Friday, January 29, 2010

History and Debt

Here is a little piece contributed by  "Anon on a California Mountain" from the remarks section that is worth reading.  He sees deflation as being the bigger monster at the present time.

History has shown over and over that it is always debt that destroys empires and countries (except for war, climate change and migration away from failing crop lands).

Usually after a financial crisis you have a number of sovereign defaults (because of all the bailout, stimulus and drops in tax revenue). The cycle: a government goes into excessive debt that can finally no longer be managed or serviced... it can't get money from tax revenues, trade or the economy, so... in desperation it raises taxes and becomes very aggressive towards its citizens... this slows growth even more... capital flees and so do citizens... the downward spiral worsens... more desperate measures from a government that is impossibly in the red... and then it is spin, crash and burn. Egypt, Rome and Greece are a few examples of that.

We Americans have now entered into this cycle. The deflation and deleveraging can't be stopped. The correction/recession/depression can be postponed but never avoided... and it will be more painful and destructive in direct ratio to the length of postponement. We've been on a credit expansion cycle since the mid 40's. It has ended and is beginning its contraction cycle now.

Bernanke is back in and we will be the worse for it. Don't worry about the Federal Reserve printing 2 Trillion into the money supply. With 30+Trillion of derivatives and other assets that are collapsing, 2T is a mosquito bite. Inflation worries are premature. This is deflation.

Figure out how to survive, in an environment of high taxes, slow to no growth, oppressive government, lower standard of living, poorer infrastructure and lower levels of social services.

Anon On A California Mountain


Rob in NS said...


Although I don't disagree with what Anon said in post when looking at it from long view of history I have to add one caveat. I just bought a chocolate bar for 2 bucks. I says right on wrapper that it is king size. I used to be able to buy same bar at hockey rink 30 years ago for about 10 cents. Unfortunately, most people in world don't understand derivatives or securitization of mortgages but everyone can relate to price of a chocolate bar. I have no doubt that deflation will take place but I'm guessing it will go hand in hand with our standard of living. If one has little or no debt than this will not be a problem. However current easy money policies in force by central banks of this world seem to me to be a suckers bet to try and hook as many of us into debt servitude so that the Wall street hucksters can pay out their outrageous Christmas bonuses each year. As long as mainstream media can convince the majority of people that things are getting better I don't see things changing. Some may complain about price of chocolate bar but the demand for remedies to underlying problems in ecomony will not exist. That said, unless I live to be 200 years old I won't live to see end of Anglo-American Empire. I will more likely be be a death from a thousand cuts.

Rob in Snowy Nova Scotia

Jim in San Marcos said...

Hi Rob

I think the inflation you are seeing in the candy bar is the results of inflation from 2 to 5 years ago.

I'm not sure which way this will go. Anon in California suggests that the derivatives will collapse and cause deflation which is plausable. I tend to side that maybe the currency could go to hell before that happens.

It kind of like two dogs pulling on a towel. Which one will win? They could tear it in half in a worse case senerio.

I think it is a toss up at the present time. "Caution" is the word for now.

Rob in NS said...


Great analogy except I think the dogs are smarter thans us.


frakrak said...

Jim a lot of the money the FED has printed hasn't gone directly into circulation, would that be right?

For instance, banks to a greater degree are sitting on the TARP money and not lending. Other trillions have bought back bonds (hope that one was correct?).

To really and truly get inflation going in your country, wouldn't monetary policy have to be a little more direct in "pump priming" prices within the economy?

The FED is just packing the wound with paper and linen at the moment, and we can still see the hole!! By the way this will be what your new health care system will be like on a more personal basis!

I would have to agree with your reader, and yourself ...... DEFLATION!

Jim in San Marcos said...

Hi Frakrak

In a normal world what you suggest would happen. In this case it is different. The Treasury sells bills and bonds to the public to raise cash for the government to spend. This is a loan from the saver to the government that currently pays about zip in interest. The Federal Reserve controls the money supply when it feels necessary. If they buy Treasuries, they are increasing the money supply. If they sell Treasuries the money supply decreases. The normal use of this Federal regulation of the money supply would probably top out at 10 or 20 billion (a guess on my part).

