Thursday, February 25, 2010

Keynesian Economics:Fire in the Hole

These days it is getting harder and harder to be bummed by the the endless torrent of bad political and economic news finding its way to my desktop. The sun is returning to Wyoming and the sparkling days and slanting sun on our snow capped peaks is a better physic to the soul than any antidepressant. As a carpenter I find myself at our local lumberyards from time to time. There are few carpenters at the order desks these days and few orders. Jackson Hole has 5 lumber yards and if the foot traffic I see in them is any indication, there will be fewer of them pretty soon. The gossip is that one or two will be gone by the summer . Tax receipts are off , for rent signs are everywhere and rumors abound of local banks and even the local ski hill possibly going under . But thank goodness our Wyoming legislators in Cheyenne are manning the fort promising no change in the country's most lenient DUI laws("You can't take away a guys license. How is he going to get to work!?") and repeal of concealed weapons permits. Now anyone may be able to pack their piece in plain view anywhere they want: "No Obama is gonna take away my gun!"
Our elected, appointed and bought and sold representatives in the District of Corruption continue to shovel manure out the front door to a waiting unquestioning media. Timmy, our Secretary of money said yesterday in his best Keynesianeese Catch 22 logic that "without growth we cannot begin the process of fiscal responsibility." I guess that means we don't get fiscal responsibility any time soon. So he called for more spending, more QE, more stimulus,more debt. The only way to fix a debt laden economy and get back to that Amurican Dream is more shovel ready projects and more money shoveling. That's how these Keynesian imbiciles think. Paul Krugman and Joe Stiglitz keep telling us that if the current level of stimulus isn't working, that we're not shoveling enough. Their solution to a fiasco caused by debt is to take on more debt, prop up more banks so we can get them loaning again and get the old American consumer consuming again gorging on cheap Chinese junk at Walmart and overpriced american cars and vinyl McMansions in distant suburbs. Thirty years of bogus neoclassical economic assumptions have destroyed what used to be a pretty nice country. But Timmy says we need to continue to borrow to get our growth back. Unless you are JP MorganChase or Gold-in-Sacks. you have to pay interest on what you borrow. To pay back the principal and the interest, you need growth. And what happens if you don't have growth? You can't pay your loan off. Therein lies a fallacy of Lord Keynes and his deluded followers. You cannot just keep assuming debt ad infinitum hoping that growth will retire the debt.Once the debt becomes too large, default will become inevitable. We have had exponential economic and population and productivity growth as a consequence of the industrial age and this growth was achieved by work which was accomplished by ever more efficient machines and technological innovations running on virtually free energy. Growth was easily achieved if for example one man could run a machine which could do the work of 100 men in one day. These machines created prodigious increases in productivity and wealth creation and spawned a generation of economic thinkers who labored to understand and explain the workings of this new economic machine inside the box of the Industrial age but now that the Industrial Age is coming to a close, they continue to use the same models and assumptions and policies that seemed to explain the functions of money and capital and labor within an industrial economy. Most economists ignore the role of fossil energy within such an economy. Without this free seemingly inexhaustible source of energy, the Industrial revolution would not have occurred in the manner that it has. The world population would not be approaching7 Billion people. The US would not be carpeted with strip malls and nail salons and suburban shitboxes linked by millions of miles of asphalt and concrete highways. Simply put, energy facilitated this transformation of society and the disappearance of free fossil energy dooms this economic model and despite the Panglossian promises of Exxon that our fuel will soon come from algae allowing this wondrous profligate dream to continue unabated, simply put, it ain't gonna happen and our something for nothing society will soon be undergoing wrenching changes. Our politicos don't get it, our citizens don't get it. This massive wealth creation has led to an entitlement mentality in which we Americans representing 5% of the population get to consume 30% of the world's resources playing our version of a zero sum wealth and power game. As Americans we are entitled to live and work and travel where we want spend and consume what we want and receive pension and health benefits at the end of our fulfilling lives. We elect leaders who promise these benefits. Again, simply put,it ain't gonna happen. We have millions of unionized state and municipal workers who have been promised unimaginably generous benefits.
Cops and firemen in California with a high school education drawing 6 figure incomes retire on 6 figure incomes in their 40's and 50's with lifetime health benefits.Both the States and the Federal Government have immense unfunded promises totalling over $50 Trillion dollars, a sum as large as the entire GDP of the world. We do not have a government that is telling us that we need to learn to find better and cheaper ways to travel and grow food and clothe and house and educate ourselves. We instead have leaders who tell us to shop and spend and drive and eat. We will consume and borrow our way back to prosperity, and most of the baying sheep just keep grazing and shitting, oblivious to the wolf of economic reality that will soon tear them to pieces.

