It is not complicated to understand how laws are being violated by the FDIC. Karl Denninger in his post details that and why there should be no losses from bank closings (unless there is bank fraud involved). Simply stated, it is the FDIC that is causing the losses by not closing banks when their mandate says they must. Leaving them open beyond this point enables losses to continue to mount to the point that, when they are finally closed, taxpayer funds are needed to bail out depositors. Timely closings would ensure taxpayer funds would not be needed.
There are two possible reasons why the FDIC is in violation of the law. First, they are inept. Second,
Monday, May 7, 2012
Saturday, May 5, 2012
The stronger banks
The bailout fiasco is just now starting to show up for the act of desperation that many suspected it was. Instead of allowing markets to resolve a severely over-leveraged and distorted economy, the government decided to try to “bluff” its way through one more time. This strategy has been one used for almost 5 decades. Each time the credit stimulus required is bigger than the last. Each time the distortions to relative prices is made worse. Each time the misallocation of resources becomes greater. Each time the credit levels of individuals and government expand. Each time inflation becomes a bigger problem. Finally, a time comes when malinvestment and credit burdens are too large to be supported. It is probable that we have reached that point. To appreciate how far we have come regarding the abuses of credit creation, one need only note that since the Federal Reserve was created in 1913, the dollar has lost about 96% of its purchasing power. Most of that loss (probably in excess of 90%) has occurred since 1980.
There are still many that believe that government actions will get us out of our predicament. They
There are still many that believe that government actions will get us out of our predicament. They
Thursday, May 3, 2012
The economic condition of the country
Paulson, Bernanke and Geithner have horrible forecasting records. Anyone forecasting, leaves himself open for a certain amount of embarrassment. Yet these people persist in pretending that they are capable of managing the economic condition of the country. That is truly scary!
Now we have the latest bit of evidence of their prowess. Look at this statement (one of many in a detailed report) made by Frederick Mishkin when he was on the Federal Reserve Board: “… they clearly illustrate that Iceland is a well run, advanced Nordic country that has little in common with emerging market countries, a fact important to recognize when we start discussing financial stability in the next section.” Shortly thereafter, Iceland inconveniently and totally collapsed into financial rubble.
Perhaps it isn’t Bernanke; perhaps it is his aides that are so wrong. Actually it is neither. No one can accurately forecast such things. That they are wrong is not surprising; that they have the hubris to pretend to know these things is what is amazing. Frederick Hayek’s Nobel acceptance speech entitled The Pretence of Knowledge has much to say both about the problem and professional hubris. Perhaps this speech should be required reading by all Washington economic and other policy dunderheads.
Now we have the latest bit of evidence of their prowess. Look at this statement (one of many in a detailed report) made by Frederick Mishkin when he was on the Federal Reserve Board: “… they clearly illustrate that Iceland is a well run, advanced Nordic country that has little in common with emerging market countries, a fact important to recognize when we start discussing financial stability in the next section.” Shortly thereafter, Iceland inconveniently and totally collapsed into financial rubble.
Perhaps it isn’t Bernanke; perhaps it is his aides that are so wrong. Actually it is neither. No one can accurately forecast such things. That they are wrong is not surprising; that they have the hubris to pretend to know these things is what is amazing. Frederick Hayek’s Nobel acceptance speech entitled The Pretence of Knowledge has much to say both about the problem and professional hubris. Perhaps this speech should be required reading by all Washington economic and other policy dunderheads.
Wednesday, May 2, 2012
The Honeymoon Is Over
For the first time in recent years, voters trust Republicans more than Democrats on all 10 key electoral issues regularly tracked by Rasmussen Reports. The GOP holds double-digit advantages on five of them.
As a libertarian I have equal distrust for all political parties, but this report is quite telling in what it could mean for the balance of power in Congress come the next general election.
Here’s some more from the report:
Republicans have nearly doubled their lead over Democrats on economic issues to 49% to 35%, after leading by eight points in September.
On the highly contentious issue of health care, voters now give the edge to Republicans 46% to 40%. The parties tied on the issue last month, after Republicans took the lead on it for the first time in August.
Most voters (54%) oppose the health care reform plan proposed by the president and congressional Democrats, but 42% are in favor of it.
On taxes, Republicans are now ahead of Democrats 50% to 35%, nearly doubling their September lead on the issue. Prior to July, the percentage of voters who trusted the GOP more on taxes never reached 50%. It has done so three times since then.
As a libertarian I have equal distrust for all political parties, but this report is quite telling in what it could mean for the balance of power in Congress come the next general election.
Here’s some more from the report:
Republicans have nearly doubled their lead over Democrats on economic issues to 49% to 35%, after leading by eight points in September.
On the highly contentious issue of health care, voters now give the edge to Republicans 46% to 40%. The parties tied on the issue last month, after Republicans took the lead on it for the first time in August.
Most voters (54%) oppose the health care reform plan proposed by the president and congressional Democrats, but 42% are in favor of it.
On taxes, Republicans are now ahead of Democrats 50% to 35%, nearly doubling their September lead on the issue. Prior to July, the percentage of voters who trusted the GOP more on taxes never reached 50%. It has done so three times since then.
Tuesday, May 1, 2012
Major currencies has fallen
A nice article detailing the recent history of the dollar. The fact that the dollar has declined 79% in the last 9 years versus the Euro is shocking. What is even more astounding is that it has declined so much against a currency not backed by a country and a region that has underperformed for decades. The socialistic economies of “Old Europe” have been stagnant for many years, especially regarding job creation. What does this say about the US for the past 9 years? Obviously it has implications for our economy, regardless of what government-reported GDP statistics say. It says even more about our loose monetary policy which would reflect even more directly into exchange rates.
The image to the right depicts a unit of currency issued by the United States of America. On the back is the phrase: “In God We Trust.” To the extent that the dollar has much value left, it may be as a result of this phrase. I assume that means it is less valuable to atheists than believers, but that is purely speculation.
Home > Euro Bests Dollar by 79% in This Millennium
Euro Bests Dollar by 79% in This Millennium
The image to the right depicts a unit of currency issued by the United States of America. On the back is the phrase: “In God We Trust.” To the extent that the dollar has much value left, it may be as a result of this phrase. I assume that means it is less valuable to atheists than believers, but that is purely speculation.
Home > Euro Bests Dollar by 79% in This Millennium
Euro Bests Dollar by 79% in This Millennium
Currencies against the greenback
“Some sort of crisis is looking inevitable,” said Neil Mellor, a currencies analyst at the Bank of New York Mellon in London. “You can’t continue down this road without something giving way, and it’s clear that the U.S. is not going to do anything to put meat on the bones of its strong-dollar policy.”
Dollar decline draws international protest
LONDON — This could end up being viewed as the week when dollar weakness became too much for the rest of the world to bear, setting the scene for tense encounters at the upcoming meeting of finance ministers from the world’s 20 largest economies.
Brazil has now imposed a tax on some foreign-exchange inflows. The Bank of Canada has cranked up its negative tone on the strength of the Canadian dollar. And a whole slew of European officials have practically begged the U.S. to step in and boost the buck.
This chorus of pain marks a rise in international pressure on the U.S. to live up to its oft-quoted “strong-dollar policy,” after central banks in South Korea, Taiwan, the Philippines, Thailand,
Dollar decline draws international protest
LONDON — This could end up being viewed as the week when dollar weakness became too much for the rest of the world to bear, setting the scene for tense encounters at the upcoming meeting of finance ministers from the world’s 20 largest economies.
Brazil has now imposed a tax on some foreign-exchange inflows. The Bank of Canada has cranked up its negative tone on the strength of the Canadian dollar. And a whole slew of European officials have practically begged the U.S. to step in and boost the buck.
This chorus of pain marks a rise in international pressure on the U.S. to live up to its oft-quoted “strong-dollar policy,” after central banks in South Korea, Taiwan, the Philippines, Thailand,
Monday, April 30, 2012
Waiting for the next crisis
Hope and Change in the Banking System seems to be “hope” that the system can get through this economic cycle while “change” is non-existent. “Too big to fail” creates incentives for risk-taking that would not occur in a true free market. Taxpayers underwriting risk and backstopping failure ensure that firms will take on more, rather than less, risk.
Legislated rules need to be imposed to contain excessive risk-taking based upon taxpayer guarantees. While a truly free market could handle this better than legislation, there appears to be zero hope for that occurring. Thus, a reinstatement of Glass-Steagall or its equivalent is necessary. Without some type of legislation, we are merely waiting for the next crisis to occur. With it, crises will still occur, but they should be more manageable.
The return to risky behavior is already underway. An analysis of JP Morgan’s recent financial results concludes:
You might as well label JP Morgan the new Lehman Brothers because they are operating like an investment bank. So much for those bailouts helping the average American. The media really needs to scrutinize how these companies make their earnings. They are simply using hot and easy money to double down in the Wall Street casino on the taxpayer dime. No reform has happened since the collapse of Wall Street because these banks own our politicians.
Legislated rules need to be imposed to contain excessive risk-taking based upon taxpayer guarantees. While a truly free market could handle this better than legislation, there appears to be zero hope for that occurring. Thus, a reinstatement of Glass-Steagall or its equivalent is necessary. Without some type of legislation, we are merely waiting for the next crisis to occur. With it, crises will still occur, but they should be more manageable.
The return to risky behavior is already underway. An analysis of JP Morgan’s recent financial results concludes:
You might as well label JP Morgan the new Lehman Brothers because they are operating like an investment bank. So much for those bailouts helping the average American. The media really needs to scrutinize how these companies make their earnings. They are simply using hot and easy money to double down in the Wall Street casino on the taxpayer dime. No reform has happened since the collapse of Wall Street because these banks own our politicians.
Friday, April 27, 2012
Intervening into the housing market
Interventionism is economic intervention by the government into the free market. It typically involves subsidies or penalties to particular groups. Interventions never improve the economy. Indeed, many interventions lead to additional interventions to attempt to correct the harm done by the first action. Interventions may improve the lot of a targeted group, but does so at the expense of society. While a particular group may be said to benefit, the total economy is always made worse off. As stated by Henry Hazlitt:
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
Others like Bastiat expressed a similar views about a hundred years before. Based on Bastiat, this
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
Others like Bastiat expressed a similar views about a hundred years before. Based on Bastiat, this
Thursday, April 26, 2012
A slack employment environment
Death of Muddle Through
The US government is on an unsustainable path. Deficits are soaring and the Obama administration is planning massive tax hikes.
Moreover, businesses have little reason to hire already because of massive overcapacity. Add increasing health care costs to the list of reasons for businesses not to hire.
Given that government spending crowds out private investment, these policies all but assures that unemployment is going to remain high for a long time as noted in Structurally High Unemployment For A Decade.
Killing The Goose
Last week in Thoughts on the Economy: Problems and Solutions I listed the problems and some of the solutions facing the economy. It was a discussion between John Mauldin and I about his weekly E-Letter Killing The Goose.
The US government is on an unsustainable path. Deficits are soaring and the Obama administration is planning massive tax hikes.
Moreover, businesses have little reason to hire already because of massive overcapacity. Add increasing health care costs to the list of reasons for businesses not to hire.
Given that government spending crowds out private investment, these policies all but assures that unemployment is going to remain high for a long time as noted in Structurally High Unemployment For A Decade.
Killing The Goose
Last week in Thoughts on the Economy: Problems and Solutions I listed the problems and some of the solutions facing the economy. It was a discussion between John Mauldin and I about his weekly E-Letter Killing The Goose.
Tuesday, April 24, 2012
The world needs more food
Not much to disagree with here, at least in the intermediate to long-term. If we have a market correction in the US, which seems almost inevitable, then the whole world will be affected including, if not especially China. There is much not to like short-term in China — the banking systems, centrally-directed economy (when they make mistakes they tend to be doozies), dependence on US for exports, coming currency adjustments, etc. Despite these near-term concerns, I am in agreement with the article. Just don’t “double-down” right now.
Jim Rogers on the Next 10 Years
I’m moving to China … possibly to live in a bunker. At least that was my inclination after listening to a presentation by Jim Rogers Thursday.
Now don’t get me wrong―Mr. Commodities wasn’t all doom and gloom. In fact, his talk was both informative and highly entertaining. But Rogers doesn’t sugarcoat things―he’s very matter-of-fact about his concerns and projections for the future. And most of them don’t bode well for the U.S.
I’ll be posting an interview with Jim Rogers on the site in the coming week, but for now, I just
Jim Rogers on the Next 10 Years
I’m moving to China … possibly to live in a bunker. At least that was my inclination after listening to a presentation by Jim Rogers Thursday.
Now don’t get me wrong―Mr. Commodities wasn’t all doom and gloom. In fact, his talk was both informative and highly entertaining. But Rogers doesn’t sugarcoat things―he’s very matter-of-fact about his concerns and projections for the future. And most of them don’t bode well for the U.S.
I’ll be posting an interview with Jim Rogers on the site in the coming week, but for now, I just
Sunday, April 22, 2012
Monetary system
This is a piece that I wrote in response to a request for a guest post over at ZeroHedge. It ran there yesterday garnering some nice attention and a diverse range of comments beneath.
Based on some of those comments, this article represents nothing more than my attempt to find an explanation that matches the data.
My central thesis to this crisis, developed a few years before it even hit, is that the economic troubles are the symptoms, while the money system itself is the cause.
My views on this are expressed in the opening of an article that I initially penned in 2006 but updated in 2008:
Within the next twenty years, the most profound changes in all of economic history will sweep the globe. The economic chaos and turbulence we are now experiencing are merely the opening salvos in what will prove to be a long, disruptive period of adjustment. Our choices now are to either evolve a new economic model that is compatible with limited physical resources, or to risk a catastrophic failure of our monetary system, and with it the basis for civilization as we know it today.