The Treasury is selling bonds and it looks as if the Federal Reserve is buying about 60% of them (an enormously absurd amount). They print dollars to buy the bonds and it is considered a zero sum game. When the Federal Reserve redeems the bonds, the printed money is taken back out of circulation.

This massive buying of bonds keeps the interest rate low. The Treasury has no problem covering the low interest rate. Right now the Federal Reserve has 4 trillion in Treasury and bank securities. The question arises, if the Fed decides to start selling the paper to redeem the dollars issued, will that have the result of raising interest rates dramatically. If that is the case, they would be committed to keep on printing to buy the Treasury issue to keep interest rates low. There are serious questions as to the real value of a lot of the bank debt being held by the Fed, it is probably trash.

So to answer your question, the money spent by the Fed is being used by our government to pay bills, Social Security, payrolls and the like. The banks aren’t even in the loop yet. If they write enough low interest loans and then if rates go up we will have another bank meltdown.

In essence, the government has spent 4 trillion dollars it didn't have and it doesn't show on the books.

MiTurn said...

How about this: deflation for a few years, followed by hyper-inflation as the federal government attempts to pay off its trillion dollar debt with the printing press. Think Weimer Republic, post-WWI Germany.

AIM said...

I agree with the person on the mountain. Deflation. Definitely.

Inflation, maybe even hyper, but a long way off.

The printed money has to get into the economy and the velocity of money has to take off for inflation to begin.

Banks are holding their money to recapitalize when the upcoming tsunami hits (derivatives, next 2 major waves of foreclosures, increasing auto/student/credit card defaults, eventually marking to market, etc.)

Savings rate is going up, consumption is going down, unemployment is going up = velocity of money continuing to slow.

If lots of foreigners buy our bonds that increases the money supply, if Americans buy, it does nothing.

The tens of trillions of derivatives, other toxic financial instruments and deflating assets on a global basis going into correction will hold of any inflation. The US Federal Reserve could drop another 2 trillion into the air and it wouldn't get into the economy... no one wants any credit right now... except the government... which is our next big debt bubble.

USD is going to get real strong as deflation continues. Hold onto your dollars people... make a lot of them... when the tide finally turns be prepared to turn your dollars into tangible assets and let them ride the severe inflation spike.

Another way to look at it... Japan has been doing exactly what we are now doing for the last 20 years. No inflation... they can't do it no matter how hard they try... they are deflating still. Everytime the govmt withdraws their stimulus... boom down they crash again. Look at the news today... the Japan CPI just dropped again... a record drop too. No one is buying over there because they know prices are going even lower. This continues the dwindling spiral.

We're doing what Japan has been doing. Let's fact it... a long line of recessions over a two decade period is... a depression.

A correction is in inverse proportion to the excess the proceeded it. The US went up real high on credit and excess... try as Bernanke/Obama do they will not be able to stop the fall.


Tyrone said...

USD is going to get real strong as deflation continues. Hold onto your dollars people... make a lot of them... when the tide finally turns be prepared to turn your dollars into tangible assets and let them ride the severe inflation spike.
A correction is in inverse proportion to the excess the proceeded it.

Very well said, AIM. Couldn't agree more.

Tyrone said...

Oh, and six (6) more banks today, with $2B the FDIC must "cover".

Jim in San Marcos said...


Your quote:

"If lots of foreigners buy our bonds that increases the money supply, if Americans buy, it does nothing."

is not quite right. Anybody that buys Treasuries is increasing the money supply. Our government is borrowing this money and not paying it back. They are just paying the interest on it.

Foreigners buying our bonds also have to contend with currency exchange rates.

Our Congress gave everyone a tax break, to put money in an IRA or 401k. This increase in savings is cash the Treasury can borrow for 40 years before the boomers retire. We pay in hard real dollars today for a tax savings and in 40 years with inflation, it will buy a bag of groceries.

