Wednesday, November 4, 2009

Socialism takes a baseball bat to the head

Obama Election Defeat Termed 'Astonishing'

The Obama freight train that has been steamrolling American politics ever since his election one year ago ran squarely into a political brick wall Tuesday night, as Democrats suffered stunning setbacks in the Virginia and New Jersey gubernatorial races.
The big surprise: New Jersey, a blue state where Obama invested significant political capital by pulling out all the stops to try to put incumbent Democratic Gov. Jon Corzine over the top.
The president personally campaigned for Corzine three times, taped "robocalls," and sent his vice president to make two more appearances.

Yet despite the president and vice president repeatedly putting their personal prestige on the line, and despite a $10 million Corzine advertising advantage, the incumbent was unable to turn back the wave of dissatisfaction with the economy and high property taxes.
"There is a reason Obama went in over and over in Virginia and New Jersey," Wall Street Journal columnist and author John Fund told Newsmax. "He was worried what this would do to spook blue dog Democrats on healthcare . . . he was right to be worried."
GOP strategist Roger Stone told Newsmax, "The bloom is off the Obama rose."
Even Democratic strategist James Carville said the results show the GOP is “all gassed up” and suggested that the Republican sweep may undermine Obama’s legislative agenda, including his healthcare reform plans.
Fox News contributor and author Dick Morris describes the New Jersey result as "astonishing in a core Democratic state."
"It shows the apathy of the Democratic base, the erosion of the Democratic base, and the intensity of the Republican electorate," he told Newsmax.
With nearly all votes recorded, GOP challenger Chris Christie, 47, a former corruption-busting attorney general, becomes the first Republican in a dozen years to seize a statewide office in New Jersey.
Christie was declared the winner with 49 percent of the vote to Corzine's 45 percent. Corzine's defeat marked only the third time in the past 60 years that a governor in the Garden State lost re-election after serving only a single term.
Morris predicted, however, that the GOP sweep in Virginia of the Old Dominion's top three offices — governor, lieutenant governor, and attorney general — will have an even bigger impact on the nation's debate over healthcare and energy cap-and-trade.
In Virginia, Republican Bob McDonnell won the election over Democrat Creigh Deeds by a whopping margin of about 20 points. Obama, who carried both New Jersey and Virginia handily a year ago, had campaigned for Deeds as well.
"That sends a message to the 83 Democratic congressmen, who come from red states that [Sen. John] McCain carried, and the 20-plus Democratic senators who come from those states. And that message is you cannot count on Obama to carry you through. If you vote for a healthcare proposal that people don't like, you are on your own. And if Obama couldn't bail out Corzine in a blue state, and he couldn't bail out Deeds in a borderline red state, he can't bail you out."
That, Morris said, will have a heavy influence on the debate over the Obama administration's big-government legislative programs. The will affect the administration dramatically, he said, adding, "In retrospect this really could be seen as the high water mark of the Obama administration."
The results signal that the entire healthcare package is in trouble, and not just the public-option aspect of it, Morris said.
"Obama until now has not cared what the American people think. His whole approach has been just, 'Trust me, I won the election, and all the rest of you can get lost.' I think after tonight he can't say that anymore."

Monday, October 19, 2009

Monty Python Celebrates 40 Years

A bunch of heroes of mine. I did a college thesis on the comedic antics of the Pythons. Sorrily, when Graham Chapman died, it seemed to take the wind out of their sails. Idle keeps the name alive with some of his projects, but the others seem to have settled down to somewhat quieter existences. I didn't post a picture from their IFC shindig last night because I want to remember them as young-ish, vibrant comics at the top of their game. They re-wrote sketch comedy and redefined television as a medium. In these dark, turbulent times I wish we had comedy stars that burned at half the Python's wattage - it'd be a better world.
John, Eric, Terry G., Terry J., Michael and Graham. Thank you so much for the laughs, they'll echo through eternity.

Even CNBC Is Saying What We'Ve Said For Over A Year

Recession Will Be 'Full-Blown Depression': Strategist

This global recession will turn into a "full-blown depression," Nicu Harajchi, CEO of N1 Asset Management, said Friday, adding that global stimulus hasn't come down to Main Street.
Wall Street is making money, while consumers aren't, Harajchi told CNBC.
"We have seen the G20 coming out with cross border capital injections of $5 trillion this year… But a lot of this money hasn't really come down to Main Street," he said.
"When it comes down to corporate America, corporate Europe or even in Asia, in Japan, we are not seeing Main Street making any money," he said. "Consumers are losing their jobs. They are struggling with their mortgages, with their credit. And we are just seeing this continuing."
The $5 trillion injection is "monetary expansion," according to Harajchi. "At some point, which we believe to be 2010/11, some of the central banks are going to recall some of that money and that will turn from monetary expansion to monetary contraction."
He also said he doesn't see the corporates or the public "being able to pay back that debt."
"We see 2010 becoming a much more risky year than 2009," he said.
Harajchi said unemployment data are "a leading indicator" instead of a lagging indicator.
Mike Lenhoff, chief strategist at Brewing Dolphin Securities, told CNBC that the recovery will depend on the improvement in cyclical sectors.
"The sooner companies generate their profits, and I think it is moving towards mainstream, it's not just the financials now," Lenhoff said. "If present trends continue, we're talking about jobs being created sometime in the second quarter of next year. That could do a lot for consumer confidence."
Weak Dollar is Everybody's Friend
It is no longer up to the U.S. but more to the rest of the world to decide about the dollar's status as the global reserve currency, Harajchi said.
China and the Gulf countries which have their oil pegged to the dollar "would like to see some other currencies, maybe the euro, playing a more dominant role," he said.
Lenhoff disagreed with Harajchi, saying he believes the dollar will continue to play a dominant role in global trade and global finance.
Central banks will continue to keep interest rates very low in order to avoid a depression, he said. The reason for the dollar's recent weakness "is really down to Fed policy," he added.
"The Federal Reserve has made it crystal clear that interest rates are staying where they are for an extended period of time. We're getting to see a more confident tone to global growth, to a recovery, and as a result of that, we're seeing the tolerance towards risk aversion drop and that in turn has washed back onto the dollar as investors go in search of risk assets," he said.
"This is something we're going to see for a while, until there is a change in Fed policy. That doesn't seem imminent and certainly it doesn't seem at all likely until sometime in the latter half of next year."
The dollar's depreciation will help boost the S&P 500 index over the coming quarters, Lenhoff told CNBC.
"A weak dollar is everybody's friend," he said.
"If the dollar serves the role of an additional stimulus in reflating the U.S, then I think that it's very good," he said.

Thursday, October 15, 2009

Best Question Of The Night Is...............

Who Needs a Central Bank?

“Recovery is here!” the Pollyannas shout. “This is the first sign. And soon all nations will be following with their rate increases.” They talking, of course, about the Australians decision to hike their central bank index rate. And instantly the howls of recovery were on the lips of all the pundits.But the recovery at large is still not on the horizon. We may be facing a serious battle with deflation, and that the evidence is all around us, Australia notwithstanding. And now we have seen more than just anecdotal evidence.~

A few days ago, the United Kingdom, which has been struggling with a weakening currency, released inflation numbers far below expectations. Not only was inflation lower than expected; the figures were actually negative.What does that mean? Well, when inflation numbers turn negative, that is deflation. And England wasn’t alone.The number one economy in the Eurozone, Germany, released numbers that said the same thing. Prices are not increasing, they are decreasing…and at a surprising rate!That’s contrary to conventional wisdom, which says that the bloated money supply should be raising prices. But as I explained last week, that money supply isn’t natural — it’s being created on a whim by the central back and being pushed into its member banks.From there, it is being held against the mountain of derivative losses, bad loans and investments, instead of flowing into the economy at large through lending.That lack of lending is what’s preventing inflation. It won’t show up until the money is released to the public. Until then, the money supply has not effectively changed or expanded…and we’ll continue to see deflation.Deflation, in turn, will lead to longer periods of extended “non-growth” and lower interest rates — at least in the places where they can be lowered. Where they cannot be lowered, “stimulus ad nauseam” will remain the protocol of the day.But, of course, a flat-broke country can’t stimulate unless it can borrow. We are not like China with $2 trillion in reserves. Staying afloat requires borrowing unparalleled in history. The problem is, now that we aren’t buying the world’s widgets, the world is far less inclined to loan us anything. After all, that’s the way the game has been played. They lend to us — we buy from them. And everybody was happy. But you just can’t borrow forever.So if deflation is going to be the name of the game, what happens to the currency markets

