Global Worries

The world has a lot of things to worry about at the moment. Unless you were born without mirror neurons, you cannot help being stricken by the horrific images emanating from Haiti, a country which has been in full collapse mode for eons. The US will likely play a big and expensive role bringing aid and equipment to deal with the devastation of a 7.0 magnitude quake. Let us hope that the nation of France ponies up the largest aid package as it was France that imposed onerous reparations on the country after the successful slave rebellion which began just after the French Revolution. These reparations, initially 150 million francs were imposed on former slaves to pay back the loss of lands and slaves of the wealthy French Planters and it took the former French slave colony almost a century to pay back these huge sums, a burden not unlike what was imposed upon post WWI Germany. The US has also occupied Haiti from time to time in attempts to restore order to a country which has been pretty disordered for a long time.
Meanwhile back at the ranch Phil Angelides investigating the financial collapse had his hands full with tongue lashings from the Likes of Lloyd Blankfein of GS because Phil dared to suggest that Goldman Sachs created the type of garbage securities that brought down the world's financial system while secretly running counter bets against their own garbage. Replied god's own worker Lloyd: They were grownups. They should have known better. Lloyd wasn't worried by a little insolent twerp like Phil Angelides, lately of the Callifornia Treasurer's Office. I mean, how much money did Phil make ? He obviously was not doing god's work like Lloyd was with his blood funnel as CEO of Goldman Sachs. Goldman is AAA rated and what is Callifornia's debt rating? Just a few notches above junk bond status. I am not a bond expert but I'll bet that the big municipal bond funds are prohibited from owning munis with a junk bond rating. Speaking again of rating agencies, Fitch, an international rating agency has put out the word three days ago that the debt of the United States may lose its AAA status if Barak and Ben and the rest of the Keynesian katzenjammer kids don't start acting like adults and cutting spending or raising taxes. State and Federal debt will be hitting 94% of US GDP this year. Just 3 years ago in the glory years of the bushwacker it was a mere 57%. This is a very big deal. Why did I have to read about it in a British paper, the Telegraph? Likewise little has been made in the mainstream US media about this debt which is has an average maturity of only 4 years as compared to 7 years in Eurosville and 10 years in the insolvent sovereign island of god save the queen. Something like 40% will have to be refinanced over the next 18 months which will be a problem if China and the Saudis and Japan don't buy these new treasuries. China in fact has already cut way back on its purchases. It's just released trading surplus with the US fell about 35% in 2009 from $296 billion to $196 billion . China has been spending it's surplus building infrastructure:highways, dams,buildings, railroads,cars, ports and canals. It has also been spending 14% more on oil and purchasing a stunning 80% more iron ore last year. It seems that for some reason the Chinese think that spending these dollars now as fast as they can is a better bet than buying more Fannie Mae and Freddy Mac and Ben Bernanke toilet paper, and who can blame them. The Saudis have also cut way back and are mimicking the Chinese throwing up infrastructure and Refineries and chemical plants. As for the Japanese, well they are not doing so good either. They are starting their third lost decade running unimaginable budget deficits which have been largely funded by their own citizens who now are old and wont be buying any more Japanese bonds. They'll be selling them to buy rice cakes and sushi. Japan could be the big story this year or next. The only sizable country now running bigger budget deficits than Japan is, you guessed it: the good ole US of A. Look at the stunning graph listed above of annual budget deficits in percentage terms. You will see Japan running immense deficits, never less than 35%, and their total debt is approaching 240% of GDP. Now that Japan's export driven economy has hit the wall, it is hard to imagine any way to get cheap financing for Japan's deficits. It remains to be seen if there will be buyers for low interest long duration US debt either. The big buyer of US debt lately has been the Fed. That's right: we are conjuring money out of thin air to buy our own debt. If you can wrap your mind around this, you're a better man than me. The Fed also of course loans money at zero interest to those fine banks that we all love, so that they can buy treasuries yielding 4%. That way these banks don't have to go out and loan money to the public and take the risk that the public will not pay them back. With the money that these banks get for free they can take some of the interest earned and pay out nice fat bonuses to themselves. I'm not making this up. It seems to me that the Fed could just as well loan this money at zero interest to Joe Q Sixpak and let him buy treasuries, or to the Guvnah of Callifornia and bingo! Callifornia is saved along with the treasury auction. What could be simpler? Instead, because the banks own the Fed and the government, they get the free money while the rest of us stand in line at the unemployment office, hide our cars from the repo man and hope that the knock at the door isn't the sheriff serving papers. And now that Barak Ofaker's popularity is going down the toilet because even Joe Pickemuptruck has figured out the basics of this Ponzi casino game, the Pres is pretending to hate the bankers who own him and the legislature lock stock and barrel. The big question is how long can this goofy charade last? So to summarize, we have two countries. One is building roads, power plants. railroads and factories with money they have on hand and the other is invading oil producing countries and bombing turbans with toy planes remotely controlled in Langley Virginia using toy money. Which of these two countries has the best chance to succeed?