The Treasury doesn't get a shot at every dollar invested in retirement accounts, but it is enough that it keeps the interest rate below what it probably should be.

Right now Treasuries at .005 kind of sucks. With the rule of 72 it would take 144 years to double your money. Inflation has to be at least 12%.

Common sense suggests, buy what you want, saving money accomplishes nothing. This kind of thinking rubs my fur the wrong way (I'm frugal). Go figure.

I'm not sure which side is up from here.

AIM said...

Your correction noted. My error for not being clear. What I meant to say was that The Fed has been buying US government debt and as a result injecting cash into the system. But if the bonds are sold to The Fed by foreign holders there is no injection of cash into the domestic economy. It is still monetizing the debt but it doesn't increase our money supply.

AIM said...

In my earlier post I meant to say americans or foreigners selling bonds not buying them.

Despite this, The Fed and/or US Gov have no tools left if you really think about it...

Interest rates? Lowering them to zero will not reverse the economic decline. Japan did it for nearly a decade. Didn't solve their problem.

Monetary policy? The Fed's buying bonds from market is not a guaranteed increase in our money supply, especially with velocity of money collapsing. There is too much deleveraging and debt destruction for printing to make a difference.

Infrastructure spending? Turning to infrastructure in middle of a debt crisis makes no sense. The idea that just spending money will stimulate the economy is a misguided notion. It doesn't deal with the fundamental economic maladies that we have. (FDR's WPA, etc. doesn't fit into our modern picture.)

Economic history shows that the WPA actually only reduced unemployment by 20%. Also, 40% of the workforce was agrarian back in the 30's. The dust bowl in 1934 drove them out of work AFTER the 1932 low in the stock market. They needed to be retrained into skilled labor. The depression by force of necessity created an industrial work force.

I agree with Anon On the Mountain... depending on the government is just wishful thinking. we must attack the debt structure to get out of this. That is our only hope. Restructure the system (including the banks). Take the pain of debt destruction and then reform and begin a new cycle. The longer we wait the worse it is gonna get.

Anonymous said...

With all that said, will 2010 be worse than 2009? (for the average middle class American. We all know how the rich will fare.)

frakrak said...

Thanks Jim for taking the time there to explain the Fed's buying programme, understand it now (a little better anyhow)! I mis-quoted unemployment in a previous post, it is "officially 5.7%" here!

And indeed for comment number thirteen I wonder what sought of year it will be also? I think I will keep my fan off just incase ...


Anonymous said...

How can our prospects for this year be good?!

The fundamentals of our economy are falling apart. Our key statistics are horrible and portend a huge crash that will make this last financial crash look like a picnic.

The only reason it will look like were ok will be due to all of the government prop up and intervention and meddling (which won't last forever).

You heard Obama's state of the union address....... now listen to the state of the republic address and hear where we are really at , where we are headed if we don't wake up and what needs to be done to avert disaster.

It's in 3 parts.

Jim in San Marcos said...


I think we are in complete agreement but we are mixing a few apples in with the oranges.

The Federal Reserve is buying Treasury paper. This allows the Treasury to print checks for SS and Medicare. The government gets nothing in return.

The velocity of money through the system has decreased dramatically. Government transfer payments like SS and Medicare are a two step process. Issued by the Fed spent by the Treasury on say Social Security. The check recipient spends it on groceries. It's gone and very low velocity.

Now spending this fictional money on infrastructure isn't quite the same thing. The government (us as a whole) gets something back, like new water mains, sewage plants, better roads etc. It was money that had to be spent sooner or later. This part of the spending is a good thing. These checks make several hops before they are spent on consumption (higher velocity) (government spending is the lowest multiplier for velocity).

You touched on a issue that I have pointed out before that is quite important. In the 1920's, we went from a agrarian economy to an industrial economy. This is happening again with the computer revolution.