Thomas Jefferson Fears the Federal Reserve To answer that question, first we need to determine which currencies are going to move in which direction. That will continue to unfold over time. But it will likely lead to the currencies of the West doing a slow gyrating dance. Neither currency is better than any of the others, so they will just move back and forth until one of them gets their debt and banking situation under control. Very possibly, the first nation to get rid of its central bank will be the first to really break out.Because as we all should be well aware by now, central banks exist for one purpose and one purpose only: to bailout their banker buddies who, in the pursuit of greater profit, have made risky loans… to bail out large industries in order to preserve the job base… and to make sure that the taxpayers foot the bill. They will masquerade it in the best of terms, but at the end of the day, we are paying for their foolish business practices.The sooner we do away with a central bank, the richer we all will be. This is not our first experiment with a central bank in the United States, but it has been our most costly. Our forefathers vehemently opposed the idea of a central bank for just this reason. They believed that such a cartel would rape and pillage the public and increase poverty on a massive scale, until there is nothing left to take. “I believe that banking institutions are more dangerous to our liberties than standing armies,” Thomas Jefferson wrote. “The issuing power of money should be taken away from the banks and restored to the people to whom it properly belongs. The modern theory of the perpetuation of debt has drenched the earth with blood and crushed its inhabitants under burdens ever accumulating.”Amazing, isn’t it? Here’s a man who, two centuries ago, understood why central banks brought themselves into existence. The Federal Reserve in the United States has done nothing to improve our lot and has done everything it can to extort our wealth by the tax of inflation, then to export it to economies and dictators who live like massive welfare recipients off of the taxes your fathers have paid, and you continue to pay, and your children will have to pay.And it will remain like this until the Fed is abolished again. As I mentioned, the population of the United States has closed more than one central bank. Former presidential hopefuls even lost their bids to the White House over their stand in favor of a central bank. Until such a day as we are sufficiently educated again to see them as a menace to our wealth and way of life, until we take it in hand to dismantle the Fed as it is, we will continue to suffer the expropriation of our hard-earned money to those who act as our overlords.

Problem is, I seriously doubt that will happen within our lifetimes. Look how long it’s taken us just to consider a bill that audits the Fed. In the meantime, I recommend you take your capital to the place it’s treated best. That specific place, however, is yet to be determined. Will it be Australia — the first ones to hike rates? Will be China — the almighty ones holding a financial nuclear option?I can’t say for sure. But I can say that, over the long run, it won’t be the greenback.

How government caused the financial crisis

Have we learned anything?
In The Big Picture, The Great Financial Meltdown Of 2008 Can Be Blamed On The Collapse Of A Series Of Bubbles -- Bubbles In Credit, In Housing, In Asset-Backed Securities. In The Aftermath, We Face A New Threat -- A Knee-Jerk Bubble In Regulation And Government Intervention In Financial Markets. You've Been Warned.