Vampyroteuthis Infernalis

"The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. "
............Matt Taibbi-Rolling Stone
in an article July 13, 2009

I was stunned by the vivid visual imagery of Matt's characterization of Goldman Sachs, the investment bank from hell that everyone loves to hate.............except of course almost everyone in Barak's economic cabinet.
It turns out that there really is a species called the Vampire Squid just as there really is an investment bank headquartered in New York which has captured the White House and the engaging black family within that house. Goldman Sachs may be the most powerful and visible financial superpower controlling the economic destiny of the United States but it is simply one of many, and it perfectly epitomizes the class of arrogant rapacious insatiably greedy money changers now running amok through the swinging doors between Washington and Wall Street. But no matter how many insults and brickbats are hurled at them, old GS and the rest of the ragtag band of financial bandits just keep partying and jamming their blood funnel into the heart of America. And a curious fact I stumbled upon the other day was that this super profitable casino bank was in the 1% income tax bracket in 2008. That is not a misprint. This is the bank that was bailed out by the US taxpayer with the hysterical importuning of it's former CEO Hank Paulson, lately of the bush administration and the US Treasury, the bank whose current CEO Lloyd Blankfein claims he is doing ""god's work," having made many king's ransoms peddling worthless securities all over the globe and then rewarding its worker class with billions and billions in bonuses earned from the destruction of the world's financial system. And they paid 1% income tax. I mean how bad does this have to get before these millionaire financial terrorists are brought to justice? Of course if you accept the premise that GS sets the agenda of the government, I guess they are the government in effect....Check...Mate.