As you alluded to, FDR had a clean slate no debt or demands for SS or Medicare. So his method even if it failed wasn't that big of an expense.

You are probably right in calling for
" Take the pain of debt destruction and then reform and begin a new cycle"

The problem I see, is it wipes out all of our savings. Debt is not future buying power. It does solve the problem and we start over anew. There just aren't that many people who have saved for forty years that will enjoy, the reality of your suggestion.

I don't see any simple way out of this mess. I agree, it is going to get a lot worse before it gets better.

Take care.

Jim in San Marcos said...

Hi Anon 10:15

The rich have the most to lose. It is their money that has been lost.

I think we need to be prepared for several more years of bad economic times.

If you saved all your life for retirement over 40 years, you could be one of the rich people we are talking about. Kind of sucks doesn't it?

Thank you for your comments.

Jim in San Marcos said...

Hi Frakrak

5.7% unemployment is hard to believe. It sounds like it is time to pick up and move to the "Down Under."

It does make sense though, your government is taking a more laid back approach and I give them an A+.

Burn a shrimp on the barbie for me.

Take care.

Jim in San Marcos said...

Hi Anon 2:34

Thank you for the link. It is about 15 minutes if you do all three. It is Ron Paul in front of a tele-prompter.

It is quite good. It might add some focus and structure to questions that are unanswered.

Thank you for your comments.

frakrak said...

Jim I can see a time when an American can “come on down and put a shrimp on the barbie” and not need a passport! From most of what I read there seems to be this expectation that the U.S. has passed its “zenith” and what we are seeing is the end of western dominance of global capital and China looms as the victor!! We’ll see …

China’s global exports are down 25% in just one year, real estate is through the roof in China, new developments are being sold for scorching prices (1M plus is not uncommon)! China’s GDP growth is not a good indicator of overall wealth in that country; it excludes a large base of the population. And here you have a dilemma for the Chinese political elite, a population that has had enormous change and looming political instability. Their frustration is becoming apparent with how the U.S, is handling the crisis, I have seen the Chinese premier scolding the U.S. on the news, perhaps the chess pieces aren’t really where they would like them? After all they are playing against an opponent that seems to have quite a few wining runs on the board these past few hundred years!

The last year or two I have seen large bank executives, financiers, hedge fund managers shocked by what has happened with global markets, commentators that have been appalled by the lack of simple regulation that, in their minds could quite simply have averted the depth of this catastrophe, leading economist duelling with economic theory and opposing outcomes, so why didn’t these experts predict this? And yet there are the few average citizens that knew the end was nigh just by using plain old fashioned common sense! So what really is going on here?

History does seem to repeat, but it is only revealed in its perspective, perhaps America is on the verge of getting rid of the competition and revitalising the empire after a short waltz with deflation? I can see ways it can pull out of its descent and refresh!!


Jim in San Marcos said...

Hi Frakrak

I think that China is like a little kid with a million dollars in a candy store. The candy store owner will be the one who retires.

Two points to consider, it is a socialist country and the people are using free enterprise capitalism in their economic markets (they don't mix well).

Their real estate market bubble will collapse just as ours did, only the government will look at the collapse, as just punishment for those that participated.

A depression in China would be blamed on the Democratic principles of free enterprise. It would reinforce to the populace the concept that Socialism is a better choice over Democracy.

The US owes China a lot of money. China could become a very angry creditor. We could get out of this mess the same way Germany did before WWII . . . . .

Any way you look at it, we have front row seats.

Take care

AIM said...

Steve Forbe's new book... How Capitalism Will Save Us, is a great read and explains very simply and very well how capitalism and free markets are not and have never been the cause of problems... it has ALWAYS been government intervention or government not upholding its actual responsibilities.

I believe Greece will go down (IMF will rescue) and maybe one or more of the other PIIGS might too once they see that they could get bailed out like Greece (Spain, Ireland, Italy, etc.)

Then Japan will crash.

