Thursday, February 26, 2009

Zombie Banks, Zombie Economy, Zombie Politicians

Do you recognize anyone here? Say John Thain or Hank Paulson? I definitely see Tim Geithner there to the right. I keep hearing about the Zombie banks and Ben Bernanke at the Fed really hates the term. But the term is absolutely precious. A zombie is a reanimated human corpse.
What better way to describe Citigroup or B of A or Wells Fargo. Zombies have no free will are are under the control of a distant sorcerer. Larry Summers, are you listening? Today I spent considerable time reading testimony from Bernake and interviews with Geithner as well as a transcript from Barak before the congress and I was ready to launch into another rant on prevarication and other forms of deception but it occurred to me that it is possible that they do not think they are lying or that lying to the public is acceptable if it serves a nobler purpose. This has been a tried and proven strategy from Machiavelli to Karl Rove and a few in between.......

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State"...................Joseph Goebbels

I am afraid that it is more than the banks that are Zombies. I think it is our entire American Dream Economy that is zombified but most of us haven't figured that out yet. I think that in this century we will be winding down the industrial economy as energy sources get ever more scarce and expensive . James Michael Greer who writes the Archdruid Report: has been writing about this postulated change to society for many years and he believes that our industrial society will over time become less industrial as it smashes headlong into resource and energy constraints. He thinks we are likely to go down in stairstep fashion as we exhaust our heretofore free fossil energy. JMG as he is known is a brilliant thinker and he has been unfairly characterized as a "doomer" and dismissed by the mainstream panglossian press. I happen to agree with many of JMG's ideas but I don't think the current depression has been largely caused by these factors raised by Greer. We are going through a classic debt and credit fueled expansion and collapse that we have seen on multiple occasions in the past 200 years commonly referred to in old books as a PANIC. It also is a great phrase and I intend to resurrect it on this blog as a term superior to "depression" which conjures up visions of sad faces and Prozac. This Panic was very much as inevitable as the Panics in 1929,1873,1867,1937 and 1819. Those previous panics led to years of depression just as I think this one will. The difference with this panic is more a matter of scale. I think this panic has the possibility of becoming the mother of all depressions because of the globalized interconnected nature of the credit and debt collapse. It is likely to be far worse than previous panics because the blunders have been worldwide in scope and because it involves strange and terrible structured investment vehicles as they have been called. I include all the various acronyms given to them like CDOs, CDSs and the gigantic derivatives market of swaps and bets and currency and commodity futures contracts which banks and hedge funds and corporations devised to mitigate risk. Now it's all coming unglued at a level of magnitude clearly never dreamed by its mathematical model creators. These are models that only a Cray computer can understand. I do concede that all the counter party risk associated with this panic will probably not all implode at once and there is probably a chance that this world economic downturn will not be as bad as some people think but the simple fact is: no one really knows. Yikes! Even Ben Bernanke reassured us saying"We're not completely in the dark." That's reassuring. I ran that through by Babelfish translation program and it came back in English as "We are completely in the dark." And so the untouchables at Treasury and the Fed using flawed outdated Keynesian assumptions of growth and the economy keep plugging away at fixing the banks by pouring borrowed money into insolvent skyscrapers so they can again lend to companies who will go bankrupt and citizens who are broke and soon to be hungry sleeping in their Hummers in a Wall Mart parking lot. Here is my chief objection to this level of borrowing to bail out insolvent banks and corporations. Credit works only as long as the money borrowed can be repaid later:Principal + Interest. For that to happen you need growth . If you can persuade Abu Dhabi and China to buy 30 year bonds yielding 3.5% and your GDP growth exceeds 3.5% for the next 30 years, that debt will be serviced. If you have a steady state or contracting economy, it will not. It's worked to some extent for the past 60 years because for various reasons the US had a monopoly in energy production and industrial production of goods and services the world needed. We used to be a manufacturing powerhouse with 26% of the workforce engaged in manufacturing in 1960. This had fallen to 9+% by 2006 . What do we make in the US now besides weapons and aircraft and heavy machinery that the world wants? We make very little here that our population needs and therein lies the tragedy of our manufacturing economy. For many years our growth has been fueled by relentless debt assumption by our citizens, our corporations and our government. If the world stops buying our debt or stops believing that we will ever pay off the debt, the party will end. There are several scenarios which could play out. These countries could fall into a depression and their exports to us could fall. This is now happening. Their economies could also collapse or go into a prolonged recession or depression. Their current account surpluses could disappear. Even if that doesn't happen, these countries could decide that 3.5% is too low a rate of return if they see the dollar at risk because of inflation or because they fear that Fed might decide to devalue the dollar. But they are already in a bind because if they demand a higher rate of return than 3.5% they could see the value of their bonds fall because the value of bonds runs inversely to the yield. If they try to sell their bonds as the US is trying to issue new bonds, the market could become oversupplied with sellers. They must be fearful of future inflation in the US. So they are in a catch 22 position. It seemed so ironic to me that Hillary Clinton visited China and begged for the Chinese to continue buying our debt. This is the same Hillary who in the campaign said that being indebted to the Chinese was a threat to national security! Which is it Hillary? I think Hillary's pleadings are a very ominous sign that the big fear of the administration is that unless we have countries stupid enough to buy our debt, the party will be soon over. And my final very important point is that if Greer is right, we are undergoing a paradigm shift in our economies primarily because of post Peak Oil. If rapid growth and rising industrial production is simply not possible, then the assumption of debt is also not sustainable, and therefore fundamental macroeconomic assumptions are fatally flawed. If we continue to borrow without the ability to pay off the debt, we will collapse economically and the greater risk is that we could collapse socially. Many countries have bounced back after defaulting on their debt. Spain defaulted eight times in the 19th century. But a civilization that collapses may not bounce back.

