Paper Is Poverty

The coming social revolution

2010-03-16T11:16:00.002-04:00

Just wanted to recommend this excellent article by Eric Walberg on the Greek / PIGS / EU crisis.

If you haven't been following it, basically Greece is being screwed because they no longer have their own currency, which means they can't take the usual action (currency devaluation) to stave off what promises to be a severe economic depression. Latvia has long been in the same situation, with its stupid government insisting on maintaining a peg to the euro even though it means sinking their people into poverty. This isn't going to fly in the long term (or even the fairly short term). From the article:

Last week saw a succession of strikes and protests throughout Europe: Lufthansa’s pilots, French air traffic controllers and oil refinery workers, protest rallies in Madrid, Barcelona and Valencia against the austerity measures of the Spanish Socialist Workers Party government. Trade unions in the Czech Republic announced that public transport would be halted this week. A one-day general strike of the public sector in Portugal protested measures to cut the deficit to 3 per cent of GDP by 2013. A truly pan-European movement is being born. The Independent's Sean O’Grady predicts such actions “promise to be just the start of the greatest demonstration of public unrest seen on the continent since the revolutionary fervour of 1968.”

Clinging to the first world

2010-03-14T21:53:00.007-04:00

[Photo by the excellent journalistic photographer Harvey Finkle -- check out his site.]

By the standards of developed nations, America has a shocking level of poverty, even while we host a great many of the filthy rich. As was pointed out on Washington's Blog:

A report by University of California, Berkeley economics professor Emmanuel Saez concludes that income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression.
The report shows that:
Income inequality is worse than it has been since at least 1917
"The top 1 percent incomes captured half of the overall economic growth over the period 1993-2007"
"In the economic expansion of 2002-2007, the top 1 percent captured two thirds of income growth."
As others have pointed out, the average wage of Americans, adjusting for inflation, is lower than it was in the 1970s. The minimum wage, adjusting for inflation, is lower than it was in the 1950s. See this.

On the other hand, billionaires have never had it better (and see this).

Of the 535 members of Congress, over 44% - 237 to be exact - are millionaires. Fifty have net worths of at least $10 million, and seven are worth more than $100 million. By comparison, around 1% of Americans are millionaires. There is no other minority group that is as overrepresented in Congress. See this.

Impoverished Americans are largely invisible since they are rarely on TV or in the movies, but there are a hell of a lot of poor people in the US. We tend not to be aware of those who are worse off, because Americans are highly segregated by income. Here's a small example of that segregation: on one side of town, there's a grocery store with such astronomically high prices (e.g., $6 for a teeny 1-cup container of fresh-made salsa) that I can't quite believe it's been in business for 2 years. Where I live, that store would go under-- and yet I still live in a fairly well-off area. On the opposite side of town the people are poorer, and there's a grocery store out that way where I never have to return my empties, because there is always someone hanging around by the recycling machines who is grateful to take them as a donation. The first time this happened I was rather stupid about it; I was waiting for an available machine and this very thin man made a comment or two, in a sympathetic vein, about how lousy it was to have to wait, especially when you have kids with you (meaning mine). Eventually he came right out and said he'd been collecting cans and bottles to try to make his room rent, at which point I finally said "Oh! Well, here, take my stuff...."

And really, that store is still not in an impoverished area, just a slowly decaying section of suburbia. That store doesn't sell to the rural poor, nor to the inner city.

To remind us all, some statistics:

1 in 8 Americans is on food stamps (source)
Only 2 out of 3 Americans eligible for food stamps receive them (source)
As many as 10% of workers are under the table, and will never be eligible for food stamps, regardless of their level of poverty (source)
Half of all American children will receive food stamps at some point in childhood (source)
90% of all African-American children will receive food stamps at some point in childhood (source)
7% of all mortgages are more than 2 months behind on payments (source)
1 in 50 American children experiences homelessness in a given year (source)
The true unemployment rate is over 21% (source)

Meanwhile, in mainstream news: Green shoots! Recovery! Worst is past! Back from the brink! Losses slowing! Signs of improvement!

Uh-huh. Right. In a way, you have to laugh at the absurd stupidity of the uber-rich. Every brainless parasite knows you don't kill your host if you want to go on collecting free food. But these uber-rich got so damned greedy and took so much for themselves that they have collapsed the Western economies from which they drew their wealth in the first place. The stupid fools! Only such psychopaths (see here) could be so blithely inattentive to the suppliers of their stolen wealth.

In the early 20th century, not only Henry Ford but the whole class of industry titans learned that if they wanted to sell things and have a prosperous society, the little people would have to be reasonably well paid. I'm not saying they just woke up one day and realized this like an epiphany out of the blue; it was more like they were forced to understand this by strikes, sit-ins, demonstrations, riots, and so forth. And it looks like it's time for the titans to learn these economic realities all over again. They should consider themselves lucky if they get through it this time without revolution.

Dumber than a box of rocks

2010-02-28T22:06:00.002-05:00

My title refers to unknown persons in my state legislature-- but I'll get to that in a minute.

The kids and I visited our local food bank a couple of days ago, on a field trip. The bank receives food from various sources: surplus produce from wholesalers, goods that grocers know they can't sell before the expiration date, surplus food from restaurants, and donations from the community. They also use cash donations to buy certain items in bulk, and last year they dug up a garden plot and produced 20,000 pounds of their own vegetables. All this food is distributed to about 40 food pantries across the county, which pass it along to those in need. In addition, they've worked out some kind of token system with the farmer's market, where needy families can buy units of veggies with their tokens. People are trying really hard to get healthy protein, fruits, and vegetables to these families, since relying on cheap carbs is a sure path to health problems.

The food bank is most definitely a success story, and I was really glad to visit them and have my kids put our donated food onto their shelves. But they are struggling to keep up with a 138% increase in people asking for assistance over the past three years. That's considerably worse than in the country as a whole, where requests have increased 46% over the past three years. (No surprise here-- I live in Michigan.) On top of the rise in people needing help, food costs are going up. Our local food bank now needs three times the budget that it did in 2006.

While I was reading about food banks, I discovered that there are some people in the Michigan legislature who are so disconnected from reality that apparently only the glare of torches in the window is going to wake them up. Quoting from a report from last August (available here as a Word document):

Despite record levels of need, food banks forced to turn away fresh produce from local farmers

LANSING – Due to pending state cuts to a surplus crop donation program, food banks across the state are left with no choice but to turn away fresh produce as Michigan’s bounty of seasonal crops reach their peak.

. . .

Annually, an average of six million pounds of food are distributed to local pantries, soup kitchens and shelters that would otherwise go to waste or end up in a landfill. MASS [Michigan Agricultural Surplus System] stimulates Michigan’s economy by assisting farmers, extending the growing season and adding agricultural-based jobs, while also providing low-income families with nutritious food. The state Legislature has proposed cutting the program for the 2010 budget.

Michigan food banks are seeing up to a 30 percent increase in food distribution so far this year and it is particularly painful for the food banks to know that there is surplus food that can’t be acquired in this time when so many people are struggling financially. For example, Marshall said Michigan’s tart cherry industry is looking at likely producing 100 million more pounds of fruit this year than last year.

“We normally would have funds to get these cherries canned or processed somehow, but not this year,” she said. “Michigan producers are exceedingly generous. They hate to see food go to waste and offer it to us at a very low cost. We have been blessed with this generosity towards our MASS program for 17 years now and it kills us to have to turn down food, especially when the need is so great.”

MASS normally costs the state $635,000 annually and the funding covers the harvesting, packaging and shipping of the produce. The dollar amount is miniscule and only accounts for .05 percent of the total funding cut.

$635,000???? Seriously, they can't swing $635,000?

Food is one of the most basic needs of the citizens. If government is (ostensibly) by the people and for the people (hello!!!), the legislature would never have cut such a no-brainer food program. For 10 cents a pound, we can pay farmers, preserve food, employ workers, and distribute that food to the poor. All for a fricking dime a pound-- and this is where they imagine they see fat that can be cut? This is where they see unnecessary waste?

Fer chrissake, $635,000 is only 5 or 6 high-level school administrators. Guess what happens if you cut school administrators? Fewer meetings, same education. Cry me a river.

But instead they chose, first of all, to take money from farmers. This is typical of our cultural inability to understand what wealth is (i.e. production, food, tangible assets). The Michigan Legislature has a message for us all: If you produce something tangible, then fuck you. If you push paper all day, come see us in Lansing!

And the legislature chose, secondly, to take 6 million pounds of produce out of the mouths of the poor and to dump it into the landfill. They just couldn't manage to find that last 1/20 of a percent of the budget cut amongst the overpaid anti-producers in administrative positions. (And I mean anti-producers, I do not mean non-producers.)

If you're among those in need, the only way a trip to Lansing can help you, apparently, is if you bring along your pitchforks and your torches.

Under the table workers

2010-02-24T22:00:00.005-05:00

Something is being left unsaid in reporting about unemployment benefits, Medicaid, food stamps, and other government aid during this burgeoning Depression. Under-the-table workers, who (according to an older article) may make up roughly 10% of the work force, often cannot apply for any of this aid. If you have to bring in official pay stubs and proof of expenses, and your official income can't explain how you pay your bills, then you've just announced to the government that you've been violating tax laws. You might qualify for food stamps even with your undeclared income, but due to the IRS you can't apply. Should you lose your job, you might be desperate to feed your children and avoid homelessness, but there won't be any unemployment benefits available.

People tend to see undeclared workers as strictly an immigrant issue, which isn't right. It's also a poverty issue. I know 7 people who are regularly paid under the table, and none of them is an illegal immigrant. (One of them is an immigrant, but he came to the US many, many years ago.) All of these people are in constant struggle to keep their heads above water.

I'm not saying that everyone working in the black market is poor, but I would venture that the vast majority are in poverty or close to it. A disproportionate number of them would qualify for food stamps or Medicaid, relative to above-board workers. And given that unemployment has hit less educated workers the hardest, I assume that undeclared workers would find themselves out of work disproportionately often.

So when you read statistics like "38 million Americans rely on food stamps" as an indication of poverty in the US, remember that a tenth of all workers (and sometimes their children) are not represented in that calculation, even though they're more likely to be poor enough to qualify. People ask "What are the jobless supposed to do when their emergency benefits run out?" But the other question is, what on earth do the black market workers do when there are no unemployment benefits?

We assume we have safety nets, that there's a government agency or at least a food pantry somewhere that will take care of these unfortunate souls who fall through the holes in the safety net. This is sometimes known as the "bystander effect," when people stand by and watch a tragedy unfolding without thinking to give any help themselves. Partly, people feel disconnected from the emergency, as if they're watching it on TV. And partly, we've all been taught to trust the experts, wait for the experts, leave it to the cops or the social workers or the nurses. And so, even when we're good people, sometimes we see an emergency and do nothing. I hope we can get past that. There are many people the government can't help -- again, maybe a tenth of all workers and some of their dependents -- and they need somebody's help.

One grim thing to keep in mind in the years to come is that nobody dies of poverty, per se. They die because they're 80 and can't afford to run the AC, and die of heart attack. They die because malnutrition leaves them vulnerable to diseases we thought we'd seen the last of after the previous Great Depression. They die because they drink themselves to death or commit suicide. I recently read somewhere (no doubt in something Dmitry Orlov wrote) that in Russia after its collapse, the life expectancy for men fell to 10 years less than for women, largely due to self-destruction and violence. But no institution counts such deaths as being due to poverty, except in some far-distant academic paper which looks back, years later, and estimates the surplus deaths.

The reason I'm being so terribly depressingly (sorry, Mom) is that -- should we go the route Dmitry Orlov imagines -- the little things we can do for each other might actually save lives, when people have come to the end of their rope. Eggs for the kids down the road, poker with the depressed guy across the street, a little help with an electric bill or a heat bill here or there... that stuff might truly make a difference. Read some novels from the 19th century, and you discover that people acted this way all the time. I don't hold myself up as a paragon, I just think that we'll have to make a mental shift toward providing more charity. You know, the strong caring for the least among us. I think some religions used to talk about that, back before charity got replaced by judgment.

Reality returns

2010-02-23T21:51:00.006-05:00

Some hideous consumer confidence numbers came out today. For one of the confidence measures, economists had predicted a slight fall from ~~56.5~~ 55.9 (in January) to 55.0. Instead it fell drastically to 46, and one of its components -- how respondents feel about their present situation -- is at a low point not seen since February 1983. The other measure of confidence also fell, to just a hair above its all-time low, set 24 years ago.

A very famous trader and an expert in gold, Jim Sinclair, sums up the world's economic situation this way:

The media can play all the games they wish. Just keep firmly in mind that:

1. Towns are broke.
2. Cities are broke.
3. States are broke.
4. Main Street is in dire pain.
5. The apparent improvement in the financial industry is accounting smoke and mirrors.
6. Most corporate improvements are not sales driven but cost cutting based. You can also call that "firing the help."

Greece or any state of the United States that goes under must be supported by QE to infinity as a country bankruptcy of the Iceland type will sweep across the Western World faster than Lehman Brothers locked up the credit markets.

QE to infinity means money printing to infinity. Bankers like to call it "Quantitative Easing" so that it's harder for the public to understand what's going on. Destroying the currency also means destroying the debts that are denominated in that currency, so it's like a jubilee, which will wind up being a good thing for some people. On the other hand, it also destroys savings, and much worse than that, the lack of a stable currency means economic activity grinds to a stop. The people who get through it best will be those who "get it" that tangible assets are now far more desirable than paper assets. You don't want more stocks and bonds in your 401k, you want land and non-perishable food and bits of silver.

While all this destruction of currencies is going on, we've still got a decline in economic activity. On the jobs front, this animation about unemployment says it best. Darker colors mean worse unemployment. See the contagion spread over the land....

Where is your money?

2010-02-21T12:06:00.002-05:00

Citigroup has recently notified its customers that it might take 7 days to receive withdrawals from checking accounts at their banks. Specifically:

"Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change."

Apparently this only applies to Texas, but was mistakenly sent out to every Citi bank customer nationwide. I'd call that a heck of an error. And it's a convenient mistake, since at least some of their customers (even outside Texas) will be slightly more likely to accept delays in receiving their cash, since they were warned in advance. As I wrote last month, a dollar in hand is worth 20 in the bank.

Meanwhile, Zero Hedge alerts us to other troubles in getting our hands on our own damned money in Expecting A Tax Refund? If You Live In Hawaii Or North Carolina (And Soon New York) You Will Have To Wait:

Two weeks ago we warned readers who wanted to get 2009 tax refunds to file their taxes asap. It appears we were prescient. The state budget crisis is about to hit home. Again. Last year California delayed tax refunds due to simply not having any money which to refund. This year, the first states to announce a hold in refund processing for just the same reason are Hawaii and North Carolina. New York State is also considering a comparable action. If you have delayed filing your taxes, it is high time to do so now regardless of where you live as the same "money-saving" approach of halting refunds is likely about to become prevalent now that "everyone is doing it."

Meanwhile, Illinois has not been making its mandatory payments to schools, universities, and various other agencies. California is likely to run into similar cash flow problems in 2 or 3 months, and perhaps this time they won't even bother with official IOU's, but will simply take the Illinois route and just not make payments. So far, school districts and state universities have juggled funds in order to keep paying their workers, but you can see where this is headed. One day, in some state or another, certain state-employed workers will simply not be paid. The money they have earned under contract will simply not arrive.

Speaking of employment contracts, pension funds are vastly underfunded, and the government entity that is supposed to guarantee pension funds (the Pension Benefit Guaranty Corporation) is... right, utterly underfunded. Social Security is underfunded, and will go into deficit (meaning we can only make payments using borrowed money or by hiking withdrawals) this year. And our own, private retirement funds are in danger of being stolen over the long term, as I wrote about in Nationalizing our 401k's.

Are you beginning to see a pattern? You might be worth a certain amount on paper, but what do you have in hand? What money or assets do you have in your house, in a safe, squirreled away at a relative's house, or whatever? What have you actually got in hand?

And now for the ultimate question: what have you got in hand that doesn't depend on the value of the dollar? What do you have that is not denominated in Federal Reserve Notes? Because a couple of years from now, the value of all that green cotton/linen blend could be dwindling fast. Or even sooner than a couple of years.

It's time to think 19th century for at least some of your wealth (should you still be so lucky as to have any wealth). You know: Land, tools, wheat and rice, salt and sugar, firewood, silver and gold, the family jewels (in the literal sense), cows, pigs, chickens. More people would see this if they weren't blinded by a knee-jerk disdain of "survivalists," and by the "Everything Is Normal" meta-message of television.

Potemkin retail

2010-01-28T22:50:00.005-05:00

Potemkin village: an impressive facade or show
designed to hide an undesirable fact or condition

In spite of the poor economy, the remaining stores in my area look about the same as they always have. True, there are fewer little shops in the strip malls, but the big chain stores seem unchanged. Until you pick something up, that is.

I used to buy casual clothes at Target. I got some jeans there last fall, only to discover that the pockets had been sewn shut. They weren't fake pockets-- after I got my little seam-ripper out and undid the damage, the pockets functioned as normal. It was just a goof. A pair of denim shorts bled blue dye for multiple washings and wound up a much different color by the time I would risk wearing them. And the socks seem to last through only 8 or 10 wearings before developing holes in the heels. As for T-shirts, forget it. The material has gotten very thin and chintzy, and half the time there are threads coming out of the seams.

I'm not trying to pick on a particular chain; it's like this at all the big box stores. I tried ordering shirts from Land's End instead, unaware that they too had cut their quality pretty drastically. The shirts that arrived were... well, okay, you couldn't literally read a newspaper through them, but close. Big headlines, maybe.

I bought some Hanes sweatpants for my son, who still crawls around much of the time. On the first day he wore them, they turned out to be not actually woven material but a sort of felt or other fuzzy stuff attached to a gauzy network of threads. The knees didn't exactly wear through, it was more like they rubbed off. Incidentally, I also once bought a blanket that I thought was microfleece but which turned out to be fuzz attached to a plasticky network in the middle. I washed it once and half the fluff came off. They don't even bother weaving cloth anymore, it appears. And yet the blanket had appeared to be of better quality, as seen through its plastic case (un-openable) on the store shelves.

As the story goes, it's all China's fault. They swindle us with their bad products. But actually, the crappy clothes I've unwittingly bought have come from Singapore and Guatemala, El Salvador and Malaysia as well. It's not all China's fault. Something else is going on here.

Food, as we all know, has been declining in quality steadily for decades, but is now also declining in quantity. The 32-oz jars are now 28 oz, the 7-oz tuna cans are down to 5 or 6 ounces, the 16-oz container of ricotta cheese is now 14 ounces. And yet, prices are up.

Loss of quality is happening across the board. I now prefer to spend money on all-stainless kitchen gadgets or to buy them from (say) a Swiss manufacturer like Kuhn-Rikon. It seems like more money, but it actually isn't, because at least that way you don't have to buy it again in 2 years. And quality kitchen items, like my pressure canner or my Squeez-o, can be found used.

I've replaced bathroom fixtures only to wish I'd kept the dated 1960's stuff because at least the old fixtures didn't constantly come unscrewed, rust in unexpected places, or turn out to contain plastic where you'd expected steel. Must everything be made with planned obsolescence?

But it isn't just intentional obsolescence, any more than it's "all China's fault." In truth, this is hidden inflation. American dollars used to buy steel instead of aluminum, glass instead of plastic, wood instead of particle board, goosedown instead of fiber-fill, silk instead of rayon. Today American dollars buy you stuff that looks good in the store, but which falls apart once you begin using it.

Inflation, on paper, has been bad enough. We all just accept that prices go up every year, and that our wages and salaries don't quite keep pace. But meanwhile the things in our houses, and the houses themselves (think toxic drywall or disintegrating faux-wood siding) have gone to hell, quality-wise. That, too, is inflation, but not the sort that shows up on price tags.

Ironically, the government looks at quality, but only when quality is improving. If you spent $1500 on a computer a few years ago, and this year you bought another computer for $1500, they'll claim that you actually got it cheaper. The new computer, you see, has a bigger hard drive and more memory and a faster processor, so you actually got more computer for the money. They adjust for that; it's called a "hedonic adjustment." They're telling us that we're not actually paying the same prices... not if you measure it per gigabyte or per gigahertz.

But -- get this -- they never adjust for declines in quality. If you had to spend $10 for a T-shirt made with 50% fewer threads than the $10 T-shirt you bought last year, tough luck. The government doesn't "adjust" to indicate that you're paying more per thread.

That lets the government hide inflation, as long as almost everything we're buying gets crappier with every passing year. Which it most certainly does.

And again, it isn't wholly China's fault. We can't pay the Chinese good money for good quality, because we haven't got good money... we have slowly failing currency. The price tag may look the same, but the dollars themselves have lost value. As the dollar has fallen, it's squeezed Chinese companies. Wal-Mart has demanded the same stuff for less real money, and naturally the Chinese have cut every corner they could. What we get from them today is largely what our currency is worth.

And thus, America's well-stocked, cheery retail stores are in fact full of junk. It's all just Potemkin retail.

Pillaging Haiti

2010-01-27T22:54:00.006-05:00

Let me start with the blatant propaganda:

Jan. 26 (Bloomberg) -- The earthquake that killed more than 150,000 people in Haiti this month may have left clues to petroleum reservoirs that could aid economic recovery in the Western Hemisphere’s poorest nation, a geologist said.

The Jan. 12 earthquake was on a fault line that passes near potential gas reserves, said Stephen Pierce, a geologist.... The quake may have cracked rock formations along the fault, allowing gas or oil to temporarily seep toward the surface....

Haitian Prime Minister Jean-Max Bellerive met yesterday in Montreal with diplomats, including U.S. Secretary of State Hillary Clinton, to discuss redevelopment initiatives.

Oh puh-leeze. Are we going to claim we just discovered oil there, just at the moment when we happened to be invading the country? The Pentagon comes and takes over the ports and airports of a tiny nation and-- hey! What do you know, there's oil there! What a surprise.

As I've recently been learning, we've known there was oil in Haiti for years. Check it out:

There is evidence that the United States found oil in Haiti decades ago and due to the geopolitical circumstances and big business interests of that era made the decision to keep Haitian oil in reserve for when Middle Eastern oil had dried up. This is detailed by Dr. Georges Michel in an article dated March 27, 2004 outlining the history of oil explorations and oil reserves in Haiti and in the research of Dr. Ginette and Daniel Mathurin.

There is also good evidence that these very same big US oil companies and their inter-related monopolies of engineering and defense contractors made plans, decades ago, to use Haiti's deep water ports either for oil refineries or to develop oil tank farm sites or depots where crude oil could be stored and later transferred to small tankers to serve U.S. and Caribbean ports. This is detailed in a paper about the Dunn Plantation at Fort Liberte in Haiti.

[These are] the economic and strategic reasons the US has constructed its fifth largest embassy in the world - fifth only besides the US embassies in China, Iraq, Afghanistan and Germany - in tiny Haiti, post the 2004 Haiti Bush regime change.

The 2004 Bush regime change was when the US faked a coup attempt in Haiti, kidnapped the democratically elected president (claiming it was for his own safety), and put American agents in power. The current prime minister, we're to believe, is meeting with Hillary Clinton to discuss "redevelopment" projects. If by "redevelopment" one means letting the US come in and steal oil and minerals from Haiti for pennies on the dollar, then yes, that's what the guy is doing.

But how much oil could such a tiny nation have? Perhaps more than you think:

“The Central Plateau, including the region of Thomonde, the plain of the Cul-de-Sac and the bay of Port-au-Prince are full of hydrocarbons” he said, adding that “the oil reserves of Haiti are more important than those of Venezuela.”

“An Olympic pool compared to a glass of water; that is the comparison to illustrate the importance of Haitian oil compared with those of Venezuela,” he explains.
“Venezuela is one of the world’s largest producers of oil.”

And it isn't just oil, but also minerals.

Remember how it was such a big deal that the US moved 30,000 more troops to Afghanistan? Well, we now have over 15,000 troops in Haiti, a country the size of Massachusetts. And there were already well-informed suspicions that the US was after Haiti's natural resources, months and years before the earthquake.

So, I have to take back my earlier statement that perhaps the US really is so incompetent that we don't know how to distribute food and water. That's not the case. We're just tied up with other details, like securing the oil fields and the future gold and silver mines. Thievery first... humanitarian missions a distant second.

You are on your own

2010-01-17T21:35:00.010-05:00

What happened in New Orleans in the wake of Hurricane Katrina was so bad that some have theorized it was an intentional failure, an experiment. How do Americans react when put into concentration camps? How do police officers react when told to fire on US citizens trying to find food and water? How do police and residents react when the cops are asked to go door to door confiscating guns illegally? How do parents react when they are put on a bus and their children are taken to a separate bus, to be relocated to a different state for no discernible reason? How do internally displaced Americans behave in their new communities?

But perhaps it was no experiment. Perhaps, here at the end of our empire, we are simply that stupid, that incompetent, that frightened, that bureaucratic, that inhuman. I direct you to Greg Palast's excellent piece on the miserably lousy US response to the Haiti disaster:

6.
From my own work in the field, I know that FEMA has access to ready-to-go potable water, generators, mobile medical equipment and more for hurricane relief on the Gulf Coast. It's all still there. Army Lt. Gen. Russel Honoré, who served as the task force commander for emergency response after Hurricane Katrina, told the Christian Science Monitor, “I thought we had learned that from Katrina, take food and water and start evacuating people." Maybe we learned but, apparently, Gates and the Defense Department missed school that day.

7.
Send in the Marines. That's America's response. That's what we're good at. The aircraft carrier USS Carl Vinson finally showed up after three days. With what? It was dramatically deployed — without any emergency relief supplies. It has sidewinder missiles and 19 helicopters.

8.
But don't worry, the International Search and Rescue Team, fully equipped and self-sufficient for up to seven days in the field, deployed immediately with ten metric tons of tools and equipment, three tons of water, tents, advanced communication equipment and water purifying capability. They're from Iceland.

9.
Gates wouldn't send in food and water because, he said, there was no "structure ... to provide security." For Gates, appointed by Bush and allowed to hang around by Obama, it's security first. That was his lesson from Hurricane Katrina. Blackwater before drinking water.

Iceland, as we all know, has been economically crippled by currency collapse and massive deflation. But they still managed to be far more helpful to civilians on the ground than the US, which behaves like the cartoon elephant scared of a mouse, and isn't willing to deploy food and water until the police state apparatus is well underway. Blackwater before drinking water.

Take note. If we run out of diesel, if hyperinflation shuts down food production, if we can no longer import food (we are net importers of food), if we can no longer properly fertilize and harvest our crops due to the absence of bank credit-- if, in short, the food runs out--

You Are On Your Own.

Ain't nobody gonna be distributing sacks of rice in the town square, unless Iceland cares to fly in on a humanitarian mission. Our sad government isn't capable. All the soldiers and planes and MREs in the world are no match for stupidity at the top, and we have stupidity in spades.

ADDENDUM:

Another report from Haiti (January 17):

Thousands - or tens of thousands - more are still trapped under the rubble and need rescue. Today is an absolutely critical day. If these people don't get water today they will die....

President Barack Obama, flanked by his predecessors George W. Bush and Bill Clinton said, "By coming together in this way, these two leaders send an unmistakable message to the people of Haiti and to the people of the world."

Finally we hear the truth on a major foreign policy issue from Obama. A message has been sent: we have come to pillage your country in its greatest hour of need....

Yesterday, Secretary Hillary Clinton was sent to Haiti and gave a speech saying that the US is doing "every thing we can" to help the Haitian people. But that fact that her trip to the Haitian airport stopped all aid from arriving for three hours - three critical hours on a day when the difference between life and death for tens of thousands is a drink of water - should tell you everything you need to know about the US relief effort.

Remember that the rich are post-national; they don't care whether the poor are Haitian or American... either way, they're the nameless rabble. George Carlin's message was "They don't care about you," which -- harsh as it is -- is true. So do something to protect yourself, and to help the Haitians. (I went through Medecins sans frontieres / Doctors without Borders, here, but I don't honestly know which charities are best.)

