The first installment of this blog came out in May of 2006. There were no real perceived problems, just suspicions. Now we have progressed three years into this morass. Each step forward seems a little more encumbered.

With the bank failures, our government claims many banks are too big to fail (a bank with an office in every state seems to fit this profile). FDIC insurance has covered all bank losses so far. For some odd reason the FDIC now wants to collect 3 years of premiums from the banks in advance. The bookkeeping instructions for carrying this on the bank books, is what could be politely labeled “creative financing.”

With unemployment, those no longer looking for work or those working part time are not counted. And unemployment insurance has just been extended to 92 weeks. If you are lucky/ unlucky enough to have joined the unemployed, you have just won a two year vacation from Uncle Sam. Ski the winter in Colorado giving ski lessons and relax in the summer in Malibu busing tables at night (On the unemployment forms never check working out of state or mail the form back with an out of state postmark). I do recommend the season pass at Vail–great skiing, and the ski bunnies are young.

The Federal Reserve is keeping home loan rates low by buying all T-bills presented for redemption by the market. Congress is curious how much money the Federal Reserve has on the books dealing with securities it is holding as collateral. Freddie and Fannie figure into this mess. Just how is the paper carried and on whose books? At what point does a home foreclosure become bank owned real estate? And at that point who’s books carry the asset? Hint, it’s probably not the bank.

None of these actions appear to be any sort of real solution, but rather a method to keep the game going. Each in their own way is becoming a larger problem. And then someone chimes in “Bernanke was slow to act, but his actions saved us from having a Great Depression.” That is a professional car salesman close if I ever heard one.

What we need to realize, we still haven’t arrived to our unplanned and unscheduled destination, “The Great Depression.” Government intervention has slowed down the process. It could take four years to get there not three as I had anticipated. Nobody is throwing in the towel yet, and we need millions of people doing so, not just one or two of me.

It is very easy to point to state budgets and look how much they are short this year alone. They can’t run on deficits like the Federal Government. How can state tax collections for next year exceed this year’s? When you think about it, common sense doesn’t cost anything, how come Congress can’t see the light of day?

Just ask yourself one question. If governments crystal ball didn’t see this coming, how come it has all of the answers now? I’m pretty well fed up with this government snow job.

On another note, Google has cut me off from posting pictures unless I agree to terms written back in 12/13/06. I haven’t clicked to agree on it, only because it is back dated 3 years. I did have three visuals for this article, but I modified it to leave them out. I think that Google is becoming a hard ass, there is no option to deny, only the yes button if you want to upload pictures. Not sure what this means. Bear with me for now.

Read more….

The Daily Reckoning

The God of Abraham may rule the Vatican. But another group of gods rules finance. They are like the Greek gods…playful and mischievous, with a keen sense of humor. They look down from heaven not like a benevolent shepherd watching his flock, but like a cackling gawker betting on mud-wrestlers.

Here at The Daily Reckoning, this is not the first time we’ve paid homage to these lesser deities. Nor is it the first time we’ve mentioned their perverse method: Those whom these gods wouldst destroy are first cursed with good luck. Today, we look at the bright side: later, they are blessed by misfortune.

According to a pair of researchers from the University of Michigan, a depression does more for longevity than diet or exercise. Life expectancy during the worst years of the Great Depression increased from 57.1 years in 1929 to 63.3 years in 1933, says the report by Jose A. Tapia Granados and Ana Diez Roux. It didn’t matter whether you were a man or a woman, black or white. And it didn’t matter if you were in the US during the Great Depression or in Spain, Japan or Sweden during their economic downturns. The results were the same.

By contrast, life expectancy declined during the boom years. For most age groups, “mortality tended to peak during years of strong economic expansion (such as 1923, 1926, 1929 and 1936-1937),” they wrote in the “Proceedings of the National Academy of Sciences.”

Conventional wisdom holds that recessions are times of stress. People do not eat as well. They skip medical check-ups. They should drop dead earlier. Instead, they live longer. Perhaps it is because the economy slows down, allowing people to live at a more comfortable pace. Maybe the unemployed get more sleep. We don’t know. But if you want to live an extra six years, nothing works like a slump. When it comes to economic health too, nothing beats a depression.

Last week, World Bank president, Robert B. Zoelick, explained to Washington how the dollar made Americans wealthy:

“The United States is incredibly fortunate that the dollar enjoys this special status [as the world's reserve currency.]” It made it possible for Americans could buy things abroad with dollars and then, rather than come back to the United States as a claim against US assets, the dollars stayed in foreign central bank vaults. It was as if the Untied States, and the United States alone, could issue IOUs and never have to pay up. An “exorbitant privilege,” Valery Giscard d’Estaing called it.

Since the end of WWII, the world had no real alternative. It had to use the dollar in its international transactions, just as it once used gold. This had a marvelous effect on world trade and roughly the same effect on America as a winning lottery ticket. And like a lottery winner, she was ruined by it.

With no effective limit on the number of IOUs they could issue, Americans issued far too many. From a low of around 2% of disposable income in 1945, US debt service rose to nearly 15% in 2007. In terms of total debt/GDP, the ratio was only about 150% in 1945, but that was with public debt from the war years at 120% of GDP. By 1950, the war debt had been cut down to about 70% of GDP, with private debt still at about 35%. At the height of the bubble years – 2005 to 2007 – total debt in America hit 360% of GDP, only 60% of it owed by the federal government.