Wednesday, February 25, 2009

Stimulus Medicine

Readers of this site know I rack my brain trying to understand and explain how we got into this financial mess and what if anything we can do about it and after listening to Bernanke's testimony and Obama's address, I have finally found the solution and it is to the left and will have to be administered in massive doses as part of the stimulus package for it to work. Bernanke really boosted my confidence yesterday when he said addressing the Financial Services Panel:"We're not making it up. We're not completely in the dark." If you don't think that is bad enough, he really set every one's mind at ease when he announced the end of the recession:..."the current recession will end in 2009 and 2010 will be a year of recovery."
And Barkak confirmed Bernanke when he signed the stimulus bill last week saying:"Today marks the beginning of the end." He may not know prescient that statement was.
Come on boys, open up. Take your medicine.
So what is a reasonable person (such as myself) to conclude? These guys are either deluded and incompetent or they are not telling the truth. The media tells us daily that the real need is to "restore confidence". Get banks lending again. More syrup. Open up. We are told that the American people cannot take negative messages. So I guess that means, feed them positive messages.Tell them lies, lies and more lies. The Obama administration is obviously relying on the same people in Treasury and the Fed who were there with bush and clinton. These Keynesian bankers are bound and determined to save the hides of their banking cronies and not the hides of the American people. They should be focused on saving the American people but they are not. They are spending billions and trillions and there is nothing we or our political leaders can do to stop them. And why not? Because the Treasury and the Federal Reserve can do as they like. The Federal Reserve is no more "federal" than the Stagecoach Bar, our local bar here in Wilson..... It is a private organization to serve the interests of the banking establishment and if you or even Congress doesn't like what they do, that's tough. The Fed was set up in 1913 to control monetary and fiscal policy but it's powers have increased over the years so that it is a defacto branch of the government not under the control of its citizens and is able to spend what it wants, when it wants and how it wants with the money of its citizens and those citizens still in diapers. The tragedy of the whole process is that there is not a broad cross section of people deciding on fiscal and economic and budgetary policy. Obama had a choice of economic advisers and diverging from the Citi and Goldman Sachs advisers of the past two administrations, but he didn't, and this one choice has the potential to doom his presidency and our economy. Is it possible that these people do not understand how serious this economic meltdown is? I have to assume that they understand the global interconnections and the toxic assets and loans going bad right now in the entire world along with the other counter Party risks and deleveraging taking place everywhere. How could they not? We have an insolvent banking system. You don't need "stress tests" to prove that. Geithner knows that. How could he not? He was at the NY Fed since 2003 for gosh sakes. In a recent blog I showed how Citi was insolvent and I established that from data I found from banking websites. My only conclusion is that as Bernanke said, he is "not completely in the dark." They must be hoping something will change, that we will get a Deus Ex Machina and the toxic deleveraging will stop, that house prices and sales will not keep falling, that Iceland and Ireland and all of Eastern Europe will not default on their debt, that oil prices will not go up, that the stock market will not keep dropping and so forth. I have no confidence in their decision making abilities . In fairness to Ben and Barak, they have never seen anything like this happen and they are unwilling to admit that we have a falling knife or guillotine which no one can stop. So they have to keep lying and hoping. Our only hope is to try to mitigate these effects and try to save the American people from the worst blunders of the Wall Street bankers . And if Barak doen't figure this out on his own pretty soon, we are doomed.