Based on some of those comments, this article represents nothing more than my attempt to find an explanation that matches the data.
My central thesis to this crisis, developed a few years before it even hit, is that the economic troubles are the symptoms, while the money system itself is the cause.
My views on this are expressed in the opening of an article that I initially penned in 2006 but updated in 2008:
Within the next twenty years, the most profound changes in all of economic history will sweep the globe. The economic chaos and turbulence we are now experiencing are merely the opening salvos in what will prove to be a long, disruptive period of adjustment. Our choices now are to either evolve a new economic model that is compatible with limited physical resources, or to risk a catastrophic failure of our monetary system, and with it the basis for civilization as we know it today.
The necessity of government spending
A depression was borne out of high levels of private sector debt made apparent by a financial crisis.
The effects of this depression have been lessened by economic stimulus and government support.
Government intervention led to a reduction in asset price declines, which led to stock market increases, which led to asset price stabilization and more asset price increases. This has led to a false sense that green shoots are leading to a sustainable recovery.
In reality, the problems of high debt levels in the private sector and an undercapitalized financial system are still lurking, waiting for the government to withdraw its economic support to become realized
Because large scale government deficit spending is politically impossible, expect a second economic dip within three to four years at the latest.
While I might quibble with his time frame and the necessity of government spending (a bit too Keynesian), it is a valuable piece that provides background for those attempting to understand better what has happened and what the future may hold.
The effects of this depression have been lessened by economic stimulus and government support.
Government intervention led to a reduction in asset price declines, which led to stock market increases, which led to asset price stabilization and more asset price increases. This has led to a false sense that green shoots are leading to a sustainable recovery.
In reality, the problems of high debt levels in the private sector and an undercapitalized financial system are still lurking, waiting for the government to withdraw its economic support to become realized
Because large scale government deficit spending is politically impossible, expect a second economic dip within three to four years at the latest.
While I might quibble with his time frame and the necessity of government spending (a bit too Keynesian), it is a valuable piece that provides background for those attempting to understand better what has happened and what the future may hold.
Friday, April 20, 2012
Another trillion dollars
Tim Geithner hadn’t slept well on Friday night, having again decided to stay in one of the grim rooms on the 12th floor of the Federal Reserve. By six a.m., he had returned upstairs to his office dressed in an oxford dress shirt and sweatpants.
In his mind, he was already making battle plans. He had made it safely to the weekend but was worried about what would happen on Monday.
“John’s holding on to a slim reed,” Paulson had told Geithner about John Mack’s perilous position on a phone call the night before. Paulson was also still anxious about Goldman Sachs, his former employer. “We’ve got to find a lifeline for these guys,” said Paulson, and they reviewed the possible options.
On note cards that morning, Geithner started writing out various merger permutations: Morgan Stanley and Citigroup. Morgan Stanley and JPMorgan Chase. Morgan Stanley and Mitsubishi. Morgan Stanley and C.I.C. Morgan Stanley and Outside Investor. Goldman Sachs and Citigroup. Goldman Sachs and Wachovia. Goldman Sachs and Outside Investor. Fortress Goldman. Fortress Morgan Stanley.
It was the ultimate Wall Street chessboard.
In his mind, he was already making battle plans. He had made it safely to the weekend but was worried about what would happen on Monday.
“John’s holding on to a slim reed,” Paulson had told Geithner about John Mack’s perilous position on a phone call the night before. Paulson was also still anxious about Goldman Sachs, his former employer. “We’ve got to find a lifeline for these guys,” said Paulson, and they reviewed the possible options.
On note cards that morning, Geithner started writing out various merger permutations: Morgan Stanley and Citigroup. Morgan Stanley and JPMorgan Chase. Morgan Stanley and Mitsubishi. Morgan Stanley and C.I.C. Morgan Stanley and Outside Investor. Goldman Sachs and Citigroup. Goldman Sachs and Wachovia. Goldman Sachs and Outside Investor. Fortress Goldman. Fortress Morgan Stanley.
It was the ultimate Wall Street chessboard.
Thursday, April 19, 2012
Move investments out of the dollar
History is replete with situations where the middle class of a country has been wiped out as a result of the profligacy of its government. If one believes the risks of such an outcome are high, steps should be explored that will protect one’s savings and wealth. If you believe the dollar is going to collapse, you move investments out of the dollar. One way for US investors is to invest in non dollar-denominated instruments like foreign stocks, foreign bonds, foreign currencies and CDs in foreign banks. Unfortunately, history is also replete with government reactions in such situations. In virtually all, the government prevents its citizens from protecting themselves by imposing capital controls. Rather than government enabling or encouraging its citizens to protect their savings and wealth, they preclude them from doing so via “emergency” legislation. While such a step is not inevitable, it becomes highly probable as less capital enters this country and more leaves. Capital controls are never discussed in advance; they appear as a “surprise,” effectively precluding any protective actions. If you might be affected by such legislation or merely want to learn more about it, read this post at Naked Capital.
If a bank takes that approach
Here is an idea so absolutely idiotic that it is hard to believe our government didn’t implement it first. It is from the Japanese, perhaps reflecting the creative thinking responsible for their outstanding economic results of the past two decades. Apparently, if a bank customer is a deadbeat, the bank will not have to classify the loan as non-performing or set up loss reserves against it. Now that is a strategy that should produce stronger banks.
Japanese banks’ bad loans won’t be driven higher by a proposed moratorium on debt payments by struggling small companies, said Financial Services Minister Shizuka Kamei.
Lenders won’t have to classify loans encompassed by the plan as non-performing, Kamei, 72, said in an interview yesterday at his office in Tokyo. That means they won’t be forced to boost provisions when borrowers postpone repayments of interest or principal, he said. At the same time, Kamei vowed to push banks to extend more credit to small businesses after bankruptcies hit a six-year high in Japan.
“We’re going to get financial institutions to provide these firms with more loans,” said Kamei. “Banks won’t have to treat debt on which they provide a moratorium as bad.”
The moratorium, postponing repayment of principal and interest, will be extended to individuals as well as firms Kamei said. It will aim at giving relief to companies with about 100 million yen ($1.1 million) or less in capital.
“As long as I’m financial services minister, I’m not going to leave small companies in the lurch unable to get loans,” Kamei said. “If a bank takes that approach, I’ll hit them with a business improvement order.”
The full article by Mish can be read by clicking on his name.
This may be one of the most asinine economic policies ever implemented, very high praise indeed given all the competition. A third-grader should be able to spot the fallacies in such policy. Weak banks will be made even weaker. Strong banks presumably would be able to stop pouring good money after bad and recognize the loss (although I have no idea how much being hit with “a business improvement order” hurts). Even more damaging will be the unintended consequences. The law effectively coerces banks to overturn contracts at the whim of the State. That has frightening implications for all business, not only banks. For banks, it dramatically raises the risks of lending money, ensuring that future loans will be more restrictive than they otherwise would have been.
The idea is so bad that we should expect to see it surface here. Oh yes, we have already heard it discussed in different variants — forced moratoriums and/or cramdowns on mortgages. Thus, our government has not lost its creativity, but appears to be a bit tardy on applying such ideas. Whether this tardiness reflects ineptness or the acquisition of a conscience should not be too difficult for the reader to figure out. On the other hand, perhaps our creativity is slipping. After all, cash for clunkers was not our idea. We copied others.
Japanese banks’ bad loans won’t be driven higher by a proposed moratorium on debt payments by struggling small companies, said Financial Services Minister Shizuka Kamei.
Lenders won’t have to classify loans encompassed by the plan as non-performing, Kamei, 72, said in an interview yesterday at his office in Tokyo. That means they won’t be forced to boost provisions when borrowers postpone repayments of interest or principal, he said. At the same time, Kamei vowed to push banks to extend more credit to small businesses after bankruptcies hit a six-year high in Japan.
“We’re going to get financial institutions to provide these firms with more loans,” said Kamei. “Banks won’t have to treat debt on which they provide a moratorium as bad.”
The moratorium, postponing repayment of principal and interest, will be extended to individuals as well as firms Kamei said. It will aim at giving relief to companies with about 100 million yen ($1.1 million) or less in capital.
“As long as I’m financial services minister, I’m not going to leave small companies in the lurch unable to get loans,” Kamei said. “If a bank takes that approach, I’ll hit them with a business improvement order.”
The full article by Mish can be read by clicking on his name.
This may be one of the most asinine economic policies ever implemented, very high praise indeed given all the competition. A third-grader should be able to spot the fallacies in such policy. Weak banks will be made even weaker. Strong banks presumably would be able to stop pouring good money after bad and recognize the loss (although I have no idea how much being hit with “a business improvement order” hurts). Even more damaging will be the unintended consequences. The law effectively coerces banks to overturn contracts at the whim of the State. That has frightening implications for all business, not only banks. For banks, it dramatically raises the risks of lending money, ensuring that future loans will be more restrictive than they otherwise would have been.
The idea is so bad that we should expect to see it surface here. Oh yes, we have already heard it discussed in different variants — forced moratoriums and/or cramdowns on mortgages. Thus, our government has not lost its creativity, but appears to be a bit tardy on applying such ideas. Whether this tardiness reflects ineptness or the acquisition of a conscience should not be too difficult for the reader to figure out. On the other hand, perhaps our creativity is slipping. After all, cash for clunkers was not our idea. We copied others.
Tuesday, April 17, 2012
Quantity of credit with positive systemic results
oug Noland of Prudent Bear tackles the flaws in credit and interventionism practiced by our government and concludes: “… it is my view that a flawed Credit apparatus, ill-advised government intervention, and dysfunctional market dynamics ensure economic maladjustment gets worse before it gets better.” His commentary on the current state of economic thinking and what it will produce appears below.The Governator and the Market Operator
I’ll begin with an excerpt from Bill Gross’s latest Investment Outlook:
“But California’s problems, while somewhat unique and self-inflicted, are really America’s problems, and not just because the California economy is 15% of national GDP. While California’s $26 billion deficit is not directly comparable to the federal gap of $1 trillion-plus, they both reflect a lack of discipline and indeed vision to perceive that the strong growth in revenues was driven by the same excess leverage and same delusionary asset appreciation that was bound to approach cliff’s
I’ll begin with an excerpt from Bill Gross’s latest Investment Outlook:
“But California’s problems, while somewhat unique and self-inflicted, are really America’s problems, and not just because the California economy is 15% of national GDP. While California’s $26 billion deficit is not directly comparable to the federal gap of $1 trillion-plus, they both reflect a lack of discipline and indeed vision to perceive that the strong growth in revenues was driven by the same excess leverage and same delusionary asset appreciation that was bound to approach cliff’s
Saturday, April 14, 2012
The personal income tax
Congress has done a phenomenal job in taxing, spending and borrowing. Nobody does it better. They should get a Congressional gold medal for taxing, spending and borrowing. Up until 1913, the government was limited in their ability to spend because there was no personal income tax and the currency of the United States was backed by hard assets. Woodrow Wilson and Congressmen, under the control of the banking cartel, created the Federal Reserve and the personal income tax in 1913. The unleashing of politicians from any constraints on their spending has led to a predictable result. The US dollar has lost 97% of its value versus gold since 1913. The U.S. National Debt was $2.9 billion in 1913. Today, it is $11.9 TRILLION, a mere 400,000% increase in 96 years. That is the good news. President Obama plans to add at least another $9 TRILLION to our debt in the next 10 years. That is the actual plan. Can you picture George Washington spinning in his grave?
Rather than conclude that the gig is up and that running up huge deficits in order to police the world and provide welfare benefits to the 50% of the population that does not pay income taxes, Obama and Bernanke have decided to double down. Their solution is to double the National Debt, greatly expand the welfare state, and continue to police the world. Does anyone really think it is going to work? Bankruptcy is a certainty.
Rather than conclude that the gig is up and that running up huge deficits in order to police the world and provide welfare benefits to the 50% of the population that does not pay income taxes, Obama and Bernanke have decided to double down. Their solution is to double the National Debt, greatly expand the welfare state, and continue to police the world. Does anyone really think it is going to work? Bankruptcy is a certainty.
Raise the cost of building for everybody
A recovery in the economy can only occur via recovery in the private sector. Much of what has been hailed as “green shoots” results from government stimulus. It is not clear what is being stimulated other than reported GDP, because there are few signs of private sector recovery. One area that has received enormous stimulus is the housing market, even though its reported numbers are still dismal.
In the mortgage issuance area, the private sector has disappeared (see previous post by Chris Martenson). Is this because banks are unwilling to lend? Is it because there are no creditworthy borrowers? The answer to both of these questions is a resounding No! Then why is this happening? The government has driven down interest rates so low in a (foolish) attempt to support housing prices that they have made it unattractive for banks to risk money at these rates. In that sense, the government is subsidizing low interest rates with taxpayer money/risk. Private firms make mortgage loans at interest rates commensurate with risk. When interest rates are held artificially low, there are few loans that meet this requirement. Another way to state this is that the government is taking on risks with your money that prudent investors would not take on with their own money. It is precisely that strategy that gave us the Fannie and Freddie debacle. This is not rocket science. The results are predictable and inevitable as evidenced by the following quote:
Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to “buy” houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief in the long run they do not increase overall national production but encourage malinvestment.
