Mish's Global Economic Trend Analysis

Scranton Mayor Slashes All Public Worker Wages to $7.25 per Hour, Including Police, Fire, His Own; City Effectively Bankrupt
Negative Yields In France For First Time, Record Negative Rates in Germany; 10-Year Yield Back Above 7% in Spain, Above 6% in Italy
Global Collapse In Auto Sales Coming Up

Scranton Mayor Slashes All Public Worker Wages to $7.25 per Hour, Including Police, Fire, His Own; City Effectively Bankrupt

Posted: 09 Jul 2012 03:23 PM PDT

Scranton, Pennsylvania's, the state's sixth-most-populous city (population of 76,089 in 2010 census), is down to its last $5,000 and has no way to pay salaries.

The mayor wants an immediate tax hike of 29% and 78% over three years. In every sense of the word, Scranton is bankrupt.

NPR reports Scranton's Public Workers Now Paid Minimum Wage.

The city of Scranton, Pa., sent out paychecks to its employees Friday, like it does every two weeks. But this time the checks were much smaller than usual. Mayor Chris Doherty has reduced everyone's pay — including his own — to the state's minimum wage: $7.25 an hour.

Doherty says his city has run out of money.

Doherty wants to raise taxes to fill a $16.8-million gap. The city council wants to take a different approach and borrow money. City council members did not respond to NPR's requests to discuss the dispute.

After paying workers Friday, the city had only about $5,000 left in the bank. More money flowed into city accounts that day, but it was still not enough to pay the $1 million the city still owes to its nearly 400 employees.

The firefighters' union, along with the police and public works unions, have taken the city to court. Lackawanna County Judge Michael Barrasse issued an injunction, essentially agreeing with the unions that the city was breaking the law, but Doherty says he doesn't have another choice. Despite the injunction, he had the city send out paychecks based on minimum wage.

The unions plan to be back in court first thing Monday morning to ask the judge to hold Doherty in contempt.

There's been no love lost between Doherty and the public employee unions because of this battle; they've already spent the past decade in a legal dispute over pay that went all the way to the state supreme court. Both sides come to this latest battle with plenty of baggage and hard feelings. But with nearly 400 city workers receiving a fraction of the pay they typically get, pressure is building to resolve the issue soon.

Scranton Mayor Slashes City Workers' Pay

Filling in a few more details, IBT reports Scranton Mayor Slashes City Workers' Pay To Minimum Wage

Doherty wants to raise taxes by 29 percent immediately and by as much as 78 percent over the next three years, while the council wants the city to borrow money. The Scranton Times-Tribune reported there's no way for the city to take out a loan because it is unable to show it is capable of paying it back.

"I'm trying to do the best I can with the limited amount of funds that I have," Doherty told NPR. "I want the employees to get paid. Our people work hard -- our police and fire -- I just don't have enough money, and I can't print it in the basement."

Since the political firestorm erupted, Scranton Police Chief Dan Duffy has stepped down from his position, although he claimed his decision has nothing to do with the financial mess the city finds itself in, according to the Times Leader.

The unions see the mayor's pay slash as a bullying technique designed to force the city council to adopt his tax increases.

City Effectively Bankrupt

It should be perfectly obvious to every soul on the planet that Scranton is bankrupt. Tax hikes are not the answer. The solution is filing bankruptcy with the hope of killing public union wages and benefits.

However, inane rules in Pennsylvania prohibit cities from filing bankruptcy without state approval.

On October 12, 2011 I reported Pennsylvania State Capital Files for Bankruptcy

Unfortunately, City of Harrisburg chapter 9 bankruptcy dismissed

The US Bankruptcy Court for the Middle District of Pennsylvania has dismissed the bankruptcy petition filed on behalf of the City of Harrisburg, Pennsylvania, finding that the city failed to meet eligibility requirements under the Bankruptcy Code to be a chapter 9 debtor.

The dismissal of Harrisburg's petition, in November 2011, highlights the US constitutional considerations in municipal bankruptcy cases and the Bankruptcy Code's strict requirement for a municipality to have express state authorization to become a chapter 9 debtor.

Inept city management, with public union wages and benefits at the heart of it, killed Scranton.

The city is bankrupt. Period. Will the state once again deny the obvious?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Negative Yields In France For First Time, Record Negative Rates in Germany; 10-Year Yield Back Above 7% in Spain, Above 6% in Italy

Posted: 09 Jul 2012 10:52 AM PDT

Add France to the list of eurozone countries with negative short-term interest rates. The Wall Street Journal reports France Joins Germany to Sell T-Bills At Negative Yield

France joined a handful of euro-zone countries Monday in selling short-term debt at negative interest rates as investors seek alternatives to expensive German and Dutch debt.

The negative yield at Monday's German auction, the lowest on record in this maturity segment, means that investors effectively pay the German state for the privilege of holding its debt.

The Dutch State Treasury Agency had already sold Treasury Certificates, or short-term debt, at negative yields. Now the French government is doing so as well.