Thursday, February 19, 2009

Inflation or Deflation?

Another Leg Down

The news is not good if you're the portfolio manager for Fidelity Investments. It seems that in the last quarter Fidelity convinced that financial stocks had hit bottom, loaded up on bank stocks and today they own over 3% of Citigroup. In mid 2007 Citi was a $55 stock. Today it is a $2.50 stock. That's a drop of 95% in a year and a half. Another 5% and it will be zero which is more than it is worth but fear not, the economic keystone cops in the Obama administration applying failed Keynesian concepts are continuing to shovel money at insolvent banks, insurance companies, mortgage monsters like like AIG and fred and his bloated ugly misbegotten sister Fannie. It hasn't worked and their solution, keep shoveling! Barak Obama , sweet man that he is has made disastrous choices picking his economic cabinet of Keynesian economists who have learned nothing and forgotten nothing. The last thing a president needs in an economic crisis are economists, bankers and Wall Street financiers advising him. They are destroying a presidency which has barely begun. They hum the Keynesian mantra of economic growth by extending credit and debt and "stimulus". Paulson said the problem was a "liquidity crisis" and he flooded the markets with liquidity borrowed from our children. Paulson, Bernanke, and Bush said we needed more lending, more credit, more debt. It was never a liquidity crisis. It was a debt crisis but they didn't get it and Obama and his cast of bozo economists don't get it. It has not occurred to them that the very crisis at hand was caused by cheap credit, massive debt assumption and mindless consumption combined with a negative savings rate . Common sense would seem to indicate that the solution is not more of the same, turbocharged in overdrive with an afterburner. It has not occurred to them that people who are broke and over extended will not want to borrow. It has not occured to them that people in a half million dollar house worth $250,000 who are behind on their payments may not care if their new mortgage payment is only 31% of their income if they have no equity or no job. And what about the hardworking dummies who also live in houses underwater who HAVE been making their payments on time? No help for them. Just like it is no help for solvent banks. Give money to the failed banks, the failed homeowners. And borrow if from our children! They know that the latest in a series of boneheaded poorly thought out rescue plans for the housing problem isn't a rescue of them, it's another rescue for the mortgage companies and banks. The White House and Congress are solely focused on saving the very people who are their constituency:Wall Street corporations and the banks. The American people are not their constituency and they know it . They are focused on saving insolvent banks and corporations . Of course not all politicians believe this but the powerful ones do and therein lies the problem. If the banks and insolvent insurance companies are allowed to fail, a lot of wealthy investors, sovereign wealth funds, mutual funds and hedge funds and other corporations will lose a lot of money and this shadow government is going to do every thing it can to save its sorry hide, even if it means turning a bad recession into a worse depression or even worse, tearing the fabric of our society to shreds.


Kreppa is what they are calling it in Iceland, also known locally as Kreppaland. Kreppa is a common word uttered by Icelanders and roughly translated it means "Crisis" and is derived from an old Norse word. Icelanders have been living in a state of kreppa for these past months well chronicled from various blogs out of Iceland and especially my favorite online publication Iceland Review, you see frequent references to kreppa. Heimskreppa is a new variant and translates as Worldwide Crisis. To paraphrase John Kennedy, "We are all Icelanders, now. Icelanders are in a state of shock trying to grasp how they could have fallen so far as a country because of the utter evil greed and folly of their unregulated bankers who have destroyed the future of a proud nation. Businesses of all stripes are failing or will be failing in Iceland and even Iceland Review is at risk with staff being laid off. Sadly, some of the staff are immigrants who have lived there for many years and in a new twist of fate, may soon be deported. Manitoba is even advertising for skilled Icelanders as the largest population of Icelanders outside of Iceland reside in Manitoba which last accepted a wave of immigration from Iceland in the 1880's. But what is an Icelander to do if they lose their job in a collapsing economy hopelessly in debt? The horrible scenario in Iceland desperately needs a Deus Ex Machina but that is a forlorn hope at this point and I suspect there are many Icelandic Citizens who will take Manitoba up on their offer to have a job and a home in a community of Icelanders even if it is in Canada. Perhaps some day they can return to their splendid icy island in the North Atlantic. I wonder if we will see other waves of immigration from the other countries on the verge of collapse like Ireland and Greece and Ukraine and a good portion of Eastern Europe but few countries will be eager to have more mouths to feed if this kreppa is a heimskreppa.
Meanwhile over here in bushobamaland things are not yet as grim as Reykjavik. A recent poll had over 30% of Americans opining that we are already in a depression but I wonder if those 30% even have an inkling of what a depression is or what it could mean as only people my mother's age still remember the Great Depression. There are now many commentators starting to say that the actions being taken by the current assemblage of Keystone Cops are turning a bad recession into a depression and I would Like to examine those actions in a future blog.

