Because if you experience some precipitous decline, the decline of the type that we enjoyed in 2008, having the cash gives you the ability, and it gives you the courage to take advantage of calamitous mistakes made by others, and not having the cash exposes you to making those same mistakes that you would otherwise hope to take advantage of.

~ Rick Rule, interviewed by Kung Fu Finance:

http://www.kungfufinance.com/kung-fu-girl-interviews-rick-rule/

~ The Great Money Illusion by Marc Faber

From a high of US$850, the price of gold fell very quickly back to US$450 in March 1980, bankrupting in the process thousands of speculators, both big and small, all over the world… some followers of gold cult who had previously felt that gold had moved ahead of itself were now taking advantage of the ‘low’ prices to buy in readiness for the next increase. Although, at US$450, gold appeared to be cheap compared to US$850, the level at which it had sold just a couple of weeks previously, it certainly wasn’t cheap relative to what it had been in 1971 and 1976, when it had sold for as little as US$30 and US$100 respectively. But in a boom, the crowd never adopts a long-term perspective; rather, it acts emotionally and irrationally. A renewed buying binge therefore propelled gold prices up once more to around US$700 by October 1980.

~ The Great Money Illusion by Marc Faber

It’s not surprising to find out that the USPS is in trouble—a first-grader could figure that one out—but it’s startling to learn just how dire the situation is. The mail was once something which one could measure order, timeliness, and reliability against—now it is just another failing American institution, signaling that the end is near.

There’s talk about eliminating Saturday mail delivery, closing up to 3,700 postal locations and laying off between 120,000 and 220,000 workers. That last one is going to be hard to do, as labor contracts forbid it. Already, Republicans and Democrats are arguing about what needs to be done. The GOP is going to use this as a significant tool for busting up even more unions …

… but unions are not necessarily the problem. It is true that postal workers receive excellent pay and benefits—why else would they work there?—but the real trouble stems from the fact that traditional mail is no longer economical. The amount of mail that is handled is down 22% from five years ago—and it’s expected to further plummet by 2020 if the USPS is even still around.

The law prevents the post office from raising postage fees faster than inflation and it also restricts its ability to make basic business decisions, like reducing the frequency of deliveries. Another thing that current law prevents: allowing the USPS to double as banks, sell insurance and cellphones, deliver alcohol, and sell advertising space on its trucks and in its offices. Another embarrassing idea is to rent space inside of Wal-Mart stores. Oh boy.

Ten years ago, the USPS employed nearly 900,000 people; today that number has dwindled to 653,000. Slash another 220,000 and what do you have left? But so what? They also want to close 300 of its 500 sorting facilities, so you won’t even need all of those people.

So, it is going to be up to Congress to decide whether or not the USPS can end Saturday delivery, lay off its workers, and so forth. The trouble is, cutting back on service is just going to drive more people away.

According to the Times: “Meanwhile, Representative Darrell Issa, the California Republican who is chairman of the House Oversight Committee, says the pension proposals would amount to an unjustifiable bailout that would not solve the agency’s underlying problems. He is pushing a bill that would create an emergency oversight board that could order huge cost-cutting and void the postal service’s contracts—a proposal that not just the unions, but Senators Carper and Collins oppose.”

We’re fucked. There is no good way to fix this. Most people nowadays use the USPS only for Christmas and birthday cards; everything else is junk mail. But what about those people who still write letters and send checks every month to the power company? UPS and FedEx have a lock on the business of carrying packages, so … what’s left? If the U.S. Mail is going to survive, they’re going to have to do everything mentioned above and more—and that sucks.

I’m not sure whose side I’m on; I’m not sure if there even is any sides. This is a symptom of a bigger problem, namely the end of life as we know it. I’m not talking about extinction—I’m talking about inevitable change.

People still need money; unfortunately, more and more jobs are being eliminated because they are no longer needed. There are so many angles to this situation—the problem is so vast­—that it’s difficult to wrap one’s head around it or even know where to start.

How about this? I’ve talked a lot about our economy—the monetary system—and how it is destined to collapse. Three major things contribute to this reality: fractional reserve banking, fiat currency, and compound interest. This is a given. Our present system is unsustainable—that is a mathematical certainty.

Luckily, this is only an imaginary problem, as our entire monetary system is imaginary. Money is an invention; if our “economy” collapses, we have lost nothing tangible.

Here’s a bigger issue: peak oil. The United States’ oil production peaked many years ago as did almost all other reserves; the Middle East—the last frontier, as it were—is peaking now. Our population is increasing dramatically (I’ll get back to that) and so is our need for oil; in contrast, oil production is now beginning to wane. As it is, globally we are just barely able to balance supply and demand. These two opposing forces will steadily drive up the price of oil over the coming years until it is so scarce and expensive that it is only used in the rarest of circumstances.

This too is a mathematical certainty.

Fossil fuels are a finite resource—there is only so much and eventually they will be gone. No one has ever argued this point—it’s just that nobody ever cared because they thought that there was enough to last for centuries.

There isn’t.

We’re at about the halfway point—150 years—and the downward slope is not going to be as gentle. We’re not going to run out overnight, but even the gradual process is going to be painful.

Now, oil is tangible. Our entire world and way of life is based on petroleum; it is used for transportation, energy, computers, plastics, paints, rubber, microchips, etc. Human beings can survive without these things, but imagine the blow to our quality of life.

And although this situation will in no way cause our extinction, it will result in a severe loss of life. How many of you are familiar with bubble economics?—the tech bubble, the housing bubble, the cycle of boom & bust, and so forth. You might be surprised to learn that we are living in a population bubble—and like all bubbles, it must burst.

This bubble began to form when we discovered oil and became dependent on it; when that oil runs dry, we will no longer be able to support such a tremendous number of human lives. Bear with me, and I will explain further … to wit:

Two of the most obvious reasons for a reduced population is famine and disease. Without oil, medicine will suffer; similarly, we will not be able to plant and harvest even a fraction of what we can now.

The absence of oil is not going to drive us back to the Stone Age; it will, however, curtail many luxuries and do away with our global culture. Alternative sources of energy are useful, but none of them (even combined) are capable of delivering the same amount of energy as crude oil—they will keep the lights on, but the machine will be forced to throttle back.

As for global culture, without petroleum, it will not exist. People will find themselves living in relatively small communities and producing what they need themselves. Trade may exist between neighboring communities, but that will be about the extent of it. We will survive, but we will not be importing exotic fruits from South America nor will we be ordering iPods from overseas.