Then China will... they can't fool everyone and stimulate for that much longer... can't hide fact that they were 100% set up to be an export economy. Well the exporting is over now for some years and their population can't take over as the consumers they need so it's trouble. Plus, they have and still continue to over build and ramp up capacity. For what?

Governments have to be the slowest, dumbest and most reckless entities that ever appeared on this planet.

The protector and organizer has turned into man's greatest enemy.

Go figure.


AIM said...

Oh... I just did some figuring. I guess the answer is that government is a reflection or the manifestation of: all the negative, destructive, self-serving, avaricious, and oblivious aspects of that part of the human mind that we'd all be collectively better off without.


frakrak said...

Jim previous post should have read “executives of large banks” although Brittain has cut the fat from “large bank executives” by imposing a 50% tax on their “fat” bonuses, so it maybe grammatically correct either way!

I do agree with your take on China, they may turn out to be very angry indeed, and they are like children playing the game of capitalism with experts in global capital, so let’s hope this finds a soft landing for all our sakes, and a relatively positive chapter in history!! What do you think?

Can only post with an “Aussie” perspective, and China being our largest trading partner (mining exports), Australia is probably the most resource rich nation on the planet, with a population inversely proportionate to its great wealth (25M) people, and its location gives me great interest in how this looming economic catastrophe will effect our own security as a nation! I fear history will re-write this nations existence dramatically!

Always felt a little at odds with your call about people’s greed being a factor in the present outcome, I thought that people would always take the lead from government policy, and if easy credit was available, then the responsibility for the mess trickles from the top down! But you have a convert here, in the past year Australians have been aware of developments in the world, aware that China is facing its own meltdown, and yet have taken on more debt, than ever before. As a result we have a “bubble” in many sectors of our economy! Our banks were not immune from the meltdown over a year ago, loosing Billions, but because of tighter regulation, survived a little better than most other nations. The outlook is bleak, banks have lent so much money in the housing market, and even the smallest interest rate increases will increase the delinquency in mortgages substantially.

There is no common sense with government policy or our citizenry, when it comes to debt, recent history has been ignored by both sides. ALL economic growth in this country has been fuelled by debt for the past fifteen years, clearly unsustainable.
I would place this country where the U.S. was two to three years ago, and what makes it worse these recent historical facts are being ignored here, the previous post was right about the lack of intellect with governments, but from the Australian perspective I feel we have what we deserve!

Jim in San Marcos said...


Your quote " capitalism and free markets are not and have never been the cause of problems," has some issues. We had unsupervised capitalism in the late 1800's into the 1920's. The government ended up breaking up a lot of monopolies. A very few people were amassing great fortunes at the expense of the worker.

In a Democracy, a government is expected to defend the country, build roads and provide regulating services for commerce. If farmers overproduce pigs or builders overproduce houses, it isn't the governments fault and they really are not part of the solution.

People look to government to get them out of problems or blame government for the problems they are in. It's a great concept, blame someone else for your present problems.

We are not talking politics or religion here, just government in general. Governments tax a percentage of our gross and regulate the state. It is not very efficient but that's the trade off for a Democracy.

From my perspective, it is very hard to expect a government solution for this mess whether it be Japan or the US.

If you go back to my second post on this blog, you will see an article on the Kondratieff Wave, it has to do with economic cycles. Most of what is happening now was predicted. It is really hard to hold government accountable for the short comings of human nature.

I think that between the two of our views, there is probably a common ground to understand what is happening. Nothing is clear cut, there is no right or wrong, only shades of grey.

Take care.

Jim in San Marcos said...

Hi Frakrak

I tend to think that this mess could bypass Australia.

If you compare the size of Australia to the United States, they are about the same size (without Alaska).

Your country could be the new frontier. Loads of resources and low population. That's how the US started out.

Australia could "grow out" of this mess, where the US just isn't going to do that. We have too many people and not enough of them paying taxes.

Take care

AIM said...

Good points Jim. Thanks.