In the mortgage issuance area, the private sector has disappeared (see previous post by Chris Martenson). Is this because banks are unwilling to lend? Is it because there are no creditworthy borrowers? The answer to both of these questions is a resounding No! Then why is this happening? The government has driven down interest rates so low in a (foolish) attempt to support housing prices that they have made it unattractive for banks to risk money at these rates. In that sense, the government is subsidizing low interest rates with taxpayer money/risk. Private firms make mortgage loans at interest rates commensurate with risk. When interest rates are held artificially low, there are few loans that meet this requirement. Another way to state this is that the government is taking on risks with your money that prudent investors would not take on with their own money. It is precisely that strategy that gave us the Fannie and Freddie debacle. This is not rocket science. The results are predictable and inevitable as evidenced by the following quote:
Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to “buy” houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief in the long run they do not increase overall national production but encourage malinvestment.
Friday, April 13, 2012
Economic activity should subside
Investors worrying about a significant pullback in economic growth this quarter are sorely mistaken, Deutsche Bank analysts wrote in a note published earlier this week.
As we pointed out yesterday, analysts thinking equities markets are just repeating the same bearish Q2 pattern we saw in 2011 and 2012 have a point:
As we pointed out yesterday, analysts thinking equities markets are just repeating the same bearish Q2 pattern we saw in 2011 and 2012 have a point:
Thursday, April 12, 2012
There is no safe store of value
America has produced its share of radicals, both left and right. Although the definitions of “radical” have shifted over time (our Founding Fathers would be considered extremists today), those that are on the wrong side of prevailing definitions are usually precluded from public roles. Exceptions can be found, usually accompanied by a perceived “road to Damascus” conversion. Senator Robert Byrd of WV, an alleged former member of the Klan, is one example. Another astonishing example is provided below. This man stated the following:
The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
Deficit spending is simply a scheme for the confiscation of wealth.
… the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.
Based on the above, one would assume this man would have no desire to serve a government whose primary role, as perceived by him, was plunder of the wealth of its citizens. Furthermore, one might also assume that such a man would be judged unfit to serve, because his philosophical framework would be a threat to the myth of government and the bulk of its programs. Yet such a man did go on to serve and serve admirably in the eyes of many. Indeed, in terms of the thinking reflected in the statements above, he became the Chief Officer of Plunder. In more polite terms, the office is known as Chairman of the Federal Reserve. His name, of course, is Alan Greenspan otherwise dubbed “The Maestro” by admirers in the media. Lately, his admirers have lessened as his policies are seen to have been at the root of our current economic problems. Perhaps he should have stuck to his original principles rather than become an instrument of the State and a part of the problem.
The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
Deficit spending is simply a scheme for the confiscation of wealth.
… the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.
Based on the above, one would assume this man would have no desire to serve a government whose primary role, as perceived by him, was plunder of the wealth of its citizens. Furthermore, one might also assume that such a man would be judged unfit to serve, because his philosophical framework would be a threat to the myth of government and the bulk of its programs. Yet such a man did go on to serve and serve admirably in the eyes of many. Indeed, in terms of the thinking reflected in the statements above, he became the Chief Officer of Plunder. In more polite terms, the office is known as Chairman of the Federal Reserve. His name, of course, is Alan Greenspan otherwise dubbed “The Maestro” by admirers in the media. Lately, his admirers have lessened as his policies are seen to have been at the root of our current economic problems. Perhaps he should have stuck to his original principles rather than become an instrument of the State and a part of the problem.
Massive tax increases
We are told that massive tax increases will be needed to cover the large projected deficits. History, however, shows that this strategy will not work. Regardless of the tax rate or the tax structure, tax revenues remain relatively constant as a percentage of GDP. Whether the “Laffer curve” or disincentives are responsible is moot. The fact is that since the mid 1940s there has been a ceiling on tax revenues related to GDP. The ceiling is unaffected by low or high top marginal tax rates that have ranged from 28 to 90%. Government is too large and needs to be cut back. The common man understands this; pompous politicians do not or will not. We now have a government that has become the biggest bubble of all. Like all other bubbles, it too will burst. The deficits are unsustainable. Tax increases will not change that reality.
Federal Income Tax Rates and Total Revenues
Federal Income Tax Rates and Total Revenues
Manufacturing events increased
Employers took 2,690 mass layoff actions in August that resulted in the separation of 259,307 workers,
seasonally adjusted, as measured by new filings for unemployment insurance benefits during the month,
the U.S. Bureau of Labor Statistics reported today. Each action involved at least 50 persons from a
single employer. The number of mass layoff events in August increased by 533 from the prior month,
and the number of associated initial claims increased by 52,516. Over the year, the number of mass
layoff events increased by 803, and associated initial claims increased by 70,356. Year-to-date mass
layoff events (21,184) and initial claims (2,162,202) both recorded program highs through August. In
August, 900 mass layoff events were reported in the manufacturing sector, seasonally adjusted, resulting
in 93,892 initial claims. Over the month, the number of manufacturing events increased by 279, and
associated initial claims increased by 21,626.
seasonally adjusted, as measured by new filings for unemployment insurance benefits during the month,
the U.S. Bureau of Labor Statistics reported today. Each action involved at least 50 persons from a
single employer. The number of mass layoff events in August increased by 533 from the prior month,
and the number of associated initial claims increased by 52,516. Over the year, the number of mass
layoff events increased by 803, and associated initial claims increased by 70,356. Year-to-date mass
layoff events (21,184) and initial claims (2,162,202) both recorded program highs through August. In
August, 900 mass layoff events were reported in the manufacturing sector, seasonally adjusted, resulting
in 93,892 initial claims. Over the month, the number of manufacturing events increased by 279, and
associated initial claims increased by 21,626.
Our creditors know this better than we do
Despite all the hoopla regarding an economic recovery, there can be no recovery until the economy sheds the excess debt. The consumer is tapped out and is adjusting his balance sheet to reduce leverage. That is good, despite what the government wants (another credit bubble).
The so-called stimulus programs can mask economic performance for a limited time only. They may produce increased GDP reports in the third and fourth quarters, not unusual in the middle of recessions. The media and Bernanke have already proclaimed that recovery is underway. Supporters will only become louder if positive GDP stats show up soon. Do not fall for this hype.
The statistics will be hailed as confirmation of a recovery. However, they are merely statistics produced by government that have more to do with GDP methodology and reporting bias than real growth or real recovery. They cannot go on forever, and they do not produce real growth or balanced economic activity. David Rosenberg, in his daily eletter, exposes the effects of stopping such programs:
POST-CLUNKER ECONOMY LOOKING CLUNKY
Edmunds.com just reported that U.S. motor vehicle sales so far in September are running at an 8.8 million annual rate — a 28-year low and a 38% plunge from the incentive-induced 14.1 million tally in August. If this is what autos do, imagine what housing does once the $8,000 first-time homebuyer tax credit expires (if it does) at the end of November (not to mention what the Fed does in terms of extending its mortgage purchase program beyond the December expiry too — it has had a hand in financing 80% of all new mortgage issuance. But look at the good news — at least we will be able to see what the economy can do without the walker.
What is coming will not be pretty! If the government renews these programs or implements new ones targeted at other sectors of the economy, it may be able to produce a short-term effect. However, this “benefit” is only created by pulling demand forward. That is, it pumps up current results at the expense of future results as Rosenberg discussed above. Even if one were to (erroneously) argue that these programs did some good, we are fast approaching the limits of what can be done. Each involves government subsidies of one sort or another. As such, each involves widening the deficit and increasing Federal debt, whether it be via tax rebates or increased spending. There is a limit to Federal debt. We have already passed the tipping point of being able to service government debt and promised social benefits. Our creditors know this better than we do and periodically scold us for our fiscal irresponsibility. We have become the Blanche du Bois of the world
The so-called stimulus programs can mask economic performance for a limited time only. They may produce increased GDP reports in the third and fourth quarters, not unusual in the middle of recessions. The media and Bernanke have already proclaimed that recovery is underway. Supporters will only become louder if positive GDP stats show up soon. Do not fall for this hype.
The statistics will be hailed as confirmation of a recovery. However, they are merely statistics produced by government that have more to do with GDP methodology and reporting bias than real growth or real recovery. They cannot go on forever, and they do not produce real growth or balanced economic activity. David Rosenberg, in his daily eletter, exposes the effects of stopping such programs:
POST-CLUNKER ECONOMY LOOKING CLUNKY
Edmunds.com just reported that U.S. motor vehicle sales so far in September are running at an 8.8 million annual rate — a 28-year low and a 38% plunge from the incentive-induced 14.1 million tally in August. If this is what autos do, imagine what housing does once the $8,000 first-time homebuyer tax credit expires (if it does) at the end of November (not to mention what the Fed does in terms of extending its mortgage purchase program beyond the December expiry too — it has had a hand in financing 80% of all new mortgage issuance. But look at the good news — at least we will be able to see what the economy can do without the walker.
What is coming will not be pretty! If the government renews these programs or implements new ones targeted at other sectors of the economy, it may be able to produce a short-term effect. However, this “benefit” is only created by pulling demand forward. That is, it pumps up current results at the expense of future results as Rosenberg discussed above. Even if one were to (erroneously) argue that these programs did some good, we are fast approaching the limits of what can be done. Each involves government subsidies of one sort or another. As such, each involves widening the deficit and increasing Federal debt, whether it be via tax rebates or increased spending. There is a limit to Federal debt. We have already passed the tipping point of being able to service government debt and promised social benefits. Our creditors know this better than we do and periodically scold us for our fiscal irresponsibility. We have become the Blanche du Bois of the world
Competing government insurance company
We are embroiled in a great debate over health care reform. There are two aspects of the debate that are often not identified. The first is whether healthcare is a “right.” The second is the best way to deliver healthcare. When one does not separate the two issues, one biases the solution.
While I do not agree that healthcare is a right (you cannot morally produce a “right” for some by violating the rights of others), let us assume for the moment that it is so deemed. Then the issue becomes how is this “right” best delivered. It seems that the US has answered the first question and now struggles with the answer to the second.It is the natural tendency of government to want to run things, hence we have the preoccupation with the single payer system or a competing government insurance company. The latter, using the concept of competition and government, is oxymoronic. Is there anyone outside of Washington DC that believes the government at the Federal or local level can run anything efficiently? The empirics regarding this issue are devastating — social security, Amtrak, medicare, medicaid, financial system regulation, the school system, potholes in the streets, the post office, infrastructure maintenance, the court system, garbage collection, department of motor vehicles, etc. etc. ad nauseum. One might reasonably argue that everything government touches deteriorates.
Back in the days of the Cold War, a joke that was popular in Europe went something like this: QUESTION — What would happen if the Soviet Union took control of the Sahara Desert? ANSWER — Initially no changes would be apparent; eventually there would be a shortage of sand.
Contraction must take place
Economic conditions will be sub-par perhaps for a decade or more as a result of the great credit unwind. For the past 20 plus years consumers spent most or more than their income by taking on extraordinary levels of debt. As Karl Denninger writes today:
Attempts to avoid the necessary adjustments are futile. They only ensure that the US ends up with a lost decade or two like Japan. That is if we are lucky, and the bottom does not drop out. At this point, debt levels exceed the levels where they can be comfortably serviced and contraction must take place.We have blown several trillion dollars in a futile attempt to stave off the contraction in debt outstanding and GDP that must come. The contraction is still coming, but the several trillion we wasted in an ill-advised attempt to prevent the inevitable is all gone.Make sure you thank Bernanke, Geithner, Obama, and of course Paulson and Bush.
Tuesday, March 20, 2012
Significant debt write-downs
Phoenix Capital Research predicts the Euro won’t survive 2012. So does James Quinn in his annual forecast among many others.
Most prognosticators deliberately provide a fuzzy time frame with their forecasts. It is prudent to do so. The prediction is likely true, although whether it will occur in 2012 or not is debatable.
There is great staying power for governments and institutions. They always take longer to die than reasonable estimates suggest. Extra longevity comes from their ability to ignore laws and contracts and utilize coercion on their citizens in the form of increased taxation, capital controls and often outright confiscation. Will the Euro die? Yes. Will it die in 2012? It may well do so, although be ready for whatever means possible to avoid that ending. The elites and their cronies are powerful. They have no interest is seeing the Euro die.
With that reservation in mind, here is Phoenix Capital Research’s take:
The Euro-zone in its current form is in its final chapter. Anyone who argues otherwise is not paying attention.
Consider the Greek situation. Greece’s debt problems first made mainstream media headline news at the beginning of 2009. The IMF/ EU/ ECB/ and Federal Reserve have been working on this situation for two years now. And they’ve yet to solve anything: after two bailouts, significant debt write-downs, and numerous austerity measures, Greece remains bankrupt.
Now, if the Powers That Be cannot solve Greece’s problems… what makes anyone think that they can address larger, more dangerous issues such as Italy or France, etc?
Consider that the world’s central banks staged a coordinated intervention in November… and Italy’s ten year is back yielding more than 7% less than two months later. Again, a coordinated intervention by the world’s central banks bought less than two months’ time for Italy.
And now we find the debt contagion spreading to France:
French Debt Costs Rise at Bond Sale as AAA Decision Looms
France sold 7.96 billion euros ($10.2 billion) of debt, with 10-year borrowing costs rising in the country’s first bond auction of the year as credit-rating companies threaten to cut the nation’s AAA grade.
The government sold 4.02 billion euros of the bonds maturing in October 2021 at an average yield of 3.29 percent, from 3.18 percent on Dec. 1. The euro fell to its weakest level against the dollar in 15 months, and the extra yield investors demand to hold French 10-year bonds instead of benchmark German bunds widened to the most in about six weeks.
