Thursday, December 24, 2009

Ben Bernanke as the Wizard of Oz

Is it all just a Ponzi scheme? – Sprott Asset Management  h/t  Must reading.

Not only does the Fed not tell us what’s charging off on the asset side of its balance sheet, of all the crap they’ve taking in, but the Treasury’s accounting for purchases of Treasury securities suggests the Fed has been much busier than they have admitted, monetizing US federal debt, and that international demand for our sovereign debt is much weaker than most imagine.

I called my Senators and told them not to reappoint Bernanke.  Even though I have a Ph.D. in economics and lots of industry experience, I have trouble fathoming what’s going on.  But some things stand out:  WaMu failed and the depositors were just fine.  They found people to run the bank.  Most big banks have infrastructures that run themselves largely independently of the wheeling and dealing that occupies the fat cats.  As Barry Ritholtz and I and others have pointed out, the bailouts represented the largest wealth transfer in the history of the world.  And in this case the transfer of wealth was upwards, from taxpayers to the generally well-heeled bond and equity investors—and the very well compensated managements—of the rescued institutions.  This was truly obscene.

And now Ben Bernanke has apparently decided that he needs to rescue the US government.  This is pretend and extend on a massive scale.

I surmise that the monetary authorities of the world are trying to orchestrate a global debt jubilee through rampant coordinated inflation, perhaps hyperinflation once it gets going—and that the Vampire Squids of the world, the Goldman Sachs and as a class the well-heeled speculators of the world with deep pockets and even deeper access to leverage, are just salivating over the opportunity to lever up again after the next debt-deflationary collapse circa 2013 (and there must be another debt-deflation because we still carry all that bad debt on the books).  Debts that can’t be repaid get charged off sooner or later—unless the Fed buys them and never tells us about them, in yet another secret monetary transfer to the wealthy!

This reminds me of the cyclic universe theories, in which the universe goes from big bang up and down to big bust in a new singularity, over and over again.  For surely the next leveraged rip-off by the moneyed class in the almost inevitable inflation to come will enable further strangulation of honest working people around the world, and further increases of inequality, that primary cause of the current collapse of effective demand.

For most people, money in the bank is a deposit, not a loan.  It’s money.  The feds could have insured deposits up to $250,000 or more and let all the big bankrupt financials collapse and most people wouldn’t have noticed any more than a change in the sign on the bank. And then with all the bad debt and the bad managements cleared out of the system, we might have started to work towards having sound money. 

But that would have required a kind of backbone and commitment to principle that our federal government and the Fed don’t have. 

The Fed blew it, and continues to blow it, if Sprott’s analysis is correct.  Volatility of all kinds is bound to increase once the inflation begins.  We are in the eye of the storm.

Friday, December 18, 2009

Dennis Kucinich: a truth teller in Congress


Kucinich: ‘Class war is over, working people lost’

By Sahil Kapur
Thursday, December 17th, 2009 -- 3:05 pm

denniskucinich20090616b Kucinich: Class war is over, working people lostWASHINGTON -- Reflecting on the growing divide between Wall Street and Main Street, Rep. Dennis Kucinich (D-OH) on Wednesday offered a powerful critique on the state of the economy in an open committee hearing.

"The class warfare is over -- we lost," Kucinich said before the Committee on Oversight and Government Reform. "I want to make that announcement today. Working people lost.  The middle class lost."

The harrowing comments from Kucinich, who is Chairman of the Domestic Policy Subcommittee, come amidst a national unemployment rate of 10 percent, one year and several months after the economic collapse of 2008 has marred the livelihoods of many.

"Don't tell me about class warfare," he continued. "Come to my neighborhoods in Cleveland.  I will show you class warfare.  I’ll show you hollowed out areas. I’ll show you businesses that went down because they don’t have access to capital.  And on Wall Street it is fat city.  Don’t tell me about class warfare."

Kucinich, a former presidential candidate who is viewed across the nation as a progressive champion on many issues, said that despite the recent uptick in economic figures, many regular Americans continue to struggle.

"All across this country people are starved for capital," Kucinich said. "Small businesses are failing, you have shopping centers that are becoming vacant because people can’t afford the rents anymore because the people who own the malls the developers are getting cash calls and credit is tightening."

"The separation between the finance economy and the real economy is real. This is not some fake idea. You can’t call that class warfare. That’s a fact."

Kucinich, who voted against the Emergency Economic Stabilization Act of 2008 (also known as the Wall Street bailout), lamented it as a catalyzing force for the rising inequality of income in the United States.

"The wealth of this nation is being accelerated upward," Kucinich said. "That’s one of the problems that I had with the bailout."

"You could say that it helped stabilize the American economy, but what I see is the separation between the real economy and Wall Street. Wall Street is stabilizing, markets are a lot better, banks are doing well -- they parked their money at the Fed for a while so they could get higher interest rates."

With income and wealth inequality at levels greater than in 1929, Kucinich’s statement is not an exaggeration.  Presidents George W. Bush and Barack W. Obama, along with Hank Paulson, Ben Bernanke, Timothy Geithner, Larry Summers and the rest of the Whole Sick Economic Policy Crew, will go down in history as the puppets of the plutocracy who drove the nail into the coffin of the American middle class for a generation or more.  Just wait until they start raising taxes to pay for the bank bailouts!  You never hear these shysters ever talk about raising taxes on the rich (see previous post).  They are good lackeys of the plutocracy, all.

Combined with his sickening Nobel Prize acceptance speech, which displays a stunning ignorance of the realities of terrorism, social justice and proportionality (see Global Guerillas for up-to-speed discussion of asymmetric conflict) President Obama, with his soaring yesteryear rhetoric and good-little-boy conformism to his masters’ wishes, may go down as our most fey, quixotic president ever.

Tuesday, December 15, 2009

Who ain’t pulling his oar? Joe Lieberman!

Via:  Visualizing Economics 

Income Gap and Marginal Tax Rate 1917-2006 

Thank you, Joe Lieberman!  We wouldn’t want all those rich Republicans you represent in Connecticut to have to pay more taxes!


From the Nation. The top graph shows the average income of the top o.o1% compared to the bottom 90%. The higher the peak the bigger the gap between the two groups. In 2006 you would need an income of over $10 million to make it into the top 0.01% while your income would have to be less than $100,000 to be in the bottom 90. The second graph shows the marginal tax rate over the same time period. Here is graph I created plotting similar data.

Monday, December 14, 2009

John Williams: hyperinflation within five years

Via:   h/t

John Williams of argues that the international float of American currency losing favor as a store of value will trigger a sell-off, domestic inflation triggered by rising import prices, and a resultant hyperinflation.  Grim reading.  Predicts failure of domestic electronic commerce and a return to barter. 

Hyperinflation Special Report

Friday, December 11, 2009

Why we are in Afghanistan

Via Wikipedia:  Trans-Afghanistan Pipeline  It’s all about “our” oil.  Can’t we just buy it, like everyone else?  The Chinese are way ahead of us in their strategic thinking about this.  They do deals instead of invading.

Monday, December 7, 2009

Stock market update

Warning:  this is research, not investment advice.  You invest at your own risk.

The Coppock Guide as well as the animal spirits stock market indicator continue up from below the zero line indicating that there is still emotional support for the rally on an adaptation level-theoretic basis.  The stock market index has been inflation adjusted.


Comparing the current position to the long 1968 to 1982 bear market, it looks like we’re at about 1975.  The market will trade in a range for while, and then enter the final leg down to a bottom in three to six years, in about 2012 to 2015.  The previous range-bound episode lasted over a year.  Given the decennial weakness associated within the first few years of the decade, I don’t think range-bound trade will last that long this time.  I think we could see a top this winter.  Also, the pronounced tendency toward collapse early in a new decade suggests that we may not have to wait six years for the final bottom.

Capital preservation remains the name of the game.