I don't have a much of a grasp on our economic history in the 1800's. I'll need to study up. I do know that the Fed's creation of liquidity in the 20's was one of the key causes that set the stage for the Great Depression (so there is the government intervention).

Forbes and also Thomas E. Woods have helped to clarify that the whole story of the robber barons in the USA was not totally accurate.

We have to look at the facts that the Rockefellers, Carnegies, Vanderbilts, etc. created lots of jobs, donated billions to the country, and brought prices down and standards of living up en masse.

As an example, sure Vanderbilt made a lot of money but he cut the cost of ferrying across to NYC down to almost nothing. And he made railway passage affordable to almost everyone.

With the bad comes a lot of good too I guess.

It would be good to make a full study of true free markets and capitalism at work and functioning in the USA (not sure how much of it there ever was) as opposed to government controlled capitalism with interventions, etc. and determine with which we were better off.

Tyrone said...

How about some debasement of our current coinage?

Proposed 2010 Budget

Terminations, Reductions, and Savings
Greater flexibility in the composition of coinage materials could enable the Mint to utilize less expensive metals in the minting process and substantially reduce its production costs. Using alternative coinage materials could save $150 million annually after an initial period of development and capital adjustments. These savings result from increased seigniorage, or the difference between the face value of the coin paid by the Federal Reserve and the cost of production. Seigniorage increases the available means of financing, but has no direct budgetary impact. Specifically, the Budget includes provisions that authorize the Department of the Treasury to approve alternative coinage compositions and weights across five denominations (half dollar, quarter, dime, nickel, and penny).

Jim in San Marcos said...


I think we are both in agreement that Spain Portugal, Greece, Ireland, Japan and China are in worse shape than we are.

It was a great economic party and no country stood in the way to protect us from ourselves. This is going to be one hangover that no one will enjoy.

Government intervention now, won't fix anything, but it could stretch this mess out a few more years.

Jim in San Marcos said...

Hi Tyrone

You crack me up. I can't believe that they are going to that. I wrote a piece in 2007 on Inflation, complaining about the coin quality.

The coins they are turning out now, are pathetic if you are a collector.

I'd like them to come back with silver coins again. We could print $20 on the silver dollars and $5 on the quarters. That way, a penny might actually buy something.

Of course at the present rate of inflation, the $20 silver coin could go the way of the 20 dollar gold coin. It never went away, it just went out of circulation


Take care.

AIM said...

I vaguely recall a story about Christus who was king of Haiti. He kicked the British, Spanish (or whoever was ruling) out, declared all gourd trees in the country as government property and then made the gourd the new currency for the country. Pretty smart for a savage.


Anonymous said...

"a full study of true free markets and capitalism at work"

I'd like to know what, if any, countries are free market. Can any government resist meddling?

Rob in NS said...


The more I think about it the more I agree with Anon about deflation. A savings account my wife and I have is paying .0015% interest. So after I pay all the service charges it is costing me money to keep it in bank. Government would like my wife and I to spend it and start borrowing. It makes more sense to take that money and pay down mortgage or just sit on it. Literally! This from what I gather is deflationary, am I correct? I could go out and buy a flat screen TV but they are getting cheaper by the week. They soon could be practically giving them away.

Anonymous said...

Put your savings into Everbank in Florida. Very sound bank. No fees. 1.75% interest. A money market account is FDIC insured up to 250k. You get a checkbook. And you can set up a free world account that allows you to transfer your money into it and change into any currency or basket of currencies you'd like (good to have if you need to jump out of your currency into something else).

This is where I have my cash.

This is

Jim in San Marcos said...

Hi Rob

I think we are looking at both. All of the things that we have overproduced are dropping in price. Whereas everyday consumables have doubled and tripled in price. Potato chips, chicken and steak are out of sight now. Four dollars for 11 ounces of potato chips is outrageous.

The odd thing is the low interest rate being paid by the banks. There is no incentive to save, and no real rate of return. Very low interest rates are inflationary. Assume you have a saving account of $200. If you went to an auction with $100 cash and bid on say a painting for $100. The guy next to you, if he borrowed $200 from your bank, could outbid you using your money.