Of course, most economists saw nothing to worry about. Instead, they set to work proving that such a ‘dynamic’ and ‘flexible’ economy would never fail.

They even won Nobel Prizes for elegant formulae that showed investors how to beat the market, year in and year out.

Then, the bottom fell out of asset prices in ’07-’09. In March of this year, Americans found that their stocks had fallen back to real values not seen since 1968. Their houses were sinking fast too. By May 2009, one out of every four US homeowners was ‘underwater’ – with a mortgage greater than the value of his house. Incomes and profits were falling, along with the net worth of the typical American household. Everything was falling – except debt. How the gods must have roared when they saw the looks on their faces! In the biggest, longest boom of all time – even with a monopoly on the world’s reserve currency – Americans had lost ground.

But while Americans were once damned by good fortune, they are now blessed by bad luck. “Looking forward, there will increasingly be other options to the dollar,” says Mr. Zoelick. Thank the rascal gods. Americans are saving again…rebuilding their balance sheets…and, eventually, their economies. They can even look forward to living longer. And with a little more bad luck, maybe their moron economists will wise up too.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

Similar Posts:

• Contradiction in the Balance of Economic Forces
• The Greatness of a Depression is Commensurate to the Government’s Efforts to Prevent It
• Good Luck with Money
• Where, Exactly, is this Economy Headed?
• RIP Robert S. McNamara and California’s Holes in its Budget

More articles from The Daily Reckoning….

The recent data from the USA, Japan and the big countries in
the Eurozone have indicated that these economies are recovering from the downturn
unleashed by the global financial crisis. Data for second quarter growth in the
three Baltic countries has also been released within the last week or so, but the
overall picture is still mixed. This blog piece provides a bit of background
information which is sometimes missing in the newspaper commentaries.

To start with the raw numbers, from the second quarter 2008
to the second quarter 2009 the economy contracted by 16.6% in Estonia, 19.6% in
Latvia and 22.4% in Lithuania. These numbers follow a similarly dismal first
quarter and imply that all three economies now qualify for the dismal “depression”
label (see Figure 1).

Needless to say unemployment has increased as lower
production volumes have made firms shed workers. Eurostat estimates that the
unemployment rate in June 2009 was 17.0% in Estonia, 17.2% in Latvia and 15.8% in
Lithuania (although national authorities report unemployment rates that
are a couple of %-points lower).

The severe downturns come on the back of years of strong
growth since the Russian crisis in 1998-99. Until mid-2007 the annual growth
rates hovered within the interval 5-10%, implying a rapid closure of the income
gap towards the EU15 countries (albeit from a low starting point). Figure 2
shows an index of the GDP level with the average value for 2000 set equal to
100. The downturn has set the countries back to their 2004 income levels, i.e.
to the levels around the time of entry to the European Union.

The overall economic development has been remarkably similar
in the three countries in spite of many structural and policy differences
across the countries. Estonia has traditionally had the highest income level
with Lithuania and Latvia trailing, respectively, 10 and 20 % behind. The
trading partners as well as the industry structure differ markedly. Estonia is
more open, ranks high on indices of free market economies and has generally
pursued the most prudent fiscal policies. All three countries have pegged exchange
rates, but in the beginning of 2002 Lithuania switched the peg from the dollar
to the euro which subsequently resulted in a substantial real appreciation. In
spite of all these differences, the relative economic position of the three
countries has not changed in any noticeable way over almost 15 years.

The causes of the depression are relatively easy to
identify. Data shows that the downturn is concentrated in three sectors, namely
industrial production, construction and retail trade. Figure 3 shows the development of industrial
production in the Baltic countries and, for comparison, also in Sweden and
Finland. Given the limited size of the Baltic economies, the industrial
production is primarily exported. The global
demand compression has hit the Baltic countries in line with the experiences in neighbouring small countries Sweden and Finland. (It is remarkable that
although Sweden has seen its currency depreciate markedly against the euro, its
industrial production mirrors the Finnish case in spite of Finland using the
euro. The exchange rate developments do not seem to make much of a difference
in the current situation of a general demand collapse.)

Returning to Figure 1, it may, at first sight, be surprising
that the GDP fall in 2009 in Lithuania has been larger than in the two other
countries, including in Latvia which has experienced a severe financial crisis.
Part of the answer is that industrial production constitutes a much larger
share of GDP in Lithuania (approx. 25%) than in Estonia (20%) and Latvia (15%).
Thus, the collapse of industrial production has a disproportionate effect on
overall GDP in Lithuania.

The construction and retail sales sectors have also seen dramatic
value-added falls. The main factor behind the contraction in these two non-traded
sectors is the retrenchment of credit available to both enterprises and
households.

All three countries saw rapid credit growth from
around 2003 when membership of the European Union became virtually certain. The
EU confidence shock encouraged people in the Baltic countries to borrow more to
buy the cherished hallmarks of prosperity, namely real property, cars and
foreign travel. The EU shock also encouraged increased inflows of foreign capital.
The greater demand and supply for capital was intermediated by the banking
sector, whose exposure increased in the process. In the statistics the capital
inflow showed up in the form of gigantic current account deficits. In Lithuania
the 2002 re-pegging of the currency meant that the Lithuanian economy never
overheated to the same extent as in Estonia and Latvia and the current account
deficit remained smaller than in the other countries. (See Figure 4.)  