Nationalizing our 401k's

2010-01-09T23:37:00.009-05:00

Of all the economic possibilities I've mentioned to people, the one that gets the quickest "No, that'll never happen" reply is when I suggest the government will nationalize our retirement accounts. By "nationalize" I don't mean outright confiscation-- I am not saying they'd simply seize the contents of our 401k's. But they might, for instance, mandate certain investments: we'd all have to buy our fair share of Treasury bonds. They might limit withdrawals, limit investment options, and/or impose egregious fees and taxes. In short, the government may begin controlling our retirement money in ways which amount to a de facto nationalization.

They are not, obviously, going to use the word 'nationalization.'

The power elite are masters of the incremental approach. You don't just suddenly announce you're going to make all airline passengers go through roughly the same treatment afforded to incoming prisoners. People would be outraged. No, you just slowly introduce one damned thing after another until you arrive at the prisoner treatment, having suffered no more public protest than a bunch of kvetching. Similarly, they aren't going to suddenly impose 20 new controls on our retirement accounts, but you can bet it's at the end of their road map.

And so it begins:

The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams....

It sounds so innocent. Convert your retirement into a simple, safe annuity that pays you X amount on a set schedule, and you never have to worry about a stocks crash again. But what exactly will they be putting your money into, behind the scenes, in order to guarantee you those safe, set payments?

Treasuries. Which they're having a hell of a time offloading just about now.

Here's Karl Denninger's take (boldface is his):

Let me tell you what this is - it is an attempt to prevent the collapse of the Treasury market!

. . .

I have no quarrel with the government mandating that you have a choice in your IRA or 401k account to buy short-duration Treasuries....

But - "choices" have a funny way of turning into mandates, and this looks to me like a raw admission that Treasury knows it will not be able to sell its debt in the open market - so they will effectively tax you by forcing your "retirement" money to buy them!

This may be the only way for Treasury to hold down interest rates to something reasonable in the intermediate term, but doing so will instantaneously remove a major source of funding for the stock market - that is, the monthly and quarterly inflows from retirement accounts.

. . .

This "proposal" can only mean one thing - Treasury smells smoke.

Jesse over at Jesse's Café Américain weighs in as well:

As a rule of thumb, the worst possible time to convert lump sum savings into a fixed income annuity would be when interest rates are historically low....

For some reason the Obama Administration is promoting the idea now that there should be some encouragement for Americans to start converting their 401K's and IRA's into annuities, to provide themselves with lifetime income.

Interest on your savings, currently, is just about zilch. Why lock in that crappy interest rate by converting to an annuity? You'd be turning your money over to the government in return for payments which would not keep up with inflation. You'd have less and less purchasing power as time went on. This is not being done for the benefit of the American people.

And it's not just the people who already have retirement accounts. If you don't have any retirement funds, don't assume this won't affect you.

Jesse highlights an article from last June which suggests that the Obama administration wants to mandate retirement contributions:

Officials in the Obama administration are moving quickly to develop the investment infrastructure behind the president’s proposal for mandatory automatic enrollment in individual retirement accounts, which could be supported by the creation of Treasury-issued retirement bonds [emphasis mine].

J. Mark Iwry, deputy assistant secretary for retirement and health policy at the Department of the Treasury, said that administration officials are exploring some “conservative” options for investing the assets of 78 million Americans that he estimates could be automatically enrolled in this “universal” workplace retirement system.

The initial proposal allows for employees to opt out of the plan, but I'm skeptical about that. Consider that some versions of the health care bill suggest prison time for not buying insurance, even though insurance may cost up to $15,000 per year per family. Now consider how likely it is that employees will be allowed, without penalty, to opt out of the retirement plan. Not too likely, in my opinion.

No... the US Treasury wants its cut of the money made by 78 million Americans who do not currently save for retirement. Your sole option, initially, may be to purchase "R bonds" (government retirement bonds), with the ability to "graduate" to other conservative funds once you've saved enough money. Your distributions will come in the form of an annuity, with no say over the rate of draw-downs. If that isn't nationalization then I don't know what is. This will not be the plan for everyone, but once it's the plan for some, their foot is in the door. You have to think like an incrementalist. We've got annuity plans, mandatory enrollments, R bonds... you can see where this is going, right?

But hey, keep contributing if you think it can't happen here.

UK Telegraph, October 21st, 2008:

Here is a warning to us all. The Argentine state is taking control of the country’s privately-managed pension funds in a drastic move to raise cash.

It is a foretaste of what may happen across the world as governments discover that tax revenue [is plunging], and discover that the bond markets are unwilling to plug the gap....

President Kirchner has been eyeing the pension pool for some time. Last year she pushed through new rules forcing them to invest more money inside the country – always a warning signal.

My fear is that governments in the US, Britain, and Europe will display similar reflexes. Indeed, they have already done so.

Anything is possible in a banana republic

2010-01-06T21:10:00.002-05:00

From the Wall St. Journal's Fund-flows firm suggests government manipulated stocks:

The unusual circumstances that led the U.S. market to rally powerfully in 2009 might be explained by secret government moves to buy stocks, according to Charles Biderman, the founder and chief executive of TrimTabs, a research firm that tracks liquidity flows in the market.
"We cannot identify the source of the new money that pushed stock prices up so far so fast," Biderman said in a statement Tuesday.
The source of approximately $600 billion net new cash necessary to lift the market's overall capitalization by $6 trillion last year could not be identified by TrimTabs, Biderman said. The money, he said, didn't come from traditional players such as companies, retail investors, foreign investors, hedge funds or pension funds [my emphasis].

So that rules out... well, practically everybody. Who the heck is buying this crap?

According to Biderman, the Fed would have done this by purchasing stock futures, which are traded after hours. This caught my eye because Zero Hedge has recently argued that the past 3 months' worth of stock market gains have been entirely due to after-hours futures trading:

Furthermore, if anyone was merely looking at the trading action in regular hours, one would think there was absolutely no profit made since early September. The reason for that: all the upside since September 14th has come exclusively from after hours action. The chart below demonstrates the relative performance of regular hour trading in the SPY as well as that in the extended session. The notable observations: gaps, gaps, gaps. Every single day, minimal volume pushes the futures index higher. Good news, bad news, it don't matter to the Goldman S&P and Russell 1000 futures desk: they just lift every micro offer, giving the impression that the market is unstoppable, often leapfrogging each other as the latest viagra'ed GDP or unemployment rumor is spread. Come morning, it is time for the HFT brigade to come in and scalp their trillions of pennies while leaving the market unchanged, then at 4pm handing it off again to leveraged futures manipulation and dark pools. In a nutshell, this is the secret of the past quarter's phenomenal market performance.

The red line is how stocks have performed during normal trading hours. The green line represents the rise in stock markets that came from futures trading during the off hours. And as Zero Hedge says, it's all coming from the futures.

There seems to be some argument about whether it's the Fed direct, or the Plunge Protection Team, or Golden Sacks who's behind the futures buying. As if there is any daylight between these guys! The pseudo-government plutocracy is the pseudo-government plutocracy, regardless of the official titles.

What's evil about this is that the prolonged rally will have sucked investors back into stocks in their 401k and other retirement accounts. And the rich, in case you weren't aware, can make just as much money as the market falls as they can while the market is rising. We may become poorer, but the rich always get richer.

A dollar in hand is worth twenty in the bank

2010-01-04T23:47:00.006-05:00

Customers wait in line to remove their savings from a branch of The Northern Rock bank on September 17, 2007 in Kingston-Upon-Thames, England. Approximately £2bn has been withdrawn by customers since the bank applied to the Bank of England for emergency funds.

In a much-publicized post, the folks at Zero Hedge have alerted us that money market funds, one of the safest and most liquid investments available, may soon be neither safe nor liquid. The Obama administration, it turns out, wants to allow money market managers to halt redemptions. "Halt redemptions" is a nice way of saying that they can decide not to give you your money back, indefinitely.

From This Is the Government: Your Legal Right to Redeem Your Money Market Account Has Been Denied:

A key proposal in the overhaul of money market regulation suggests that money market fund managers will have the option to "suspend redemptions to allow for the orderly liquidation of fund assets." . . . The next time there is a market crash, and you try to withdraw what you thought was "absolutely" safe money, a back office person will get back to you saying, "Sorry - your money is now frozen. Bank runs have become illegal."

It was money market accounts, if you recall, which nearly imploded the US financial system in September of 2008. If you haven't seen the video of the Congressman who spilled the beans on this, you can see it here (under 2 minutes). He said:

On Thursday [September 18, 2008] at about 11 o'clock in the morning, the Federal Reserve noticed a tremendous draw-down of money market accounts in the United States, to the tune of 550 billion dollars was being drawn out in the matter of an hour or two.

The Treasury opened its window to help. They pumped 105 billion dollars into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic out there. And that's what actually happened. If they had not done that, their estimation was that by two o'clock that afternoon, five and a half trillion dollars would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.

Now we talked at that time about what would happen if that happened. It would have been the end of our economic system and our political system as we know it.

The Obama administration want to prepare for the next leg down, the next panic in the markets, by making the same sort of run on money market accounts impossible. And I suspect that, more generally, if the banks get wind that we want our money out, rules will come into play that prevent withdrawals. In the UK, in October of 2008, they had their own near disaster, and reportedly came within 2 hours of a total banking shutdown, including ATMs.

It's hard to imagine such a shutdown, I know. Here's an old New York Times report on a surprise banking shutdown in Argentina in 1987:

The crisis that has crippled the Argentine economy for the past five months took a sudden turn for the worse over the weekend after the government suspended bank and foreign exchange operations indefinitely....
The sweeping embargo on banking and foreign exchange transactions, announced late Friday, goes into effect Monday and is expected to aggravate the economic crisis further.... A similar decision in December to freeze bank deposits led to huge street protests and food riots that left 27 people dead and ushered in a period of chaos in which the country had five presidents in less than two weeks.

Argentina had banking shutdowns of varying lengths over and over again, with long periods where withdrawals were possible but limited to small amounts. As I understand it, during the most recent currency crisis there were many who never were able to reclaim their savings in full. Some part of their money was simply confiscated by the banks.

And although it's not an explicit policy, it is reportedly already very difficult to obtain large sums of cash from banks, and it's been this way for a year or two. Banks have extremely little physical cash on hand. They resist withdrawals of as little as a few thousand dollars, and if a wealthy individual wanted to withdraw (say) $25,000 in cash on a given day, the bank would likely be unable to accommodate such a request.

For most Americans this may not be much of a consideration, as they might not have much money in the bank, let alone any savings in money market accounts. But if you happen to have savings, you might: 1) withdraw physical cash, 2) diversify holdings into several banks, 3) utilize smaller community banks or credit unions (with caution), 4) spend the money to pay down debts, or 5) make necessary purchases or home repairs today, rather than waiting.

I'm no fan of fiat paper currency, but there is likely to be a period of time when credit systems freeze and only physical cash is accepted. And we really have nowhere near enough cash to maintain commerce. Not even fricking close.

Let's do the math here. John Williams has estimated that the US might contain only $200 billion in physical cash, or less than $700 per person. (Most physical US dollars are in use outside the US, in the drug trade, in Russia, by Hezbollah... the list goes on.) Over the past decade, the estimated "velocity of money," or the number of times that a given dollar would change hands in a year, ranged from about 8.5 to 10.5. In other words, in order for everyone to pay their bills and make their purchases, each dollar had to change hands close to 10 times.

But hang on-- if we were using actual physical cash at that rate of money velocity, we'd only have $700/person x 10 exchanges/year = $7,000 to spend per year. Which clearly is not enough.

Having to go to solely physical cash -- let us fervently hope this never happens -- would be catastrophic. On the one hand the deflation would be crushing; commerce would crash and there would be shortages of everything. On the other hand, money velocity would skyrocket and presumably the printing presses -- the real, actual, printing presses -- would be run full throttle. At some point this would lead to price instability, with prices for the most necessary goods rising quickly.

Physical cash would be infinitely more valuable than some 0's and 1's at the bank that you can never withdraw. And in this case, I am using the term "infinitely" with mathematical precision, since the value of your binary digits would approach zero.

Don't wait till everyone else figures this out. By then the emergency banking shut-down will already be underway.

The reset button

2009-12-18T18:09:00.006-05:00

More thoughts on deflation and currency collapse--

The currency collapse itself is not really the problem for most of the population. Suppose for a moment that we could be done with the currency collapse instantaneously, but without the economy being destroyed. Dollars, whether they are dollars you have saved or dollars that you owe, suddenly cease to exist. Instead, paychecks magically begin arriving in the new currency, and we all switch over to the new money for all transactions.

This wipes out savings, but it also wipes out debts. It's like pressing a giant reset button, and most Americans would choose to push that button. Not the wealthy Americans, not the top of the middle class-- but most of us. Even middle class Americans with sizeable 401k accounts might push the button, since not having to make mortgage, car loan, student loan, and credit card payments would free up so much income that they could easily catch up as far as retirement.

We would certainly have to adopt, and immediately, a real safety net for the elderly. But with all US sovereign debt wiped out we would be more able to do this than we are now. Furthermore, if the new currency were backed by gold and/or silver, this would prevent the relentless inflation which has eroded Social Security payments year after year. (Yes, SS payments are supposed to increase with inflation, but then, the government lies its ass off about inflation, so it doesn't quite work that way.)

Without debts, government or private, we could resume real growth. If other nations were wary of doing business with us due to the recent currency change, all the better, as that might revitalize domestic production.

People lament hyperinflation because it "wipes out the assets of the middle class," but really, how many Americans have more assets than debts? And whatever assets they do have may be relatively inaccessible, e.g. tied up in the house they live in, the paid-off car they drive, or in retirement accounts they are decades away from tapping.

Again, most of us would gladly push reset. Or-- we would in this magical world I've just described. In real life the death of a currency takes a while and gets seriously messy. It brings the real economy to a screeching halt. The question is not "how do we save the dollar?" when it cannot be saved. The question should be how we transition as rapidly as possible to a gold- or silver-backed new currency, once the dollar finally begins to fall apart. The longer it takes, the more production is lost, and the more we all suffer.

7 causes of deflation during a currency collapse

2009-12-16T18:40:00.008-05:00

I've been pondering the deflation (in real / gold terms) which occurs during currency collapse and I can find 7 reasons for it, so far:

1) Continuation of existing deflation. Currency failures tend to occur in the midst of terrible economies. After all, if there is more and more paper and less and less production, a loss of confidence in that paper is just a matter of time. Or, as I've heard it said recently: "Deflation is the midwife of hyperinflation." If you had an unhealthy economy before, it is not going to be reinvigorated by a failing currency.

2) Disruption of business due to price instability. Businesses fail to take into account escalating price inflation and wind up bankrupt. Businesses close, jobs are lost, and production declines.

3) Money supply is shrinking in real terms. There's a point of no return, a sort of event horizon, beyond which prices increase faster than the rate of money printing. Say the government is printing so fast that the money supply will increase 20-fold this year. If you are past the point of no return (characterized by sky-high money velocity), then prices will go up more than 20-fold, perhaps more like 30- or 50-fold. Which means that in terms of "stuff," or gold, there is less total money in circulation. (Note that a decrease in the supply of money is the Austrian definition of deflation.)

4) Price controls destroy production. Governments always attempt to demonize merchants and pass laws capping prices, which causes factories and farms to simply shut down, because it would cost more to produce their goods than they would ever get back.

5) Capital is destroyed. Businesses and many wealthy families have their savings wiped out, meaning there is less capital to invest in means of production.

6) Capital goes on strike. Even when capital is preserved by being moved off-shore or into gold, silver, antiques, landed estates, etc, this capital is not available to industry. Gold has sometimes been called "capital on strike," since the rich move into gold when economic conditions are dire or chaotic, as there are no viable investments. The elites are merely interested in wealth preservation, not in traditional forms of investment, which no longer make any sense. Thus, any remaining capital is sunk into unproductive stores of value and production suffers.

7) Fatalism sets in. There are fascinating descriptions of the psychology of Germans in the Weimar era, and of other times and places which have gone through hyperinflation. Saving and planning for the future have failed as savings are wiped out, and chaos now reigns, so people stop planning. Society begins breaking down: crime increases, moral or behavioral standards go out the window, and people live in the moment. When this happens on a societal scale I can only assume it hampers production.

What happens to prices in nominal terms doesn't matter, not once middle class savings have been destroyed and pensions have been made worthless. By that point, a price or a wage or the total money supply as measured in the currency are all irrelevant. What matters is how many minutes of labor are required to buy X units of "stuff," and there you will find that more and more labor is required to buy less and less stuff. And to the man and woman on the street that's all that matters.

The second wave

2009-12-15T23:27:00.001-05:00

Heard of the sub-prime crisis? Meet the Option ARM crisis:

The chart (stolen from a Casey Research article) shows how many mortgages re-set to a new payment, usually higher. With the sub-prime fiasco, people often had low initial interest rates, a lot like the teaser rate on a new credit card. Once the interest rate reset to a higher level, the payment increased and people defaulted in droves.

Option ARMs are even worse, since they allow people to (for example) pay only the interest and none of the principal for the first X years. Or, in some cases, people paid even less than that, and the total amount of the loan was actually growing over time because they weren't even keeping up with the interest. Many of these folks will be doubly screwed when the "teaser" period expires and they have to begin making normal payments. Not only will they be typical principal + interest payments, but the interest will be calculated at a higher rate. Defaults galore!

Also, prime mortgages are defaulting these days due to job losses, which was not the case when the sub-prime debacle began.

We have a long way to fall in housing, even now. If you own a house on a fixed-rate mortgage and the payments are manageable, congratulations, you'll be paying off the mortgage early when the dollar hyperinflates. If you don't own a house, congratulations, housing should be dirt cheap in a few more years. And, because we are approaching the long-awaited stock market crash (yes, I was very early and have learned the hard way just how long the market can stay irrational)... well, gold and silver will get knocked down a peg as well. Which is to say, they'll be on sale! For cheap! And the precious metals are a safer way to accumulate savings than by depending on the dollar-- whose fate, as with every other fiat currency, is sealed.

Collapsing tax revenues

2009-12-09T23:52:00.000-05:00

The suits can go on CNBC and C-SPAN and tell whatever lies they want, finagle the unemployment numbers or claim ridiculous corporate earnings figures. But in the end we can see what is happening by looking at tax revenues. The government manages to get a cut of virtually all economic activity, so if their "cut" is shrinking rapidly then you know the GDP is too. Never mind what lunatic estimates they pull out of their hat. Follow the money, look at the taxes.

Zero Hedge informs us, in Collapse in Tax Withholdings Refutes Improvements in Either Unemployment or Corporate Profitability, that withholdings from employees' wages were down almost 8% last month as compared with the same month a year ago. These are the Social Security and Medicare withholdings, mostly SS. And the SS tax applies only to the first $107,000 a person earns per year. So if the rich bankers have lesser bonuses this year (ha! not likely!) it wouldn't show up in this (much). This is mostly the middle and working class who are seeing a decline in total wages.

Furthermore, corporations must withhold a portion of their earnings to be paid in taxes, and these withholdings are down (get this) 64% compared to last year. Holy cow!! Remind me why the stock market has rallied massively since March?

Moreover, Mish has been watching state tax revenues fall. State and county sales tax revenues in New York were down over 8 percent. In Georgia they were down 16%; in Texas, 12.5%. Iowa's tax revenues missed their government's predictions by over 7%, while in California they missed by over 5%. Revenues in Kentucky were down almost 10% and in Indiana they were off 14%. You get the idea.

Many states have laws saying they must balance the budget. With plunging revenues this must mean they lay off workers. Incidentally, education was one of the only job sectors to show growth in the last B(L)S employment report. If that was ever true -- which is doubtful -- it certainly is not a sustainable trend, since state and local taxes pay teacher's salaries.

In Illinois some state colleges are not receiving promised payments from the state government:

"We have run our entire system for nearly a half a year with no payments from the state," Poshard said. But if the state doesn't kick in with its payments -- which comprise approximately 60 percent of university budgets -- the university will run out of money to make its payroll by December.

In New Jersey, payrolls are also in jeopardy:

"Things are probably worse than most people believe," state Sen. Mike Doherty told me the other day. "It’s questionable if we’ll even be able to meet payroll in a few weeks."

Zero Hedge summarizes it this way:

Hopefully the administration by now has realized that unless it wants uprisings (either metaphoric or literal ones) it has to tackle the state situation. As today's Census Bureau update points out... total state revenues dropped by 16% to $1.678 trillion, even as total expenses increased by 6.2% to $1.736 trillion.

On the plus side, lottery and liquor sale revenues are up.

Interview on hyperinflation

2009-12-07T23:35:00.000-05:00

If you follow economics at all, you're probably familiar with the Shadow Stats website, where economist John Williams presents the real (or closer to real) econ data. Basically he just calculates things the way we used to calculate them, before successive administrations started finagling the numbers. Williams is widely trusted and respected.

In an interview this past weekend on King World News he laid out, in his usual calm way, his estimate that the United States could face hyperinflation within 1 to 3 years:

In this interview John discusses looming hyperinflation, staggering unemployment, the reality of the US economy, the Fed’s inability to stimulate the economy, consumer’s inability to spend, the coming collapse of the US Dollar, how listeners need to prepare themselves for this crisis, the Fed’s debasement of the Dollar, an intensifying great depression, disappearance of cash as we know it and more.

Back in the summer of 2008 Williams issued a now-famous Special Report on Hyperinflation where he predicted it would set in between 2010 and 2018. So he's revised the timeline in the belief that dollar collapse will come sooner than he previously thought, due to the Fed's massive money printing in the past year. The interview is excellent and worth downloading.

To clarify, since hyperinflation has no agreed-upon, set definition, Williams' definition is when the largest circulating bill becomes more functional as toilet paper than as currency. This would be the $100 bill in our case... made worthless. Sometime in the 2010-2012 period.

And this, I should mention, agrees with reports from Lindsey Williams. Put on your tinfoil hat for a minute and lend me your ear. Williams is a minister who happened to spend quality time with a few elites in the early 70s, while working on Alaskan oil pipelines. (Yes, it's weird-- they hired him as a chaplain for their employees.) And he's being used by one of these very elite guys (think Bilderberg) to pass along leaked information. Back in spring 2008 Williams' source told him that oil -- then well above $100 / barrel and headed ultimately for almost $150 -- would crash to below $50 within a year. Williams went on radio to pass this along, and I had a very clear response to this, which was: "Bullshit!" But since Williams was right on that (and apparently on a number of past predictions), I feel I should listen to him with half an ear. His source recently told him that the dollar collapse timeline had been delayed by the elites because they were given so many trillions of dollars by the Fed and US government -- more trillions, apparently, than they had hoped for in their wildest dreams -- and it was taking them some time to convert all that paper into things of real value. So, instead of the dollar being in its death spiral already, it has been held up to give the uber-rich time to exit their dollar positions. This will not last much longer, however, as Williams' source said the dollar would be toast within 2 years. Take it for whatever it's worth-- it's just interesting that the timeline is similar.

Safest way to think about it is that 2010 is the last year of the dollar. For those of you with no money or assets, well hey, you won't have any wealth to evaporate the way middle class 401k's will. And those student loans? Ha! You'll be paying them off with pocket change. If you have very little to spare, concentrate on food... stockpiling it or moving closer to it. I wouldn't want to live in Phoenix, that's all I'm sayin'.

No jobs, no recovery

2009-12-03T22:15:00.003-05:00

In an interview I heard today, the excellent Catherine Austin Fitts talked about how she knew many years ago, as did others, that GATT and NAFTA would permanently eliminate millions of American jobs, resulting in high "structural" (not fixable) unemployment. Her fears, obviously, have been confirmed. Manufacturing and other means of production have been gutted.

Mish reported yesterday that 24 states are having to borrow money to meet unemployment benefits payments. North Carolina has so far borrowed an amount equal to 21% of its annual budget.

It gets worse. The debt is still rising. The problem is that with about 500,000 people out of work, the state has more unemployment claims than it can pay. So it has been borrowing from the federal government since February, sometimes as much as $20 million a day.

States will be further hit when the health care legislation passes, as Medicaid costs (paid by states) will increase, without commensurate increases in federal aid. And at least 10 states are already in very serious trouble:

A study released Wednesday warned that at least nine other big states [besides California] are also barreling toward economic disaster, raising the likelihood of higher taxes, more government layoffs and deep cuts in services.
The report by the Pew Center on the States found that Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin are also at grave risk....

The 10 states account for more than one-third of the nation's population and economic output, according to the report.

State and local governments have total budget shortfalls of around half a trillion dollars for this fiscal year. And states and local governments cannot print their own money, which means they'll have to beg for aid from the feds. Yet even if the feds come through with major bailouts, states will still be forced to cut expenses dramatically. Goldman traders may not have to give up their bonuses, but you can bet your local school will be giving up its teacher's aides. Have you ever seen the IMF come in to give "aid" to an impoverished nation? It demands as much austerity as it thinks the people can stand without it causing a revolution. And if there's anything useful in the country, any natural resources, those are sold off to somebody else. That's the Washington model for you. So if California needs to be bailed out, so be it, but there will be as many kids in a classroom as they can physically pack in. The homeless shelters will close, the potholes will never be filled, and the forest fires can consume as many homes or hamlets as may be. Everything will be cut to the bone, including payrolls.

In a long and detailed post, Mish made some predictions for the unemployment rate over the next several years. His conclusion is enough to make you weep.

Yet, in spite of all those generous assumptions, no double dip recession, no second recession, high rates of job growth and falling participation rates all the way through 2020, and unemployment peaking at 11.6% not 13%, the best I can do is suggest the unemployment rate will be over 10% all the way through 2015 and never dip below 8% all the way out through the end of 2020.

His "generous assumptions" will not be met, of course; the reality will be worse than that. We'll have this level of unemployment for another decade, in other words. At least this level. Next year is sure to be higher.

When people can no longer borrow, they must be able to earn money if we're to have a functioning economy. Without jobs the deflation will worsen, because the Free Money Fiesta over at the Federal Reserve does not include you and me. It doesn't even matter what happens to the dollar. Inflation or no inflation, we will still have deflation in real terms. Weimar Germany had absolutely terrible deflation when measured in real terms (i.e. if you convert all sales into gold gram equivalents)-- they had more than a 90% fall in gold-denominated GDP. In fact, the currency failure (hyperinflation) was a huge factor in causing the disruption and collapse of commerce. If the dollar collapses it will only exacerbate the real life economic slowdown that we normally think of as "deflationary."

It isn't as if nobody has any ideas about how to ameliorate this economic disaster we're headed into. Webster Tarpley has suggested a 1% tax on financial transactions (known as the Tobin Tax, which also means death to Goldman Sachs' beloved high-frequency trading). He's also suggested 0% interest loans to production and manufacturing, and real stimulus along the lines of the Tennessee Valley Authority, including high-speed rail lines, local public transportation, and nuclear power. Bob Chapman has suggested using tariffs to force a revitalization of domestic production. Catherine Austin Fitts advocates local business and local banking, or in other words, decentralized production.

Basically we need to reverse globalization and start making things where we live. What we produce translates into our communal wealth; production is wealth. I suppose the elites on Wall Street don't care for this idea since they themselves produce nothing at all.

We're not going back to normal

2009-12-02T22:44:00.007-05:00

I still hear people talk about the economy or their financial situation as if this were just a recession, and everything is now headed back toward normal. Friends are opening a new business, other friends are waiting until their house returns to its old value before selling, others blithely assume that their income will be higher in a few years. (Perhaps it will be, but not in real purchasing power.)

And when I hear people talk like this, even when they are speaking directly to me, I don't say anything about my views on the US economic situation. I don't point out that one in 5 American workers can't find a job and that most of the missing jobs are gone until after the dollar collapses, a situation known euphemistically as "structural unemployment." The word "structural" here means it's built into the system. If you offshore all production and manufacturing, "structural" or permanent unemployment is what you get. No fixing that until we hyperinflate the dollar into oblivion and we are forced to produce things domestically because we can no longer afford imports.