Friday, December 4, 2009

Animal spirits flash update

“Animal spirits” or confidence levels are projected to continue to rise sluggishly toward zero in about 2012 with relative stabilization of the unemployment rate, which is forecast to rise for another ten months to ~10.5 percent.


A close-up shows this recovery will resemble the jobless recovery of the last decade in basic shape.


The government appears to be “grinding to a halt,” as an acquaintance put to me recently, as lobbyists strangle any progressive legislation.  The Presidential election of 2012 is likely to occur in an America so fractured as to be almost unrecognizable.  “Polarized” does not adequately describe the splitting-up of the electorate that is occurring, to the joy of the money interests invested in maintaining the status quo.  Everyone, from Paul Krugman to Ron Paul to Dick Cheney, will be blaming their own special demons for the mess, when the real demon is the one in the mirror, and the fact that Americans don’t trust government and hence don’t know how to govern themselves.

There is little chance of negative real GDP growth in the coming year.  I forecast sign only.  Coming off a big bottom we may get big percentage changes but simply looking around tells you the economy is very sick.  U6 unemployment is near 20 percent.  About 40 percent of measured unemployment is over 27 weeks.  And then there are another several million of marginally attached workers who would like to work but haven’t actually looked for work in the past four weeks.


The big waves of residential mortgage resets coming in the next several quarters will not be kind to housing or households.  I note in passing that this recession forecasting model has forecast the last two recessions in real time, a year or more ahead.  As you can see from the chart, it was flashing red in 2006, well before the crisis.

The current collapse of effective demand results from excessive inequality in income and wealth.  The lower income classes were lured into debt beginning about 1980 to try to keep up with the upper income classes.  Wall Street pumped and dumped the housing bubble.  Home-equity debt pushed consumption to over 70 percent of GDP, far above long-term trend level of mid-60s percent.  Consumption as a percentage of GDP will fall, and government will be politically unable to replace it with government investment spending.  The failure of demand will forestall housing price reflation, and the debt deflation plaguing the weaker banks will continue.  A secondary, more severe collapse of demand may occur at the end of this cycle around 2013-2014.  Many fear war will be the solution chosen to mobilize the people.

The United States of America is a fiscal basket case.  It is time for the government to start practicing triage, taking care of those whose lives are truly being ripped apart by the profligacy of the past thirty plus years. 

Some KISS (keep it simple, stupid) proposals:

  • Take the cap off the payroll tax immediately and lower the flat rate for all employees.  Yes, this is a tax increase on the highly compensated, but hey, it’s a flat tax, and every good neo-con can get behind a flat tax, right?  The cap is currently at about $120,000.
  • Provide a livable poverty-level stipend to the unemployed.  I am seeing middle-class families in my community simply dropping into destitution—running out of money—when just one working spouse loses a job.
  • Pass a health bill.  If you haven’t watched Michael Moore’s “Sicko,” you should, whatever you think of him, just to see what it’s like in developed countries other than ours.  PBS also ran a revealing series on this.  America is rightly being viewed as a barbaric place by many outside.  People with socialized medicine tend to measurably healthier than we are, and are generally happy with it.  The level of propaganda we’re exposed to in-country is astounding.  The bottom line is that as with the collapse of the Soviet empire, the collapse of the social contract in America is likely to have profoundly negative health consequences.
  • Get out of Afghanistan. 


Wednesday, December 2, 2009

Cartoon of the decade

Hat tip:


See also:  George Washington’s blog on this topic: 

A leading advisor to the U.S. military, the Rand Corporation, released a study in 2008 called "How Terrorist Groups End: Lessons for Countering al Qa'ida". The report confirms what experts have been saying for years: the war on terror is actually weakening national security.

As a press release about the study states:

"Terrorists should be perceived and described as criminals, not holy warriors, and our analysis suggests that there is no battlefield solution to terrorism."
In fact, starting right after 9/11 -- at the latest -- the goal has always been to create "regime change" and instability in Iraq, Iran, Syria, Libya, Sudan, Somalia, Lebanon and other countries.

The military-industrial complex demands to be fed, and President Obama appeases….

Sunday, November 29, 2009

Is global warming unstoppable?

Via:  Science Daily

ScienceDaily (Nov. 24, 2009) — In a provocative new study, a University of Utah scientist argues that rising carbon dioxide emissions -- the major cause of global warming -- cannot be stabilized unless the world's economy collapses or society builds the equivalent of one new nuclear power plant each day.

"It looks unlikely that there will be any substantial near-term departure from recently observed acceleration in carbon dioxide emission rates," says the new paper by Tim Garrett, an associate professor of atmospheric sciences.

Garrett's study was panned by some economists and rejected by several journals before acceptance by Climatic Change, a journal edited by Stanford University climate scientist Stephen Schneider. The study will be published online the week of November 23.

The study -- which is based on the concept that physics can be used to characterize the evolution of civilization -- indicates:

  • Energy conservation or efficiency doesn't really save energy, but instead spurs economic growth and accelerated energy consumption.
  • Throughout history, a simple physical "constant" -- an unchanging mathematical value -- links global energy use to the world's accumulated economic productivity, adjusted for inflation. So it isn't necessary to consider population growth and standard of living in predicting society's future energy consumption and resulting carbon dioxide emissions.
  • "Stabilization of carbon dioxide emissions at current rates will require approximately 300 gigawatts of new non-carbon-dioxide-emitting power production capacity annually -- approximately one new nuclear power plant (or equivalent) per day," Garrett says. "Physically, there are no other options without killing the economy."

Getting Heat for Viewing Civilization as a "Heat Engine"

Garrett says colleagues generally support his theory, while some economists are critical. One economist, who reviewed the study, wrote: "I am afraid the author will need to study harder before he can contribute."

"I'm not an economist, and I am approaching the economy as a physics problem," Garrett says. "I end up with a global economic growth model different than they have."

Article continues here.

Read the paper at here.  Should be read in conjunction with that oldie-but goodie, “Finite-time singularity in the dynamics of the world population, economic and financial indices” found here.

Moral: Prepare for a lower standard of living.

Friday, November 27, 2009

Update on thorium

Sounds a lot better than uranium.  Thanks Anonymous for the reference.

The triumph of social Darwinism or American self-reliance?

Americans of all stripes seem poised to renounce with a certain finality any shred of unselfishness or social responsibility in an understandable rejection of “government” as we have come to know it in the latter days of the plutocracy, as the oligarchs of Wall Street complete their vacuum-cleaning of the incomes and assets of the drowning American middle class.

Can you blame good-hearted Americans for rejecting the calls of Keynesians to spend even more money on projects to be chosen by a kept Congress?  More pork for the friends of the Democrats this time, when we just finished watching the Republicans enrich Halliburton and Blackwater (now Xe) and untold others in military Keynesianism and financial deregulation, both now getting a second wind under Obomba?

Americans are a self-selected group of self-reliant risk-takers and establishment-leave-takers.  It is my guess that the majority of Americans are ready to leave the existing establishment in their dust.  Whether they succeed in creating a new American social contract, with a government that works for them and not the elite—or are ground down under the heel of the empire for another century or more in a fascist neo-feudalism—this will be the central drama of the twenty-first century.  The world is watching. 

But let me say to Americans of the left and right and center, as you reject government, remember that you cannot reject each other, for no man or woman is an island, and as the probable failure of the American state unfolds, we will need each other’s help more than ever. 

Happy Thanksgiving, gentle readers, and may your Black Friday be sustainable.

Sunday, November 22, 2009

Global warming cooling

With the hacking of the East Anglia climate lab’s data and documents, and the revelations therein (that Mish does an adequate job of summarizing) I am reminded of the late Michael Crichton’s remarks on the subject to the National Press Club.  Crichton was admirable for maintaining throughout his life—even after becoming rich and celebrated—the ability to apply critical thinking skills typical of college graduates of the early postwar period to current events.  In other words, he resisted spin.  I recommend reading “The Case for Skepticism on Global Warming” (2005).  Crichton shows that just on the face of the research presented, global warming was a fraud.

