By Eldon Mast, on August 31st, 2009
Last week marked the end of the Cash for Clunkers program. Many have called it one of the best economic stimulus programs ever implemented. Of course the White House has called it “Wildly Successful.”
“This is one of the best economic news stories we’ve seen and I’m proud we were able to give consumers a helping hand,” said US Transportation Secretary Ray LaHood.
The White House Council of Economic Advisers, released preliminary analysis on the program:
1. Their analysis estimates that the program will boost Q3 economic growth by 0.3-0.4 percentage points because of resultant automobile sales in July and August.
2. The program will sustain the increase in Q4 GDP because auto production will continue in order to replace depleted showroom inventories.
3. Clunkermania will create or save 42,000 jobs in the second half of 2009. It is further expected that those jobs will remain well after the program’s close.
The program, combined with earlier economic stimulus, has second half economic growth coming on strong.
By Eldon Mast, on August 31st, 2009
Another Good News Thursday saw major US stock indexes closing at fresh 2009 highs. The Dow Jones Average was up for the eighth straight day — the best winning run since April 2007.
As we predicted here, the bull market move has been swift and steep leaving many investors in the dust. Stocks have essentially risen for the last five months, with the S&P 500 index now up better than 52% from the 12-year low on March 9.
It continues to amaze me how the stock market charts for 1974-75 look so similar to the 2009 stock graphs.
By Thersites, on August 31st, 2009
The community organizers’ struggle is one of class warfare. As Saul Alinsky wrote, “A People’s Organization is the banding together of large numbers of men and women to fight for those rights which insure a decent way of life…A People’s Organization is dedicated to an eternal war. It is a war against poverty, misery, delinquency, disease, injustice, hopelessness, despair, and unhappiness.”
Interestingly enough, the very system that defeats the conditions that Saul laments is capitalism. It has improved the lot of many, leading to higher living standards and a more moral economy than any to come before it. Yet it is this very philosophy that these groups decry – one which is also ironically their lifeblood.
As a WSJ editorial notes, ACORN is “a union-backed, multimillion-dollar outfit that uses intimidation and other tactics to push for higher minimum wage mandates and to trash Wal-Mart and other non-union companies…its organizers are best understood as shock troops for the AFL-CIO and even the Democratic Party.” Indeed, much of the steering committee for HCAN (Health Care for America NOW), a good proxy for the socialist movement is tied in one way or another to labor, labor which would not exist without capitalism.
Without capitalism (the antithesis of the socialism they relish), the jobs that it creates, the living standards it furnishes and the varying degrees of wealth that it naturally leads to, these comrades would have nothing to fight against.
Without capitalists to build businesses, there would be no jobs save for those provided by the state, and no labor unions. Living conditions would be miserable. The poorest would only dream of televisions, cars, cell phones and computers, not to mention cheap generic drugs, food, clothing and running water. FDR’s “Second Bill of Rights” would not have been conceived of because these so-called “rights” (if they had developed at all) would have been reserved solely for kings and queens, not middle class Americans.
The community organizers use the fruits of capitalism to fund themselves. Many of these groups are taxpayer-subsidized. Donors also consist of private charities and fat cats like George Soros. All government funds come out of the pocket of the taxpayer, who earns his income from his work, work attributable to the market. Others such as private foundations and “Soros-ites” use their own funds, again earned from their labor in the (nominally) free market to bankroll these radicals.
The socialist groups use instruments created by capitalism to propagandize. They use the computer to disseminate information (I grant that R&D for the internet was partially attributable to government, but practically all of the applications were created by the private sector), signs, t-shirts and other merchandise all produced by private enterprises to advertise and lastly books put to market by private publishers and sellers to spread their message.
Read “I, Pencil” and tell me that the tools the organizers use are attributable to anything other than the spontaneous order of capitalism.
The aforementioned groups all fight to kill capitalism, but without capitalism they would not have their natural enemy. Without capitalism they would not have a conception of what “decent” living standards were. Without capitalism they would not have jobs besides being agents of the state (which admittedly they might prefer), let alone their precious unions. Without capitalism they would not have the means to mass propagandize. Without capitalism these parasitic groups would perish. But instead they feast on the fruits of capitalism, drinking the sweet nectars of which the productive members of society are responsible.
By Ajay Shah, on August 31st, 2009
On 31st (Monday) morning, interest rate futures trading will start at NSE for the second time. Watch me on the CNBC TV18 website on interest rate futures. I had a blog post on this recently, and Mobis Philipose has an article on the same subject.
