In a recent editorial, Peter Schiff reminded me of what my late friend Harry Browne, the former Libertarian Party candidate for president, used to say: “The government is great at breaking your leg, handing you a crutch, and then saying, ‘You see, without me, you couldn’t walk.’” That maxim is clearly illustrated by the financial industry regulatory reforms proposed recently by the Obama administration. (“Would you like a broken arm, or would you prefer a broken leg?”)

Every economic problem we face can be directly traced back to the federal government and the interfering laws that it continually passes. Remember the Resolution Trust Corp. back in the 1980s? It became “necessary” to bail out the savings and loan industry because so many of the S&Ls gambled wildly with their depositors’ money. Sound familiar? How could the S&Ls of the 1980s and the too-big-to-fail banks of the ’00s make such horrible business decisions? Were/Are the management teams just stupid or are they also incompetent?

Consider this: We’ve had a record number of bank failures just this year. As of June 19, 2009, the FDIC has closed 40 banks at a net cost of over $11.5 billion. Are you worried? Why not? Oh, your account is insured. By whom? So when the management of the bank that controls your deposits makes stupid business decisions, you don’t care? The FDIC will bail out your account. Not only that, the “insured” amount was increased from a “mere” $100,000 per account to $250,000 this year (this extra coverage expires at the end of 2013 and reverts back to the $100,000 figure in 2014 as currently scheduled). Do you see a slight problem here?

Just for giggles, suppose there were no FDIC and your deposits at any bank or S&L were simply not insured. Would you then perhaps have a slightly different outlook as to the safety of your money? Would you perhaps behave somewhat differently when selecting a bank in which to deposit your funds? Why? Do you now see that the FDIC is a federal government-sponsored insurance scheme to protect you from greedy and stupid bankers? Or do you perhaps see that the FDIC actually facilitates excessive risk-taking on the part of the bankers, since they have nothing to loose? Do you suppose there might be a slight moral hazard hiding somewhere in this mix? If the bank did not have the FDIC insuring your deposit and that same bank had to compete in the open, free market for your deposit account, would you suppose that the bank management might behave in a slightly more conservative manner? Wouldn’t you behave in a slightly more conservative manner when selecting a bank?

Now consider the actions of the too-big-to-fail companies, be they banks, insurance companies, Freddie and Fannie, or even automobile manufacturing companies. What’s to restrain the management of those companies? If they mess up, the government will protect them. And as we’ve all observed, the very folks that made the stupid and reckless business decisions will still get their multimillion-dollar bonuses. Would you be willing to make a wild guess that maybe there is a slight moral hazard hiding somewhere in this scheme?

What about the business management that continues to make prudent decisions and continues to operate profitably? What is their incentive? How are they rewarded? The same federal government that bails out the too-big-to-fail companies totally ignores the hardworking, successful managements of the smaller businesses. Actually, it’s even worse than that. The companies and individuals that are successful now get penalized, because their tax dollars are used to bail out the unsuccessful. They get to subsidize the failures. Isn’t that a wonderful reward for doing a good job?

So I again ask what am I missing? Am I the only person (or only one of the very few) concerned? When I/we comment about these obvious inequities, does anyone pay attention? Does anyone question the wisdom of the federal government’s decisions? Based on the feedback I’ve received from the congressmen and -women who claim to “represent” me, they certainly don’t care. Aside from the folks who attended the various Tea Parties on April 15, the rest of the folks don’t seem to care. What am I missing?

One of the factors that caused me to write this white paper is the incredible discussion of so-called “green shoots” from our eminent Fed head “Helicopter” Ben Bernanke and the observation of the recovery light at the end of the tunnel that now seem to be so visible to the mainstream media. As Ronald Reagan used to say, the media know a great deal that just isn’t true.

There has been a tremendous recent effort to create “transparency” in and from government. Using that as a diversionary tactic, the public’s attention is now away from the facts. While perception is important and can mask facts for a period of time, it cannot avoid ultimate economic laws of nature. In this case, the public’s attention is being diverted from the undeniable facts that we are nowhere near the bottom of this economic downturn. Banks are still hiding toxic waste in their off-balance sheet accounts. These virtually worthless assets are not just going to disappear with no one noticing. Sooner or later, these near-worthless assets must be accounted for. The so-called bank stress tests were a joke. The intent was just to give the public the perception that the worst is over.

It isn’t. We have at least one more major leg-down in our economic future. And I believe that leg will take us to a Dow of 5,000 and perhaps as low as 3,000. Yes, the Dow may continue upward to 10,000 from its current level of 8,500, but then it will head down once again. All we have to do is look at Japan 1989-present and our own economy from 1929-1932. Oh, yes, it can happen again! Absolutely nothing has been done to prevent a repeat of this history. In fact, what has already been done by the federal government interference with our markets almost assuredly guarantees that it will happen once again.

What is it that will happen? A depression. Why? Because too many government interferences have occurred over the decades since the last depression. Perhaps it might be helpful to first define the difference between a recession and a depression — at least by my definitions of the terms.

Business cycles frequently become what are referred to as overheated economic cycles. (Note that every one of these so-called overheated situations is a direct result of government monetary interference with what otherwise would be free market behavior.) So a so-called cooling-off period of adjustment then takes place to correct the malinvestments that were made during these periods of irrational exuberance (thanks, Alan). These adjustments happen rather quickly, and then the recession is finished. You’ve heard it called the “V” recession because we tend to enter quickly but then we tend to also recover quickly. Today, the mainstream is talking of a “W” recovery, meaning a double in-and-out recession. But recessions usually take place rather quickly and are then finished. In a depression, structural changes to the economy actually occur and then it takes years to readjust. Can you say Japan? The new version of the resulting economy is a major change from the prior economy. Old bubbles are never reinflated, but new bubbles are ultimately formed. Note that our federal government is trying to reinflate the last bubble, meaning a return to a consumer-led economy. It simply won’t happen. We’ll waste a tremendous amount of taxpayer money and it will all be for naught.

Ultimately, a new bubble will be created. In the past decade, we’ve enjoyed the Greenspan dot-com bubble followed by the real estate bubble. Now we are starting to form what I see as a bond bubble. In the process, everything in the path of this “recovery” is being socialized: banks, insurance companies, mortgage lenders, even automobile companies. Yet to come will probably include national health care. If you think private health care is expensive, wait until you see how much “free” health care costs. But this is what I mean by “structural” changes. It’s new territory for most of the participants.

What do you think will be the end result: inflation or deflation? I think we’re in for both deflation and inflation — in that order. Short-term deflation, but longer-term inflation. So I’d invest to protect myself against inflation. That means precious metals, energy, and commodities such as foods and water. Period. For the foreseeable future. Speculations would be in the area of biotech, nanotech, and stem-cell-tech.

I also hope that my comments are just being realistic — not doom and gloom. I admit my emotional reactions may be affecting my opinions. I hope not. But I’d rather be overprepared than underprepared or unprepared.

Considering that the value of our dollar is being actively destroyed by our government, how will you protect yourself and your family from further destruction of the dollar? Are you aware that the dollar is now worth 4% of what it was worth when the Federal Reserve was created with the charter mandate to provide a stable dollar? What did I just say? Are you happy with 4 cents of purchasing power left for your hard-earned 100-cent dollar? Don’t take my word for it — it’s on the Bureau of Labor Statistics (BLS) Web site. My recommendation includes making investments in areas that are not dollar denominated. As such, you can expect to benefit from a currency hedge as well as from the performance of the investment itself. Today, all currencies are fiat, so this becomes a relatively moot consideration — see my next comment below.