Monday, February 16, 2009

Some NewTrouble Spots

I normally start my morning reading newspapers and online magazines in Europe before the US markets open. The graph to the left shows in percentage to GDP of loans that the Austrian banking knuckleheads made to the developing countries of Eastern Europe. Note that this is as of September 2007. There are no dollar figures and so I will provide them. These figures were obtained from the Austrian national newspaper derStandard in an article describing the frantic efforts of their finance minister Joseph Proll to put together a rescue package for a banking sector which looks like it could blow sky high. There was a similar coverage in the superb German news magazine Der Spiegel. It seems that Austrian Banks recently lent 230 billion Euros to the countries listed to the left. Austria's GNP is about 330 Billion euros and thus they lent a figure equal to 70% of the country's GNP, a gigantic figure. DerStandard said that if only 10% of these loans fail, the Austrian banking system could collapse. They provided no explanation how a seemingly small figure of 23 Billion euros could destroy their banks and why Joseph Proll is trying to raise a rescue package of 150 Billion Euros but something dangerous is clearly afoot. I would expect it might have something to do with leverage. Many other countries have lent to Eastern Europe as well but for reasons unknown, the Austrians went hogwild. These losses could rival the blunders of our own homegrown banking imbeciles on a per capita basis. The financial meltdown is afflicting other countries in the Eurozone as I have noted before and include Iceland, Spain, Greece ,Italy and the UK and Ireland as particularly at risk.Ireland seems to sink almost day by day with businesses like Dell Computer fleeing the country this past month. Now the politicians have pledged sums to the banks equal to 220% of the country's entire GDP and the really worrisome figure in my opinion is not that almost unimaginable number but the shocking jump in CDS quotes for the Irish debt. One year ago it would have cost you 10 cents to insure $100 of Irish debt via a Credit Default Swap(CDS). Last week it had jumped to $3.50 per $100 and that quote had tripled in about a week! I should mention that CDS premiums are soaring for many countries but clearly Irish debt looks really shaky.
The news from Japan is horrible with their GDP falling 12.7% in the most recent Oct to Dec quarter which compares to the US at -3.8% and Eurozone -1.2%. It's hard to decide which region is going to hit the ground first with so many countries in a flat spin death spiral.