Select Yields From WSJ

Germany: Germany sold 3.290 billion euros of six-month Treasury bills, known as Bubills, at an average yield of -0.0344%. The record lows was previously -0.0122% seen at an auction Jan. 9.
France: France sold EUR 3.917 billion of 13-week Treasury bills at an average yield of -0.005%, down from 0.048% a week ago, and it sold EUR 1.993 billion of 24-week Treasury bills at an average yield of -0.006%, down from 0.096% last week.

Supposedly, French yields of -.005% are a veritable "bargain" compared to German yields at -.0344%

Unforeseen Consequences

The Journal notes "Several large money-market funds restricted or closed their European funds to new investments after the ECB cut the deposit rate to zero, as they have struggled to provide returns to investors. This emphasizes the unforeseen effects of the extreme monetary policy actions that are currently being carried out by the ECB," said Rabobank's fixed-income strategists.

Unforeseen or Ignored?

It should be easy to foresee such effects.

In the US, the seen effects are the impacts of low rates for those on fixed income. In addition, record low rates makes it impossible for pension plans to meet their over-optimistic goals of 8% annualized returns when interest rates are near zero.

Bernanke has to understand these things. If so, he simply chooses to ignore them for the benefit of banks over everyone else. What he fails to understand is he is doing no one any favors!

10-Year Yield Back Above 7% in Spain, Above 6% in Italy

As short-term yields plunge in Germany, France, and the Netherlands, long-term yields are soaring elsewhere in Europe.

Yield on 10-Year Spanish Government Bond closed at 7.062%

Yield on 10-Year Italian Government Bond closed at 6.015%

As I have repeatedly said, nothing has been solved. It took less than a week this time for yields to head back North.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Global Collapse In Auto Sales Coming Up

Posted: 09 Jul 2012 09:26 AM PDT

In response to my post Plunging New Orders Suggest Global Recession Has Arrived I received a couple of interesting emails from readers, one from the US, the other from an employee of the world's largest automotive parts manufacturer.

Small US Distributor Responds

Dear Mish,

I am a small distributor and sell mostly to online stores. In the past 3 weeks, our business has dropped off a cliff.

Our retail store that usually has 5 orders a day, has had 1 in the past week. I also have a customer with an Amazon store and he has gone from 10 orders a day to a total of 1 order all this week.

Moreover, I have spoken with a number of other distributors and they are all begging for business. There is a dead silence in the buyers right now.

Something is definitely happening and it isn't good. The numbers are not showing the real depth of this. I think we may see them fall off hard in the next 90 days.

Tom

Employee of German Manufacturer Robert Bosch Responds

Hi Mish,

Love your blog. I've written before.

I work for Robert Bosch in Germany. We make diesel injectors for common rail systems (truck and passenger car).

Our sales forecasts are again down and there is a huge crunch now to save money to try to squeeze out a profit at the end of the year. Sales are down 10% to business plan so they are looking for every dime right now.

The retiring CEO (Ferhnback...a good man) wishes for a "black 0" at the end of the year. However, I doubt that will happen.

Numerous older people have been given incentives to leave the company before official retirement age.

There are numerous closure days still planned. I would guess we can expect more.

So what you are seeing in the PMI is reality. I do not see or hear similar hints in the rest of the German economy yet......

Regards,

Name Withheld by Mish

Notes About Bosch

Wikipedia has these details about Robert Bosch.

Robert Bosch GmbH (commonly known as Bosch) is a German multinational engineering and electronics company headquartered in Gerlingen, near Stuttgart. It is the world's largest supplier of automotive components.

Bosch's core products are automotive components (including brakes, controls, electrical drives, electronics, fuel systems, generators, starter motors and steering systems), industrial products (including drives and controls, packaging technology and solar panels) and consumer goods and building products (including household appliances, power tools, security systems and thermotechnology).

Bosch has more than 350 subsidiaries across over 60 countries and its products are sold in around 150 countries. Bosch employs around 303,000 people and had revenues of approximately €51.4 billion in 2011. In 2010 it invested around €3.8 billion in research and development and applied for over 3,800 patents worldwide. In 2009 Bosch was the leader in terms of numbers of patents at the German Patent and Trade Mark Office (GPTO) with 3,213 patents.

Global Auto Sales Collapse On The Way

Anecdotes are personal by definition, and thus cannot tell the full story.

However, anecdotal evidence is in sync with a collapse in new manufacturing orders globally as noted in Plunging New Orders Suggest Global Recession Has Arrived (same as link at top, repeated for convenience).

For more details on the US specifically, please see US Manufacturing ISM Contracts for First Time in Three Years; New Orders and Prices Plunge; Perfect Miss: 0 of 70 Economists Polled By Bloomberg Expected Contraction

Given the nature of Bosh's business, the reported slowdown in that business, and a plunging collapse in new manufacturing orders virtually everywhere, a collapse in global automobile sales is coming.

Perhaps there is one more channel-stuffing rise in sales coming up in the US (sales are reported when cars are delivered to dealers, not when consumers buy them), but if so, it will be the last big hurrah.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

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