Most prognosticators deliberately provide a fuzzy time frame with their forecasts. It is prudent to do so. The prediction is likely true, although whether it will occur in 2012 or not is debatable.
There is great staying power for governments and institutions. They always take longer to die than reasonable estimates suggest. Extra longevity comes from their ability to ignore laws and contracts and utilize coercion on their citizens in the form of increased taxation, capital controls and often outright confiscation. Will the Euro die? Yes. Will it die in 2012? It may well do so, although be ready for whatever means possible to avoid that ending. The elites and their cronies are powerful. They have no interest is seeing the Euro die.
With that reservation in mind, here is Phoenix Capital Research’s take:
The Euro-zone in its current form is in its final chapter. Anyone who argues otherwise is not paying attention.
Consider the Greek situation. Greece’s debt problems first made mainstream media headline news at the beginning of 2009. The IMF/ EU/ ECB/ and Federal Reserve have been working on this situation for two years now. And they’ve yet to solve anything: after two bailouts, significant debt write-downs, and numerous austerity measures, Greece remains bankrupt.
Now, if the Powers That Be cannot solve Greece’s problems… what makes anyone think that they can address larger, more dangerous issues such as Italy or France, etc?
Consider that the world’s central banks staged a coordinated intervention in November… and Italy’s ten year is back yielding more than 7% less than two months later. Again, a coordinated intervention by the world’s central banks bought less than two months’ time for Italy.
And now we find the debt contagion spreading to France:
French Debt Costs Rise at Bond Sale as AAA Decision Looms
France sold 7.96 billion euros ($10.2 billion) of debt, with 10-year borrowing costs rising in the country’s first bond auction of the year as credit-rating companies threaten to cut the nation’s AAA grade.
The government sold 4.02 billion euros of the bonds maturing in October 2021 at an average yield of 3.29 percent, from 3.18 percent on Dec. 1. The euro fell to its weakest level against the dollar in 15 months, and the extra yield investors demand to hold French 10-year bonds instead of benchmark German bunds widened to the most in about six weeks.
Many local governments collapse
Many are in denial that our country is in decline. Not slow decline either, but a relentless slide that produces Escape From New York conditions. A trailer can be watched here. For those who are unaware of this movie, Wikipedia describes it as follows:
[It] is a 1981 American science fictionaction film directed and scored by John Carpenter. He co-wrote the screenplay with Nick Castle. The film is set in the near future in a crime-riddenUnited States that has converted Manhattan Island in New York City into a maximum security prison. Ex-soldier Snake Plissken (Kurt Russell) is given 24 hours to find the President of the United States, who has been captured after the crash of Air Force One.
Carpenter wrote the film in the mid-1970s as a reaction to the Watergate scandal, but proved incapable of articulating how the film related to the scandal. After the success of Halloween, he had enough influence to get the film made and shot most of it in St. Louis, Missouri.[3]
The film’s total budget was estimated to be US$6 million.[1] It was a commercial hit, grossing over $50 million worldwide.[2] It has since become a cult film.
[It] is a 1981 American science fictionaction film directed and scored by John Carpenter. He co-wrote the screenplay with Nick Castle. The film is set in the near future in a crime-riddenUnited States that has converted Manhattan Island in New York City into a maximum security prison. Ex-soldier Snake Plissken (Kurt Russell) is given 24 hours to find the President of the United States, who has been captured after the crash of Air Force One.
Carpenter wrote the film in the mid-1970s as a reaction to the Watergate scandal, but proved incapable of articulating how the film related to the scandal. After the success of Halloween, he had enough influence to get the film made and shot most of it in St. Louis, Missouri.[3]
The film’s total budget was estimated to be US$6 million.[1] It was a commercial hit, grossing over $50 million worldwide.[2] It has since become a cult film.
This quote is an example of his outlook on markets
It is nice to see that Richard Russell, famed octogenarian investment newsletter author, has apparently recovered fully from his recent setback. This quote is an example of his outlook on markets (emboldening added):
Subscribers who are buying or holding stocks on the on the basis of the better employment news should remember that deteriorating internals in the face of improving newspaper headlines give us the worst of all markets. I cannot warn subscribers strongly enough that they face hard times in both the market and the economy during the months ahead. The operative words now are “extreme caution.” Please be out of all common stocks with the exception of the mining shares. According to my studies this year it’s going to be a long, cold fall and winter.
It is difficult to argue with his outlook, although mining stocks likely have not done well in down markets, at least during the primary downward moves. Longer term they should be fine. I currently own them although not in aggressive quantities.
Subscribers who are buying or holding stocks on the on the basis of the better employment news should remember that deteriorating internals in the face of improving newspaper headlines give us the worst of all markets. I cannot warn subscribers strongly enough that they face hard times in both the market and the economy during the months ahead. The operative words now are “extreme caution.” Please be out of all common stocks with the exception of the mining shares. According to my studies this year it’s going to be a long, cold fall and winter.
It is difficult to argue with his outlook, although mining stocks likely have not done well in down markets, at least during the primary downward moves. Longer term they should be fine. I currently own them although not in aggressive quantities.
An Economic Collapse Is Unavoidable
We are living through the death throes of an empire. For those citizens who understand what is occurring, the process is akin to being trapped in a taxicab where the meter is on and running at an infinite pace. We cannot get out; nor will we be able to pay when the bill is submitted.
Government Duplicity
The duplicity and outright lies of government are becoming more apparent. There are too many to list here. Here are a few:
Favorable forecasts regarding the economy are cruel jokes to everyone, but especially to those unemployed and underemployed. The country is told that the economy is out of the woods and on its way, recovering from the worst recession since the 1930s. No one with an IQ higher than room temperature or the ability to see should believe that.
The Obama Administration stumbled badly with their first major promise. We were told that if the stimulus package was passed, unemployment would not exceed 7%. It was passed and unemployment soared over 10%. The package had no promised shovel-ready jobs and turned out to be the biggest pork bill ever. Virtually nothing went to Main Street to help individuals. Unions, government employees and other
Democrat constituents were the primary beneficiaries along with the banking industry. President Reagan, like President Obama, inherited a difficult situation when he entered office. To the right is a comparison of what happened under Reagan and under Obama. The chart compares unemployment rates. Changes in the manner in which unemployment is currently measured favorably distort the unmitigated disaster that is
Government Duplicity
The duplicity and outright lies of government are becoming more apparent. There are too many to list here. Here are a few:
Favorable forecasts regarding the economy are cruel jokes to everyone, but especially to those unemployed and underemployed. The country is told that the economy is out of the woods and on its way, recovering from the worst recession since the 1930s. No one with an IQ higher than room temperature or the ability to see should believe that.
The Obama Administration stumbled badly with their first major promise. We were told that if the stimulus package was passed, unemployment would not exceed 7%. It was passed and unemployment soared over 10%. The package had no promised shovel-ready jobs and turned out to be the biggest pork bill ever. Virtually nothing went to Main Street to help individuals. Unions, government employees and other
Democrat constituents were the primary beneficiaries along with the banking industry. President Reagan, like President Obama, inherited a difficult situation when he entered office. To the right is a comparison of what happened under Reagan and under Obama. The chart compares unemployment rates. Changes in the manner in which unemployment is currently measured favorably distort the unmitigated disaster that is
Monday, March 19, 2012
Bankers and politicians will choose inflation
The ECB doubling their balance sheet and funneling trillions to European banks will not solve anything. The truth that no one wants to acknowledge is the standard of living for every person in Europe, the United States and Japan will decline. The choice is whether the decline happens rapidly by accepting debt default and restructuring or methodically through central bank created inflation that devours the wealth of the middle class. Debt default would result in rich bankers losing vast sums of wealth and politicians accepting the consequences of their phony promises. Bankers and politicians will choose inflation. They believe they can control the levers of inflation, but they have proven to be incompetent, hubristic, and myopic. The European Union will not survive 2012 in its current form. Countries are already preparing for the dissolution. Politicians and bankers will lie and print until the day they pull the plug on the doomed Euro experiment.
Mr. Quinn believes that excessive debt, rather than being addressed, will continue to be abused by government leading to an inevitable end:
… the excessive levels of sovereign debt will slow economic growth to zero or below in 2012. At worst, interest rates will soar as counties attempt to rollover their debt and rolling defaults across Europe will plunge the continent into a depression. The largest banks in Europe are leveraged 40 to 1, therefore a 3% reduction in their capital will cause bankruptcy. Once you pass 90% debt to GDP, your fate is sealed.
Contrary to what you have been told about de-leveraging under way, Mr. Quinn states that is not the case (my emboldening):
In a world inhabited by sincere sane leaders, willing to level with the citizens and disposed to allow financial institutions that took world crushing risks to fail through an orderly bankruptcy process, debt would have been written off and a sharp short contraction would have occurred. The stockholders, bondholders and executives of the Wall Street banks would have taken the losses they deserved. Instead Wall Street used their undue influence, wealth and power to force their politician puppets to funnel $5 trillion to the bankers that created the crisis while dumping the debt on taxpayers and unborn generations. The Wall Street controlled Federal Reserve provided risk free funding and took toxic mortgage assets off their balance sheets. The result is total credit market debt higher today than it was at the peak of the financial crisis in March 2009.
The country is experiencing accelerating rates of money inflation. Thus far, this money growth has not translated into price inflation primarily because of reporting bias in the CPI index and the fact that we are in a recession (regardless of whether the government calls it one or not). Any fiat money system survives only based on confidence. Once confidence is lost, so too is the currency. Quinn succinctly describes the anomaly supporting our currency:
The world has total confidence in pieces of paper being produced at a rate of $3.7 billion per day. Confidence in Ben Bernanke, Barack Obama and the U.S. Congress is all that stands between continued stability and complete chaos. What could go wrong?
Mr. Quinn’s forecast is worth reviewing. It is chock-full of informative graphs and strong opinions. As an example, the following graph supports his argument that we are still in recession (depression?) and that we have become a corporatocracy:
Quinn is not one to mince words or opinions. Is his forecast reasonable? Yes, although predicting it to hit in 2012 may not be. It seems too compressed a period for all his events to play out. Over a bit longer time frame, perhaps. It is more difficult to forecast timing than quantities. Generally, institutions take longer to die than we expect.
Mr. Quinn believes that excessive debt, rather than being addressed, will continue to be abused by government leading to an inevitable end:
… the excessive levels of sovereign debt will slow economic growth to zero or below in 2012. At worst, interest rates will soar as counties attempt to rollover their debt and rolling defaults across Europe will plunge the continent into a depression. The largest banks in Europe are leveraged 40 to 1, therefore a 3% reduction in their capital will cause bankruptcy. Once you pass 90% debt to GDP, your fate is sealed.
Contrary to what you have been told about de-leveraging under way, Mr. Quinn states that is not the case (my emboldening):
In a world inhabited by sincere sane leaders, willing to level with the citizens and disposed to allow financial institutions that took world crushing risks to fail through an orderly bankruptcy process, debt would have been written off and a sharp short contraction would have occurred. The stockholders, bondholders and executives of the Wall Street banks would have taken the losses they deserved. Instead Wall Street used their undue influence, wealth and power to force their politician puppets to funnel $5 trillion to the bankers that created the crisis while dumping the debt on taxpayers and unborn generations. The Wall Street controlled Federal Reserve provided risk free funding and took toxic mortgage assets off their balance sheets. The result is total credit market debt higher today than it was at the peak of the financial crisis in March 2009.
The country is experiencing accelerating rates of money inflation. Thus far, this money growth has not translated into price inflation primarily because of reporting bias in the CPI index and the fact that we are in a recession (regardless of whether the government calls it one or not). Any fiat money system survives only based on confidence. Once confidence is lost, so too is the currency. Quinn succinctly describes the anomaly supporting our currency:
The world has total confidence in pieces of paper being produced at a rate of $3.7 billion per day. Confidence in Ben Bernanke, Barack Obama and the U.S. Congress is all that stands between continued stability and complete chaos. What could go wrong?
Mr. Quinn’s forecast is worth reviewing. It is chock-full of informative graphs and strong opinions. As an example, the following graph supports his argument that we are still in recession (depression?) and that we have become a corporatocracy:
Quinn is not one to mince words or opinions. Is his forecast reasonable? Yes, although predicting it to hit in 2012 may not be. It seems too compressed a period for all his events to play out. Over a bit longer time frame, perhaps. It is more difficult to forecast timing than quantities. Generally, institutions take longer to die than we expect.
Economic future is absolute nonsense
The recovery propaganda is destroyed by this list of two dozen statistics that are frightening. The list is from The Economic Collapse website and truly reflects how hollowed out our economy has become. Were it not for the debt binge, standards of living would have been reduced long before this time.