For a model of what a typical city of the future might look like—if we get our shit together—visit Jacque Fresco and The Venus Project. If we begin to implement some of his ideas, and the ideas of The Zeitgeist Movement, we could be looking at a society where there is no longer a need for money or work. When the industrial revolution came about—and the technology that came with it—people suddenly found that they had spare time. It is only logical that we continue in this direction. Menial chores and labor could be fully automated, leaving people unlimited time not only for leisure, but to pursue the arts, philosophy, and science, among other things. We don’t need people to sweep up shit or sell cigarettes; instead, those people could be free to contribute something meaningful to society—and they would, because that is our nature.

If you’d like to learn more about all of this, check out A Crude Awakening: The Oil Crash and Escape From Suburbia: Beyond the American Dream, two fascinating, must-see films.

Human beings have existed on this planet for approximately 100,000 years, evolving very slowly. The last 150 years or so has seen such incredible leaps forward in technology that it is staggering to think about. We are now living at the peak of that golden age. Think about the things that have been invented and that have become commonplace in that brief span of time: airplanes, automobiles, radio, television, and computers, just to name a few. Think about all of the things that exist now that didn’t just ten years ago.

When I was a child, no one had cable, multiple televisions, VCRs, or computers. When my father bought our first PC in 1984 it cost thousands of dollars and people thought we were weird. Today, every individual over the age of twelve has a laptop that is thousands of times more powerful than that thing that I grew up with, for a fraction of the cost.

Abundance—that is a key word. Now, since we are at our peak, household goods are so abundant that they are virtually worthless. I have televisions, VCRs, DVD players, stereos, and computers in every room of my home—and they cost me close to nothing. Most of these things can be had for free—just check out the “free” section of CraigsList—or in such cases as the DVD players, maybe twenty dollars. Using CraigsList alone, a person could fill an entire home in one day for no money, including furniture and appliances. I have things littering my home and my garage that my parents could have only dreamed of—and most of it is “junk.”

Nowadays, rather than fix or improve something, people find that it’s easier to throw that thing away and get a new one—and since the more affluent people of our society replace things every year or two, the rest of us end up with their hand-me-downs, which are in fact still perfectly good.

And whether you like to admit it or not, this incredibly hedonistic existence is made possible by extremely cheap energy—oil.

Some people realize all this and want to prepare now; most others don’t even have a clue. It is hard to envision a society that is so different from the one that we know, but it is coming. What the naysayers refuse to acknowledge is that we’re not going to have a choice. These coming changes can either be our finest hour or our darkest. Mankind is extraordinarily tenacious, resilient, and innovative—he is also greedy, corrupt, and pigheaded. The choice is ours. If we put our minds together and use what resources remain to dig our way out of this hole, we may find ourselves enjoying an even better quality of life than we do now, thanks to new technologies—and I doubt very much that it will hinge on something as flimsy and finite as petroleum.

Here’s your wisdom:

Back in February, in an earlier Insight column, we highlighted the major build up of consumer debt at extremely high rates of interest, putting a significant cash flow burden on the repayment capacity of borrowers.

Since then, the situation has deteriorated further. Pressures are building in the Brazilian credit cycle.

The average rate of interest on consumer lending has jumped from 41 per cent in 2010 to 47 per cent most recently in May 2011. This rise from an already elevated level reflects the cumulative effect of tightening by the Brazilian central bank in order to contain inflation.

Read more…

(Versions in Español, Français, Português, Русский)

With all the anxiety generated by the troubles of Portugal, Greece, and Ireland, it is easy to forget that a different part of Europe was in the spotlight two years ago, facing equally dire predictions of bank runs, fiscal ruin, and devaluation.

Today, many economies in emerging Europe are quietly staging a strong comeback. Most impressive is the turnaround in the three Baltic countries, which suffered record deep recessions in the wake of the 2008/09 financial crisis. Take Lithuania, which grew an eye-catching 14.7 percent in the first quarter of 2011. But many other countries in the region are seeing strong growth as well.

True, it will take a while before most crisis-hit countries will be able to reclaim the economic output that was lost as a result of the crisis. But things are definitely going in the right direction. Most encouragingly, the growth pattern is very different from that in the years leading up to the crisis.

• During the boom years, emerging Europe grew rapidly, but growth in many countries was unbalanced—real estate, construction, and banking boomed while manufacturing languished. Capital inflows were large, but they boosted demand rather than supply, and led to a surge in imports, extremely high current account deficits―25 percent of GDP in Latvia and almost 30 percent of GDP in Bulgaria ―and overheating.

• Today, growth is driven by exports and manufacturing. Take Estonia, where exports of goods in the fourth quarter of 2010 were 52 percent higher than a year earlier. The old growth engines are spluttering, but others have kicked into gear. And it is not just exports anymore―the recovery is broadening to include investment and even consumption. In 2011, domestic demand is set to become the main growth engine in emerging Europe.

What has caused the shift? The answer is both markets and policies.

• Markets at work. During the boom years, real estate, construction, and finance were very profitable—much more so than manufacturing. But profits were artificially inflated by asset price bubbles and the under-pricing of risk. Now that profits have evaporated, investors are moving into other sectors. The adjustment is underpinned by improving competitiveness—the wage explosion of 2007-08 has given way to a decline in labor costs across the region.

• Policies have delivered. Painful but determined fiscal adjustment put public finances back on track, which has led to a sharp reduction in risk. For instance, Latvia’s credit default swap spread (which measures the cost of insuring debt against default) is 200 basis points today―down from 1100 basis points in 2009.

Given this good news, what more can policymakers do to sustain the recovery—and prevent a new boom-bust cycle? Raising the long-term growth trend is key.

• Good structural policies can raise growth potential. A big push to remove bottlenecks in energy, transportation, and communication would boost productivity. Here, funding from the European Union could be used to overcome the current lack of domestic resources. Efforts to upgrade the skills of the labor force would enable industry to climb the quality ladder.

• Good macroeconomic policies can prevent boom-bust cycles. When the next boom takes off, policies should be much tighter. This will reduce the risk of overheating that pulls resources away from manufacturing and other traded goods into sectors where there is little competition, such as real estate and banking. When revenues are growing strongly, they should not be used to increase spending and public wages, as was done during the boom years. Instead, savings that can stimulate the economy during a downturn should be built up. This means that large, even very large, surpluses may be needed during boom years.

Emerging Europe still has a lot of scope for catching up with advanced Europe. But catching-up is not a law of nature―without the right policies, countries can get stuck, as we have seen all too clearly with Greece, Ireland, and Portugal.

Recently Jeffrey Tucker, editorial vice president of the Ludwig Von Mises Institute, interviewed me about capitalism, the free market, and literature.  We discussed, among other things, Marxism in literature and humanities departments.  Just days later, a review titled “Marx’s Return” appeared in the London Review of Books.  That shows how relevant my interview was and is.  The interview is below:

A graceful piece from Canada’s own CTV:

by: KEVIN CARMICHAEL

He’s the man the economics profession left behind.