If people start stuffing the mattress or a safety deposit box with their saving, interest rates have to rise.

Anon On A California Mountain said...

Our economic system is damaged and out of order domestically and internationally. It has been creating excess money supply and credit on a global basis and resultantly has birthed one giant bubble after another. It has encouraged bankers—and most everyone else—to take excessive risks. What have we ended up with? A monumental cascade of liquidity and debt combined with financial deregulation, saturated with moral hazard.

When the bankers are right, they keep their rewards. When they are wrong the government absorbs their losses. Can you really blame bankers for picking the ripe fruit from the trees that the politicians have planted? We elected these politicians and keep them in office. Privatize gains, socialize losses: a formula for destruction.

It’s taken us close to 100 years to get to this severely damaged state. Some of the key causalities are:

1. Creating the Federal Reserve in 1913; creating the FDIC and Fannie & Freddie; Nixon taking us off gold standard in Aug of 1971; termination of Bretton Woods; all the bailouts (Mexico/early 80’s and early 90’s, emerging markets/late 90’s, Long Term Capital Management/1998; the post NASDAQ bubble, and now this crisis/2007-2008).

2. The existence of fiat currencies have allowed countries to manipulate their currency for export. Japan and China are examples. (Have you ever thought about what this has done to the US worker?)

3. Allowing institutions to become “to big to fail”.

4. Our government has become the real capital of banking system—resulting in minimal reserves and excessive leverage.

Don’t confuse the stock market with the economy, they are two different things.

Astute economic historians (unbiased and with a global view) have documented that it was not the market crash of ’29 and "the greed of Wall St." that caused The Great Depression. Yes, they agree that there was excessive leverage in stocks. Yet, what isn’t pointed out within the “approved” history books is that this was largely caused by The Federal Reserve creating abundant liquidity throughout the 20’s. Another key point you won't find in the standard history books was that Europe was collapsing then. The debt bubble there had burst and the disease was spreading to the US. Almost all of EU had defaulted on public debt. The capital fleeing to the US pushed the USD up to record highs and this damaged our trade. (As a solution the Smoot-Hawley Act was created and began an era of protectionism.)

Anon On A California Mountain said...

Hoover, in his ignorance, declared: “Prosperity is around the corner.” Yet, it never manifested. Why? The collapsing debt structure.

Our crisis today stems from leverage in debt, not stocks. If our leaders don’t soon understand this, history will duplicate itself. With the combination of collapsing leverage and the unfunded federal, state and city entitlements... you can double the money supply and lower interest rates until the cows come home but it will be to no avail.

Wall St. and the salaries paid to CEOs and corporate officers is the wrong target. That doesn’t hurt the economy any more than the equally high payouts to sports heros.

The correct target is the leverage generated by Investment Bankers, that is the cause. Leverage sometimes at 50:1!

Let’s create an analogy that everyone can understand. Our country in microcosm: If you had a building worth 100k and the bank loaned you 5M. Even doubling the money supply to 200k would not stop the contraction in leverage.

The cost of this bailout will be in the trillions and the domino effect that is just beginning will be overwhelming and will spread into all areas of the economy. Add the tsunami of entitlements that is on the way and you’ve got a recipe for massive collapse.

The Investment Bankers are who have done it. The unregulated derivative market they created has done it. Their hiring government attorneys to gain inside protection from prosecution and regulation have done it. The investment models they created that have nothing to do with reality created it. (Look what happened to the model they created for AIG). And now they are becoming commercial bankers to get longer term deposits to play with and to be protected by the government.

No, we don’t need more regulation on Wall St., we need regulation on banks and leverage. Debt and leverage has historically been the source of all major economic declines.

There are solutions. Let’s call this Post I. Solutions will follow in Post II.

Anon On A California Mountain

Anon On A California Mountain said...