WHAT EXACTLY HAPPENED? How could overly enthusiastic homebuyers in the United States sink the global economy? When the global financial crisis took root last year, many politicians across the world quickly determined that it must have come from inside the financial system, that the reason must have been that market players had been given too free a rein and made too many big mistakes. "Laissez-faire is finished," President Nicolas Sarkozy of France exclaimed in September 2008. "The idea of the all-powerful market, which wasn't to be impeded by any rules or political intervention, was a mad one." At the same time, German finance minister Peer Steinbruck claimed that the crisis revealed that the argument put forth by laissez-faire "was as simple as it was dangerous." German chancellor Angela Merkel drew the conclusion that more financial-market regulation was necessary.
The problem, however, was not that we had too few regulations; on the contrary, we had too many, and above all, faulty ones. Some readers may object that I am mainly quibbling about the meaning of words and fighting an ideological battle. You may have a point. Please feel free to call the problem whatever you like -- just so long as you are aware of what it consists of. Because what would be fatal would be for slogans about "insufficient regulation" to give rise to the idea that the crisis happened because the government was absent, and that the government must therefore intervene and regulate more to avoid a repeat.
Let's look again at the historical background of the crisis. The U.S. housing bubble was pumped up, along with the hunt for even greater risk, when the U.S. Federal Reserve Bank, not wanting the market to set exchange rates, cut interest rates to record-low levels. U.S. politicians pumped up risk-taking and housing prices further through deductions, tax benefits for home savings accounts and restrictions on new construction. By means of legislation, subsidies and government-sponsored enterprises, they managed to generate mortgages even for people that the market deemed uncreditworthy.
The quasi-governmental institutions Fannie Mae and Freddie Mac developed the securitization of mortgages (allowing lenders to package and sell mortgage debt, thus replenishing their capital to make further loans). Wall Street fell madly in love with these mortgage-backed securities once the credit-rating agencies -- which had been given a legally protected oligopoly by the government -- declared them to be safe investments. The central position of Fannie Mae and Freddie Mac reinforced confidence that the government would intervene if the housing market ran into trouble. The Fed's safety net and the federal government's deposit insurance made banks dare to take big risks because they could privatize any gains and socialize any losses.
When home prices began to fall and the market no longer wanted mortgage-backed securities, the financial authorities stepped in and decreed that banks had to write down the value of such securities radically, giving rise to waves of panic selling. This, along with other factors, put such a burden on bank balance sheets that regulations forced them to pile up capital rather than make loans. President Bush and other leading policymakers whipped up a panic to push through laws they wanted. And just as the markets were worried more than ever because they did not know where the big risks were, U.S. authorities banned shorting, thus depriving the markets of liquidity and information when they needed it most.
If this is laissez-faire, then I would like to know what government intervention looks like. If the politicians, central bankers and bureaucrats had intentionally tried to create a crisis, they would have been hard put to find more effective actions.
IT IS A FUNDAMENTAL misunderstanding that the market is rational and at some sort of equilibrium, where all information and wisdom are incorporated in decisions. Neoclassical economic models filled with unrealistic assumptions about humans and the economy should always have warning stickers attached to them. The market is nothing other than all the millions of decisions that we all take as we produce, act and invest -- and the tiniest bit of introspection is enough to realize that we do not behave like the textbook models. Since finding lots of information before acting takes time and costs money, we often go with our gut, following rules of thumb and copying what others have already done. That is why the market has a herd instinct. When others seem to be successful at something and get rich on it, you follow suit. After a while, the hollowness of the enthusiasm becomes apparent, and then it often changes into overblown fear that soon ushers in recession.
A key lesson to be drawn from such events, however, is that borrowers, lenders, bankers and brokers are not the only ones to be affected. Politicians, bureaucrats and central bankers are at least as likely to succumb to the herd instinct -- and they have special power. If you act in a different way from what they have approved, they may take your money or even send you off to jail. This gives them the ability to head the march of the lemmings and set its pace.
Today, the herd is saying that we need strict regulation to ensure that the kind of financial crisis we've endured over the past year will not happen again. Words are cheap. But if it is so easy to avoid crises, why didn't the thousands of new pages of regulation written after earlier crises steer us clear of this one? In fact, the story of this storm in the global markets is the story of how government intervention to solve previous crises laid the foundation for the new one. The Fed started making money cheap in 2001 to avoid deflation and a depression. The credibility of credit ratings became exaggerated because financial authorities believed that government-sanctioned ratings would lead to more stable levels of risk. The capital requirements agreed to under these international banking standards gave rise to increasingly exotic financial instruments and pushed assets off banks' balance sheets. New requirements to mark assets to market were intended to prevent cheating, but in reality they served to amplify the downturn and knock out the investment banks. And so forth.
Nothing looks easier than retrospective regulation to ensure that we do not repeat the particular mistakes that messed things up in the past. But like generals, bureaucrats always fight the last war.
The best outcome to be hoped for is that they will prevent market players from making exactly the same mistake they made last time -- that is, the mistake everybody is focusing on avoiding anyway. On top of that, you also get a whole new battery of regulations that may well make the next crisis considerably worse.
Since no one knows where the next crisis will come from, companies and investors hardly need more bureaucrats looking over their shoulders, trying to guess what they are doing right or wrong. They need room to manoeuvre so that they can adjust or change their strategies as quickly as possible whenever there is new information about what is happening to demand, competition and credit. Nothing is more dangerous than going too far in the search for safety, because that may lead to regulations that block the best paths of action in a crisis.
There is already a dangerous homogeneity in the market in that many rely on the same types of clever computer models that make them buy the same types of securities at the same time as everybody else. We may increase the precision of our models, but the risk is that this will only cause us to rely ever more blindly on them. As Warren Buffet urges us all, "Beware of geeks bearing formulas."
For the same reason, we should also beware of bureaucrats bearing plans. Strict regulations laying down what you may and may not do will add to this homogeneity. If the government prevents market players from holding securities below a certain credit rating, it means that they will all sell at the same time when a security is downgraded past the limit. If the government's capital requirements favour certain ways of holding assets, all banks will hold their assets in those ways, and they'll all be struck by the same type of problems at the same time.
After each crisis, the authorities investigate what worked better at the time and then force the market players to conform to this "best practice." But all these attempts to make the system as safe as possible really make it extremely sensitive to small blows and changes. As professor Lawrence Lessig of Stanford University concludes, a single virus gaining a foothold in a banking monoculture may knock out the market completely. All deviations, diversity and mutations have been eradicated by precautionary principles and regulations, meaning that there's no resistance left anywhere. At a conference in 2007, the risk-management officer of one company said that his firm was fortunate not to have much historical data on business risk, because if it did, the authorities would immediately force the company to use those data to build risk models and act according to those models, rather than use common sense and develop various scenarios for future risks, as the company preferred to do.
As business became increasingly global through the last decades of the 20th century, energetic work was undertaken to develop international rules on capital adequacy, accounting principles and credit ratings. Politics had to catch up in order to increase stability and safety in a new Wild West. But the result was the same as national policies: homogenization of the way banks and companies viewed risk, regardless of where they came from and where they operated. As long as things are going smoothly, this creates predictability and peace and quiet. But it also gives everybody the same Achilles' heel. The likelihood of that particular part of the body being hit is small, but when it does happen, everybody tumbles to the ground in the same way in all countries.
All the salvage operations and bailouts that have been implemented this time will make the problem seven times worse next time, completely regardless of the effect that they may have in the short term to prevent free fall. Banks and companies have learned that the more they do things just like everybody else -- like the rest of the herd -- the more likely they are to be saved by the government if things go wrong. Because then their operations or their market will be too big to be allowed to fail. Those who think differently and do things their own way -- and thus pose no threat of systemic crisis -- cannot hope for any help. A prudent banker is one who is exactly as imprudent as the other bankers, so that he goes bankrupt when others do, as the early 20th-century interventionist economist John Maynard Keynes is claimed to have said. If we really want to make future financial storms less severe, we should be doing the opposite of what is happening now. We should remove the safeguards and untie the safety nets. We should abolish bailout plans and deposit insurance, so that banks would be forced to think about what risks they can really bear and how much capital they need to cover those risks. We should deprive the credit-rating agencies of their official role, so that investors would have to think for themselves about where to put their money. We should systematically put an end to the protections and guarantees that government authorities give to investors and savers, to leave room for their own common sense and their own responsibility. Those who do not trust themselves should not go anywhere near the riskiest markets.
No regulation has had as great an effect on the risk-taking of the banking sector than the lifeguard role of central banks (and now finance ministries, as well). This has taught the major financial players to take hair-raising risks in the knowledge that they can privatize any gains and socialize any losses because they are too big to fail. The dilemma, however, is that they would never have grown so big if they had not had that safety net. Present-day capitalism is sometimes attacked for being nothing more than a "casino economy." But I know of no casino where the head of a central bank and the finance minister accompany customers to the roulette table, kindly offering to cover any losses.
The problem is, we do not have a casino economy. To borrow a metaphor from child rearing, we have a "helicopter economy." Helicopter parents hover over their kids, preventing them falling and hurting themselves. This means their children never grow up and learn to see dangers for themselves. And for this very reason, such children will eventually fall in more serious and dangerous contexts instead, because risk is part of the human condition. The helicopter economy works in a similar way. The government hovers over the banks and investors, making sure they do not get hurt too badly (and cleaning up any messes they leave behind.) Whenever there is an accident, the benchmark rate is lowered, the central bank extends credit and taxpayers' money is pumped in. The players never learn to look out for risks; they just continue their reckless behaviour, and sooner or later they will fall off a ledge that they were not watching out for and pull us all down with them.
Capitalism without bankruptcy is like Christianity without hell -- it loses its ability to motivate humans to be prudent or respect their fears. If completely removing the safety net from under the financial market is not politically feasible, then it is necessary to make a division so that they protect only pared-down banks engaging in simple operations. All other financial institutions should be told in no uncertain terms that the government's only responsibility to them, if they fail, is to wish them luck.
If we chop down the jungle of government support, protection and requirements, investors and savers will be left to their own devices. That is tough. But thinking for yourself should be tough, because the intellectual exercise it provides will train skills that have lain dormant. And they are necessary. Just think about the hedge-fund fraudster Bernard Madoff, who may have cheated his established and well-heeled clients out of an unbelievable $50 billion. Despite the phenomenal returns reported by his fund, the big institutional investors stayed away. One of them explained that the fund made a non-serious impression, "because when you get to page two of your 30-page due diligence questionnaire, you've already tripped eight alarms and said, 'I'm out of here.'" Madoff's con was not rocket science. But how come so many others entrusted Madoff with their fortunes? Like many other victims, the former textile businessman Allan Goldstein said that he trusted Madoff because he trusted the government. "We conducted our affairs in good faith in the belief that the SEC would never allow this sort of scheme to be conducted. ..."
THERE IS A BROAD consensus that the way was paved for this financial crisis by record-low interest rates, huge deficits and large-scale credit-financed consumption. Today, governments around the world are trying to solve the crisis -- by means of low interest rates, huge deficits and large-scale credit-financed consumption. Many people now agree that the Fed's record-low rates of 2001 to 2005 contributed to the financial crisis. Many observers now think it was utterly senseless of Alan Greenspan to cut rates drastically without worrying about the credit boom that might ensue. I would be more understanding of their moralizing if those same observers were not also demanding that central banks do the same today.
Greenspan simply wanted to avoid depression and deflation in the only way he could. For the same purpose -- avoiding depression and deflation -- the central banks of the world have now cut rates significantly faster and further than he did, without worrying about the inflationary boom that may ensue. The feelings, the intentions and the arguments are the same: Now we have a crisis, tomorrow we will worry about when it comes, in the long run we will all be dead.
It was Karl Marx who said that history repeats itself, the first time as a tragedy and the second time as a farce. But he probably could not have guessed that the interval can be as short as eight years. There is no saying where all this will end, but dark clouds are looming.
Johan Norberg is a senior fellow at the Cato Institute, a policy research foundation based in Washington, D.C. This article has been adapted from his new book Financial Fiasco: How America's Infatuations with Homeownership and Easy Money Created the Economic Crisis, published by the Cato Institute.

'nuff said....................

But There Aren't Any Earnings.........

Global Investor: Bank “Earnings” A Sham
By Eric Roseman
The phony results now underway for Q3 bank earnings continue to mask the greatest bear market rally or con-game in history.
Despite great numbers for the largest banks since Q2, financial sector intermediation remains severely impaired, small businesses can't obtain financing while consumer installment debt has markedly declined through a combination of debt reduction and rising defaults. Yet the banks have reported a miraculous recovery in bond trading revenues over the last several months – while still harboring toxic assets, rising non-performing loans and for smaller banks, more FDIC bailouts.
The latter, by the way, is broke again and requesting urgent funding from the Treasury.
I've got no trust and no faith in the stock market. The banks are rigged and the accounting system is a joke. This is neither the time nor place to make new, substantial equity-related investments in the U.S…following the biggest con-game in history, which has deceived the poor, unsuspecting public into believing things are improving since March.
For all intents and purposes, they are not.

Image Of The Day

Nicely Said......................

The state is the great fiction by which everybody tries to live at the expense of everyone else. - Frederick Bastiat

Wednesday, October 14, 2009

Gee, If The Financial Times Says A Depression Is Almost Here - Does A Liberal Acknowledge It?