But remember, Al Gore (allegedly) invented the Internet, so he must know what he’s talking about.  And he also got really rich selling fear, a topic that Crichton addressed in his novel State of Fear.  George W. Bush made fear-mongering his stock in trade, and Dick Cheney is pathetically still carrying the torch.

We have so many fear-mongers now that it’s hard to get good panic attack going.  Was that a meteor streaking across the Western sky that if it had been bigger could have started the next ice age in six months?  Oh well, back to worrying about the collapse of the world economy….

Maybe people will wake up, learn to think, and shut the fear-mongers up.


Movie rental recommendation:  Food, Inc.  Eye-popping.  Corporate consolidation of the food industry based on mass production and the horrors thereof; the demand for organic food by consumers is the only hope as Walmart and others come on board. 

When the Supreme Court gave corporations the right to patent life forms, they set the stage for evil on a planetary scale by agribusinesses.  Thank you, Clarence Thomas.

Crichton’s novel Next is an entertaining diatribe on this topic, although he seems to have given up the fight spiritually.  It was one of his last novels.

The housecleaning that the human race faces over coming decades is truly staggering, if we are not to perish by our own misdeeds.

Tuesday, November 17, 2009

What will it take to forge a new social contract?

Via:  FT 

Clive Crook reviews Creating An Opportunity Society by Elizabeth Sawhill and Ron Haskins.

By international standards, intergenerational mobility in the US is quite low. This will surprise few who have ventured into a US public housing project or troubled inner-city school, but many middle-class Americans never have. The figures show that US children born in the lowest and highest quintiles of the income distribution are more likely to stay there than in Britain, for example, and much more likely than in countries such as Sweden and Denmark.

But what to do about it? The book confirms a finding well established in the literature, that transition to the middle class is all but guaranteed for poor children if they do three things: finish high school, work full time and marry before having children. The US underperforms as an opportunity society because so many of its young people fail at one or more. The book focuses on these areas.

Education, as the Obama administration recognises, is pivotal. The book calls for gradual increases in spending on early education programmes for the poor, an exceptionally productive investment according to all the research.

The authors also suggest policies to improve schools, such as adopting national standards (a strengthening of the state-based standards of the No Child Left Behind law); new federal incentives (like those being introduced by the Obama administration) to encourage the hiring and retention of good teachers; and support for “paternalistic” schools that stress order, good attendance, basic skills and frequent assessment. Teachers’ unions find plenty to object to here.

Incentives to find and stay in work could be improved by extending the earned-income tax credit, say the authors, and through support for vocational training. But work requirements under the 1990s welfare reforms should be maintained or tightened, they say. At this many liberals will bridle, as they will at the claim that the “success sequence” of school, employment, and children after marriage requires firmer pro-family suasion and incentives. “To those who argue that this goal is old-fashioned or inconsistent with modern culture, we argue that modern culture is inconsistent with the needs of children.” So there.

The cost of these new and expanded interventions, net of savings from schemes the book wants trimmed, would be about $20bn (€13.4bn, £12bn) a year. This seems modest by current standards, but, as good fiscal conservatives, the authors think the country cannot afford its present commitments, let alone new ones. Here, therefore, they make their boldest suggestion of all. The US social contract needs to be revised, so that the elderly, many of whom are comparatively well off, receive less so that the poor can get more.

The authors lay out an admirable agenda.  The only problem is that it would require a new social contract already in place to get it legislated.

I had a neighbor years ago when I was living in an apartment complex in Philadelphia who first expressed to me what I have come to think of as the “perennial wisdom” on this topic:

“It will take a depression to bring people back to their senses,” the cantankerous gentleman said.

Monday, November 16, 2009

Going Galt with Stephen Colbert


The Colbert Report Mon - Thurs 11:30pm / 10:30c
The Word - Rand Illusion
Colbert Report Full Episodes Political Humor U.S. Speedskating

The worst is yet to come

See:  The worst is yet to come

I agree with Noriel Roubini that the worst is yet to come, but even Roubini falls prey to the figment that a fiscal stimulus involving “shovel-ready” infrastructure spending “creates jobs”:

There's really just one hope for our leaders to turn things around: a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, helps fiscally strapped state and local governments and provides a temporary tax credit to the private sector to hire more workers. Helping the unemployed just by extending unemployment benefits is necessary not sufficient; it leads to persistent unemployment rather than job creation.

In the past, I have also recommended infrastructure spending or workfare instead of just a livable poverty-level dole.  But upon reflection, and watching the way our government malfunctions, I have become more conservative.  I don’t trust the government to spend my money on anything other than humanitarian aid for my fellow citizens.  And “extending unemployment benefits” is not an adequate answer to the abject lives that Americans confront when they become unemployed long-term (most Americans don’t even qualify for unemployment benefits, to begin with). 

I don’t know any other commentator who is singing my song, which is that the current collapse of effective demand is a distributional problem, to solve which quantitative easing and fiscal stimulus are a fool’s tools.  If the problem is distributional, the solution needs to be as well.

Provide spending power to the disenfranchised and let the system self-organize.  That’s the one thing markets do well.  I never bought John Stuart Mill’s argument that redistributional strategies always ultimately fail.  As I recall it was tied up with that marginal productivity fairy tale.  The rich in America have done very well redistributing income and wealth in their own direction via manipulation of corporate compensation and personal taxes.

The more that government is involved in job creation, the more worthless the resulting jobs will be, generally.  Otherwise, I don’t object to workfare in principle, I just think it will be botched and disagreements (pork-squabbling) over what jobs to create will be used as an excuse for delaying direct humanitarian aid.  People on a livable dole can engage in search for jobs that use their actual skills, rather than just blistering their hands with a shovel.  Or they can engage in training for real jobs.  Government jobs create vast Sargasso Seas of waste in the economy that tend never to go away.

Tax credits for hiring new workers, or as Yves referenced recently, mandatory short work hours per the German solution make a lot of sense (although they don’t have a prayer of being tried here). 

But there will be no excuse for letting our fellow Americans fall into a life on the streets when the next collapse occurs.

Saturday, November 14, 2009

Stock market still riding a thermal

Warning:  this is research, not investment advice.  You invest at your own risk.

Birds can stay aloft for hours riding thermals or updrafts of warm air.  I look at the human responses to adaptation level effects in much the same way.  When things are better than what we have in recent memory, we feel good, relatively speaking.  The stock market now is riding an emotional thermal upward and may continue to do so for a while.  Of course, it is also riding a tsunami of Fed-supplied liquidity that has engendered a new carry trade in paper assets. 

My best guess is still that the market will make a final top this winter before entering a multi-year period of turbulence and flat to negative growth as the most severe economic contractions and bear markets tend to occur early in the decade (see this).  The current period most resembles 1970, 1974-1975, or 2001-2003.

The graph shows my “animal spirits” stock market oscillator and the venerable Coppock Guide, both of which are still coming off impressive bottoms.


Just for kicks, here is the picture if you adjust the S&P 500 by the CPI.  We could very easily have another big down leg coming in real terms (using any reasonable price index).  Note that it took fourteen years from the 1968 top to hit a final bottom in 1982.  A similar interval from the top in 2000 would put our final bottom in 2014, which is consistent with my general view of the current business cycle.  It’s also generally consistent with the Great Depression experience.  The biggest debt-deflationary collapse is yet to come, and may be “stagflationary” in the event given tightness in critical commodity markets.


Tuesday, November 10, 2009

A picture of the collapse of effective demand


Aggregate Demand  = Consumption + Investment + Government + Net Exports

I’ve included all series in nominal dollar terms because that’s what matters in the end, whether the dollars are flowing or not.  All series are relative to an index equal to 100 in 1990:1.  Net exports was more volatile so it got its own scaling on the right axis (note that the index is positive, even as we ran a negative trade balance).

