetization of same) by the government, funding high spending and, for example, 20% of personal disposable income, together with an inventory build that is probably coming to an end right now.

Yes, the recession is over, technically, if all you care about is the “data.” After all, a recession is simply a pronouncement by the NBER. But the fact is that legions of economists haven’t been able use that “data” to make a useful forecast. One has to take a holistic view, looking, dare I say it, at the big picture. And the big picture is a tectonic shift away from the global economic leadership by the U.S. that resulted from the Second World War. The decline that began in the early 1980s has been offset by massive borrowing to finance consumption. That process is coming to an end, despite desperate attempts by the administration and the Fed to keep it going. Consumption in the U.S. will have to fall by 25% or more. That is a depression. Have a Guinness.

“No matter how cynical you get, it’s impossible to keep up.” — Lily Tomlin

The robo-signer scandals have gone quiet in recent days, but there is trouble brewing. It seems that  failure to properly transfer mortgage notes into securitization trusts may be widespread. The consequence is that the trusts either don’t exist or are void. Professor Adam Levitin discusses.

Last week the US Bankruptcy Court for the District of New Jersey issued an opinion in a case captioned Kemp v. Countrywide Home Loans, Inc. This case looks like the first piece of evidence in what might turn out to be the Securitization Fail or, in homage to Michael Lewis, The Big Fail.

Briefly, Countrywide as servicer filed a proof of claim for a mortgage in a bankruptcy case on behalf of Bank of New York as trustee for a securitization trust. The bankruptcy court denied the claim because there was no evidence that Bank of New York ever owned the mortgage. The mortgage note had never been negotiated or delivered to Bank of New York, despite the requirement to do so in the Pooling and Servicing Agreement (PSA) that governed the securitization of the loan. That meant that Bank of New York as trustee had no interest in the loan, so the proof of claim filed on its behalf was disallowed.

This opinion could turn out to be incredibly important. It provides a critical evidence for the argument that many securitization transactions simply failed to be effective because non-compliance with the terms of the transaction: failure to properly transfer the mortgage meant that the mortgages were never actually securitized.