Still another area to consider is foreign exchange. Consider Swiss francs and Chinese renminbi (yuan) for starters. Also consider the Brazilian real, due to the country’s incredible discovery of offshore oil. The real would be a speculation, while the franc and yuan are slam-dunks. Norway’s kroner is also a consideration, due to the country’s oil economy. I’d stay away from the Canadian loonie simply because Canada’s economy is so closely tied to the US’.

I believe we are in a depression, not just a recession. By that, I mean we’re in for major structural changes, not just a clearing of some malinvestments that got out of hand in recent years. The Dow could go as high as 10,000 before the next drop, but there will be another drop. As I said, I expect the Dow to go as low at 5,000 and possibly 3,000. I know how that sounds, but that is what the markets are telling me. While we will then recover, it will be a long, drawn-out recovery. Years, not months. This is not the muddle-through recession that so many expect. I’m guessing we’ll remain in this morass for at least five years, if we’re lucky. We could go the way of Japan, which hasn’t recovered yet after two decades! The more Washington interferes with the markets, the more severe the problems then become and the longer the recovery period. As Bill Bonner is fond of saying, we’ll see “a corrective force equal and opposite to the deception and delusion that preceded it.” And of course, we could just be headed into outright and total socialism, so all this attempted planning could just be for naught.

But back to my original question: What am I missing? What do you know that I seem to be overlooking? Why am I not in agreement with all the mainstream economists and government officials such as “Helicopter” Ben Bernanke and Timothy tax cheat-in-charge-of-the-IRS Geithner? Why is it OK for the U.S. government to “fire” all the profitable Chrysler dealerships because they donated to the Republicans while keeping the unprofitable Chrysler dealerships because they supported the Democrats? Why is it OK to medically insure the 47 million uninsured at the expense of the folks that actually pay the premiums? Why is it OK to bail out AIG because it insured Goldman Sachs? Why is it OK to “gift” a major ownership of General Motors to the UAW simply because the union supported the Obama election campaign? Why is it OK to stiff the Chrysler and GM bondholders who, by USA contract law, have first right to the assets of the corporations in case of a bankruptcy? Why is it OK to simply ignore and override centuries-old corporate law? Why is it OK to issue presidential edicts that circumvent corporate and civil law? Why? What am I missing? Why?

There is much, much more to be said on this topic. However, what I’ve already written is probably more than enough for the moment. By the way, were I a registered broker or financial adviser, the securities rules and regulations would prohibit me from telling you the above. So don’t be too hard on your current financial adviser. The government would suspend his/her license for telling you the truth.

Regards,
Tex Norton

July 10, 2009

This article was originally featured on Whiskey and Gunpowder

FDIC Fosters Moral Hazard Among Banks

In the simple press release that followed, we learned the Fed’s intentions remain the same. Its quantitative easing (QE) plans—that is the Fed’s buying of Treasuries to goose the economy—have not been expanded, nor have they been fully implemented. But if the economy forces their hand, they will!

After the Fed announcement, the dollar immediately sold off against the euro and the pound.

The end of June brought the third revision of the U.S. gross domestic product reading. It was revised to a slightly better figure than expected. In accordance with the trading patterns of late, strength returned to the dollar as its counterparts sold off strongly.

Then there was the massive Treasury auction, with a record number of Treasuries up for bid. Despite fears of no one showing up, the auction went off quite well. Bidding was strong and yields dropped from their recent highs. Of course, falling yields are bad for the dollar, so even though demand for U.S. investments held up, the dollar’s value fell.

That put the focus back on the euro and the pound, which gave the dollar a nice beating. But then on Tuesday the U.K.GDP numbers came out worse than expected. - and once again the dollar was the shining star.

Dizzy yet?

The currencies just keep vacillating from strength to weakness. The problem is, every time they show more strength, they quickly back off. It is hatefully referred to as a churning market. Lots of movement, but no real direction.

Lots to consider: GDP from Canada; Case-Shiller Home Price Index, consumer confidence, the ADP Payroll numbers, continuing jobless claims and non-farm payroll here in the United States; and rate announcements from the United Kingdom and the European Central Bank.

But the numbers you should keep a close eye on this week are the Bureau of Labor Statistics’ continuing jobless claims and the early holiday release of the non-farm payroll report (which is usually done on the first Friday of the month).

Crooked Math

Now, I’m not asking you to look at the numbers as a setup for a potential trade. It’s just that the numbers will highlight something I’ve been saying all along.

Here’s how it goes: The monthly report was expected to show a negative 350,000. That means we lost 350,000 jobs last month. However, the weekly figure will come in at a negative 600,000 (or so).

Funny, that. If have new jobless claims running at about 600K per WEEK, how can we only lose 350K jobs per MONTH?

Sometimes readers will complain about my politicizing the weekly wrap-ups in my newsletter. But doggone it, stuff like this really sticks in my craw. I have little confidence in the present administration, and I had little confidence in the last administration. And that’s just the start of it. I believe the mess we are in is the product of the last 100 years of administrations.

For far too long, our leaders have paraded themselves around in the most expensive of accommodations, spent our money like it is as plentiful as dirt, presumed to make intelligent decisions, and foisted them on the public as such when, in truth, they are no brighter than the emperor in his “new clothes.”

That bothers me. Immensely.

So when I complain about government intervention, I’m not specifically talking about the current occupiers of the White House or Capitol. (It just so happens the current administration has been big on intervention.)

For example, I’ve been asked what I meant by “the repressive taxation being currently inflicted on the citizenry.” “Where are the new taxes?” Essentially, I was being asked to point to a specific spending bill with accompanying taxes.

But that’s not exactly what I meant. My point was — and continues to be — this: whenever the “government” enacts a new law, it enacts a tax by default.

We have a current view of law that is “positivistic.” In other words, rather than making laws that restrict, we make laws that propose. There’s a huge difference. A negativistic view of the law is basically what we find in the Ten Commandments: Thou shalt NOT kill. Thou shalt NOT steal. Thou shalt NOT committ adultery. Each of them is negative or restrictive in nature.

Modern law, being positivistic, actually demands new behaviors. Thou shalt wear a helmet when riding a bicycle… Thou shalt wear a safety belt when riding in a car… Thou shalt provide insurance for former employees. Thou shalt produce cars with better gas mileage and friendlier emissions. Thou shalt purchase carbon credits for excessive pollution.

What’s all this got to do with taxes? Well, it costs money to enforce and police the new standards of behavior. They must be enforced and policed upon the entire population. Whereas the old laws were only enforced upon the minority who were murderers or thieves. In any “civilized” society, they are a minority, and the cost to enforce the law upon them, if it is done right, is miniscule.

But when you must police and enforce behavior across an entire population, the costs increase exponentially. That’s why with every new bill that is pushed out by Congress, taxes must go up. Unless we believe the Polyannic line that they will cut costs over here to pay for new “programs” over there!

Finally, without exception, I believe any taxation above 9.9% in toto is repressive and draconian. Only God is great enough to require 10%. [Any government that requires more has a lot of nerve—ed.]

Now, I say all that for this reason: These government statistics do not add up. When they don’t, we know they must be manipulated. If a government will manipulate its currency (which is downright theft), manipulating some monthly numbers will not cost them any sleep at night. And this month, at least in the weekly and monthly job figures, it will be out there for everyone to see who will look at it.

How does this play into your investment strategy? Well, if you were purely a technical trader, you’d say it doesn’t factor in at all. Technical traders only watch the charts and price action. Their mantra is, “Price action tells the whole story of the market.”

Now, I believe charts and price action have their place, but I would argue that it’s been stunted by the recent market. What should be good news for the dollar has often turned out to be bad news, and vice versa. Thus, if a trader is watching price action only, he would just be able to react to the markets reaction to the news, rather than trading what he thinks the market ought to do. So that’s why I think this kind of top-down, fundamental analysis should have a role in looking for investment opportunities.