NSE has setup a nice web page on interest rate futures which is the same as what they have for currency futures.
By Winton Bates, on August 28th, 2009
This is the question raised in a recent article in the Journal of Happiness Studies: “The China puzzle: falling happiness in a rising economy”, by Hilke Brockman, Jan Delhey, Christian Weizel and Hao Yuan (V10, 4, 2009).
The focus of the study is the decade from 1990 to 2000. Even though real per capita GDP in China was 2.8 times higher in 2000 than in 1990, the percentage of Chinese describing themselves as very happy declined from 28 percent to 12 percent and the average life satisfaction rating fell from 7.3 to 6.5 (on the WVS 10 point scale).
The authors consider three possible explanations: anomie (powerlessness), political disaffection (declining trust in government) and relative deprivation (frustration because increased income inequality resulted in a higher proportion of the population with below average incomes). Anomie is measured by survey data on the lack of a feeling of free choice and control over the way you live your life. Political disaffection is measured by survey data on lack of trust in the government and parliament. Survey data on financial dissatisfaction (dissatisfaction with the financial situation of your household) is used as a proxy for relative deprivation.
To cut a long story short, the authors conclude that relative deprivation provides the best explanation because the decline in life satisfaction is strongly associated with a decline in financial satisfaction. (A fuller summary of the article is available on Psyblog )
The main problem I have with this conclusion is that data presented in the article suggests that average life satisfaction of high income earners declined along with the life satisfaction of those on lower incomes. There was no reason for the high income earners to feel relative deprivation.
When I look closely at the data it seems to me that the main puzzle is not why average life satisfaction in China was lower in 2000 than in 1990, but why such a high proportion of Chinese were recorded as satisfied with life in 1990. This figure, 68 percent, was higher than in such high income countries as Austria, France, Germany and Japan.
When you look at average life satisfaction of people in different age groups (Fig. 1) older people seem to have been much happier than young people in 1990 and the situation has been partially reversed since then. A comparison of Figure 1 and Figure 2 shows similar patterns for life satisfaction and financial satisfaction. This suggests to me that the apparent decline in average life satisfaction between 1990 and 2000 might possibly be attributable to perceptions by older people that their financial security had declined for some reason e.g. concerns that as a result of social changes young people might be less likely to support them in their old age.
Even if we disregard the 1990 data, however, it is apparent from the Figures that we are still left with the problem of explaining why average life satisfaction and financial satisfaction has not increased since the mid 1990s. The decline in consumption as a percentage of GDP from about 50 percent around 1980 to about 32 percent in recent years cannot provide a complete explanation, because this has not prevented real per capita consumption from increasing substantially.
My guess is that the failure of average life satisfaction to rise in China is associated with a change in the benchmarks that people use to assess their current well-being. In 1990 many people in China may have been using past living standards as the benchmark in assessing their current satisfaction with life. Since then, however, their aspirations have probably risen as they have come to view the living standards enjoyed in high income countries as attainable in the foreseeable future. If I am right most Chinese people would probably agree that “they have never had it so good”, to borrow an unsuccessful political slogan. But those old enough to remember what life was like 30 years ago would probably rather forget about that.
Note: The subjective well-being data referred to above is from the World Values Survey. Gallup data also shows no increase in subjective well-being in China. See: http://www.gallup.com/poll/14548/chinese-far-wealthier-than-decade-ago-they-happier.aspx
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By Trace Mayer, on August 28th, 2009
Interview With Jim Willie
An interview with Jim Willie where we discuss the potential of bank failures emanating from the Middle East and rippling throughout the world being the catalyst for the next round of the credit contraction.
TRACE MAYER: Hey this is Trace Mayer and you’re listening to the 50th episode of the RunToGold.com podcast (mp3)and today I’ve got a special guest with me – Jim Willie from GoldenJackass.com. Hi Jim!
JIM WILLIE: Hi, good to be here.
ENEMIES AT THE GATE
TM: Yeah, good to have you with me. I know we communicate every now and then about lot of the very important things. And you have just posted a really important article about five minutes ago. Can you give us a brief overview about what this article is about?
JW: Sure. The article is entitled “U.S. Bank Enemies at the Gate“, I wanted to take off on that wonderful title about the Siege of Stalingrad, but you know there’s a lot of attention, Trace, that US Banks are doing this and interest rates kept low, liquidity is strong and blah, blah, blah. And what they’re missing is that foreigners have their own agenda. They have their own bank failures. They have their own failed construction projects and their own failed-nations if you will, like Spain. I think we may see a threat to the U.S. banking system come from outside. Like for instance Persian Gulf bank failures just span across the United Arab Emirates and Kuwait and Saudi Arabia and before you know it – London and New York, so maybe there is a threat outside and we have got too much attention on the inside.