Friday, February 5, 2010

The Jobs Joke

This depression is starting to get me down, should I say depressed? Washington continues to disgorge lies and bogus statistics. 4th quarter economic growth up 5.7%, unemployment hitting a 5 month low of 9.7%, more green shoots everywhere. Mark Twain talked about lies, damned lies, and statistics! Obama talked about creating jobs and he has a jobs bill which is another in a long line of bad bills and bad policy going back to ronnie and the trickledowners with the usual structure of tax breaks and government guarantees. This is no way to create jobs. Last year the federal government extended and extended unemployment benefits to the tune of $140 Billion. All you have to do to get an unemployment check is to ask for it and prove you don't have a job. You get unemployment for doing nothing. FDR gave money to the long term unemployed but he made them work for it with projects like the CCC. The banks and corporations allied with their Keynesian economists in government and academia have destroyed good jobs in this country . We have been told for decades that free trade and globalization was good for America, that America would be an information and service economy. This was a fraudulent, cruel hoax. In the 1950s, manufacturing contributed 28% to our GDP. Today it is a minuscule 12%. There are far more people employed by Federal, state and local governments whacking away at keyboards and pushing paper than employed in actually making something! Public sector jobs contribute nothing to the wealth of a nation. Banking ,finance, insurance and real estate represented about 14% of our 50's economy and that is now more than doubled. We once had an economy that would extract raw materials from our mines and forests , deliver them to a factory and build things for ourselves and for export. We made things that the world needed and sold them to a world that paid us in cash and gold. In the 1920's the US had amassed a giant trade surplus equal to 5-6% of World GDP. This manufacturing and trade economy provided real jobs for a growing nation. And now what do we have? Only 12% of our economic activity involves making stuff. These same corporations moved their factories to the lowest cost producers overseas encouraged by supportive government laws and tax policy which made fortunes for our corporations at the expense of their US workers. The banks and corporations thorough their shills in government deregulated laws protecting workers and a domestic manufacturing economy. The past decade of the Bush administration's bank and business friendly encouragement finally killed off the goose that laid the golden egg. The banks and corporations now control the government. And with no one looking, these banks looted the world with leveraged bets on bogus innovative instruments and in the process destroyed the world economy. And when their bets finally went sour, they looted the public treasury to cover their losses.
So what can we do to fix this mess? We can remove the influence of these banks and corporations. We can change the laws and tax policy that allowed this debacle to happen. In short, we can remove all the bad guys and replace them with good guys, remove all the bad laws and replace them with good laws. How hard is that? We can then pay off our debts and start anew. Again,how hard is that?
The serious answer is that it would be very hard. In fact in my view, it will be impossible. I am working my way through a wonderful new book entitled "this Time is Different" by Carmen Reinhart and Kenneth Rogoff, a history of world economic crises of the past 800 years. One of the little tidbits I discovered in their analysis of financial crises was that once a country has a debt to GDP ratio exceeding about 90%, recovery became prolonged and difficult and in many cases impossible without collapse. Our current official debt as of yesterday was $12.27 Trillion, and our estimated 2009 GDP is $14.4 Trillion. That is a debt/GDP ratio of 85%. But that figure is wrong. You see in the US we have these things called GSE's whose sole purpose is to provide backing for mortgages, and they are in almost all respects government entities, every bit as much as the FAA and Homeland Security. You know them as Fannie Mae and Freddy Mac and the other debt laden entities like Ginny Mae and the FHA. These organizations have presided over the 100% federalization of home ownership in the US and the problem is, they are broke and have had to have their debt covered by the taxpayer.The total debt of these GSE's is now $6.3 Trillion. They have sold this debt to the world. It is owed to the Chinese and Japanese, pension funds, sovereign wealth funds, and others . It's called agency debt and trades like treasuries. It is real debt and yet is not counted as Federal debt, even though Barak Obama and his Budget Office had promised to include this as federal debt in any of their calculations. To date they have not. So if you include this $6.3 Trillion you have $18.5 Trillion of Federal debt. This is a debt/GDP of 128%, not 85 %, and is far above the 90% danger point of Rogoff and Reinhart. This is fixed debt, not budget deficit. Obama's proposed budget deficit for the next fiscal year is an additional $1.6 Trillion which of course will be added to the Federal debt if he can persuade someone to buy more of our debt. IF he is successful, that will be $20.1 Trillion in debt or 139% of GDP. And trillion dollar deficits loom in the future. No one in their right mind believes that this debt will ever be repaid but in order to not default on this debt the US has to continue to pay interest on this debt which of course represents loans from the Chinese and others. At some point they may stop extending us loans either because they fear US default or because they become mad at us if we say, sell arms to Taiwan, or if their economic bubble pops. If the largest government in the world can't borrow, that American dream could really unravel. These folks in the bond markets might demand much higher interest rates for their perceived risk incurred in lending to a profligate United States. In fact I am betting that this will happen and I have been investing in ETF's which short treasuries. Tim and Benny and Larry know this and someone has leaked plans of their proposal to compel Americans to own some percentage of government debt in their retirement accounts!!!
Nassim Taleb wrote a recent financial best seller called the Black Swan which dealt with the risk of unlikely but catastrophic events. When I look up now I don't see one black swan but a veritable flock of black swans. That we are entering a depression is in my view a virtual certainty, and the economic, political and employment structure of the US is such that the difficult decisions necessary to deal with this predicament are not being made. Time is running out.