How Wal-Mart is Destroying America

You have to admit that is a provocative blog post. I could have entitled it "How Trade with China is ........."
The reason I chose to come down on the world's largest retailer is because their business model has been the indirect cause of massive job losses in the United States and in China. Their original business motto was "Always low prices." Wal-Mart scours the world for the lowest cost goods to sell in their low cost big box stores and for the past few decades that has largely meant goods from China as any visit to your local Wal-Mart will establish. The company began as a publicly traded company in 1970 but it didn't really accelerate its expansion until the late 70's and 80's which was also not coincidentally the beginning of the Reagan Republican deregulation and Globalization movements. Therein hangs our tale.
There is a long established concept in economics called The Law of Comparative Advantage first elucidated by Robert Torrens and David Ricardo in the second decade of the 19th century. This law refers to the ability of one country to produce something at a lower cost more efficiently than might be the case in another country. This may occur because of an abundance of a particular resource or the skilset of the population. Other countries may also be able to produce the same good but at a higher cost. Countries can take advantage of these differentials to market goods in which they hold a comparative advantage by trading with countries which also hold a comparative advantage in the production of something else. Country A might produce beautiful durable pottery and stoneware while country B might make equally good metal pots and pans. Both countries can then trade to get the best quality and price for the respective goods and thus both countries benefit from the trade. Capital can move within the countries borders among the different industries to facilitate trade and industry but historically capital did not flow freely between countries. Historically the IMF, the WTO, the World Bank and others pushed free trade under the comparative advantage principle but the ascent of the globalization paradigm in the past several decades has killed that model of comparative advantage and replaced it with absolute advantage where production is shifted to the lowest cost producer in the world.Cost is the sole driver of the business. It's the bottom line. How many times have you heard that! Not quality, service, reliability, growth in the company, but cost, low cost and just low cost.That's what Wal-mart says right in the front of it's blue buildings. So what do you get for the lowest cost? JUNK ! But low cost JUNK! We now have a global zero sum game where global corporations able to move capital and companies across borders unimpeded for the purpose of making the greatest possible profit for the corporation by procuring the lowest cost of production. As a result some countries benefit and some do not. These globalized corporations do not concern themselves with the chaos and destruction of native industries that result from this business model. These corporations and especially the financial TBTF have been able to perform what is in effect gang rape of the American middle class by waving free trade slogans and policies that ridicule manufacturing and promoting the new information and financial economy. The result has been that real wages adjusted for inflation for the shrinking middle class has actually contracted over the past thirty years. This has occurred because the US manufacturing base has also been contracting and now represents only 13 % of our economy. You may not care if you are a bankster or an orthopedic surgeon or one of the few winners in this new wunderwirtshaftssystem, but if you are not one of those lucky beneficiaries, you may have noticed that you are circling the drain. My view is that this horrific decline of our middle class economy has been caused by these neoclassical and libertarian economists who came into ascendancy at about the time of the Reagan Administration but which has continued under both Republican and Democratic administrations. Now I will ask again, should you care? Damn straight you should care because this economic damage to the American economy has real true national security implications. Wal-Mart and globalized mega corporations like Wal-Mart have subcontracted our manufacturing economy over to China. Now I don't care if your plastic salad shooters now come from Shanghai instead of Skokie but really vital components like machine tools, auto and truck and plane parts, computer and electronic and communication components and even certain parts in weapons are manufactured overseas. Those overseas workers have real jobs making real things designed by American educated engineers which the world absolutely needs while Americans have jobs in a declining and even frivolous service sector. Does America really need any more human resource or marketing consultants or fast food or retail clerks? More nail salons in strip malls and more geriatric wal-mart greeters luring us into their fluorescent lit junkboxes to buy their always low cost Chinese junk?
Industrial products today are assembled from many parts and the lack of a key component can mean that the product cannot be completed until the part arrives. And if the part comes from a factory in Chongqing, then what? What if the whole product comes from Chongqing? The really annoying feature of having products arriving from China is that they may still retain their American names. In many cases the American corporations moved everything, lock, stock and drill press to China, everything but the workers. American companies using American machinery run by Chinese laborers . The corporations were ably assisted by friendly tax laws devised by their lobbyists lawyers who ensured that the cost of the decommissioning and closure of the factories, the transport of the machinery, and even the travel and entertainment and living expenses of the executives were all deductible corporate expenses. Now instead of having to pay American workers $17/hr and provide pensions and health care, these executives can now pay 70 cents/hour to poor Chinese girls from distant rural villages who are virtually slave labor. And if business falls off, well then you just send those poor girls back to their villages and shutter the factory. Nothing personal, ma'am. Its just business. Oh by the way, you have to buy your own bus ticket.This is virtually what happened when the giant Broyhill furniture factory in the Carolinas moved their furniture manufacturing to China in this last lost decade. So if you're a corporate executive, what's there not to like. Ronnie said it would be like this if we could just get guvment off our backs. What's there not to like, you ask again? Well these corporations have allowed one of history's great wealth transfers from a rich nation to what had been the worlds most populated poor nation. So much has been transferred that the USA is now in debt to China who hold more than $2 trillion of our treasury and agency securities. With all this new found wealth funneled by our corporations into the Communist government of China, they have been able to embark on a massive industrial, military, infrastructure, and energy buildup such that they are now the world's second largest economy. They are scouring the world building refineries and buying exclusive energy contracts from African and South American oil producers who formerly supplied an open world oil market. China has surpassed the US to become the world's largest producer of greenhouse gasses. China is now the world's largest car producing nation, on track this year to produce 13 million vehicles from 117 car and truck plants. It should be kept in mind that our money is being transferred to a nation that has 1.3 billion hard working, rugged and clever people who had little difficulty fighting the giant US military behemoth to a decisive standstill in Korea in the 1950's . The US had a great deal of difficulty defeating the tiny nation of Japan while suffering horrendous losses in the waning years of WW 2. The US military fights wars by dropping bombs .That advantage would be marginalized if we tried it on the Chinese.And nuclear weapons would be virtually useless in a modern great power conflict as was realized by the cold war with Russia. It would be a MAD option. Trying to fight a land war in Asia would be a fools errand. The smart money would be on the Chinese. Our last land war in Asia didn't go too well despite clouds of aircraft and high tech weapons. We were defeated by a pajama clad peasant army on bicycles. I don't think the Chinese Communist government deliberately decided to co opt our manufacturing economy to achieve military, economic and technological superiority but the fact remains that they are well on the way to just that. Our globalization free trade champions on Wall St and K street have handed our economic destiny over to the totalitarian government of China with the acquiescence and cooperation of our own government which of course is no longer a representative democracy any longer but instead an organized cadre of Wall Street Bankers and Global corporations who control the agenda, the bills and the purse strings by virtue of their minions on K Street .The noise from Washington about stimulus measures and restoring jobs and reestablishing lending is posturing and peristaltic flatus wafting across the plain and there is little to indicate that the politicians and bankers or the corporations are changing their modus vivendi as they go about god's work amassing mammon. This corporate dominated Washington political establishment with it's shock troops in the WTO, the IMF, Goldman Sachs run Federal Reserve and the World Bank have brought the citizens of this country to their knees as they live in opulence and suck on the teats of the shrinking udder that once was the milk of the American economy.