In the second half of 2007 it became clear that the private
debt stock in Estonia and Latvia had reached its peak and the capital inflow
started falling, reflecting itself in lower current account deficits. In
Lithuania the credit slowdown took place half a year later due to the lower
debt stock of households and firms. In the summer 2008 the typical assessment
was that the debt driven expansions had run its course and it was time to
consolidate exposures. This benign scenario was shattered by the global
financial crisis.

Latvia has been most severely hit. In the fall 2009 the
Latvian government had to bail out Parex bank, the second biggest bank, when
the bank experienced problems rolling over its syndicated loans. The
uncertainty emanating from the bailout in combination with the “flight to
safety” after Lehman Brothers went belly up meant that the government lost
access to credit on commercial terms. The government had to turn to the IMF, which
put together a rescue package amounting to a whopping 7.5 billion euro.

In all three countries foreign capital inflows essentially
dried out during the last quarter of 2008 and forced a drastic adjustment. Credit
volumes fall in both real and nominal terms, which have led to lower demand for
real estate, cars and many other products. All three countries have attained
positive current balances in the first half of 2009, stemming from trade
balance surpluses due to import having contracted even more than export.

So where are the Baltic economies heading? All three governments
have repeated their commitment to maintain the hard pegs. They also pursue
tight fiscal policies to avoid that the budget deficits explode in lieu of
collapsing tax revenues. (I will later return with a blog piece on the fiscal
policies in the Baltics.) In other words, economic policies do not provide any
stimulus in the current situation. The main perception is that the depression
is bottoming out these days as the fall in quarter-on-quarter GDP has been
declining. Growth may then turn positive in the fourth quarter 2009 or early
next year.

The scenario for return to growth rests on economic activity picking
up in the western trading partners with increased export from the Baltics as
the result. Statistics for the first quarter of 2009 suggest that the nominal
wage growth has decelerated markedly. The press in the Baltics is also full of
stories of workers being forced to accept nominal wage cuts, but there is still
not substantial data evidence to suggest that this a widespread phenomenon. Finally,
a normalisation of the situation in financial markets might also imply that
some credit will start flowing to the Baltics again. The Baltic countries have learned how dependent they are on developments in the world economy. Indeed, an early recovery in the Baltic economies requires that the recent positive news from the USA, Japan and Eurozone are sustained in the second half of 2009. Whether this is a realistic assumption is anyone’s guess.

Read more….

The Daily Reckoning

Is it time to buy a house?

Depends…

If you need a place to live and want to own a house, why not? Prices in some areas are fairly reasonable. But if you’re speculating, our guess is that you’ll get a better deal if you wait.

Why? For the many reasons we have given you in these Daily Reckonings. House prices may be firming in some areas – that’s what the Case- Shiller numbers seem to show. But nationwide, they are probably headed down for quite a while longer.

Herewith, four reasons why:

First, as you know, this is a depression. It will probably be long. And deep. You wouldn’t know it from looking at the stock market or reading the news. The Dow went up another 114 points yesterday. Oil rose to $71. And the dollar – anticipating inflation – fell to $1.44 per euro.

But that’s what bounces are supposed to look like. They look good enough so that people mistake them for the real thing…and get suckered into more losses.

This is a depression. Depressions drag down asset prices. Typically, prices become much more reasonable. And then they reach UNREASONABLE levels. House prices have become reasonable. Now they will become unreasonably cheap…

Second, waves of resets and foreclosures are still washing over the housing market. As Barry Ritholz told us in Vancouver, we’re only half way through the foreclosure process. There are more than 18 million empty houses in America. A news report yesterday told of a 32-storey apartment building in Florida with only one lonely tenant. And still coming up are more refinancings…more drowning homeowners …and more people giving up on homeownership altogether. The bubble era created new households at the rate of 1.2 million per year. Practically every one of them wanted to get in on the housing boom. Now, there are only 500,000 new households per year. And few of them still believe that housing is the route to wealth. At the current rate, it will take many years to fill up all America’s empty houses.

Third, incomes are falling. Property crashed because people with average incomes could no longer afford to buy the average house. Now, they can afford even less. Ken Rogoff estimates that the consumer needs 6-8 years to pay his debts down to a more reasonable level. Part of that deleveraging process will mean getting rid of heavy mortgage debt – one way or another.

Fourth, there are too many houses that are too big…and in the wrong places. Big houses were a status symbol in the bubble years. Now they’re a symbol of extravagance and error. Plus, they’re expensive to own. People will want to dump them – even if they can afford them. There was far too much building in the outlying suburbs of the sand states too – Arizona, Nevada, California and Florida. Those houses may have to be abandoned as people are forced to move closer to where the work is.

There are also a couple of more technical reasons why the Case-Shiller numbers may be erring on the bright side: seasonal adjustments and a changing mix of houses sold. But our guess is that real house prices – adjusted for inflation – will continue going down for many more years.

You want to see deflation? Go to Tokyo City in London. The restaurant chain says it is going to give its food away for free. Customers will pay for drinks plus 2 pounds 50 pence for service.

Meanwhile, in Tokyo itself prices are falling – again. The Japanese have had on-again, off-again deflation for the last 20 years…ever since their stock market crashed in 1989.

Hey, what’s the matter with those Japanese? Don’t they know about stimulus?

Hold on there, pilgrim. What the Japanese don’t know about stimulus ain’t worth knowing. They’ve stimulated their economy so much that their government debt now measures 200% of GDP. And what did they get for all that stimulus? Did it get their economy moving?