And those fundamentals include studying the policies — and contradictions — spewing from the government.

Regards,
Bill Jenkins

July 9, 2009

This article was originally featured on Whiskey and Gunpowder

DC and the Fed manipulating Interest Rates and Your Money

Linda Traynham, our Whiskey morning glory, had us poking into HR 2454 when she mentioned Texan Rep. John Carter’s amendments to it in her recent shot.

Ron Paul is right on the money in saying this bill will “sell pollution permits to the industry as the Catholic Church used to sell indulgences to sinners.”

But the intrepid Carter was no Martin Luther. Dem House leaders barred his amendments from floor debate on June 25. Carter was bested by the 309-page amendment from California Democrat — and bill sponsor — Henry Waxman. Of course, Waxman’s folly came to a floor vote before House Members had time to read it. HR 2454 squeaked by with seven more yeas than nays.

Harry Reid expects Senate results this fall. But in the meantime, let’s take stock and follow the money trail to the bill’s real supporters.

Behind That Green Machine, Pope Goldman Is Pushing

Project Cap and Tax began with the unholy Enron. That blind Cyclops of Energy pushed hard for cap-and-trade policy before its 2001 demise. But you’ll never believe who wanted in on it next.

Insurance titan AIG. The once-proud member of USCAP.

AIG knew creating exotic “insurance” wasn’t going to stay profitable much longer. But investing in currently worthless carbon credits and tanking alternative energy companies COULD mean big-time money — if Congress wanted it.

Back in 2007, then-CEO Martin Sullivan wanted to jump in feet first, saying that AIG:

“can help shape a broad-based cap-and-trade legislative proposal, bringing to this critical endeavor a unique business perspective on the business opportunities and risks that climate change poses for our industry.”

Note that Sen. Dodd has been AIG’s donation darling since 1990 — netting $284,000 from AIG’s employees, executives and PACs. And right now, Chris Dodd can help make the Senate’s version of the cap and trade. He’s so pro-cap and tax he wants to tack on a carbon tax — above and beyond cap and trade — that he hopes will generate $50 billion annually for renewable energy research..

But in February 2009, Joe Barton (R) led to charge to cut AIG out of USCAP. He cited AIG’s use of taxpayer money to finance lobbying activities. Point for cap-and-trade critic Joe Barton! We bet GM will drop from the USCAP roster if Barton has a hand in it.

But AIG’s single biggest counterparty will pick up the slack. Goldman Sachs spent $3.5 million on climate issues alone last year.

Then on Jan. 12, 2009, former Goldman CEO Hank Paulson offered think tank Resources for the Future (whose chairman of the board is also a Goldman alum) this interview: “How Markets Can Help Address Climate Change and Other Major Environmental Problems.”

We doubt this interest is merely because Hank Paulson is a lifelong bird-watcher.

Paulson confides that he “could see at Goldman” the value of carbon credits: “to come up with a system ultimately that has got credibility or is verifiable, that when someone pays to avoid it, you know, a ton of carbon emissions, they know they’re really getting a ton of carbon emissions avoided.”

When pressed, Paulson pooh-poohed the carbon tax. He said a tax wasn’t transparent, as the cap and trade was — amid crowd hoots and howls of laughter — as he emphasized the words “fair,” “credible,” “efficient” and “transparent.”

Is this the same man who guaranteed an efficient, transparent, and, um, highly credible, unregulated credit default swaps market? Is this the same purveyor of the clarity and transparency of the Moody’s and S&P ratings on bundles of mortgages?

But where Paulson may have stepped down, a new pro-CAP man steps up.

Treasury chief of staff Mark Patterson clocked lots of time across the street from Capitol grounds. From 2005 until April 11, 2008, he lobbied for Goldman as VP of government relations. While you’d think allowing a former lobbyist to work on an issue he has lobbied for within the past two years would besmirch Obaman ethics, we’ve been assured that he “steps out” of such matters at the Treasury, like a judge stepping down from a case. Yeah, sure he does.

Goldman likes cap and trade for one big reason: Its investments depend upon it.

Follow the Money Trail to Mr. Derivative

When you ask who’s the biggest winner if the bill goes through, you’ll find the Chicago Climate Exchange (CCX), co-founded by Hank Paulson and Al Gore. Members include Amtrak, DuPont, Ford, Oakland, Chicago, and the Iowa Farm Bureau.

The whole idea is the brainchild of Richard Sandor — aka “Mr. Derivative.” He’s the guy to thank for interest rate futures, as well as earthquake futures. In the early ’90s, he pioneered the collateralized mortgage obligation(CMO). And while you might not know exactly what a CMO is, you’ve probably heard the name Kidder, Peabody — where Mr. Derivative worked. By the mid-’90s, it held 28% of the total world CMO pie on its own balance sheet. Surprise, surprise, it all blew up in 1994, forcing the 130-year-old firm to the auction block — because of toxic instruments that look an awful lot like the mortgage securities that just blew up on us in 2007.

Do you feel confident?

Goldman sure does. It owns a 10% stake in it. It also owns a 19% share in CCX’s parent: Climate Exchange Plc. It nearly doubled its holdings in January 2009.

The icing on the cake is its stake in Blue Source, a Utah-based purveyor of carbon creds. In 2005, when Paulson drew up the bank’s environmental policy and started Goldman on a stream of energy partnerships, investments and subsidiarys, he offered this comment: “We’re not making those investments to lose money.”

In 2009, Goldman got caught up in a botched IPO of its investment Changing World Technologies, which turned Butterball turkey offal into diesel — at the cost of $80 a barrel — before filing for Chapter 11. You can bet Goldman will ensure this sort of misstep doesn’t happen again.

Government-Guaranteed Price Hikes

The government “cap” is what makes this market a true racket.

As Peak Oilers know, the less and less of a dwindling resource, the higher the price you can get from the people that need it.

Capped carbon follows the same logic. We start with a high cap of carbon pollution and that’s the national limit of how much CO2 can be emitted that year. Each year, that cap shrinks a little more, and the next year even more, until we reach the “no-harm” level — which some environmentalist absurdly place at zero.

Now here’s the catch. The government divvies up the shares of emissions among businesses that produce or consume energy. (This handout may be based on history of consumption.) Say hello to a new breed of lobbyist pimping a whole new tier of Beltway bureaucracy.

The “surplus” credits will trade on exchanges like Chicago Climate Exchange or Blue Source, allowing companies to outbid each other for the leisure of producing more than the government said they could.

Each year, the government will hand out fewer and fewer emissions indulgences. Meaning there will be fewer credits to trade. And we commodity buffs know that the less there is of something, the higher the price rockets.

And the Chicago Climate Exchange will score larger and larger sums from the corporate carbon largesse. Goldman and company have everything to gain from this.

And you’ve got to ask: What exotic new derivatives can come out of this? Will institutional investors bet on futures of how much the government will lower the cap in 2025…2030? Wait, there already is a Chicago Climate Futures Exchange. Of course, it’s the wholly owned subsidiary of the Chicago Climate Exchange.

Could the coal companies purchase carbon default swaps? After all, what happens when they discover the hydropower credits they bought in Brazil didn’t quash emissions as much as anticipated?

That brings us to a big flaw: Does it really work?

Capital Abandons Its Own Carbon Purchase Scheme

The best part of this swindle? It’s hard to tell if it’s a swindle. You see, the credits fund development projects in countries like India or Brazil, for installing things like hydropower plants or rice husk-fired generators. Watchdog group International Rivers concluded that three-quarters of these projects would probably have been funded anyway, since they were already completed at time of approval.