Friedrich August von Hayek, born in Vienna in 1899, was an emerging star in the early 1930s. He was lured to the London School of Economics at that time to counter the growing influence of Cambridge University’s John Maynard Keynes, who was developing his ideas on how governments could counter recessions by replacing lost private demand.

Hayek saw the business cycle differently: Booms and busts were unavoidable because business investment always gets ahead of consumer demand. Tampering by politicians and central bankers will only make things worse by encouraging “malinvestment,” which only prolongs the downturn.

Many economists said Hayek’s theory was sounder than Keynes’s early work. But the Austrian couldn’t hold his supporters. Keynes’s gifts as a “persuader” were supreme, according to Robert Skidelsky, the author of a three-volume biography of Keynes, and the economic recovery that followed the heavy public spending during the Second World War appeared to reinforce his views.

Keynes, who died in 1946, inspired a legion of disciples and economics textbook writers who took over the field. When the Chicago School of economists pushed back against government intervention in the 1960s and 1970s, it was Milton Friedman who came to dominate the resistance, despite Hayek being awarded a Nobel Prize in economics in 1974. By the time of his death in 1992, Hayek had been mostly forgotten or dismissed.

“When I began studying economics at Oxford in the early eighties, Hayek was widely seen as a right-wing nut,” writes journalist John Cassidy in his 2009 book How Markets Fail: The Logic of Economic Calamities.

But in 2011, Hayek is poised to exact a measure of revenge. The stage for his comeback is already set: Capitol Hill.

The ideas of Hayek, his mentor Ludwig von Mises, and others from the so-called Austrian School of economics figure prominently in the intellectual underpinning of the Tea Party movement that stormed the American political establishment’s barricades at November’s mid-term elections.

FULL ARTICLE HERE

Almost unnoticed, amid the difficulties in western Europe, the other half of the continent has begun to recover from the deepest slump in its post-transition period. The emerging economies in central and eastern Europe will grow by 3¾ percent this year and next—a relief after the 6 percent decline in 2009.

Why was the crisis so severe—and how do we avoid a repeat? We consider just that question in our fall 2010 Regional Economic Outlook: Europe. While the crisis was triggered by external shocks, it is clear that domestic imbalances and policies also played a key role.

After Lehman Brothers defaulted in September 2008, global trade collapsed, capital inflows into the region plummeted, credit growth suddenly stopped, and domestic demand plunged.

But pre-crisis domestic imbalances and policies made a difference in how these shocks affected each country’s economy. Some countries saw declines in gross domestic product (GDP) similar to those in the Great Depression (Estonia, Latvia, Lithuania, Ukraine), while others avoided declines altogether (Albania, Poland).

Origins of the crisis

The seeds of the crisis were sown, in large part, in the five years before the crisis. Between 2003 and 2008, much of the region experienced a boom in bank credit, asset prices, and domestic demand. This boom was fueled and financed by large capital inflows.

With low interest rates in advanced countries, banks in western Europe expanded aggressively into emerging Europe—where returns were higher. And, while the influx of capital boosted growth, it also led to rising imbalances and vulnerabilities.

• Current account deficits increased to unprecedented levels in some countries, and inflation accelerated.
• Substantial vulnerabilities emerged in bank and household balance sheets, particularly because much of the borrowing was in foreign currency.

The boom years had left much of the region addicted to foreign-financed credit growth, making it very vulnerable to a disruption in capital inflows.

High-cost experience

The first lesson of the crisis is one that is unfortunately not new. Boom-bust credit cycles can be very costly, so it is essential to prevent credit booms from getting out of hand.

Indeed, countries that experienced the fastest credit growth during the boom years saw the deepest recessions. And it now appears that average GDP growth over the full business cycle in this group was no higher, and in some cases was lower, than in countries with more modest credit growth.

How to restrain credit booms

Controlling credit growth is not easy. Prudential measures alone rarely do the trick, particularly in small countries easily overwhelmed by foreign capital inflows. Fixed exchange rates often impose further constraints. Indeed, it is striking that the strongest credit growth during the boom years took place in countries with fixed exchange rate regimes. This is partly because countries with fixed exchange rates don’t have the full range of monetary policy tools to restrain credit booms once they set in.

Fixed exchange rates are not the cause of credit booms—there were also some countries with fixed exchange rate regimes that did not have a credit boom. But fixed exchange rates do make it harder to stop credit booms, particularly in the presence of large capital inflows.

 Closer cooperation with supervisors in western Europe can help prudential measures become more effective. Credit booms driven by capital flows from western European parent banks are hard to stop, especially when faced with supervisors only from the (often smaller) recipient country.

Building up fiscal buffers

The second major lesson is the need for more prudent fiscal policy. This is a policy of saving money when revenues are growing instead of increasing spending and boosting public wages. Prior to the crisis, fiscal positions in emerging Europe looked good—better than in other emerging market regions. But those good-looking headline numbers masked a deterioration of the underlying fiscal position. Public expenditure was surging, financed by a temporary revenue boom. This not only further contributed to overheating; it also set the stage for large fiscal deficits. So when revenue plummeted in 2009 and fiscal deficits increased sharply, many countries had no choice but to cut spending precisely when this was most painful.

When revenue takes off during the next boom, it should be used to build up fiscal buffers rather than boost expenditure. Politically, this may be very challenging—when revenues abound there is strong pressure to increase expenditure or cut taxes—but this will help dampen the boom and create fiscal space that can be used to soften the impact of the next recession.

In search of balanced growth

Going forward, growth in the region should become more balanced, and less dependent on domestic demand and capital inflows. Much of the shift will come about through private sector actions. Now that profits in the nontradable sector (finance, real estate, construction) have shrunk, investments will seek more promising venues. More balanced macroeconomic policies and wage restraint can also help maintain balanced growth by preventing the overheating that pulls resources from the tradable to the nontradable sector.

Above all, it will be important—when the next boom comes—to be wary of claims that “this time will be different.” Such narratives often have some plausibility and attractiveness in the heat of the moment. But a careful analysis of the drivers of growth, current account deficits, asset price developments, and credit growth should always be used as a “reality check.”

http://dailycapitalist.com

YOU CAN ALWAYS TELL WHEN SOMETHING IS UP WHEN THE FED PRESIDENTS ARE MAKING NEWS. For the past several days we’ve heard Bernanke, Bullard (St. Louis), and now Evans (Chicago) talk about quantitative easing. The NY Fed’s President William Dudley and Brian Sack Exec. VP in charge of carrying out FOMC decisions, have made major speeches about it. You have to understand that the Fed always has a purpose in its communications with the public, and rarely do its interlocutors stray from the official script.