A second Great Depression is still possible
October 11, 2009 4:37pm
by FT
By Thomas Palley
Over the past year the global economy has experienced a massive contraction, the deepest since the Great Depression of the 1930s. But this spring, economists started talking of “green shoots” of recovery and that optimistic assessment quickly spread to Wall Street. More recently, on the anniversary of the Lehman Brothers crash, Ben Bernanke, Federal Reserve chairman, officially blessed this consensus by declaring the recession is “very likely over”.
The future is fundamentally uncertain, which always makes prediction a rash enterprise. That said there is a good chance the new consensus is wrong. Instead, there are solid grounds for believing the US economy will experience a second dip followed by extended stagnation that will qualify as the second Great Depression. Some indications to this effect are already rolling in with unexpectedly large US job losses in September and the crash in US automobile sales following the end of the “cash-for-clunkers” programme.
That rosy scenario thinking has returned to Wall Street should be no surprise. Wall Street profits from rising asset prices on which it charges a management fee, from deal-making on which it earns advisory fees, and from encouraging retail investors to buy stock, which boosts transaction fees. Such earnings are far larger when stock markets are rising, which explains Wall Street’s genetic propensity to pump the economy.
As for mainstream economists, their theoretical models were blind-sided by the crisis and only predict recovery because of the assumptions in the models. According to mainstream theory, it is assumed that full employment is a gravity point to which the economy is pulled back.
Empirical econometric models are equally questionable. They too predict gradual recovery but that is driven by patterns of reversion to trends found in past data. The problem, as investment professionals say, is that “past performance is no guide to future performance”. The economic crisis represents the implosion of the economic paradigm that has ruled US and global growth for the past thirty years. That paradigm was based on consumption fuelled by indebtedness and asset price inflation, and it is done.
There is a simple logic to why the economy will experience a second dip. That logic rests on the economics of deleveraging which inevitably produces a two-step correction. The first step has been worked through, and it triggered a financial crisis that caused the worst recession since the Great Depression. The second step has only just begun.
Deleveraging can be understood through a metaphor in which a car symbolises the economy. Borrowing is like stepping on the gas and accelerates economic activity. When borrowing stops, the foot comes off the pedal and the car slows down. However, the car’s trunk is now weighed down by accumulated debt so economic activity slows below its initial level.
With deleveraging, households increase saving and re-pay debt. This is the second step and it is like stepping on the brake, which causes the economy to slow further, in a motion akin to a double dip. Rapid deleveraging, as is happening now, is the equivalent of hitting the brakes hard. The only positive is it reduces debt, which is like removing weight from the trunk. That helps stabilise activity at a new lower level, but it does not speed up the car, as economists claim.
Unfortunately, the car metaphor only partially captures current conditions as it assumes the braking process is smooth. Yet, there has already been a financial crisis and the real economy is now infected by a multiplier process causing lower spending, massive job loss, and business failures. That plus deleveraging creates the possibility of a downward spiral, which would constitute a depression.
Such a spiral is captured by the metaphor of the Titanic, which was thought to be unsinkable owing to its sequentially structured bulkheads. However, those bulkheads had no ceilings, and when the Titanic hit an iceberg that gashed its side, the front bulkheads filled with water and pulled down the bow. Water then rippled into the aft bulkheads, causing the ship to sink.
The US economy has hit a debt iceberg. The resulting gash threatens to flood the economy’s stabilising mechanisms, which the economist Hyman Minsky termed “thwarting institutions”.
Unemployment insurance is not up to the scale of the problem and is expiring for many workers. That promises to further reduce spending and aggravate the foreclosure problem.
States are bound by balanced budget requirements and they are cutting spending and jobs. Consequently, the public sector is joining the private sector in contraction.
The destruction of household wealth means many households have near-zero or even negative net worth. That increases pressure to save and blocks access to borrowing that might jump-start a recovery. Moreover, both the household and business sector face extensive bankruptcies that amplify the downward multiplier shock and also limit future economic activity by destroying credit histories and access to credit.
Lastly, the US continues to bleed through the triple haemorrhage of the trade deficit that drains spending via imports, off-shoring of jobs, and off-shoring of new investment. This haemorrhage was evident in the cash-for-clunkers program in which eight of the top ten vehicles sold had foreign brands. Consequently, even enormous fiscal stimulus will be of diminished effect.
The financial crisis created an adverse feedback loop in financial markets. Unparalleled deleveraging and the multiplier process have created an adverse feedback loop in the real economy. That is a loop which is far harder to reverse, which is why a second Great Depression remains a real possibility.

Hyperinflation Is In The Works

Investor Sounds Alarm on Hyperinflation

The headline from the Bloomberg News internet site said it all, “U.S. Inflation to Approach Zimbabwe Level, Faber Says.” But while Bloomberg was running the story, the main stream media (MSM) didn’t touch it.
Faber is the legendary Marc Faber, who publishes the Gloom, Boom & Doom Report. He said in an interview with Bloomberg Television in Hong Kong, “I am 100 percent sure that the U.S. will go into hyperinflation. The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”
Zimbabwe’s inflation rate reached 231 million percent in July, 2008, the last annual rate published by the statistics office.
To put that into perspective, inflation in the U.S. in 1979 reached a high of 13.5 percent. That alone was a 500 percent increase above the 70-year average 2.5 percent, and those of us who were alive back then remember just how uncomfortable 13.5% inflation could be.
We’ve been warning for a long time on Personal Liberty Digest and in The Bob Livingston Letter that Fed policies were sending us on a path toward inflationary destruction. And we’re not alone in this thinking. But the MSM and the boys and girls in government don’t want you to know about it.
Why? Because they don’t want you know that for almost 100 years now they’ve been silently, stealthily stealing your wealth.
It started in 1910 when a group of powerful bankers met in secret at Jekyll Island, Ga., and created a monster, then pushed Congress to grow that monster—the Federal Reserve. Founded in 1913, the Fed is a non-Constitutional cartel of private bankers that has control over the U.S. monetary system.
Since then, the Fed’s policies have caused a gradual devaluation of the dollar that has siphoned off the wealth of millions of Americans. Ever wonder why things cost so much more today than they did 40 or 50 years ago? That’s US monetary policy in action.
For example, in 1933 the Consumer Price Index (the price of a basket of common goods purchased by the average consumer) was 12.8. In 2008 the same CPI was 225. In other words, that same basket of goods has increased from just under $13 to $225. That’s the result of your devalued dollar.
But to call this “petty theft” would almost be an insult to the masterminds at work here. To the contrary, there are a number of reasons why the powers that be prefer inflation as a policy…
Here’s what noted economist Peter Schiff wrote in his book, Crash Proof, which predicted the financial meltdown, when he detailed why the government likes inflation:
Inflation makes the national debt more manageable because it can be repaid with cheaper dollars.
In a democracy full of personally indebted voters, the government will pursue monetary policies hospitable to debtors even as it accommodates the special interests that lend to them.
Inflation finances social programs that voters demand while allowing politicians to avoid the politically unpopular alternative of higher taxes, enabling Uncle Sam to play Santa Claus.
Inflationary spending is confused with economic growth, which is confused with economic health. (Of course, GDP numbers are theoretically adjusted for inflation but that doesn’t mean much if the inflation figures are misrepresented.)
Inflation causes nominal asset prices to rise, such as those of stocks and real estate, instilling in the minds of voters the illusion of wealth creation even as the real purchasing power of their assets falls.
Back to the Bloomberg story: Federal Reserve Bank of Philadelphia President Charles Plosser was quoted as saying that inflation may rise to 2.5 percent in 2011.
But the head of Asian economic forecasting at Action Economics in Singapore said he was confident that the Fed would be able to contain inflation at 2 percent or less.
Meanwhile, the Fed, Keynesian economists and MSM ignore history. They ignore Zimbabwe, which got into its mess by printing money to pay down its debt. They ignore 1970s America. And they ignore Weimar Germany in 1918-1923, where hyperinflation and deficit spending caused 30,000 percent inflation and led to the collapse of their civilization and the rise of Adolf Hitler.
The government boys and girls don’t want you to understand inflation, and the MSM is not going to report it until it can’t be ignored. Meantime, you ignore it at your own peril.
What can you do? First, call your Congressman and Senators and urge them to get behind HR 1207, which calls for an audit of the Federal Reserve.
Second, buy and hold gold and silver. Because when hyperinflation comes, precious metal is the only thing that will stand between you and financial hardship.

Besides The Fed, Nobody Is Buying Agency Debt

Foreign investors no longer buying federal-agency debt. Federal Reserve, with money created from nothing, is buying all of it plus other debt as well. More inflation and Dollar decline is inevitable.

Where would we be without the Fed and its printing press? There's been a lot of debate about the appetite of foreign investors of our debt -- Treasury auctions continue to be strong, even as noises emanate from overseas about wanting to dump the dollar.
But here's a stark fact, via the Council on Foreign Relations: Only the Fed is buying agency debt. Foreign buyers, who once consumed it voraciously, have been net sellers so far this year.

Steve Wynn Puts Gov. Jennifer Granholm In Her Place

Steve Wynn the voice of reason? Maybe it's a sign of the Apocalypse!

Robert Reich: What An Honest President Would Say About Health Reform

Guys got guts and the audience is full of idiots.

A Website You Have To Visit: Good Material, Very Relevant

Keep Voting Democrap.....