Consider tree planting. How do you measure the carbon offset? It all changes based on soil and climate conditions, not to mention growth rate. Only when a tree has lived 100 years does it become a net carbon absorber.

Mr. Sandor doesn’t care if it works or not. He finds the debate: “quite interesting, but that’s not my business…I’m running a for-profit company.”

So why does the House of Reps think cap and trade will work? Well, it shouldn’t — based on recent experience.

It’s “Green the Capitol” campaign began with compact fluorescents. Then it switched to natgas power to keep the lights on. But the Capitol still wasn’t carbon neutral, so the House bought 24,000 metric tons of carbon offsets on the Chicago Climate Exchange. (Yep, through the same outfit owned 10% by Goldman Sachs.) But in February, after not being able to confirm that it offset any of its carbon, the House dropped all plans to “go green” with offsets.

So we have a classic case of “do as we say, not as we do” from our honorable reps.

We got the above anecdote from Ted Gayer — who worked a single year as deputy assistant secretary of economic policy at the Treasury: 2007-2008. Wonder if the unpopularity of his opinions turned him toward Georgetown professordom?

Lest we leave out another odious option, let’s talk direct carbon tax. The carbon heavies would pay a penalty for the carbon content of their products. The idea is that companies would cut emissions for the sake of avoiding the tax. But they’d probably just tuck the added cost into what you and I will pay.

So that’s our choice: A private tax collection scheme that’s government backed or yet another Fed tax that business will probably loophole its way out of.

Either way, Shooters, we’ll end up with a case of cap and stick it…and you’re holding the bag, as usual. Estimates from various sources say you could pay $175-3,300 per household because of it.

The only way to trump this system? Hope the government will hand us a set of credits for owning — but not using — our clothes dryer…and then, as we hang our clothes to dry in the free sunshine, selling our credits to the highest bidder via the Blue Source Exchange.

Of course, if you feel the need to storm your senator’s home office during the summer recess, we wish you luck.

Regards,
Samantha Buker

July 8, 2009

This article was originally featured on Whiskey and Gunpowder

Cap and Trade Shenanigans with the Chicago Climate Exchange

The U.S. Labor Department reported that around 467,000 Americans lost their jobs in June. This was unwelcome news. The data had been getting less bad every month since January. Then the June numbers rocked up, fell out, and took stocks down with them. This is causing everyone with a pulse (and most with a brain) to have second thoughts about just how good things are-or how much worse they might get.

The S&P and the Dow both fell nearly three percent. Oil and gold were down too. About the only things up were Treasury bonds and notes. Speaking of which, the U.S. will auction another $73 billion of those this week. Wednesday’s auction is for $19 billion in ten-year notes while $11 billion in 30-year bonds go on sale Thursday.

“You may have green shoots, whatever you want to call them, you may have temporary relief, but you are still in a world that’s breaking,” Black Swan author Nassim Taleb told CNBC’s Squawk Box. “Anything that’s fragile like the financial system will eventually crash, he said…We’re in the middle of a crash…So if I’m going to forecast something, it is that it’s going to get worse, not better.”

Taleb’s point is not a popular one. But it is a realistic one. The fiat money, leveraged finance Western financial system went global in the last twenty years, providing an epic rise in asset prices (and the debt used to purchase them). There’s no doubt that real goods and services have traded hands with world growth. But now we wonder how much of that is sustainable when you take the credit away.

Did we use phony money to build a world with completely unrealistic levels of growth? Were trillions of dollars of capital allocated based on final demand that was artificially pumped up by credit, currency manipulation (low U.S. interest rates and global dollar pegging), and government stimulation?

Yes we did!

Mind you, the crash of the financial system is not the end of the world. It is a massive calamity to be sure, wiping out the value of retirement assets many people were counting on to make it through their golden years. But as many readers have reminded us in the last few months, there is more to life than money.

Fair enough. But there is more to wealth than money too! Peace of mind, having your assets in forms that can’t be inflated away or won’t suffer from debt deflation…we would count these as “wealth” at a time like this.

That brings us back to the problem growing at the back of our mind yesterday. Can a massive deflating credit bubble nullify the liquidity measures by central bankers, which are puny in comparison to the nominal value of the assets at risk? “Yes you can!” comes the answer from some of the friends we put the question to.

“I’m tempted to disagree that expansion in government credit won’t reach the economy and therefore won’t be inflationary,” replied Money Morning editor Kris Sayce. “I’m not mistaken, the Fed is buying up these ‘assets’ in order to take them off the banks and also to help price them. If the Fed didn’t do this then the banks wouldn’t be able to lend extra money to customers as they would breach their lending limits.”

“It’s not so much that the Fed is directly feeding the banks money which flows through to the economy, it’s more that the Fed is feeding the banks money which allows them to expand lending which they otherwise wouldn’t be able to do. Thus at the very least is preventing prices from falling, or from falling as much as they ordinarily would without the intervention. In effect there is more money flowing in than there otherwise would be. There already IS inflation.”

Another colleague in the States replied that, “I am leaning more and more to the idea that the credit-based stuff will deflate (real estate, stock prices) but the cash-based stuff could rise (like foodstuffs, energy). In a way, it’s not a debate about inflation or deflation, but which assets inflate and which deflate. There might be a strong dichotomy within the economy between the two.”

To the extent that you cannot eat a mortgage-backed security, we see the wisdom in this view. The world has a lot of people. They have a lot of real needs. Regardless of the value of derivatives and opaque financial assets, a certain level of economic activity for a certain kind of tangible good will still be there. The challenge for investors is to determine if you can profit from this in traditional ways (stocks and bonds) or if you have to venture into less traditional asset classes and forms of ownership (land, real commodities, precious metals).

And of course, the thesis could be incorrect. If credit is not money-or if the large lending and government guarantee programs don’t reignite a lending boom in the real economy-then you may simply see a lot of wealth disappear down the memory hole.

Finally, a mystery Aussie commentator who wishes to remain anonymous but whom you may hear from in the future in this space sent a philosophical yet practical reply.

“What is money? Currently, that’s what the Federal Reserve (and other central banks) put in the reserve accounts of their member banks. The banks then use this as a base to create their own money, or ‘like money’. I guess this is also known as credit. So yes, credit is not money.

“And this bank credit is now contracting as the natural force of the market tries to drive prices lower and correct the boom. The Fed is offsetting this process by swapping ‘money’ (fed funds) for the impaired assets. But the banks are sitting on the cash, and obviously do not have the risk appetite (or the demand) to lend it out.”

“So at this point additional base money is not being lent out as inflationary ‘like money’. I’m not sure the Fed has the mechanism to make out and out purchases of assets other than through lending facilities, unless they are Treasury or Agency purchases. As far as I’m aware, the Fed can only distribute its newly created money through the banking system, and no other way. The banks have always been the source of inflation, and they need to lend to create this. They will probably use their excess reserves to buy Treasury’s in the coming years, and then the Fed can but the Treasury’s back off them in time. This will be inflationary.”

“Where does gold come into it? Well, gold is real money….chosen independently by the people. As trust in the US dollar continues to evaporate, demand for gold will increase. At some point gold will again be referred to as money. Because the amount of credit (debt) in the world dwarfs the amount of gold, and because gold will be a legitimate extinguisher of the debt, gold will likely rise massively to have the capacity to extinguish the debt. This is a process unfolding over years though.

“A rising gold price is actually deflationary in that it represents a rise in the purchasing power of money. So I think deflation is the ultimate force that cures this massive credit bubble…outright deflation if long-term faith in the US dollar remains, or gold price induced deflation should the bottom fall out of US dollar trust. The quantity of US dollars may be rising at the moment but the real turning point will be when the perceived quality of the dollar declines.”