And no point mentioning that one in 4 children relies on food stamps to get enough to eat, suggesting we are a developing nation. Or that all the campgrounds within 100 miles of Los Angeles are filled with homeless people. If it's not on television it might as well not exist.

And I don't mention that next year we will have to borrow around $1.5 trillion to make up the budget shortfall, plus we'll have to "roll over" or re-borrow another $1.9 trillion because a slew of short-term loans must be repaid, and naturally, we don't have the money. If numbers or math are involved, nobody wants to hear it. But that's $2.4 trillion we'll need to borrow next year, which is godawful. That's over $9 billion we'll expect the rest of the world to give us every single business day. And if they don't? If they refuse? Then we print the money to cover our bills, and erode our currency, and thus erode the savings and assets of the middle class. Or, if we don't print it, we must make drastic cuts in government, and that would be very painful to the American people because government expenditures make up 36% of our GDP.

Almost the entirety of the GDP is consumer spending and government spending -- which is, in fact, normal for all nations -- but the problem here is that consumers are spending borrowed money and so is the government. Only... the borrowing is gradually coming to a halt as credit dries up.

We have two choices.

The first is, we simply allow the credit and loans to disappear, we let the "liquidity" dry up, and suffer the consequences. This results in economic collapse. Forget the term "deflation," as that does not get the idea across. The economy collapses. Commerce largely evaporates. The US defaults on its sovereign debt, as do virtually all US states and municipalities as well as many corporations.

The second is, we print enough brand-new money to keep the "liquidity" flowing, but that money has a rapidly shrinking real value. I mean, you can't just print new money out of nothing and expect it to maintain the same value as the old money. The value has to shrink. Which means prices have to go up in dollar terms. If this process gets out of control (which historically is likely) then the dollar collapses until it has no value at all, until it is useful only as toilet paper or kindling. Which means commerce largely evaporates and businesses close because nobody can deal with the lack of viable currency. This is probably worse than the first scenario, but it's what the US government will attempt. Politicians always hope -- and perhaps truly believe -- that they can maneuver just a bit of inflation, enough to ease the debt burdens and keep commerce alive, but not so much that they ruin the currency.

Either route is disastrous. But even if I said all this to most of my friends and acquaintances, almost none of them would do a thing to make preparations for such miserable scenarios. It's one thing to build a bomb shelter against nuclear war; we've never had a nuclear war. Or to buy potassium iodate tablets; we've never had a dirty bomb attack. Or to buy batteries and food and water before y2k; that was similarly unprecedented. Hyperinflation, however, is not only common, it is always and without exception the fate of a fiat currency. It is not a novel catastrophe. This is a routine human experience, and it's a hell of a bad experience. During the currency crisis in Argentina, middle class men would dress in suits to go out looking for work in the mornings, but by afternoon would be seen in alleys picking through trash for something to eat. Not only has this happened in many other nations, it has happened twice in our own nation.

But Americans, I think, are addicted to a feeling of normalcy. We like to be cheerful and positive, for one thing, and so we reject gloomy predictions. But we especially like to turn on the TV or go to the mall or the movies and be bathed in the sense that all is well, the world is still functioning, and the US is still the greatest nation on Earth. And that is why nobody will have any cash when the banks announce withdrawal limits or outright closures; that is why nobody will have food when distribution begins to break down; that is why nobody will have alternative forms of money such as gold, silver, or copper coins when the paper stuff begins to go haywire.

And Americans don't care a whit about history. We seem to believe that we have achieved the permanent utopia (with slight fluctuations) of the Technology Age, and that calamity is virtually impossible. The Experts know how to keep us safe, but in the unlikely event of a crisis, The Experts will take care of us. You know, like they did for the people of New Orleans.

We're clinging to the old normal as best we can, but it simply can't last.

Blessed Blankfein

2009-11-11T16:40:00.001-05:00

In case you missed it, this past Sunday the head of Goldman Sachs was quoted saying that he does "God's work." In the same interview he also said "We're very important," "We have a social purpose," and "Everybody should be, frankly, happy."

Just call him Lloyd Marie Antoinette Blankfein.

Tom Gregory over at HuffPo put up a hilarious response as follows:

THE LLOYD's Prayer

Our Chairman,
Who Art At Goldman,
Blankfein Be Thy Name.
The Rally's Come. God's Work Be Done
On Earth As There's No Fear Of Correction.

Give Us This Day Our Daily Gains,
And Bankrupt Our Competitors
As You Taught Lehman and Bear Their Lessons.
And Bring Us Not Under Indictment.
For Thine Is The Treasury,
The House And The Senate
Forever and Ever.
Goldman.

Goldman's performance in the markets was so spectacular last quarter that they only lost money on 1 out of 65 trading days. You cannot do that without massive corruption. It's simply impossible. With this "God" reference, perhaps Mr. Blankfein is arguing that it wasn't criminal behavior-- it was Divine Intervention.

Losing faith

2009-11-09T23:45:00.006-05:00

Over the past few millenia, humans have used a great many things as money. Units of labor, peppercorns, giant slabs of rock too heavy to lift, seashells, clay tablets, sticks, and of course, gold and silver. (The sticks were surprisingly effective. Worked for centuries in England.)

From an elitist's perspective, the most fantastic form of money yet devised is paper. It has less utility than seashells (which after all are made of minerals), or peppercorns, or sticks. Even the lowly stick can be burned for warmth. (The British had loads of these very old sticks lying around in the Houses of Parliament, and in 1834 they got the brilliant idea of destroying them in a stove, whereupon the entire Parliament burned down. That was some seriously dry wood.)

But fiat paper money doesn't represent any tangible goods whatsoever. (Over 90% of our "paper" money is actually just a computer entry somewhere.) Paper money is an object of collective faith. That could be said about any of the other forms of money, too; but the thing with paper is that it can be created by governments, in enormous quantities, at will. Money printing makes the currency less rare and therefore less valuable, robbing the people of their savings.

Whatever governmental mistakes bring about the failure of a currency, in the actual moment when it tilts over the precipice and plummets in value, it's mass psychology that does it. It's a sudden, widespread loss of confidence in the value of the currency.

I note that people are already losing confidence in Wall Street, in the Treasury, in the Presidency (that is, in the position itself), in Congress, in the two-party system, in the People themselves. This is to say nothing of the sense of decline one gets from the new crappy houses with deteriorating siding and toxic drywall, the clothing made of increasingly thin material, the ruined historical buildings and town centers, the shrinking food packages, the disintegrating barns and silos, the uglier and emptier strip malls, the rusting factories, the increasing drop-out and illiteracy rates. As an Empire, we are through. Stick a fork in us, we're done.

As for the financial world, I wouldn't know where to begin or how to express how criminal, insane, and plainly dangerous the markets have become. On blogs where people are knowledgeable about these things, the cynicism and bitterness are rampant (although there's a lot of humor, too-- what can you do but laugh?). Nothing in the financial world is considered to have any meaning anymore, because it's all disconnected from the real world and the real economy.

In short, there's not a lot of confidence in the institutions surrounding the dollar, nor in the society that exports all these dollars, nor in the international banking system in which the dollar operates. Psychologically speaking, the supports are being knocked out one by one.

You can start to prepare yourself for this coming distrust of paper money by taking out a bill-- not a one-dollar bill, but say a twenty-- and recognizing that it is just a bit of cotton and ink. Seriously. The only reason you can hand it over and get gas or jeans or eggs in return is because the guy taking your money is an idiot. Okay, not an idiot, but willfully blind, in the manner of the villagers praising the non-existent clothing of their emperor.

Another tactic is to imagine yourself on a desert island with a big wad of tens and twenties. You're screwed, right? Now imagine you get one hour to shop at a Super Wal-Mart before we drop you and your stuff off for two weeks on that same barren island. Makes it pretty clear what's really important, doesn't it?

This is NOT all survivalist thinking. Actually there is a very long-term cycle in which for a couple of decades or more, financial assets (paper) do very well. And then they get way over-valued and there is a return to real assets (also known as hard or tangible assets) such as gold, silver, real estate, agricultural commodities, crude oil, natural gas, base metals, etc. We are now exiting the overblown paper party, and hard assets will be far superior investments for the foreseeable future.

But it's true, it's pretty easy to understand at a survivalist level. If you have loads of cash, you assume that can be turned into wheat or clothing or firewood or batteries at your convenience. Essentially those dollars are someone else's future promise to give you stuff. As long as nothing goes wrong, these future cashiers can keep that promise, and you won't have to do without.

As long as nothing goes wrong. I mean, as long as people don't change their minds and start worrying about the bits of cotton in their wallets. If people start worrying, en masse, then in the blink of an eye the stores may no longer have that stuff you meant to buy. Whatever can be reasonably converted today from "colored cotton paper" into "stuff" should be converted. A great many things last almost forever: toilet paper, soap, salt, sugar, popcorn, properly stored firewood, wool blankets, oil lamps & oil, Coleman stoves & fuel canisters. Think of it as making an investment change from paper assets to hard assets, and try to get it done before all faith in paper is lost.

Still losing jobs, no end in sight

2009-11-08T21:08:00.007-05:00

[So much for my goal of blogging daily in November... my family was waylaid by a virus.]

Last week the official unemployment rate hit 10.2%, meaning that -- and here comes the tricky bit -- among those still considered part of the American work force, 1 in 10 are out of a job. However, if you've given up looking for a job because there are none (think of a construction worker in Florida or Arizona), then you don't count. If you've been out of work over 6 months, you also don't count.

And it doesn't matter whether your job is enough to survive on, either. If you used to work full time, and now the only job you can find is for 8 hours per week, it doesn't matter. That's considered "employed". If you are a self-employed real estate agent who hasn't sold a home in 6 months-- you guessed it! Employed.

If you put the "discouraged workers," the long-term unemployed, and the under-employed into the unemployment category, our unemployment rate is 17.5%. But even that's an underestimate, since various administrations have finagled this number in order to soften the bad news. Economist John Williams calculates this unemployment figure the way it was calculated prior to the Clinton administration, and his figure is 22.1% unemployment.

In truth, then, at least 1 in 5 American workers cannot find a job.

Meanwhile, those still employed are being squeezed mercilessly. Wall Street was just frickin' ecstatic over this bit of news from last Thursday:

The Labor Department said the output per hour of nonfarm workers rose at an annual rate of 9.5% in the quarter, more than four times the average productivity growth rate of the past quarter-century. When taken together with the second quarter's 6.9% rise, it was the strongest productivity growth rate over a six-month period since 1961.

Woo-hoo! CEO's are going to get almost 10% more work out of people this year, and all without paying them a red cent more! Bust out the champagne on the floor of the NYSE!

Disgusting. In the past 6 months, the output per hour of work has increased dramatically while worker's incomes have been flat or falling. This increased productivity has meant that more workers can be let go, or not hired back. In effect, Wall Street was cheering the fact that companies won't have to employ as many people.

Meanwhile the government claims it saved or created 640,329 jobs via its stimulus plan. As Mish points out, if that's true then it means they spent $323,739.83 per job. I don't know about you, but that doesn't look too impressive.

Furthermore, more than half those jobs were in government, meaning that government must continue to pay over 320,000 salaries indefinitely. The Obama administration had promised that 90% of the jobs would come from the private sector, in effect assuring us that government wouldn't have to keep paying for these jobs by paying the salaries year after year. But in fact, the minority of new jobs were in the private sector; most must be funded by government in perpetuity.

But this jobs number turns out to be entirely bogus, because (get this) pay raises were counted as new jobs.

Uh-huh. You read that right. Check it out over at The Automatic Earth:

AP found, just to name an example, that of 14,506 jobs allegedly saved or created by just one federal agency, two-thirds (!) were not saved or created at all. They were counted because existing government employees got pay raises.

An unfortunate and isolated accident? No, it's not. The administration has even issued directives to count pay raises as saved jobs. AP: "The inflated job count is at least partly the product of the administration instructing local community agencies that received money to count the raises as jobs saved."

You can't make this stuff up!

Who knows what we spent on the few measly jobs we did manage to create. Half a million each? A million apiece? And even if the Obama administration had been correct, and we had saved or created 640,000 jobs, that still would be terribly disappointing considering that unemployment rolls show 559,000 people lost jobs just last month.

Of course, the Bureau of Labor Statistics or BLS -- also known as the Bureau of Lies and Statistics -- says we only lost 190,000 jobs last month. But this is a much-manipulated estimate based on the bogus "birth and death model" which we now know has vastly underestimated job losses throughout 2009. The BLS will correct this understatement of lost jobs after the end of the year. Still, even according to these rosy-colored BLS numbers we have lost 2.8 million jobs since the stimulus plan was passed roughly 10 months ago.

The blue lines in the graph below show the estimated unemployment rate, without any stimulus plan (the higher light blue line) or with the stimulus (the lower dark blue line). Reality is a bitch... the real numbers are in red.

Meanwhile the Goldman crowd continues to suck down their hundreds of thousands in bonuses and the Too Big to Fail banks (more like So Big We Can Screw You) throw multiple trillions of our dollars into their black hole, bankrupt coffers. Who needs production? We gotta save the bankers!

Massive income disparity is not financially healthy and usually leads to a ruined economy and major social unrest. You would think the banking elites must know this, yet they appear to think Things Are Different This Time, and that they have nothing to fear from the masses. Meaningless pop culture, electronic toys, public schooling, and controlled media make Americans so passive -- or so the popular thinking goes -- that they couldn't lift a torch if their children were starving. Well, I don't think so. In fact, Americans have such a sense of entitlement that they're liable to be far more pissed off about their falling standard of living than the citizens of many other nations.

Unrest doesn't have to be sparked by anything directly related to joblessness, foreclosures, or other economic problems. Last December, during rioting in Greece, 16 bank branches were burned down. The riots weren't about the banks or the economy, but had been ignited when police murdered an unarmed teenaged boy. Nonetheless, the underlying economic discontent was enough that banks were targeted.

Jobs are not simply the key to economic health, they are also the best way to prevent civil unrest. And yet with all the money being spent, virtually nothing is being done to bring work back to the United States. According to Mish in a recent interview, we still give tax benefits to corporations' overseas operations which they cannot get for US operations. In other words, the US Congress is continuing to give incentives to US companies to offshore their labor, even as we speak.

As Jim Kunstler has said, once the first window gets broken, all bets are off.

Policemen stand by the burned Emboriki Bank in central Athens on December 9, 2008. AFP PHOTO /Louisa Gouliamaki

Disaster is inevitable

2009-11-03T20:47:00.002-05:00

Well, I mean, if you're going to put up a seriously doom and gloom post you might as well announce it right there in the title.

I'm going to translate from a newsletter written by a well-respected money guy named Eric Sprott. I can't offer any expertise in economics, but what I can hopefully offer is a translation service into plain English. The excerpts below are from the October 2009 issue, Dead Government Walking.

[T]he United States Government is on a trajectory to default on their obligations. In its current financial condition, it will not be able to fund its forecasted budget deficits and unfunded Social Security and Medicare promises on top of its current debt obligations.

That is, there will be no Social Security or Medicare for most of us. Imagine a company that was setting aside money for its employee pension plan, only every single year they "borrowed" the entire amount that was supposed to go into pension funds, and instead used it to make payroll. That's what the US government did. There is no Social Security money. We just figured we could borrow or raise taxes when the time came. Ha! Not so much.

[T]he financial condition of the US government is completely untenable. The projected US deficit from 2009 to 2019 is now slated to be almost $9 trillion dollars. How on earth does anyone expect them to raise this capital?

In other words, the rest of the world cannot afford to loan us $9,000,000,000,000 over the course of the next decade when everyone is broke.

As we stated in a previous article, in order to satisfy US capital requirements, all existing investors would have had to increase their US bond purchases by 200% in fiscal 2009. Foreigners, however, only increased their purchases by a mere 28% from September 2008 to July 2009 - far short of what the US government required.

So here's a similar example. Suppose that last year you had to put $1,000 on your credit card to make ends meet. This year your income is lower and your expenses are greater, and you know you're going to need to borrow $3,000. But then your credit card company sends you a letter announcing that your credit limit is being lowered to $2,280. You can only borrow another $1,280 this year, far short of what you need to get by. But here is where the difference comes in: you don't have a printing press with which to counterfeit money to make up the difference. The government does. And boy howdy, they use it.

[T]he Federal Reserve isn’t merely supporting the market for US treasuries… it is the market for US treasuries. Printing new dollars to support an almost $9 trillion dollar budget deficit that stretches out over the next ten years puts the US on the road to ruin....

In other words we print money and buy our own Treasuries. It's like transferring counterfeit money from your left pocket to your right, and pretending that all money in the right-hand pocket is now magically legitimate. Here in the real world, as it says above, that puts you on a very bad path. One that often leads to hunger, and occasionally leads to guillotines or fascism.

Taxing the citizens is another possibility, one that doesn't involve borrowing or printing, and thus seems a tad more responsible. But here we run into the principle that "you can't get blood out of a stone":

The US taxpayer can’t cover the difference either. According to recent estimates, tax revenue from all sources would have to increase by 61% in order to balance the 2010 fiscal budget. Given that State government income tax revenues were down 27.5% in the second quarter, the US government will be lucky just to maintain its current level
of tax revenue, let alone increase it....

Can't borrow it, can't get it from taxes. That leaves only breaking promises and printing money, both of which will undoubtedly take place.

Hemingway wrote that a man goes broke “slowly, then all at once”. We believe the same sentiment can be applied to governments....

Like dead men walking, the US government is merely biding its time until the moment of truth. Unlike Fannie Mae, General Motors or Citigroup, however, there is no one left to grant a reprieve.

The Japan risk

2009-11-02T23:36:00.001-05:00

[I'm attempting to blog every day for the month of November.]

A totally new danger -- new to me, anyway -- was brought to my attention today by Ambrose Evans-Pritchard in his article It is Japan we should be worrying about, not America. I'll attempt to translate some of it into plain English.

The basic problem is that Japan has borrowed wayyyyy too much money. They've been even worse than the US, and now owe more than twice their total GDP. They may, in the not too distant future, be forced either to default (stop making debt payments) or to print massive quantitites of new money, thus collapsing the value of the yen.

When you loan a government money by buying its bonds, there is always a risk that it will never give you your money back. You can buy insurance to protect yourself against the risk of not being paid back. It currently costs $63 per year for every $10,000 you've loaned to Japan (the loan in this case is for 5 years). That's a much higher insurance premium than for other major governments; the same sort of insurance only costs $22 if your loan was to the United States. These insurance costs for Japanese government debt have spiked higher just recently, a sign that people are becoming more doubtful about Japan being able to handle its debts.

Part of the problem is that the new left-leaning Japanese administration wants to... well, "borrow and spend," in an attempt to extricate the country from a horrible deflation. However good the intentions, Japan is already in debt up to its eyeballs and this is only making the fiscal situation more dire.

On top of the new round of borrowing and spending, Japan has a heck of a lot of elderly people, and various retirement funds are having to sell off Japanese government bonds in order to give people their retirement money. When all these old folks were still working, their pension funds were buying government bonds, i.e., they were loaning oodles of cash to the government. Now it's time for the government to start giving that money back.

And here we come to the Spooky Quotes section of the piece:

If Japan's bond rates rise to global levels of 3pc to 4pc, interest costs will shatter state finances.

No one knows exactly when a country tips into a debt compound trap. But Japan must be close....

"The debt situation is irrecoverable," said Carl Weinberg from High Frequency Economics. "I don't see any orderly way out of this. They will not be able to fund their deficit. There will be a fiscal shutdown, a pension haircut, and bank failures that will rock the world. It is criminally negligent that rating agencies are not blowing the whistle on this."

"Irrecoverable" is not a word one likes to see in an econ piece. It means, as I said earlier, that Japan is stuck with two really awful choices. It can default on its debt outright-- thus saying "Screw you!" to its lenders. Or it can print brand new money to pay its bills, eventually collapsing the value of the yen. When the yen gets decimated, that's essentially another way of defaulting, because although they will be paying people back, they'll be paying them back with toilet paper.

Now, I really doubt that they would simply stop making payments (default). If they did, the amount of interest that other major governments would have to pay to their lenders would shoot up rapidly, because everyone would be spooked. Government debt would no longer look like the "safe haven" investment it's assumed to be. People would be a lot more skittish about loaning money to governments, and would demand a lot more interest. Skyrocketing interest rates would completely crush stock markets, bond markets, and real economies worldwide. Frankly, I'm not sure Japan could even get away with it; other governments would presumably intervene somehow to avoid a catastrophic global deflation.

Option #2, then: Japan starts printing money to pay its bills. That dilutes the value of existing yen, so the value of yen starts to go down. This often ends in a sudden loss of confidence and Japan could then experience hyperinflation. When Thailand experienced a currency collapse in 1997 it spread to a number of other Asian currencies like an epidemic disease. If one of the world's major fiat currencies implodes, what happens to the others? Aren't all purely paper currencies impugned when one of them utterly falls apart? But if so, then this scenario might end in global hyperinflation; a collapse of all currencies (to varying degrees, but in all cases disastrous). Sure, there might be some little ones that would survive (maybe the Swiss would return to strict gold backing), but such currencies would not be plentiful enough to facilitate global trade as we've come to depend on it.

I certainly hope I'm missing something here. If Japan's situation is "irrecoverable" and if they could drag the rest of the developed world down with them, then it might not matter what Western central banks do from here on out.

My UPS guy on the economy

2009-11-01T22:55:00.005-05:00

[I'm attempting to blog every day for the month of November.]

About a week ago I was signing for a new printer, and my UPS guy asked me out of the blue whether we're stockpiling food. I'd seen this guy several times before, and I figured he'd delivered boxes from Emergency Essentials, Pleasant Hill Grain, BulkFoods.com... that sort of place. So he had a pretty good idea that we have a survivalist bent (although in our case, TEOTWAWKI arises not from nuclear war, Chinese invasion, or fire and brimstone, but currency failure). Mind you, we hadn't gotten any suspiciously survivalist boxes in a long time, and I wondered how long he'd been wanting to ask me this.

So I said yes, and admitted it. He nodded and recommended FoodInsurance.com for freeze-dried food. I recommended EmergencyEssentials.com and explained that our food isn't freeze-dried, it's mostly wheat and rice and dried beans and canned stuff. He said he's also been buying food at the regular old grocery store, stuff like mac and cheese and canned tuna. He explained that his dad lived through the Great Depression and we're headed that way again.

I started to say something about the dollar and he interrupted with "Yeah, they're gonna destroy it unless we can do something about these communists." I told him he could also buy silver, and it turned out he was already doing that. He'd been buying junk silver (old 90% silver dimes, quarters, half-dollars and dollars) because "that's currency, so they can't confiscate that." He was also saving old pennies (before 1982), which are 95% copper.

I mentioned the bankers, and he got on a tear talking about the Matt Taibbi article in Rolling Stone. He and I were mutually amazed that the other one had read it. And shortly thereafter he ran off to his truck, while I stood there realizing that my UPS guy knows more about the current economic situation than most people I know (even if you include the "communists" bit, where in my opinion the better term is "corporatists").

I think it's an excellent idea (if you can manage it) to lay aside food, silver, batteries, blankets, larger sized shoes / boots / coats for growing children, and so on. We don't know exactly what we're facing here, except that it's the end of an empire, and that's never pretty. I hope the idea of taking precautions is spreading.

For my family, this past week's precautionary purchases include two one-liter bottles of lamp oil (we have a very old-fashioned -- in fact, antique -- oil lamp) and two half-gallon jars of raw honey. Honey keeps forever. Oh, and 4 new LED flashlights, which don't eat batteries anywhere near as fast as our old incandescents.

And you?

Gold at record highs

2009-10-06T21:15:00.003-04:00

When I first got onto the computer this morning, it was just when the price of gold was shooting up in a nearly vertical line. As it turned out, it didn't have much farther to go, and was "only" headed to around $1,040 per ounce. But I didn't know what was going on and felt sick, wondering if Israel had bombed Iran or the Chinese had done something. Gold tends to go up in response to political turmoil, war, uncertainties about currency, and so on. It's true that it fell temporarily when the banking crisis hit late last year, because many people had to sell whatever they had that was liquid in order to meet obligations. But compared to other kinds of investments it has done amazingly well since the whole ball of yarn started unraveling in 2007.

Today's gold move was from about $1020 to an all-time record high of almost $1045. The reason for this, some speculate, is that journalist Robert Fisk -- one of my favorite journalists ever, by the way, constantly smeared by other Western journalists because he won't toe the line -- broke the news that a number of countries were meeting in secret to discuss moving away from the US dollar as the only currency in which to trade oil.

You may have heard the term "petrodollar," short for "petroleum-backed dollar." The idea is, since everybody but everybody needs oil, and you can only buy the stuff using dollars, everybody needs dollars. This maintains the dollar's status as reserve currency and it also supports its value by insuring demand.

If oil is routinely sold in anything other than dollars, then nobody has to have dollars anymore.

Most Americans don't have any clue what kind of danger our currency is in. They know about unemployment, bank bailouts, falling wages, store closings. But the idea that everything at China-Mart could double in price in 6 months (to choose a random hypothetical example) is not on their radar.

All of that said, I don't think this is "the big one," the point at which gold skyrockets and the dollar tanks, never to return. I still expect a stocks crash, a short dollar rally, and a major pullback in gold (although this pullback could be less than I'd been thinking, because the Chinese stand ready to buy gold whenever the price gets attractively low).

Silver, by the way, is known as the "poor man's gold," for being so much cheaper. It is currently undervalued relative to gold, meaning that not only are both precious metals expected to rise over the coming years, but silver should rise by even more. I wouldn't buy any silver just yet, because it could go off a cliff again if we have something similar to the fall of 2008. But if the price drops, go out and snatch up whatever silver you can. Sometime in the next few years (and possibly pretty soon) the world's post-WWII dollar system will fail.

Young and restive

2009-10-05T20:42:00.002-04:00

One thing you do not want, if you're a politician, is a whole slew of unemployed, impoverished youth. They don't have a lot to lose, but they do have plenty of energy. Piss them off and you could have a situation on your hands.

With that in mind, this news from the Telegraph seems fairly alarming:

Youth unemployment has reached 39pc in Spain, 31pc in Lithuania, 28pc in Latvia, 26pc in Ireland and Slovakia, 25pc in Italy and Hungary, 24pc in France.
"There's tragedy unfolding here," said Julian Callow, Barclay’s Europe economist. "This is going to haunt the political outlook for years to come. Europe has been in denial about this because youth are not a powerful lobby like the unions, so they can be ignored.

Ignored, but not forever. In cases of massive unrest (as in Argentina) you see every kind of person on the streets, including elderly women banging pots with spoons. But in the early stages of unrest, in which windows are broken and cars torched, it's young people who carry it out. Consider Greece:

Data showed on Thursday nearly 18 percent of 15-29 year old Greek workers were unemployed in the second quarter, compared with 8.9 percent for the whole population and strongly up from last year.

The issue has proven explosive in the past. Last year leftists and young students took to the streets in Greece's worst riots in decades over the economy and the killing of a teenager by police. (source)

In 2005, riots broke out in many French cities and towns after police killed two teenagers. In that instance, racism and immigration played a role, but those issues are very much intertwined with unemployment and poverty. Young people are disproportionately without jobs and in poverty, both in the US and Europe, and young people have less to lose than older adults.

As the Barclay's economist said above, politicians have felt pretty safe ignoring teenagers and twenty-somethings. They don't vote (much) and have no lobbyists. But having this attitude today, as the world slips into economic Depression, is amazingly blithe.

Here in the US, the situation is worse than Spain or similar to Eastern Europe, depending on the color of your skin:

The September teen unemployment rate hit 25.9%, the highest rate since World War II and up from 23.8% in July. Some 330,000 teen jobs have vanished in two months. Hardest hit of all: black male teens, whose unemployment rate shot up to a catastrophic 50.4%. It was merely a terrible 39.2% in July. (source)

Like I said, racism, immigration, poverty, unemployment-- it's all interconnected, and it's a tinderbox. (It would be helpful if police the world over would stop killing unarmed teenagers, which tends to spark violence; but I'm not optimistic.)