Doctors as Theater........for Obamacare

Spin Doctors For Obamacare

By Michelle Malkin October 7, 2009
Lights, camera, agitprop! The curtains opened on yet another artfully staged performance of Obamacare Theater this week. One hundred and fifty doctors took their places on the plush lawn outside the West Wing -- many acting like "Twilight" groupies with cameras instead of credible medical professionals. The president approved the scenery: "I am thrilled to have all of you here today, and you look very spiffy in your coats."
White House wardrobe assistants guaranteed the "spiffy." As the New York Post's Charles Hurt reported, the physicians "were told to bring their white lab coats to make sure that TV cameras captured the image." President Obama's aides hastily handed out costumes to those who came in suits or dresses before the doc-and-pony show began.
But while Halloween came early to the Potomac, these partisan single-payer activists in White House-supplied clothing aren't fooling anyone.
Obama's spin doctors belong to a group called Doctors for America (DFA), which reportedly supplied the white lab coats. The White House event was organized in conjunction with DFA and Organizing for America, Obama's campaign outfit.
OFA and DFA are behind a massive new Obamacare ad campaign, letter-writing campaign and doctor-recruitment campaign. The supposedly "grassroots" nonprofit DFA is a spin-off of Doctors for Obama, a 2008 campaign arm that aggressively pushed the Democrats' government health care takeover. DFA claims to have thousands of members with a "variety of backgrounds." But there's little diversity in their views on socialized medicine (98 percent want a taxpayer-funded public insurance option) -- or in their political contributions.
DFA president and co-founder Dr. Vivek Murthy, an internal medicine physician at Brigham and Women's Hospital and an instructor at Harvard Medical School, served as a member of Obama's Health Policy Advisory Committee and the New England Steering Committee during the 2008 presidential campaign.
DFA vice president Dr. Alice Chen of Los Angeles is an Obama donor and avowed supporter of Organizing for America, Obama's campaign shop run by the Democratic National Committee. On Monday, she posted on the OFA website with an appeal to Democratic activists for letters to the editor in support of Obama's "health care reform."
DFA "senior adviser" Jacob Hacker is an Obamacare architect who laughed at criticism of the plan being a Trojan horse for single-payer coverage. "It's not a Trojan horse, right?" he retorted at a far-left Tides Foundation conference on health care. "It's just right there! I'm telling you. We're going to get there."
And here's a brief political donation history of other top DFA docs compiled by Brian Faughnan at
Dr. Hershey Garner (who stood on stage with Obama at the White House event): more than $10,000 in donations to Democratic candidates since 2001.
Dr. Winfred Parnell: More than $5,700 in donations to Democrats since 2001.
Dr. Michael Newman: $4,550 in donations to Democrats since 2001.
Dr. Boyd Shook: $3,500 in donations to Democrats since 2002.
Dr. Jan Sarnecki: $3,400 in donations to Democrats since 2004.
Dr. Amanda McKinney (who also flanked Obama at the White House event): $2,750 in donations to Democratic candidates since 2001.
Dr. Tracy Nelson: $1,500 in donations to Obama.
Dr. Stanton McKenna: $1,000 in donations to Democrats since 2001.
Dr. Jason Schneider: $600 in donations to Democrats since 2001.
Dr. Biron Baker: $500 donated to Obama last year.
Dr. Nick Perencevich: $500 in donations to Democrats since 2008.
Dr. Elaine Bradshaw: $500 in donations to Obama last year.
Who unveiled Doctors for America earlier this spring? No, not ordinary citizens outside the Beltway. The decidedly un-grassroots sponsors of the Doctors for America launch were Democratic Sen. Max Baucus, chair of the Senate Finance Committee, and the left-wing Center for American Progress, which is run by liberal operative John Podesta and underwritten by far-left billionaire George Soros.
CAP is a lead organization in the Health Care for America Now coalition, the so-called "grassroots" lobbying group for Obama's health care takeover legislation run out of 1825 K Street in Washington, D.C., with a $40 million budget. CAP is also the parent group of Think Progress, the far-left website leading the smear campaign against fiscally conservative activists who protested at congressional town halls this summer. And several CAP alumni are now leading the Obamacare push at the Department of Health and Human Services, including special HHS assistant Michael Halle and HHS Director Jeanne Lambrew, a former senior fellow at the Center for American Progress who worked on health policy in the Clinton administration.
CAP/HCAN's most recent initiative? Bussing protesters to the private homes of health care executives last week to bully them over the public option -- even as many health care executives line the pockets of Obama administration officials and allies lobbying on their behalf.
It's all in keeping with the elaborate Kabuki productions that have marked Team Obama's efforts to manufacture support for government-run health care. They've been doctoring it up from Day One.

Why? Because He Hates America.........

Europe Prefers A Presidency That Fails America

By Christopher G. AdamoOctober 8, 2009
Last January, Rush Limbaugh shocked the liberal establishment, and much of the world, when he flatly assessed America's prospects under the Obama Administration with the words "I hope he fails." In the minds of myopic leftists who cannot comprehend the possibility of anything succeeding outside of taxpayer funded government programs, Limbaugh was expressing his desire for America itself to fail.
Surely, America could only succeed if Obama succeeds. This is the heart and soul of liberalism. But, like the rest of the liberal philosophy, it is fundamentally wrong. From the welfare state to the public school system to the various "family service" agencies that consistently peddle their poisonous anti-family agenda, it is liberalism itself that fails America on every occasion that it gains any new toehold in society.
In short, Limbaugh's assertion was that he hoped Obama's far-left radicalism would not succeed in doing still more damage to the country than has already been done by past liberal endeavors at state sponsored "compassion." Nor does he, or any other sincere American patriot, want to see a continuation of the international disasters that ensue as predictable repercussions of naive, morally and spiritually rudderless leftist dabbling in international affairs.
Unfortunately for the radio talk-show giant, as well as the rest of heartland America, that is precisely what Barack Obama, with his twisted philosophies and his ineptitude, has in store for this nation. The Olympic sight selection fiasco at Copenhagen was only the beginning.
To the hopelessly dull-witted, it may seem contradictory that European nations, who loudly claim to be so much happier with Barack Obama than they ever were with George W. Bush, would nonetheless rule against Obama's wishes on an issue in which he invested so much of his credibility. The "slap in the face" that they delivered to him on the world stage will not soon be forgotten. Yet to expect otherwise, based on the presumption of universal international adulation for the Obamas, is to ascribe to a worldview that is completely devoid of the realities of modern international relations.
When dealing with the America of George W. Bush, foreign leaders were compelled to respect the intentions and desires of America, whether they liked it or not. In the wake of 9-11, Bush's assessment of the world as "either with us or against us," imputed a requirement on all countries to take a side in the Terror War, and expect to be held accountable to it.
Of course this generated much backlash against President Bush, since so many of America's "allies," had frittered away the decade of the 1990s, when they should have been shoring up their defenses against the dangerous rise of militant Islam. But while the Islamist threat grew and metastasized, several European nations were making underhanded deals with middle-eastern leaders. The infamous "oil for food" program, by which Saddam Hussein exploited the corruption of so many prominent Europeans, was the most egregious example. That sort of international game playing, which lined the pockets of crooked officials while yielding the insidious side effect of empowering terrorist states, could not continue unchecked without eventually reaching a day of reckoning.
President Bush was indeed despised for standing firm and effectively shutting down the scam. So of course the countries that had benefited from the laxities of Clinton-era international relations were not happy that their lucrative game was ending. Now they once again see increased opportunities to wheel and deal as they had done, unhampered by an American executive branch that is too weak and ideologically disjointed to call them to account.
The problem for Barack Obama is that, prior to the Copenhagen decision, he had perceived the international reaction to him as supportive and sincere. Only under such a muddled premise could he or his wife have hoped, by their sophomoric and self-absorbed lobbying, to garner victory in their bid to have Chicago host the 2016 Olympics. Make no mistake about it, this was no mere decision on the location of a sporting event. By his presence in Copenhagen, Obama had elevated its significance to that of a major international accord. In the end, the other participating nations viewed it as no less significant.
Now, the brutal reality of his real international standing is hitting him directly in the face, though he may still be too self-aggrandizing and shallow to comprehend it. The other nations of the world do not "like" him personally, but they like the detrimental effect he is having on a nation that they have long viewed as too powerful and too competitive with their own interests.
America, in their view, needs to be cut down to size. And Barack Obama, with his abhorrent and counterproductive economic and domestic policies, is just the person to do it. If the American economic engine can be sufficiently weakened, then the rest of the world can move past it. Ditto on the diplomatic front. As the sole world "superpower," America has historically been the defining force in the direction of international affairs in which it became involved. But if it can be mired down in failed social and diplomatic policy, its international role can likewise be significantly reduced.
This is the America that Europe, and much of the rest of the world wants to see. This is the "change" for which America's competitors on the world scene had so fervently hoped. And if the "useful idiot" leading the country eventually becomes a victim of the collapsing international standing that he has so diligently championed, such "collateral damage" is of little or no consequence to them.

Wise Words Of Warning

Autumn’s Inflation Time Bomb

It’s not only the energy markets that threaten the ‘low inflation’ data now encouraging bondholders to keep buying...The published inflation data are surprisingly unsophisticated in so far as they compare current prices with a snapshot a year earlier.