Investment and net exports have collapsed the most.  Consumption is bravely trying to get back to where it was in early 2008, but will probably not get there.  At the risk of a busy graph I’ve included wage and salary compensation of employees; it has tanked more than consumption.  So there is some question what’s going on with the consumption numbers, as Contrary Investor points out, possibly transfer payments.  The (ridiculously named) Permanent Income Hypothesis tells us consumers may just be adjusting to the new realities slowly.  (Why couldn’t Friedman just call it an adaptation level, and fall in line with the central currents of scientific thought?  Why couldn’t Shiller and Akerlof cite the most important paper published on “animal spirits” in the past twenty years?  Such is arrogance and provinciality of economists.)

Investment spending is usually more responsive to my “animal spirits” measure.  A technician would look at the government spending line and say “looks hyperbolic” and therefore unsustainable.  Government spending has been growing at a faster than exponential rate over the past couple of years.  The econophysicists have shown us that faster than exponential growth is a signature of a process heading toward a “singularity,” or phase change, or crash, in the case of stock markets.  It’s reasonable to suppose a similar process must organize government spending.

Monday, November 9, 2009

Animal spirits update


Data to October.  Unemployment is assumed to climb to 11.1 percent in a year and then decline.  I still expect “animal spirits” to climb up to about zero in 2012.  The last couple of times they rose to zero from depressed levels in a presidential election year were 1972, followed by Nixon’s resignation, and 1976, followed by the electorate’s rejection of the Republicans.  President Obama faces an ugly national mood.

Confidence will stagger upward till 2012 even if unemployment rises to 13 percent over coming quarters according to the “animal spirits” model.

The recession forecasting model, which forecast the last two recessions a year or more ahead in real time, well ahead of the consensus, sees no NBER-defined “recession” in the coming year.  Output and demand aggregates can be expected to grow, although I think the collapse of consumption (November 2009 commentary) due to increased saving will crimp growth.


This economic situation is unfortunate in that a majority of people will retain their jobs and houses and will have very little incentive to adopt changes that appear risky or expensive to them.  The process of marginalization of the lower strata that has been so evident over the post-Reagan years will become pronounced.  I think any American can understand how this can happen.  Most of us have little job security, much to lose, and there is no safety net to speak of.  Congress’s recent extension of unemployment benefits only highlights this sad fact.  Most of us have friends who have lost their jobs and are dealing with losing their houses and their family’s way of life in short order if adequate employment is not found.  And of course our politicians will do nothing fundamental until events force their hand, in which case they are likely to serve the hand that feeds them.

This is what the late stages of failure of the social contract might look like.  As regular readers know, I subscribe to the thesis of Strauss and Howe’s The Fourth Turning in this regard.  It is a couple of economists’ melding of economic long wave theory with a theory of generational archetypes.  Anglo-American history has been punctuated by crises about every saeculum, the length of a long human lifetime, or about 80 years, in a sequence like this: 1688, 1776, 1860, 1940,…2020?

The crisis will unfold with bankruptcies of the federal government, states, pensions, banks, and anything else that is insolvent and resistant to the Fed’s ministrations of reflation.  Will Hank Paulson’s threat to impose martial law come true?  Will the unemployed cease to pay taxes on whatever pick-up work they can get?  Will a barter economy emerge?  Will we all be living hand to mouth?  Certainly there is another hard leg down coming—for most people, maybe not so much for the rich.  One way to look at the past thirty years is to note that to counter a slowing economy the rich have simply increased their share of income and lowered the tax rates they pay on it.  The fact the share of taxes paid by the rich has gone up only shows that inequality has increased faster than tax rates have gone down.

It is not necessary to comment on the obscene remarks by the head of Goldman Sachs alleging that he is “doing God’s work.”

See Robert Samuelson’s article on the IMF’s view of world fiscal policy.  Note that even a sustained 6 percent inflation won’t solve our problem, even if it didn’t damage our currency.

I still expect the next debt-deflationary collapse to come in 2013 or 2014.  There doesn’t seem to be much danger of inflation before then.

Thursday, November 5, 2009

Resistance for S&P 500 at 1121.44

Warning:  this is research, not investment advice.  You invest at your own risk.

A convincing clearing of 1121.44 will indicate the rally has another leg to run.  Seasonality favors such a move, sentiment probably doesn’t (too bullish).  If not this fall, this winter will see the final topping before the early decennial plunge.


Magical misdirection from the ruling class

Reading the summaries of the Treasury-blogger love-fest (see interfluidity) brings to mind some recent stuff I’ve read about magic, that it’s all about misdirection.  Get the people looking in the wrong places and you can fool them every time.

The cause of our current collapse of effective demand, which is not going to go away soon (proof:  consumption is falling 5-10 percentage points from 71 percent of GDP, and the government is too broke to make up the aggregate demand with government investment spending, not to mention that they’re too incompetent to do it, and private investment is still to scared to jump in) is not fundamentally too much debt, although that is a proximate cause, it is mal-distribution of income (and increasingly and massively so, of wealth). 

Once the glorification of greed really got going 30 years ago under Reagan, the rich started to manipulate the system (taxes, incomes) more and more to their benefit, with the assent of the masses, who all expected to grab the gold ring themselves at some point.  As I point here, as the rich started to pull away, everyone else took on too much debt to try to keep up.  The way things are going, I am not alone in worrying about the US becoming a neo-feudal society; Emmanuel Saez, the establishment economics profession’s leading expert on income and wealth inequality, shares the concern.  I qualify the profession because the best research on what’s actually happening has been coming from alternative sources for some time now, e.g., Robert Prechter’s book Conquering the Crash, which was early on the timing, as is so often the case, but got the big picture right, which is more than you can say for Bob Rubin, Larry Summers, or any of the other clowns in Washington with the possible exception of Ron Paul.

So all the talk about reforming regulation (Right!  We’ll trust them to do their jobs next time?), putting in a systemic risk regulator (we already had one, called the Fed, totally compromised by Wall Street—they let the whole thing happen so the Wall Street bankers could get rich quick), about “too big too fail” and so on ad nauseum is pure misdirection, a shell game.  So long as the crooks are running the show there will be no reform.

And why don’t shareholders, who by and large own the companies of America through their pension funds, and who, by and large, are not fat cats—why don’t the shareholders attack the obscene compensation the small club or CEOs and board members arrange for themselves?  Peter Drucker wrote about “pension fund socialism” thirty years ago.  It didn’t happen, did it?  The pension administrators are in on the game.  Peter, with whom I discussed this years ago, must be rolling over in his grave

Obscene greediness needs to become so socially unacceptable that its practitioners wither away.  Or go away.  And lots of luck trying to get your money out of the country.

This is why when I write to my elected representatives I stress that America is a fiscal basket case, and that we need to begin to practice triage, providing necessary human services—a poverty level dole, education and health care—to the unemployed and abandon all stupid imperial ambitions and obscene bail-outs for the well-heeled.

And for crying out loud, get the investment banks out of the Fed’s cookie jar.  The carry trade that’s happening now is obscene beyond measure and “will not end well.”

Wednesday, November 4, 2009

Are American income taxes high relative to other countries?

Not particularly, but Americans are not happy with what they’re getting for their money (unlike the Scandinavians, who are ever so happy, especially the Danish).  Our government apparently does not serve the people.

Via:  KPMG  The presentation is confusing in that the green numbers to the right of the green bar are the effective income tax rate, not the magnitude of the green bar, which is the sum of income and social security taxes.  The chart gives results for an income of USD100,000.  Tax rates on incomes below USD50,000 are known to be quite low.