Having some sort of mandatory military service (as the White House Chief of Staff wants), or mandatory civil volunteering, or any other sort of "youth brigade" could become a popular idea if we begin to see destructive protests among teenagers and young adults. (One wonders about the color of their uniforms and whether they will have a special salute?) The military poverty draft is already useful to the establishment as a means of neutralizing -- in one way or another -- poor and potentially angry teenagers.

The thing to get into our heads, I suppose, is that the kids we will one day see on television throwing the tear gas canisters back into the police ranks would truly rather be working, making a living and making their way in the world. In some ways the US is better off than Europe in the longer term, because although we don't produce anything now, we could start making stuff. And that will eventually provide more jobs for those who are 17 or 19 today.

Nothing has been fixed

2009-10-03T18:31:00.003-04:00

I listened to a great interview today with one of my favorite financial commentators, Jim Willie. It's about a half hour long, but if you have time to listen, you certainly won't be bored.

The theme of the interview is that "green shoots" are a joke, because we have not fixed anything. We haven't increased US production. We are not, in truth, really trying very hard to halt foreclosures. Nothing has been done about derivatives, many of which are a kind of insurance against rising interest rates. If interest rates do rise, as at some point they must, it will obliterate the major banks (again). The central banks are already talking about how to repair the derivatives nightmare with -- you guessed it -- newly printed bailout money.

The most striking thing Willie said was that he thinks the Fed is buying 60 to 80% of all Treasuries. Holy cow. If that is true, there is no way to avoid Weimar now. It's too late.

No, nothing has been fixed, unless you think printing money is the solution to every problem.

You'd better have food stored.

If you start accumulating things now, picking up extra TP and some canned soup and a bag of dried beans every time you go to the store, or taking advantage of that sale on batteries or the 2-for-1 fleece blankets, you have time enough to gather a good deal together. If you think this is silly, visit some preparedness sites to see what the other end of the spectrum looks like.

But wait, it gets worse

2009-10-02T14:45:00.003-04:00

Economists' estimates of how many jobs we lost in September have ranged from 100,000 jobs lost to 260,000 jobs lost, with a median estimate of 175,000. Pretty bad, especially considering that the working-age population is growing and we would need to add jobs every month just to keep unemployment rates from rising.

This morning the actual number came in at 263,000 jobs lost last month. Worse than the worst of economists' estimates, and a heck of a lot worse than the median prediction. Most likely, this number will be revised in the next month or two and will look even worse still, as that's what usually happens.

Of course, these numbers are the finagled, "adjusted" numbers. The government uses the "birth-death model" (meaning the birth or death of businesses) to change the estimate. Much later, after certain tax data has become available, they can tell us whether their adjustments got us any closer to the truth. Well, the government thinks that from March 2008 to March 2009 we actually lost 824,000 more jobs than their "adjusted" estimates had thought. So you can bet that this 263,000 figure is considerably too rosy, as well.

Karl Denninger has looked at some of the unadjusted data (all emphasis his):

But the Household Data is VASTLY worse than reported. Here are the month-over-month changes, and they're in the realm of frightening. (all numbers in thousands)

Civilian Labor Force: 154,879 to 153,617 this month.

Employed: 140,074 down to 139,079 this month.

That's a loss of 995,000 jobs, not 263,000, and the labor force contracted by 1,262,000 people!

The participation rate was absolutely decimated, down 0.6% this last month alone. The people "not in the labor force" rose by a staggering 1,516,000 in the last month.

The government doesn't count people as "unemployed" who have given up and exited the labor force, but as I have repeatedly noted, whether the government counts them or not, the corner store owner sure as hell does!

The fact of the matter is that nearly 1 million fewer people were working in September as compared to August; there has been absolutely no improvement in that trend whatsoever.

It also turns out that average hours worked per week (among those lucky enough to be employed) fell another tenth of an hour, with a corresponding small decline of $1.54 in average weekly income. It's a tiny decrease per individual, but multiply that by 140 million workers and you get $216 million per week which is no longer available for consumer spending. That income loss does not count the unemployed; that's the income loss per week among those who still have jobs.

To have a real recovery the working and middle classes must have larger incomes, which means we must have higher wages and less unemployment. That means we must produce more. No more "service economy" or "post-industrialist economy" nonsense.

(It's true that there's one other way to become wealthier as a nation, and that's to simply loot and plunder other nations. But I think America's days as an empire are coming to an end, so that's out.)

No other choice but to grow things, mine things, and make things.

Choose your poison

2009-10-01T18:37:00.003-04:00

So here's a bit of math that doesn't look too good.

The US Treasury would like to borrow $138 billion next week. That is, they want to print some IOU's and take people's money and promise to return it with interest.

Recently, the Federal Reserve has been providing almost half of these loans to the US government, using brand new money, invented out of thin air. It's not that the Fed really wants the IOU's, it's that nobody else wants them.

This arrangement with the Fed is known as "quantitative easing" or QE. (A leading Scottish money manager recently said: "Quantitative easing is a phrase which bears the same relationship to ‘printing money’ as ‘terminological inexactitude’ does to ‘lie’.")

Trouble is, QE was not an infinite program. The Fed says it's being wrapped up now and is coming to an end. Only $7 billion more can be spent buying Treasuries this way. And -- not to belabor the obvious -- but $7 billion is a far cry from half of $138 billion.

So what if we can't sell our IOU's for some fast cash? What happens if people look over the Treasuries and say "No thanks," and there's no Fed to ride in and save us?

Well, they wouldn't exactly say "No," they'd say "You look like a shady character, so I'll give you the money, but only if you pay me a heck of a lot of interest to make it worth the risk." So instead of borrowing money at some measly amount like 2%, we get the loan all right, but we have to pay 4%. Or 6%. Or 10%. Who knows, once confidence is lost?

This is Poison #1: Rising Interest Rates. The housing market was just starting to pop its head out of the bunker to see if the smoke had cleared, and here come high interest rates to discourage home sales, make refinancing even less feasible, and crush adjustable-rate mortgage holders. Not good. And the federal budget deficit would balloon even more quickly than it has been.

Alternatively, we could simply revert back to QE again and let the Fed step in and buy debts within a new, emergency round of money-printing. This is Poison #2, and it would be very risky. Words like "Armageddon" are being used (video) to describe what happens if we piss off China and Japan enough that they start refusing to buy our bonds. And they would certainly be pissed. Nobody wants to be paid back in Weimar-like currency, which is to say, kindling. Run the printing press enough, and you're on the path to currency collapse.

Poison #3 has political and economic ramifications, but is the least unpredictable and least chaotic of the options. And it would cause a dollar rally, smash the gold price temporarily, and please our foreign creditors. It's the simplest thing, really-- you just push the stock market off a cliff. Have Goldman hurry it along so it can be out of the way by Oct 7 or 8 when we have to sell some longer-duration IOU's that nobody would otherwise buy. Make stocks plummet (which was inevitable anyway, just a matter of timing), and investors and fund managers panic and race into Treasuries as a "safe haven." Problem solved, for the time being.

Of course, political approval ratings and consumer confidence are heavily dependent on stock markets. Pension funds, 401k's, university endowment funds, and some municipal funds will all suffer. It's not good political policy to enrage the middle class, as it's the middle classes who engender revolutions. But the first two options risk chaos on the international scene. Nobody likes the dollar, but as it is the world's reserve currency and foreigners are in possession of around 2/3 of all dollars in existence, everyone would prefer that it die an orderly death.

So that's how I see the dangers in the next 10 days. (There may be a less awful scenario that I haven't thought of, like working out a back-room deal with EU nations, but I can't envision how that would work.) We could see rising interest rates, or money-printing and a plunging dollar, or a crash in stocks bad enough to cause panic. If you've been reading the blog, you know how I feel about stocks.

[Addendum: Immediately after posting I went to Zero Hedge and saw that Goldman just revised its estimate of job losses from 200,000 jobs gone to 250,000 jobs gone. A bad jobs number, coming on top of today's bad day in stocks and other bad econ data this week, could set off the downturn in equities.]

Headlines from the Real Economy

2009-09-27T19:00:00.012-04:00

US Job Seekers Exceed Openings by Record Ratio

[U]nemployed Americans now confront a job market that is bleaker than ever in the current recession, and employment prospects are still getting worse.

Job seekers now outnumber openings six to one, the worst ratio since the government began tracking open positions in 2000. According to the Labor Department’s latest numbers, from July, only 2.4 million full-time permanent jobs were open, with 14.5 million people officially unemployed.

14.5 million unemployed does not count the long-term unemployed or those who have given up because there are no jobs in their area. The real ratio of unemployed to available jobs might be closer to 10 to 1.

35 Million Americans on Food Stamps

The raw data shows us that a stunning 12 percent of our entire population is receiving some form of food stamp assistance.... This is the highest percentage of Americans receiving food stamps since records started being kept back in 1969.

A Surge in Homeless Children Strains Schools

Charity [Crowell] is one child in a national surge of homeless schoolchildren that is driven by relentless unemployment and foreclosures. The rise, to more than one million students without stable housing by last spring, has tested budget-battered school districts as they try to carry out their responsibilities — and the federal mandate — to salvage education for children whose lives are filled with insecurity and turmoil....
While current national data are not available, the number of schoolchildren in homeless families appears to have risen by 75 percent to 100 percent in many districts over the last two years....
With schools just returning to session, initial reports point to further rises. In San Antonio, for example, the district has enrolled 1,000 homeless students in the first two weeks of school, twice as many as at the same point last year [emphasis mine].

Housing Crash to Resume on 7 Million [New] Foreclosures

The crash in U.S. home prices will probably resume because about 7 million properties that are likely to be seized by lenders have yet to hit the market.....

The "huge shadow inventory," reflecting mortgages already being foreclosed upon or now delinquent and likely to be, compares with 1.27 million in 2005.....

Assuming no other homes are on the market, it would take 1.35 years to sell the properties based on the current pace of existing-home sales....

Meanwhile, in La-La Land, we have headlines like this:

Bernanke: Recession "Likely Over"

Federal Reserve Chairman Ben Bernanke said Tuesday that the recession was "very likely over," as consumers showed some of the first tangible signs of spending again.

These "tangible signs of spending," which apparently prompted Bernanke to pronounce the end of the recession, were based on August retail sales figures. That is, August sales looked better than July sales. Of course, as usual with government statistics, it was all the sheerest nonsense. Let's take a look at this August data:

So we sold more cars. Yeah, no kidding! That was part of a little thing called Cash for Clunkers. (Notice, however, that even with Cash for Clunkers we still sold slightly fewer cars than in August 2008.) And we sold more gasoline too, although notice that compared to August 2008, gas stations sold 27% less (wow!!). And, continuing down the chart, 6 of the next 7 "better than July" categories were also down compared to the same month in 2008.

Econo-bloggers have started to comment on this trend of looking only at month-to-month changes, which sometimes show small improvements, rather than the usual year-over-year changes. Because of simple variability and certain seasonal trends, there's usually some economic statistic somewhere which showed a slight improvement since last month. It's the year-over-year figures that show we've not had any real recovery.

Back to the chart-- the remaining improved category of restaurant and bar sales, which actually was up even on a y-o-y basis, was surely not enough to outweigh the drops in building materials, garden supplies, furniture, and furnishings.

Basically we're hanging our "recession is over!" hats on a measly 0.3% increase in fast food purchases and bar tabs from July to August. Or, to be fair, a 0.7% increase compared to August 2008.

Damn slim data on which to come out publicly and declare the end of the recession. Mr. Bernanke needs to take his egghead out of the ivory tower and go spend a weekend in a place like Gary, Indiana or Flint, Michigan.

[T]here are indications that the severest phase of the recession is over.
-- Harvard Economic Society, January 18, 1930

Overpriced stocks

2009-09-26T13:42:00.005-04:00

One measure of whether stocks are over- or under-valued at current prices is the P/E or price-to-earnings ratio. If a stock costs $10/share, and the company is earning $2/share, then the P/E is 10/2 or 5. This would usually mean that stock is priced pretty cheap. If the ratio is more like 40 then the price would typically be considered too high, based on what the company is earning.

Bearing that in mind, take a look at these hideous graphs (click to enlarge), from a long report titled Economic and Financial System Train Wreck Dead Ahead:

It's not that stock prices have gone up astronomically. The Dow and S&P (which are aggregate price measures) are still far below the highs they reached in 2007. What's happened, of course, is that earnings have plunged precipitously:

Check out the x-axis. This chart goes back 75 years. Nothing even remotely like this has happened since the Great Depression.

So why have stocks kept up these price levels? If earnings are down 98% since the 2007 highs, why are stocks down only around a third? Is this why Congressman Grayson asked the Fed whether they manipulate stock markets?

Stocks have not been rallying because there is any sort of recovery underway. Numbers may tack up or down a little bit, they may vary from one month to the next, they may appear to improve temporarily because of bailouts or foreclosure moratoriums or Cash for Clunkers. But there is no recovery. Eventually stocks will have to "correct" to reflect reality.

Workers running out of unemployment benefits

2009-09-25T20:00:00.000-04:00

Once again I have to thank Zero Hedge for bring this bit of bad news to people's attention:

According to the BLS, the exhaustion rate, or the number of people who have used up their benefits, and will no longer be receiving unemployment checks, has hit an all time high of 52.40% for August.

In other words, over half of those who lose their jobs cannot find a new job before their benefits expire. What they do then is anyone's guess. I suppose they move to tent cities or become hobos (on the railcars that are still moving, that is).

This is a staggering number, and whats worse it was grown in practically a linear fashion with not even a hope of a second (third or fourth) derivative green shoot in sight. In fact, the deterioration in "employability" is accelerating. And yet assorted "pundits" claim the employment picture is improving.

They talk about a "jobless recovery" and the "post-industrialist economy," so the natural next step is the phrase "jobless economy." You'll hear it on CNBC first!

Ghost railcars

2009-09-24T17:41:00.012-04:00

The other day I blogged about "ghost ships" -- empty, unused cargo ships sitting anchored in various parts of the world. Well, there are "ghost railcars" as well, parked in locations around the United States.

The above line of rail cars is 2 miles long and has divided New Castle, Indiana for many months. They used to transport autos, back when this used to be a Chrysler town.

The above is a line of hundreds of railcars in Montana, parked (helpfully) near a popular tourist fishing locale. Has anyone considered what effect a huge iron wall might have on moose, elk, or deer?

The above is in Colorado....

And taking the prize, the above railcars (built to haul lumber) lie in a thirty mile stretch through Oregon's otherwise beautiful wilderness. Quoting from the article where I found this image:

The situation is a snapshot of a national picture. The economic slump has idled about 70,000 Union Pacific railcars, now sidetracked wherever space can be found, said Zoe Richmond, a Union Pacific spokeswoman in Roseville, Calif. The railroad has also furloughed 5,000 of its 48,000 workers. Other railroads are in the same predicament, she said.

Back to back, Union Pacific's idled railcars would reach from Seattle to Albuquerque, N.M.

"We don't have 2,000 miles of track anywhere in our system to put them," Richmond said. "Unfortunately, the stored cars are really just a big visual reminder of our current economic situation."

Uh, yeah. Not too good.

Zero Hedge did a post on how railcar traffic has fallen since 2008. It's fallen so much, in fact, that we've gone all the way back to 1993 railcar volumes.

Specifically, in the first 36 weeks of 2009, we've shipped 22% fewer carloads of grain, 23% fewer carloads of farm products other than grain, and 13% less "food and kindred products" than we did in the same 36 weeks of 2008. Now, I think we shipped a little less grain because we shipped less corn bound for ethanol-fuel plants. And, partly, the temporarily stronger dollar made our exported grain more expensive for other countries, so perhaps we exported less, which meant we shipped less. Even so, these statistics seem to imply that somebody, somewhere, has cut back on the food they're eating.

We've shipped 9% less coal this year. Perhaps that was because it was cool (meaning less AC, so less electricity required). But I tend to think of dark, empty shops and houses when I see that coal shipping has fallen 9%. Energy is the lifeblood of any economy, and our electricity usage has clearly fallen off... so what does that say?

Railcars of lumber were down 37%, and cars of "crushed stone, sand, and gravel" were down 22%. Casualties of the disaster in real estate.

Pulp and paper shipments were down 21%. Fewer operating offices, I presume.

Metals & metal products were down 53% (!!), which has to mean that manufacturing is way off. And I mean way off, not "GDP declined by 1%" or similar bullshit, but way off. Even after considering the steel and iron that did not go into construction, that can't account for a 53% decline. This is a hideous number.

Putting aside the government's lies, damned lies, and statistics, things do not look good. As they say: It's the real economy, stupid.

The economy is a lie

2009-09-23T17:51:00.000-04:00

James Howard Kunstler has called it the "hallucinated economy," but Paul Craig Roberts simply calls it a lie:

Americans cannot get any truth out of their government about anything, the economy included. Americans are being driven into the ground economically, with one million school children now homeless, while Federal Reserve chairman Ben Bernanke announces that the recession is over.

You've heard of a "jobless recovery"? This is the "recoveryless recovery."

The spin that masquerades as news is becoming more delusional. Consumer spending is 70% of the US economy. It is the driving force, and it has been shut down. Except for the super rich, there has been no growth in consumer incomes in the 21st century. Statistician John Williams of shadowstats.com reports that real household income has never recovered its pre-2001 peak.

Instead of using income to make purchases, Americans began relying on home equity, credit cards, and ever-larger student loans. Every kind of debt we had access to, we took on... not that, you know, we could actually pay it back. (I'm not necessarily blaming consumers here, because many of them were told by knowledgeable-sounding suits that these debts were acceptable and nothing to worry about. Nor have most people received any education about finance or economics, which if you ask me, is by design.)

This debt party is now at an end.

As consumers no longer can expand their indebtedness and their incomes are not rising, there is no basis for a growing consumer economy. Indeed, statistics indicate that consumers are paying down debt in their efforts to survive financially. In an economy in which the consumer is the driving force, that is bad news.

Later in this piece (please click through-- it's a great essay) Roberts says that he can't see how unemployment is going to get back below 20+%, because the work has been sent overseas. The problem isn't idled factories, waiting for a pick-up in the general economy (or easier financing) so they can get back to work. The problem is a lack of factories.

Sometimes I'd like to wring the neck of whatever smug economist coined the term "post-industrialist economy." What kind of bozo thinks you can have an economy without producing anything? We might as well talk about the post-food diet.

I doubt that the US could turn to older methods of job creation, such as massive-scale works projects or tariffs and protectionism. We cannot risk further debasing the dollar by taking on massive debts to fund the next Tennessee Valley Authority. Nor can we withdraw from the WTO and piss everyone off with protectionist measures. We're far too dependent on the rest of the world to take our dollars, and to sell us oil in return for dollars.

There's a third way jobs can be created... eventually. But we aren't going to like it. A failing dollar would drive up the cost of imports, forcing us to turn back to domestic production and the rebuilding of a manufacturing sector. If we have the very best of luck, the dollar will lose half its value in an orderly manner. If we have bad luck, the dollar will plunge in value in a disorderly manner until it is worth nothing, leaving utter chaos, riots, and hungry people in its wake. I presume that if the worst happens, the next American currency will be pegged to the gold-backed yuan. Once that's settled, we'll go back to making and growing things again.

It would be nice to avoid the worst of all outcomes (total destruction of the currency), but as everyone in Washington seems to believe their own lies about the economy, I'm not too sanguine.

More warnings on stocks

2009-09-22T15:10:00.003-04:00

Quoting Mish, from a post he put up last week:

[T]he opinion that the market can and will continue to rise is becoming ever more widespread, and ironically the bulls ALL say the same thing, namely "everybody else is bearish".

Mutual fund (MuFu) managers are not bearish, that much is certain. At 4.2%, the the MuFu cash-to-assets ratio is one of the lowest in history, in fact lower than at the 2000 top, and only a hair above the 2007 low. Those stats (from a friend) are from July. Given the continued rally, MuFu cash on hand has probably decreased even more in August.

In other words, the professional money managers -- the "big" money -- long ago went back into the market. They've got so many stocks, the amount of cash on hand is at extremely low levels.

Remember that when the stock market rises, the smart money gets in first, probably very close to the bottom. Soon after, the big money goes in-- and apparently, they were mostly "in" by July. That leaves... the dumb money. Us. We don't get in until we're nearly at the top of the market. If history is any guide, we proles have been buying stocks just in the past few weeks. Just as the "smart" money was fleeing like rats from a sinking ship. And now the market is about to turn, and we proles will get fleeced again. More Mish:

The Dow's dividend yield is now at the level of the the 1968 top and the September 1929 top. Good luck with that!

The dumb money knows none of this, because the mantra in the media is all about green shoots, recovery, the recession is over, we averted disaster, Hallelujah! The goofballs on CNBC will cost many Americans a hefty chunk of their life savings. I don't know how they can sleep at night.

Counterfeiting money to pay our bills

2009-09-20T21:00:00.005-04:00

Zero Hedge is reporting that in Q2 (April, May, & June), about half of the Treasuries we sold to fund our deficit were purchased by the Federal Reserve. That is, about half the money we had to borrow (by selling bonds and promising to return the money later) was loaned to us by the Fed. But the Fed, of course, got this money by simply inventing it. They ran the metaphorical printing press. Quote:

The degree of intermediation [buying] by the Federal Reserve in the issuance of US Treasuries [UST] hit a record in Q2, accounting for just under 50% of all net UST issuance absorption. This is a startling number.... In fact, the Fed was a greater factor in UST demand than all three traditional players combined: Foreigners, Households and Primary Dealers [major US banks]....

Translation: People are tired of buying Treasuries. Many people are done with lending us money, so the Fed has to make up the slack. If they didn't, the US government could not pay its bills. So it's imperative (if we're to preserve the status quo) that the Fed buy up whatever US investors, US banks, and foreigners refuse to buy.

But remember-- the Fed is using brand new money.

The hundreds of billions of new dollars will eventually dilute (erode) the value of the existing dollars. Were we not in a tremendous economic slowdown, we would be seeing rising prices because of the degraded value of the dollar. But because we are in a tremendous slowdown, which would typically mean falling wages and prices, this is masking the erosion of the dollar. To see that the dollar is sinking, we can look at how many dollars are required to buy an ounce of gold or silver, and sure enough, those prices have been rising. But even here, gold and silver prices are suppressed by various methods by major governments and their central banks. They go to great lengths to disguise the depreciation of the dollar.

Back to Zero Hedge:

This dramatic imbalance puts a lot of question marks over how the upcoming hundreds of billions in incremental Treasury purchases will be soaked up, now that QE only has $15 billion of capacity for USTs....

QE is short for Quantitative Easing, a fancy academic term for "the Fed giving newly printed money to the US government." The currently planned QE effort is about to come to an end; only $15 billion more is intended for Treasury purchases. That probably amounts to a week or two. And what then???

...with Households lapping up risky assets it is unlikely they will look at Treasuries absent some dramatic downward move in equities [emphasis mine]....

Newsletter writer Bob Chapman predicted months ago that when the time came, "they" (meaning the Fed, the Plunge Protection Team, Goldman Sachs, etc) would crash the stock markets in order to frighten people back into dollars and Treasuries-- thus giving the dollar one last day in the sun. With the low trading volumes in the stock market, stocks are easier to manipulate these days. A crash would be simple for them to arrange.

That such a plan might be discussed among the financial elites is suggested by the very high levels of "insider selling" -- that is, executives selling their own company stocks. If the amount of selling were only 10 or 20 times more than the amount of insider buying, we might say "Well, they're selling because it's the bad time of year," or "Well, they have too many of their own stocks and they're simply diversifying." But when executives are selling 100 or even 300 times more than they're buying, you'd better think "Uh-oh." These guys are the "smart money." They move first... and they're getting out.

Back to Zero Hedge again:

...while Foreign purchasers... have in fact been aggressively lowering their purchases of Treasuries (from $159 billion in Q1 to $101 billion in Q2, an almost 40% decline in appetite!).

Translation: the foreigners are walking away from the table. They're saying "No thanks, we don't want to loan you any more money. We don't care to bet that you can ever repay us."

One thing is certain: in terms of priorities of the Federal Reserve, keeping the equity [stock] market buoyant is a distant second to ensuring successful auction after auction [of Treasuries] well into 2010. After all there is near $9 trillion in budget deficits that need financing over the next 10 years.

Translation: the Fed cares more about successful Treasury sales -- even if they themselves have to buy up the slack -- than about keeping the stock market healthy. The Fed doesn't really care about stocks, and in fact, it might be damned convenient if stocks suddenly tanked.

I've had no formal training nor on-the-job experience in any of this, so take this with a big grain of salt, but I think this next dollar rally (in response to a stocks crash) will be much shorter-lived than it was in late 2008. American currency is not the only safe haven out there, and the Fed's "QE" or counterfeiting program makes the dollar considerably more shaky. The smart money will use a temporarily strong dollar (and temporarily cheap stocks & commodities) to get the hell out of fiat paper and into real things. They'll sell dollars furiously and buy tangible assets such as gold, silver, mining shares, soybeans, and crude oil. They'll be waiting to pounce on that opportunity. The dollar won't rally for long.

A collapse of confidence

2009-09-17T21:14:00.005-04:00

Jim Sinclair has said that when a currency enters a catastrophic decline (i.e. "hyperinflation"), this is a psychological event. It's a widespread and rather sudden loss of confidence which causes the currency to fail (or be dramatically devalued). The currency held by foreigners comes rushing back into the country, dumped back onto the market as a bad asset. Furthermore, the citizenry becomes desperate to get rid of this rapidly depreciating paper, and commerce temporarily soars as everyone plays "hot potato" with their failing paper, hoping to convert it into anything and everything of real, tangible value. Just as a stock market may crash because of a change in attitudes, so may a currency.

Lately I've been wondering: Does a collapse of confidence in government predict an imminent loss of confidence in the currency?

During the Bush years, many on the left felt that Bush had not won the 2000 election nor the 2004 re-election, but had stolen both. He was an imposter, a usurper. Today, some on the right wing think Obama cannot legally be the President. Set aside, if you would, any thoughts about whether these folks are correct or incorrect. The point is that a goodly part of the population no longer believes our presidents are legally elected (let alone fairly elected, which everyone knows hasn't been the case for decades).

Meanwhile, Congress is approaching record low approval ratings in both parties. A Pew research poll shows that 63% of those polled feel the news media is frequently inaccurate -- up from 53% only 2 years ago. Homeschooling is on the rise as people abandon public schooling, and alternative medicine is also on the rise as people increasingly distrust mainstream medicine. Again-- whatever your personal thoughts about all this, it points to a loss of faith in authorities and institutions. It points to a growth in distrust, suspicion, and cynicism. And I don't say they're wrong, because when you come to the end of an empire, everything pretty much goes to hell in a handbasket, and that's where we are today.

Moreover, I don't think the "incompetence" defense is working anymore. People are more inclined to believe that their representatives are corrupt through and through, that they have never acted in good faith, that they're "in on it," "one of the boys," "taking a cut." They're increasingly willing to believe that a given disaster was "an inside job." And I don't say they're wrong. At the end of an empire, maximal levels of corruption are reached. Power corrupts not only individuals, but societies.

I would assume that this disillusionment spreads from one area of life to another. Americans who feel disillusioned about government, the media, schools, the military, the FDA, and other institutions are Americans who are angry, cynical, and ready to feel they've been cheated. Such Americans will be ready to believe, in the not-too-distant future, that the ultimate swindle is that piece of green cotton in their wallet. That cotton they worked so hard for, but which is now swiftly losing value, robbing them as surely as a thief. They might soon look at their Federal Reserve Notes and recognize that they are worth nothing of real value, that their only real utility is as kindling. They might be quite ready to make the paradigm shift and realize that they are much better off with sacks of sugar and dried beans than with currency. They might realize, in a panic, that they'd better get out all that green cotton from the bank and convert it into canned food and blankets and shovels and seeds.