Just over a year ago, oil was every hedge fund manager’s favorite speculation. In summer 2008 a barrel got to well over $140, before falling sharply back.That summer’s high oil price had the effect of canceling out the deflation which was occurring elsewhere in the economy, as the first phase of the credit crunch started to bite. It helped keep inflation up. But by summer 2009, after hitting a trough of $30, the price was back down around $65 representing an annual fall in the oil price of over 50%. Now it was keeping the inflation figures down. Oil would continue to be below the price of 12 month previous throughout the period from January ‘09 to September ‘09.Now — in the fall of 2009 — prices are more or less where they were a year ago, but 12 months ago they were falling fast, while now they are rising. So for the first time in over a year the effect of oil prices in the inflation figures, in October/November 2009, will be up again. And by January, even if prices don’t continue to rise from here, the low prices of winter 2008/9 will form the base. Oil will again be at twice the price it was a year earlier. This will have a marked impact on inflation data.It’s not only the energy markets that threaten the “low inflation” data currently encouraging bondholders to continue buying government debt paying little more than 3.0% per year. There are well over two billion Chinese and Indians who used to make the unwelcome but necessary market adjustments on the demand side when world grain prices rose:Some 30% of the world’s population went hungry.Until the current decade, that was an important part of how world demand came into line with dips in world food production, before big price rises would cause Westerners to feel the sharp pain of a world food shortage. But this has now changed, and permanently.The wealth and dollar reserves of the Asian countries are now large, and their people are not going to go hungry in future (and quite right, too). Instead they will be competing on world markets, and the price of grains will start to show the very sharp spikes associated with unreliable supply and a newly inelastic demand in critical commodities.You may remember the food riots of early 2008, and how they seem to have disappeared. Well, that occurred after a small dip in world grain production in 2007. Fortunately, by its end, 2008 had turned into a bumper year for the global food harvest and a serious crisis was averted. That bumper harvest brought global food prices down again — but for how long?Rice gives us a hint of the nature of price movements we should learn to expect. From a stable base it spiked viciously upwards (by 300% and more) as it sucked in speculative money during the 2008 panic. But when it fell back as panic subsided, it still remained twice the original base level. It is from here that the next upwards spike seems to be starting.In a similar pattern sugar has already started to cool off a bit, but pepper is in the earlier stages. At the end of August ‘09 it rose 17% in a week on news of a poor crop arising from adverse weather in South East Asia./

Unlike camcorders, food is not a discretionary purchase and under the harsh law of marginal utility — together with the new inelasticity of Asian demand — even modest food shortages will cause sharp price spikes, and maybe more riots, which indeed started to appear in Asia in September 2009, with tragic consequences.When necessities are in short supply people behave in the opposite way to normal. Instead of reducing demand they tend to panic and stockpile food for safety, perversely increasing demand on those higher prices...

81% Of Any Group Is A Big Group Of Idiots....

Back in the States, 81% of economists say the U.S. recession is over, says a National Association for Business Economics survey. The majority of respondents are signing the new status quo -- that the economy grew 3% in the third quarter. Interestingly, 54% said the economy won’t regain the jobs it’s lost during this downturn until 2012, and about a third say the worst is yet to come for home prices.
So outside of your job (your biggest source of income) and your house (biggest investment), everything should be just fine.
“We don't care what they said,” says Bill Bonner in The Daily Reckoning. “These are the same seers who missed the biggest single event in financial history. There are many banking crises, recessions, panics and defaults in the record books. But none were as great as the one that hit September a year ago. Most economists didn't see it coming; why should we trust them to tell us when it is going?
“Besides, they've got the whole thing wrong. It isn't a recession; it's a depression. There is no recovery from a depression; instead, the economy has to reinvent itself in another form. Things aren't going ‘back to normal,’ in other words. Because the period leading up to the crisis was not ‘normal’; it was a bubble. After a bubble explodes, you have a lot of debris to clean up. The bigger the bubble, the more damage it does when it blows up…
“Today, we are officially running our ‘Crash Alert’ flag up the pole here at the London headquarters of The Daily Reckoning. Cross Blackfriars Bridge and you might see if flapping in the wind, between the two huge gold balls on the roof.
“Our Crash Alert flag is out because stocks have become too expensive...and because this bounce should be reaching its apogee by now. Already, central banks are talking about cutting back on their efforts to sustain the bounce with easy credit. Australia led the way last week with a rate hike.
“It is also becoming clearer and clearer that the feds' efforts aren't really working. They can give money to their friends in the banking industry. They can give money to speculators who then make bets on the stock market, among other things. They can bail out major companies. But they can't really get much money into the real economy.”

Nicely Said...........

The dollar is a scrap of paper, or an electronic impulse, the value of which is anchored by the analytical acuity of the monetary bureaucracy that failed to predict the greatest financial crackup since the 1930s. - James Grant,

Very Scary Post....When Our Currency Becomes Worthless........

When Money Becomes Worthless
by Martin Hutchinson
October 12, 2009
The Financial Times last Tuesday noted a disturbing new trend – hedge fund and other investors are increasingly seeking to invest in physical commodities themselves, rather than in futures. Given the excess of global liquidity, this is not entirely surprising. It does, however, raise an ominous possibility of a supply shortage in one or more commodities, caused by investor demand that exceeds available mine output and inventory. That could potentially produce a collapse in economic activity similar to that from the 1837-41 and 1929-33 liquidity busts, but with the opposite cause.
The problem arises because of the size of the world's capital pools in relation to its volume of trade. The total assets of U.S. hedge funds in September 2009 were $1.95 trillion (down from almost $3 trillion a year earlier). That compares with total U.S. imports of goods and services in 2008 of $2.1 trillion. However, in addition to the hedge funds, there are other huge pools of money available for deployment in commodities markets. For example China and Japan each have around $2 trillion of foreign exchange reserves, while Saudi Arabia and the Gulf states have comparable sized pools of liquid assets available for investment. Since the available inventory of commodities is a fraction of their annual production, we could potentially end up with an extreme case of too much money chasing too few goods.
This would not matter much if investment were concentrated in futures markets. The open interest in such markets is controlled by the traders, who arbitrage to close positions as the settlement date nears. Thus when huge speculative money flows pour into futures markets, they drive up the price of the commodity concerned, but do not significantly interfere with the production of that commodity, nor with the flow of the commodity from producer to consumer.
Normally, commodity investment is confined to futures markets because it is much more convenient. The cost to a hedge fund or other financial investor of holding stocks of a commodity is quite high, normally sufficient to deter investors from attempting to buy commodities directly. They will only buy commodities directly if they are afraid that the normal arbitrage mechanisms between the futures markets and the commodity markets will be overwhelmed by the volume of demand, so that investment in futures will prove less profitable than it "should."
When investment moves to physical commodities, as it may now be doing, it potentially disrupts trade flows. A ship laden with copper ore that would normally have sailed from Chile to a smelter on the U.S. West Coast is instead parked in a holding area in order that investors can profit from the rise in value of that copper. That reduces the amount of ore available to smelters. Since the balance between supply and demand of most commodities is quite delicate, and supply cannot be ramped up by more than a modest percentage at short notice, that could result in a physical shortage of the commodity at the smelter, shutting down the smelter for a period and depriving its customers of the copper products they need for their own operations.
Disruptions of commodity flows of this kind can potentially cause both hyperinflation and a major recession. The value of copper to the smelter and its customers is much higher in a shortage than if it is available normally, because the cost of closing their own operations is large – hence the price of any spare copper that might be available locally zooms upwards. Equally, the economic cost of shutting down the smelter and its customers far exceeds the value of the copper ore shipment. Products containing copper are suddenly in short supply, while workers lose their paychecks and so are forced to stop consuming at the same level.
The effect of a gross liquidity surplus is thus quite similar to that of a sudden shortage. In the shortage case, as in 1837-41 and 1929-33, prices decline sharply – in those two cases by as much as 20-25% – economic activity is hugely reduced as businesses are unable to obtain financing and workers are laid off. The resultant decrease in demand causes producers to lose money, eventually closing their doors, as well as bankrupting the financial system.
In a gross liquidity surplus, in which investment capital disrupts commodity trade flows, inflation rather than deflation results, probably very rapid inflation rather than the moderate 5% to 10% inflation we became used to in the 1970s. That inflation still further increases demand for commodities, worsening the problem. Businesses unable to obtain raw materials close their doors, workers' real incomes decline sharply (even when they keep their jobs) and Gross Domestic Product declines similarly to the deflationary case.
We have never experienced a global hyperinflation, in which money is unable to purchase goods, so it becomes worthless. In particular countries, wars have produced this effect, notably in the Revolutionary wars in both the United States and France, when the "continentals" and "assignats" became of no value. Similar effects have been produced by excess money printing in Latin America; in hyperinflationary periods citizens of Argentina have starved, even though the country is one of the world's greatest food producers. However, globally we have experienced nothing worse than the moderate worldwide inflation of the 1970s, in which trade flows were disrupted and incomes and assets affected, but commodities generally remained available in the market and output weakened but did not decline sharply.
The fascination of adding another chapter to economic historians' textbooks is not sufficient to make global hyperinflation anything other than an event to be avoided at all costs. It might help the Ben Bernanke of 2080 to make better monetary policy decisions than the current incumbent, since he would have the chance to be the world's greatest expert on the hyperinflationary crash of 2011. However, as far as this column is concerned, future generations can take their chances – we need to avoid hyperinflation happening to this generation.
The cost of avoiding this disaster appears to be steadily increasing. Once articles start appearing in the Financial Times about investors choosing to buy physical commodities rather than futures, many more such investors will be drawn into this activity. A moderate tightening of monetary policy that might well have deflected the forces of hyperinflation if it had been instituted several months ago may well prove ineffectual at this stage.
In determining the necessary monetary policy, the gold price provides a very useful signaling device (and its definitive breakout through previous highs last week provides a stern warning.) It does not matter one whit whether investors demand physical gold rather than futures, because gold has only insignificant industrial uses and the stocks of gold available in "inventories" such as Fort Knox are far more than sufficient to supply those uses for a decade if necessary. However, the commodity investment impulse is closely tied to the gold investment impulse; both reflect a well warranted distrust of fiat money and a desire to hold items of secure long-term value. Hence the gold price is available to show policymakers whether their monetary policy is appropriate.
If, following last week's breakthrough, the gold price continues to increase, heading for $2,400 per ounce, the equivalent in today's money of the 1980 high, that will be an excellent signal that monetary policy urgently needs tightening.
If, after a first monetary tightening, the gold price retreats for a few weeks and then breaks through its recent highs, that development will be a signal that monetary policy must be tightened further, as the flight to commodities has not halted.
Only when the gold price breaks definitively downwards, dropping 25% or more from its high, will policymakers know that they have succeeded in breaking the commodity investment mania. Such a development is however likely to occur only after a definitive crack in government bond markets, forcing policymakers to address their gigantic budget deficits as a matter of urgency.
Given the predilections of today's policymakers, it is unfortunately unlikely that they will tighten monetary policy sufficiently to break the commodity flight, whatever the gold price does. Instead, led by the determined Keynesians of the International Monetary Fund, they are much more likely to attempt to control the gold price itself, either surreptitiously by selling off massive quantities of the world's gold reserves, or openly by imposing limits on gold futures trading and possibly, like Franklin Roosevelt in 1933, making it illegal for ordinary individuals to own gold or to buy gold futures.
That will of course only make matters worse; it would be equivalent to trying to avoid a speeding ticket by smashing the car's speedometer. Manipulating the gold price to pretend that liquidity is not excessive does not stop liquidity from being excessive. Nor does it lead any but the stupidest institutional investor to believe that his urge to invest in physical commodities is misguided. Rather, it will cause commodities investment to be carried out through shell companies in tax havens, away from regulators' radar screens. The effect on global supply chains will be equally damaging, but policymakers will no longer have a straightforward way of determining how to avoid the resulting economic depression.
I wrote last week that tightening liquidity directly by entering into a central bank "exit strategy" is dangerous. However , the Financial Time's story itself and the gold price breakthrough have significantly increased the size of the hike in interest rates necessary to halt the flight to commodities.
Time is short, and the probability of disaster is rising.