Read it and weep:
Beware of bubbles of false hope. Right now there is a lot of talk about how the U.S. economy is improving, but it is all a lie. The mainstream media can be very seductive. When you sit down to watch television your brain tends to go into a very relaxed mode. In such a state, it becomes easy to slip thoughts and ideas past your defenses. Sometimes when I am watching television I realize what the media is trying to do and yet I can still feel it happening to me. In this day and age, it is absolutely critical that we all think for ourselves. When you look at the long-term trends and the long-term numbers, a much different picture of the U.S economy emerges than the one that is painted for us on television. Over the long-term, the number of good jobs in America has been steadily going down. Over the long-term, the number of Americans living in poverty and living on food stamps has been steadily going up. Over the past couple of decades, tens of thousands of businesses, millions of jobs and trillions of dollars of our national wealth have gone out of the country. Our debt is nearly 15 times larger than it was 30 years ago, and U.S. consumer debt has soared by 1700% over the past 40 years. Year after year the rate of inflation goes up faster than our incomes do, and
Read it and weep:
Beware of bubbles of false hope. Right now there is a lot of talk about how the U.S. economy is improving, but it is all a lie. The mainstream media can be very seductive. When you sit down to watch television your brain tends to go into a very relaxed mode. In such a state, it becomes easy to slip thoughts and ideas past your defenses. Sometimes when I am watching television I realize what the media is trying to do and yet I can still feel it happening to me. In this day and age, it is absolutely critical that we all think for ourselves. When you look at the long-term trends and the long-term numbers, a much different picture of the U.S economy emerges than the one that is painted for us on television. Over the long-term, the number of good jobs in America has been steadily going down. Over the long-term, the number of Americans living in poverty and living on food stamps has been steadily going up. Over the past couple of decades, tens of thousands of businesses, millions of jobs and trillions of dollars of our national wealth have gone out of the country. Our debt is nearly 15 times larger than it was 30 years ago, and U.S. consumer debt has soared by 1700% over the past 40 years. Year after year the rate of inflation goes up faster than our incomes do, and
Politicians must not allow a deflation
The argument persists as to whether our current economic crisis will end with massive inflation or in a deflationary spiral. Ultimately, either one results in a Depression.
For investors, this argument is more than an academic one. It is the single most important variable for near and intermediate term investing success. It is also important in regard to taking actions which can prepare and protect you and your family.
Respected analysts are on both sides of the inflation-deflation debate. Each side makes a strong case for their position. Which group should one believe? In my opinion, the primary difference between the two camps is how narrowly or broadly they view the field of economics. For purposes here, it is useful to view conceptions of economics in the context of an imperfect taxonomy described as “narrow” and “broad.” These are neither technical terms nor normal classifications, although this dichotomyis useful for explanatory reasons.
The Narrow Perspective of Economics
The narrow perspective utilizes current or historical data as he input to mathematical models. Doing so produces a very strong case for massive deflation based on increased saving, lowered consumption and debt defaults. The amount of debt is the overwhelming problem. Government at all levels – federal, state and municipal — are hopelessly insolvent, especially when the ticking time bomb of pensions is considered. Debt in the private sector is also massive, primarily in the mortgage, student loan and consumer finance areas. The banking system is also insolvent and faces another crisis bigger than the previous one.
Bankruptcies and other debt defaults are inevitable. Debt contraction leads to money supply contraction which is the very definition of deflation. Thus the deflationary scenario is quite plausible and would produce a deflationary collapse, otherwise known as a Depression.
A form of “deterministic physics” is the basis for virtually all macroeconomic models. None of these models saw the current crisis coming. It is mechanistic and oriented to past relationships. Economics is a social science dealing with acting and reacting individuals who are constantly shifting their behavior in order to protect and improve themselves. People are not dumb molecules bouncing off walls of laboratory beakers. The rate at which molecules collide with walls can be determined using past behavior (or explanatory theory) because molecules do not change behavior. When human beings bump into walls, it is unpleasant so they purposefully adjust their behavior to reduce the probabilities of it recurring.
A Broader Perspective of Economics
The broad perspective of economics recognizes economics as a science of human behavior. As thinking beings, men act purposefully in order to achieve ends. As such it cannot be modeled like physics which depends on past actions repeating. That does not mean economics does not have fundamental laws which allow knowledge of what a rational response would be toward a particular end. The difficult problem is discerning ends or the intentions of the human being. That piece of knowledge is subjective and problematic, limiting the value of economics as a predictive science.
Future actions are sometimes reasonably predictable. While it is nearly impossible to predict the actions of millions and millions of individuals because of their differing goals, it is possible to reasonably predict the actions of the federal government, at least in the near term. To understand why, one needs to understand the behavior and motivation of politicians.
No politician anywhere in the world wants to have a Depression on his watch. No politician wants to even experience an economic slowdown. Hence, we can be nearly certain that government will take whatever actions it believes will avoid the bad experience. Ironically, prior attempts to avoid economic corrections make a Depression inevitable. As expressed by Bob Chapman:
[The] crisis has been with us for more than 50 years and this portion of that crisis could become a very dynamic closer as massive monetization and inflation is let loose. We are at the stage now that risk is growing exponentially, as central banks and governments aggressively intervene into markets causing major distortions. These actions set the stage for heretofore-unexpected events, now called “black swan” events.
Politicians have tools to defer some crises, but only by making future crises bigger. But future crises are of no concern to politicians who live in the moment, dominated by the Keynesian creed that “in the long run we are all dead.” All political decisions are designed to produce short-term fixes. Most only achieve cosmetic outcomes from which temporary political advantage can be gained. “Kick the can down the road” is used almost exclusively to describe such political actions.
Politicians must not allow a deflation, which equates to a Depression under current circumstances. So long as they control the printing presses, they will flood the system with liquidity in hopes that one final bounce can be elicited from the economy. Two crises are foremost in their minds.
The insolvent banking system which will need to be bailed out again. Banks are carrying toxic assets on their books (made attractive by government changing FASB rules of accounting) which are grossly overvalued. If banks recognized these, the entire system would contract, plunging the economy into a Depression. Government knows this and encourages the fraud to continue. What cannot be ignored is a collapse of the banking system in Europe which will trigger a similar result here. The Fed is already surreptitiously involved in an effort to assist in the bailout of European banks.
The federal government has no money and will soon be unable to pay its bills from revenues obtained from taxes and bond sales. Politicians will do anything rather than stopping payments on things like social security, medicare, military pay and the like. The government will sell bonds to the Federal Reserve (quatitative easing or printing money, if you prefer), to avoid this. The Fed has become little more than the “buyer of last resort.” Cutting spending back to the levels that can be funded by tax revenues and market bond sales is unacceptable to the political class. That will not happen during a recession, nor with a political class that has conditioned themselves and their constituents to the idea that the government has unlimited resources. A complete and total economic debacle will be necessary before this mindset is altered.
Politicians will not allow deflation. Of course, there is the risk of political miscalculation in the pursuit of this goal, but virtually no risk in determining what they will attempt to accomplish.
We are headed for high inflation which the Fed will undoubtedly rationalize as necessary in order to save the economy. There are two reasons for that:
The level of inflation is dependent on the supply of money but also the demand for money. Arguably the Fed may be able to control the former. They are unable to control the latter which is determined by the millions of people who handle money. As inflation increases, people spend their money faster in order to beat expected price increases. This increases the “velocity” of money which changes the relationship between the quantity of money and economic activity. Ludwig von Mises termed this end stage as “the crack-up boom” which is accelerated spending that results in hyperinflation. The purchasing power of money is declining so rapidly that people do not want to hold it. Think Weimar Germany or Zimbabwe.
The Fed cannot stop increasing the supply of money unless government limits its spending to what they bring in.
Unfortunately there is no way the Fed can calibrate the level of inflation. It is impossible, for example, to say that we will have an 8% level of inflation with any reasonable hope of achieving it. Neither politicians nor the Federal Reserve are capable of “managing” inflation in the sense that they can dial in some acceptable level and maintain it. Furthermore, inflation will not help the economy but can kill it. Once money reaches the “crack up boom” phase, it ceases being acceptable as currency. People resort to barter which is necessarily inefficient and costly. The economy shrinks and the economy plunges into a Depression. This result can occur in a highly inflationary environment (a hyperinflationary Depression) or it could devolve into a deflationary Depression. The decision as to which occurs is in the hands of the government and the Federal Reserve. If they continue printing, there will be a hyperinflationary Depression.
Whether the government chooses to pursue inflation or allow deflation to play out, economically the end is the same — a Depression. From a political standpoint, it is beneficial to continue to kick the can down the road. The bottom line is that a Depression is unavoidable. I am betting on the inflation choice based on politicians doing what is in their best interest rather than that of the country. There are decades of political greed and cowardice upon which my position rests. That is not going to change, regardless of who is elected in 2012.
If one believes that politicians will behave as I suspect, the only way to believe that deflation is our next step is that printing money is not inflationary. Even with a complete collapse in debt levels, there is no speed that the printing presses cannot match.
For investors, this argument is more than an academic one. It is the single most important variable for near and intermediate term investing success. It is also important in regard to taking actions which can prepare and protect you and your family.
Respected analysts are on both sides of the inflation-deflation debate. Each side makes a strong case for their position. Which group should one believe? In my opinion, the primary difference between the two camps is how narrowly or broadly they view the field of economics. For purposes here, it is useful to view conceptions of economics in the context of an imperfect taxonomy described as “narrow” and “broad.” These are neither technical terms nor normal classifications, although this dichotomyis useful for explanatory reasons.
The Narrow Perspective of Economics
The narrow perspective utilizes current or historical data as he input to mathematical models. Doing so produces a very strong case for massive deflation based on increased saving, lowered consumption and debt defaults. The amount of debt is the overwhelming problem. Government at all levels – federal, state and municipal — are hopelessly insolvent, especially when the ticking time bomb of pensions is considered. Debt in the private sector is also massive, primarily in the mortgage, student loan and consumer finance areas. The banking system is also insolvent and faces another crisis bigger than the previous one.
Bankruptcies and other debt defaults are inevitable. Debt contraction leads to money supply contraction which is the very definition of deflation. Thus the deflationary scenario is quite plausible and would produce a deflationary collapse, otherwise known as a Depression.
A form of “deterministic physics” is the basis for virtually all macroeconomic models. None of these models saw the current crisis coming. It is mechanistic and oriented to past relationships. Economics is a social science dealing with acting and reacting individuals who are constantly shifting their behavior in order to protect and improve themselves. People are not dumb molecules bouncing off walls of laboratory beakers. The rate at which molecules collide with walls can be determined using past behavior (or explanatory theory) because molecules do not change behavior. When human beings bump into walls, it is unpleasant so they purposefully adjust their behavior to reduce the probabilities of it recurring.
A Broader Perspective of Economics
The broad perspective of economics recognizes economics as a science of human behavior. As thinking beings, men act purposefully in order to achieve ends. As such it cannot be modeled like physics which depends on past actions repeating. That does not mean economics does not have fundamental laws which allow knowledge of what a rational response would be toward a particular end. The difficult problem is discerning ends or the intentions of the human being. That piece of knowledge is subjective and problematic, limiting the value of economics as a predictive science.
Future actions are sometimes reasonably predictable. While it is nearly impossible to predict the actions of millions and millions of individuals because of their differing goals, it is possible to reasonably predict the actions of the federal government, at least in the near term. To understand why, one needs to understand the behavior and motivation of politicians.
No politician anywhere in the world wants to have a Depression on his watch. No politician wants to even experience an economic slowdown. Hence, we can be nearly certain that government will take whatever actions it believes will avoid the bad experience. Ironically, prior attempts to avoid economic corrections make a Depression inevitable. As expressed by Bob Chapman:
[The] crisis has been with us for more than 50 years and this portion of that crisis could become a very dynamic closer as massive monetization and inflation is let loose. We are at the stage now that risk is growing exponentially, as central banks and governments aggressively intervene into markets causing major distortions. These actions set the stage for heretofore-unexpected events, now called “black swan” events.
Politicians have tools to defer some crises, but only by making future crises bigger. But future crises are of no concern to politicians who live in the moment, dominated by the Keynesian creed that “in the long run we are all dead.” All political decisions are designed to produce short-term fixes. Most only achieve cosmetic outcomes from which temporary political advantage can be gained. “Kick the can down the road” is used almost exclusively to describe such political actions.
Politicians must not allow a deflation, which equates to a Depression under current circumstances. So long as they control the printing presses, they will flood the system with liquidity in hopes that one final bounce can be elicited from the economy. Two crises are foremost in their minds.
The insolvent banking system which will need to be bailed out again. Banks are carrying toxic assets on their books (made attractive by government changing FASB rules of accounting) which are grossly overvalued. If banks recognized these, the entire system would contract, plunging the economy into a Depression. Government knows this and encourages the fraud to continue. What cannot be ignored is a collapse of the banking system in Europe which will trigger a similar result here. The Fed is already surreptitiously involved in an effort to assist in the bailout of European banks.
The federal government has no money and will soon be unable to pay its bills from revenues obtained from taxes and bond sales. Politicians will do anything rather than stopping payments on things like social security, medicare, military pay and the like. The government will sell bonds to the Federal Reserve (quatitative easing or printing money, if you prefer), to avoid this. The Fed has become little more than the “buyer of last resort.” Cutting spending back to the levels that can be funded by tax revenues and market bond sales is unacceptable to the political class. That will not happen during a recession, nor with a political class that has conditioned themselves and their constituents to the idea that the government has unlimited resources. A complete and total economic debacle will be necessary before this mindset is altered.
Politicians will not allow deflation. Of course, there is the risk of political miscalculation in the pursuit of this goal, but virtually no risk in determining what they will attempt to accomplish.
We are headed for high inflation which the Fed will undoubtedly rationalize as necessary in order to save the economy. There are two reasons for that:
The level of inflation is dependent on the supply of money but also the demand for money. Arguably the Fed may be able to control the former. They are unable to control the latter which is determined by the millions of people who handle money. As inflation increases, people spend their money faster in order to beat expected price increases. This increases the “velocity” of money which changes the relationship between the quantity of money and economic activity. Ludwig von Mises termed this end stage as “the crack-up boom” which is accelerated spending that results in hyperinflation. The purchasing power of money is declining so rapidly that people do not want to hold it. Think Weimar Germany or Zimbabwe.
The Fed cannot stop increasing the supply of money unless government limits its spending to what they bring in.