Are you kidding? Now, the latest news tells us that they also have the highest jobless rate in 6 years. And the latest figures show the inflation rate NEGATIVE. In fact, never has the inflation rate been lower.

In other news, jobless benefits are running out for 1.5 million unemployed Americans, says a New York Times report.

And here a commentary by David Pauly on what Wall Street is doing about low earnings – lying!

“Stock analysts continue to promote corporate earnings lies, insisting that net income isn’t really what investors need to know…

“In analyst speak, Intel Corp. wasn’t hit with a $1.45 billion fine from the European Union in the second quarter for anticompetitive practices.

“After setting aside funds to cover the fine, which Intel is appealing, the semiconductor-maker had a quarterly loss of $398 million, or 7 cents a share. Disregarding the fine altogether, analysts maintain the company earned 18 cents a share, beating their average estimate of 8 cents.

“As Wall Street tells it, the employee stock options Google Inc. granted in the second quarter didn’t cost its shareholders $293 million.

“Google, according to generally accepted accounting principles, earned $1.48 billion, or $4.66 a share, in the period. Not enough for Wall Street, which prefers to say the company earned $5.36 a share, leaving out the cost of stock options.

“Viacom Inc., an entertainment company, this week reported second- quarter net income of $277 million, or 46 cents a share. Analysts had estimated profit as if money Viacom paid out in severance in the period wasn’t the real thing. On that basis, Viacom earned 49 cents a share, beating the average estimate by 1 cent.

“Time Warner Inc., a rival of Viacom for entertainment dollars, said it earned $519 million, or 43 cents a share, in the quarter. Analysts insist Time Warner earned 45 cents, excluding, according to Bloomberg data, costs related to litigation and asset sales. Lawyers must work for nothing.

“By similar Wall Street reckoning, the expense of cutting jobs and selling an asset that reduced McGraw-Hill Cos. second quarter earnings per share by 10 percent was immaterial.

“Analysts also say investors should ignore $129 million that Textron Inc., maker of small airplanes, helicopters and golf carts, charged against net income in the latest quarter. Included was the cost of shutting a plant for an eight-seat jet Textron decided not to build.

“General Electric Co., which makes jet engines and electric power equipment and has a financial services arm, had a second- quarter profit of 24 cents a share. GE and the analysts emphasized earnings from continuing operations, which at 26 cents a share, exceeded their estimate by 2 cents. A $194 million loss from discarded businesses was discarded.”

And so on…and so on…

Bill Bonner
for The Daily Reckoning Australia

Similar Posts:

• Riding the Bear & Deep Drilling in Australia
• The Profits Depression
• The Price of Gold Has Not Retreated Permamently
• Inflation and Deflation Battle is a Long Way from Won
• Your Second Chance to Escape the Bear Market

More articles from The Daily Reckoning….

The Daily Reckoning

What’s new? Nothing much….

Markets still moving up…

Oil rose $2.50 on Friday…to $69. Gold rose $18 to $953. The Dow was up 18 points. And the dollar fell to $1.42 per euro.

And governments are still doing the wrong thing…trying to increase demand. It’s not possible…for reasons we describe below…

Well, it’s August…and we’re on vacation. But just because we’re on vacation doesn’t mean the world stops turning. It just doesn’t turn quite so fast.

“Why don’t you just stop writing for a while?” our mother asked this morning. She is visiting for the summer.

“I don’t know how you write every day anyway. You must say the same thing…”

Richard Russell has given a Dow Theory bull market signal. When you get a signal, he says, you don’t argue with it; you go with it. Stock prices are going up.

We don’t doubt it. The Dow would have to clime to about 10,300 just to give us a classic 50% bounce.

But we are in a depression. We don’t gamble on stocks in a depression. It’s too risky. Instead, we go with the flow. And the flow over the next 10 years or so is probably going to be down.

By our reckoning the Dow hit its high in January of 2000. Adjusted for inflation it’s been running downhill ever since. Investors have made nothing for their trouble. And if we’re right, they won’t make anything in the years ahead either. Instead, they’ll have to wait until stocks are cheap again.

You know, dear reader…investing is really very simple. Buy low. Sell high.

Okay…now that we got that figured out…let’s move on…

Sticking with the basics, what we notice is that stocks, bonds and commodities move in broad patterns that last for many years. Not to put too fine a point on it, but they go up and then they go down. Or vice versa. Just looking at the last 50 years, stocks were very expensive in 1966. Then, they dilly dallied around for a couple of years…and headed down. This bear market continued until August 1982. That was when BusinessWeek magazine declared that stocks were not merely ailing, they were dead: “The Death of Equities” was the cover story that month. Naturally, equities got up from their deathbed the very next month and entered the marathon. They ran for the next 18 years.

Well, you know the rest of the story as well as we do. It’s not complicated. The problem is that it takes patience to see it…to understand it…and to take advantage of it. The way to make money in stocks is to buy them when they are very cheap. But you may have to wait for 15-20 years. They’re not cheap towards the end of the bull cycle. Since you never know exactly when it’s going to end you don’t want to buy anywhere near the top. So you wait…and then stocks keep getting more and more expensive. Finally, the top arrives…and then you have to wait another decade or more until they reach bottom.

“Well, why don’t your write The Daily Reckoning once every 20 years?” mother wanted to know. “Just tell them when to buy…wait 20 years…and then tell them when to sell.”

But we’re going to ignore our dear, sweet momma this morning. She just doesn’t understand the complexity of the financial world!