Hmm. Gold rising indicates the rising value of cash…because gold is money. But if money is not wealth…and gold is money…does this mean gold is not wealth? Now there is something to think about.

Regards,
Dan Denning
Daily Reckoning Australia

July 7, 2009

This article was originally featured on Whiskey and Gunpowder

Money Isn’t Wealth

Ponzi promised 50% profit in 45 days or 100% profit in 90 days; investor’s choice. He originally bought Postal Reply Coupons in other countries and then cashed them in the USA. Due to the foreign currencies exchange-rate differences, it was a form of arbitrage. But the paperwork to make this happen was so involved that there was just not enough profit to warrant all the work required. That didn’t slow-down Ponzi, however. He kept promoting his scheme despite the lack of actual Postal Reply Coupons in his vault.

So the concept of taking money from one person early-on and then repaying that early person with monies obtained from later investors has been called a “Ponzi Scheme” ever since. Sound like anything else in which you’re forced to participate?

It wasn’t even original to Ponzi. Charles Dickens described a similar scheme in “Little Dorrit” which was published before Ponzi was born. Speculation is that Ponzi actually learned of this concept from William F. Miller, a Brooklyn bookkeeper who used the same pyramid scheme in 1899 with which he took-in $1 million.

Charles Ponzi was always a ne’er-do-well throughout his life. Bernie Madoff by comparison, had developed an impeccable business reputation. Furthermore, Bernie kept within the realm of reasonable expectations; high though they may have been. Bernie also operated his scheme during a period of generally increasing stock prices.

So now that we’ve sentenced Madoff for “high crimes,” when are we going to sentence the SEC (the Swindler’s Encouragement Committee) for their crimes? After all, one Harry Markopolos sent letter after letter to the SEC over a 10-year period telling them that Madoff was doing something illegal. Markopolos even provided calculations to prove that Madoff couldn’t possibly have accomplished what he claimed. In their infinite wisdom, the SEC ignored Markopolos and allowed Madoff to continue his Ponzi scheme. Shouldn’t the SEC be held responsible? We’re told time and again that we needn’t worry – the SEC (read government) is here to protect us from financial fraud. Right! Most investors do rely on SEC oversight, and Madoff was right at the very top of their good-guy list. Now, the very agency that allowed this to happen right under their noses not only goes Scott-free but is being allocated still more money for their budget needs. Are you beginning to see the picture here? Talk about rot on the vine!

Just how unusually evil were Madoff’s actions? Not that unusual. In fact, the whole notion of paying off past investors with the funds of present investors is at the very core of our Social Security system. At least Madoff sought the consent of his investors who let him “invest” their money based on their own free volition. Do you have anything to say about the withholding of Social Security taxes from your paycheck? And at least Madoff didn’t attempt to then defend himself with the claim that he was conducting wise public policy.

It never ceases to amaze me that “the folks” continue to permit the government to play this charade. Invariably, the government messes-up some program and then says by way of excuse, “we were overworked, understaffed and didn’t have enough money to do it correctly.” And then they get even more money for that failed project, yet the project continues to fail. Many of FDR’s “programs” from the 1930s were later ruled unconstitutional yet they still exist in Washington, District of Criminals. Their excuse is that they are still “winding-down” those programs in preparation to then end them. Don’t forget that the Department of No-Energy created under the Carter Administration now employs over 100,000 bureaucrats, operates with a budget in excess of $100 Billion, and has yet to accomplish it stated objective – that of helping the USA become energy-independent.

Back in the 1980s, a “creative” teenager by the name of Barry Minkow, formed a company in Los Angeles called ZZZZBest. He took his company public in 1986 and was considered a real hot shot in the business world. Well, of course, it was a sham and Barry went to jail. But now Barry works for the government helping them ferret out other crooks. “It takes one to know one” seems to work. So why not put Madoff to work helping the government root-out all the other Wall Street crooks? Chances are he knows all of them on a first-name basis.

Sincerely,
Tex Norton

July 7, 2009

This article was originally featured on Whiskey and Gunpowder

Bernie, Ponzi and Social Security

Here’s a thought—that tiny handful of investors and analysts warning how Fed policy risks hyper-inflation are in fact doing the central bank’s work.

The Fed wants you to believe hyperinflation is looming. Or at least, it should want that, if doubling its balance-sheet – purchasing and lending against investment junk – is going to work the wonders that modern central-bank theory says it can. And the Fed certainly wants you to believe it will stop at nothing to avoid deflation (”whatever means necessary” as the chairman put it back in 2002).

So anyone touting the hyperinflation risk in public is playing the shill, a decoy – seemingly unconnected – proclaiming the miracle powers of Dr.Ben Bernanke’s snake oil to CNBC anchors at every chance.

In fact, they’re doing the Fed’s work better than the Federal Reserve itself. Really.

“The major danger with a zero lower bound for the interest rate,” said Swedish policy-wonk Lars Svensson (also a Princeton colleague of the Fed chief and his credit-bubble associate Paul Krugman) in a speech earlier this year, “is that inflation expectations will be too low and even negative, and that the real interest rate will thus become too high.”

With it so far? Slashing interest rates to the very minimum of 0% suggests inflation has vanished, at least in the central bank’s eyes. But that, in turn, reduces the rate of inflation expected by consumers, investors and business. Central banks are credible forecasters, you see. At least in central-bank eyes. So in Svensson’s philosophy, the zero-rate solution to falling inflation proves self-fulfilling as people hoard cash and sit tight in bonds.

“It is thus necessary to…to counteract expectations of falling inflation, and preferably to create expectations of higher inflation,” Svensson went on. But “as Paul Krugman put it” says the Riksbank’s deputy governor, “How will the central bank ‘credibly promise to be irresponsible’…?

Heaven knows the Fed’s trying. (So’s Krugman, to no one’s surprise.) But while it’s embraced credible recklessness, the Fed’s stop short of French kissing it.

Why so coy…?

“We have a very serious recession, we have a 9.4% unemployment rate,” said San Fran Fed governor Janet Yellen in a speech in California on Tuesday. “If we were not at zero, we would be lowering the funds rate…We should want to do more.”

Just how much further would the Fed go – all the way to hyperinflation perhaps? Racing to first base, “The vigorous policy actions of the Fed and other central banks, combined with sizable fiscal stimulus here and abroad, have sent a clear message that deflation won’t be tolerated,” Yellen said.

“Based on measures of inflation expectations,” she went on, an apparently reading straight from Svensson, “the public appears confident that the Fed will adopt policies that will maintain a low, positive rate of inflation. Evidently, the credibility that the Fed and other central banks have built over the past few decades in bringing inflation down has spilled over into a belief that we won’t allow inflation to get too low either.”

Steady on, cheeky! Second base next, and “A glance at history shows that many countries with massive structural deficits and without an independent central bank turned to the printing press to pay off their debts,” Yellen continued.

Straight to third then, and “That’s a recipe for high inflation and, in some cases, hyperinflation.”

Gulp, almost home! But then, somewhere between third and fourth base, the Fed’s gone shy and rebuttoned its blouse. Because “I don’t believe the United States faces that threat,” Yellen said, showing the come-on to be just one big tease.

“Looking back in history, runaway fiscal deficits have often been accompanied by high inflation,” she explained in Tuesday’s speech in the bankrupt state of California. “But, since World War II, such a relationship has only held in developing countries. In countries with advanced financial systems and histories of low inflation, no such connection is found.”

Oh man, what a let down! Who’s gonna put out hyperinflation if not the Fed…?

“In order to make up for the collapse of credit, we are effectively creating money,” said George Soros, the legendary if only occasionally accurate hedge funder, at a Washington forum in March. “If and when credit is restarted, you would then have an incredibly swollen monetary base, which, if it were leveraged, you would have an explosion of inflation.”