And I don't say they're wrong.

Dead in the water

2009-09-16T15:18:00.014-04:00

A recent Daily Mail article made a splash with its photographs of a "ghost fleet" of empty, unused cargo ships off the coast of Singapore (please do click on the article and glance at the other amazing photos):

A ghost fleet -- in fact, many ghost fleets anchored in waters all over the world -- are what you get when the global economy tanks and trade slows dramatically.

When I look at that photo I'm reminded of a hideous moment I had just before Christmas a few years ago. I had picked up an ad circular which was advertising a 13-inch-tall, battery-powered, talking Homer Simpson Giant Pez dispenser (you can't make this stuff up). And I suddenly realized that a significant part of both the Chinese and American GDP was based on such totally, utterly, useless crap. Crap I would pay money not to have in my house. (Consider, for instance, the uniformly poor-quality and entirely superfluous junk sold by the Oriental Trading Company -- may they go out of business.)

And there sit the empty ships which used to carry such Pez dispensers and silly straws and amusing plastic eyeglasses. The world has discovered it doesn't need so much pointless junk. The Western middle class simply doesn't have the credit anymore.

The folks at Zero Hedge put up more maps of unchartered / unused ships in various places on the Earth, including this map of some of the most active ports in the US:

The red dots are the unused ships, while the green dots are ships in use. Again, please follow the link and scroll through to see the red dots off the coast of England, China, Dubai, etc.

Meanwhile, the Dow and the S&P were up substantially today, as they have been for 8 of the past 9 business days. Who cares about a collapse in global trade when Bernanke has cheery things to say? Hurrah-- Dow 10K is coming back, baby!!

The "markets" are just a casino now, disconnected from the real world.

The middle class grows poorer

2009-09-13T19:23:00.000-04:00

The US Census Bureau has released its report for 2008, and the data show that median household incomes fell from 2007 to 2008 by almost $2,000 per year. The median household income for last year was $50,303, so 50% of American households made less than that and 50% made more.

This means that middle class families are suffering major losses in income. As far as this statistic goes, it doesn't matter what happens to the poor or the rich. The poor are already squarely in the "below" half, whether they lose a job or not. Similarly, it makes no difference whether a banker does or does not get that fat bonus check, because they were always squarely in the "above" half. The only way this median can fall is if many middle class families are losing income. They're the ones who fall from the "above" half to the "below," so that the median must be set lower.

Middle class families, I should point out, are the ones who do the spending. They're the bulk of the consumers on whom 70% of our economy depends.

Mish has a good post on this with some charts showing income over time. Over the past 10 years (1998 to 2008) median income did not rise. This is the first time we had a "lost decade" in incomes since the Great Depression. After adjusting for inflation and putting everything into 2008 dollars, incomes have increased by about $10,000 per household over the past 40 years.

Only... government estimates of inflation are too low. They say "Oh, sure, we know that a 1968 dollar bought a little more than a 2008 dollar." But in fact, a 1968 dollar bought much more than a 2008 dollar, something the government doesn't admit. They keep pretending that the dollar only lost (say) 2% of its value in a given year, when in fact it lost 4% of its value. If we were being honest about inflation, I'd bet that American household incomes have been unchanged for the past 40 years.

That is, it now takes 2 workers to earn the same income that 1 worker earned 40 years ago, for the majority of the middle class. Why should that be, when technological advances should have increased the productivity of individual workers? Aren't workers typically creating more wealth now than they were 40 years ago?

Well, no, because the workers 40 years ago included a heck of a lot more real producers, such as small farmers and manufacturers. We have a great many jobs today that produce nothing, that involve securitizing mortgages or prescribing useless drugs or designing standardized tests. We don't produce as much real wealth, and we are poorer for it.

If you consider households that are now two-income but would have been one-income 40 years ago, you can see that for a large part of the population we are making half what we made in the late 60's. And on top of that we're in debt up to our eyeballs!

Growing income disparity -- in which the poor get poorer and the rich get richer -- is part of the problem. Incomes have not been flat for the highest income households, but have increased substantially over the past 40 years. For the very wealthiest, the top fraction of a percent, incomes have skyrocketed. Money has been sucked out of the middle class and given to the bankers. This disparity has to be corrected, and if the ultra-rich don't wake up to that fact, it will be brought to their attention when they see the pitchforks glinting in the torchlight.

That said, it's also a simple fact that only production is real wealth. For decades, we've been offshoring production and onshoring debt, and I think that grand experiment is coming to an end.

We must produce more if we hope to regain the wealth we had 40 years ago.

The decline of credit cards

2009-09-09T20:58:00.003-04:00

Considering that our economy is based on consumer spending, yesterday should have been a terrible day in the markets.

Sept. 8 (Bloomberg) -- U.S. consumer credit plunged more than five times as much as forecast in July as banks restricted lending terms and job losses made Americans reluctant to borrow.

Consumer credit fell by a record $21.6 billion, or 10 percent at an annual rate.... Credit dropped by $15.5 billion in June, more than previously estimated. Credit fell for a sixth month, the longest series of declines since 1991. (source)

So, the consensus among financial analysts was too optimistic by a factor of five. Mind you, these are the people telling us that the economy is recovering. Ha!

Let's look at this in graph form, courtesy Karl Denninger (click to enlarge):

Every source of money available to the middle class is drying up. One in five workers are unemployed or underemployed. Hours worked per week have fallen. Wages are falling in real terms. Home equity is gone. 401k's and IRA's may have rallied, but most are still far below what they were last summer or in 2007. What we've got left is consumer credit, and this is disappearing at a 10%-per-year rate. [Edit: I didn't make this clear, but consumer credit also includes auto loans and other loans for big-ticket items.] How fast, then, is consumer spending going to decline over the next 12 months?

It's true that some part of the decline in credit is because those who are still well-off are reluctant to take on debts. A credit card they might have signed up for 2 years ago holds far less appeal today, when people fear for their jobs and just want to save some money away, if they're able. But for many, their credit is being cut off. As Mish and Karl Denninger have put it, those who could borrow refuse to; those who would borrow cannot.

Meanwhile, today's buzz was over a YouTube video titled Debtors Revolt Begins Now, featuring a woman telling Bank of America that because they raised her credit card interest rate to 30% for no reason, she was not paying them another red cent. In the comments at Zero Hedge the sentiment was mostly of the "Brava!" sort. Apparently this is called "radical default" in the industry-- people who simply will not pay, no matter what they are threatened with, even if they still have some ability to pay. Part of the attitude is: the banks don't give credit to those who need it anyway, so what the hell do we care about credit ratings? If we should ever desperately need credit, by definition we'll be denied!

The hotels and car rental outfits better be thinking about what to do when half their would-be clients haven't got credit cards anymore. Maybe in ten years we'll be telling kids how you used to be able to buy things using a little plastic rectangle, even if you couldn't cough up the money till months or years later.

Betting on death

2009-09-08T17:59:00.007-04:00

The other day a friend mentioned to me that Goldman Sachs was thinking of putting together a fund that would go up in value if people began dying earlier. I didn't completely understand this concept, but I have now run across it several more times, and have some thoughts.

The basic idea is this: Suppose an older person has a dire need for cash, and they happen to have a $1 million life insurance policy. A company might come along and offer them $400,000 today in exchange for the policy. This company (or fund) would continue to make the monthly payments, and upon the person's death the fund would collect the entire payout. If the person keels over almost immediately, the fund would have made $600,000. If they live a long time, the fund may end up losing money because the monthly payments add up to more than their profit at the time of the person's death.

Now, if you know how insurance works you can spot the flaw in this idea. The insurance company, naturally, has worked this all out so that they are likely to make a small profit. Otherwise, this insurance company would not be in business, right? So they've done all the math and worked out all the probabilities so that -- in all likelihood -- they will take in more money from the monthly payments than they'll pay out at the time of death. If you don't take in more money than you're paying out, then you don't have a business.

Now, as an individual who's buying life insurance, you don't really care that you might wind up paying out more money, over a long period of time, than your family would ever receive. What you are actually purchasing, in a given month, is peace of mind. You're paying the bill in order to protect your family. Nobody wants to get gouged, but it's the nature of the insurance business that they're probably going to make a profit from you.

Okay, fine. But why in the hell would a disinterested third party want to assume those monthly payments, knowing that these payments will -- probabilistically speaking -- be more than the eventual return?

This is what certain Germans should be asking themselves. The German newspaper Spiegel recently ran the article Investing in Death: Betting on US Life Expectancy Proves Risky:

Deutsche Bank and other financial institutions manage complex funds that buy up Americans' life insurance policies and pay their premiums in return for their payouts. But angry German investors are finding that Americans aren't dying as quickly as expected -- and that only the bankers are making a buck....

The "db Kompass Life" fund buys up life insurance policies of Americans and assumes responsibility for paying their future premiums. When a policyholder dies, the entire payout from the policy goes to the fund. And since everybody dies, it would seem to be a fairly crisis-proof investment.

Actually, it would seem to be not so much crisis-proof as profit-proof, at least during normal times. The only way such a fund would make money is if people started dying, en masse, earlier than predicted. Such a fund would only soar during pandemic, massive warfare, or an economic catastrophe dire enough to kill thousands from cold, heat, and hunger. Meanwhile, a new category of cancer drugs or a new heart medication could cause the fund to tank.

(These funds, by the way, will cause life insurance premiums to rise for everyone. This is because people often cancel a life insurance policy once their kids are grown or the house is paid off or whatever. But once a policy has been bought by a fund, it will not be canceled. The cancellations are a financial boon to the insurance industry, since it never has to make a payout. Without those helpful cancellations, higher premiums will have to be charged in order to make up the difference.)

Wall Street makes a ton of money just packaging things and charging fees and commissions, which is risk-free. They made a slew of money off bundling up risky mortgages and passing them off to the big money and the dumb money. And they'll make huge profits bundling up life insurance policies and securitizing those, too. As reported in the New York Times:

Undeterred, Wall Street is racing ahead for a simple reason: With $26 trillion of life insurance policies in force in the United States, the market could be huge....

But even if a small fraction of policy holders do sell them, some in the industry predict the market could reach $500 billion. That would help Wall Street offset the loss of revenue from the collapse of the United States residential mortgage securities market, to $169 billion so far this year from a peak of $941 billion in 2005, according to Dealogic, a firm that tracks financial data.

The key thing to understand here is that Wall Street doesn't have to fleece the sheep itself. It's more like Wall Street collects a finder's fee for delivering sheep to the shearer; the finder's fee is otherwise known as "fees and commissions." They earn a steady income just by creatively shuffling paper, right up until their Next Big Idea blows up and leaves pension plans, 401k's, and European banks in smithereens. Wall Street's problem, at the moment, is that they're in dire need of a new way to shuffle paper.

Our old friends at Goldman Sachs have gone one better than merely packaging "life funds" (how's that for Orwellian?). Goldman has created a way to gamble on US life expectancies, without the gambler even having to join one of these funds:

Goldman Sachs has developed a tradable index of life settlements, enabling investors to bet on whether people will live longer than expected or die sooner than planned. The index is similar to tradable stock market indices that allow investors to bet on the overall direction of the market without buying stocks.

Boy, that should be an interesting thing to watch. Considering the insider trading that went on just before 9/11, the Goldman Death Index could foretell a very nasty event. Some big player might get wind of a widespread, mutated H1N1 in China and go long the Death Index before the news hits the Western press, which we would see as an inexplicable price spike. Or someone might know about a terrorist event about to occur in a major city, and might buy a slew of call options on the Death Index. As my friend pointed out, a speculator could take a "pro-Reaper" position or short the Reaper. Major pro-Reaper moves would signal something very bad coming down the pike.

I'll leave you with an excerpt from Wall Street Vultures Betting on Death:

The rating agency involved in the ” early death investments,” DBRS, employs a “mathematics whiz” who has created computer models to manage the risk of investing in life-insurance securitizations. The risk being, of course, people living longer than expected.

The math whiz, Jan Buckler, also has a PH.D. in nuclear engineering and she has devised a scheme of packaging the bond instruments based on the type of disease to lower the risk. She recommends bundling policies with a mix of certain diseases such as leukemia, lung cancer, heart disease, breast cancer, diabetes and Alzheimer’s. The theory is, if too many people with breast cancer are in the securitization bundle and a cure is developed, the value of the bond would drop.

Wall Street is betting against a cure for cancer.

Sarah Palin was looking for her death panels in the wrong place.

The Other America

2009-09-07T15:42:00.014-04:00

A couple of years ago I was listening to a podcast with Max and Stacy, and she mentioned that a friend had recently gone to the States as a tourist. This friend had intended to start in New York City (I think it was NYC) and travel down the entire East Coast. She only made it as far as -- if I remember rightly -- Virginia, then caught a plane back to Europe because she was so horrified at the poverty. That tale has always stuck in my mind... say, when I'm driving past a tiny rural home with junk in the yard and a sheet tacked over the window.

If you haven't heard of photographer Harvey Finkle, he does some excellent photo journalism on the subject of homelessness, poverty, and advocacy for the poor. The photos in this post are from his gallery on child poverty.

While current national data are not available, the number of schoolchildren in homeless families appears to have risen by 75 percent to 100 percent in many districts over the last two years, according to Barbara Duffield, policy director of the National Association for the Education of Homeless Children and Youth, an advocacy group.
There were 679,000 homeless students reported in 2006-7, a total that surpassed one million by last spring, Ms. Duffield said.
With schools just returning to session, initial reports point to further rises. In San Antonio, for example, the district has enrolled 1,000 homeless students in the first two weeks of school, twice as many as at the same point last year. (source)

So, maybe 2 million homeless students this year. The last time we went to the library, one of the books my daughter checked out was called "How to Steal a Dog." The protagonist is a girl whose family is living out of their car (she wants to steal a dog to return it for the reward money). I guess this is becoming a mainstream reality.

The number of working Americans turning to free government food stamps has surged as their hours and wages erode, in a stark sign that the recession is inflicting pain on the employed as well as the newly jobless.
While the increase in take-up is often attributed to the sharp rise in unemployment... the Financial Times has learnt that some 40 per cent of the families now on food stamps have “earned income”, up from 25 per cent two years ago.
The agriculture department, which runs the programme, attributes this rise to workers having their hours cut back.
“I’m sort of stunned, it seems like a dire warning . . . that even the jobs people are retaining in this recession aren’t at the wage level and hours level that they need to provide for their families,” said Heidi Shierholz, economist at the Economic Policy Institute. (source)

Jobs and wages must increase or there is no economic recovery. Furthermore, those jobs must come from extraction (things like mining, fishing, and forestry) and from production (manufacturing, textiles, refineries, new infrastructure). Put another way: the recovery must come from well-paid blue collar work. A "jobless" recovery is no recovery at all, but merely a sick joke told by the media.

The poverty rate among older Americans could be nearly twice as high as the traditional 10 percent level, according to a revision of a half-century-old formula for calculating medical costs and geographic variations in the cost of living.
The National Academy of Science's formula, which is gaining credibility with public officials including some in the Obama administration, would put the poverty rate for Americans 65 and over at 18.6 percent, or 6.8 million people....
The overall official poverty rate would increase... to 15.3 percent, for a total of 45.7 million people [emphasis mine], according to rough calculations by the Census Bureau.
(source)

In other words, the real number of poor people in the US is approaching 1 in 6.

The National Alliance to End Homelessness (NAEH) estimates that this recession will create 1.5 million new homeless – nearly double the current number. Half of those people will exist outside the shelter system – in cars, tents, campers, or sleeping bags under highway overpasses....

The rise in long-term tenting and camping is a sign that people’s options are running out, says Nan Roman, president of NAEH. (source)

I think these people are invisible to most of those in charge. In their meetings about interest rates and banking liquidity and GDP and SDR's, nobody is talking, say, jobs projects to build rudimentary cottages in areas with high numbers of homeless families. Nobody is talking about the re-opening of textile mills and foundries. Sure, we'll use stimulus money to re-pave some roads, but where do the new blue collar jobs come from? And how do we make sure they are well-paid jobs when workers get slave wages in so much of the world? The only thing I can think of is so taboo, one dare not whisper it in mixed company: tariffs and protectionism.

The pretense of honesty

2009-09-06T19:02:00.005-04:00

I had mentioned that the government tells lies about the unemployment rate, "adjusting" the numbers according to this theory or that theory. Mish quotes from an article that addresses some of these jobs numbers [all emphasis is mine]:

What was really key were the details of the Household Survey, which provide a rather alarming picture of what is happening in the labour market.

First, employment in this survey showed a plunge of 392,000, but that number was flattered by a surge in self-employment (whether these newly minted consultants were making any money is another story) as wage & salary workers (the ones that work at companies, big and small) plunged 637,000 — the largest decline since March (when the stock market was testing its lows for the cycle).

Right, so they call people up and they say "Well, I'm self-employed... I'm setting up my own consulting business." And maybe their income from that business, for this month, was negative $500. Doesn't matter. They still count as employed.

As an aside, the Bureau of Labor Statistics also publishes a number from the Household survey that is comparable to the nonfarm survey (dubbed the population and payroll-adjusted Household number), and on this basis, employment sank — brace yourself — by over 1 million, which is unprecedented. We shall see if the nattering nabobs of positivity discuss that particular statistic in their post-payroll assessments; we are not exactly holding our breath.

Wow-- a million jobs lost last month. Seems like that would make the news, no?

In the Dmitry Orlov presentation called Closing the Collapse Gap, in which he talks about the fall of the USSR and its similarity to the coming denouement of the US, he says that the Soviet collapse was harder to predict because of government secrecy. Well, I'm not so sure about that. Everyone acknowledged that the Soviets, having a command economy and an opaque, secretive government, would be dishonest about their fiscal situation. The US government pretends to be transparent, but they sure do play with the numbers. Some of the people watching CNBC don't seem to understand that this is cheerleading and lies, or that the jawboning coming from the Fed and Treasury are more of the same. Most people probably don't believe that the Fed has found ways to buy our own Treasuries without admitting to it (first using Cayman Islands accounts, and then using "swap accounts" or "swaps" with other central banks-- I can't claim to understand all the details). Which is more dangerous-- flat out stonewalling, or the illusion of honesty and transparency while they're lying through their teeth?

All news media outlets reported August job losses of ~~298,000~~ 216,000, the official number the government likes to use. [Edit: 298,000 was the ADP estimate.] Meanwhile other estimates put the real figure at over 1 million, but few news articles, if any, will mention such a horrifying figure. I think green shoots might prove worse for the average person in the US than secrecy. Secrecy makes citizens suspicious, and rightly so; green shoots give them the warm fuzzies. As it grows harder to maintain confidence in the US dollar, in US stocks, and in Treasuries, the incentive for government to lie becomes stronger and stronger. Before it's all over they might be making up numbers out of whole cloth, yet some folks will still believe they are honest.

So I think Mr. Orlov might be wrong; it might be harder to predict the timing of the demise of the United States.

By the pricking in my thumbs

2009-09-05T16:36:00.000-04:00

This summer felt like a waiting period, a hiatus during which everything slowly got a little worse but nothing major happened. Now, however, it's September, and things feel foreboding.

I'm hearing rumors again about banks and hedge funds that are in trouble (Morgan Stanley, Wells Fargo, and Cerberus). This reminds me of last fall, when a slew of banks were teetering. Sub-prime may be old news, but the commercial real estate implosion is just getting going. Mish writes that 1 in 6 construction loans is in trouble.

Unemployment is still ticking up. Officially it's 9.7%, except that doesn't include the long-term unemployed or those who need full-time work but can only find part-time jobs. Including those folks the unemployment rate is 16.8%, but even this is seen as a low-ball estimate because the government plays with the numbers and makes a lot of ridiculous assumptions. Economist John Williams has the real unemployment rate at 21.1%.

Meanwhile, in at least 18 states the money has run out for unemployment benefits, and they are borrowing from the federal government to make payments. California pays out $80 million per day to the unemployed. As Ilargi writes in States of Shock:

At state level, a mountain of trouble is brewing in America....

There are lots of political fights ongoing.... In some cases, parties are rolling over the floor for budget cuts of 2-3-4 percentage points. Whoever is involved in any of those fights is up for a rude sunrise, since in many cases, tax revenues are already off by 10-20%. I haven't seen one state that doesn't admit to at least a few hundred million in budget deficits, with losses predicted to grow rapidly in years to come....

There is no doubt that all states, with perhaps 1 or 2 exceptions, will go into the next fiscal year with a budget that is far too optimistic. This is how politics works. Whatever can be made tomorrow's problem will be. And tomorrow's problems are set to be huge....

We are about to see a huge increase in the issuance of state bonds and other forms of borrowing. Kicking all your cans down all the roads that you can find. Many states are in the process of opening some kind of gambling den or another.

And then down the line will come the tax increases, stealthily at first, more openly later. But raising taxes on a population that is getting poorer fast is a stillborn idea, especially at the lower levels of government, where people know where you live.

To understand the underlying justification for budget cuts that are way too meagre, for not properly tackling problems and for issuing even more debt, you only need to look at the White House and its message of recovery and 3.5%-4% economic growth right around the corner. That message undermines the need for more unpopular measures at the state level, even as revenues are falling much faster than that.

On another note, as I've written about recently, the stock market looks set to have another major fall in the next month or two, which will cause further havoc with pension plans, university endowment funds, and 401k's. Insider buying & selling activity (e.g. if the CEO of a company wants to sell some of his stock in that company) must be reported to the authorities. For most of August the insiders were selling 31 times more than they were buying. In the last week in August this shot up to 62 times. For every $10 worth of stocks they purchased, they sold $620. This is important because major market moves happen in three steps:

The smart money buys (sells).
The big money buys (sells).
The dumb money buys (sells).

The dumb money is the public. We're just here to buy at the top, sell at the bottom, and generally get fleeced by the big boys.

Currently, the "smart" money (insiders) and some of the "big" money (funds, money managers) are getting out. When stock prices are going up it's usually on slow, low-volume days. When they go down, though, they go down on busy, high-volume days. This is indicative of the big guys starting their exodus.

I do think the dollar will be okay for the next little while, because most people don't know about gold and silver, and when stocks fall and they panic, they run straight back into Treasuries and dollars in the bank. That makes dollars and Treasuries in hot demand and supports their value. But somewhere out there, and quite possibly just a few months away, we could see one of these "black swan" events and the dollar could tank. Most dollars in existence are not in the United States. Once the rest of the world decides they don't want our dollars, there is nothing the Fed or the government can do to keep the dollar from losing much of its value.

I increasingly find that people are very cynical and tired of the government / Goldman manipulation of markets, commodities, and currencies. People still trade in the markets, but it's partly based on their understanding of what the government / Goldman gang will do, e.g. "They always shove stocks up starting at 3:30 on Fridays" or "They always smash gold when the market opens in New York." Wall Street is becoming a bit of a joke. Too much more corruption and our foreign friends will pack up and go home, taking their investment money with them.

Should be an interesting fall.

Wages must increase

2009-09-03T16:30:00.001-04:00

I was over at Karl Denninger's Market Ticker yesterday, and saw this amazing graph:

This graph shows the growth in the US population since 1970 (about a 50% rise), as well as the growth in consumer credit (close to a 20-fold increase). As Denninger points out, this doesn't even include mortgage debt. Or corporate debt. Or government debt.

Why this gigantic increase in debt?

In real terms, if you properly adjust for inflation, wages have been falling during the entirety of the above graph. Note that government statistics about inflation, particularly after about 1980, are lies. The government understates inflation in order to reduce Social Security payments, which increase along with inflation.

The American standard of living doesn't seem to have fallen much, though. Particularly not if you watch a lot of TV, where fictional characters are mostly wealthy and the mainstream news pretends that everyone is upper middle class at minimum. But even here in the real world, considering that wages have been falling for 40 years, it's amazing that we've kept this standard of living. (Again, I'm saying they're falling in real terms, in terms of what you could actually buy with your paycheck.)

Partly this is explained by the prevalence of two-income households, which are now usual. But clearly, much of the gap left by falling wages has been made up by credit cards, home equity loans, student loans, and so on.

However, that credit is now drying up and going away. Home equity lines have been canceled, credit card limits have been slashed. And yet 70% of the economy is based on consumer spending, so if you take away Americans' credit cards, their reduced spending also reduces the whole GDP.

Meanwhile, income disparity has been rising. We all know about the bonuses given to bankers who are complete failures, bankers making many hundreds of times what the bottom quartile of Americans earns.

The solution here really ought to be obvious: wages must rise. That hasn't happened, perhaps, because of globalization, but thankfully that is now coming to an end. Protectionism, tariffs, wars, and expensive crude oil will spell doom for the globalized economy. As this happens, workers need to demand better wages. It's not selfishness-- it's what's needed to restore some semblance of an economy.

The Mogambo Guru on derivatives

2009-09-02T11:31:00.002-04:00

If you're not familiar with The Mogambo, he's quite funny and his column makes reading the economic news a bit easier. Here he is talking about "derivatives" -- essentially, a bunch of bets that banks have placed with each other, and which will eventually raze large parts of the financial world:

And when combined with all the other hundreds of trillions of dollars in other derivatives around the world, we are talking about more than a quadrillion dollars in various bets and hedges, a figure that I figure must be more than the total value of everything in the whole world because even $1 quadrillion comes out to, for each of the Earth’s six billion inhabitants, $166,667 each! Gaaahhh!

The worst part is that the real, in-your-face nominal total of global derivatives may actually be several quadrillion, or even the hundreds of quadrillions of dollars, as has been previously estimated, I forget where, but you can trust me on this one because you don’t forget a thing like learning of a $225 quadrillion estimate for total global derivatives outstanding, which is 4,500 times as large as the world’s $50 trillion GDP, which is so bizarre that I can hardly imagine it, and have drunk many, many shots of various alcoholic beverages trying to get to the “zone” where I can even vaguely comprehend such a figure, which seems to be that narrow “window of opportunity” right before I pass out after raising my head up off the floor and loudly declaring “$166,667? Sure! Why not?”

A lot of these derivatives cancel out-- JP Morgan Chase owes a billion to Goldman Sachs, but Goldman owes a billion to Chase on some other contract, so it comes out even. But we don't know who's got what. Nobody really knows which banks might be left standing and which will be mere smoldering ruins, once these contracts start getting triggered. Certain banks will never be allowed to go under, and the Fed will print new money to give to them to plug the holes in their balance sheets, even if it means decimating the dollar.

The fact that gold has no counter-party risk will be a big part of its appeal, in the not-distant future.

Fed says no worries about inflation

2009-08-31T20:28:00.004-04:00

As you may know, the Fed has created brand-new dollars out of thin air which it has used to loan the US government money. That is, we've been paying our national bills using dollars still wet with ink (figuratively speaking). Dollars straight off the metaphorical printing press. You might even call them counterfeit dollars.

Countries which engage in this generally devalue or destroy their currencies. But the Fed assures us it's okay:

Fears of inflation because of the Federal Reserve’s massive quantitative easing measures are overblown, because the Fed has the ability to pull the liquidity out of the market fast enough to prevent price rises, William Dudley, New York Fed president, told CNBC Monday....

Many analysts have warned the measures carry a high risk of inflation....

“My view is that we have tools to manage our balance sheet so that we’ll not have an inflation outcome,” Dudley told CNBC. “We’re far along in terms of having the interest on excess reserves and, just in case, developing other means of pulling out the excess reserves.”

I'm reminded of Fiat Money Inflation in France (pdf of text here), in which the author discusses the precautions and the care with which the French politicians first engaged in money printing. These men were not idiots, and they believed they had built in mechanisms that would prevent the newly printed money from being inflationary. Just like Mr. Dudley of the New York Fed.