Monday, February 9, 2009

The Bushobama Depression

Well it's official. It's a Depression. Two days ago at a regional conference in Kuala Lumpur, IMF Managing Director Dominique Stauss-Kahn said that the big world economies are already in a depression. Of course this is coming from a guy with a hyphenated name like a Singing Nun who is also known in France as le grand seducteur for bonking a colleagues wife at last years Davos festivities. Maybe we should wait for a second opinion from someone not from France. How about say, from Japan? In the 1990's they went through their own depression and only briefly pulled out of it in the past 5 years with the debt fueled world boom but now it looks like they are back in their depression with the rest of us in our globalized death spiral. But take heart. Bushobama has picked some real winners to pull the US out of it's flat spin with some really creative ideas tried during the Japanese depression. Bushobama's first face plant was picking some real winners to head his economic team like Larry Summers and Tim Geithner. This is the same Larry who was fired as the Dean at Harvard for saying women are too dumb to do math and science. I'm sure they are too stupid to do the kind of economics practiced by old larry. Geithner and the terminally arrogant Summers actually have some knowledge of Japan's attempts to fix their depression and they say that that those attempts failed because they were too halfway and weak and too poorly timed. We will take a detailed look at their comments but I am starting to think that men are too stupid to do economics. In 1990 Japans public debt was 19% of their GDP and now it's the highest in the developed world at 180%. The US by contrast was 60% in 2007 but obviously much higher now with $9.7 Trillion dollars in debt already borrowed or promised as of this month. Does this sound like a country who used half way measures? In the 1990's the Japan spent more than $1 Trillion on 10 stimulus programs which most observers including Summers said was money down a spiderhole. The NY Times last week did a segment of the Japanese stimulus concluding it was a waste of money building bridges and highways to nowhere. The Japanese prevented the default of insolvent banks and corporations by preventing markdowns of their debt and buying equity and commercial paper. The more money they poured into their banks, the more the banks hoarded the money. And what was worse the companies actually tried to pay down their debt and the doggone Japanese consumers wouldn't consume and instead saved their money at a 12% clip, one of the highest in the world.
So you ask, is it fair to compare the US economy to the Japanese economy or for that matter the Swiss or Swedish or Chilean economy if we are trying to avoid a repetition of their mistakes? If you believe in John Maynard Keynes it is fair, because the solutions are the same Keynesian solutions of digging a hole and filling it up. In 1980 the Japanese Central Bank interest rate was 9%. By 1987 Japan was fueling a ferocious bubble in real estate and their stock market. The central rate was 2.5% and cheap and easy credit fueled a boom which drove the Nikkei from 8000 in 1983 to almost 40,000 near the end of the decade. As an aside, the Nikkei is now today exactly where it was in 1983. The bubble finally popped when the Central bank suddenly raised their rates to 6%. Then to stop the carnage they tried dropping interest rates to nearly zero in the 1990's. Nada. They cut taxes following the lead of Reagan and other Alzheimer economists. Nada. Nothing trickled, not up, not down, not sideways. The citizens of Japan were fried and refused to consume and instead did the only rational thing: they saved while their government borrowed and floundered and spent to no avail. Do these blunders sound familiar? The so called stimulus working its way through the Washington pork and sausage factory is a a real mishmash of unrelated plundering of of my children's future. . The national debt at the end of the Texan Bushwhacker was said to be about 10.8 Trillion which is 78% of our GDP. There are all manner of trillions allocated or promised which run from about another 4 Trillion to $9.7 Trillion which will take us to well over 100% this year and Bushobama promises trillion dollar annual deficits into the future and so it appears the US is catching up with Japan's 180% debt to GDP at a rapid clip. The perps who fueled our own real estate and debt driven boom are in charge of the solutions which are attempting to solve the problem with yet more debt and propping up the wealthy and the financial institutions by running the printing presses which serve to increase the power of the Wall Street and Beltway Elite and increase the power and reach of the government. It goes without saying that this will produce inflation down the line which will destroy the savings of our citizens who are only just now trying to stop consuming and start saving. This is a cruel betrayal and a cynical disregard for the millions of young people who voted for change who will soon find their futures are being sold down the river by a charming black president with a good jump shot and a bad cigarette habit. So the depression is on and will be likely picking up speed in coming months as other dominoes fall like the commercial real estate market, commercial paper,credit card and student loan debt, regional banks and assorted and sundry corporations who made the mistake of not trying to suck on the Federal Tit while they had the chance. The financial meltdown which started under the bushies is picking up speed under the already failed policies of a corporate financial and military state which like the Bourbon Dynasty, has learned nothing and forgotten nothing.

Saturday, February 7, 2009

Thoughts on Default

This is a hundred billion mark note from Germany circa 1923. With this bill you could buy 2 beers during the episode of German hyperinflation which ended in November 1923 when the government finally capitulated and issued the new and improved Rentenmark. You could exchange 10 of these bills to obtain one Rentenmark or 1 trillion old marks to 1! Could hyperinflation happen here? The short answer of course is that it probably could happen almost anywhere. Countries default in different ways. Kenneth Rogoff and Carmen Reinhart are one of the most prolific economic writers and you will see them cited in many searches on economics. They wrote a fascinating study for the IMF and the NBER(National bureau of economic research) where they searched the last 800 years for government defaults:
They concluded that national defaults were hardly rare. They even used the phrase that these bankruptsies were a "universal phenomenon." France went bankrupt 8 times from 1500 to 1800 and it wasn't always a pretty phenomenon. The regents after the Revolution expropriated chuch property and lands of the wealthy and you bankers take note: they executed many lenders. Spain went bankrupt 7 times in the 19th century alone!
It would seem likely that we will see some national bankruptcies in the near term. The obvious candidates are Zimbabwe and Iceland. The 3 largest banks in Iceland have defaulted on their debt of over $120 Billion which has left every man woman and child in the icy country owing over $500,000! The bank debt to GDP is an astronomical 1000%. Much of the rest of Europe is in terrible shape with the UK, Ireland, Spain, Italy and Greece suffering the most. There are many requirements to join the EU, one of which is a deficit to GDP not exceeding 3%. The EU central bank estimates that the average debt of all members could rise above 4% in 2009 with 17 EU states above 3%. By comparison, the US looks to be above 10% which leaves us out from consideration I suppose. This could pose grave dangers to the EU if some of its members default and according to Der Spiegel, if several countries default, the Euro could collapse. The countries are funding these deficits with bonds which are in the case of Italy and Greece becoming a hard sell without ever escalating interest rates, Most of the European banks including the economic heavyweights like Germany and Switzerland have banks full of poisoned US toxic debt as well as loans to emerging markets in Eastern Europe which are turning sour fast. The UK is in terrible shape with plummeting oil exports from the North Sea and almost total collapse of their financial services industry and their real estate market. The pound is off 40% in the past 6 months and is approaching parity with the Euro. The Brown administration has been pouring money into their banks with the same terrible results there as here and their most recent idea this week is an insurance plan for the toxic debt also eerily similar to the ideas floated by Geithner and his blockheads in Washington. It all hearkens back to Tom Lehrer's song"We will all go together when we go, Every Hottentot and every Eskimo..." The major difference in the US is that we depend upon other countries, chiefly China and Japan, to buy our debt from their historically large current account surpluses. But those surpluses look to be dropping fast. In Japan the Yen has become the strongest currency in the world just as their exports have literally fallen off a cliff . MSNMoney reports that Japan's industrial production is now falling at at a jaw dropping 63% annual rate followed by Korea at 43%. China is keeping a brave face on and figures are hard to come by lately but it appears now that their job losses in the last 6 months are now over 23 Million! It would seem to this observer that if the surpluses go, so will the need to buy treasuries. The surpluses are dropping in the oil exporting countries as well posing obvious potential problems for the treasury auction market. The problems in Japan are particularly acute with a soaring yen and exports so vitally important to their economy. They also have a huge public debt to GDP ratio of 170% surpassed only by Zimbabwe and Lebanon. With a limited understanding of World financial markets, I find it difficult to see who faces the greatest risks other than a few outlier train crash states. Most of us are broke but some are more broke than others. I am preparing a blog on the Japan at the moment which has gone through its own depression in the 1990's and it appears the Japanese government utilized many of the same actions being done by the current geniuses in the BushObama administration.