For the last nine years, stocks have been going down (albeit with a major countertrend to the upside). We’ll probably have to wait another few years before they are cheap enough to buy. And when the end comes, stocks will be very cheap – between 5 to 8 times earnings.

When will that day come? Probably around August 15, 2018. Don’t forget to read The Daily Reckoning that day!

Stock market cycles tend to coincide, more or less, with broad trends in the credit cycle. When people borrow and spend it causes business profits to grow. The businesses then expand; they hire more people; they build more capacity.

Then, when the credit cycle turns, everything goes in the other direction. People stop borrowing and begin paying back. Sales decline. Unemployment grows. Profits fall. Credit contracts.

We are now in the early stages of a major credit contraction. This is not a pause in a credit expansion; it is a change of direction, a credit contraction with all that goes along with it – joblessness, bankruptcies, foreclosures, and so forth.

Bloomberg tells us that the numbers have already been revised – downward. “Worst recession since the Great Depression,” says its headline.

It is the worst recession since the Great Depression because it’s not a recession at all; it’s a depression. And the government is doing its level best to make it a great one.

The key to understanding a depression – or the downswing of the credit cycle – is that demand contracts. Consumers have less to spend. For a very simple reason: they already spent it.

Listen up, because this is important. When you borrow in order to consume, what you are really doing is consuming something today that you would have normally consumed in the future. You spend money you haven’t earned yet on something you’re not really ready to buy. You’ve heard the expression, ‘time is money.’ That’s why borrowing money is really borrowing time. Later, you have to make it up. You have pay off the debt. When you do, you take money out of current consumption; you’ve already consumed it!

This is what economists refer to as “demand destruction.” It’s what happens in a depression. People are replacing what they took from the future. They’re can’t consume because they’ve already spent their money in the last boom. Demand collapses.

We’ve seen that happen in the last two years. Savings rates went from zero to 7%. Sales have declined (the latest revisions show them off more than was previously thought.) Profits are shrinking.

This is, of course, a completely natural and necessary adjustment. You can’t take things from the future without putting them back eventually. The future won’t stand for it. But the feds, in their benighted confusion, fight the problem like a farmer who plows backwards to fool the crows. They think the problem is too little demand. So, they try to add demand…with tax cuts…spending programs…low rates…easy credit…cash for clunkers and other fixes. What do these policies achieve? Do they really increase demand? No, they can’t do that…that would require a richer population with more money to spend. What they try to do is to move demand forward.

The problem, of course, is that too much demand has already been moved forward. But they’re nevertheless trying to steal even more of it…taking away demand that would normally show up two, three, four…ten years from now. That car that you might buy next year, for example. With the ‘cash for clunkers’ program, you might make the purchase now instead of waiting until you actually have the money. Or, that new parking lot behind the town hall. We won’t really need it for a few years, but heck, if they’re giving away money now… Or how about that trip to Europe? With a big tax rebate check, you might decide to take it on your 20th wedding anniversary, rather than wait ’til your 25th.

Real demand increases only when real wages increase. Then, people have more purchasing power. Trying to increase demand by borrowing – or stealing – from the future is a scam at best. Even if it works now, it fails later.

Bill Bonner
for The Daily Reckoning Australia

Similar Posts:

• Krugman Warns That the Run-up in Stocks Can’t Be Justified By the Fundamentals
• What We Face Now Is a Depression
• Big Australian Resource Stocks Up 24% in 2008
• England Sinks Deeper into Depression in Decade of Pain
• The Profits Depression

More articles from The Daily Reckoning….

I think President Hoover ran on a slogan “A chicken in every pot and a car in every garage.” So with the new car rebate program in full force, it’s just a case of which comes first the car or the chicken. We have an old 1995 Dodge Caravan that qualifies. I can’t sell it for $2,000 because no one has two grand lying around. Now the government wants to give me $4,500 for the Caravan so I can buy a new car.

The odd thing, this program is to replace clunkers that get bad gas mileage. The damn thing is, the Caravan gets 25 miles to the gallon which is 3 better than my newer fuel efficient Mazda 626. I guess this is where the chickens come in. If you are stealing them, you want to make as little noise as possible. I wonder if Volkswagen is on the clunker list?

Then we have the meeting of the big three; The President, a Harvard Professor, and a police officer. The Harvard Professor was instructing Obama how to kick in the door if he gets locked out of the White House. And the cop was suggesting what not to add to the word “mother” when greeting a police officer, answering a burglary call. Going to the White house for one can of beer has to be some sort of punishment.

It could be just my imagination, but have you noticed that Obama is always standing in front of one or more American flags? It kind of reminds me of a little man who wrote Mein Kampf, he always had a flag behind him. Plus the President’s face is popping up on every magazine I subscribe too, why?? Let the girl he married enjoy his face; give me and my magazines a break.

If we travel back to the Hoover administration and also to FDR; Government did not get us out of the depression. They made it last longer. They raised the taxes of every worker with the promise of Social Security retirement. There was no income tax back then for the masses.

When the government calculates who pays taxes it always comes out to be the rich, Social Security isn’t even considered, that’s a “retirement plan.” They have been spending this non tax for regular government and handing IOU’s to the Social Security Fund. This new health care will be the same sort of tax. Most people from the age of 20 to the age of 60 will end up paying $5,000 a year into it and maybe have a boil lanced or a cut stitched up. Free medical will raise about 1.5 trillion a year for the government to spend if everyone is working.