TM: Yes. Because we are seeing really high inflation rates in many middle eastern countries and they are also engaging in their own type of bailouts and stimulus packages, although they might be named differently. And so you are thinking that we may see perhaps a major bank failure come out of the middle east which will affect one of our large London or New York banks?
JW: Yeah. What I am hearing that the Dubai construction projects with all the pictures of magnificent bridges and unbelievable architecture for high rise buildings may look good but are failing at an unbelievable rate – the construction boom has turned into a magnificent bust and the bailouts have come from Abu Dhabi, the financial center, is like the London of the entire Persian Gulf. So, they are bailing out these construction firms, billions are changing hands, and the currency of choice that is being loaded up on all kinds of balance sheets is Treasury Bonds. So they will start liquidating and they have already begun this and if they continue the liquidation process then we are likely to see more bank failures just from lower values.
And you know, they have to deal with their own reality. They do not have a Plunge Protection Team there, they do not have phony stress tests there, they do not have phony accounting standards board. I go into more details in the article and even more detail in my August Hat Trick Letter member’s only which is a great source of information.
There is a lot of stinking stuff coming down the pipe and if we see some bank failures string across the Persian Gulf then there is no way it does not reach London and New York because they own a lot of bank stocks for the giant U.S. Banks. Now, there is a threat that you are just not catching in the financial networks in the U.S.
FAILED REAL ESTATE
TM: Right. Interest rates regulate production over time. By keeping the interest rates artificially low, we stimulated this huge commercial real estate bubble here in the U.S., but if we think the US commercial real estate bubble is a mess then just look at what has happened in Dubai. They built all this commercial real estate and what underlying economy do they have in Dubai; sand. There is no real underlying economy there to support any of these loans on the bank’s balance sheets.
So now they have built all these giant skyscrapers that are all like white elephants of dehydrating debt in the dessert. There are these huge buildings and they are all completely empty; are they not? Of course we are going see many bank failures coming out of Dubai. Do you think that is going to start impacting the U.S. banks here because like Prince Alwaleed, a big shareholder in Citigroup, for example might want some New York banks to subsidize these failed projects with bailout fund?
JW: Well, I think that could be the sequence that happens and there are a lot of unknowns. There is one particular construction project that I think of all the time when somebody says, “Oh, the big Dubai construction boom”. Well, there is a big property with all kinds of housing and it is laid out from shaped like a big palm tree. If you are looking down from 5,000 feet it is a beautiful, beautiful thing.
What I have heard is that it is entirely empty. It has failed with no income stream. Now, I would like to just to make a quick point here and it is not like their economies are based on processing sand. They have an oil industry and a petro-chemical industry. They make refined gasoline, chemical products, have feed stock, crude oil and natural gas.
Saudi Arabia actually has the most diversified economy in the Persian Gulf. I do not think they make their own pharmaceutical aspirin pills or razor blades or soap but maybe some. But as for other Persian Gulf nation like Kuwait, U.A.E. and Bahrain, they do not have a diversified economy but they do have a petro-chemical industry and that is it. Banks and Petro-chemical.
So, beware of the threat from the back door where you have some bank failures as this is not just a liquidation of Treasury Bonds, I am talking about bank failures – large, large Persian Gulf banks that go bust and as a result there is a vast liquidation that takes place which ripples into New York and London. That is what I think could happen.
TM: Yeah, and then we see the next round of this credit contraction start because, as you know, we had the first shocks last year and we had a little bit of shaking and we saw couple of buildings go down – Lehman Brothers and AIG, but as I have written about in my book The Great Credit Contraction, which you like, is that this is just getting started. And we are seeing the collapse of a multiple centuries old monetary system. We are in for the next round and I would not be surprised if we do see the next shock-waves emanate from the Middle East.
FDIC FAILURE
JW: But we are getting shock-waves that happen from the inside too, Trace. Look at the FDIC today. FDIC came out and says four hundred and sixteen troubled banks, well try a thousand.
TM: Or four thousand!
JW: And their fund is dead, so they raised some fees earlier this year on member banks within the system. But they are going to have to raise it again and the bank industry has said this will reduce earnings and it is going to reduce liquidity which decreases their ability to lend. So, the FDIC itself is going to be a wet blanket on the banking industry even if they appeal to Congress for the increased funds and that is going to cause the insolvency of more banks and add pressure to the U.S. government and the Dollar. So the threat is outside the gate.