Friday, February 6, 2009

Economists and the Corporate State

The ongoing debate about the stimulus package illustrates to this writer the utter futility of politicians invoking economists to support their arguments . Economists pack the upper echelons of government, academia and wall street and their assumptions drive policy like no other discipline. Economics has evolved over the years with one school of thought such as Keynesian Macroeconomists slugging it out with the Neoclassical economists over how to manage capitalistic markets as these markets with a mind of their own lurch from one extreme to the other. The economists using their particular econometric models try to prove what is most important in a particular situation: demand! No supply! No!:Fiscal policy, monetary policy! No! tax policy! So I will not mince words. Economics is a social science and as such, it is descriptive. It begins with assumptions and incorporates observations of patterns using historical perspective. With the advent of applied mathematics and statistics and behavioral psychology and modeling theory and better data handling, its priests have endeavored to become prescriptive movers and shakers in government and industry. And they have succeeded. My conclusion is going to be seen as harsh. This is a stature that they do not deserve because the field of economics is too inexact to be utilized as the driving discipline in formulation of economic and social policy. I will state my background is in science. The scientific method also utilizes assumptions but then performs tests and experiments to prove or disprove those assumptions. The results are examined and subjected to statistical analysis and peer scrutiny and then if possible, replicated by other scientists. If the same results are obtained by others, you now have a body of work you may be able to hang your hat on. If enough people can verify the work, it can become a defined principle or even a law. The same can be said of other disciplines which have a scientific basis such as engineering. They have a certain body of laws and principles that allow you to build a skyscraper, a bridge or an airliner. The same cannot be said of economics and many of the other social sciences. As such, any conclusions they offer may have value or may not.There is no way to know. George Bush Sr used the term "voodoo economics" to deride Ronald Reagan's trickle down supply side ideas in the 80's during a campaign. Old George got that right. The problem is that economics is little removed from voodoo. Economists on one side of the argument can argue with each other and reach opposite conclusions. Thus there is no way to prove which opinions are correct. Today we hear our political and financial corporate leaders saying things like"If such and such a program isn't enacted in this time frame, then the result will be such and such." And the incredible thing is, almost no one questions these assumptions! As John Stewart said recently, these people live in Bizarroworld !!! So I must conclude since there is no way to test most of their assumptions, there is no way to know whether they know what they are talking about and therefore there is no way we can trust their decisions. The Kenesians think they know. The supplysiders think they know. They all behave like doctors and high priests. They have a religion with a body of dogma and they act on it. This body of dogma has become incorporated into the genome of our Military Corporate State to justify and augment their power and wealth at the expense of the rest of the population. The large corporations and the financial establishment marshal armies of lobbyists many of whom are former politicians to provide the care and feeding of the current politicians who write the laws to benefit the corporate state. I can only conclude that the Military Corporate State is the government and the government is the Military Corporate State. And the corporate media controls and modulates the flow of information you read and see and hear to protect the corporate state, hopefully distracting the baying sheep outside the palace walls with infomercials of consumerism, reality games and fostering a cult of trivial celebrities. Now that the wheels are starting to come off the wagon, we had a new election based on "change you can believe in" and the bankers and economists who were architects of the current debacle, the Rubins and Summers and Paulsons and Geithners of the banking world are the very people in charge of formulating the solutions in the new Obama administration. This is NO change you can believe in! Is it then any surprise that the solutions offered by bankers have been"Save the banks and the bankers!" The country has binged for almost 30 years on easy credit, lax lending and debt assumption and the solution these voodoo bankers are offering is more credit, more lending, more tax cuts and more mindless consumption, more consuming??!! And how are these monsters of industry and government proposing to do this? By borrowing from our children and our children's children. By assuming more debt! What other word can you use to describe these people except to say they are insane. They propose to utilize the same policies that caused the current blowup but are hoping for a different result. That meets the definition of insane. I hope in future blogs to compare and contrast how other nations have met similar crises in the past and try to see if we can learn from their actions but in the back of my mind I know I may be relying on the voodoo science of economics.!!