The gist of each of these communiques has been that the Fed will soon, perhaps by the November 2 meeting, start massive additional purchases of Treasurys in order to create inflation. They wish to create inflation because they are clearly worried about “deflation.”[1] According to a recent report by Goldman Sach’s Jan Hatzius, as reported in todays Zero Hedge by fellow reporter Tyler Durden, GS believes that the Fed will buy at least $500 million of medium-term Treasury’s, probably $1 trillion, and “possibly much more.”

The Fed hierarchy believes that price inflation is necessary to enable them to carry out their mandate: maintain stable prices and full employment. They will attempt to stimulate the economy by massive quantitative easing (QE), a process by which the Fed monetizes the debt of the federal government. This is one of the ways the Fed can expand money supply. Price inflation, they believe, will create economic activity by reducing the debt burden on borrowers, maintain asset values, improve credit, and create additional income from consumers. And, importantly, they believe it will prevent price deflation.

Today I went through 30 pages of reports including the official texts of Messrs. Dudley’s and Sack’s speeches, whom I believe to be the most important players at the Fed next to Ben Bernanke.

What is infuriating to me is that they still do not have a clue why i) the boom-bust cycle occurred, ii) why the monetary and fiscal remedies have failed, and iii) what will happen when they print massive amounts of money in QE ($1 trillion plus).

President Dudley according to my review of his lengthy speech,  is the ultimate post-Keynesian, neoclassical, econometrician Monetarist tinkerer. He states that the Fed can set goals for the economy with some precision and carry them out. I believe that much of this kind of talk is “communique” from the Fed that is meant to make financial actors believe that the Fed is in control of the situation. He says:

As the central bank, we and we alone can control inflation—if not precisely in the short run, then over the medium term. By clarifying our intentions, we can reduce the risk of further disinflation.

And, in reference to the Fed’s exit strategy, he said:

[T]he Federal Reserve has the tools to control financial conditions and credit creation even with an expanded balance sheet.

In fact they are far from being in control and Dudley’s speech is both fascinating and frightening at the same time. One could raise the questions: If they were in charge of things, i) why did they let the crisis happen, and ii) why haven’t they revived the economy two years after October 2008?

I’m going to take you through Mr. Dudley’s speech and point out to you why we are in so much trouble. First we need to examine his, and I assume the Federal Reserve’s, view of QE. Dudley says:

I am very mindful of concerns here and abroad that balance sheet expansion could be interpreted as a policy of monetizing the federal debt. However, I regard this view to be fundamentally mistaken. It misses the point of what would be motivating the Federal Reserve. The FOMC would only engage in large-scale asset purchases in order to push the economy more rapidly toward the dual mandate goals of full employment and price stability. Once these goals were accomplished, there would be no basis for further purchases regardless of the government’s fiscal position because additional purchases would not be consistent with this mandate.

This is an astounding statement from an economist so prominent as Mr. Dudley. He is saying that debt monetization isn’t really debt monetization when they do it for good reasons. He says they wouldn’t do it for bad reasons, such as if the economy was fine but the government was still running massive deficits. He notes that those reasons don’t fit into their mandate. But since I am certain that the government will continue to run massive deficits, would not the result be higher interest rates, putting a halt to the inflationary boom they create with QE? Perhaps he should have read Mr. Bernanke’s speech on Monday:

In the short run, “concerns and uncertainty about exploding future deficits could make households, businesses, and investors more cautious about spending, capital investment, and hiring,” he said in remarks prepared for a meeting of the Rhode Island Public Expenditure Council.

“In the longer term, a rising level of government debt relative to national income is likely to put upward pressure on interest rates and thus inhibit capital formation, productivity, and economic growth,” Mr. Bernanke said.

In reviewing this and other statements by Mr. Dudley, I believe we will have the desired inflation they wish for, but it will not be mild.

Most disturbing to me is that Mr. Dudley’s explanation of the boom and the bust fail to mention anything about the role of the Fed in the cycle. He discusses the conventional wisdom explanations such as the run up in housing prices, the decline in mortgage standards, the rise of CDOs, and the spending financed by home equity loans. Nowhere does he mention the real causes of the boom: lowering the Fed Funds rate to 1%, thus exploding the money supply, or the role of the federal government and GSEs in guaranteeing the mortgage market’s abandonment of common sense underwriting standards.

To his and the NY Fed’s credit he fully acknowledges the problems that exist in the economy, including the credit crunch, the decline in real estate values as collateral for loans, deleveraging in all sectors of the economy, increased savings by consumers, lack of loan demand by businesses and consumers, and the reality that there may be a “sea change” in consumer spending-savings patterns.

Then Mr. Dudley gets to his point: we need price inflation to prevent price deflation. He explains the need for more price inflation than we are currently experiencing (1.5% per the PCE deflator):

[A] decline in inflation expectations that drives up the real interest rate and thereby increases the real cost of credit cannot be offset by simply lowering the federal funds rate. Thus, in a very direct sense, a fall in inflation expectations when the target interest rate is at the zero bound represents a de facto tightening of monetary policy and of financial conditions. Such a tightening would clearly be highly undesirable at a moment when unemployment is too high, inflation is too low and the economy has only moderate forward momentum.

And why are falling price inflation expectations important?

As the central bank, we and we alone can control inflation—if not precisely in the short run, then over the medium term. By clarifying our intentions, we can reduce the risk of further disinflation—or even an outright debt-deflation spiral that would make it still more difficult to accomplish the necessary balance-sheet adjustments.

Deflation is the core of the Fed’s anxiety. By creating price inflation debt can be paid off cheaply. Who are the big debtors right now? The consumer and the federal government (actually all governments). If we experience price deflation, money will be more valuable, debtors will have a greater burden, creditors will benefit, but the upside is that goods will be cheaper.

But, Mr. Dudley is, of course, on the side of debtors, not creditors. He believes that by careful purchases of Treasurys, perhaps at least $500 billion, they can effect a reduction of long-term interest rates from 50 to 75 basis points. They will target maturities from 2 to 10 years, average 5 years, and thus reduce the holding period price inflation risk premia for such debt. This would reduce interest rates or at least prevent a further decline.

The benefits of such renewed price inflation:

Even in today’s challenging circumstances, lower long-term rates would support the economy through a number of channels. Lower long-term rates would support the value of assets, including houses and equities and household net worth. Lower long-term rates would make housing more affordable and support consumption by enabling households to refinance their mortgages at lower rates. This would increase the amount of income left over for other spending. Of course, this channel can be made more powerful to the extent that further progress can be made in efficient mortgage debt restructurings that allow households with negative equity in their homes to take advantage of the drop in mortgage rates. In addition, lower long-term rates would reduce the cost of capital for businesses, thereby fostering higher levels of capital spending for any given economic outlook.