Carter Redux

The question, “Is Barack Obama the next Jimmy Carter?”

The question is not meant as political bait. To Democrats and Republicans alike we say, “A pox on both your houses.”
The question matters because if the answer is yes – if President Obama is, in fact, channeling President Carter – then the inflationary malaise of the 1970s looks set to repeat. The darker aspects of the disco era could become as much a part of the future as the mostly forgotten past. And that, in turn, leads to some pretty clear investing and trading implications for the years ahead.

Norway’s Exploding Cigar
As if you hadn’t heard, a committee of Norwegians has bestowed upon Barack Obama the Nobel Peace Prize. They might as well have given him an exploding cigar.
(As The Onion put it, "Oh, to be honored among such towering presidents as Woodrow Wilson and Jimmy Carter.")
The sentiment behind the prize was silly and unserious. Given how far in advance these things are decided, the POTUS was in office for a scant 12 days before the committee deemed him worthy. He barely had time to find the Oval Office bathroom, let alone do anything peace-worthy.
This matters because many of President Obama’s tasks will be harder now. One could argue that countries like Russia and Iran will take the White House less seriously, knowing that the U.S. Commander in Chief has a dovish reputation to live up to. On the other side of the coin, if the president makes a distinctly “non-peaceful” military decision – of the sort that looms large, re, Iran and Afghanistan – the subject of the prize could surface again as an object of mockery.
It’s almost as if the Norwegian committee wanted to hog-tie Mr. Obama – to mold him into the vessel of hope and salvation they craved, subtly seeking to limit his options with a deliberate preemptive gesture. “If we give him the prize, he’ll be that much less tempted,” they may have reasoned. Or maybe they were thinking something else entirely.
Either way, an attempt on the part of Europe to influence American foreign policy simply looks bad. The act in itself feels mildly insulting. It comes off as unfortunate no matter how you slice it.
Of course, it is not the president’s fault he got nominated. But he could have said no.
North Vietnam’s Le Duc Tho was awarded the Nobel Peace Prize jointly with U.S. Foreign Secretary Henry Kissinger in 1973. But Tho declined to accept it, on the grounds that a true Vietnam peace agreement had not yet been secured.
Le Duc Tho, in other words, recognized the importance of being a worthy recipient. President Obama could have graciously declined too, making the point that no shortage of compelling nominees existed.
This would have been a wise thing to do sheerly on political grounds. It might have even bolstered Mr. Obama’s standing as a leader, distancing him from the baggage of utopian expectations and starry-eyed rhetoric.
Instead, the POTUS accepted the award... and let the cigar explode in his face. Why?
Tennis Courts and Swimming Pools
Perhaps because, like President Carter before him, our current president is just too damn distracted.
Jimmy Carter was known for being a micro-manager, caught up in such a vast array of little things that the truly big things were left untended. For example: Legend has it that, in his first six months in office, President Carter personally reviewed all requests to use the White House tennis court. (Carter later denied this, but various insiders confirmed it. As James Fallows writes in The Atlantic, “I always provided spaces where he could check Yes or No; Carter would make his decision and send the note back...”)
Your editor was reminded of this anecdote on reading a recent Washington Post piece, “A Vigorous Push From Federal Regulators.” According to the Post, “The Obama administration is taking on Cheerios. And popular cold remedies and swimming pool drains and rhinestones on children's clothing.”
In a move designed as much for symbolism as effect, the new chairman of the Consumer Product Safety Commission dispatched all 100 agency inspectors across the country last month to enforce a law that requires special drains on swimming pools to prevent children from entrapment. The agency shut down more than 200 pools.
“Symbolism” indeed. The frightening message we are getting is that swimming pools, Nobel Prizes and Olympic bids (witness the recent mad dash to Copenhagen on behalf of the city of Chicago) have more mindshare in the president’s head than things like the rapidly deteriorating job situation, the unfinished business in Iraq and Afghanistan, and the quiet coup that has taken place on Wall Street.
And then there is healthcare...
Neither the Time nor the Place
Whether you stand adamantly in favor of universal healthcare coverage or adamantly against it, at least one thing has become clear. Efforts at healthcare “reform” have become a giant boondoggle.
According to fund manager Jeff Matthews, who took a keen look at the Senate Finance Committee’s efforts, the bill as it stands would still leave 25 million Americans uninsured in the year 2019. (So much for “universal.” What was the point again?) An additional 29 million “nonelderly” Americans would be insured under the bill at a theoretical cost of $829 billion.
The word “theoretical” deserves strong emphasis there because the present bill 1) assumes large Medicare cuts that will never happen, 2) anticipates heavy taxation of “Cadillac” private insurance plans, and 3) surely underestimates the added fraud, abuse and gaming of the system that would take place under an expanded government mandate.
As if all this weren’t headache enough, the massively powerful health insurance lobby known as America’s Health Insurance Plans, or AHP, appears to have thrown a spanner into the works at the last minute. AHP has released a study saying premiums could rise sharply for all privately insured Americans were the present bill to pass. The White House angrily cried “sabotage.”
All of this leads your editor to ask in strident tone: Why the heck are we getting so caught up in this now?
Healthcare reform is the political equivalent of cleaning out the Augean Stables. Hercules had to reroute two rivers to wash the mountain of horse crap away. Given the intense emotional stakes, the deeply entrenched corporate interests, and the sheer degree of complexity involved, tackling healthcare head-on might rank as one of the most ambitious political endeavors of all time.
In other words, draining the healthcare swamp would be a challenging enough task during flush economic times with nothing but blue skies on the horizon – let alone in the midst of an epic financial crisis/jobs crisis/energy crisis punctuated by wars past, present and future!
It’s the Economy, Stupid
In your editor’s humble opinion, the president should have a Clinton-era campaign phrase affixed to his desk: “IT’S THE ECONOMY, STUPID.” (The prez is far from stupid, of course. He may well be a genius. But then, so was Carter.)
Even the most vocal and loyal Obama supporters, like columnist Bob Herbert of The New York Times, are wondering if the president “gets it” when it comes to jobs. As Herbert wrote on Oct. 6,
The Obama administration seems hamstrung by the unemployment crisis. No big ideas have emerged. No dramatically creative initiatives. While devoting enormous amounts of energy to health care, and trying now to decide what to do about Afghanistan, the president has not even conveyed the sense of urgency that the crisis in employment warrants.
...The word now, in the wake of last week’s demoralizing jobless numbers, is that the administration is looking more closely at its job creation options. Whether anything dramatic emerges remains to be seen.
We’re being set up for something “dramatic” all right – just not the type of drama that Herbert is hoping for.