Unfortunately there is no way the Fed can calibrate the level of inflation. It is impossible, for example, to say that we will have an 8% level of inflation with any reasonable hope of achieving it. Neither politicians nor the Federal Reserve are capable of “managing” inflation in the sense that they can dial in some acceptable level and maintain it. Furthermore, inflation will not help the economy but can kill it. Once money reaches the “crack up boom” phase, it ceases being acceptable as currency. People resort to barter which is necessarily inefficient and costly. The economy shrinks and the economy plunges into a Depression. This result can occur in a highly inflationary environment (a hyperinflationary Depression) or it could devolve into a deflationary Depression. The decision as to which occurs is in the hands of the government and the Federal Reserve. If they continue printing, there will be a hyperinflationary Depression.
Whether the government chooses to pursue inflation or allow deflation to play out, economically the end is the same — a Depression. From a political standpoint, it is beneficial to continue to kick the can down the road. The bottom line is that a Depression is unavoidable. I am betting on the inflation choice based on politicians doing what is in their best interest rather than that of the country. There are decades of political greed and cowardice upon which my position rests. That is not going to change, regardless of who is elected in 2012.
If one believes that politicians will behave as I suspect, the only way to believe that deflation is our next step is that printing money is not inflationary. Even with a complete collapse in debt levels, there is no speed that the printing presses cannot match.
Saturday, March 17, 2012
Despite millions of dollars
To think that civilizations always progress is a sign of ignorance, if not stupidity.
Ludwig von Mises emphasized how proper institutions and incentives were necessary for progress. He knew that progress neither constant nor guaranteed. If institutions and incentives are damaged or destroyed, progress will cease and retrogression will set in.
Henry Hazlitt
History is replete with examples of how societies and civilizations revert to less prosperous times and conditons, often accompanied by rebellion and civil unrest. The Roman empire died from within. Oh, they were overrun but only after their empire had exhausted itself and its resources.
Mises used the phrase “time will run back” to describe the process of losing ground or retrogressing. Henry Hazlitt wrote a fictional novel using Mises’ phrase as the title in which changes in institutions, laws, incentives and freedom all combine to impoverish a previously prosperous and civil society.
Victor Davis Hanson details below how this process is already well underway in his home state. It is not limited to California. The same retrogression is underway in Michigan, Illinois and a number of other states. Inner cities in parts of the country have sections that are too dangerous to visit. The retrogression is underway and the regulatory apparatus and insolvency of Washington is destroying incentives. This process will not stop until the craziness that we call government is stopped.
In Greek mythology, the prophetess Cassandra was doomed both to tell the truth and to be ignored. Our modern version is a bankrupt Greece that we seem to discount.
News accounts abound now of impoverished Athens residents scrounging pharmacies for scarce aspirin — as Greece is squeezed to make interest payments to the supposedly euro-pinching German banks.
Such accounts may be exaggerations, but they should warn us that yearly progress is never assured. Instead, history offers plenty of examples of life becoming far worse than it had been centuries earlier. The biographer Plutarch, writing 500 years after the glories of classical Greece, lamented that in his time weeds grew amid the empty colonnades of the once-impressive Greek city-states. In America, most would prefer to live in the Detroit of 1941 than the Detroit of 2011. The quality of today’s air travel has regressed to the climate of yesterday’s bus service.
In 2000, Greeks apparently assumed that they had struck it rich with their newfound money-laden European Union lenders — even though they certainly had not earned their new riches through increased productivity, the discovery of more natural resources, or greater collective investment and savings.
The brief euro mirage has vanished. Life in Athens is zooming backward to the pre-EU days of the 1970s. Then, most imported goods were too expensive to buy, medical care was often premodern, and the city resembled more a Turkish Istanbul than a European Munich.
The United States should pay heed to the modern Greek Cassandra, since our own rendezvous with reality is rapidly approaching. The costs of servicing a growing national debt of more than $15 trillion are starting to squeeze out other budget expenditures. Americans are no longer affluent enough to borrow hundreds of billions of dollars to import oil, while we snub our noses at vast new oil and gas deposits beneath our own soil and seas.
In my state, Californians for 40 years have hiked taxes; grown their government; vastly expanded entitlements; put farmland, timberland, and oil and gas lands off limits; and opened their borders to millions of illegal aliens. They apparently assumed that they had inherited so much wealth from prior generations and that their state was so naturally rich, that a continually better life was their natural birthright.
It wasn’t. Now, as in Greece, the veneer of civilization is proving pretty thin in California. Hospitals no longer have the money to offer sophisticated long-term medical care to the indigent. Cities no longer have the funds to self-insure themselves from the accustomed barrage of monthly lawsuits. When thieves rip copper wire out of street lights, the streets stay dark. Most state residents would rather go to the dentist these days than queue up and take a number at the Department of Motor Vehicles. Hospital emergency rooms neither have room nor act as if there’s much of an emergency.
Traffic flows no better on most of the state’s freeways than it did 40 years ago — and often much worse, given the crumbling infrastructure and increased traffic. Once-excellent K–12 public schools now score near the bottom in nationwide tests. The California state-university system keeps adding administrators to the point where they have almost matched the number of faculty, though half of the students who enter CSU need remedial reading and math. Despite millions of dollars in tutoring, half the students still don’t graduate. The taxpayer is blamed in constant harangues for not ponying up more money, rather than administrators being faulted for a lack of reform.
In 1960, there were far fewer government officials, far fewer prisons, far fewer laws, and far fewer lawyers — and yet the state was a far safer place than it is a half-century later. Technological progress — whether iPhones or Xboxes — can often accompany moral regress. There are not yet weeds in our cities, but those too may be coming.
The average Californian, like the average Greek, forgot that civilization is fragile. Its continuance requires respect for the law, tough-minded education, collective thrift, private investment, individual self-reliance, and common codes of behavior and civility — and exempts no one from those rules. Such knowledge and patterns of civilized behavior, slowly accrued over centuries, can be lost in a single generation.
A keen visitor to Athens — or Los Angeles — during the last decade not only could have seen that things were not quite right, but also could have concluded that they could not go on as they were. And so they are not.
Washington, please take heed.
Ludwig von Mises emphasized how proper institutions and incentives were necessary for progress. He knew that progress neither constant nor guaranteed. If institutions and incentives are damaged or destroyed, progress will cease and retrogression will set in.
Henry Hazlitt
History is replete with examples of how societies and civilizations revert to less prosperous times and conditons, often accompanied by rebellion and civil unrest. The Roman empire died from within. Oh, they were overrun but only after their empire had exhausted itself and its resources.
Mises used the phrase “time will run back” to describe the process of losing ground or retrogressing. Henry Hazlitt wrote a fictional novel using Mises’ phrase as the title in which changes in institutions, laws, incentives and freedom all combine to impoverish a previously prosperous and civil society.
Victor Davis Hanson details below how this process is already well underway in his home state. It is not limited to California. The same retrogression is underway in Michigan, Illinois and a number of other states. Inner cities in parts of the country have sections that are too dangerous to visit. The retrogression is underway and the regulatory apparatus and insolvency of Washington is destroying incentives. This process will not stop until the craziness that we call government is stopped.
In Greek mythology, the prophetess Cassandra was doomed both to tell the truth and to be ignored. Our modern version is a bankrupt Greece that we seem to discount.
News accounts abound now of impoverished Athens residents scrounging pharmacies for scarce aspirin — as Greece is squeezed to make interest payments to the supposedly euro-pinching German banks.
Such accounts may be exaggerations, but they should warn us that yearly progress is never assured. Instead, history offers plenty of examples of life becoming far worse than it had been centuries earlier. The biographer Plutarch, writing 500 years after the glories of classical Greece, lamented that in his time weeds grew amid the empty colonnades of the once-impressive Greek city-states. In America, most would prefer to live in the Detroit of 1941 than the Detroit of 2011. The quality of today’s air travel has regressed to the climate of yesterday’s bus service.
In 2000, Greeks apparently assumed that they had struck it rich with their newfound money-laden European Union lenders — even though they certainly had not earned their new riches through increased productivity, the discovery of more natural resources, or greater collective investment and savings.
The brief euro mirage has vanished. Life in Athens is zooming backward to the pre-EU days of the 1970s. Then, most imported goods were too expensive to buy, medical care was often premodern, and the city resembled more a Turkish Istanbul than a European Munich.
The United States should pay heed to the modern Greek Cassandra, since our own rendezvous with reality is rapidly approaching. The costs of servicing a growing national debt of more than $15 trillion are starting to squeeze out other budget expenditures. Americans are no longer affluent enough to borrow hundreds of billions of dollars to import oil, while we snub our noses at vast new oil and gas deposits beneath our own soil and seas.
In my state, Californians for 40 years have hiked taxes; grown their government; vastly expanded entitlements; put farmland, timberland, and oil and gas lands off limits; and opened their borders to millions of illegal aliens. They apparently assumed that they had inherited so much wealth from prior generations and that their state was so naturally rich, that a continually better life was their natural birthright.
It wasn’t. Now, as in Greece, the veneer of civilization is proving pretty thin in California. Hospitals no longer have the money to offer sophisticated long-term medical care to the indigent. Cities no longer have the funds to self-insure themselves from the accustomed barrage of monthly lawsuits. When thieves rip copper wire out of street lights, the streets stay dark. Most state residents would rather go to the dentist these days than queue up and take a number at the Department of Motor Vehicles. Hospital emergency rooms neither have room nor act as if there’s much of an emergency.
Traffic flows no better on most of the state’s freeways than it did 40 years ago — and often much worse, given the crumbling infrastructure and increased traffic. Once-excellent K–12 public schools now score near the bottom in nationwide tests. The California state-university system keeps adding administrators to the point where they have almost matched the number of faculty, though half of the students who enter CSU need remedial reading and math. Despite millions of dollars in tutoring, half the students still don’t graduate. The taxpayer is blamed in constant harangues for not ponying up more money, rather than administrators being faulted for a lack of reform.
In 1960, there were far fewer government officials, far fewer prisons, far fewer laws, and far fewer lawyers — and yet the state was a far safer place than it is a half-century later. Technological progress — whether iPhones or Xboxes — can often accompany moral regress. There are not yet weeds in our cities, but those too may be coming.
The average Californian, like the average Greek, forgot that civilization is fragile. Its continuance requires respect for the law, tough-minded education, collective thrift, private investment, individual self-reliance, and common codes of behavior and civility — and exempts no one from those rules. Such knowledge and patterns of civilized behavior, slowly accrued over centuries, can be lost in a single generation.
A keen visitor to Athens — or Los Angeles — during the last decade not only could have seen that things were not quite right, but also could have concluded that they could not go on as they were. And so they are not.
Washington, please take heed.
It is not the outcome of proper economic policy
Ultimately the debate as to whether this crisis ends in a deflationary or inflationary collapse will be decided by the outplay of several forces. While it is impossible to determine which way this drama plays out (it could go either way), there are reasons to believe either position. Ultimately which side one takes depends on whether one believes:
that economic forces will be allowed to play themselves out or
that political intervention will occur to attempt to prevent these forces from working.
In a truly free market, the sorry existing state of affairs could never have developed. Massive political interventions enabled matters to get to this advanced state. The political motivation was not to cause a crisis but to prevent prior smaller ones from occurring. The belief that government could eliminate, or at least dampen business cycles, is false. All government accomplished was a cover up of problems, deferring them to a later periods when they resurfaced in bigger and more threatening fashion. After decades of this behavior, it appears we have run out of cover-ups. The problems now are too large to be contained without massive additional interventions.
If you believe that government will refrain from taking action, then you should believe that we will have a deflationary Depression. If you believe they will continue to try and play the game of “extend and pretend,” you must believe there will be high inflation ahead, probably culminating in a hyperinflationary Depression. Both alternatives end in Depression.
It appears naive to believe that suddenly intervention will stop. Indeed, interventionary efforts have only increased as evidenced by the exploding balance sheets of all central banks. And this continuing expansion is at a time when the authorities want you to believe that they are not engaged in quantitative easing.
Does anyone truly believe that politicians will stand by and allow another Great Depression to occur? That is what deflation means in this grossly exaggerated, Alice-in-Wonderland, over-leveraged world. No, in a fiat money system, it is too easy to run the printing presses. To see an explanation of how easy and the mechanics of doing so, see this article ”How Deflationary Forces Will Be Turned into Inflation“ by Thorsten Polleit at Mises.org.
In a fiat money system, inflation is always a political decision. It is not the outcome of proper economic policy. It is the last refuge of political cowards. It will not improve matters. Ultimately it will wipe out the middle class by destroying their savings. Then a Depression will occur, one which the population will be in substantially worse shape entering than the one in the 1930s.
Here is a take from The McAlvany Commentary. Especially relevant is the part where John Williams is interviewed. It begins around the 8:30 minute mark. Note a key point: The government cannot fund its operations. The option is to cut spending drastically or to print money! Which one do you believe is about to happen?
that economic forces will be allowed to play themselves out or
that political intervention will occur to attempt to prevent these forces from working.
In a truly free market, the sorry existing state of affairs could never have developed. Massive political interventions enabled matters to get to this advanced state. The political motivation was not to cause a crisis but to prevent prior smaller ones from occurring. The belief that government could eliminate, or at least dampen business cycles, is false. All government accomplished was a cover up of problems, deferring them to a later periods when they resurfaced in bigger and more threatening fashion. After decades of this behavior, it appears we have run out of cover-ups. The problems now are too large to be contained without massive additional interventions.
If you believe that government will refrain from taking action, then you should believe that we will have a deflationary Depression. If you believe they will continue to try and play the game of “extend and pretend,” you must believe there will be high inflation ahead, probably culminating in a hyperinflationary Depression. Both alternatives end in Depression.