With this new clunker rebate program, it looks like we will all be working for a car company.I don’t think that the guy managing the rebate plan for clunkers could get a ride on the short bus, they might be dumb but they’re not stupid. We are financing more debt unless the purchaser can pay cash for the balance. This plan works for all the wrong reasons. It’s a little like mixing Viagra and Ex-lax while your wife is visiting her mom. You’ll be coming and going for all the wrong reasons.

Read more….

“The Great Depression did not end when the economy stopped shrinking in the first quarter of 1933, after contracting in real terms by 27% over the previous three years. At the time economists heralded the event as the end of the depression. In fact, they were less than a third of the way through the ten-year period between 1930 and 1940 that came to be known as The Great Depression… Several years from now, no one will say that the FIRE Economy depression ended in Q3 2009, either. ”

Read more….

Those of us who have long studied Peak Oil and other issues tend to underestimate the shock, denial, fear and anger of the newly exposed.

Correspondent D. recently submitted this startling (at least to me) report:

We received a huge disappointment from our next-door neighbor last week. Having been inspired and encouraged by your writings to try and “reach out” to begin to form a community of like-minded souls, and also to foment discourse about the Great Transformation, we loaned him the copy of Survival+ that we’d printed out.

We thought he’d appreciate the warning and the inspiration provided in your book. And so we were stunned the next day when we were walking down our street, and our neighbor, seeing us go by, raced down his driveway and practically threw your book at my husband, then turned and marched away. What the heck?!!

I was surprised and disturbed that Survival+ would evoke so violent a rejection, and wrote to D. that perhaps the book was “like straight gasoline,” that is, full-strength and highly flammable. D. replied:

After I read your reply yesterday, I realized that it might have been unintentionally cruel of us to have dropped such a powerful book into our neighbor’s lap. Mea culpa! I should’ve remembered how panicky I felt when my husband asked me to start reading the various Peak Oil websites last summer, and how upset and shocked I felt at learning about the true state of affairs in this country.

Thank you, D., for sharing this first-hand report. When I recounted the story to my wife, she suggested that the gentleman’s reaction showed there was some truth in the book, for if it had been without any truth the gent would have dismissed it with a shrug. I think there is something in that notion: when our world is threatened, we respond with shock, denial and then an anger which masks our fear.

This chain of thought leads back to Janet’s statement from The Fluttering Pulse of Entitlement Nation: “I sensed (maybe this sounds crazy) a lot of anger and hostility in the crowd (at a diner).” Steve R. then suggested in Denial, Fear, Anger: The Real Depression Part I that “This undercurrent of anger may reflect a general feeling of betrayal by the system.”

I think the hostility has multiple roots:

1. The sense of betrayal by a system which was presented by the Powers That Be as fair, sound, beneficial to everyone, etc.

2. The betrayal one feels when a “sure bet” goes bad and is lost.

3. The anger we feel toward ourselves for making poor judgments, but which we project onto others to spare ourselves the pain of responsibility.

4. The anger which humans use to cover a deep, abiding fear.

There may be more sources, but this list begins the process of parsing the complex emotions which are being unleashed by rising unemployment, the loss of homeownership, equity and the hope of easy wealth, and a fear that the future will not be as bright as we once assumed.

Frequent contributor Harun I. made these observations about self-delusion, greed and responsibility:

From the Mayans to the Romans, from Asia to Europe and now the U.S., all empires seem to experience a series of psychotic episodes that lead to their decline. It seems as if it is a necessary ingredient. What military might cannot bring down, self-delusion will.

However, I cannot accept that the idea that because we responded as encouraged, anger is now justifiable. What ever happened to that pithy adage, “you can lead a horse to water but you can’t make him drink”? This represented choice. After all the history (which can be easily “googled” today) of bubbles and manias, how did we fall for it again?

I can think of nothing more potentially damaging to the psychological well-being of an individual than telling him/her, “its not your fault, you had no choice.” I’d like to think that humankind is smarter than horses and do not involuntarily salivate when they hear a dinner bell.

I told my seven-year-old daughter to hold her breath and that it was okay because I would be breathing. She looked at me quizzically but complied (she innately understood the absurdity of the proposition).After she could no longer hold her breath, she blew it out and did the obligatory gasping. I asked her why she let out her breath. She yelled at me angrily, “DADDY, YOU CAN’T BREATHE FOR ME. I HAD TO BREATHE OR I WOULD DIE!” I smiled and quietly told her, “Just as breathing is essential to life and can be done only by you for you, so is thinking. Do not ever believe that you can let someone else do your thinking.”

What was this so called dream? Regardless of the different forms in which it is presented, the “dream” has been and will always be simply getting something for nothing. Personal greed is and always will be the lever. Greed resides within us all but not all of us interact with it.

What was this encouragement? It was, is and always will be nothing more than someone validating what we already believe.

A democratic republic cannot survive without self-responsibility in the majority of its citizens; the crumbling of our society and those before it should be proof enough. No society/empire fails because of money problems. They failed because the collective citizenry began to believe absurdities.

As Voltaire warned us: “Those who can get you to believe absurdities can get you to commit atrocities.” Believe is the operative word. It requires that a choice be made. What is the absurdity we have chosen to believe since 1913? To what atrocity has it led?