The trouble comes, as Lars Svensson guessed back in January, with that “if and when”. Because it opens the door to the idea that a central bank might opt instead to withdraw all this new money after the deflation panic has ended. And that in itself is enough to make creating it useless. Pointing to Japan’s five-year experiment with ‘Quantitative Easing’ between March 2001 and March 2006, said Svensson, boosting the monetary base by some 70% failed to “noticeably affect expectations of inflation and the future price level.

“For example, the Yen did not depreciate as it should otherwise have done. Firms and households clearly believed that the expansion of the monetary base was temporary and not permanent, which subsequently proved to be true. The monetary base fell back to normal levels when the interest rate was later raised to above zero.”

Sure, the Bank of Japan’s trillions did triple Japanese Gold Prices. But even with gold refusing to drop back against the Dollar right now, eagle-eyed readers will note that, quite apart from the urgent debate in Europe, the US authorities are at pains to deny they need an ‘exit plan’ any time soon. White House advisor Christina Romer made that much plain in last week’s Economist magazine, blaming the double-dip depression of 1937 on “an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy.” Yellen said it again Tuesday.

So Team Bernanke have got the right idea – at least on Planet Svensson – if not the right level of irresponsibility just yet. Slip a little vodka into their juice though, and they might start talking up inflation like Alan Greenspan, Bernanke’s predecessor and the Maestro himself, writing last week in the Financial Times. He tried to spook everyone out of cash and into the stores by warning of a decade of inflation ahead!

“A pending avalanche of government debt is about to be unloaded on world financial markets,” Sir Alan of Greenspan warned sagely, almost visibly winking from behind those enormous spectacles. “The need to finance very large fiscal deficits during the coming years could lead to political pressure on central banks to print money to buy much of the newly issued debt.”

Or given enough sauce to get really loose, the Fed might even get crazy like Asia-based doomster Dr.Marc Faber. (He’s been known to enjoy the odd cocktail or two.) Stop warning on hyperinflation. Just come out and say it instead.

“I am 100% sure that the US will go into hyperinflation,” as Faber told Bloomberg in late May, and again on June 29th. “The US central bank has structured and introduced policies without considering exponential credit growth and its consequences,” added the Gloom, Boom & Doom author in an interview with the Korea Times on Wednesday.

See what I mean about being a shill? It’s like he’s on the payroll…

“The United States will not raise interest rates for many years to come because it needs to pay off its huge debts,” he went on, recommending inflation-friendly assets such as equities and Gold Bullion. “In turn, too much money in the economy will raise costs of everything, including healthcare and education, giving rise to hyperinflation.”

There, now that’s the way to do it! Greenspan and Faber on song, while the Bernanke Fed tip-toes around stating its aim:

Spark inflation and leave it to burn. Because putting it out worsened both the Great Depression and Japan’s “lost decade” – the one that started two decades ago and hasn’t yet ended. Everyone who’s anyone in monetary theory knows that.

And if they claim otherwise, maybe they’re the ones kidding.

Regards,
Adrian Ash
BullionVault

July 6, 2009

This article was originally featured on Whiskey and Gunpowder

Faber and Greenspan: Shills for Fed Snake Oil

“Into the valley of death rode the 600.”  Ed Freeman flew into the La Drang Valley of death fourteen times in a row to evacuate wounded under enemy fire so intense that the high brass had written the beleaguered outpost off and ordered the Medivac ‘copters to stand down.  It wasn’t Ed’s job to go in but he perceived it to be his duty, and he deserves a shot raised in his memory.  Here’s to you, Ed; you were a true hero and credit to your country.

That couldn’t happen under modern rules of engagement.  The kids are scarcely allowed to shoot back, and in all probability Ed would be reprimanded, charged with disobeying an order he hadn’t been given, and punished for endangering equipment.

It was said long ago that when respect for the old virtues declines, so does the society.  So long as the Romans practiced gravitas, fidelitas, pietas, civilitas, and constanzia and young men served in the Legions out of patriotism, not as a necessary ticket punch to higher political rank, Rome grew and thrived.  When position became all and politics came to count more than character the barbarians took the spoils.

Ed Freeman was most likely a Warrant Officer, but my point is that even junior officers from 1965 have long since retired and today’s political climate is far different.  Our young troops are still capable of being valiant, and they are still learning survival skills passed on since the days of Centurions, but years of political correctness and other Liberal notions are catching up with our nation.  Now we have “soldiers” who volunteered bleating, “I didn’t join up to fight!  I just wanted G I Bill rights.”

Our nation is torn with scandals at all levels of government and Congress and the White House are commanded by those who hate the military.  Many of them were chanting “baby killers” when Ed Freeman “with reckless disregard for his own life” flew in to rescue the wounded a few at a time.  Modern military thought is more obsessed with acceptance of homosexuals and insisting that females are entitled (?) to join the infantry.  Israel has to train its young women to be warriors; the NOW gang is still pursuing a non-existent equality.  Sure, some females are able to keep up with bigger, stronger, fit young men, but their plumbing arrangements are not suitable for life in the field.  They endanger the rest of their squads through their physical limitations.  There are many activities women can fulfill very well, such as fire control, intelligence analysis, radar and sonar operations, and even flying, but we all remember the little truck driver who was captured and raped repeatedly by Iraquis and is never going to be normal emotionally again.  Her behavior was the proximate cause of the capture of herself and her squad mates.

Character and actions have everything to do with success, including in our investments.  We must accept our limitations, exploit our strengths, stand by our principles, and uphold our standards, both those we measure events, ideas, material things, and others humans by, and the banners we fly mentally.

The celebration of Independence Day is here and the fireworks we have been promised include North Korea lobbing a missile at Hawaii to prove they can do it and to spit in the face of our weak president.   Whatever happened to “millions for defense but not one cent for tribute?”  The millions turned into trillions, and the will to defend ourselves has eroded into wishy washy pleas that we all just be friends.

The news is full of the deaths of Farrah Fawcett and Michael Jackson, but few told us of the passing of a great American.  On the 4th of July please pause to remember Ed and all that once made our country great.  His character and beliefs still live in the hearts of many of us, and telling your children and grandchildren of his heroic actions will be an inspirational few minutes for them.

Again, here’s to you Ed.  You earned your place in Valhalla.

Regards,
Linda Brady Traynham

July 6, 2009

This article was originally featured on Whiskey and Gunpowder

The Death of Ed Freeman

The problem with households not saving is that over the long run, it ruins the economy.

Lack of savings means there are not enough long-term private bank reserves. Broadly, it translates into lack of investment in new business capital. Over time, that runs down the capital base of the economy. And improving business capital is, of course, the key to increasing productivity within an economy.

If productivity doesn’t increase, wages and living standards will stagnate - at best. Eventually, living standards decline. Don’t believe me? Have you been to Detroit lately?

Decades-Long Trends

Last year’s lack of savings was not a short-term phenomenon. The savings deficit was part of a long-term cultural phenomenon. The low savings rate in 2008 was one more data point in a string of many bad years for savings.

The personal savings rate in the U.S. makes for an interesting chart (see below, for 1930 to the present). The first thing that pops out is that savings were very high (near 25%) during World War II, when there were few consumer goods available to purchase.

All that wartime saving had much to do with kick-starting the U.S. economic explosion after the war ended. While the war was raging, many economists expected a postwar crash. That’s what had happened all the way back to the days of Napoleon.

In fact, the prospect of postwar mass unemployment, involving millions of demobilized soldiers, was one of the key drivers behind creating the G.I. Bill of Rights. It was better to send former soldiers off to college for a few years than to have them sitting around with no jobs, muttering into their beer mugs.