The Lost Decade

There is no shortage of news items crossing my desk here in the waning days of the worst decade in our history. The shadow government nominated and elected an inarticulate third rate Texas governor and a paranoid chicken hawk vice president who then chose a coterie of like minded neo conservative ideologues who launched the last imperial war with an ill thought out invasion of Iraq and Afghanistan, The stated goal in Bush's words was to establish a stable and permanent democracy, The transparently obvious goal was to control access to the vast oil and gas fields of the region. Almost ten years on, the US remains mired in what conservatively could be described as a debacle which has no end.
This was the decade that the shadow government deregulated the banks who then ran amok through the world spreading their newly devised financial instruments which largely involved the securitization of mortgage assets and the creation of an unregulated and unseen derivatives market. The failure of this business model collapsed the banking system. The same shadow government of private bankers within the Federal Reserve and Treasury then deftly transferred these vast losses to the taxpayer. During this same decade the Chair of the Fed Alan Greenspan inflated a vast asset bubble in real estate and other assets . Credit was extended to anyone with a pulse and consumer, corporate, state,local, municipal, and Federal(including GSEs) debt levels soared such that that debt is now 557% of GDP according to Forbes Magazine.( Current GDP is around $14 Trillion.). If you add in the various entitlement programs, the number soars to 840%. There has been no attempt to address this mountain of debt either by the Bush or Obama administrations.
The US stock market turned in the worst decade in the history of the United States which has had a stock market of sorts since about the 1820's. The worst decade, even worse than all the other financial panics including the decade of the Great Depression. The S&P average yielded -.0.5% annual return for the decade. The Dow hit 10,000 in 1999, about where it is now.
I include this graph of inflation and the Dow during the decade of the Great Depression. You can see the steep cliff dive descent in 1929 followed by a surprising spike of about 60% in 1930, a so called bear market rally. My contention is that we are in a similar bear market rally and I think the next moves are down mirroring the graph shown. All the chess pieces of fiscal and political incompetence are in place and I see no way to avoid the next crash. I have begun to sell off what stocks I own in my dwindling personal retirement position and I have urged everyone I know to do the same. 2010 looks to be an interesting year.