The point my article is that we have got many threats inside the economy and I agree with you completely-we are about to the second round of the monetary banking credit crisis. Perhaps September or October, probably September, but there are a lot of factors that point to the next few weeks. The FDIC announcement may be one of those factors. The summer vacation is another, they have to increase the Federal Debt limit beyond $12.1 trillion and look for Congress to come back with an attitude of responsibility when they cannot afford to stop the printing press. So, we a lot of factors coming in right now.
WHAT TO DO
TM: And so, what do people do, obviously my site RunToGold, I like the monetary metals – Gold, Silver, Platinum – what do you suggest people do, to protect themselves and to protect their capital?
JW: Well, on a smaller scale, if you only have a few thousand dollars that you want to protect, and you are not huge saver from the last twenty years from your career then I would suggest getting some gold coins or silver coins. But I would avoid the century old, you know, like the Morgan Silver Dollars. But you do not want to be buying fifty thousand dollar coins. You want bullion coins like the Silver Eagle, Kruggerand, Mable Leafs, Gold Eagles, etc. Get the standard coins because you get a lot more bullion for the price. But I do not think buying $150,000 worth of coins makes too much practical sense. You have to store them.
I believe that GoldMoney as you do, is a fine institutions, and there are others like the BullionVault, etc, but I like GoldMoney because of the way it is run and the payment features that they have.
I recommend buying gold and silver bullion bars whether 1 kilogram, 5 kilograms, 10 kilograms and etc. The real lesson that we are seeing in this credit contraction, economic failure and banks system insolvency is that because for a full generation the money has been been paper and now what survives will be not paper. It will be the metal.
ILLUSORY CURRENCY
TM: Yes. And in most cases, it is not even paper that is the currency supply but just little digits on a hard drive which is even less real than paper. We might even see a rush to the physical paper notes before we see a rush from the physical paper into the physical metal.
JW: The electronic money trade makes not only possible paper counterfeit but electronic counterfeit and where you can have computer programs counterfeiting your bonds, I mean imagine, this is why we have got trillion dollar frauds. One of the points I make in this article is something that Karl Deninger said that we need a new resolution trust corporation. But that is totally of the mark. We are never going to see it because because many properties are tied to different mortgage bonds and the fraud. And you cannot have an RTC if they go and buy a mortgage bond and then they have got to pay it out three times. It will not make any money and so there will not be a new RTC. You are going to have a top down solution with more and more fraud like TARP solutions, etc.
CONCLUSION
TM: Well good interview. I know that we are pretty short on time so I would like to thank you for coming on and sharing a little bit with our RunToGold.com listeners. Once again, you have been listening to Jim Willie of the GoldenJackass.com and thanks Jim.
JW: It has been my pleasure and watch this case that is likely its going to go the Supreme Court where the Federal Reserve is going to defend itself against the Freedom of Information Act. It is going to be the private Wall Street Syndicate versus the People. This will be quite interesting.
TM NOTE: Be sure to pre-order a copy of End The Fed by Ron Paul which debuts on 16 September 2009 and help Raze The Fed. With enough pre-orders it will make its appearance as #1 on Amazon and perhaps be a bestseller on the New York Times list which will cause even more pain for the Federal Reserve and Tim ‘tax cheat’ Geithner regarding House Resolution 1207. He was extremely uncomfortable in his Digg.com interview with the Wall Street Journal.
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By Bron Suchecki, on August 27th, 2009
It is certainly quite interesting in Goldland these past few months. Both of my anecdotal indicators are down compared to a year ago when retail shortages were rife: posts on Kitco’s forum and comments to article about gold on Seeking Alpha. Seems everyone is distracted by green shoots.
I have just finished The Myth of the Machine: The Pentagon of Power, which I mentioned in a Sep 08 post and republished on Seeking Alpha to very little acclaim  . I have pages of notes to bash into shape, nothing to do with gold but more on management theory (my BComm major) – organisations as totalitarian “regimes”, CEO’s as dictators and if this is the environment in which people spend a lot of time and see as normal why would they see any problem with increasing Government intrusion and authoritanism. Considering that, was it a good idea to make organisation’s legal entities/persons leading to reification that acts as a shield against any sense of responsibility by the individuals who actually make decisions? Anyway, I did say some panel beating was required.