On the home economic front, the news keeps going from bad to worse. Wall Street is throwing a stimulus party while “Main Street” America – i.e. regional banks, small business, and U.S. taxpayers – is headed to Davy Jones’ locker. As a certified news junkie, your humble editor reads the equivalent of five or six newspapers most every day. Here is just a smattering of recent headlines:
Foreclosures grow in housing market’s top tiers (WSJ)
Credit Vise Tightens for Small and Midsize Businesses (NYT)
Steep Losses Pose Crisis for Pensions (WPost)
Failures of Small Banks Grow, Straining FDIC (NYT)
Small firms face credit squeeze as crisis drags (Reuters)
Banks cutting back on loans to businesses (MarketWatch)
What the White House refuses to acknowledge is that the jobs crisis ties directly back to Wall Street. The trillions of dollars pumped into the U.S. economy by way of various alphabet soup programs and government guarantees have directly enriched the megabanks and top Wall Street firms, while potentially making things even worse for the average man in the street.
The way this game is played, if you have the U.S. Treasury Secretary on speed dial, you win. Virtually everyone else loses. The list of Wall Street players banking huge profits off the crisis looks uncannily similar to a “who’s who” list of Paulson and Geithner telephone contacts over the past 12 months.
It’s a losing game for America because Wall Street has become a one-way thoroughfare. Huge sums of taxpayer-funded bailout money get poured in, but nothing comes back out. The taxpayer ponies up vast sums to bail out the megabanks... the megabanks use the free funds to make fat profits on guaranteed government securities while bidding up paper assets... and the real economy continues to suffer as small banks go under and small businesses find no one willing to lend.
As Spengler (aka David P. Goldman) puts it in the Asia Times,
The parallels between America in 2009 and Japan in 1989 are uncanny. An asset price bubble has collapsed, just before a tsunami of prospective retirements that the asset bubble was supposed to fund. Demand for savings is bottomless, and the government satisfies demands for savings by running a huge deficit and issuing debt. The crippled banking system borrows at an interest rate of zero and buys government securities. And the economy shrivels up and dies.
The frustrating thing about our Carteresque president is that he shows no visible sign of giving a damn about any of this. (Perhaps he doesn’t see it happening? How could that be possible?)
As the economy contracts, a combination of rising unemployment and explosive government debt expenditure threatens to ignite a period of “inflationary malaise” like we haven’t seen in decades... maybe even surpassing the ‘70s this time around.
Unless the situation is somehow rectified – and the window seems to be closing fast – our president risks being remembered much like Carter: For a raft of lofty promises unfulfilled, crafted against a legacy of deep financial incompetence and a damning roster of big problems left unaddressed.

{The above article is well founded and excellently written. But it ignores a more obvious fact: What if this is all being done on purpose? No better way to bankrupt a country than government run healthcare. Mussolini knew that you tax the rich to destroy the economy so the government can take that over. A VAT would decimate the middle-class and make us all European-style serfs. I'm thinking rational thought is irrelevant in this current political scenario. Ed.SOC}

Smart People Say This Is Coming

Towards Hyperinflation

Hyperinflation is widely accepted as a period of out of control price rises, doubling the cost of living inside three years.It occurs when a currency loses its ability to store value, encouraging long-term savings to pour into circulation where they swamp the much narrower supply of consumer money, and cause the whole lot to lose purchasing power.

There is no specific recipe, but the pattern we risk repeating today would be typical.

Step #1: Savers, already aware of very real inflation in the cost of living, find it applies more and more to their non-discretionary purchases, such as food and energy;

Step #2: They become increasingly irritated that their currency assets earn interest at the very low official rates — typically less than 1% in the West. To beat this, they need to take big risks by lending to minor institutions. These are the smaller banks which are insignificant enough to be allowed to fail, and therefore do not get access to cheap central-bank money. They are the institutions which have to bid market rate to get depositors’ money. And of course, they will eventually fail, because they are competing in the loans market against megabanks with unfairly cheap money and a government guarantee to protect them;

Step #3: Savers also begin to understand that the government cannot adjust to higher rates because its own enormous borrowing costs forbid it;

Step #4: Savers then cash in their deposits and steadily sell/redeem their bonds, anticipating that bonds in general will repeat their 1970s’ performance, shedding value continually over the medium to long term. (By 1980 the bond market was a shriveled rump, and it didn’t re-appear until 1986, when inflation was well under control.)

Step #5: Central banks will collect the unwanted bonds (quantitative easing programs have so far collected nearly $1 trillion) and create new cash to pay the sellers — again, large and favored client banks;

Step #6: Savers now re-invest, carefully avoiding things which will repay them nominal dollars (i.e. deposits and bonds). Everything else will go up in price as the new Fed cash seeks better stores of value;

Step #7: More and more savers will reach their inflation pain threshold and start at Step 1 above.

Commodity price inflation;
Large debts, particularly government debt;
Long-term low returns for savers;
A source of new money — usually the printing press. Unusually, they are all now pointing in the hyperinflationary direction. If you’ve been thinking about buying gold as a hedge against the rapid loss of your purchasing power, now would be a very good time to act. BullionVault provides you a way to do it while keeping your gold safe.

Faber & Paulson With Their Views

John Paulson: Paulson made waves in 2008 with his billion dollar gains from the sub-prime crisis. The master wave rider was short all the way down and then reversed his bearish course in stunning fashion as he went long the very same things he made so much money betting against. In late February he referred to the market as the “buying opportunity of a lifetime”. Paulson’s reflation trade is turning out to be another home run. Paulson clearly believes in the Fed’s ability to reflate us out of this mess. In the last 6 months he has made massive bets on gold and gold related equities. In addition, Paulson has put his money on the opposite side of the trade he made a killing in last year – he now owns massive stakes in several large banks including Bank of America as well as the toxic Capital One Financial. Paulson is even putting together money for a “real estate recovery” fund.
His latest 13-F shows an interesting mix of financials, gold and healthcare related names. The hedging behind this allocation is quite brilliant. He owns massive stakes in defensive healthcare names, large stakes in the full blown recovery names (banks) and the gold positions will serve as a hedge against inflation and/or the doomsday scenario. Paulson, clearly believes inflation is likely to occur in the coming years as his bets on hard assets and real estate show.
Marc Faber: Faber has been remarkably prescient over the course of the last few years. He was very bearish throughout all of 2008 and turned bullish on March 9th of 2009 – the day the market bottomed. He even said the market was due for a 6 month rally.
He has a very similar outlook to Paulson (though his long-term outlook remains somewhat different). Faber is very bullish on hard assets and emerging market equities. He believes the Federal Reserve is in the process of causing horrible inflation and even refers to Ben Bernanke as a “criminal”. Faber is bullish on gold, gold stocks and foreign equities (primarily emerging market equities) in the long-term and remains bearish on paper assets such as the dollar and bonds in the long-term. Faber does maintain that the dollar is oversold in the very near-term and that the Euro is overbought. He also believes stocks may be near their peak for 2009.
Faber is particularly bullish on Thailand and Singapore where he sees continued value. In Thailand he likes the following companies: Tipco Food, Samui Airport Property Fund, Thai Tap Water and in Singapore he likes Design Studio Furniture. In terms of hard asset related equities Faber likes Newmont Mining, Novagold and Sprott Resources.
In the long-term Faber believes the Fed is simply reflating the bubble that helped cause this mess to begin with. He believes it will result in a total unraveling of the capitalist system.