Barak Obanker and Fed Chair Ben Banke

I try to add a new post when I read about some new outrage or insult to sensibility that comes across my desk here in die blogezimmer, my chilly unheated computer room in our log cabin in Jackson Hole. But I just can't keep up any more. From one outrage to the next insult, I'm simply overwhelmed. Barak told 60 minutes he didn't get elected to bail out fat cat bankers. Whaaaat?
Translation: I got elected to bail out fat cat bankers. The next day he sat in his oval orifice with a partial collection of those fat cats he bailed out begging:" Puleeze, pretty puleeeeze, make loans to our insolvent american economy because I am standing for re election in just a few years and we're running out of time to re-inflate the world's biggest debt machine." What I found interesting was that some of the biggest and fattest cats of all stayed home or had to be put on speakerphone, like Lloyd Blankfein of Goldman Sachs who was doing god's work by staying at home. And did you see who sat at the left hand of President Obanker? Why none other than the shadow president, Bob Rubin, lately of Goldman Sachs and Citigroup. Who does President Obanker think he's kidding? This is the same guy who took home the Nobel Peace Prize which this year was given to the biggest warlord in the world. And Ben Bernanke winning TIME's Man of the Year? I mean, how much cognitive dissonance can a body take? And this morning I see Senator John McCain proposing reinstatement of the Glass- Steagal Act which Bob Rubin tore up just 10 years ago. You know things are really in the toilet when you are agreeing with McCain/Palin on anything. Barak doesn't have much more time to throw the money changers out of the temple. We Americans may be stupid obese milling baying sheep but even sheep aren't that stupid and the sheep in this country are armed sheep and if I were a Goldman or a Sachs banker returning to my chalet in the Hamptons, I think I would be sleeping with my piece under my pillow.

Depression or Recession?