Monday, November 2, 2009

Debt deflation

Nice presentation on the unfolding of debt deflation from David Meier that, however, does not cut to the core problem that causes debt deflation and that makes the reflationist “solution” risible:  we have too much debt.   It’s the debt, stupid!  Prudent lenders have always helped their borrowers by examining the cash flows of applicants and making sure that the credit extended isn’t going to put the borrower underwater.  On the other hand, if you’re writing trash loans that you’re going to unload into a big Wall Street securitization that is going to get a triple-A credit rating from a rating agency paid by the investment bank floating the Structured Investment Vehicle (and possible taking a short position in it at the same time…), then… well let’s just say that isn’t banking, that’s fraud, and everyone loses except the Wall Street sharpies who invented the shell game and sold it to those bankers greedy enough to go for it (with full knowledge of what they were doing, IMHO—committing fraud to get obscenely rich quick).  The borrower who also falls for the ruse then loses his or her house.

What is the solution to debt deflation?  Restore honesty and transparency to the financial statements.  Write off bad debts, get society back a level of indebtedness that it can handle.  Provide a livable dole, health insurance and education to the people.  Stop imperial overextension, stupid wars, excessive and corrupt government spending.  Get real, in other words, about our fiscal position.  America was the world’s greatest creditor in 1933; today America is the world’s greatest debtor.  Reflation won’t work because any increase in interest rates given our debt load will cause interest payments to balloon to unmanageable levels faster than incomes can catch up.

Note that those who keep their jobs and houses don’t much get hurt in a debt deflation (see the comment from a friend of Jesse’s in Japan regarding their “lost decade”; turns out it wasn’t bad at all).  The lucky employed can refinance at lower rates, and get more for their money at the market.  Those who become collaterally unemployed through no fault of their own require social support, if our society believes we share a responsibility to care for one another.  Seems to be an open question among those on the right; while the question I have about those on the left is whether they, like the Wall Street grifters, will pile too much debt on the American people. 

Debt Deflation October 2009

Tuesday, October 27, 2009

Back to 1980, when the glorification of greed began

The unemployment rate is approaching peaks not seen since the Carter-Volcker-Reagan inflation-killing recession of almost thirty years ago, while the employment-to-population ratio is approaching lows not seen since then.  In the intervening years, America has become vastly more unequal in how it distributes its income and wealth.  This dynamic is like a giant scissors that is cutting the American social fabric in half—really, more like into one-tenth and the other nine-tenths.


Last time, the way that bottom-ninety-percent of Americans dealt with the problem was to increase labor force participation and employment.  The women went to work.  Because wages are sticky downward, and the un- and under-employment pool is approaching twenty percent of the labor force, the current collapse of effective demand is creating a class of neo-serfs who are experiencing steep declines in incomes.  Companies do not cut the pay of existing employees; they low-ball new hires.  You may be in this class, or one or more of your neighbors might be.

How to achieve a just distribution if corporations won’t do it, and government won’t raise taxes on the rich at this time of greatest-ever need of our government?  You can make gifts of up to $10,000 to anyone tax-free to them (it’s after-tax income to you).  Gifts to deserving kids trying to make it through college in these hard times might be especially worthwhile.

Saturday, October 24, 2009

Bohemian BK

hat tip Financial Armageddon

Give us a decent dole, Mr President, so we can write classic rock songs while we’re unemployed.  And supersize that with some health insurance so we don’t become a burden on society.

Thursday, October 22, 2009

All of the above

Via:  Financial Armageddon  Thanks to Michael Panzer for a nice collection of articles summarizing the current zeitgeist in the eyes of the cognoscenti.  Will we see a miraculous reduction of inequality as we head into this crisis, as we saw in WWII (see Income inequality, debt, crisis and depressions, my reference rant on this subject)—or will we descend into neo-feudalism?  Surely America can once again pick herself up, clean herself off, and stride purposefully in the direction of her democratic ideals….

Declining Empire, Banana Republic, or Failed State?

Not long ago, it would have been seen as something of a joke or the product of a warped mind to ponder whether the United States is a declining empire, a banana republic, a failed state -- or all three.

But these days, there are plenty of serious and intelligent commentators, including historians, ex-public servants, and journalists, who are not raving lunatics, but who are nonetheless disturbed by what they see taking place in this country.

Of course, the fact that the U.S. is on the road to ruin won't be news to those who have been regular visitors to Financial Armageddon and When Giants Fall or who have read my books, but for those who believe today's America is the same as it always was, the following excerpts will be a real eye opener:

"Niall Ferguson: U.S. Empire in Decline, on Collision Course with China" (Yahoo! Finance Tech Ticker interview by Aaron Task)

The U.S. is an empire in decline, according to Niall Ferguson, Harvard professor and author of The Ascent of Money.

"People have predicted the end of America in the past and been wrong," Ferguson concedes. "But let's face it: If you're trying to borrow $9 trillion to save your financial system...and already half your public debt held by foreigners, it's not really the conduct of rising empires, is it?"

Given its massive deficits and overseas military adventures, America today is similar to the Spanish Empire in the 17th century and Britain's in the 20th, he says. "Excessive debt is usually a predictor of subsequent trouble."

Putting a finer point on it, Ferguson says America today is comparable to Britain circa 1900: a dominant empire underestimating the rise of a new power. In Britain's case back then it was Germany; in America's case today, it's China.

"When China's economy is equal in size to that of the U.S., which could come as early as means China becomes not only a major economic competitor - it's that already, it then becomes a diplomatic competitor and a military competitor," the history professor declares.

"America’s Banana Republic Economy" (Reuters Blogs post by James Pethokoukis)

Is the decline in the dollar merely a “return to normalcy” story, as many bulls contend, and not a harbinger of a coming currency crisis?

Short version: The 2008 financial crisis and ensuing collapse in confidence drove investors to dollars and dollar-based instruments. And as the crisis has ebbed, investors are rebalancing back toward riskier assets.

Thus the falling dollar should rightly be interpreted as a sign of “new economic optimism,” argues JPMorgan Chase economist Jim Glassman.

Then again, perhaps future economic historians will look back at this stage of the dollar’s decline as the currency calm before the storm. Because at some point, investors may suddenly realize that America’s already somewhat devalued currency should not be trusted.

As Senator Judd Gregg, a New Hampshire Republican and noted budget hawk, said recently, “We’re basically on the path to a banana-republic type of financial situation in this country … You can’t keep throwing debt on top of debt.”

"America the Banana Republic" (Vanity Fair commentary by Christopher Hitchens)

The ongoing financial meltdown is just the latest example of a disturbing trend that, to this adoptive American, threatens to put the Land of the Free and Home of the Brave on a par with Zimbabwe, Venezuela, and Equatorial Guinea.

In a statement on the huge state-sponsored salvage of private bankruptcy that was first proposed last September, a group of Republican lawmakers, employing one of the very rudest words in their party’s thesaurus, described the proposed rescue of the busted finance and discredited credit sectors as “socialistic.” There was a sort of half-truth to what they said. But they would have been very much nearer the mark—and rather more ironic and revealing at their own expense—if they had completed the sentence and described the actual situation as what it is: “socialism for the rich and free enterprise for the rest.”

I have heard arguments about whether it was Milton Friedman or Gore Vidal who first came up with this apt summary of a collusion between the overweening state and certain favored monopolistic concerns, whereby the profits can be privatized and the debts conveniently socialized, but another term for the same system would be “banana republic.”

What are the main principles of a banana republic? A very salient one might be that it has a paper currency which is an international laughingstock: a definition that would immediately qualify today’s United States of America. We may snicker at the thriller from Wasilla, who got her first passport only last year, yet millions of once well-traveled Americans are now forced to ask if they can afford even the simplest overseas trip when their folding money is apparently issued by the Boardwalk press of Atlantic City. But still, the chief principle of banana-ism is that of kleptocracy, whereby those in positions of influence use their time in office to maximize their own gains, always ensuring that any shortfall is made up by those unfortunates whose daily life involves earning money rather than making it. At all costs, therefore, the one principle that must not operate is the principle of accountability. In fact, if possible, even the similar-sounding term (deriving from the same root) of accountancy must be jettisoned as well. Just listen to Christopher Cox, chairman of the Securities and Exchange Commission, as he explained how the legal guardians of fair and honest play had made those principles go away. On September 26, he announced that “the last six months have made it abundantly clear that voluntary regulation does not work.” Now listen to how he enlarges on this somewhat lame statement. It seems to him on reflection that

“voluntary regulation” was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate of the program and weakened its effectiveness.

