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The Daily Reckoning Weekend Edition Saturday, June 4, 2010 Taipei, Taiwan Addison dissects the "Little Miss Piggy" jobs numbers from Friday's market meltdown, England's budget butchers still have their work cut out for them, Plus, all the reckonings from the week just gone to accompany your cocktail hour by the pool... Joel Bowman, reporting from Taipei, Taiwan... Public finances are on the chopping block in England, but the butchers are using butter knifes and soup spoons. What's needed is a well sharpened cleaver...and the steely resolve to bring the blade down. Earlier this week, the UK's new coalition government announced the first round of what might fairly be considered rather mild "austerity" measures for one of the world's most indebted nations. Chancellor of the Exchequer George Osborne and the Chief Secretary to the Treasury David Law detailed their plan in the garden of Her Majesty's Treasury on Monday. According to The Wall Street Journal, the cuts "include £120 million from a civil-service recruitment freeze; about £1.15 billion in reductions from discretionary spending items such as consultancy fees and travel costs; and £1.7 billion from stopping projects and renegotiating large government contracts with suppliers. Local governments will be expected to find £1.17 billion in savings." All in, the measures aim at reducing Ol' Blighty's annual deficit by £6.25 billion. Impressive as that might sound, it is a drop in the pail when viewed next to the nations record-breaking £156 billion deficit for the most recent financial year. Expressed as a percentage of GDP (10.4%), the UK's budget deficit is only fractionally "healthier" than those of Greece and Spain (11.2% and 13.6% respectively), both of which recently saw their sovereign credit ratings decapitated by typically late-on-the-scene ratings agencies. To be fair, the early cuts are meant as a "down payment," as Mr. Laws explained, to show government departments that "the years of public- sector plenty" are over. "These are only the first steps we'll need to take in order to put our public finances back in shape," he said. Tough talk is a political prerequisite, of course, but it's tough actions that ultimately count. Alas, such decisive actions are unlikely. In what is seen as a concession to Liberal Democrats, some £500 million of the coalition's proposed savings will be siphoned right back into government welfare programs. Another £700 million in cuts to Scottish, Welsh and Northern Irish authorities aren't due to take effect until 2011, far beyond the use-by date of most political promises. The government also vowed to protect spending on health care, defense and overseas aid budgets, adding that it will not take the knife to public school outlays and various other education programs. It's not difficult to understand why a new government would opt for a "softly softly" approach. Budgetary savings must be weighed against a cost to political capital. A dollar saved is a vote lost, in other words. Or something like that. Of course, the state is never short of academics willing and eager to advise more and more spending, especially during recessionary or fragile economic landscapes. Keynesian interventionalists argue that withdrawing government support during downturns can hinder efforts to build a sustainable recovery. What they routinely forget, or misunderstand, is that state-sponsored "productivity" is not really productivity at all, but rather an opportunity cost to the private sector. A dollar spent hiring a post office clerk or, indeed, any molly-coddled rubber stamper is (at least) a dollar that real businesses can't then put to better, more efficient use elsewhere. Although government spending shows up in the GDP figure as a net positive, it really ought to be tallied as a minus. These agreements aside for the moment, the immediate impediment to slicing too deeply into public sector finances in countries like the UK is that so many citizens have their fingers on the cutting board. Over the past thirteen years - since the Labor government first came to power in 1997 - the number of public sector employees increased in the UK by almost 1 million, with government jobs now accounting for more than one-fifth of the total workforce. Public sector wages are also rising at almost three times the pace as in the private sector and, last year, average compensation for state workers actually eclipsed that of their private sector counterparts. And that's just the beginning. Public sector workers enjoy a bevy of additional financial and lifestyle advantages. On average, they retire 7 years earlier than those in the private sector, work fewer hours (35 per week), take three to four more paid days off annually and receive employer pension contributions worth 19.4% of their wages, more than three times the 6% average contributions afforded in the private workplace. And yet, despite these comparative advantages (or perhaps because of them) productivity in the UK's public sector actually fell by 3.4% in the 10 years from 1997 - compared with an increase of 28% in the private sector over the same period. Unfortunately for those seeking to push through spending cuts, it's virtually impossible to get rid of a public employee once you've got one on the books. In the two years following the collapse of Northern Rock (seen by some as Britain's "Lehman Bros. moment") in late 2007, the state increased its workforce by some 300,000 members. The private sector, by contrast, took the axe to almost a million jobs last year alone. Nevertheless, The Institute of Fiscal Studies, a British economic research institute, estimates government departments vulnerable to cutbacks will face reductions of 8.4% during the coming financial year. Our guess is that's not going to go over well. As we've seen in Greece and, more recently, in Spain, workers without fingers have a tendency to march in the streets, burn buildings and cause social unrest. Indeed, before the recent election, Bank of England governor Mervyn King is said to have warned that