Readers of this blog know my opinion on whether we are in a depression. Whether you think it is a depression or recession is beside the point as there is no good definition of either. Oh I know, it used to be said that 2 negative quarters were a recession if the referee the US government employs, the NBER(National Bureau of Economic Research), decides to call it one. Other economists have opined that a recession is a 1.5% rise in unemployment. But NBER does not referee depressions because they are on the Fed payroll and if they said we were in a depression, why folks would panic, consumer confidence would drop and sales of Wallmart's salad shooters would plunge. In fact I read that the Great Depression wasn't even called that until 1937 when a journalist dubbed it the Great Depression. Most economic writers do seem to agree that a recession morphs into a depression if it lasts a long time(3-4 years), if unemployment really increases, credit availability drops or goes unused, banks fail, companies fail at a high rate, the stock market collapses, trade and commerce falls and so forth . It is a time of fiscal and financial crises and collapses. Virtually everyone I read say the recession is an unfortunate but normal component of any business cycle. I doubt that any government would ever call a recession, no matter how severe, a depression. That is left to journalists, economists and now us bloggers. The government has gone to great lengths to minimize and obfuscate and conceal any information or data that would give a true and accurate picture of our economic situation. Our government and probably most governments no matter which party is in control, or which continent they are on, have no incentive to engage in truth telling. It makes them look bad and they are afraid the citizens would take to the streets if they really knew the facts. It is rare that government officials lay out the facts in a truthful fashion. Paul Volker got away with doing it for a while 30 years ago but when his President, Jimmy Carter put on his cardigan and told Americans they should conserve energy and move to a more sustainable way of life, he was crushed by an aged republican who developed full blown Alzheimer dementia in his second term and he has been replaced by a steady stream of advisers with economic dementia. The government statistics are manipulated and modeled until they are meaningless. If a particular statistic is bad, government statisticians will make it less bad. If it's good, they will spin it better. I completely ignore government statistics and so should you. John Williams gives unvarnished statistics at his website: http://www.shadowstats.com/. On John's site you will find official government numbers and John's take usually listed as "SGS" and with what I find particularly useful, older official government statistical methodologies. Here are some examples: Official unemployment is 10% which is the U-3 government number. A broader government number is U-6 which is 17.8%, and John's number which he says approximates the methodology used 50 years ago is 22%. Similarly, official CPI inflation is -.2% and using pre-Clinton era methods, the inflation rate is 3%. I am unable to post John's graphs here and would urge the reader to just go to his website. John says that the recession started in the 4th quarter of 2007 which would make this recession 2 years old. If this downturn, as Obama calls it, lasts another year or two, then we will have met even the conservative definition of a depression. You can be sure TPTB will not allow this recession to be re characterized as a depression. Even the way government economists calculate GDP is inherently flawed. For example. Let's take a worker at Rockford Products in Illinois, where my wife worked briefly. A worker getting paid $10/hr might produce in one hour bolts or screws which could be sold for $50, thus adding $50 to the nations GDP. An MBA at Goldman Sachs making $250/hr(before taxpayer assisted bonuses of course), might craft a CDO or CDS derivative product which could be sold for $10,000,000. Let's give Goldman Sachs a net profit on that very small transaction $1 million and so that gets added to GDP. Now there is no way to make the productivity of these two disparate laborers equivalent but don't tell that to the BLS. If there were just two workers in the country then BLS would say that the average hourly salary in the US was($130/hr...250+10/2.) They would also calculate worker productivity in similar fashion. Now of course there are many workers in the country to lump together but when over 20% of your GDP is related to financial services, as it was before our recent cliff diving economy, then calculating and posting the notional value of the nation's goods and services and comparing them to to other nations becomes somewhat meaningless. I would think that our GDP should be broken out into several categories of GOODS production and SERVICES production which is the only way I can see to make comparisons to other nations economies even possible. I do not think our current severe recession meets the criteria of a depression but only because it has only gone on for 2 years. Unemployment is not yet at the 25-30% rate of the Great D, but it is close. Many other metrics of this recession match or exceed the Great D such as the debt to GDP ratio and certainly unfunded liabilities far exceed what existed in the 1930s. The main reason I think that we are in a depression is that the government is doing nothing to resolve or attenuate the mountain of debt built up and in fact is doing the exact opposite by shielding the bondholders in the big financial institutions as well as attempting to save favored industries and propping up the housing market and other asset classes while at the same time urging continued expansion of debt and credit. Christine Romer on Obama's economic nothinktank even said today that"spending our way out of recession is sensible policy." She means of course"printing our way out of recession is sensible policy." With economic advisers of this caliber, I will stick to my opinion that this recession will meet the definition of depression within the next year or two.

Viet Nam 2.0

It's been an easy winter so far here in Jackson Hole other than a week of sub zero weather this past week and only minimal snowfall. Helicopter Ben has been mocked before Congress and Obama continues along his blundering way using the worst ideas of the Republican party to ensure the ruin of his presidency and his country's future. Lie follows lie on a daily basis as he tells us the recession is over with green shoots galore. Unemployment is down and his Afghan surge will certainly work so well that 18 months after our hapless soldiers arrive in country, they will be able to leave. No one including Obama has stated what this Afghan invasion is supposed to accomplish. A well armed and trained conventional military force that relies on high tech weapons and air strikes wont have a chance combating a popular Islamic insurgency armed with simple primitive weapons and a burning desire to drive invaders from their soil. The Brits and the Russians were driven out and the American Army will suffer the same fate in Afghanistan as it suffered in Viet Nam and Somalia. The American Military is in the region to ensure access to oil and the fundamental flaw is the assumption that a military occupation can dominate a disintegrating collection of failed and failing states long run by warring tribes and clans. In any war between guerrillas and a standing army,the smart money is on the guerrillas whether those guerrillas were ragtag colonists facing the world's most powerful army in 18th century America or pajama clad Viet Cong facing down a massive American Army in Indochina. The Islamic insurgents in the Persian Gulf and Central Asia regard the West with the same hatred as the American Marines felt toward the "japs" in the South Pacific. In the end it wont be defeat by a determined insurgency that drives the US out of Afghanistan and Iraq but our coming economic collapse that dooms this tragic foolish incursion into the lion's lair.