It appears naive to believe that suddenly intervention will stop. Indeed, interventionary efforts have only increased as evidenced by the exploding balance sheets of all central banks. And this continuing expansion is at a time when the authorities want you to believe that they are not engaged in quantitative easing.
Does anyone truly believe that politicians will stand by and allow another Great Depression to occur? That is what deflation means in this grossly exaggerated, Alice-in-Wonderland, over-leveraged world. No, in a fiat money system, it is too easy to run the printing presses. To see an explanation of how easy and the mechanics of doing so, see this article ”How Deflationary Forces Will Be Turned into Inflation“ by Thorsten Polleit at Mises.org.
In a fiat money system, inflation is always a political decision. It is not the outcome of proper economic policy. It is the last refuge of political cowards. It will not improve matters. Ultimately it will wipe out the middle class by destroying their savings. Then a Depression will occur, one which the population will be in substantially worse shape entering than the one in the 1930s.
Here is a take from The McAlvany Commentary. Especially relevant is the part where John Williams is interviewed. It begins around the 8:30 minute mark. Note a key point: The government cannot fund its operations. The option is to cut spending drastically or to print money! Which one do you believe is about to happen?
Outcomes likely to happen are unimaginable
“Talk of a recovery is Orwellian in its deception.” So says Jim Willie in his lengthy piece dealing with the collapse of the US and probably the rest of the civilized world.
Mr. Willie is bold in his predictions/assertions, a style that has characterized his writing. To be sure, he is often early and sometimes exaggerated in his forecasts. Yet he is a man worth listening to because he provides early warning signals generally long before others. For those who believe I am a doomsayer, read Mr. Willie’s latest missive and prepare to consider me an optimist.
How much of this should you believe? That is difficult to say because I am not privy to all the knowledge that Mr. Willie apparently has. Those areas where I have some familiarity, I generally agree with his dire outlook. The road ahead will be unlike anything recent generations have seen. For most, outcomes likely to happen are unimaginable. To shock yourself out of complacency, read Mr. Willie.
It is up to you to decide how much of this is possible and what actions should be taken to protect yourself and family. All of it is possible, although with varying degrees of probability.
Mr. Willie is bold in his predictions/assertions, a style that has characterized his writing. To be sure, he is often early and sometimes exaggerated in his forecasts. Yet he is a man worth listening to because he provides early warning signals generally long before others. For those who believe I am a doomsayer, read Mr. Willie’s latest missive and prepare to consider me an optimist.
How much of this should you believe? That is difficult to say because I am not privy to all the knowledge that Mr. Willie apparently has. Those areas where I have some familiarity, I generally agree with his dire outlook. The road ahead will be unlike anything recent generations have seen. For most, outcomes likely to happen are unimaginable. To shock yourself out of complacency, read Mr. Willie.
It is up to you to decide how much of this is possible and what actions should be taken to protect yourself and family. All of it is possible, although with varying degrees of probability.
Stronger than markets and economics
Whether the coming collapse is slow and orderly or takes place rapidly and haphazardly is not possible to foresee. As one wag observed, these things happen slowly until they do not. Thus, most people will not realize what is happening until it is too late.
What is clear is that a currency debasement strategy, the subtle and age-old way to default on debt obligations, has been selected by Europe and the US. By paying contracted debt back in nominal currency which has been devalued, the lender is being cheated. The monies purchases less than what was anticipated at the time of the debt contract. In essence, the government cheats all debt and fixed contract holders in an attempt to pretend to “honor” their obligations without outright default.
The description of this process is called inflation, and it can be as devastating as an outright default without the stigma associated with a legal default. In essence, the Federal Reserve has practiced this policy since its inception in 1913. From the time of its formation until today, the dollar has lost 96% of its purchasing power. “Lost” is a euphemistic term to hide the fact that the government has stolen this amount from its citizens, especially lenders and those living on fixed incomes.
There is political motivation to develop a new reserve currency by all countries other than the US. No existing currency other than the dollar can serve this role today. Regional currencies, ala the Euro, are possibilities. So too is a new one-world currency. Statists and one-worlders have pushed for this latter solution long before this crisis.
It is unlikely that a change of this sort can occur quickly because of politics. It is also ironic that such a change would put most of the world on a system akin to the failing Euro. Never mind that the Euro will fail; politicians always believes they are stronger than markets and economics. History always demonstrates the fallacy in such delusional thinking.
One thing is certain: the current situation cannot hold much longer. We are headed for sovereign defaults in numerous countries. The US, even with their dollar hegemony, cannot escape this fate.
It is impossible to reasonably forecast what will happen. Every day brings more pressures that are harder to containvia the old tried and trusted methods of “sweeping the problems under the rug.” The rug is now bulging with all the debris it contains. We edge closer to a worldwide currency collapse. There are no good options, at least from the political perspective. Here are the main options left:
Belt-tightening
Governments could slash spending and social programs to the bone. That is the only real solution to the problem, but it is considered “impractical” or “impossible.” In the case of the U.S., it would mean halving current government spending, including dramatic changes to social security and medicare. Changes of this magnitude will not happen because no politician has the courage to undertake such actions.
After almost a century of convincing citizens that government is the source of goodness and wealth, it is impossible to reveal the obvious — “we lied; there is no Santa Clause. Blood in the streets would ensue among a populace that is convinced it is entitled to live off others. Any other watered-down solution is nothing more than can-kicking, an attempt to buy time without truly addressing the underlying problems. These politically palatable half efforts might buy some more time but only at the expense of greater future pain. What is the point of buying time if it does not advance a solution?
Benign Neglect
Ignoring the obvious is exactly what caused us to reach such extreme danger. In this scenario the political class continues funding whatever deficits arise, as if there were no consequence. Eventually markets make this alternative either impossible or so expensive that expensive that governments can no longer afford the interest payments on their debt. This strategy is more of the “kick the can” approach that put us into the current predicament. It is by far the favored political choice, even in Europe where “austerity” is given lip service but will not be implemented in any meaningful fashion.
Currency Devaluation
The third option is deliberate currency destruction. In a fiat currency world it is easy to destroy the purchasing power of a currency. That is why I am so amazed at so many excellent analysts that argue that we cannot have inflation or hyperinflation in an over-leveraged society. As I understand their argument, debt destruction via defaults and bankruptcy is necessarily deflationary. That point is correct, but it assumes that government will passively stand by and allow this deflation to occur. I believe they will not.
So long as government can run its printing presses faster than debt defaults occur, there will be no deflation. That is not difficult to do and government has demonstrated a great deal of skill in this regard. Once matters begin to get dicey regarding debt defaults, I believe they would easily switch to a more aggressive tactic than the mere printing of money. Why not issue a brand new currency? Here is a simple scenario as to how this could happen.
New Currency
Tomorrow morning you awaken to a news announcement that a new currency will be issued. Some excuse(s) will accompany the announcement. These are not important, nor will they be valid, but could include reasons like counterfeit threats, national security considerations or a host of other phony reasons. The announcement states that within two weeks all existing currency will become obsolete. It must be turned in for “New Dollars” “New Dollars.” The exchange rate is one old dollar will get you two “New Dollars.” Existing bank deposits will automatically be doubled. It should be obvious that each New Dollar will only purchase half as much as each old dollar.
The kicker comes when it is mandated that all existing contracts can be met with New Dollars. So, if you owe $100,000 to someone, you can satisfy this obligation by paying him $100,000 of New Dollars (which are only worth half of the dollar on which the contract was struck). Overnight a law effectively reduces the debt burden in the country by 50% and raises the inflation rate by 100%, It does so by stealing wealth from the lenders and transferring it to borrowers. Banks would be the hardest hit, but government merely prints whatever amount of new dollars is required to make them whole. A massive new bailout with newly printed money bails out the banks.
Overnight inflation rises by 100% and then rises again with the bailout of the banks. Overnight pension problems like social security are solved, although payments buy 50% or less of what was anticipated.
Inflation is easy, but it is no solution to the problem. Yet it is more palatable in politician’s eyes than deflation which raises the costs of servicing debt. Or more palatable than truly reducing benefits to levels which can be afforded by government. Instead, the criminal class in Washington will choose to defraud its citizens rather than deal with the truth.
This action is manufactured inflation or hyperinflation. It is government cutting all its prior obligations (debt and social promises) in half by reducing the purchasing power of the currency by half (or more). It is a process which destroys retirees living on fixed pensions. It also destroys all savings and wipes out the middle class.
Workers see their wages and salaries rise, likely in line with prices. Hard assets double in value overnight. Even those who are fortunate to have their incomes increase proportionately pre-tax are made worse off as they are pushed into higher tax brackets, not because their purchasing power has increased but because their nominal incomes have. The government collects substantially more in taxes from this “bracket push,” especially from the phony capital gains that result. Everyone is made poorer except government.
Will it work? Of course not! This is what created the conditions for Hitler’s rise to power. Its results in other countries were always failures, often with great bloodshed.
Will this situation play out as I have outlined it? Probably not, but whatever occurs will likely be similar in its effects on citizens. Government is the predator and you are the prey.
I know of no asset that protects as well under such a scenario as well as gold — preferably physical gold. And, I am not sure that will even be effective in what may lie ahead. It may be the best of inadequate alternatives.
Enough to borrow hundreds of billions of dollars
To think that civilizations always progress is a sign of ignorance, if not stupidity.
Ludwig von Mises emphasized how proper institutions and incentives were necessary for progress. He knew that progress neither constant nor guaranteed. If institutions and incentives are damaged or destroyed, progress will cease and retrogression will set in.
Henry Hazlitt
History is replete with examples of how societies and civilizations revert to less prosperous times and conditons, often accompanied by rebellion and civil unrest. The Roman empire died from within. Oh, they were overrun but only after their empire had exhausted itself and its resources.
Mises used the phrase “time will run back” to describe the process of losing ground or retrogressing. Henry Hazlitt wrote a fictional novel using Mises’ phrase as the title in which changes in institutions, laws, incentives and freedom all combine to impoverish a previously prosperous and civil society.
Victor Davis Hanson details below how this process is already well underway in his home state. It is not limited to California. The same retrogression is underway in Michigan, Illinois and a number of other states. Inner cities in parts of the country have sections that are too dangerous to visit. The retrogression is underway and the regulatory apparatus and insolvency of Washington is destroying incentives. This process will not stop until the craziness that we call government is stopped.
In Greek mythology, the prophetess Cassandra was doomed both to tell the truth and to be ignored. Our modern version is a bankrupt Greece that we seem to discount.
News accounts abound now of impoverished Athens residents scrounging pharmacies for scarce aspirin — as Greece is squeezed to make interest payments to the supposedly euro-pinching German banks.
Such accounts may be exaggerations, but they should warn us that yearly progress is never assured. Instead, history offers plenty of examples of life becoming far worse than it had been centuries earlier. The biographer Plutarch, writing 500 years after the glories of classical Greece, lamented that in his time weeds grew amid the empty colonnades of the once-impressive Greek city-states. In America, most would prefer to live in the Detroit of 1941 than the Detroit of 2011. The quality of today’s air travel has regressed to the climate of yesterday’s bus service.
In 2000, Greeks apparently assumed that they had struck it rich with their newfound money-laden European Union lenders — even though they certainly had not earned their new riches through increased productivity, the discovery of more natural resources, or greater collective investment and savings.
The brief euro mirage has vanished. Life in Athens is zooming backward to the pre-EU days of the 1970s. Then, most imported goods were too expensive to buy, medical care was often premodern, and the city resembled more a Turkish Istanbul than a European Munich.
The United States should pay heed to the modern Greek Cassandra, since our own rendezvous with reality is rapidly approaching. The costs of servicing a growing national debt of more than $15 trillion are starting to squeeze out other budget expenditures. Americans are no longer affluent enough to borrow hundreds of billions of dollars to import oil, while we snub our noses at vast new oil and gas deposits beneath our own soil and seas.
In my state, Californians for 40 years have hiked taxes; grown their government; vastly expanded entitlements; put farmland, timberland, and oil and gas lands off limits; and opened their borders to millions of illegal aliens. They apparently assumed that they had inherited so much wealth from prior generations and that their state was so naturally rich, that a continually better life was their natural birthright.
It wasn’t. Now, as in Greece, the veneer of civilization is proving pretty thin in California. Hospitals no longer have the money to offer sophisticated long-term medical care to the indigent. Cities no longer have the funds to self-insure themselves from the accustomed barrage of monthly lawsuits. When thieves rip copper wire out of street lights, the streets stay dark. Most state residents would rather go to the dentist these days than queue up and take a number at the Department of Motor Vehicles. Hospital emergency rooms neither have room nor act as if there’s much of an emergency.
Traffic flows no better on most of the state’s freeways than it did 40 years ago — and often much worse, given the crumbling infrastructure and increased traffic. Once-excellent K–12 public schools now score near the bottom in nationwide tests. The California state-university system keeps adding administrators to the point where they have almost matched the number of faculty, though half of the students who enter CSU need remedial reading and math. Despite millions of dollars in tutoring, half the students still don’t graduate. The taxpayer is blamed in constant harangues for not ponying up more money, rather than administrators being faulted for a lack of reform.
In 1960, there were far fewer government officials, far fewer prisons, far fewer laws, and far fewer lawyers — and yet the state was a far safer place than it is a half-century later. Technological progress — whether iPhones or Xboxes — can often accompany moral regress. There are not yet weeds in our cities, but those too may be coming.