Turd in a Punchbowl

Well I have been on vacation from blogtown for a while and it is not because of a lack of material for blog topics. I am just still stunned by scalia and the rest of the misbegotten brethren on the court who finally clarified that corporations are people just like you and me. I'm glad they cleared that up. Does that mean that corporations can be imprisoned and executed like people, waterboarded like people,TAXED like people? Does it mean that if a corp buys another corp that it is engaging in slavery? The repubs are dancing in the aisles and the dems including our dear leader are predicting Armageddon.The fact is that the court has now codified a reality that has existed for decades. To wit the corporations own the government, lock stock and barrel.They write our laws, wage our wars and determine our destiny. The financial corporations with their lobbying arm, The Federal Reserve, control monetary and fiscal policy and to a large extent foreign economic policy by virtue of dominant representation in the IMF and the World Bank.The situation is utterly out of control. We have America's favorite bank led by Lloyd Blankfein of Goldman Sachs jamming his financial proboscis into the heart of the taxpayer sucking the life out of our children. This is the same Goldman that received $12.7 billion from Hank and Timmy and Benny in TARP last year while declaring a profit of $12 Billion and paying out exec bonuses of $16 billion paying an effective corporate income tax rate of 1%! The American people are outraged and even Barack is beginning to push back with populist rhetoric shades of Andrew Jackson. But even if you believe in the sincerity of our dear leader, I do not think that this will be change we can believe in. The recently proposed Volker Rule which would in effect reinstate aspects of the depression era Glass-Steagal Act is already meeting stiff opposition from members of the Senate Banking Committee like Richard Shelby(R) of Alabama who fully intend to take care of Goldman and the other phony casinos who pretend to be banks and who contribute heavily Senator Shelby and others. And now that there is no limit to how much money, Shelby can get from Goldman, you can be sure that Richard will do whatever it takes to keep Lloyd and the rest of his blood funnel brigade happy.
There are a few green shoots visible . NY AG Andrew Cuomo yesterday brought civil charges against former Bank of America CEO Ken Lewis for fraud. And today the Italian government also seized assets of BOA in Italy. You may recall that former Goldman CEO and Treasury Secretary Hank Paulson referred to BOA and Ken Lewis as "The Turd in the Punchbowl". You will have to ask Hank to elaborate on that one. It's my view that this is a punchbowl full of turds including Hank and Tim and Summers, Rubin,Greenspan, Jamie Dimon et al. And TARP prosecutor Neil Barofsky, one of the few heroes in this mess is promising more indictments . We can only hope.