It would be a great mistake to suppose that the statesmen of France, or the French people, were ignorant of the dangers in issuing irredeemable paper money; No matter how skillfully the bright side of such a currency was exhibited, all thoughtful men in France remembered its dark side. They knew too well, from that ruinous experience, seventy years before, in John Law's time, the difficulties and dangers of a currency not well based and controlled. They had then learned how easy it is to issue it; how difficult it is to check its overissue….

It was no mere attempt at theatrical display, but a natural impulse, which led a thoughtful statesman, during the debate, to hold up a piece of that old paper money and to declare that it was stained with the blood and tears of their fathers....

Whatever may have been the character of the men who legislated for France afterward, no thoughtful student of history can deny... that few more keen-sighted legislative bodies have ever met than this first French Constitutional Assembly.

Or, in short, "the best laid plans of mice and men...."

Congressional ignorance

2009-08-29T19:10:00.005-04:00

Based on this listing of the educational background of each member of Congress, out of 535 members, there are 14 who have a degree in economics. In this category I'm including such degrees as a BS in "Food and Resource Economics" and a BA in "Agri-economics." There are an additional 16 members with an MBA and perhaps 25 or 30 with a bachelor's degree in business, accounting, or similar. Note that bachelor's degree information is missing for a number of members of Congress.

So, a rough estimate is that about 10% of Congress has had formal training in some aspect of money management or theories about money. However, most of the money-related education was focused on the nuts and bolts of business management or accounting. Only 2 members of Congress have master's degrees in economics, and none has a PhD in that field. (I don't mean to suggest that a degree is required for understanding, however; the two members of Congress with the best understanding of economics would seem to be Ron Paul and Dennis Kucinich, and neither has a degree related to money. But this gives us some indication.)

Money, as they say, makes the world go 'round. If you want to get to the bottom of something, you "follow the money," don't you? Wars are caused by economic factors, though that isn't quite how they tell the story in high school history class. Empires rise and fall because of economics. Domestically, the standard of living of constituents, and to a large degree their overall quality of life, is dependent on the economy in their district. Voters pay more attention to the economy than perhaps any other factor. As Clinton (re)discovered, "It's the economy, stupid."

In short, it's important for the people running a country to understand money, but almost none of our leaders have that knowledge. I don't think the Washington cocktail party crowd knows that the GDP numbers are bullshit, the job loss numbers are rosy-colored, or that inflation has been routinely understated for a couple of decades. It's safe to presume that most of them don't understand bear-market rallies, or why derivatives are a looming problem, or that the existence of the FDIC does not make everything hunky-dory in bank-land. They're smoking their own green shoots because they simply don't know any better. (And hey, Paul Krugman says that everything will be just fine! And he has a PhD so he must be right!)

We all know that Wall Street gives enormous campaign contributions to members of Congress, and that Washington is crawling with lobbyists, and that (more to the point) no legislator ever reads the bill they are voting on. But even if a member of Congress were trying in earnest to do their level best for the American people, they wouldn't be able to ask the right questions on the subject of finance. Someone should show up to a town meeting and ask their member of Congress: "How will confidence in the dollar be affected if the CFTC limits futures positions in gold?" Unless you were talking to Ron Paul you'd get the big, blank stare. And yet, a change in regulations by the CFTC could derail the gold price suppression scheme, thus impugning all fiat currencies as the price of gold rises swiftly, thus accelerating Chinese purchases of tangible, non-dollar assets, thus eroding purchases of Treasuries, thus devaluing the US dollar and making most things we buy much more expensive. It's rather important, yet 99% of Congress can't assess such issues because economics & finance are not their specialty.

Actually, stating that finance & economics are "not their specialty" is a bit charitable. As I wrote about yesterday, many politicians seem to lack basic common sense as applied to economics. Mandating artificially low prices in order to combat a shortage is just plain asinine. Giving $24 trillion to banks when you cannot pay your bills is also plainly idiotic. Nor does anyone in Congress seem to be alarmed that 4 out of 5 workers are in the "service" sector, or that we are having to buy our own Treasuries because there aren't enough takers, or that we are in the hole for somewhere between $70 and $100 trillion if you include future promises (as corporations must do, by law). These things are not sustainable; something has to give.

It's too bad that we cannot look to Congress (or Obama) for good ideas about how we get through this. I think we'd better assume, like the people of New Orleans after Katrina, that we're on our own.

Price control idiocy

2009-08-28T22:35:00.004-04:00

As you may be aware, in recent weeks the Massachusetts legislature has completely lost its mind and has passed frothing-at-the-mouth regulations regarding pandemic flu. Aside from violating several parts of the Bill of Rights, the flu legislation also includes this gem:

The attorney general, in consultation with the office of consumer affairs and business regulation, and upon the declaration by the governor that a supply emergency exists, shall take appropriate action to ensure that no person shall sell a product or service that is at a price that unreasonably exceeds the price charged before the emergency.

In other words, if there is a lack of supply of (say) Tylenol, the Massachusetts government should make sure that Tylenol stays really cheap. Yeah, that oughtta solve the problem.

How exactly do these people get elected? Is it like a high school popularity contest? Because apparently they don't actually have to know anything to get the job.

If you have a shortage of something, you ration it. How hard is that to understand?

What they're proposing is to insist that critical items be sold at a low price (relative to demand). Well, if something is priced low, don't more people buy it? Wouldn't the shortage grow worse? Wouldn't rationing be a far more effective way of insuring that key items are available to the public?

Reasons to leave the market

2009-08-27T21:38:00.004-04:00

If you own any stocks, you might be feeling good about all the happy-happy talk regarding the economy and the ostensible "recovery." You might have made up for at least some of your earlier losses, and you might not be feeling as bad about the Dow and the S&P.

I'm not so optimistic. In fact, I am very pessimistic verging on horrified. Here are some reasons why:

Low Volume

Share prices may be up, but that's based on very little buying and selling. Many are staying on the sidelines. True "bull market" rallies should have good trading volumes.

Insider Selling

When the big executives at corporations sell their stock, they are required to file reports about this, to prevent illegal / manipulative insider trading. The vast majority of those filing such reports -- almost 95% -- are selling, not buying.

Bad Time of Year

September and October are historically bad months for stocks.

Irrational Rally

In my opinion this "bear market rally" started out as manipulation (using TARP funds or similar, as channeled through Wall Street, with the help of the Plunge Protection Team) and eventually sucked in enough investors to take on a life of its own. It's never been based on fundamentals. How is an economy based on consumer spending supposed to grow and prosper, when 1 in 5 workers are unemployed or underemployed? Riddle me that, Paul Krugman.

1930

There was a massive rally after the 1929 stocks crash, which lasted well into 1930. It was accompanied by happy-happy talk from the Treasury Secretary, the President, economists, bankers, and captains of industry. The glad old days were here again-- until they weren't, and stocks crashed to below their 1929 nadir.

Trailing P/E Ratio

The "P" is the price of a share of stock in a company. The "E" is how much that company earned per share (total earnings divided by number of shares of stock). So in other words, if you pay $30 for a stock and it earns $2 per share, the P/E or price-to-earnings ratio is 15. That's about average, historically. Back in 1999 at the height of the dot-com bubble, the average P/E for the whole S&P 500 reached an all-time high of about 44. And today? Today it's 144. Talk about overvalued.

Elliott Wave Analysis

There's a school of "technical analysis" (chart-reading) which is fairly well respected, and which is predicting extremely dire times ahead for the stock market, sometime in the next few months. It's beyond me to evaluate the track record of the Elliott Wave school, I can only say they're quite popular. When I say "dire" I mean -- depending on the analyst -- predictions of up to a 90% fall in stock prices. I.e. total catastrophe, and the end of 401k plans.

Funny Business

I've been hanging out and reading lots of comments over at Zero Hedge, where many of the commenters are quite expert in the financial markets. The general consensus is: Everything Is Broken. Nothing is correlating like it's supposed to, manipulation is rampant, "portfolio theory" and "hedging" are dead because nothing is working the way it usually does, and many totally ridiculous moves in stocks and commodities are occurring daily. In short, anyone not plugged into the inside circle, that little cabal of Treasury / Fed / Goldman men, is just a pathetic sheep to the slaughter. I provide an illustrative comment, though it may sound like gibberish to some of you:

I'm so fucking bored of this market - without sophisticated heat mapping metrics and explosive liquidity detection behind the bid it is a waste of time trying to trade this market with a balanced risk profile. Forget Alpha, Beta, Delta, Gamma Vega, Rho, Theta - Hedged caution long/short or call/put portfolios are useless - no correlations in anything- THIN VOLUME spiking the fucking FOREX MARKETS!! I have been out on the sidelines for months and no no rational risk prioritising strategy has even worked in theory for longer than a session or so. WHAT A JOKE THIS MARKET IS!!

Truly truly truly flip a coin and save your self the time spent researching and theorizing

Well, hey, that sounds like a healthy situation. Everything they learned in finance school is out the window. You think you can do better than these guys?

Get out, if you can get out... in my humble opinion. Unfortunately I cannot claim Treasuries are a great alternative, as the dollar could be toast within months, so if your money is in a 401k you may be screwed. (If you own a 401k and you are not irate, you are not educated about said 401k, my friend. They are a scam.)

Hold your breath, we're going down again....

Price controls

2009-08-25T19:41:00.007-04:00

At some point in the not-too-distant future, when prices begin rising because the value of the dollar is dropping, we can expect the government to try using price controls. As Henry Hazlitt says in Economics in One Lesson, in the chapter on government price-fixing:

When the government tries to fix maximum prices for only a few items, it usually chooses certain basic necessities, on the ground that it is most essential that the poor be able to obtain these at a “reasonable” cost. Let us say that the items chosen for this purpose are bread, milk and meat.

The argument for holding down the price of these goods will run something like this: If we leave beef (let us say) to the mercies of the free market, the price will be pushed up by competitive bidding so that only the rich will get it. People will get beef not in proportion to their need, but only in proportion to their purchasing power. If we keep the price down, everyone will get his fair share.

In practice what happens is exactly the opposite, as shortages develop and these important goods begin to disappear. Eventually, the majority of people don't get their fair share. There are two reasons for the shortage:

First, the chosen items are a great deal, and are cheaper than the non-price-controlled foods. So, instead of fish one buys beef; instead of potatoes one buys bread; instead of orange juice one buys milk. Demand for the artificially cheap goods surges.

At the same time, the second factor comes into play: the low prices cut into the profits of producers of these items. Some producers (say, a small organic dairy farm) can't make it at all, and go bankrupt. Others may shift production away from the low-profit items, say by using milk to make butter and yogurt rather than simply selling it as milk. Large, diversified food producers may give up on the low-profit, artificially cheap foods, and rely on their other products to get by. Any way you slice it, supply of the price-controlled items drops.

It's not hard to imagine what happens when demand rises but supply drops. We run out of those items, is what happens.

Three other consequences of the price controls are

reduced quality (as businesses try to maintain profits)
unfair distribution of these goods, as retailers favor some customers over others
black markets

The next thing a government would usually try is rationing. If the supply of the item in question -- say, milk -- is still reasonably sufficient, then by some sort of coupon system each family can be guaranteed a weekly allotment of milk. The problem of reduced quality is not solved, and the problem of black markets is hugely increased.

On the black market, the price of a good may be very high, so much so that the poor cannot turn to this source of goods, though the rich can. At this point we've come full circle. The whole intention of the price controls was to insure that everyone would have ample access to these staple goods. Yet now the poor are banned from getting more than X amount per week (if they can even find that!), while the wealthy can turn to the black market. You may think that the upper middle class is unlikely to break the law. But history shows that the "black market" in fact becomes very mainstream during periods of government price fixing. Sometimes the legitimate, legal market virtually ceases to exist, and almost everyone who can afford it uses the black market. At that point the poor have almost no access to these goods, which is particularly unfortunate because these are usually important items like milk, gas, bread, or butter.

Although there is a long history of failed government attempts to control prices, politicians don't seem to be able to resist such controls. The public generally doesn't know enough about economics to understand why prices are rising (i.e. because the currency is losing value). In periods of rapid inflation there is usually anger at retailers or producers, and many accusations of "price gouging" and greed. It's easy for legislators to boost poll numbers by mandating a maximum price for key goods.

This happens despite an extremely clear and consistent record suggesting that price controls never come to any good. Consider The Economic Fallacy of Price Controls:

Throughout history, many in positions of power have used price controls to influence economic activity and the results have often been disastrous. As mentioned previously, Diocletian’s own attempts to curb the rampant inflation which was devastating Rome at the time of his reign during the third century A.D., only hastened the economic deterioration of an already declining empire (Watkins). In the aftermath of the French Revolution, the government led by Robespierre instituted price controls (“Law of the Maximum”) on a variety of items (especially on food), which not surprisingly, led to widespread shortages and starvation (DiLorenzo).

Unfortunately, the United States has not been immune to the allure of price controls despite their dismal historical record. In a book review written by author Thomas J. DiLorenzo and published on the Ludwig Von Mises Institute website, he noted that at one point during the American Revolution, General George Washington’s army was in danger of starvation thanks to price controls instituted by “friendly” colonies such as Pennsylvania. These had the effect of causing severe shortages which were only alleviated after the Continental Congress recommended the repeal of these controls in June 1778 (DiLorenzo).

Furthermore, history shows that not even the threat of the death penalty can keep goods from being sold above the legislated price on the black market. The laws cannot be enforced, yet they often dramatically disrupt the economy.

When the president, the Congress, or a state legislature first enacts price controls (2010? 2011?), this is likely to be met with almost universal approval. In our just-in-time economy, it won't take long for the shortages to ensue. Then will come the accusations about "hoarders" who are causing the problem by buying absurd quantities of the cheap, price-controlled items. This won't be true either, as most stores will impose rationing all on their own (similar to Costco and Wal-Mart during the rice shortage a couple of years ago). Everyone will be pissed off, and hardly anyone will understand that the real blame should be put on the heads of the men who have run the printing press for Federal Reserve Notes.

Comic relief

2009-08-24T15:48:00.002-04:00

Every Monday, James Howard Kunstler posts his weekly rant on his blog, Clusterfuck Nation. This week's piece was particularly irritable and curmudgeonly (and funny).

Paul Krugman says that we'll soon realize that Gross Domestic Product (GDP) is growing. He actually said that on the Sunday TV chat circuit. Not to put too fine a point on it, but I would really like to know what you mean by that Paul, you fatuous wanker.

Ha! I love it.

Kunstler then goes on to ask exactly how the economy is expected to revive-- more McMansions? More SUVs? More day trading?

Do you mean that the Home Equity Fairy is going to wade into the sea of foreclosure and save twenty million mortgage holders currently sojourning in the fathomless depths with the anglerfish? ... Do you mean that American Express and Master Card are about to declare a Jubilee on accounts in default everywhere? Do you mean that General Motors will produce a car that a.) anyone really wants to buy and b.) that the company can sell at a profit? Are you saying we get a do-over, going back to, say, 1981? Did we win some cosmic lottery that hasn't been announced yet? What's growing in this country besides unemployment, bankruptcy, repossession, liquidation, gun ownership, and suicidal despair? In short, are you out of your mind, Paul Krugman?

GDP figures, according to economist John Williams, are so finagled and manipulated and so politically driven as to be useless. Krugman may be right in strictly nominal terms-- we could see positive GDP numbers for a quarter here or there. We shouldn't be distracted by such things.

As Ilargi over at The Automatic Earth has pointed out, we might instead measure our economic health in terms of the poverty rate, the unemployment rate, the number of homeless, or the percentage receiving food aid. That gives you a better picture of what the economy feels like on the ground, out in the streets. And, politicians take note: poverty measures are surely far better predictors of civil unrest than some bullshit GDP figures nobody believes anymore.

The service economy

2009-08-23T11:42:00.005-04:00

According to Wikipedia's entry on the United States:

In 2009, the private sector is estimated to constitute 55.3% of the economy, with federal government activity accounting for 24.1% and state and local government activity (including federal transfers) the remaining 20.6%. The economy is postindustrial, with the service sector contributing 67.8% of GDP.... While agriculture accounts for just under 1% of GDP, the United States is the world's top producer of corn and soybeans....
In 2005, 155 million persons were employed with earnings, of whom 80% had full-time jobs. The majority, 79%, were employed in the service sector.

First of all, to have 45% of the economy coming from the government, at a time when state and federal budgets are a mess, does not bode well. State employees are dropping like flies.

Secondly, having more than 2/3 of your economy in the "service" sector does not bode well, either. Wikipedia describes the "service sector" this way:

The service sector consists of the "soft" parts of the economy such as insurance, government, tourism, banking, retail, education, and social services. In soft-sector employment, people use time to deploy knowledge assets, collaboration assets, and process-engagement to create productivity (effectiveness), performance improvement potential (potential) and sustainability. The tertiary sector is the most common workplace.

Typically the output of this sector is content (information), service, attention, advice, experiences, and/or discussion (also known as "intangible goods").

Deploying collaboration assets? Engaging in process-engagement?

I am strongly reminded of when my husband was subjected to days of meetings with outside "consultants" who insisted on being called "sherpas" [I kid you not] and were there to infantilize everyone and pat them on their little heads and whine about teamwork. I am surprised he got out of there without singing kumbaya. This is one example of "intangible goods," which in this case was a euphemism for "useless crap" and "an utter waste of time."

To be fair, the utility of the service sector to the nation as a whole is to improve productivity, and I am sure it accomplishes that in many cases. But you can only improve productivity when there is actual production going on. I can see that education and social assistance can improve the productivity of individuals, but only if -- later on, down the line -- they will actually be engaged in producing something. I can see that banks are useful to communities when they provide funding for local businesses, but only when those businesses actually produce something. I can see that cooking food for someone or hemming their pants can save them time, but the rest of society only sees that as beneficial if that person engages in productive work in the time saved. How can we have 2/3 of the economy involved in improving productivity when only 1/3 of the economy is production? Isn't that a bit like having 2 efficiency experts per factory worker?

Ah-- but I'm looking at the proportion of GDP, which is measuring the service sector in terms of dollars. More interestingly, 79% of all workers are in the service sector. So it's more like having 4 efficiency experts per factory worker. This is hardly sustainable.

And can I say, I am shocked that only 1% of GDP involves growing or raising food? (Livestock is included in the agriculture sector; it doesn't only mean crops.) Food seems... well, a little bit important to human existence, no? And can I also point out that soybeans are not actually edible unless fermented and that we are poisoning ourselves with all these damned soybeans? If you take out soybeans, actual food production is even less than 1% of GDP, which I find insane.

No, I don't think we will return to a subsistence level where all we need is food, shelter, and clothing. But we do need to think in terms of the basics. We need to know where our food, shelter, and clothing will come from if the currency fails. Sitting around selling each other data and advice does not make an economy. You can't feed the poor with databases, and if you don't feed the poor, they revolt.

As I said in my previous post, collective national wealth is pretty blue-collar. It's the blue-collar workers who built the roads, bridges, dams, subways, and buildings. It's the small, local farmers who we will again have to rely on, when centralized and industrialized agriculture fails in the absence of cheap fuel and cheap money. To have 4 out of 5 workers in the "soft" (that is, mostly non-producing) economy is unsustainable when heading into an economic depression. What on earth will we do with all the unemployed?

Production is wealth

2009-08-22T13:38:00.007-04:00

Economics in One Lesson features a chapter on the myth that wars stimulate economies, sarcastically titled "The Blessings of Destruction." In that chapter, Hazlitt writes:

Those who think that the destruction of war increases total “demand” forget that demand and supply are merely two sides of the same coin. They are the same thing looked at from different directions. Supply creates demand because at bottom it is demand. The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want. In this sense the farmers’ supply of wheat constitutes their demand for automobiles and other goods....
It should be obvious that real buying power is wiped out to the same extent as productive power is wiped out.

The book was written in 1946, at a time when Europe's productive capacity had been decimated by war. In the US today, our productive capacity has been gutted by globalization and offshoring, especially because we had the reserve currency of the world, which we could dole out without having to produce a thing. We abandoned the supply / demand relationship that Hazlitt described; our demand was no longer limited by what we produced. We've been able to buy things with dollars, even after those dollars ceased to represent anything at all (i.e. since August 1971).

We buy things for nothing, no supply of real goods required. Other countries want our backed-by-nothing dollars because oil and various commodities are only sold in dollars. We have had a monopoly and an insane advantage over the rest of the world. If China wants to buy crude oil from Saudi Arabia, it has to pay them in dollars. Thus our currency has always been in demand, and even as our factories closed, we could print more money and maintain our standard of living.

Most of the country seemed not to notice as our textile mills left for Asia and our steel plants closed. Granted, the incomes of the working and middle classes have been stagnant or declining in terms of real purchasing power, but this was masked by taking on debts, mainly credit card and 2nd mortgage debts. Between government debts and private citizens' debts, we've been living well while producing less.

There is no free lunch, of course. We've come to a situation now where our only option for dealing with our debts is to depreciate the currency and pay our creditors back in shrunken (if not nigh-worthless) dollars. Even if the government attempts to avoid that, demand for dollars is waning, which will cause the depreciation anyway. This process will wipe out most of the assets of the working and middle classes.

Our supply of produced goods should have represented our demand, as Hazlitt explained it. We should have bought goods in proportion to the goods we produced. To break that relationship and live high on the hog without producing much is clearly unsustainable. "The American way of life is non-negotiable" is an absurdity. Nobody gets something for nothing, forever.

It should be obvious that real buying power is wiped out to the same extent as productive power is wiped out.

We will come to recognize this again when the currency collapses. The suffering in Allentown and Youngstown will be the suffering of the whole nation, when demand for our primary export (dollars) evaporates. Nothing good can ever come from reduced production. Real wealth is production. Collective, national wealth, in fact, is pretty blue-collar. Disdain for such blue-collar, concrete wealth might explain why the ivory tower folks thought this ridiculous "service" and/or financial economy could ever work. The idea that CDO's and business consulting are necessary goods was just a mass hallucination designed to explain why we still had the highest quality of life on the planet, despite producing less and less. We simply convinced ourselves that we were still producing something.

But you can't eat derivatives contracts, you can't clothe yourself in credit default swaps, and you can't make a shanty out of collateralized debt obligations.

Well we're waiting here in Allentown
For the Pennsylvania we never found
For the promises our teachers gave
If we worked hard
If we behaved
So the graduations hang on the wall
But they never really helped us at all
No they never taught us what was real
Iron and coke
And chromium steel
And we're waiting here in Allentown

The second French hyperinflation

2009-08-21T21:43:00.002-04:00

I recently read the very short Fiat Money Inflation in France, about the destruction of the French paper currency around the time of the French revolution. What's interesting about the book is that the author does not denounce the French politicians as total morons. He takes care to show that these politicians started out printing money quite cautiously and thoughtfully. But, as I have said before, when you print more fiat currency you actually reduce the true value of the currency in circulation, exacerbating the deflationary problems in the economy. The people then begin to demand new currency, and yet new currency soon makes the troubles more severe, resulting in another round of demands for more currency. And so it went in France, until the assignats were nigh worthless and the economy was decimated.

As the author writes on pp. 73-74:

The question will naturally be asked, on whom did this vast depreciation mainly fall at last? When this currency had sunk to about one three-hundredth part of its nominal value and, after that, to nothing, in whose hands was the bulk of it? The answer is simple. I shall give it in the exact words of that thoughtful historian from whom I have already quoted [Von Sybel]: "Before the end of the year 1795 the paper money was almost exclusively in the hands of the working classes, employees and men of small means, whose property was not large enough to invest in stores of goods or national lands. Financiers and men of large means were shrewd enough to put as much of their property as possible into objects of permanent value. The working classes had no such foresight or skill or means. On them finally came the great crushing weight of the loss. After the first collapse came up the cries of the starving. Roads and bridges were neglected; many manufactures were given up in utter helplessness."

To continue, in the words of the historian already cited: "None felt any confidence in the future in any respect; few dared to make a business investment for any length of time and it was accounted a folly to curtail the pleasures of the moment, to accumulate or save for so uncertain a future."

In both Weimar Germany and revolutionary France, historians write about hedonism and impulsiveness, "loose morals" and rising crime. Take away the ability to plan for the future, and the society begins to disintegrate.

Today, however, people of very modest means have some ability to protect themselves, because junk silver is cheap and is available in very small denominations. It usually sells for something like 11-12 times its face value. So a 90% silver dime from before 1965, with a face value of 10 cents, could be bought for a little more than a dollar. A roll of such dimes, worth $5 in face value, could be bought for $60 or less. Furthermore, if the worst happens and you need to acquire food using silver, it's those little dimes you want.

Google a coin shop in your area and get yourself some silver. Remember the line "The working classes had no such foresight or skill or means." But you do have the means... you just need the foresight.

Coin shops near Mount Clemens
Coin shops near Winter Park
Coin shops near Ann Arbor

On Ellen Brown's money-printing solution

2009-08-20T15:49:00.013-04:00

Economics writer Ellen Brown has suggested that California, or any state, could solve its budget problems by creating its own state bank and essentially printing its own money. As long as the new money goes into new production, this policy is not inflationary, she argues; in fact, issuing new money can create economic miracles.

Generally speaking I believe she is wrong. In a functioning economy, the issuance of new currency to the people will increase prices by more than the rate at which the new money is issued, which means it actually creates deflation in real terms. This is because, in a functioning economy, putting currency into the people's hands also makes currency change hands more quickly. That is, you not only increase the money supply, but you also increase money velocity. Remember that

MV = PQ

When governments increase M, they eventually increase V. This means that the PQ side of the equation (prices x quantity of goods) will rise at a faster rate than M. You might give someone 10% more money, but if prices have gone up by 14% you've only made their situation worse. The government's hope is that if MV increases, production (Q) will increase, but the problem is that production can only grow just so fast, and it basically tops out when full employment is attained.

In short, when you print more fiat currency in a functioning economy, the common people experience a deflation in purchasing power. You harm the economy.

And yet, Ellen Brown points to three historical examples in which money-printing brought economic salvation: the early American Colonies, the island of Guernsey in the English Channel just after the Napoleonic War, and Germany under Hitler. In these instances, the new money spurred production and brought economic relief, and certainly not the deflation in real terms I mentioned above. So what gives?

It occurs to me that these three examples are not representative, and not relevant in today's industrialized world, because in those instances production was at virtually zero. In the early Colonies, there was tremendous room for increased production. On Guernsey, the economy had been decimated:

At the beginning of the nineteenth century, as a result of the Napoleonic wars, the trade of Guernsey was practically extinguished and the people were in despair. Unemployment was rife, the sea defences were breaking down, there were practically no roads, public buildings were in disrepair and, above all, a new market house, where the islanders could exchange their produce, was urgently needed.

And as one economist described it:

The Nazis came to power in Germany in 1933, at a time when its economy was in total collapse, with ruinous war-reparation obligations and zero prospects for foreign investment or credit.

These are cases in which, in the MV = PQ equation, Q was not much above zero, or certainly it was a great deal less than full production. This made it easier to translate increases in the supply of money (M) into increases in production (Q), without rising prices. Also, if you have almost no economic activity and no inventories to speak of, velocity cannot skyrocket because there is initially nothing to trade. Therefore, they did not experience a sudden jump in MV that would have caused prices to jump. Instead, increases in the money supply led to higher levels of production along with price stability. Purchasing power was maintained, while economic activity surged.

The American Colonies example is unique, in that Europeans were multiplying and spreading over the land, thus production could increase almost indefinitely. In the post-war examples, there were skilled and educated people living in an absolutely ruined economy, thus production could increase rapidly once rebuilding began. But in circumstances that are not so dire, in economies which are still functioning, the printing of new fiat currency will translate into real-terms deflation as purchasing power is lost. The perceived solution to this want of money will be to print more currency, causing yet worse deflation in real terms, as prices spike faster than paychecks and savings lose purchasing power. And so begins the hyperinflationary spiral.

Broken windows and broken cars

2009-08-18T23:14:00.009-04:00

I'm currently reading Economics in One Lesson by Henry Hazlitt (the entire text is available here). The basic idea of the book is to help you see not only the direct and immediate effects of economic policies, but also the longer-term and indirect effects. Or, as it's commonly put, "the seen and the unseen."