Wednesday, February 4, 2009

How low can you go

I stumbled upon this graph the other day which really stunned me. I have an investment friend, F, and the other day he idly wondered where the bottom in the markets might be. This graph represents the inflation adjusted DJ Industrial average from 1949 to the present. That big dip in the middle is 1982. Draw your own conclusions. Double click on the image to enlarge it.

The Big Picture

I started this blog with the goal of trying to understand the society within which I live. I do it as much for my benefit as to inform any readers I might have. Most of this country has little understanding of the causes and effects of the events impacting their lives, myself included. If you don't understand the system , you are likely to to feel like an impotent victim, subject to despair and ultimately unable to develop effective coping strategies. It really comes down to a battle for survival. You have a choice to be a hammer or a nail, to live or to die. I have made it my goal to study and educate myself in the important subjects of history, philosophy,economics,commerce,ecology, anthropology, geology, engineering and design, agriculture and many others. I had seven years of postgraduate education in which these disciplines played no role whatever. I let schooling get in the way of my education. No mas. I spend 3 to 4 hours every morning starting well before sunup studying world news and markets and if I find a stunning tidbit that I find fascinating, I am likely to include it in my blog, my glorified notebook, my diary. Ted Williams had a great expression:"Life is hard and it's even harder if you're stupid." I would add that not only is it hard if you're stupid, it could be unpleasant, painful, dangerous, and even fatal. With this preamble out of the way, i think it is time to step back and reconsider and reassess the significance of recent events. I have spent a lot of time teasing out statistics and graphs and articles and other data to illustrate my viewpoints and my biases. I have drawn certain conclusions and I fully expect some of them to be wrong. There is no such thing as absolute truth and absolute certainty. That said, I will continue to dwell upon the details of our human civilization on this spinning insignificant rock in the Andromeda Galaxy. I will continue to report and comment on the factors govern and influence our society and our economy and I will come back time and again to the Big Picture of our history as a civilization. I have always been fascinated on how civilizations come and go, rise and fall. This has fascinated many historians from Toynbee to Diamond. The Romans are the most studied but how can you ignore the Harappan and Mesopotamian empires, the Egyptians and the Mayans, Chacoans and Minoans and Mycenaeans, not to mention the various dynasties in China. And who can ignore the spectacle of the lonely basalt icons of Easter Island. Joseph Tainter is a little known anthropologist who teaches at a small state university several hundred miles from where live who has spent much of his professional life studying this very subject who wrote a thin monograph now out of print called "The Collapse of Complex Societies" in 1988. He concluded that there are common threads to societal collapse. At the risk of oversimplification let me summarize his conclusions.
His most oversimplified conclusion is that civilizations eventually reach a point of diminishing returns. He relates it to the Law of diminishing marginal productivity. To wit he says that
1. Human societies are problem solving organizations.
2. Society requires energy for its maintenance and expansion
3. As complexity increases in a society there will be increased costs per capita
4. Investment in increased complexity as a problem solving response often reaches a point of declining marginal returns. He relates this to what he calls the marginal productivity of increasing complexity. Since oil is the dominant energy source in our civilization, this feeds directly into the implications of Peak Oil to our society.
Tainter's conclusions and methodology are stunning and they been picked up by many current observers one of the most notable being Richard Heinberg who has made a study of how energy flows through a society from an economic and ecological perspective. I will continue to come back time and again to collapse scenarios and how they might play into our current predicament. My bias should be obvious by now. I believe that our current industrial civilization, and more particularly our current American civilization is approaching collapse. Is collapse inevitable? Of course not! Economic collapse does not necessarily imply societal collapse although they often go together. Economic collapse is expensive but societal collapse is dangerous. In this blog I will continue to offer mitigating strategies to deal with and forestall both and I will try to educate and inform and allow the reader to draw their own conclusions. Once observation I would make is that as the complexity of the financial collapse upon us has increased, the pace has markedly increased. Perhaps there is another law working here as yet undiscovered that might relate the rate of complexity to the rate of collapse. At any rate, unless useful strategies are put in place soon, economic collapse is inevitable in my opinion. I also believe that the current economic assumptions of our political and business leaders are flawed and when you combine that with greed and the innate human hardwired inability to plan for the future by sacrificing today, economic collapse is almost inevitable. In future blogs I will try to show why these assumptions are wrong and I hope to offer suggestions to soften the impact of these changes upon our lives.