Instead of a postwar crash, however, the large pool of U.S. aggregate savings aligned with pent-up demand to spark a historic economic revival. In the 1950s and into the 1960s, the World War II generation settled down to raise its baby boom offspring. While savings rates cooled down, they still averaged a very respectable 8.5%. And this was in an era of very low inflation.

The national savings rate actually increased toward 10% during the 1970s and early 1980s. But from the mid-1980s onward, the national savings rate declined steadily. The rate was in the low single digits - and falling - by the early 2000s, and went negative in 2006 and 2007. For the U.S., these recent numbers were the lowest savings rate since the Great Depression.

What Was Going On?

Let’s review some large-scale trends that occurred during the past four decades. Starting in the 1970s, many women entered the U.S. labor force. More accurately, women exited the unpaid world of homemaking and entered the paid labor force.

The demographic shift of women into the labor force started as a trickle, but turned into a flood. Indeed, over the past 30 years, many traditionally male-dominated occupations and professions opened wide for women to pursue careers. Enrollments in U.S. law and medical schools, for example, are now well over 50% women. Just this year, over 50% of undergraduates majoring in earth sciences in the U.S. are women.

More women in the work force led to a fast-growing number of two-income households. But as pointed out by Elizabeth Warren, a professor and bankruptcy specialist at Harvard Law School, those extra paychecks often went to consumption, rather than savings.

For example, working couples took the second paycheck and bought a second car, if not a second house or condo. Working couples took more high-end vacations, as you can observe by driving past the cruise ship terminals at most major U.S. port cities. And the average size of new homes has increased during the past 25 years, even as average family size declined from over three to about 2.1 children per couple.

In short, Americans saved less over the past 35 years. But U.S. consumer spending took off and grew faster than the broad economy. Consumption accounted for 62% of gross domestic product (GDP) in the 1960s. But consumption grew to 70% of GDP between 2000-2007.

Looking at the numbers another way, “investment” in the economy plummeted from 38% of GDP to 30% - a drop of over 21% from the 1960s baseline. So it makes sense that much of the increase in consumption in recent years was of imported goods. Thus did high consumption and low savings help to decapitalize the nation, as trillions of dollars wound up in foreign accounts.

And Then What Happened?

With high consumption and low savings, when the current recession hit, it hit hard. In fact, the effects of the recession were aggravated by the national pattern of high consumption and low savings over the past decades.

Let’s begin with the fact that many households spent every dollar that came in. Then they borrowed against the so-called “equity” in their house (often as not, the equity was mostly a product of inflation) to finance further consumption. But there’s a funny thing about borrowing money. Usually, the lender wants it paid back.

As Harvard’s professor Warren has pointed out, many two-income households painted themselves into a “two-income trap.” That is, when both wage-earners devote their entire paycheck to consumption, with nothing going into savings, the loss of one job can be a financial catastrophe. A household at the margin almost instantly goes underwater.

Also, it’s becoming clear that in the past year, many job losses in the U.S. economy are permanent. Instead of temporary layoffs, many jobs are being eliminated as part of a structural retrenchment of the U.S. economy. Think about the job losses in the auto and auto parts industries, in banking and finance, or in real estate. Many of these jobs are just plain history. These industries will never recover to the glory days of old.

Along these lines, a recent survey conducted by The Wall Street Journal reveals that 52% of companies polled expect to employ fewer people over the next five years. That can hardly be reassuring to the rapidly expanding ranks of the unemployed in large states like California, Michigan, Illinois and others. Big states with large numbers of jobless people make for big, long-term, intractable social and political issues.

The “Recovery-Less Recovery”

So the job cuts, and long-term unemployment, are here to stay. Much of this has to do with the previous lack of savings and long-term investment. After two decades of falling savings, and related underinvestment in new business capital, there is not enough momentum within the job-creation engine of the U.S. economy. The machine is stalled.

It’s not like you can accelerate the process of job creation, either. Sure, government can spend a lot of money (borrowed money, as it turns out) in a hurry on so-called “stimulus” programs. But what will that accomplish? People still can’t find long-term employment - let alone careers and employment security - in industries that don’t exist or never took root. Nobody gets hired in a firm or factory that never got built. So now we’re experiencing what many economists are calling a “jobless recovery.”

Jobless recovery? That might be whistling past the graveyard. Indeed, the lack of job creation going forward could also lead to a “recovery-less recovery.” Or to paraphrase former President Richard Nixon, speaking of the idea of Keynesian economics, we’re all living in the Rust Belt now.

Some Households Are Saving Again

There is some good news from the savings front, however. As 2009 unfolds, it appears that debt-burdened American households are desperately beginning to save. In April 2009, the national savings rate jumped to 5.7%, the highest level in 14 years.

Still, savings has to come out of something else. Households “saved,” but the other side of the coin is that “consumers” ratcheted down their spending - and did so even faster than aggregate incomes fell. That means empty shopping malls and auto lots. It’s a vicious cycle.

“Americans have learned a cruel, cold, hard lesson,” according to Bernard Baumohl, an economist for the Economic Outlook Group of Princeton, N.J. “People are scared. And that’s led them to replenish their savings because they now realize that their retirement nest eggs will no longer increase on automatic pilot.”

There’s no disputing the extraordinary shock to household wealth in the U.S. From mid-2007-March 2009, according to the Federal Reserve, household net worth plunged $14 trillion, or 21.5%. Just during the second half of 2008, household net worth plummeted nearly $8 trillion - with an eye-popping $4.9 trillion dip in the fourth quarter.

Meanwhile, the broad-based Standard & Poor’s 500-stock index shed 57% of value between October 2007-March 2009. While the S&P 500 has increased 36% since its March low, it is still 41% below its 2007 peak.

According to Mr. Baumohl, the economist, “There has been a fundamental shift in the behavior of American households.” That is, savings are now a priority of financial planning. Mr. Baumohl believes that we’ll continue to see the savings rate increase to between 7-9%, where it will likely hold steady for at least several years. Many of the 75 million baby boomers are now revising their retirement plans, figuring out how to work longer, save more and spend less. (Meanwhile, the federal government is working to figure out how to pay lower Social Security and Medicare benefits to those baby boomers.)

All in all, we should expect to see U.S. consumer spending grow more slowly than GDP over the next decade. As a percent of GDP, investment will increase as some fortunate households replenish savings. But any recovery will be slower than most observers expect - particularly the politicians, who cannot abide large numbers of unemployed people near Election Day.

Rooting for the Savers

The good news is that over the long-term, more savings will translate into more business investment. That should create new jobs and raise productivity, which are the basic building blocks for a rising standard of living.

Of course, there are problems with any significant shift in the direction of capital flow in the U.S. economy. But despite any issues, the unemployed of the U.S. need to root for the savers. And the politicians, of course, need to respect the process of saving. Because without those savings, the economy will continue to wind down.

And what if the political rhetoric descends into class warfare? What if the savers of the nation become objects of ridicule, subject to punitive levels of taxation and regulation? In that case, we get back to the idea that capital is portable.

If savings cannot find a safe harbor in the U.S., then the capital flows will keep moving offshore. And if that happens, all bets are off for the U.S. economy. We can just sit back and listen as the band plays “Nearer, My God, to Thee.”

Until we meet again,
Byron King

July 2, 2009

This article was originally featured on Whiskey and Gunpowder

Too Much Spending, Not Enough Savings: Destruction of an Economy

And speaking of colossally stupid government programs, you may have seen the news that the U.S. House of Representatives passed a climate change bill on Saturday by a narrow vote of 219-212. The cap-and-trade bill, otherwise known as Waxman-Markey (for the nominal writers of the bill), mandates that U.S. manufacturers and utilities reduce carbon emissions 17% from 2005 levels by 2020 and 83% by 2050.