The book starts off by describing the well-known "broken window fallacy." Suppose some disgruntled person comes along and lobs a brick through the large glass window of a bakery. This might be seen, by a rather simplistic bystander, as an economic boon for the town. After all, it generates business for the glazier who replaces the window, and the glazier, in turn, spends some of that money providing business to someone else. Of course, this is nonsense-- destruction does not help a community. We can see that the brick-lobber gives business to the glazier, but what's not seen is what the baker might otherwise have done with that money. He might have, say, bought a suit. Or, as Hazlitt explains:

The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

Now maybe this strikes you as a rather silly example. Throwing bricks through windows can't somehow improve the economy. Surely people are not so stupid as to see wanton destruction as beneficial to the community.

But consider this: the "cash for clunkers" program involves destroying the cars traded in. Apparently we pour something into the gas tank which seizes the engine and renders the car useless. These are mostly paid-off cars in working condition, mind you. They are assets -- real goods -- without attached debts. They are units of wealth which we are destroying. How can this be seen as a good thing? Well, because! Destroying them creates work for automakers.

Well, sure, but meanwhile there are people who can't get jobs because they don't have transportation, and people who are losing jobs when their cars are repossessed. Why didn't the government allot these traded-in clunkers to the needy? Why trash working automobiles? We, as a people, have completely lost all sense of what wealth actually is. Wealth is not a bunch of numbers on a screen, wealth is stuff. Tangible things.

Yes, destroying these older cars breeds demand, and provides jobs to some. But the new cars are not actually owned by their drivers, because their drivers must usually take on debt to purchase the car. And these new car owners might wind up having the car repossessed in the end. If they do make their payments, they will have less money to spend elsewhere. Whatever they spend on the car payment is money they do not spend at restaurants and retailers. Furthermore, the government has taken on debt to pay for the "cash for clunkers" program itself. And on top of that, car companies may have taken on debts in order to ramp up production to meet this new demand. So in other words, we have reduced consumer spending in the non-auto sector, increased various debts, and destroyed some of the collective wealth of the nation, in exchange for retaining auto worker jobs.

And maybe that's a trade-off that we are willing to make. I am very sympathetic to saving American auto manufacturers, because they do have one or two foundries left, plus rail lines and factories and laboratories, and they do, anachronistically, actually make stuff. GM is not some re-insurance company which wheels and deals in derivatives, and Ford is not some business consulting company which contracts out its "consultants" to fire people at other companies, all because managers don't have the guts to do it themselves. No, GM and Ford are producers, and as such they contribute to the nation's real wealth.

However, it is simply indefensible to destroy wealth (cars) as government policy. It is as stupid as paying farmers not to grow wheat and dumping milk in the streets while citizens are starving.

One day we will have to think in real terms again. We will have to survey the remains of the former empire and ask ourselves what we have left. We'll have to inventory our mines, ports, railways, farmland, canals, factories, subways, buildings. We did not evolve into higher beings which no longer require food, clothing, and shelter, but can now live on derivatives contracts alone. The whole holograph, what Jim Kunstler calls the hallucinated economy, can simply evaporate, because it isn't made of tangible things, and doesn't produce anything. And when the mirage of the "service" economy or the FIRE (Finance, Insurance, Real Estate) economy disappears, and the dollar becomes useful only as kindling, we will be short some half a million working vehicles because somebody in Congress thought it was a bright idea to lob a brick through a metaphorical window.

Life during hyperinflation

2009-08-18T16:13:00.005-04:00

[I am back from summer hiatus and will be posting regularly again.]

When I first began learning about hyperinflation, my main concern was to understand what it looked like on the street, for the common people. It is hard to imagine a situation where on Monday bread costs $20/loaf and on Wednesday that's risen to $22 and by Friday it's $25 (to make up an example). How does society keep functioning under those bizarre circumstances?

There was an excellent article published in the German paper Spiegel which gives us some details.

At the Junkers plant in Dessau the company gave its workers the equivalent of the day's price of three-and-a-half loaves of bread at 9am every morning. Their wives, who were waiting at the factory gates, took the money and dashed off to the shops before the new dollar exchange rate was published at around midday.

Many doctors insisted on being paid not in cash but sausages, eggs, coal, and the like. Because of the constant increase in prices, shops stopped displaying them in their windows. And when the Prussian authorities forced them to do so nonetheless, it drove prices even higher because traders simply took prospective increases into account....

People lived in a strange kind of tension. On the one hand there was the daily fight for survival, for food, and for heating fuel. "If we more-or-less manage to prevent the city of Cologne from collapsing completely, I shall get down on my knees and thank my Maker," the city's mayor, Konrad Adenauer, said....

Something that occurs to me, when pondering such a situation in the United States, is that if retailers want to take delivery more often, and consumers want to make purchases more often, the price of gas is going to go up faster than anything else, and the traffic will be terrible. Also, I'm not sure the big chain stores will be able to keep up with frequent pricing changes, which will either mean they go out of business, or that they gouge customers. Large organizations that make automated payments to workers will have trouble when workers need to be paid more often. If you pay your workers only on the 1st of the month, they may not have the cash to buy gas to come to work by the end of the month. The logistics of a high-velocity economy -- accelerated not due to real activity or production, but merely because people are frantic -- is hard to imagine in the current United States. A lot of retailers and companies may simply shut down, unable to cope.

On the other hand it was also a time of phenomenal wastefulness. The people were gripped by the urge to panic-buy. They squandered their money, and lived from one day to the next. "We're drinking away Grandma's house" proclaimed one popular tune of the day....
In fact petty crime in general increased in leaps and bounds. Potato fields were plundered, bakeries raided, shop windows smashed. Prices weren't the only thing that went out of control. All values seemed to have been corrupted. Dance halls and strip bars opened up in the cities, and cocaine sales skyrocketed. People lived as if there were no tomorrow. Economist Joseph Schumpeter noted the "disorganizing effects of the collapsing currency on the national character, on morals, and all branches of cultural life."

I once came across a blog written by a man who had lived through Argentina's second currency collapse several years ago, in which banks closed for 5 months and the currency lost three quarters of its value. Crime levels went through the roof, even among the middle class. He said that if someone stepped out in front of your car in an attempt to wave you down, you had to make yourself step on the accelerator, because the odds were very high that this person (or their accomplices) would rob you. After a while, he said, it got easier to do this-- they always jumped out of the way in time. In some neighborhoods people began carrying guns openly, in holsters, like it was the Wild West. Many people made sure they were home before dark and kept their children inside at all times. Such crime levels are what I fear most about hyperinflation. When people can't plan for the future they obviously grow more impulsive, which, combined with poverty, has to lead to crime.

The only objects of real value were tangible assets: diamonds and coins, antiques, pianos and art. The works of contemporary artists like Lyonel Feininger, Paul Klee, Max Pechstein and Karl Schmidt-Rottluff were in especially high demand. And if you had foreign currency, you lived like a king.

One senior mail inspector gained notoriety when it was revealed he had intercepted letters containing foreign banknotes: 1,717 dollars, 1,102 Swiss francs, and 114 French francs - enough to buy two houses for himself and a piano for a friend, with enough left over for an indulgence-like donation to the church....

Notice how few foreign bills it took to buy two houses and more. This is because, in real terms (as measured in a gold-backed foreign currency or in ounces of gold) prices in Germany were actually plummeting drastically. In real terms (gold equivalents) Germany was suffering from an astounding deflation, as I talked about in this post. Fat lot of good it did you if all you had were Marks, though; in that case, prices were rising faster than your paycheck was.

The stupid ones were those who had nest eggs: the thrifty, holders of government bonds, but primarily the country's pensioners. In other words, those who received money without having to work for it, who lived on their pensions or the interest on their savings. Large sections of the middle classes saw themselves stripped of their assets, losing almost everything they had set aside for years....

Today, all major currencies are fiat currencies (that is, just paper backed by collective confidence in its utility). It's hard to say which brands of paper (dollars, Euros, yen, yuan) will suffer the worst inflation, or when. Having small denomination silver will be much more reliable for making purchases, while gold can be used to preserve larger amounts of wealth.

By perverse contrast, the winners of the hyperinflation were those with massive debts; first and foremost the state, but also private individuals who had borrowed money to buy houses, construction land or farmland, and whose loans were slashed by the switch to the rentenmark....

This benefit to debtors is the whole reason why hyperinflation is an attractive option, in the eyes of the government, in a country with enormous debts, both public and private. You start by printing money to pay debts and deficits, and you end by defaulting on debts because the dollars you pay your creditors with are now worthless. Yes, some of the poor starve and die of nutritional deficiencies and resultant disease, but the mega-rich have safely ensconced their wealth in gold and silver, art and antiques, jewelry, and landed estates. The middle class mostly survives but is left with nothing afterward and must start from scratch.

As bad as that sounds, what's worse is that the United States doesn't have the tools to re-start production from scratch. Because of globalization, we offshored all the means of production. Yet production is the only real wealth, and real goods grown or manufactured represent the only real purchasing power for the common people. We are going to be poor in this country in a way that is hard to even imagine. We don't make anything anymore, or if we do, we buy the parts from China and merely assemble it here. We don't even have foundries, nor do we have shoe factories or textile mills, nor enough rail lines or ports. Even our means of food production have been centralized and industrialized into a business model that will, to put it plainly, abruptly cease to exist.

Modern people think they are somehow unlike the people who have gone before, because technology has made our world appear so different than the world of even Weimar Germany, less than a century ago. People photographed in black and white, stuffing banknotes into stoves or hauling it in wheelbarrows, might as well have been living on Mars, for all we care. And yet it's technology -- or more accurately, the centralization and globalization technology has enabled -- that have so terribly impoverished our country in real terms. The American way of life is non-negotiable, say our leaders. All I can say to that is, pride goeth before a fall.

Few could laugh at "the macabre joke of inflation," as writer Klaus Mann termed it. "What breathtaking fun it is to watch the world coming off the rails," he wrote in undisguised fascination. Germany was now witnessing "the complete depreciation of the only truly credible value in this godforsaken era: that of money...."

It is true to say that nothing seemed safe anymore -- all semblance of order went out of the window, and with it faith in the Weimar Republic, in democracy, indeed in the future itself.

Playing with fire

2009-07-13T21:47:00.008-04:00

From the New York Times:

Most of Wall Street, and America, is still waiting for an economic recovery. Then there is Goldman Sachs.

Up and down Wall Street, analysts and traders are buzzing that Goldman, which only recently paid back its government bailout money, will report blowout profits from trading on Tuesday.

Analysts predict the bank earned a profit of more than $2 billion in the March-June period, because of its trading prowess across world markets. If they are right, the bank’s rivals will once again be left to wonder exactly how Goldman, long the envy of Wall Street, could have rebounded so drastically only months after the nation’s financial industry was shaken to its foundations.

Oh, come on now. Nobody will be wondering how Goldman did it-- that story broke last week. Turns out Goldman has computer equipment on the floor of the stock exchange, and this equipment, along with its proprietary software, is much faster than everyone else's equipment. What Goldman does is "sniff" the traffic, detect trades that someone is in the process of executing, and jump in ahead of them. According to Daily Kos diarists:

The code, as it has been noted by many, including Goldman-Sachs, allows the firm to execute securities/commodities transactions in microseconds, thus providing their company with an extreme edge over their competitors. The tacit fact is, with proper monitoring of market trades, in general and as facilitated by Goldman's own practices, it's entirely conceivable--albeit significantly questionable from a legal standpoint--that the firm would be enabled to "frontrun" its competition at quite a grand scale, too, since it could see trades occurring in real-time, and then execute its own trades automatically at lightning speed, before the previously-observed trades of others were even concluded.
All along, for the past nine-plus months--and in part due to government-related authorizations (by appointing Goldman-Sachs as the only active player in a new effort known as the "Supplemental Liquidity Program") to enable Goldman to assist the Feds in propping up stock/commodities markets during the noted economic upheavals of same during this period--it has also been widely noted that Goldman had all but cornered the market, literally, in terms of the sheer volume of in-house trading the firm was engaged in during the time, supposedly, on its own behalf; to the point where it had been widely observed and documented that well over half of all program trading occuring on Wall Street (we're talking 20%-30% plus of all stock/commodities trades in this country, for all intents and purposes), during many weeks over the past nine months, was being executed by Goldman-Sachs, too.

Market makers get paid for executing trades. Something like a quarter of a penny per trade, which doesn't sound like much, except that Goldman Sachs could execute millions of trades per minute. It could buy and sell at the same price, and not move the price at all, but meanwhile get its little quarter penny. Anyone who recalls the plot of Office Space will be familiar with how a fraction of a penny here and a fraction of a penny there can add up, and with astonishing speed.

This all came to light because a Goldman employee stole the program code and uploaded it to a server in Germany. In arguing that this employee should be denied bail, Goldman complained that if the code got into the "wrong hands" it could be used to manipulate markets. Right, which Goldman Sachs would never ever do itself-- promise!

And yet, as I understand it, the government has been essentially paying Goldman Sachs to do precisely that-- to support US markets. We had a heck of a bear market rally these past few months. Historically speaking, it was stunning. Wonder how that happened?

It's not much different than Reagan coming up with the President's Working Group on Financial Markets, generally known as the Plunge Protection Team, after the 1987 crash. Except that this time, the government was paying banks to support the markets. Or-- not banks, plural... just one bank. The one we get our Treasury guys from.

The slavish New York Times goes on to say:

In essence, Goldman has managed to do again what it has always done so well: embrace risks that its rivals feared to take and, for the most part, manage those risks better than its rivals dreamed possible.

Helps to have a man in the Treasury, it would seem.

As Jim Kunstler put it in today's post, "This is a company playing with the fire of world history."

[Addendum: See Glenn Greenwald's story on how Goldman Sachs garnered its astounding profits, courtesy the US government.]

Deflation in the midst of hyperinflation

2009-07-11T12:04:00.009-04:00

The Austrian economic school defines deflation as a decreasing amount of money, while inflation is an increasing amount of money. But is that in real terms (in terms of how much gold it would buy you), or in nominal terms (dollars, marks, etc)?

What if the amount of money in circulation is falling in real terms (deflation), and prices are also falling in real terms, and yet nominally speaking the money supply and prices are rising astronomically (hyperinflation)?

As far as I can see, that's exactly what happened in Weimar, Germany (emphasis is mine):

But the main force which gave inflation its momentum was the steady decrease in the true value of money in circulation. This has been observed in all past rapid inflations and it is vital to understand it if inflation is to be coped with.... [P]rices began jumping much faster than the government could generate new money. Thus the total circulating currency fell drastically when measured in terms of its true value. One economist stated that, "In proportion to the need, less money circulates in Germany now than before the war. This statement may cause surprise but it is correct. The circulation is now 15-20 times that of pre-war days, whilst prices have risen 40-50 times." In fact, the total currency when calculated in gold value fell from 7428 million marks in January 1920 to a mere 168 million by July 1923.

So, measured in terms of gold, Germany experienced a catastrophic decline in its money supply. This would have been ameliorated by the very high velocity of money. That is, marks were changing hands at a far more rapid pace than during normal times, as everyone attempted to spend their currency before it could depreciate further.

If you consider that key equation MV = PQ, we might call MV the "availability of money." During Germany's hyperinflation, MV surely did not drop as precipitously as M (again, in real terms) because V was high and increasing. Perhaps, during certain periods of the hyperinflation, Germany did not have deflation in the sense that MV was not dropping. (I've argued that MV makes much more sense to look at than M alone.) But the problem is that velocity cannot just go up forever. It cannot remain sky-high when there are no more goods left to be purchased. There are physical constraints on production, and when the available goods are exhausted velocity must drop back again. Somewhere along the line, MV began decreasing in real terms.

If the figures quoted above are correct, the amount of money in real terms fell by over 97%. Velocity would have had to increase to 45 times its pre-hyperinflation values, in order to allow the "availability of money" or MV to remain stable. But you can't have 45 times normal velocity for very long, if ever. They were already at full employment and maximum productive capacity early in the hyperinflation. Once there is nothing else to buy and no one else to hire, there's nothing you can do with your money-- except burn it in your kitchen stove, as in one famous Weimar photograph. MV must fall in real terms.

Which brings us to the real crux of the matter: during hyperinflation, governments print money frantically in an attempt to stave off the real-terms deflation which threatens to crush the economy and put an end to most commerce. Yet, printing money actually exacerbates the deflation (emphasis is mine):

Once people lose confidence in a currency, they try to get rid of it. As Lord Keynes pointed out, this makes circulation speed up enormously, and hence prices rise faster than the government can print new money. Marshall, studying this process, concluded that, "The total value of an inconvertible [fiat] paper currency cannot be increased by increasing its quantity; any increase in quantity which seems likely to be repeated will lower the value of each unit more than in proportion to the increase."

In other words, you can print another trillion marks, which is equivalent to X ounces of gold, but the real value of all currency in circulation will decline by more than X ounces of gold. The paper currency will devalue at a faster rate than the rate you're printing it at. The faster you print, the worse the deflation in gold terms.

And thus, paradoxically, the Germans didn't have enough money, and that situation only grew worse:

Despite the proliferating billions of trillions of marks, the average citizen found it harder and harder to get enough money for necessities. Banks, short of money, could not honor checks. Businessmen were strapped for money to buy materials and meet payrolls. The government faced the same problem. It appeared that there was not too much money around, but rather much too little. The clamor for more money grew on all sides. It seemed that any halt to the printing presses would bring business to a standstill and throw millions of workers out on the street. The government itself would be unable to carry on. Riding a tiger, it dared not dismount. On October 25, 1923, the Reichsbank noted that it had that day printed 120,000 trillion marks. Unfortunately, the day's demand had been for one million trillion.

Once confidence in the currency has been lost and hyperinflation is entrenched, you can't merely stop printing. The resultant deflation would mean the end of the economy. Running faster and falling behind is still better than letting everything come to a screeching halt. And yet the more you print the worse everything gets. What a horrible trap.

It's a trap that can be gotten out of by going to a new currency altogether, one backed by gold or by silver, or one pegged to another hard currency, or (in the German case) by backing it with land. A currency which is equivalent to something of tangible value can retain the people's confidence, which is the only way it can remain real money. The problem with a currency which is collapsing is that it isn't actually money any more-- it is not a store of value, it's not a unit of account, and it's not even a dependable medium of exchange. It's not money-- and the country has to stop using it and put in place something that is money. The old currency is hopeless.

It's a very strange thing to say, but deflation and hyperinflation are actually mutually reinforcing when deflation is seen in gold terms. There's no way to escape that trap, once it begins; the currency must be abandoned.

Americans ready their torches

2009-07-10T22:06:00.004-04:00

As I think everyone can sense, there's a rising tide of anger against the banks and the bankers. We're not much given to protests and demonstrations here in the US, but we're not going to get through this economic disaster without unrest. That's just not historically tenable. Perhaps that's why the media steadfastly ignored the protests in Greece some months back. Greek protesters burned several banks to the ground, but the US media claimed the riots were against the police, who had recently killed a teenaged boy. Those in charge didn't want anybody getting any ideas over here across the pond.

Last autumn, there was a spectacular public protest (via email and telephones) against the banker bailout bill, which authorized giving $700 billion of the American people's money to Wall Street's mega-banks. Reportedly, calls were coming in to Congressional offices at a rate of 50, 100, even 200 to 1 -- against the banks, of course.

Around that time there was a Wall Street protest which featured this sign, rather famous out here on the inter-tubes:

That's been made into T-shirts and stickers, to boot.

More recently, Jim Kunstler -- always the curmudgeon -- was quite funny about the complacency of bankers:

One mistake that the banking elite and their lawyer paladins made the past decade was their show of conspicuous acquisition -- of houses especially -- in easy-to-get-to places where anyone can see them, for instance an angry mob in Fairfield County, Connecticut, or Easthampton, New York. Unlike the beleaguered elites of South Africa (where I visited recently), who live behind layers of fortification, the executives of Citibank, Goldman Sachs, J.P. Morgan, and a long list of hedge funds, will be found cringing in their wine-lockers behind a measly layer of privet hedge when the tattooed minions of Glen Beck come a'calling....

Social phase-change, as in the formations of mobs, is nothing to screw around with. Once the first window is broken, all bets are off for social stability. My guess is that the various bail-out gifts to the bankers are long past having gone too far in the eyes of this increasingly flammable public....

By the time Lloyd Blankfein [CEO of Goldman Sachs] sees the torches flickering through his privet, it will be too late to defend the honor of his cappuccino machine.

And then there was the Rolling Stone piece by Matt Taibbi, titled The Great American Bubble Machine: From Tech Stocks to High Gas Prices, Goldman Sachs Has Engineered Every Major Market Manipulation Since the Great Depression, and They're About to Do It Again.

There's been a raft of stories about Goldman Sachs, involving a former employee who stole proprietary trading software. It's come out that anyone in possession of these programs could manipulate stock markets. Which is also an admission that Goldman Sachs can manipulate stock markets. Gee, who'da thunk it?

Just today, the usually humorless Mike Shedlock wrote a post equating the Federal Reserve with Darth Vader's Empire:

Our hero, Ron "Skywalker" Paul, has managed to gather sufficient support to overthrow the Evil Empire widely known as the Fed.

In a brazen attempt to beat back our hero, the Empire has taken its case directly to Congress, seeking more power to rape and pillage the populace under cloak of secrecy.

The Washington Post picks up the story in Sith Lord Kohn warns Congress on meddling in the Empire's affairs.
The ~~Federal Reserve~~ Evil Empire on Thursday launched a robust defense of its independence and warned that efforts in Congress to put monetary policy under political sway would hurt the ~~economy~~ Empire.

~~Fed Vice Chairman~~ Sith Master Donald Kohn said opening up some of the U.S. central bank's most sensitive decisions to political scrutiny could result in ~~higher long-term interest rates and hurt the United States' credit rating~~ discrimination against the Sith Lords.

Testifying before a congressional panel, Kohn sought to beat back a proposed bill that would open the U.S. central bank's policy decisions to audits by ~~a federal~~ an Ewok watchdog agency. More than half of the members of the U.S. House of ~~Representatives~~ Ewoks have signed as co-sponsors of the measure.

More importantly, a major Hollywood gangster film has just come out, about bank robber John Dillinger. The New York Times understands the darker significance of the film:

If the administration wants to be reminded of how quickly today’s already sour mood can turn rancid, Michael Mann’s haunting “Public Enemies” could not be a more apt refresher course. The casting alone tells you where the audience’s sympathies will lie: Dillinger is played by America’s reigning male sweetheart, Johnny Depp, while his G-man pursuer, Melvin Purvis, is in the hands of the thorny Christian Bale....

Detective magazine polled movie theater owners during Dillinger’s yearlong spree of 1933-34, and found that in terms of drawing audience applause Public Enemy No. 1 beat out F.D.R. and Charles Lindbergh....

[O]rdinary law-abiding Americans even wrote letters to newspapers and politicians defending Dillinger’s assault on banks. “Dillinger did not rob poor people,” wrote one correspondent to The Indianapolis Star. “He robbed those who became rich by robbing the poor.”

Gorn writes that the current economic crisis helped him understand better why Americans could root for a homicidal bank robber: “As our own day’s story of stupid policies and lax regulations, of greedy moneymen, free-market hucksters, white-collar thieves, and self-serving politicians unfolds, and as banks foreclose on millions of families’ homes, workers lose their jobs, and life savings disappear, it becomes clear why Dillinger’s wild ride so fascinated America during the 1930s.” An outlaw could channel a people’s “sense of rage at the system that had failed them.”

And here I might make one final point: the unemployment rate is much higher for teenagers and those in their early 20's than for other age groups. In fact, the age group which is doing best in the job market are those over 55. This means we have a great many aimless, impoverished young people with a lot of time and anger on their hands. Not a good mix. And if they dutifully went to school and did as they were told and jumped through every hoop, believing this would net them a comfortable salary, they're that much more pissed off when the promised good job doesn't manifest.

During the Great Depression, many protests went unreported in major newspapers, for fear of "contagion." This time around, everything will be reported via the internet. Should be interesting times.

Dire

2009-07-09T22:26:00.003-04:00

I missed posting the past few days due to excessive pessimism. Let's just say that the whole "Oh my God, do we have enough soap?" and "Damn, I never bought those lentils!" mentality is back again, with a vengeance. Another thing I have not yet done is buy, say, the next 3 years worth of clothing for my kids. That's a shopping trip that cannot be put off too much longer. Far more important than that are the generator and the hand pump for the well. Suddenly, I need more time!!

There has been what I'd call a "coincidence of rumors" surrounding the end of the third quarter (Sept 30) and the month of October. Jim Sinclair is being very specific and is counting down the days until the world loses faith in the dollar (120 days to go, he says). There are rumors of bank holidays in September. There is the "embassies" rumor, reported by popular newsletter writers Harry Schultz and Bob Chapman, who say that the State Department has instructed US embassies overseas to accumulate enough local currency to last them a year (presumably because the dollar may crash at any time). Meanwhile, China has begun selling goods not in the international reserve currency, the dollar, but rather in its own currency, the yuan (who needs the dollar?). Middle Eastern nations say that their previous plans for a common currency have changed; this new currency will not be pegged to the dollar, as previously intended.

Meanwhile, the technical analyst on this week's Financial Sense Online radio broadcast said that the charts look so bad, it appears to him that the target values (meaning the bottom or minimum values) for the major stock markets of the world (Dow Jones, S&P, Tokyo Nikkei, London FTSE, etc) would be... well, essentially zero. Apparently we are approaching a catastrophic fall in stocks. So if you own a 401k, I guess you are better off in short-term Treasuries even though they're going to tank, also.

I mean really, the only thing a person can do is buy gold and silver. There really is nothing else, at least not until after the next cataclysmic drop in stock markets.

What was that? Your retirement plan doesn't allow you to buy gold and silver? Heh... exactly. There are few scams more successful than 401k plans for stealing the wealth of the middle class and sending it right on over to Wall Street.

Meanwhile California is in such a mess, they ran out of cash and they're now issuing what amounts to their own currency. Which, by the way, starts to verge on secession. I know, I know, the legislature there is faced with some awful choices -- like wanting to spend $92 billion, but being short by $26 billion (or perhaps $34 billion if the California Teachers Association takes the state to court and wins). But I read the stories about this negotiation and that negotiation, and the Speaker walking out, and the governator threatening vetoes, and I think-- Have these people forgotten what a riot looks like? Have they heard of mobs and torches?

Meanwhile, the number of people receiving unemployment benefits hit a new record, with 9.4 million people now receiving benefits. And we're just now learning that back in April, the number of people receiving food stamps hit an all-time high of almost 34 million.

The pressing question is: Where are new jobs going to come from? I really can't see any substantial job growth until the currency situation is so bad that we cannot afford Chinese shoes, Mexican food, or Guatamalan pants. Which means things are going to have to get so bad that we will have trouble feeding people. Unfortunately, I think it'll have to get that bad before our domestic production would be truly rejuvenated.

Meanwhile I've been reading about Weimar Germany.

What everyone needs to understand about currency collapse is that, counter-intuitively, even though the government will be printing money like nobody's business, there will actually be a lack of money because any given dollar will be nigh worthless. It's a lack of money in real terms, in terms of how much gold it would buy you. Without sufficient money, farmers will not deliver grains. Merchants will not sell their inventories. Truckers will not deliver goods. They know they cannot be paid what their goods are worth, and that all anyone will have to offer is swiftly depreciating paper, and not nearly enough of it to make it worth their while.

Imagine you go to the grocery store and it's empty. You have a toddler who needs shoes but there are no shoes. Your electricity keeps going out, the natural gas for your furnace is on and off, people are being fired because businesses have great difficulty in paying them given the rapidly plunging value of the currency.

I mean really, what could be worse, for a nation the size of the United States?

Argentina's tale is no better. For whatever reason it seems that their crime rate went through the roof when their currency failed (and then failed again).