Monday, February 2, 2009

To nationalize or not to nationalize

Well I am no longer alone in the wilderness crying out for the establishment of a new national bank. As my reader(s) know, I have vacillated back and forth between nationalizing the banks(some of them) and starting from scratch with a new bank. And by a new bank, I mean a new GOOD BANK. Not a bad bank as proposed by the agents for change within the Obama administration. I really fell for Obama's mantra of change but just a few weeks into this administration I am getting a sick feeling in the pit of my stomach. It is beginning to look like we have replaced and ignorant inarticulate Texan Bushwhacker with an intelligent articulate Chicago charmer with a good jump shot and a cigarette habit who is continuing the same failed economics of the bushwhackers. For me the honeymoon is over. Change? NOT! This is the administration who has given us Tim Geithner, Larry Summers and Robert Rubin...Bankers ALL.Both Geithner and Rubin have made it abundantly clear in the past week what they think of bank nationalization. Rubin is a former Treasury Secretary under Clinton who helped start the current roller coaster ride to hell and who until just a few days ago was senior advisor to one of our largest insolvent banks, Citigroup. If we nationalized the banks, all his buddies might lose their jobs and their money. So Obama has made the decision to stand with crooks, incompetents and bankers or "banksters" as I heard them referred to recently. I was asked by some family this weekend to offer some concrete suggestions for a solution to this mess. I told them that I had offered ideas in this blog which I felt would help individual people to get through this recession or depression but as to a solution.....There will be no immediate solution to 3 decades of enormous credit and debt assumption by consumers, government and business. There will be no solution to the criminally incompetent business models devised by the Wall Street financial establishment which has brought the entire world economy to the brink of ruin. The solution for these bankers in both administrations has been injecting more and more money with virtually no accountability into the very companies that caused this destruction in the first place. Their solutions are to create more lending, more DEBT to solve a problem which was caused by excessive debt and credit in the first place! Classical economics is a failure. The tools used by our Keynesian economists have failed and keeping these assumptions and economists and bankers in positions of authority guarantees continued failure. At best their actions just delay the inevitable. The tools of the greenspans, and the bernankes and the paulsons and now the rubins and the geithners have failed and will continue to fail. The interest rate from the Fed is effectively zero. The interest rate in the UK this week will drop to the lowest rate since the Battle of Hastings. Seriously, the BOE will soon drop the rate to the lowest in 315 years. I am a former ER Doc and when we exhausted all measures to save a dying patient, we quit. We "called the code." When the patient dies, you quit. The banking system of too big to fail banks is dead. They are insolvent. So now what? We quit.I think we meed to look at what we need banks for. They are a place to put and retrieve our money and if we think it's safe to poke our head out like Punxsutawney Phil to borrow a few bucks, they have a function. That is all they really have to do. And I almost fell out of my chair this morning reading that the Business Secretary in the UK, Lord Mandelson has proposed that a new good bank with these fundamental banking functions be established in the UK in the post office! So now you know who the mystery face is up at the top left. What a great idea! Iwish I had thought of it. And despite my trashing of economists, I may have to get behind Paul Krugman who has finally proposed bank nationalization in today's NY Times. It is time for the Obama administration to stop trying to rush through a gigantic stimulus package screaming there is no time to waste. Nonsense. All the government packages so far have been just that:WASTE. There is time. There needs to be time. They need to take the time to think this bailout through and listen to voices of intelligence outside Wall Street and the Beltway. The senate is the last hope. If it takes a filibuster to stop these heedless maniacs, lets have a filibuster. I have always thought of myself as a democrat but these guys are scaring the wits out of me.