This is of course is an economic chimera. What he fails to see is that by benefiting debtors, he reduces the incomes of creditors. Thus there is really no net gain when you think it through. The price inflated dollars used to pay back  creditors are now worth less than when the debt obligation was originally created, so in effect, this policy just transfers money from creditors to debtors. But then the federal government is a debtor. In essence, they are trying to avoid the consequences of the housing boom and bust by creating a new inflationary boom.

There are further depressing mistakes he makes about the economy. Such as the idea that with capacity utilization low, it might be hard to start price inflation. Of course, that just isn’t true. During the stagflation of the 1970s we had high price inflation and low capacity utilization. These little ideas are the reason we are still having big problems.

The important question is: how much? Mr. Dudley and Mr. Sacks refer to research that supports their contention that $500 million of new QE will result in a long-term interest rate reduction of 50 basis points. Goldman Sachs believes that will be the minimum number. I don’t really know, but half a billion now sounds right to me. The key to the intensity of their efforts will be the unemployment numbers. Lately they appear to be bottoming out and new jobless claims are on the decline. I believe that a lagging manufacturing sector will spillover into the general economy and keep a lid on employment, perhaps even decreasing it further. If the data coming in from the EU and other buyer of US goods continue to soften, then a slowdown will hit the multinationals as well.

If unemployment does increase or fail to trend down, then you could see the QE2 exploding well beyond $1 trillion. This, despite Mr. Dudley’s protestations, would monetize more debt which would lead to higher inflation than the Fed ever intended. This of course is difficult to predict because you have to tell me what the Fed and the government would do in the future. As Mr. Dudley said:

In making our assessments about next steps, we need to be a bit humble about our capacity to forecast how market participants would respond to our actions. We do not control their behavior nor have much historical experience that we can draw on to easily assess how they are likely to behave. Even viewpoints that turned out to be incorrect could persist for a long time and generate adverse consequences. It is not enough for us to be right in theory. We also have to be convincing in practice and in explaining why concerns we think are misplaced are indeed unwarranted.

He has no idea how right he is. I am still convinced the Fed has no idea what it is doing.

–––––––––––––––––––––––––––––––––––––––––––––––––

1. In order to not confuse my readers, I need to be more precise in how I define inflation and deflation. My definitions are different from the Fed’s. The Fed and most economists say inflation is a general rise of prices and deflation is the opposite, a decline in prices. In Austrian theory, inflation is an increase in money supply and deflation is a decrease in money supply. Thus inflation and deflation are monetary phenomenon. One of the results of inflation is rising prices. Other impacts are a distortion of the entrepreneurial process which leads to our typical boom-bust business cycles. I will refer to the Fed’s usage as “price inflation” or “price deflation.”

The Ghost of Prosperity Watches Over the Empty City: I Draw Monsters Pt. 6

The I Draw Monsters campaign continues.  This time, it also has a subtheme, and we move from American social ideology to globalization of free market ideals to American commonwealths in the South Pacific.  Crazy, I know.

I got this link from my friend and associate Chimpancrazy, aka Nate Levine. The video documents the rise and fall of the island of Saipan. An American commonwealth that launched the atomic bomb against the Japanese during WW2, Saipan recently experienced a huge boom bust cycle due to changes in WTO trade policy and transnational corporations in a never ending hunt for cheap labor. Where there once was a booming economy of textile factories, now there are rotting brand new buildings and a booming sex industry. It is a sad but true case study on how globalization has enabled rich corporations to leave the working class in the dust again, again, and again. Watch it and learn.

The Ghost of Prosperity Watches Over the Empty City: I Draw Monsters Pt. 6

The I Draw Monsters campaign continues.  This time, it also has a subtheme, and we move from American social ideology to globalization of free market ideals to American commonwealths in the South Pacific.  Crazy, I know.

I got this link from my friend and associate Chimpancrazy, aka Nate Levine. The video documents the rise and fall of the island of Saipan. An American commonwealth that launched the atomic bomb against the Japanese during WW2, Saipan recently experienced a huge boom bust cycle due to changes in WTO trade policy and transnational corporations in a never ending hunt for cheap labor. Where there once was a booming economy of textile factories, now there are rotting brand new buildings and a booming sex industry. It is a sad but true case study on how globalization has enabled rich corporations to leave the working class in the dust again, again, and again. Watch it and learn.

From the Economist:

HAS the world got a new bubble economy? A rising chorus of foam-spotters believes so. Their argument is simple: to support demand, China’s government has created huge quantities of credit. That lending is leading to unsustainable asset-price inflation, while wasteful investment is producing oodles of excess capacity. As a result, China’s stimulus will inevitably be followed by a bust down the road (see article).

Few things matter more for the global economy than whether this argument is right. With America and other economies in the English-speaking world weakened by their own asset busts, the pace of global growth over the next couple of years will depend heavily on China. A painful asset slump or banking collapse there would further slow the pace of global growth. No one doubts that credit has been growing dramatically in the Middle Kingdom. Lending grew by 34% in the year to August, around four times faster than nominal GDP. Nonetheless, today’s fears are exaggerated—for four main reasons.

Continue Reading

(H/T Economist)

Demonstration on Wall Street

The richest 400 Americans — that’s right, just four hundred people — own MORE than the bottom 150 million Americans combined. 400 rich Americans have got more stashed away than half the entire country! Their combined net worth is $1.6 trillion. During the eight years of the Bush Administration, their wealth has increased by nearly $700 billion — the same amount that they are now demanding we give to them for the “bailout.” Why don’t they just spend the money they made under Bush to bail themselves out? They’d still have nearly a trillion dollars left over to spread amongst themselves!

Of course, they are not going to do that — at least not voluntarily. George W. Bush was handed a $127 billion surplus when Bill Clinton left office. Because that money was OUR money and not his, he did what the rich prefer to do — spend it and never look back. Now we have a $9.5 trillion debt. Why on earth would we even think of giving these robber barons any more of our money?

I would like to propose my own bailout plan. My suggestions, listed below, are predicated on the singular and simple belief that the rich must pull themselves up by their own platinum bootstraps. Sorry, fellows, but you drilled it into our heads one too many times: There… is… no… free… lunch. And thank you for encouraging us to hate people on welfare! So, there will be no handouts from us to you. The Senate, tonight, is going to try to rush their version of a “bailout” bill to a vote. They must be stopped. We did it on Monday with the House, and we can do it again today with the Senate.