Yes, I think one might say that. Indeed, the “perceived mandate” of a parole program that allowed those enrolled in it to take off their ankle bracelets at any time they chose to leave the house might also have been open to the charge that it was self-contradictory and wired for its own self-destruction. But in banana-republicland, like Alice’s Wonderland, words tend to lose their meaning and to dissolve into the neutral, responsibility-free verbiage of a Cox.

And still, in so many words in the phrasing of the first bailout request to be placed before Congress, there appeared the brazen demand that, once passed, the “package” be subject to virtually no more Congressional supervision or oversight. This extraordinary proposal shows the utter contempt in which the deliberative bodies on Capitol Hill are held by the unelected and inscrutable financial panjandrums. But welcome to another aspect of banana-republicdom. In a banana republic, the members of the national legislature will be (a) largely for sale and (b) consulted only for ceremonial and rubber-stamp purposes some time after all the truly important decisions have already been made elsewhere.

I was very struck, as the liquefaction of a fantasy-based system proceeded, to read an observation by Professor Jeffrey A. Sonnenfeld, of the Yale School of Management. Referring to those who had demanded—successfully—to be indemnified by the customers and clients whose trust they had betrayed, the professor phrased it like this:

These are people who want to be rewarded as if they were entrepreneurs. But they aren’t. They didn’t have anything at risk.

That’s almost exactly right, except that they did have something at risk. What they put at risk, though, was other people’s money and other people’s property. How very agreeable it must be to sit at a table in a casino where nobody seems to lose, and to play with a big stack of chips furnished to you by other people, and to have the further assurance that, if anything should ever chance to go wrong, you yourself are guaranteed by the tax dollars of those whose money you are throwing about in the first place! It’s enough to make a cat laugh. These members of the “business community” are indeed not buccaneering and risk-taking innovators. They are instead, to quote my old friend Nicholas von Hoffman about another era, those who were standing around with tubas in their arms on the day it began to rain money. And then, when the rain of gold stopped and the wind changed, they were the only ones who didn’t feel the blast. Daniel Mudd and Richard Syron, the former bosses of Fannie Mae and Freddie Mac, have departed with $9.43 million in retirement benefits. I append no comment.

Another feature of a banana republic is the tendency for tribal and cultish elements to flourish at the expense of reason and good order. Did it not seem quite bizarre, as the first vote on the rescue of private greed by public money was being taken, that Congress should adjourn for a religious holiday—Rosh Hashanah—in a country where the majority of Jews are secular? What does this say, incidentally, about the separation of religion and government? And am I the only one who finds it distinctly weird to reflect that the last head of the Federal Reserve and the current head of the Treasury, Alan Greenspan and Hank “The Hammer” Paulson, should be respectively the votaries of the cults of Ayn Rand and Mary Baker Eddy, two of the battiest females ever to have infested the American scene? That Paulson should have gone down on one knee to Speaker Nancy Pelosi, as if prayer and beseechment might get the job done, strikes me as further evidence that sheer superstition and incantation have played their part in all this. Remember the scene at the end of Peter Pan, where the children are told that, if they don’t shout out aloud that they all believe in fairies, then Tinker Bell’s gonna fucking die? That’s what the fall of 2008 was like, and quite a fall it was, at that.

And before we leave the theme of falls and collapses, I hope you read the findings of the Department of Transportation and the Federal Highway Administration that followed the plunge of Interstate 35W in Minneapolis into the Mississippi River last August. Sixteen states, after inspecting their own bridges, were compelled to close some, lower the weight limits of others, and make emergency repairs. Of the nation’s 600,000 bridges, 12 percent were found to be structurally deficient. This is an almost perfect metaphor for Third World conditions: a money class fleeces the banking system while the very trunk of the national tree is permitted to rot and crash.

"U.S. Joins Ranks of Failed States" (Commentary by Syndicated Columnist Paul Craig Roberts)

The U.S. has every characteristic of a failed state.

The U.S. government's current operating budget is dependent on foreign financing and money creation.

Too politically weak to be able to advance its interests through diplomacy, the U.S. relies on terrorism and military aggression.

Costs are out of control, and priorities are skewed in the interest of rich organized interest groups at the expense of the vast majority of citizens. For example, war at all cost — which enriches the armaments industry, the officer corps and the financial firms that handle the war's financing — takes precedence over the needs of American citizens. There is no money to provide the uninsured with health care, but Pentagon officials have told the Defense Appropriations Subcommittee in the House that every gallon of gasoline delivered to U.S. troops in Afghanistan costs American taxpayers $400.

"It is a number that we were not aware of, and it is worrisome," said Rep. John Murtha, chairman of the subcommittee.

According to reports, the U.S. Marines in Afghanistan use 800,000 gallons of gasoline per day. At $400 per gallon, that comes to a $320,000,000 daily fuel bill for the Marines alone. Only a country totally out of control would squander resources in this way.

While the U.S. government squanders $400 per gallon of gasoline in order to kill women and children in Afghanistan, many millions of Americans have lost their jobs and their homes and are experiencing the kind of misery that is the daily life of poor Third World peoples. Americans are living in their cars and in public parks. America's cities, towns and states are suffering from the costs of economic dislocations and the reduction in tax revenues from the economy's decline. Yet, Obama has sent more troops to Afghanistan, a country halfway around the world that is not a threat to America.

It costs $750,000 per year for each soldier we have in Afghanistan. The soldiers, who are at risk of life and limb, are paid a pittance, but all of the privatized services to the military are rolling in excess profits. One of the great frauds perpetuated on the American people was the privatization of services that the U.S. military traditionally performed for itself. "Our" elected leaders could not resist any opportunity to create at taxpayers' expense private wealth that could be recycled to politicians in campaign contributions.

Republicans and Democrats on the take from the private insurance companies maintain that the U.S. cannot afford to provide Americans with health care and that cuts must be made even in Social Security and Medicare.
So how can the U.S. afford bankrupting wars, much less totally pointless wars that serve no American interest?

The enormous scale of foreign borrowing and money creation necessary to finance Washington's wars are sending the dollar to historic lows. The dollar has even experienced large declines relative to currencies of Third World countries such as Botswana and Brazil. The decline in the dollar's value reduces the purchasing power of Americans' already declining incomes.


The regulatory agencies have been corrupted by private interests. "Frontline" reports that Alan Greenspan, Robert Rubin and Larry Summers blocked Brooksley Born, the head of the Commodity Futures Trading Commission, from regulating derivatives. President Obama rewarded Larry Summers for his idiocy by appointing him director of the National Economic Council. What this means is that profits for Wall Street will continue to be leeched from the diminishing blood supply of the American economy.

An unmistakable sign of Third World despotism is a police force that sees the pubic as the enemy. Thanks to the federal government, our local police forces are now militarized and imbued with hostile attitudes toward the public. SWAT teams have proliferated, and even small towns now have police forces with the firepower of U.S. Special Forces.


In any failed state, the greatest threat to the population comes from the government and the police. That is certainly the situation today in the U.S.A. Americans have no greater enemy than their own government. Washington is controlled by interest groups that enrich themselves at the expense of the American people.

The 1 percent that comprise the superrich are laughing as they say, "Let them eat cake."

Tuesday, October 20, 2009

The end of an age approaches; what comes next?