If, instead of passively accepting bailouts and government-enforced charity, every voting age adult wrote or called his representatives and made it clear that the representative would lose his/her vote if they supported any legislation of this sort, and that he/she would actively organize and support tax revolts in their community, the outcome we are facing today would be different. Better yet, if every working age person had refused the debt trap, things would be radically different.

It is widely known that legislation is passed without being read, that our representatives often do not know on what they are voting but are told how they are going to vote. Let’s face it, government is now combat ineffective. What is our response?

Yes, we have a right to be angry but only at ourselves. Every citizenry gets the government it deserves.

Well said, Harun. Pondering that, I am not angry, but I am afraid for the citizenry and the Republic; for we have the government we deserve, and it is heading off the cliff of insolvency. The citizenry is still in denial, holding fast to the fantasy that their government can magically print trillions of dollars to fund their private entitlements, as well squander additional trillions backstopping $13 trillion in evaporated bad bets and pay for a global empire to boot.

Denial, fear and anger will not take us forward, of that we can be sure.

As an endnote, here is correspondent Dave E.’s commentary on the prevalence of denial:

Now that “consumers” are played out (and played), the government is picking up where consumers left off, proposing outrageously irresponsible policies, such as the “health care” sham being shoved down our throats, which will neither lower health care costs nor increase health care availability, but will fiscally encumber the government, the taxpayers and businesses with the additional costs.

Furthermore, all this talk about “green shoots,” “recovery,” “stimulus,” and so forth is j ust a propaganda to help keep the game going a little longer by encouraging consumers to buy houses and automobiles, the two cornerstones of our consumer economy.

What perplexes me is how the powers-that-be seem to believe that the exponential growth con game can continue forever. It’s as if their insatiable greed has trumped their own powers of reason. Or maybe, as does occur, they have been bamboozled by their own propaganda!

And speaking of denial, I recently returned from a three week driving trip covering 3,800 miles. What amazed me more than anything was the “denial” evident in the other people on the road. People were driving huge, gas guzzling vehicles, many towing huge, gas guzzling “toys,” such as boats and trailers containing other vehicles! They were paying exorbitant prices for hotel rooms, restaurant meals and attractions. I got the sense that people had a careless disregard for the future, as if they were partying with reckless abandon today because tomorrow looks too bleak to contemplate, as if ignoring the fiscal realities will somehow make them go away.

If denial precedes fear and anger, then we have a long way to go.

Excellent quotes submitted by readers:

from Kenneth R:

“Every effort under compulsion demands a sacrifice of life energy.”
– Nikola Tesla, quoted in Waking Up: Freeing Ourselves from Work

from Angry Saver:

“In a time of drastic change it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists.”
Eric Hoffer

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

“Your book is truly a revolutionary act.” Kenneth R.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Go to my main site at www.oftwominds.com/blog.html
for the full posts and archives.

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SO SUDDENLY EVERYONE’S NOTICED what a handful of nutty doomsters said about the financial crisis, long before it broke.
The end of the bubble was inevitable. Only the timing was ever in doubt.

Read more….

“The time to worry about depressions,” F.A. Hayek once wrote, “is, unfortunately, when they are furthest from the minds of most people.” He’s right, of course: imagine trying to tell a house flipper in 2004 that the housing market was a giant bubble that was going to burst. At best he’d smile politely,and then roll around in his fresh pile of Federal Reserve Notes.

It’s during an artificial, unsustainable boom like the one we’ve just lived through that, unbeknownst to most people, the real damage is done to the economy. But that’s when they’re least likely to listen or care.

Now that we’re living through the bust, on the other hand, many people are listening. That’s why it’s so important for economists of the Austrian School to redouble their efforts, whether in terms of writing, public speaking, media, or indeed whatever platform they can get, to promote a sound, free-market interpretation of what’s happening. The drones who exist to repeat clichés about market failure need a robust and energetic reply from people who know what they’re talking about.

Robert P. Murphy has done exactly this. His article archive at Mises.org has grown substantially during the crisis, and his blog is always a valuable read. In addition to all this, he managed to find time to write the recently released book The Politically Incorrect Guide to the Great Depression and the New Deal.

Murphy and I corresponded regularly late last year as we worked on our respective books. He got a kick out of the realization that he, the economist, was writing a work of history, and I, the historian, was writing a book (Meltdown) that gave the Austrian perspective on the current economic crisis. But he is a perfect fit for a study like this. Although many economists know little history, historians’ knowledge of economics is confined, with few exceptions, to a catalogue of primitive fallacies. This episode in American history has needed the careful, book-length attention of a good economist – that phrase, sadly, is practically an oxymoron in the Age of Krugman, is it not? – for a long time now.

And it isn’t just the court historians or the left-wing economists who need straightening out, either. Even otherwise free-market scholars of the Great Depression and the New Deal have a fatal soft spot for the Fed – whose failing, they tell us, was its failure to pump enough money into the system. Murphy will have none of this.

Thus, for example, the Chicago School has been critical of the Fed, but for the wrong reasons: the Fed supposedly failed to create enough money when the money supply began falling. This is not exactly a free-market criticism, but (surprise!) it’s the only one the mainstream has bothered to acknowledge. As a matter of fact, in the nearly two years following the 1929 stock-market crash the Fed engaged in what were at that time the most aggressive rate cuts in its history. (This is in contrast to the Fed’s rate increases during the 1920-1921 downturn, which was over quickly but which by Chicago’s reasoning ought to
have been more severe and persistent.) Milton Friedman and Anna Schwartz, Murphy concludes, gave birth to,

“a myth, namely that the Federal Reserve sat idly back and allowed the economy to implode. That myth – like the myth that Herbert Hoover sat idly back and watched the Depression unfold – is continuing to drive misguided policies today.”