It is clear, though, that we cannot simply keep protesting without proposing exactly what it is we think Congress should do. So, after consulting with a number of people smarter than Phil Gramm, here is my proposal, now known as “Mike’s Rescue Plan.” It has 10 simple, straightforward points. They are:

1. APPOINT A SPECIAL PROSECUTOR TO CRIMINALLY INDICT ANYONE ON WALL STREET WHO KNOWINGLY CONTRIBUTED TO THIS COLLAPSE. Before any new money is expended, Congress must commit, by resolution, to criminally prosecute anyone who had anything to do with the attempted sacking of our economy. This means that anyone who committed insider trading, securities fraud or any action that helped bring about this collapse must go to jail. This Congress must call for a Special Prosecutor who will vigorously go after everyone who created the mess, and anyone else who attempts to scam the public in the future.

2. THE RICH MUST PAY FOR THEIR OWN BAILOUT. They may have to live in 5 houses instead of 7. They may have to drive 9 cars instead of 13. The chef for their mini-terriers may have to be reassigned. But there is no way in hell, after forcing family incomes to go down more than $2,000 dollars during the Bush years, that working people and the middle class are going to fork over one dime to underwrite the next yacht purchase.

If they truly need the $700 billion they say they need, well, here is an easy way they can raise it:

a) Every couple who makes over a million dollars a year and every single taxpayer who makes over $500,000 a year will pay a 10% surcharge tax for five years. (It’s the Senator Sanders plan. He’s like Colonel Sanders, only he’s out to fry the right chickens.) That means the rich will still be paying less income tax than when Carter was president. This will raise a total of $300 billion.

b) Like nearly every other democracy, charge a 0.25% tax on every stock transaction. This will raise more than $200 billion in a year.

c) Because every stockholder is a patriotic American, stockholders will forgo receiving a dividend check for one quarter and instead this money will go the treasury to help pay for the bailout.

d) 25% of major U.S. corporations currently pay NO federal income tax. Federal corporate tax revenues currently amount to 1.7% of the GDP compared to 5% in the 1950s. If we raise the corporate income tax back to the level of the 1950s, that gives us an extra $500 billion.

All of this combined should be enough to end the calamity. The rich will get to keep their mansions and their servants, and our United States government (“COUNTRY FIRST!”) will have a little leftover to repair some roads, bridges and schools.

3. BAIL OUT THE PEOPLE LOSING THEIR HOMES, NOT THE PEOPLE WHO WILL BUILD AN EIGHTH HOME. There are 1.3 million homes in foreclosure right now. That is what is at the heart of this problem. So instead of giving the money to the banks as a gift, pay down each of these mortgages by $100,000. Force the banks to renegotiate the mortgage so the homeowner can pay on its current value. To insure that this help does not go to speculators and those who have tried to make money by flipping houses, this bailout is only for people’s primary residence. And in return for the $100K paydown on the existing mortgage, the government gets to share in the holding of the mortgage so that it can get some of its money back. Thus, the total initial cost of fixing the mortgage crisis at its roots (instead of with the greedy lenders) is $150 billion, not $700 billion.

And let’s set the record straight. People who have defaulted on their mortgages are not “bad risks.” They are our fellow Americans, and all they wanted was what we all want and most of us still get: a home to call their own. But during the Bush years, millions of them lost the decent paying jobs they had. Six million fell into poverty. Seven million lost their health insurance. And every one of them saw their real wages go down by $2,000. Those who dare to look down on these Americans who got hit with one bad break after another should be ashamed. We are a better, stronger, safer and happier society when all of our citizens can afford to live in a home that they own.

4. IF YOUR BANK OR COMPANY GETS ANY OF OUR MONEY IN A “BAILOUT,” THEN WE OWN YOU. Sorry, that’s how it’s done. If the bank gives me money so I can buy a house, the bank “owns” that house until I pay it all back — with interest. Same deal for Wall Street. Whatever money you need to stay afloat, if our government considers you a safe risk — and necessary for the good of the country — then you can get a loan, but we will own you. If you default, we will sell you. This is how the Swedish government did it and it worked.

5. ALL REGULATIONS MUST BE RESTORED. THE REAGAN REVOLUTION IS DEAD. This catastrophe happened because we let the fox have the keys to the henhouse. In 1999, Phil Gramm authored a bill to remove all the regulations that governed Wall Street and our banking system. The bill passed and Clinton signed it. Here’s what Sen. Phil Gramm, McCain’s chief economic advisor, said at the bill signing:

“In the 1930s … it was believed that government was the answer. It was believed that stability and growth came from government overriding the functioning of free markets.

“We are here today to repeal [that] because we have learned that government is not the answer. We have learned that freedom and competition are the answers. We have learned that we promote economic growth and we promote stability by having competition and freedom.

“I am proud to be here because this is an important bill; it is a deregulatory bill. I believe that that is the wave of the future, and I am awfully proud to have been a part of making it a reality.”

This bill must be repealed. Bill Clinton can help by leading the effort for the repeal of the Gramm bill and the reinstating of even tougher regulations regarding our financial institutions. And when they’re done with that, they can restore the regulations for the airlines, the inspection of our food, the oil industry, OSHA, and every other entity that affects our daily lives. All oversight provisions for any “bailout” must have enforcement monies attached to them and criminal penalties for all offenders.

6. IF IT’S TOO BIG TO FAIL, THEN THAT MEANS IT’S TOO BIG TO EXIST. Allowing the creation of these mega-mergers and not enforcing the monopoly and anti-trust laws has allowed a number of financial institutions and corporations to become so large, the very thought of their collapse means an even bigger collapse across the entire economy. No one or two companies should have this kind of power. The so-called “economic Pearl Harbor” can’t happen when you have hundreds — thousands — of institutions where people have their money. When you have a dozen auto companies, if one goes belly-up, we don’t face a national disaster. If you have three separately-owned daily newspapers in your town, then one media company can’t call all the shots (I know… What am I thinking?! Who reads a paper anymore? Sure glad all those mergers and buyouts left us with a strong and free press!). Laws must be enacted to prevent companies from being so large and dominant that with one slingshot to the eye, the giant falls and dies. And no institution should be allowed to set up money schemes that no one can understand. If you can’t explain it in two sentences, you shouldn’t be taking anyone’s money.

7. NO EXECUTIVE SHOULD BE PAID MORE THAN 40 TIMES THEIR AVERAGE EMPLOYEE, AND NO EXECUTIVE SHOULD RECEIVE ANY KIND OF “PARACHUTE” OTHER THAN THE VERY GENEROUS SALARY HE OR SHE MADE WHILE WORKING FOR THE COMPANY. In 1980, the average American CEO made 45 times what their employees made. By 2003, they were making 254 times what their workers made. After 8 years of Bush, they now make over 400 times what their average employee makes. How this can happen at publicly held companies is beyond reason. In Britain, the average CEO makes 28 times what their average employee makes. In Japan, it’s only 17 times! The last I heard, the CEO of Toyota was living the high life in Tokyo. How does he do it on so little money? Seriously, this is an outrage. We have created the mess we’re in by letting the people at the top become bloated beyond belief with millions of dollars. This has to stop. Not only should no executive who receives help out of this mess profit from it, but any executive who was in charge of running his company into the ground should be fired before the company receives any help.

