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 2027...it 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.


Thursday, October 1, 2009

Reading assignment for President Obama

In the Financial Times (click through on title; FT has asked us not to repost):

This time will never be different

Review by Martin Wolf

Published: September 28 2009 03:18 | Last updated: September 28 2009 03:18

This Time Is Different: Eight Centuries of Financial Folly
By Carmen Reinhart and Kenneth Rogoff