We need the truth and accurate statistics and all the vital data that has been withheld from us by government (and The Federal Reserve) in order to fix our economy. We can not depend on politicians to enact a solution as they are only concerned about the short term view of re-election.

Socialism, government intervention and taxation has degraded us. Unions are pure Marxism and will drive the final nail into our coffin if not stopped. The consumer wants the lowest price but labor wants the highest wage. This poses a real conundrum to a business laden with unnatural expenses. Manufacturers leave the USA out of survival not avarice. Taxes and the costs of benefits are stifling and they double or treble the cost of wages. That is why we are losing service jobs to India, the Phillipines, Mexico, etc.

The only way out of this mess is PRODUCTION. But first you need to create the proper environment that is conducive to production. And you need to reward the producers and penalize the non-producers (the opposite of what the US government is doing).

We need productive capacity. New technology. We need to be able to exchange our needed and wanted products and services on a domestic and global level. We need to create competitive labor that is exportable.

What do we need to do to create the environment for this? Here are a few big steps for starters…

1. How about stopping the Keynesian philosophy of debt, spending and stimulus—a totally unworkable method of restoring the economy?

2. Jettisoning Marxism in total?

3. Monetize expenditure as a percent of GDP?

4. Begin program to make government smaller and privatize every activity that they shouldn’t be doing?

5. Eliminating income, payroll and benefit taxes?

6. Bringing in real true tort reform so tha we can then create a real national health care system?

7. Bringing our military home and shutting down 80% of our offshore military bases?

The pendulum has swung from CONFIDENCE in the private sector to CONFIDENCE in the government (this breeds Socialism). If it doesn’t swing back soon we are going to go the way of the past empires that have collapsed due to debt crises. It is all about the public CONFIDENCE. The moving force behind economies is this psychological aspect. Our past and current government system and its fiscal and monetary policies is destroying the public’s CONFIDENCE.

PRODUCTION is the only way out and the above points are some of the key barriers to America becoming as productive as it needs to be to climb out of this hole.

Confidence will never be restored unless these points begin to be addressed and real reform begins.

The Dems and Repubs have failed us. They have unwittingly morphed into a two-headed, single party. Congress has become a whore house. A new party will have to emerge based on tenets such as the ones enumerated above if we have any chance of making it through this crisis and avoiding a global depression of devastating proportion.

Maybe The Tea Party, Ron Paul’s Campaign for Liberty, and other such movements will coalesce into a major grassroots wave that will form a new party.

We all need to live, work, speak and VOTE in this direction. Otherwise, God help us.

Anon On A California Mountain

Anonymous said...

Wow.....quite a dissertation... very enlightening...

Yes the key to recovery is production... and that increases earnings... you have to let private businesses find ways to make money which they can then share with their employees.... government has to get out of the way...

this keynesian create demand and consumption formula by stimulating, etc. is wrong... our problem isn't demand... out problem is purchasing power... americans won't be able to get out of debt and be able to consume unless they are earning good money for creating products and services...

the collective IQ of our government leaders is below that of a plant

Anonymous said...

When it comes to derivatives I am at a total loss. Can anyone give me a quick primer? What is it about this part of the market that is prime for failure? $30T is an enormous number...but is it accurate?

daniel cazangiu said...

agree with you, but at the time of the Roman Empire were of precious metal money, while now they are without value in itself (paper not worth too much).

Anonymous said...

Production is important, but how. Building factories takes capital. If private capital, who wants the risk right now?

Paradigm change is inevitable, but may not be recognized by the prevailing powers until they are behind the curve. Is China the future? Perhaps, but it could be anyone...Canada....Brazil...Indonesia?

In the short run, getting people back to work is imperative. Idle hands....not good. Rural America has suffered in the last 40 years. Why not promote some old fashioned labor based production. At the same time promote Green production. How?

Labor intensive organic farming is one idea. No machines, no chemicals, just man power. Crazy? Like a fox...

Urban labor moves to rural America to dig, plant, weed, rake and harvest. Not for much money, but a job nonetheless.

It could work...