If you have any extra money at all, even $5 a week, use it to buy something you know will keep, and that you will need in the future. An extra bar of soap and a bottle of cheap shampoo, if nothing else. There is no reason at all to feel silly about "stockpiling" such items, because the fact is, your money isn't going to make any interest or any profit at the bank. The best things to buy are the things you will need. Canned food in the basement keeps much longer than the expiration date implies, so that's also a good investment. Other than real goods, the only option is to buy gold and silver.

And by the way, it's no mystery how you buy silver. Google coin shops in your area, go in, and tell them you have X dollars to spend and that you're interested in junk silver or government-issued 1-ounce coins. Junk silver is not junk; it's slang that means pre-1965 US quarters, dimes, half dollars, and silver dollars. Government bullion coins are things like US silver eagles and Canadian silver maple leafs. Keep the receipt, because you'll need to pay taxes on the increase in value after you sell it, so you'll need to show the price you bought it at.

From the above Weimar link:

By mid-1923 workers were being paid as often as three times a day. Their wives would meet them, take the money and rush to the shops to exchange it for goods. However, by this time, more and more often, shops were empty. Storekeepers could not obtain goods or could not do business fast enough to protect their cash receipts. Farmers refused to bring produce into the city in return for worthless paper. Food riots broke out. Parties of workers marched into the countryside to dig up vegetables and to loot the farms. Businesses started to close down and unemployment suddenly soared. The economy was collapsing.

Meanwhile, middle-class people who depended on any sort of fixed income found themselves destitute. They sold furniture, clothing, jewelry and works of art to buy food. Little shops became crowded with such merchandise. Hospitals, literary and art societies, charitable and religious institutions closed down as their funds disappeared.

The question is: Do you think the current US government is smarter than the German government of 1920? Why would they be, given the coddling and bonuses they've always known at Goldman Sachs?

Many months ago a friend asked me if I thought this would be as bad as the 1930's. I said yes, at least that bad, but almost certainly worse. Take the Great Depression and the Weimar currency collapse and put them together, and you're starting to get close, but you're still not there. Our manufacturing base has been gutted, and cheap oil is coming very swiftly to an end. I try to tell myself that it's not the collapse of the Roman Empire... it's just the 1340's, is all.

It's the V that gets you

2009-07-04T14:42:00.001-04:00

I'm going to do a horrible thing to my 3 or 4 readers, and focus on an equation in this post. (Gaaah!!!) Here it is:

(amount of Money) x (Velocity of money) = (Prices of stuff) x (Quantity of stuff sold)

Otherwise known to econ students as MV = PQ. You can also think of it as MV = GDP, or MV = total economic activity aside from bartering. [V, or the velocity of money, means how often a dollar changes hands in a given year. Higher values mean there's more spending.]

Now, I never took an econ class in my life, and I never saw this equation until a few months ago. But it seems I'm not the only one who's been neglecting this equation. Many people in the "hard money" or Austrian camp tend to get obsessed with M, the money supply, rather than with MV. They tend to define things based solely on M, e.g.:

Inflation is best described as a net expansion of money supply and credit. Deflation is logically the opposite, a net contraction of money supply and credit. (Mish)

Inflation is an increase in the money supply. (Ron Paul)

Inflation and deflation are purely monetary phenomena.... Inflation is the very specific case of a rise in general price levels driven by an increasing money supply. If the money in an economy grows at a faster rate than the pool of goods and services on which to spend it, general prices are bid higher as a result. Only money creates inflation. (The Market Oracle)

This last blurb tacitly makes reference to the MV = PQ equation, but it pretends V is not there! If M is increasing, while Q (the total amount of goods and services) is not, then, the author concludes, in order for the equation to balance, P (prices) must increase.

This is not a fair conclusion. If V falls, it may counteract the increasing amount of money. Conversely, "Only money creates inflation" is not correct, because if V increases then inflation may result even with a constant money supply. The question is not "what is happening to M?" but rather, "what is happening to MV?"

Mr. Bernanke doesn't seem to recognize this, either:

By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

I guess eventually, over the long haul, he may be right. But the assertion that printing money "always" generates higher spending (PQ) once again ignores V altogether. We've seen this with the tax credit stimulus that was supposed to boost the economy... it didn't work very well, because people didn't spend that money. They paid down debts or stuck it under the mattress. To take an extreme example: if V = 0, then MV= 0, no matter how fast M is increasing.

Consider Weimar Germany, where velocity of money drove inflation moreso than the total money supply did.

By the end of the war, the amount of money in circulation had increased four-fold. In view of this, the extent of inflation was less than one might have expected. The consumer price index had risen 140% by December 1918....

Some rather simplistic folks would argue that a four-fold increase in the amount of money should have resulted in a four-fold increase in prices. Such folks should recall that the equation is MV = PQ, and not M = PQ. M went up by a factor of 4, but because people do not spend much money during wars, V went down. Thus, prices were not as strongly affected as one might expect, if one is looking solely at money supply. But then the war ended:

[I]nflation resumed after the peace until by February 1920 the price level was five times as high as it had been at the armistice. Yet during this same time the amount of currency in circulation had only doubled. Prices were in fact rising much faster than the rate at which money was being printed.

Yes, because the war was over now, and people were spending again. Velocity surged, and with it, prices.

Currency collapses -- often referred to by the inapt term hyperinflation (as if it's just an extension of regular inflation, which it is not) -- primarily seem to be caused by a catastrophic swing in velocity, from very low velocity (hoarding of money) to extremely high velocity (desperate panic buying of anything of tangible value). Jim Sinclair says history proves that currency devaluations or failures arise from very bad, deflationary economies. During the bad times, people don't spend. They hoard cash.

During this pre-collapse period, governments commonly print money to pay bills, as the Fed has begun doing. They also try to goose the economy by printing money and handing it 'round, hoping to get the party started again. This doesn't work very well, because when your economy is faltering and unemployment is rising, it's hard to get people to spend any extra cash they may have been given.

But the day comes when the psychology changes. Here again I would cite Jim Sinclair, who has repeatedly said that a currency collapse is a psychological event. The madness of crowds swings the other way, from panicked hoarding to panicked buying. (In Weimar the shift was more dramatic due to massive speculation in financial markets, which rapidly turned against their currency; but this is still a psychological event.) The change happens at some very unpredictable point, at the moment when confidence in the currency is lost. Suddenly people would rather own anything but the currency. During this phase, if you go to the store and all they've got to sell is 8 toasters, then you buy 8 toasters. That's the psychology that destroys currencies.

In terms of our equation, during the period before "hyperinflation" you have an increasing M but a falling V, so you do not see major price inflation. The currency begins to fail in earnest when V turns around and begins to shoot upward. All of a sudden MV is skyrocketing, but on the other side of the equation, Q cannot skyrocket because it is subject to physical constraints. There is only so much factory space, only so many engineers, and so on, so Q must remain relatively stable. This means that P must increase in line with MV. Prices go up rapidly, which is to say, the currency rapidly loses value.

The printing of new money, and thus the larger value of M, has a multiplying effect and makes any increase in velocity worse. It also plays a role in causing loss of confidence in the first place. But it's not like there is some value of M beyond which the currency begins failing. That failure occurs when the velocity changes.

In short, it's the V that gets you.

Not one or the other, but both

2009-07-03T13:04:00.004-04:00

One of my favorite financial writers, Jim Willie, recently wrote:

One of the primary objectives of the banking elite in firm control of the USGovt and USCongress is to confuse the public and investment community on the entire topic of inflation, what it is, how it is measured, and its risks. The same goes for deflation. All debate as to whether the Untied States will suffer from inflation or deflation is a horrible misdirected distraction that manifests the confusion. The US will suffer both higher monetary inflation and worse economic deterioration, not one or the other, but BOTH, and with steadily increasing intensity.

That is, our currency will be losing value, and our economy will be slowing to a standstill. In other words, decline and devaluation (see my earlier post).

Now, here is the confusing thing. Normally, if sales are declining and the economy is slowing down, companies would slash prices. Similarly, because home sales are down, home prices are also down. You have to have lower prices in order to get goods to move in a bad economy.

On the other hand, the dollar is losing value and we should be seeing higher prices because it takes more crappy dollars to buy the same stuff.

To some extent, these two bad trends are canceling each other out. This is one of the problems with only looking at prices. We have two really bad things going on-- total economic slowdown, plus a currency that is losing value like a balloon with a slow leak. But you can't see it in price data because they cancel out. Depending on the measure, prices may look a tad higher or a tad lower in a given month, but we're not seeing anything dramatic.

That does not mean nothing is going on. One barometer of the real value of a dollar is how many dollars it takes to buy an ounce of gold. This is why central banks, commercial banks, and governments in the West fight like hell to keep the price of gold down. Higher gold prices impugn their currencies.

As for economic deterioration, consider the trucks and rail cars piling up in various locations around the country. Or the list of now-bankrupt companies, including Crabtree & Evelyn, Eddie Bauer, Bennigan's, Chrysler, GM, Value City, Sharper Image, Six Flags, Mervyn's, Linens 'n Things, KB Toys, Saab, Nortel Networks, and Circuit City. Consider the empty commerical real estate-- something like 10% of all downtown London office space is now vacant, and there are few strip malls in the US without at least one empty space.

The worst statistic of all, indicative of an economic decline on a par with the Great Depression, is the June unemployment rate, as calculated by economist John Williams of Shadow Government Statistics. He puts the true unemployment rate at

20.6%.

One in five American workers cannot find work. That is one heck of a slowdown. Possibly if we still had a manufacturing base, or if we were not net importers of food, or if exported more than we import, or if we weren't so poor we have to buy shoddy Chinese tchatchke from Wal-Mart, then we might have hopes of a recovery in the not-too-distant future. But that's just wishful thinking.

The worse things get, economically, the less willing other nations will be to loan us money. We've already begun printing money to pay the bills (essentially, counterfeiting our own currency). Once you go a certain distance down that road, there's no turning back, and it only leads to one place: currency collapse. In the usual parlance, that's hyperinflation in the midst of a catastrophic deflation, much as Jim Sinclair has predicted.

Not one or the other, but both.

As goes the USSR...

2009-07-02T22:27:00.002-04:00

A very witty Russian-American named Dmitry Orlov gave a presentation some years back in which he argued that the USSR was better prepared for its collapse than the US is for its own demise. Collapse, as Orlov sees it, is the inevitable denouement of any Empire -- "no exceptions."

Although his message is grim, Orlov is both funny and empathetic, although to an average American his assessment of "the greatest nation on Earth" may seem harsh. (This reminds me of a David Sedaris line from when he visited Europe, which went something like: "It began to dawn on me that other countries had slogans, too, and none of them was "We're Number Two!")

Anyway, if you like Orlov's take on things, try his book Reinventing Collapse, essentially a much-expanded version of the above presentation. I guarantee you some laughs.

He's also got a blog, and he's posted another more recent presentation titled Definancialisation, Deglobalisation, Relocalization. Take a gander... I thought it was a great talk.

Decline and devaluation

2009-07-01T17:40:00.001-04:00

If you read any economic news at all, you've run across the "inflation vs. deflation" debate ad nauseum. It's got to be one of the most frustrating discussions in history, because the meaning of the words inflation and deflation changes from one person to the next. Most of the debate winds up centering on what exactly inflation is -- rising prices? Increasing money supply? Increasing money velocity? And things only deteriorate from there, because nobody knows what "money" is or how best to measure the money supply-- including, by the way, the Federal Reserve. Take it from Alan Greenspan, in 1999:

We do know that inflation is a monetary phenomenon but we don’t know exactly what money is. It is not any of the M’s people use – M1, M2, M3, MZM. They’re only proxies people use when they talk about inflation. We have great difficulty identifying something we can call true money.

Similarly, deflation seems to mean (depending on the commentator) falling prices, decreasing money supply, or decreasing velocity. Falling production, diminishing trade, and rising unemployment are also (sometimes) taken as signs of deflation, I suppose because they imply a decrease in money velocity.

Putting aside the tussle over definitions, what inflation means to the average person is a fall in the value of the currency. Your average Jane doesn't care if it came from money printing or China dumping dollars or economic recovery (i.e. increasing velocity); she just knows she can't buy as much at the grocery store because the dollars in her wallet are losing value. I'm swearing off the use of the term "inflation," which is now so fraught that it can derail a conversation as fast as you can speak the word. The better term is currency devaluation. This covers multiple economic scenarios, as well as devaluations by government decree.

Similarly, deflation might be replaced by the simple term decline. Maybe sales and prices are down because credit has dried up, or because money is not changing hands because people are afraid to spend, or because unemployment is skyrocketing, or because international trade has slowed to a trickle. People claim we need to understand the real cause of deflation, and they'll argue about (for instance) whether it was an insufficient money supply that caused the Great Depression, or insufficient velocity. I'm frankly sick of this particular debate. However it happened, you fix deflation by printing money and spending it on production and on nothing but production. If you're on a gold standard, you get extra money by redefining the exchange rate between your currency and gold, as FDR did.

Because people insist on using the terms inflation and deflation, it's very difficult for the human mind, which likes dichotomies, not to see these as opposites. The prefixes imply that they're opposites, and besides, that's just how homo sapiens think. Certain schools of thought, such as the strict Austrians, define them as opposites.

And yet, the United States is currently experiencing both, as the dollar erodes relative to other currencies, gold, and crude oil, even while unemployment soars and industrial output tanks. We are experiencing both economic decline and currency devaluation, simultaneously. There is nothing opposite about these trends. In fact, it's easy to see why they would go hand in hand, because who wants the currency of a nation that's an economic and fiscal basket-case?

Quoting from How Deflation Creates Hyperinflation [i.e. Currency Collapse]:

As an example of deflation leading to hyperinflation, consider the case of the Weimar Republic. In 1920, Germany experienced a deflationary collapse, with the average citizen finding it harder and harder to get enough money for necessities. Banks, short of money, could not honor checks, and businesses were strapped for cash to buy materials and meet payroll. Fearing a collapse that would throw millions of workers out on the street, the German government desperately printed money in an attempt to re-inflate the economy. During this period, despite the government's money printing, the mark actually gained in value against foreign currencies, so that prices of imported goods fell by some 50%.

Eventually, as a result of the money supply's rapid expansion, the nation's massive foreign debt, and the shrinking economy, German citizens lost all confidence in their currency, and the Weimar Republic experienced one of the worst cases of hyperinflation in modern economic history. Billions of hoarded marks came out of hiding and entered the marketplace. The [table] below tells the rest of the story.

The table, which you can see by following the link, details the rise of the price of an ounce of gold from 170 Marks in January 1919 to 87,000,000,000,000 Marks in November 1923. Obviously the price of gold did not change; the Mark lost virtually all its value.

Hitler renewed the devastated German economy by printing new Marks but insisting that they be tied to equivalent amounts of real production and real labor [see previous post]. The German people did not love Hitler in the mid-30's because he hated Jews; they loved him because he had restored their quality of life. (There is a lesson in this: any horrific monster can come to power if he can fix the economy.) Ellen Brown cites another example of printing one's own money in order to fund real production, in this case on the impoverished and indebted island of Guernsey circa 1815:

The end result of the Guernsey Experiment was spectacular – new roads, sea defenses and public buildings were established, fostering widespread trade and prosperity. Full employment was achieved, no deficits resulted and prices were stable, all without a penny paid in interest. What started as a trial led to a string of construction projects, which still stand and function to this day. Money was used in its purest form: as a convenient mechanism for oiling the wheels of commerce and development.

As much as I have learned from "hard money" advocates who abhor money printing of any kind, it does seem that there are examples where money was printed out of thin air and this engendered spectacular recoveries. Western elites don't want this idea getting out, because they like to control currencies themselves. They don't want states, counties, or cities getting any funny ideas about wresting control from the private mega-banks who issue our money. After all, the private mega-banks rely on everyone paying them interest on loans which they created out of thin air. That is, the private banks rely on legalized robbery for survival.

When new money is printed intelligently, and used to encourage only real wealth (that is, labor and production), it can be a society's salvation. The question is: Who figures this out first? The People, or another Hitler?

Fund production, not banks

2009-06-28T17:16:00.000-04:00

Over at Naked Capitalism I ran across this excerpt from a book about FDR and the New Deal:

[WPA] workers constructed or repaired more than 125,000 buildings, including 83,000 schools; 800 aiports; 950 sewage plants; and 650,000 miles of roads. They built or improved 78,000 bridges and 25,000 playgrounds; terraced 271,000 acres of eroded land; and taught two million people to read. They also ran a famous Federal Art Project, which hired destitute artists to create murals for public buildings, posters, and paintings. The WPA produced a highly regarded series of state guidebooks and an acclaimed collection of interviews with former slaves, and it played a major role in building the San Antonio Zoo, New York City’s LaGuardia and Washington’s Reagan airports, and the presidential retreat at Camp David.

In addition to the Works Progress Administration, there was the Tennessee Valley Authority, which provided electricity to some of the most impoverished parts of the country. Roads, bridges, and electricity increased production for decades into the future, long after the initial jobs program money had been spent.

Compare this to "stimulus" efforts today. Obama's plan, costing roughly $800 billion, spends about $80 billion on infrastructure projects, mostly for more and bigger highways rather than the things we will really need in 5 or 10 years, namely railways and public transportation. Anyway, $800 billion pales in comparison to the $14 trillion so far given to banks.

Many people have argued that the stimulus plan will do little to get us out of recession, precisely because it gives fish but no fishing poles. Meanwhile, most people are angry at the money being given to the banks. But there is another concern which is far more important: printing money to boost production does not destroy currencies, but printing money for the financiers can lead to total currency collapse.

Ellen Brown takes a close look at Germany's hyperinflation of the early 1920's, and their economic miracle of the 1930's. In both cases, oddly, the government simply printed money out of thin air. As she concludes, it's what the government does with that money that makes all the difference in the world.

The dramatic difference in the results of Germany’s two money-printing experiments was a direct result of the uses to which the money was put. Price inflation results when “demand” (money) increases more than “supply” (goods and services), driving prices up; and in the experiment of the 1930s, new money was created for the purpose of funding productivity, so supply and demand increased together and prices remained stable. Hitler said, “For every mark issued, we required the equivalent of a mark’s worth of work done, or goods produced.” In the hyperinflationary disaster of 1923, on the other hand, money was printed merely to pay off speculators, causing demand [available money] to shoot up while supply remained fixed. The result was not just inflation but hyperinflation, since the speculation went wild, triggering rampant tulip-bubble-style mania and panic.

One can hardly say that every dollar of Obama's stimulus plan will result in a dollar's worth of production. You would be hard pressed to argue that every ten dollars in stimulus money will result in a dollar of true production.

Even if we stipulated, generously, that $200 billion of the stimulus money would create real goods and services (i.e. actual wealth), this is out of nearly 15 trillion dollars so far spent alleviating the economic crisis. Mostly, we are doing what the Weimar folks did, funneling money to banks. That leaves our currency, and us, at the mercy of the financiers. People worry about China selling its dollars, but another risk is that bankers begin piling on bets against the dollar and against US Treasuries. That, as in Weimar, could ruin our currency.

Fiat currencies, backed by nothing, have worked wonderfully in some instances, and for hundreds of years in the case of British tally sticks. The trick is to print them and convert them as fast as possible into real goods and labor. As historian Webster Tarpley says, if we print our currency into oblivion while building solar arrays and maglev trains and putting in geothermal furnaces, at least in the end we would still have power, transportation, and heat.

But no. We print money and hand it to banks by the trillions, hoping against hope that Goldman Sachs never builds up a massive short position in Treasuries.

Buy real metal

2009-06-27T13:16:00.000-04:00

I used to read Baghdad Burning, a blog written by an Iraqi woman living in (you guessed it) Baghdad, back before her family fled to Syria. If you want evidence that gold is money, and an excellent store of value, there are several telling anecdotes at her blog.

American troops, on breaking into Iraqi homes and finding small piles of gold jewelry, assumed that this was evidence of criminal or black market activity. Only a really wealthy person would bother with so much gold, to their minds. They had no understanding of gold beyond an ostentatious display of social status. But, as our Iraqi blogger 'Riverbend' explains:

Iraqi people don’t own gold because they are either spectacularly wealthy, or they have recently been on a looting spree... Gold is a part of our culture and the roll it plays in ‘family savings’ has increased since 1990 when the Iraqi Dinar (which was $3) began fluctuating crazily. People began converting their money to gold- earrings, bracelets, necklaces- because the value of gold didn’t change. People pulled their money out of banks before the war, and bought gold instead. Women here call gold “zeeneh ou 7*azeeneh (khazeeneh)” which means, “ornaments and savings”. Gold can be shown off and worn, but in times of economical trouble, a few pieces can be sold to tide the family over.

. . .

My aunt went into a tirade against raids, troops, and looting, then calmed down and decided that she wouldn’t hide her gold tonight: her daughter and I would wear it. I stood there with my mouth hanging open- who is to stop anyone from taking it off of us? Was she crazy? No, she wasn’t crazy. We would wear the necklaces, tucking them in under our shirts and the rest would go into our pockets.

. . .

I told everyone that we looked like maids who were playing dress-up with the mistress’s jewelry… E. said we actually looked like gypsies ready to make off with the mistress’s jewelry. The ‘mistress’ called out that we could laugh all we wanted but since the jewelry was everything she had saved since 1965, we had better be careful.

Gold is valued as a store of wealth throughout the Middle East and in India, as well as in nations that have experienced hyperinflation (Germany, for instance). Because it's a longer-term store of wealth, it tends to stick around until there is an emergency. Riverbend's family had to sell gold in order to make a ransom payment to save a relative's life:

We spent the rest of the day rushing to sell gold, collect money and my uncle took a broken L. to the bank to empty the account- they've been saving up to build or buy a house. A.'s parents were soon at my uncle's house and we had a difficult time breaking the news to them. His mother cried and wanted to rush home for her few pieces of gold and his father sat, stunned, chain-smoking and trying to make sense of the situation.

These small gold trinkets were their insurance. Am I suggesting the US will turn into Baghdad? Obviously not. But the crime level in Argentina, following their currency crisis, was phenomenally high. Argentina, you recall, was once the 5th most prosperous nation on Earth. Thus the phrase "rich as an Argentine."

Here in the US, where television broadcasts the "Everything Is Normal" message, equivalent to Soma, the few investors who've heard about gold usually buy a bit of paper that claims to represent the actual thing. They say "Sure I own gold... I have X shares of the gold ETF," or perhaps they own gold certificates or gold futures or some other paper instrument. This is truly ironic. You need gold when there's a disaster. Your quarterly statement showing your gold shares isn't going to mean squat during a disaster. Can you trade that statement for groceries, gasoline, or to pay a bribe?

But even if we disregard the importance of gold (and silver) during catastrophes, we still have the very important point that all these paper peddlers have not got the gold they say they have.

Not only do the ETF's not have the gold, and not only does the Comex not have the gold they claim, and not only is the Canadian mint missing $20+ million in gold, but probably Fort Knox doesn't have the gold it says it has, either. Or-- as GATA asked in a recent piece--

Who really owns that gold? And how many people have claims to it?

. . .

And of course the gold purportedly kept by the U.S. government at both Fort Knox and the depository in West Point, New York, is never seen at all and never publicly audited. For all that is known... on Mondays an assistant secretary of the treasury may take the German ambassador to Fort Knox and show him around and say, "Take a look at your gold," and on Tuesdays the assistant treasury secretary may take the French ambassador to Fort Knox and show him around and say, "Take a look at your gold." Wednesdays may be reserved for the Swiss ambassador, Thursday for the Italian ambassador, and Friday for the British ambassador, who is almost surely in on the joke and just making a social call.

If you're going to buy gold or silver, find a local coin shop and go and buy government minted bullion coins (or old silver coins, known as junk silver). Do not buy paper promises with some loose affiliation to actual metal sitting in some vault, ostensibly. Some may want to own gold and/or silver overseas, in which case the (audited!) GoldMoney is a good vehicle, but first get the kind of metal you can drop on your foot, as they say.

What is wealth?

2009-06-26T19:11:00.000-04:00

Here is a typical mainstream treatment of "survivalists," courtesy the Wall Street Journal:

We're not talking about the extreme end, the "preppers" who are "New Mattress Stuffers" gone wild. They believe you have to be ready for a return to an almost primitive state of existence and survival.

No... that's wrong. Just because I value wheat and firewood does not mean that I expect to return to the Dark Ages three years from now. What it means is that I looked at the money accumulating in the checking account and tried to think how to convert binary digits into real wealth. That is, into things that human beings have always needed to survive and to be comfortable and happy. I bought military surplus wool blankets for $20 each. The first time I bought wheat, I got 50 pounds of the highest protein, longest shelf life (10+ years), organic wheat for $28 (it now sells for twice that). The pressure canner was a couple hundred dollars. The rechargeable batteries and solar battery recharger were maybe $100 or $120. I also bought a lot of classic literature and games. Was my money seriously better off sitting in a Chase account getting no interest, awaiting devaluation and bank holidays?

[Yes, I also own gold and silver. But at some point I realized you can't eat it, wear it, or use it to keep the rain off.]

The mainstream news engages in a kind of propaganda that disparages those with historical perspective, those who are not convinced that all is well simply because Twitter is still functioning and the ATM still spits out bits of green cotton. When I was growing up I read the Little House books several times over. The Ingalls family didn't live in the Dark Ages, they lived 150 years ago. And they nearly starved (and froze) to death, one winter. Trains that had been expected to deliver food were trapped in impassable snow-filled gullies and could not get through until May. They braided hay to burn in their stove in lieu of wood. A different year, locusts decimated their crops. Once, when the girls were left alone and a blizzard came up, Laura brought the entire woodpile into the house, terrified of freezing to death as some neighboring children had. She might have been 10 or 12 at the time.

Similarly, I've read 19th century novels in which one's proximity to the fireplace conveys one's social status. Warmth, it turns out, has long been a privilege. Were the gentlemen of 19th century Britain primitive savages? Hardly. In historical terms, the temporal distance between us and them is but the blink of an eye.

A bewildering tide of new technologies has made most Westerners believe that concerns about heat, clothing, shelter, and food are now, thankfully, obsolete. In fact, says the Western establishment, such concerns are absurd and paranoid. To put aside a month's worth of food for one's family is, according to the Wall Street Journal and every other mainstream news outlet, simply loopy. And yet, a 19th century man would not be able to comprehend our trust, our blind faith that the grocery store will always be chock full of food, the electricity will always be on, the gas or oil will always be there to fire up the furnace and keep us at 72 degrees. Americans used to value self-sufficiency. Now we laugh at it.

I watched a YouTube video put up by a Serbian man who had undergone Yugoslavia's currency failure in the early 90's. He talked about a pensioner who had used his entire month's check to buy a pound of good salami and a loaf of bread. The pensioner then went home, ate a couple of salami sandwiches, and hung himself. He left a note, saying "I don't want to die of starvation." This happened in the late 20th century, in Europe. It did not happen in 1702 or in Sao Paulo or Mumbai.

The mainstream media tries to laugh at "preppers" by implying, more or less: "Come on, now, your iPhone still works, doesn't it? The sports are still on TV, right? You can still buy 1,200 different food-like items at your local supermarket, eh? So let's not be paranoid!"

What I have is not paranoia. It's a respect for the human condition in history. It has very little to do with fear. It has to do with my understanding that 0's and 1's in a computer at a bank are intrinsically worthless. People who understand this take different routes: some buy junk silver, some buy wheat and a grain mill, some buy real estate in foreign countries and enough gold to bribe their way out of a failed state should the very worst somehow occur. Some do all of the above. But the point is, the 0's and 1's in your checking account -- and even moreso the binary digits in your 401k -- are purely theoretical and could lose all value in a moment.

Have some respect for your ancestors. Think about what they would have considered "wealth" and what they considered to be insurance against hardship. Stop putting unmatched funds into your 401k or tying up cash in stupid CD's and money markets. Stop being smug about your lifestyle, here at the apex of an empire, here in the last heyday of the Cheap Oil age. Buy a few real goods as a gesture of respect to those who have gone before you.