any party seeking to enact ambitious spending cuts would face a public outrage so severe it would see them ousted from power for an entire generation. Like their counterparts in neighboring, faltering Club Med economies, England's would-be budget butchers have some tough choices to make in the coming months. Today the cleaver...tomorrow the guillotine. ALSO THIS WEEK in The Daily Reckoning... Good News for the Grandchildren By David Einhorn [Excerpted from his presentation to the Ira Sohn Investment Research Conference on May 26, 2010] I have titled today's talk Good News for the Grandchildren. By that, I mean that I do not believe that there is a need to worry that today's debts will be passed on to our current youth...I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation - not our grandchildren's - will have to deal with the consequences. If we do one thing, let's stop bemoaning the fate of our grandchildren on this topic. We might take the issue more seriously if we realize that our own future is at risk. Good News for Your Grandchildren, Part II By David Einhorn [Excerpted from his presentation to the Ira Sohn Investment Research Conference on May 26, 2010] We should have learned by now that every credit - no matter how unthinkable its failure would be - has risk and requires capital. Just as trivial capital charges encouraged lenders and borrowers to overdo it with AAA rated CDOs, the same flawed structure in the government debt market encourages and therefore practically ensures a repeat of this behavior - leading to an even larger crisis. (Greenlight continues to hold short positions in the common stock of the rating agencies, Moody's and McGraw Hill [owners of S&P]). Spain's Dropout Generation By Jaime Levy Moreno Madrid, Spain In the last two decades in Mediterranean Europe, and especially in Spain, a new social group has emerged, called jovenes (youngsters). Members of this group exhibit several specific characteristics. First, jovenes are usually male, aged 25-35, although some members are in their 40s. Second, they are in a perpetual state between graduation and their first job. Third, they usually live with their parents to save money, allowing them to go out at least three times a week. Fourth, they occasionally work a part-time job - if only due to the pressure imposed by their parents. Last, and most important, they receive unemployment benefit credits and renew their membership on the "unemployment list" from time to time, so that the state subsidies don't run out during their "temporary" hibernation. Honohan, meet Havenstain By Bill Bonner Baltimore, Maryland One of the most puzzling questions from history is why smart people do such moronic things. Bonaparte was warned; it seemed obvious to anyone who knew the lay of the land that the Russian campaign was foolhardy. In WWI, both sides should have called it quits by 1917. And what was Rudolf von Havenstain thinking? The president of the Reichsbank printed up billion-mark notes; surely he must have known they would cause trouble. ------------------------------------------------------- The Weekly Endnote: "You'd think the spinmeisters at the Bureau of (much be)Labor(ed) Statistics (BLS) could do a better job of putting lipstick on a pig than this," mused Addison Wiggin, in yesterday's issue of The 5-Minute Forecast. Your Asia-based managing editor was already mixing his second (or maybe third) nightcap by the time the tarted-up job figures hit the wires. Fortunately for us, Addison was on the case back in the Baltimore H.Q.: "At first glance, she looks well coifed and attractive. But when you lift the blouse a bit, there's only one word that comes to mind - ugly. Miss Piggy ugly. Let's examine the rolls on her belly... 431,000 jobs added in May. Good start... except all but 20,000 of those added were Census jobs State and local governments cut 22,000 jobs last month. The private sector added a 41,000, compared with 218,000 newly employed in April. This number is lower than ADP's estimate of 55,000 issued yesterday. (Usually, the ADP figure is lower. So the revisions on these numbers next month are not likely to improve "the jobs picture" On the BLS site, U-3 unemployment rate fell from 9.9% to 9.7%. The U- 6 "underemployment" rate is down to 16.6%. Good news? Hardly. The numbers fell because 322,000 people dropped out of the labor force, reversing a trend that had been in place most of this year. "Next month," continued Mr. Wiggin, "the 'Census halo' comes off as the bureau starts letting go all those temporary workers. At least, that's how it played out in 2000 and 1990. Maybe this year, they'll get rolled into ditch work under the Orwellian-titled American Recovery and Reinvestment Act." If the poorly massaged government numbers shock you, you clearly haven't been taking advantage of Addison's brand new Apogee research service. In it, Addison seeks to "bridge the nexus between Washington and Wall Street," boiling down what's really going on out there so you can make more informed investment decisions. That means, for instance, taking the BS out of the BLS. Fellow reckoners can still grab a free Apogee subscription while it's in the "beta-test" phase. So why not download some gratis reading material to peruse over the weekend? All you've got to lose is the politico-doublespeak of the mainstream neckties...but hey, you can just turn on the television for that. Well, that's about it from us for another week. We'll be back with our usual musings on Monday. Until then, enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com   The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.

AGORA Financial Resources: The Daily Reckoning Is: Economics & Politics Crisis & Opportunity Gold, Oil & Energy Growth, Tech & Medical Options Investing Founder: Bill Bonner Editorial Dir: Addison Wiggin Publisher: Eric Fry Managing Ed.: Joel Bowman Web Ed.: Greg Kadajski About The Daily Reckoning: Now in its 10th anniversary year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. For additional articles and commentary follow The Daily Reckoning on Twitter and Facebook.