8. STRENGTHEN THE FDIC AND MAKE IT A MODEL FOR PROTECTING NOT ONLY PEOPLE’S SAVINGS, BUT ALSO THEIR PENSIONS AND THEIR HOMES. Obama was correct yesterday to propose expanding FDIC protection of people’s savings in their banks to $250,000. But this same sort of government insurance must be given to our nation’s pension funds. People should never have to worry about whether or not the money they’ve put away for their old age will be there. This will mean strict government oversight of companies who manage their employees’ funds — or perhaps it means that the companies will have to turn over those funds and their management to the government. People’s private retirement funds must also be protected, but perhaps it’s time to consider not having one’s retirement invested in the casino known as the stock market. Our government should have a solemn duty to guarantee that no one who grows old in this country has to worry about ending up destitute.

9. EVERYBODY NEEDS TO TAKE A DEEP BREATH, CALM DOWN, AND NOT LET FEAR RULE THE DAY. Turn off the TV! We are not in the Second Great Depression. The sky is not falling. Pundits and politicians are lying to us so fast and furious it’s hard not to be affected by all the fear mongering. Even I, yesterday, wrote to you and repeated what I heard on the news, that the Dow had the biggest one day drop in its history. Well, that’s true in terms of points, but its 7% drop came nowhere close to Black Monday in 1987 when the stock market in one day lost 23% of its value. In the ’80s, 3,000 banks closed, but America didn’t go out of business. These institutions have always had their ups and downs and eventually it works out. It has to, because the rich do not like their wealth being disrupted! They have a vested interest in calming things down and getting back into the Jacuzzi.

As crazy as things are right now, tens of thousands of people got a car loan this week. Thousands went to the bank and got a mortgage to buy a home. Students just back to college found banks more than happy to put them into hock for the next 15 years with a student loan. Life has gone on. Not a single person has lost any of their money if it’s in a bank or a treasury note or a CD. And the most amazing thing is that the American public hasn’t bought the scare campaign. The citizens didn’t blink, and instead told Congress to take that bailout and shove it. THAT was impressive. Why didn’t the population succumb to the fright-filled warnings from their president and his cronies? Well, you can only say ‘Saddam has da bomb’ so many times before the people realize you’re a lying sack of shite. After eight long years, the nation is worn out and simply can’t take it any longer.

10. CREATE A NATIONAL BANK, A “PEOPLE’S BANK.” If we really are itching to print up a trillion dollars, instead of giving it to a few rich people, why don’t we give it to ourselves? Now that we own Freddie and Fannie, why not set up a people’s bank? One that can provide low-interest loans for all sorts of people who want to own a home, start a small business, go to school, come up with the cure for cancer or create the next great invention. And now that we own AIG, the country’s largest insurance company, let’s take the next step and provide health insurance for everyone. Medicare for all. It will save us so much money in the long run. And we won’t be 12th on the life expectancy list. We’ll be able to have a longer life, enjoying our government-protected pension, and living to see the day when the corporate criminals who caused so much misery are let out of prison so that we can help reacclimate them to civilian life — a life with one nice home and a gas-free car that was invented with help from the People’s Bank.

Source: MichaelMoore

A Wall Street trader watches as the stock market crashes in reaction to the bankruptcy of Lehman Brothers (Zuma)

THE LATEST chaos on Wall Street–the worst financial upheaval in the U.S. since the Great Depression of the 1930s–highlights not just the scale of the world financial crisis, but the needless destruction caused by the blind competition at the core of capitalism.

The Wall Street crisis will almost certainly make the current economic slump worse. A shadow banking system beyond the reach of regulators in the U.S. or any other country is crashing down, destabilizing the world financial system. Even before the latest crisis, Bill Gross of Pimco, a big money-management firm, warned that an uncontrolled liquidation of debt by financial institutions “can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami.”

The risk of such a catastrophe is growing. As hundreds of billions of dollars in financial assets vaporize, banks will be forced to raise interest rates to increase the amount of money they have in their reserves. This, in turn, will cut off credit to business and consumers alike, further choking an anemic economy.

Falling tax revenues will trigger painful cuts in social spending. Home prices will continue their downward slide, and the number of home foreclosures will rise. The unemployment rate will jump still higher. Workers who do hold onto their jobs will have already seen their real income cut this year due to inflation and shorter working hours–and they’ll face renewed employer attempts to slash pay and pass on the costs of health care.

In short, the financial turmoil threatens to turn an already bad recession into something the U.S. hasn’t experienced in decades.

- – - – - – - – - – - – - – - -

THE WRECKAGE in the financial markets has also left the U.S. economic model in ruins.

Since the mid-1970s, Corporate America and the politicians of both parties have championed supposedly “free market” solutions involving deregulation of business, privatization of government services and “flexible” labor markets, based on weak unions and an increase in the use of part-time, temporary and contract workers.

But now, after decades of preaching “personal responsibility” to working people and attacking the poor for their “dependence” on welfare, Wall Street is running to the government for multibillion-dollar bailouts and emergency low-interest loans, all at the taxpayers’ expense.

The nationalization of Fannie Mae and Freddie Mac, the government-sponsored mortgage companies that own or guarantee nearly half the nation’s $12 trillion in mortgages, committed up to $200 billion in government money to make sure that holders of the companies’ bonds get their investments back.

The Fannie-Freddie bailout came just six months after the Federal Reserve Bank stepped in to provide $29 billion in taxpayers’ money to finance JPMorgan Chase’s takeover of the investment bank Bear Stearns. The Fed also used a Depression-era law to create special “lending facilities” to funnel billions more in low-interest loans to troubled Wall Street investment banks like Lehman Brothers.

Federal Reserve Bank Chair Ben Bernanke and Treasury Secretary Henry Paulson claimed that such moves would prevent a repeat of the debacle at Bear Stearns, which went into crisis because of a decline in the value of the mortgage-backed securities that it owned. The Fed even agreed to accept some toxic mortgage-backed securities as collateral for those loans.

Now, with the Fannie-Freddie nationalization and Lehman’s bankruptcy, this strategy has failed spectacularly. With $639 billion in assets set to be liquidated, Lehman’s bankruptcy is six times bigger than that of WorldCom, which went bust in 2002.

This time around, the Fed and the Treasury refused to finance a rival bank’s takeover of Lehman, as they had done with Bear Stearns.