When a child gets greedy, with his hand in the cookie jar too much, what do you do?  You slap his hand (metaphorically speaking, of course).  In this spirit I have suggested the fiscal policy action most needed right now is to raise marginal tax rates on incomes over $1 million to 75 percent or so to bring the super-rich down to earth, to let them know they breathe the same air as the rest of us.  Why doesn’t it happen?  Because our politicians are prostitutes, bought and paid for by the Super-Rich.  We couldn’t even get a 5 percent surtax on incomes over $1 million to help fund health care reform.  It is kind of amazing when articles like this appear in the mainstream financial press. 

Via:  MarketWatch

Paul B. Farrell

Oct. 20, 2009, 8:08 a.m. EDT

Death of 'Soul of Capitalism:' Bogle, Faber, Moore

20 reasons America has lost its soul and collapse is inevitable

By Paul B. Farrell, MarketWatch

ARROYO GRANDE, Calif. (MarketWatch) -- Jack Bogle published "The Battle for the Soul of Capitalism" four years ago. The battle's over. The sequel should be titled: "Capitalism Died a Lost Soul." Worse, we've lost "America's Soul." And worldwide the consequences will be catastrophic.

That's why a man like Hong Kong's contrarian economist Marc Faber warns in his Doom, Boom & Gloom Report: "The future will be a total disaster, with a collapse of our capitalistic system as we know it today."

Insuring against economic calamity

Gold ETFs are so popular they now hold more of the shiny stuff than most central banks. What will it take to sustain the funds' big gains? Barron's Clare McKeen reports.

No, not just another meltdown, another bear market recession like the one recently triggered by Wall Street's "too-greedy-to-fail" banks. Faber is warning that the entire system of capitalism will collapse. Get it? The engine driving the great "American Economic Empire" for 233 years will collapse, a total disaster, a destiny we created.

OK, deny it. But I'll bet you have a nagging feeling maybe he's right, the end may be near. I have for a long time: I wrote a column back in 1997: "Battling for the Soul of Wall Street." My interest in "The Soul" -- what Jung called the "collective unconscious" -- dates back to my Ph.D. dissertation: "Modern Man in Search of His Soul," a title borrowed from Jung's 1933 book, "Modern Man in Search of a Soul." This battle has been on my mind since my days at Morgan Stanley 30 years ago, witnessing the decline.

Has capitalism lost its soul? Guys like Bogle and Faber sense it. Read more about the soul in physicist Gary Zukav's "The Seat of the Soul," Thomas Moore's "Care of the Soul" and sacred texts.

But for Wall Street and American capitalism, use your gut. You know something's very wrong: A year ago "too-greedy-to-fail" banks were insolvent, in a near-death experience. Now, magically they're back to business as usual, arrogant, pocketing outrageous bonuses while Main Street sacrifices, and unemployment and foreclosures continue rising as tight credit, inflation, skyrocketing Federal debt killing taxpayers.

Yes, Wall Street has lost its moral compass. They created the mess, now, like vultures, they're capitalizing on the carcass. They have lost all sense of fiduciary duty, ethical responsibility and public obligation.

Here are the Top 20 reasons American capitalism has lost its soul:

1. Collapse is now inevitable

Capitalism has been the engine driving America and the global economies for over two centuries. Faber predicts its collapse will trigger global "wars, massive government-debt defaults, and the impoverishment of large segments of Western society." Faber knows that capitalism is not working, capitalism has peaked, and the collapse of capitalism is "inevitable."

When? He hesitates: "But what I don't know is whether this final collapse, which is inevitable, will occur tomorrow, or in five or 10 years, and whether it will occur with the Dow at 100,000 and gold at $50,000 per ounce or even confiscated, or with the Dow at 3,000 and gold at $1,000." But the end is inevitable, a historical imperative.

2. Nobody's planning for a 'Black Swan'

While the timing may be uncertain, the trigger is certain. Societies collapse because they fail to plan ahead, cannot act fast enough when a catastrophic crisis hits. Think "Black Swan" and read evolutionary biologist Jared Diamond's "Collapse: How Societies Choose to Fail or Succeed."

A crisis hits. We act surprised. Shouldn't. But it's too late: "Civilizations share a sharp curve of decline. Indeed, a society's demise may begin only a decade or two after it reaches its peak population, wealth and power."

Warnings are everywhere. Why not prepare? Why sabotage our power, our future? Why set up an entire nation to fail? Diamond says: Unfortunately "one of the choices has depended on the courage to practice long-term thinking, and to make bold, courageous, anticipatory decisions at a time when problems have become perceptible but before they freach crisis proportions."

Sound familiar? "This type of decision-making is the opposite of the short-term reactive decision-making that too often characterizes our elected politicians," thus setting up the "inevitable" collapse. Remember, Greenspan, Bernanke, Bush, Paulson all missed the 2007-8 meltdown: It will happen again, in a bigger crisis.

3. Wall Street sacked Washington

Bogle warned of a growing three-part threat -- a "happy conspiracy" -- in "The Battle for the Soul of Capitalism:" "The business and ethical standards of corporate America, of investment America, and of mutual fund America have been gravely compromised."

But since his book, "Wall Street America" went over to the dark side, got mega-greedy and took control of "Washington America." Their spoils of war included bailouts, bankruptcies, stimulus, nationalizations and $23.7 trillion new debt off-loaded to the Treasury, Fed and American people.

Who's in power? Irrelevant. The "happy conspiracy" controls both parties, writes the laws to suit its needs, with absolute control of America's fiscal and monetary policies. Sorry Jack, but the "Battle for the Soul of Capitalism" really was lost.

4. When greed was legalized

Go see Michael Moore's documentary, "Capitalism: A Love Story." "Disaster Capitalism" author Naomi Klein recently interviewed Moore in The Nation magazine: "Capitalism is the legalization of this greed. Greed has been with human beings forever. We have a number of things in our species that you would call the dark side, and greed is one of them. If you don't put certain structures in place or restrictions on those parts of our being that come from that dark place, then it gets out of control."

Greed's OK, within limits, like the 10 Commandments. Yes, the soul can thrive around greed, if there are structures and restrictions to keep it from going out of control. But Moore warns: "Capitalism does the opposite of that. It not only doesn't really put any structure or restrictions on it. It encourages it, it rewards" greed, creating bigger, more frequent bubble/bust cycles.

It happens because capitalism is now in "the hands of people whose only concern is their fiduciary responsibility to their shareholders or to their own pockets." Yes, greed was legalized in America, with Wall Street running Washington.

5. Triggering the end of our 'life cycle'

Like Diamond, Faber also sees the historical imperative: "Every successful society" grows "out of some kind of challenge." Today, the "life cycle" of capitalism is on the decline.

He asks himself: "How are you so sure about this final collapse?" The answer: "Of all the questions I have about the future, this is the easiest one to answer. Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent ... overspends ... costly wars ... wealth inequity and social tensions increase; and society enters a secular decline." Success makes us our own worst enemy.

Quoting 18th century Scottish historian Alexander Fraser Tytler: "The average life span of the world's greatest civilizations has been 200 years" progressing from "bondage to spiritual faith ... to great courage ... to liberty ... to abundance ... to selfishness ... to complacency ... to apathy ... to dependence and ... back into bondage!"

Where is America in the cycle? "It is most unlikely that Western societies, and especially the U.S., will be an exception to this typical 'society cycle.' ... The U.S. is somewhere between the phase where it moves 'from complacency to apathy' and 'from apathy to dependence.'"

In short, America is a grumpy old man with hardening of the arteries. Our capitalism is near the tipping point, unprepared for a catastrophe, set up for collapse and rapid decline.