Under the sausage making process that is the American Congress, the bill was filled with compromises. Congressmen from coal-producing states or states with lots of manufacturing jobs had to be bribed into supporting it through various means. It must now go the Senate, which must pass its own version of the bill.

If the Senate bill is different from the House bill (and it almost always is, given the different agendas in both bodies and the need for more bribes), the two bills go to “reconciliation.” That’s where a committee made of members from both houses settles on a final compromise version of the two bills and sends them back to their respective bodies to be voted on. Then it gets sent to the President to become the law of the land.

By the way you may have missed an amendment to the bill that’s stirred a bit of controversy. It was inserted the night before among the bill’s 1,200 pages, which you can be sure none of America’s elected officials actually read. The amendment placates Congressmen from Rust Belt states who worry about losing even more manufacturing jobs to the developing world (China). It requires the U.S. President to make a “border adjustment” on goods from countries that do not cap or reduce carbon emissions by 2020. It’s a tariff.

Already President Obama has backed off that particular amendment. He says, “At a time when the economy worldwide is still deep in recession and we’ve seen a significant drop in global trade, I think we have to be very careful about sending any protectionist signals out there.” Very careful, sure. But you already did send the signal didn’t you?

For what it’s worth, we think this was all an exercise in political window dressing to get some version of a bill passed. If the Senate and the House actually agree on a climate change bill that puts a high tax on carbon, then the apotheosis of Obama will be complete.

We will take The One at his word, though. Besides, as everyone knows, the real purpose of the bill is not to start a trade war (although it may do so). The purpose is to make conventional energy more expensive AND—in an era of declining government tax receipts and rising liabilities—to create a huge new source of government revenues by taxing carbon. It’s a revenue and power grab by an institution (the Nation state) that finds itself increasingly off-balance.

It’s also a massive project in socioeconomic engineering that ignores the reality (and physics) of energy generation in an industrial society. It’s true the world could benefit from cleaner and cheaper energy. But cleaner and more expensive energy is a recipe for economic suicide. It’s something Western nations seem particularly keen on committing, although we can’t really figure out why. It could be that the global Left simply finds modern life aesthetically ugly and consumerism (with all that pesky individual choice) a vulgarity that should be destroyed via legislation.

But speaking strictly in economic terms, unless a region or a country has ample hydroelectric or geothermal resources, it’s impossible to meet base load electricity needs reliably with renewable energy. Advocates envision a world full of ultra-long life batteries, windmills, and solar farms. But it’s just a fantasy. If the climate bills become law in Australia and America, it will accelerate the deindustrialising of Western economies and mean the transfer of even more manufacturing jobs to the developing world.

Of course maybe that’s just what the architects of these laws want. Who knows? We know they want to tax productive enterprise and make the bulk of the population dependent on government handouts. That makes people compliant and easily controllable. That is big government Utopia. Advancing the fears of climate change is the easiest way to get more control.

We’d expect to see the construction of a lot more natural gas fired power plants in the coming years in the West (although they are more expensive than coal-fired plants). All those re-chargeable plug-in hybrids have to get their electrons from somewhere. If it’s not going to be coal (which will be taxed out of existence), it’s probably going to be cleaner-burning natural gas power plants, powered by both conventional and unconventional gas.

Right now, global LNG capacity is rising and stockpiles are fairly high. But if you keep your eye on the big picture and we see a transition of the world’s power plant fleet from coal to natural gas, it obviously favours gas producers and explorers. Australia is moving ahead by leaps and bounds in this area with conventional offshore production in the North West Shelf and Timor Sea and more unconventional production (hopefully) from coal-seam-gas in Queensland.

Regards,
Dan Denning

July 1, 2009

This article was originally featured on Whiskey and Gunpowder

Climate Change, Cap, Trade, and the End of the Industrial West

A new area emerged from the update Rep. Carter sent me, one to be expected:  lo and behold, those poverty-stricken families who make no more than $42,000/year are going to receive “energy stamps” so that only the middle class–which Mr. Obama defined as those making up to a quarter of a million dollars a year–are going to bear the brunt of increased prices.  Fancy that.  What a nifty little dividend for core Democrat voters, new entitlements that tap the public till for gas money and utility bills.  That isn’t going to seem quite as great when they find out that everything goes up when energy does.  Shoes, lollipops, dog food, basketball tickets…

“The debate over this bill is over how much it will raise prices for consumers,” House Republican Conference Secretary Carter said. “Democrats contend the effect will be minimal, so they should have no problem adding these two amendments just to make sure. A vote against either will therefore be a recorded vote to raise energy prices on consumers.”  I would have had a twinkle in my eye if I had uttered those words on the floor of the House because twitting Democrats is always good fun.

Polls from all political angles (Gallup, WSJ, Rasmussen, Fox, CNN, NBC, The Los Angeles Times, USA Today, ABC, Planet Green, Stanford University, and Quinnipiac Universities, among others) are turning against “hope and change” and being force fed socialism like a Strasbourg goose.  They show clearly how many of us want what, and here it is, courtesy of Rep. John Carter:

1. Expanded wind and solar power – 81% public approval
2. No new energy taxes – 74% public approval
3. Lower energy prices – 72% public approval
4. Continue existing oil and gas support – 65% public approval
5. Expanded offshore and Alaska oil drilling – 63% public approval
6. Expand nuclear power – 60% public approval

If the bill that comes out of the Conference Committee is no worse than what has been proposed thus far–and this year all such bills do–what we’re going to get is at least an additional dollar a gallon for gas, and much higher electrical, propane, and fuel oil bills for our homes, in addition to raising prices across the board.  Offshore drilling and that in Alaska will be blocked, and existing drilling taxed.   Expanding nuclear power will be prevented by denying the storage of nuclear waste storage at Yucca Mountain, Nevada, while Congress and the White House carol that our electrical needs will be met by new nuclear power plants and vast fields to harvest solar and wind energy.  Those last two require enormous capital outlays and have their own hurdles, including protests about sullying the sacred desert habitat and the cost of erecting vast windmills that turn only when the wind is at sufficient strength and have to be shut off when there is no “storage capacity” for the electricity generated.  I couldn’t say “demand” because there is always a need for electricity; the problem is the electricity has to have somewhere to go or the mill has to be stilled.  As a technical explanation that leaves much to be desired, but it gets the point across:  this isn’t like a kindergarten class holding pinwheels on a breezy day.  Those multi-million dollar towers are stilled by lack of wind and lack of demand (draw.)  With hydroelectric plants “excess” electricity can be used to pump water back up to the lake or reservoir; obviously, it isn’t feasible to send the wind back whence it came.

Drive by the enormous wind farm outside El Paso and see how many of the massive monoliths stand motionless while others spin on any given day.  We aren’t able to use the capacity available now, and Texas has the only independent power grid in America.

The stage is set to destroy the coal industry which provides fifty per cent. of our power; that diminished capacity is not going to be restored by nuclear power plants which will not be allowed to be built and would require between ten and twenty years between obstructionists, greed, theft, and Cape Cod millionaires who block wind generators because they would block the view from their mansions.  Solar panels are costly and fragile, do not work at night, and have eco-opponents…Tidal and volcanic/thermal proposals look good on paper but they are far from “shovel ready.”

“Renewable” resources are a pretty dream but they are nothing to stake our energy supply on at present levels of technology and political forces.  In my book they aren’t anything suitable for private investors unless we throw a little money in one and see if it returns a profit in about twice the time it takes to cultivate a new truffle field.

Regards,
Linda Brady Traynham

July 1, 2009

This article was originally featured on Whiskey and Gunpowder

The Fate of Representative John Carter’s Proposed Amendments to Cap and Trade