Whether the decision to let Lehman go down was made because another bailout wasn’t politically defensible or because the Fed simply didn’t have the money available isn’t yet clear. But it was an enormous gamble. “Mr. Paulson seems to be betting that the financial system–bolstered, it must be said, by those special credit lines–can handle the shock of a Lehman failure,” wrote economist Paul Krugman in his New York Times column. “We’ll find out soon whether he was brave or foolish.”

Lehman won’t be the only financial titan to bite the dust. An even more famous Wall Street firm, Merrill Lynch, had to sell itself to Bank of America in order to avoid the same fate. And it’s possible that AIG, the world’s largest insurance company, will be forced into bankruptcy within days.

Washington Mutual, the largest savings and loan in the country, and Wachovia, the fourth-largest bank, could also go under soon. If either one files for bankruptcy, it would wipe out the Federal Deposit Insurance Corporation (FDIC), which protects deposits up to $100,000. The FDIC has just $50 billion to insure more than $1 trillion in total deposits.

- – - – - – - – - – - – - – - -

CAN FALLING house prices really be responsible for a crash of this scale? In fact, the housing bust has acted as a detonator for more powerful explosives–the enormous debts of all kinds piled up in the shadow banking system created by deregulation.

At the center of this banking deregulation effort was former Sen. Phil Gramm (R-Texas), now John McCain’s leading economic adviser and his likely choice for treasury secretary if he were to become president.

And it was Democratic President Bill Clinton who signed into law the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, which, as Timothy Canova wrote in a recent issue of Dissent, “swept aside parts of the Glass-Steagall Act of 1933 that had provided significant regulatory firewalls between commercial banks, insurance companies, securities firms and investment banks.”

Canova continued:

Banks were suddenly free to load up on riskier investments as long as they did so through affiliated entities such as their own hedge funds and special investment vehicles. Those riskier investments included exotic financial innovations, such as the complex derivatives that were increasingly difficult for even experts to understand or value.

Alistair Barr of MarketWatch summarized the consequences:

The shadow banking system grew rapidly during the past decade, accumulating more than $10 trillion in assets by early 2007. That made it roughly the same size as the traditional banking system, according to the Federal Reserve.

While this system became a huge and vital source of money to fuel the U.S. economy, the sub-prime mortgage crisis and ensuing credit crunch exposed a major flaw. Unlike regulated banks, which can borrow directly from the government and have federally insured customer deposits, the shadow system didn’t have reliable access to short-term borrowing during times of stress.

Unless radical changes are made to bring this shadow network under an updated regulatory umbrella, the current crisis may be just a gust compared to the storm that would follow a collapse of the global financial system, experts warn.

Whether we’re at the brink of such a collapse is anybody’s guess. For example, the unregulated market for “credit default swaps”–a form of insurance for bondholders–is worth a mind-boggling $62 trillion on paper, equivalent to four times the annual gross domestic product of the U.S.

The bankruptcy of Lehman will trigger multibillion-dollar payments from insurers to bondholders. But since these “swaps” are privately traded from one institution to another, no one knows who owes what to whom–or whether they can afford to make such payments. If they can’t, more bankruptcies could follow.

Whatever shape this financial calamity takes, there’s one certainty: Capital, as always, will try to push the costs of the crisis onto the backs of working people, both in the U.S. and around the world. But this time, the insanity of the system has been dramatically exposed.

A financial crisis on a scale unseen for generations will lead millions of people to question why they must make sacrifices for the sake of a tiny minority of wealthy parasites.

It’s time to make the case for a new, planned economic system–one that’s under the democratic control of working people, aimed at meeting human needs rather than bankers’ greed.

Source: SocialistWorker.org

If graphs could bare fangs and snarl, this one would:

Uh oh...

What always happens after a graph does this?

My friends, we don’t have a lot of time to put this right.  We’ve already waited too long to avoid pain.  We must, if we care for our children and our children’s children, govern our government.  We must radically, constitutionally chop political powers, agencies and “services” if we’re to keep this nation out of the hands of tin-pot dictators or collapse.

The constitutions, as written, would work.  What we’re doing now is not working. 

Please do remember that when it comes to human governments, failure is not just an option; it is a certainty.  Let’s try to put it off for a little while, at least, as societal collapse makes a horrible mess.

 By Clifford F. Thies            Posted on 1/31/2008

An old joke is that economists have called 19 of the last 16 recessions. Our signal of a recession is three months running of decline in the index of leading indicators. We have not yet had a recession without first having the signal. But, we have occasionally had the signal without the subsequent recession. Well, on January 18th, the Conference Board released its economic indicators and, with this release, we got the signal of the now long-awaited recession. What does it mean?

First, it does not mean we will have a recession. It means we will probably have a recession. We might wind up with a mere slowing down of the economy and avoid an actual recession.

Second, it does not mean we will have a deep or long recession. How short or long, and how shallow or deep is the recession, if we have one, cannot be forecast. Your guess would be as good as mine.

Third, and this is the important point, we economists can now stop trying to explain to people that we actually are in a well-functioning economy, and can start to commiserate with them about how bad things are. If there’s one thing hypochondriacs don’t want to hear, it’s that their many serious illnesses are all in their heads.

Before, we would respond to complaints about the global economy taking away jobs by saying a 4 percent unemployment rate means we have roughly full employment. Now, we can say, while 5 or 6 percent unemployment is a low level of unemployment by historical standards, its recent uptick is indicative of a slowing down of an economy and possibly of the start of a recession.

Hopefully, the listener will be assuaged by the sympathetic response, and not ask if there is a connection between the global economy and the recession, because we would have to explain that, because of the recent surge in exports, the recessionary pressure that has developed has been ameliorated by the global economy.

Instead of responding to complaints about the high rate of inflation by saying a 2 percent rate of inflation is pretty close to price stability, we can now say that a rate of inflation of 3 or 4 percent, which has been accelerating recently, is indeed a cause for concern.

For all the talk by the Federal Reserve about “inflation targeting,” we now see that responding to short-run problems is paramount for the Fed. Holding the line on inflation is something the Fed does when it is convenient. Resorting to inflating the money supply when times are tough is predictable, as is a continuing loss of purchasing power of the US dollar. The only uncertainty is how fast the dollar will lose purchasing power. Will it be at a creeping rate, or at a galloping rate, or at a hyperinflationary rate?

You might think that we learned our lesson about inflation during the 1970s, when we moved first from a creeping to a galloping rate, and then risked a further move to hyperinflation. The double-dip recession we then went through starting in 1979 fell in the second tier of economic downturns (below only the Great Depression). There is currently no indication that a severe downturn is on the horizon. But, if we work hard enough at it, with fiscal and monetary policy pumping up the economy and delaying and exacerbating the inevitable, we can make such a severe recession possible in the future.

Full Article:  http://www.mises.org/story/2853