15 more clues capitalism lost its soul ... is a disaster waiting to happen

Much more evidence litters the battlefield:

  1. Wall Street wealth now calls the shots in Congress, the White House

  2. America's top 1% own more than 90% of America's wealth

  3. The average worker's income has declined in three decades while CEO compensation exploded over ten times

  4. The Fed is now the 'fourth branch of government' operating autonomously, secretly printing money at will

  5. Since Goldman and Morgan became bank holding companies, all banks are back gambling with taxpayer bailout money plus retail customer deposits

  6. Bill Gross warns of a "new normal" with slow growth, low earnings and stock prices

  7. While the White House's chief economist retorts with hype of a recovery unimpeded by the "new normal"

  8. Wall Street's high-frequency junkies make billions trading zombie stocks like AIG, FNMA, FMAC that have no fundamental value beyond a Treasury guarantee

  9. 401(k)s have lost 26.7% of their value in the past decade

  10. Oil and energy costs will skyrocket

  11. Foreign nations and sovereign funds have started dumping dollars, signaling the end of the dollar as the world's reserve currency

  12. In two years federal debt exploded from $11.2 to $23.7 trillion

  13. New financial reforms will do little to prevent the next meltdown

  14. The "forever war" between Western and Islamic fundamentalists will widen

  15. As will environmental threats and unfunded entitlements

"America Capitalism" is a "Lost Soul" ... we've lost our moral compass ... the coming collapse is the end of an "inevitable" historical cycle stalking all great empires to their graves. Downsize your lifestyle expectations, trust no one, not even media.

Faber is uncertain about timing, we are not. There is a high probability of a crisis and collapse by 2012. The "Great Depression 2" is dead ahead. Unfortunately, there's absolutely nothing you can do to hide from this unfolding reality or prevent the rush of the historical imperative dead ahead.

Tuesday, October 6, 2009

Calendar effect check

Warning:  this is research, not investment advice.  You invest at your own risk.

On a monthly closing basis it was ten years ago December that the Dow Jones Industrial Average peaked.  The chart below shows average relative price movement of the Dow for each ending-digit year of the decade since 1928 (data from Yahoo Finance). 


Click on graphs for larger image in new window.

The early years of the decade usually have the worst bear markets and the worst business slumps, the Thirties, the Seventies and the Eighties especially.  Other decades have fared relatively better in the early years, although the best results generally come mid- to late-decade.

Ignoring quibbles about when decades begin, we’re about ninety days from the end of the Oh-Oh Decade and the start of the Twenty Tens decade.  The market should be topping soon if it remains true to form.  And as indicated in the last “animal spirits” update, the chance of another business cycle slump in the next five years appears to be high.

Much the same picture results from the NASDAQ (data from Yahoo Finance).


Monday, October 5, 2009

“Animal spirits” still poised to rise

Not because the fundamentals of the economy are better, but because people are becoming accustomed to the higher unemployment rates (rising adaptation level), some degree of confidence is returning to American consumers, although they are still in technically “depressed” territory because the current unemployment rate at 9.8 percent is above the current adaptation level of 6.4 percent.  Recall that my formula for imputed “animal spirits,” A, is

A = - (U – UMEAN)/Stdev(U)

over a recent four-year period, where UMEAN is an exponential weighted average.


Click on graphs for a larger image in new window

The primary distinguishing feature of this slump is the credit crisis.  But not everything is different this time, to coin a phrase.  “Animal spirits” still drive economic activity to a large degree, and inversions of the yield curve (perhaps as reflections of expectations) accurately signal “recessions” as defined by the NBER, what ordinary folk call business cycle slumps, troughs, depressions or panics.  My model predicted this past slump in 2006, and the previous recession in 2001, both at times when the majority of professional forecasters were predicting “no recession in sight.” 

So it is with a bit of irony that I report that my “animal spirits” plus slope of the yield curve recession forecasting model is saying “no recession in sight.”


That little blue squiggle near the zero line extending a year into the future represents the “probability of recession” over the coming year.  It is negligible, in the NBER-defined sense of recession.  The components of output they look at will probably turn upward and show positive growth rates.  Unemployment will continue to climb for about a year, and there will be no reform of the financial institutions that created this mess.  Wall Street is squarely to blame.  Barry Ritholtz and Andrew Ross Sorkin have books out that do a good job describing how.  Our entire monetary system is compromised, our financial markets manipulated at a prima facie level beyond dispute (e.g., Goldman Sachs and Morgan Stanley, now “banks,” can borrow at a zero interest rate from the Fed in a carry trade and turn around and speculate with taxpayer money); our Congress and President are totally flaccid in the grip of Big Money.

I expect, with others, that the United State of America is heading toward a major crack-up that will change the way we live permanently.  Whether the rich and their mercenaries take over the country and subject the rest of the populace to a form of neo-feudal servitude (likely the result here and in China), or whether there will be a splitting up of the American states (unlikely), or whether there will be a “revolution” and a new government put in place (possible), who knows?  But the additions to debt that Congress and the President are blithely talking about—coming on top of existing indebtedness—will bankrupt the US and destroy the value of its currency, so a hand-to-mouth existence for many is entirely possible.

As Proverbs says,

He who oppresses a poor man insults his Maker,
but he who is kind to the needy honors him.

The fate of America depends largely on the wisdom of the wealthy, who have feathered their nests so well since Reagan (symbolically, at least) began the movement toward false wealth (debt) for the majority, lower taxes and massive worldly wealth for the tiny upper crust.  It is the now-inbred arrogance of the American “aristocracy” (oligarchy?) that makes me think the best near-term remedy for what ails us would be to raise marginal tax rates on incomes over a million dollars to something like 75 percent—to bring these knuckleheads down to earth and make them realize they breathe the same air the rest of us do.  Man up, Congress!  Man up, Mr. President!  And this is coming from a quasi-libertarian classical liberal!  There is no escaping the state; there will always be a state; the question is what do we want it to do.

I still expect a greater collapse to come after the next Presidential election, in about 2014.  It may come with war.  Our Federal Reserve is on record stating that some inflation would be good for us.  But they have the problem that excessive debt, debt that doesn’t get repaid, causes deflation, not inflation, as we’ve seen in real estate.  Historically, a hot war is the best way to get an inflation going.  The secret hope of the Federal Reserve is that the rest of the fiat money central banks in the world, many in as bad shape as ours, inflate more quickly than we do, causing our currency to retain relative value. 

This will be the final supernova of Bretton Woods II, pure fiat money with no backing.

But it will take a long time to get an inflation going, easily five years, I would guess.  We could continue to have deflation in some major asset prices like houses while experiencing inflation in day-to-day consumer prices like food and energy.

In other developments, labor market volatility, which serves to soften the blows of rising unemployment when volatility is rising, and to amplify the psychological effects of small increases of unemployment when volatility is very low, as it was early in this decade—labor market volatility will peak around yearend 2010 and begin a steep decline.


“Animal spirits,” in turn, will “go positive” a year later, about the beginning of 2012.  The sense of a stabilizing labor market will be strong.  If this occurs as forecast, it will herald a time of seeming happiness (that Shakespearean “seeming” is added because I don’t think people will really believe it).  It may be quite euphoric and strange.

“Animal spirits” will peak in early 2013 shortly after the president’s inauguration.  Then “animal spirits” and the economy will probably drop like a rock as the federal debt binge and drying up international credit squeeze the last drop of effective demand out of American households.  By rights, this should be a deflationary collapse because it will be caused by too much debt.  As I say, I think it will take a hot war to get a general inflation going.  In passing, I note that when you have a carry trade in a quantitatively-eased currency, the Big Money can create spot inflations and hyper-inflations in commodities or paper assets at will, as happened with commodities last year.  Certainly the sharpies are keeping an eye on oil, as a little trumped-up panic about the stability of the Middle East could create a situation they could play going up and coming down.

I do believe that our thoughts have power, not only on other people, but in the physical world.  Lynn McTaggart’s wonderful books provide an introduction to the now three or four decades of scientific research on such topics.  It is necessary for the mass of humankind to pray for the new aristocrats, the oligarchs, who bestride the globe with their unimaginable wealth and their plans for the rest of us.  Let’s all pray that they come back down to earth, that they realize that it is not they who are going to determine what our rights are, but a power far higher than we or they. 

For the love of money is the root of all evils; it is through this craving that some have wandered away from the faith and pierced their hearts with many pangs.