The average Californian, like the average Greek, forgot that civilization is fragile. Its continuance requires respect for the law, tough-minded education, collective thrift, private investment, individual self-reliance, and common codes of behavior and civility — and exempts no one from those rules. Such knowledge and patterns of civilized behavior, slowly accrued over centuries, can be lost in a single generation.
A keen visitor to Athens — or Los Angeles — during the last decade not only could have seen that things were not quite right, but also could have concluded that they could not go on as they were. And so they are not.
Ludwig von Mises emphasized how proper institutions and incentives were necessary for progress. He knew that progress neither constant nor guaranteed. If institutions and incentives are damaged or destroyed, progress will cease and retrogression will set in.
Henry Hazlitt
History is replete with examples of how societies and civilizations revert to less prosperous times and conditons, often accompanied by rebellion and civil unrest. The Roman empire died from within. Oh, they were overrun but only after their empire had exhausted itself and its resources.
Mises used the phrase “time will run back” to describe the process of losing ground or retrogressing. Henry Hazlitt wrote a fictional novel using Mises’ phrase as the title in which changes in institutions, laws, incentives and freedom all combine to impoverish a previously prosperous and civil society.
Victor Davis Hanson details below how this process is already well underway in his home state. It is not limited to California. The same retrogression is underway in Michigan, Illinois and a number of other states. Inner cities in parts of the country have sections that are too dangerous to visit. The retrogression is underway and the regulatory apparatus and insolvency of Washington is destroying incentives. This process will not stop until the craziness that we call government is stopped.
In Greek mythology, the prophetess Cassandra was doomed both to tell the truth and to be ignored. Our modern version is a bankrupt Greece that we seem to discount.
News accounts abound now of impoverished Athens residents scrounging pharmacies for scarce aspirin — as Greece is squeezed to make interest payments to the supposedly euro-pinching German banks.
Such accounts may be exaggerations, but they should warn us that yearly progress is never assured. Instead, history offers plenty of examples of life becoming far worse than it had been centuries earlier. The biographer Plutarch, writing 500 years after the glories of classical Greece, lamented that in his time weeds grew amid the empty colonnades of the once-impressive Greek city-states. In America, most would prefer to live in the Detroit of 1941 than the Detroit of 2011. The quality of today’s air travel has regressed to the climate of yesterday’s bus service.
In 2000, Greeks apparently assumed that they had struck it rich with their newfound money-laden European Union lenders — even though they certainly had not earned their new riches through increased productivity, the discovery of more natural resources, or greater collective investment and savings.
The brief euro mirage has vanished. Life in Athens is zooming backward to the pre-EU days of the 1970s. Then, most imported goods were too expensive to buy, medical care was often premodern, and the city resembled more a Turkish Istanbul than a European Munich.
The United States should pay heed to the modern Greek Cassandra, since our own rendezvous with reality is rapidly approaching. The costs of servicing a growing national debt of more than $15 trillion are starting to squeeze out other budget expenditures. Americans are no longer affluent enough to borrow hundreds of billions of dollars to import oil, while we snub our noses at vast new oil and gas deposits beneath our own soil and seas.
In my state, Californians for 40 years have hiked taxes; grown their government; vastly expanded entitlements; put farmland, timberland, and oil and gas lands off limits; and opened their borders to millions of illegal aliens. They apparently assumed that they had inherited so much wealth from prior generations and that their state was so naturally rich, that a continually better life was their natural birthright.
It wasn’t. Now, as in Greece, the veneer of civilization is proving pretty thin in California. Hospitals no longer have the money to offer sophisticated long-term medical care to the indigent. Cities no longer have the funds to self-insure themselves from the accustomed barrage of monthly lawsuits. When thieves rip copper wire out of street lights, the streets stay dark. Most state residents would rather go to the dentist these days than queue up and take a number at the Department of Motor Vehicles. Hospital emergency rooms neither have room nor act as if there’s much of an emergency.
Traffic flows no better on most of the state’s freeways than it did 40 years ago — and often much worse, given the crumbling infrastructure and increased traffic. Once-excellent K–12 public schools now score near the bottom in nationwide tests. The California state-university system keeps adding administrators to the point where they have almost matched the number of faculty, though half of the students who enter CSU need remedial reading and math. Despite millions of dollars in tutoring, half the students still don’t graduate. The taxpayer is blamed in constant harangues for not ponying up more money, rather than administrators being faulted for a lack of reform.
In 1960, there were far fewer government officials, far fewer prisons, far fewer laws, and far fewer lawyers — and yet the state was a far safer place than it is a half-century later. Technological progress — whether iPhones or Xboxes — can often accompany moral regress. There are not yet weeds in our cities, but those too may be coming.
The average Californian, like the average Greek, forgot that civilization is fragile. Its continuance requires respect for the law, tough-minded education, collective thrift, private investment, individual self-reliance, and common codes of behavior and civility — and exempts no one from those rules. Such knowledge and patterns of civilized behavior, slowly accrued over centuries, can be lost in a single generation.
A keen visitor to Athens — or Los Angeles — during the last decade not only could have seen that things were not quite right, but also could have concluded that they could not go on as they were. And so they are not.
Probably culminating in a hyperinflationary depression
Ultimately the debate as to whether this crisis ends in a deflationary or inflationary collapse will be decided by the outplay of several forces. While it is impossible to determine which way this drama plays out (it could go either way), there are reasons to believe either position. Ultimately which side one takes depends on whether one believes:
that economic forces will be allowed to play themselves out or
that political intervention will occur to attempt to prevent these forces from working.
In a truly free market, the sorry existing state of affairs could never have developed. Massive political interventions enabled matters to get to this advanced state. The political motivation was not to cause a crisis but to prevent prior smaller ones from occurring. The belief that government could eliminate, or at least dampen business cycles, is false. All government accomplished was a cover up of problems, deferring them to a later periods when they resurfaced in bigger and more threatening fashion. After decades of this behavior, it appears we have run out of cover-ups. The problems now are too large to be contained without massive additional interventions.
If you believe that government will refrain from taking action, then you should believe that we will have a deflationary Depression. If you believe they will continue to try and play the game of “extend and pretend,” you must believe there will be high inflation ahead, probably culminating in a hyperinflationary Depression. Both alternatives end in Depression.
It appears naive to believe that suddenly intervention will stop. Indeed, interventionary efforts have only increased as evidenced by the exploding balance sheets of all central banks. And this continuing expansion is at a time when the authorities want you to believe that they are not engaged in quantitative easing.
Does anyone truly believe that politicians will stand by and allow another Great Depression to occur? That is what deflation means in this grossly exaggerated, Alice-in-Wonderland, over-leveraged world. No, in a fiat money system, it is too easy to run the printing presses. To see an explanation of how easy and the mechanics of doing so, see this article ”How Deflationary Forces Will Be Turned into Inflation“ by Thorsten Polleit at Mises.org.
In a fiat money system, inflation is always a political decision. It is not the outcome of proper economic policy. It is the last refuge of political cowards. It will not improve matters. Ultimately it will wipe out the middle class by destroying their savings. Then a Depression will occur, one which the population will be in substantially worse shape entering than the one in the 1930s.
Here is a take from The McAlvany Commentary. Especially relevant is the part where John Williams is interviewed. It begins around the 8:30 minute mark. Note a key point: The government cannot fund its operations. The option is to cut spending drastically or to print money! Which one do you believe is about to happen?
that economic forces will be allowed to play themselves out or
that political intervention will occur to attempt to prevent these forces from working.
In a truly free market, the sorry existing state of affairs could never have developed. Massive political interventions enabled matters to get to this advanced state. The political motivation was not to cause a crisis but to prevent prior smaller ones from occurring. The belief that government could eliminate, or at least dampen business cycles, is false. All government accomplished was a cover up of problems, deferring them to a later periods when they resurfaced in bigger and more threatening fashion. After decades of this behavior, it appears we have run out of cover-ups. The problems now are too large to be contained without massive additional interventions.
If you believe that government will refrain from taking action, then you should believe that we will have a deflationary Depression. If you believe they will continue to try and play the game of “extend and pretend,” you must believe there will be high inflation ahead, probably culminating in a hyperinflationary Depression. Both alternatives end in Depression.
It appears naive to believe that suddenly intervention will stop. Indeed, interventionary efforts have only increased as evidenced by the exploding balance sheets of all central banks. And this continuing expansion is at a time when the authorities want you to believe that they are not engaged in quantitative easing.
Does anyone truly believe that politicians will stand by and allow another Great Depression to occur? That is what deflation means in this grossly exaggerated, Alice-in-Wonderland, over-leveraged world. No, in a fiat money system, it is too easy to run the printing presses. To see an explanation of how easy and the mechanics of doing so, see this article ”How Deflationary Forces Will Be Turned into Inflation“ by Thorsten Polleit at Mises.org.
In a fiat money system, inflation is always a political decision. It is not the outcome of proper economic policy. It is the last refuge of political cowards. It will not improve matters. Ultimately it will wipe out the middle class by destroying their savings. Then a Depression will occur, one which the population will be in substantially worse shape entering than the one in the 1930s.
Here is a take from The McAlvany Commentary. Especially relevant is the part where John Williams is interviewed. It begins around the 8:30 minute mark. Note a key point: The government cannot fund its operations. The option is to cut spending drastically or to print money! Which one do you believe is about to happen?
Printing money is not some harmless act
The end point is near. The only thing keeping both Europe and the US afloat is massive money printing by the ECB and the Fed. The world has reached the point where markets are increasingly unwilling to purchase government debt.
Downgrades by S&P of European countries, as usual, are behind the curve of what markets already reflect. Further downgrades will be forthcoming whenever the ratings agencies become too embarrassed to hold at current ratings.
It appears the only ones who still believe money creation will work are governments themselves. They refuse to cut back spending, bringing it into line with tax revenues. Undoubtedly this reluctance has something to do with maintenance of ”the myth of government.” Politicians have convinced constituents that government is the source of prosperity and “entitlements.” They have been so successful that slowing down this spending will produce civil unrest among recipients who believe they have a right to other people’s funds, even when these are not available.
It is doubtful that politicians truly believe the myth they created for the masses. But pols do know what will happen if they cease these payoffs. The masses will target them as enemy numero uno. As hunger sets in, looting and rioting will target anyone with assets. Thus, pols will continue to print money in an effort to “buy off” the masses even thought it will not solve any useful purpose other than their maintaining office for a bit longer.
But such a strategy is both selfish and harmful to the country. Printing money is not some harmless act to be used to fool citizens. It corrodes society and markets with insidious inflation. Inflation sets consumers against producers, as they are blamed for the price increases. It encourages class warfare as the middle class is slowly destroyed while the wealthy are able to prevent or minimize their own loss of purchasing power.
Inflation is not something that can be controlled at some pre-determined level. It is equivalent to setting a fire without the proper resources to contain it. When it breaks out it does so with a fury that cannot be controlled. People quickly take steps to spend money faster to beat the anticipated price increases. This condition is the precursor to hyperinflation which destroys both the economy and society. At this point, “saviors” like Hitler who claim they can solve everyone’s problems, generally arrive. Governments typically do not survive hyperinflations.
The video below, by Chris Ciovacco, explains why we may be nearing the point where control is lost. Pay special attention to the graphic where the money scam is revealed for what it truly is: insolvent central banks injecting money into insolvent banking systems so that insolvent banks can buy the debt of insolvent governments.
The entire system is bankrupt, morally and fiscally and is about to collapse. The taxpayer, whether he knows it or not, is making unknown, hidden “investments” which will come back to haunt him and his heirs for generations.
Downgrades by S&P of European countries, as usual, are behind the curve of what markets already reflect. Further downgrades will be forthcoming whenever the ratings agencies become too embarrassed to hold at current ratings.
It appears the only ones who still believe money creation will work are governments themselves. They refuse to cut back spending, bringing it into line with tax revenues. Undoubtedly this reluctance has something to do with maintenance of ”the myth of government.” Politicians have convinced constituents that government is the source of prosperity and “entitlements.” They have been so successful that slowing down this spending will produce civil unrest among recipients who believe they have a right to other people’s funds, even when these are not available.
It is doubtful that politicians truly believe the myth they created for the masses. But pols do know what will happen if they cease these payoffs. The masses will target them as enemy numero uno. As hunger sets in, looting and rioting will target anyone with assets. Thus, pols will continue to print money in an effort to “buy off” the masses even thought it will not solve any useful purpose other than their maintaining office for a bit longer.
But such a strategy is both selfish and harmful to the country. Printing money is not some harmless act to be used to fool citizens. It corrodes society and markets with insidious inflation. Inflation sets consumers against producers, as they are blamed for the price increases. It encourages class warfare as the middle class is slowly destroyed while the wealthy are able to prevent or minimize their own loss of purchasing power.
Inflation is not something that can be controlled at some pre-determined level. It is equivalent to setting a fire without the proper resources to contain it. When it breaks out it does so with a fury that cannot be controlled. People quickly take steps to spend money faster to beat the anticipated price increases. This condition is the precursor to hyperinflation which destroys both the economy and society. At this point, “saviors” like Hitler who claim they can solve everyone’s problems, generally arrive. Governments typically do not survive hyperinflations.
The video below, by Chris Ciovacco, explains why we may be nearing the point where control is lost. Pay special attention to the graphic where the money scam is revealed for what it truly is: insolvent central banks injecting money into insolvent banking systems so that insolvent banks can buy the debt of insolvent governments.
The entire system is bankrupt, morally and fiscally and is about to collapse. The taxpayer, whether he knows it or not, is making unknown, hidden “investments” which will come back to haunt him and his heirs for generations.
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