Murphy also includes in this chapter a very useful section on deflation, a subject nearly impossible to find treated without breathless hysteria. To blame the Depression on a decrease in the supply of money is to get the relationship exactly backward. Moreover, the money supply fell by the same percentage between 1839 and 1843 that it did between 1929 and 1933, but robust increases in real consumption and real GNP followed. Under the heat of Murphy’s magnifying glass throughout this much-needed chapter, the arguments of the deflationphobes melt away.

Naturally, Murphy devotes considerable attention to the interventionist program of Herbert Hoover, the president whom most Americans, if they have heard of him at all, associate with laissez-faire. According to Paul Krugman, for example, “the federal government tried to balance its budget in the face of a severe recession.” Murphy, in response, says “it would be difficult to render a more misleading account of Hoover’s policies without actually lying.” In Fiscal Year (FY) 1933, which ran from mid-1932 to mid-1933, the federal government ran a $2.6 billion deficit – at a time when it took in only $2 billion in tax receipts. So the deficit that Krugman represents as wild slash-and-burn budget cutting was in fact greater than the federal government’s entire tax haul that year. That would be equivalent, Murphy observes, to a $3.3 trillion deficit in FY 2007, as opposed to the actual figure of $162 billion.

Now it is true that the FY 1933 budget included some minor budget cuts, but these relatively trivial cuts came only after Hoover’s dramatic spending increases of the previous several years had failed to show any results other than a deepening of the Depression. Murphy’s book has all the figures. By the time Hoover pulled back from what would later become standard Keynesian fiscal policy – a pullback that came in the form of minor spending cuts and major tax-rate increases – unemployment had already gone higher than 20 percent.

In a 1926 speech while secretary of commerce, Hoover had observed that Americans enjoyed both higher real wages and a higher standard of living than did people elsewhere. Like all too many others, though, Hoover drew the fallacious conclusion that the prosperity was the result of the high wages rather than the other way around. (This was the fallacy, exploded by Henry Hazlitt, that high wages promoted prosperity by providing workers with “enough to buy back the product.”) The high purchasing power of American wages reflected American workers’ productivity: because they were able to produce so much physical stuff, thanks to the amount of capital per worker in the United States, the resulting abundance made their paychecks stretch farther. “Unless workers have first physically produced the goods (and services),” Murphy writes,

“there will be nothing on the store shelves for them to buy when they attempt to spend their fat paychecks…. If more stuff is produced within America than within Mexico, obviously Americans are going to have a higher standard of living, regardless of ‘wages policy.’”

It was this fallacy that later informed Hoover’s disastrous high-wage policy, a policy FDR later codified with the National Industrial Recovery Act and that served to deprive countless Americans of employment.

On the New Deal itself, Murphy is just devastating. It’s been amusing to watch the likes of Brad DeLong tell us how super the government’s economic recovery efforts were. Let’s see: cartelizing American industry, restricting production, imposing extremely high minimum wages via the National Recovery Administration, destroying crops to prop up prices, paying farmers to
reduce their acreage, blowing billions on arbitrary projects in the name of “creating jobs,” raising taxes – and that’s only a bit of it. That combination was supposed to make Americans rich – and don’t you try to say otherwise, you incorrigible extremist. Bob discusses all of this and much more (including Social Security and labor legislation), and raises evidence and
arguments that, if the standard treatment of these subjects in every single American-history textbook is any indication, your delicate ears are not supposed to hear.

In addition to his merciless evisceration of the propaganda surrounding specific New Deal programs, Murphy assembles some suggestive evidence, in addition to the clear testimony of economic theory, regarding the destructive, growth-inhibiting nature of the New Deal in general. In particular, he lays to rest (to put it gently) the recent claim that FDR did make headway against the Depression, as indicated in the unemployment statistics, and that this progress resulted from his willingness to suck resources from the private sector and squander them on arbitrary things.

Readers will also enjoy Murphy’s treatment of the banking industry during the Depression, since we’re usually told that FDR’s alleged cure for that distressed sector was just super. It was no cure at all; it addressed none of the underlying problems, which continued to fester for decades thereafter. The state governments, for their part, had contributed to banks’ vulnerability by yielding to small institutions’ demands for “unit-banking” laws prohibiting branch banking. These laws made it more difficult for banks to manage risk by diversifying their portfolios. Most of the thousands of banks that failed during
the Depression were in states with unit-banking laws. The number of bank failures during the same years in Canada, on the other hand, which had no unit- banking laws, was zero.

Although many readers will be able to name at least several important titles on the Depression and the New Deal, I cannot insist strongly enough that there is no book quite like this one. I am not aware of any other book on this subject that both carries the story from the 1920s through World War II and is economically sound throughout. Murray Rothbard’s America’s Great Depression, still indispensable, covers only through 1932; and books critical of the New Deal typically adopt, probably thoughtlessly, the Chicago position on the Fed.

In the midst of an economic crisis that ought to be causing people to rethink much of what they thought they knew about the economy (e.g., the Fed is a great stabilizing agent!), Bob Murphy has written an accessible and persuasive Austrian account of an essential period of American history that most people know only in propaganda form. He deserves to be richly rewarded.

Regards,

Thomas E. Woods
for The Daily Reckoning Australia

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