I am currently reading Hayek’s Serfdom Revisited (1985), put out by The Centre for Independent Studies, which should be familiar to Australians. Considering my previous comments about Governmental intrusion, I may wait until I finish this before writing a blog on the Lewis Mumford book.
I also found this article of interest: Adrian Douglas: GFMS cooks books to make gold look bad.I do think the GFMS/WGC numbers have some sticky tape and rubber bands holding them together. Admittedly it is difficult to really know what is going on in gold, but they don’t really explain how they do their numbers or give some +/- confidence levels. I think they want people to think it is super accurate and this works because a lot of people really treat it as gospel.
The dodgy nature of the GFMS numbers is revealed if you go to the WGC website and go through their past Demand Trends reports, which I did when putting together some numbers for the Mint’s CEO on general supply/demand trends (as detailed in this Mar 09 post). If you go through each Demand Trends report and compare the figures it it to the previous report, you will see all the revisions. And I’m not talking about just revising the prior period’s figures, which you can expect. The reports usually have 5 quarters of past data. If you look at a specific quarter as reported originally and then subsequently in the following 5 reports, you can see them changing the figure each quarter, that is, they are revising supply demand numbers every quarter over one year later!
If I could be bothered getting the data off it, it would make for an interesting analysis of the accuracy of the data – memo to self: write GFMS expose blog.
Finally, I found in the Mint’s library/archives a report by Blanchard and Company Inc titled “Gold Bullion: Caught in a Bear Trap”. I remember when it first came out, we got one of the advance copies December 2001 (note the date), 53 pages in all. Quote: “Sell your gold and take your tax losses now, before they get even bigger. If, at some time in the future, you find that you miss your gold, you’ll be able to buy more of it for less.” I leave it to Mineweb, Maurice Rosen and Clif Droke to give you more details (everything is remembered on the Internet). Memo to self 2: never make ballsy calls on the direction of the gold price! 
By D H Smith, on August 27th, 2009
Ann Elk: Where? Oh, what is my theory? This is it. My theory that belongs to me is as follows. This is how it goes. The next thing I’m going to say is my theory. Ready?
TV Interviewer: Yes.
Ann Elk: … This theory goes as follows and begins now. All brontosauruses are thin at one end; much, much thicker in the middle; and then thin again at the far end.
(From Monty Python’s Flying Circus)
I too have a theory, which is to say it is a theory and it is mine. I hope it’s a bit less silly than Ann Elk’s theory, but in any case let’s try it on. The next thing I’m going to say is actually not my theory, but another theory, which is someone else’s and got me to thinking about my theory.
This other theory is something called Dutch Disease, which is an economic diagnosis of the Netherlands’s loss of competitiveness in goods producing industry following a 1959 discovery of natural gas off its North Sea coast. In the simplest terms, this leads to inflows of investment, which pump up the exchange rate and alters terms of trade in such a way that exports become uncompetitive. In this perverse fashion, a lucky strike in natural resources creates not employment and growth but unemployment and stagnation.
America, my theory states, has a version of that, only the natural resource is money. I want to name the problem “American Disease” but I read in an article by Bryan Caplan (http://bit.ly/tkDRJ) that that’s the name of a syndrome of Americans living beyond their means. Actually the problem I pose is closely related, just as H1N1 influenza is closely related to other strains of the flu. Perhaps I can say “2009 American Disease” to differentiate it from old established strains, or should I call it “California Disease” to reflect the fact that the disease has advanced furthest in the Golden State?
America is a country with real natural resources, of course, but the high costs of extraction and environmental compliance and restrictions on land use places them increasingly out of reach. In the days when the country did produce resources and processed them into manufactured goods which foreigners bought, the U.S. generated a vast amount of wealth, much of which was invested in buildings and infrastructure and so remains visible in the present day as a reminder our peak of economic power.
(Exactly the same is true of Argentina, by the way, which was the wealthiest country in the world 100 years ago and still has the buildings and boulevards to prove it, even though Mr. Juan Peron and the generals set the country on an unusual course from first world to third world status.)
Now, even after the financial crisis, America’s most important industry is finance, broadly defined. The financial industry differs from the auto industry and the chemicals industry in one interesting respect. The auto industry inputs steel and plastic and outputs autos, the chemicals industry inputs primary and intermediate materials and outputs finished chemical products – in other words, they work on raw materials and change them into something else. Most industries do this. But the finance industry has money both as input and output – it changes money’s form but not its nature in its processes. Money is both the input and the output, the resource base and the finished product.
The American finance industry is competitive, one of the nation’s success stories in terms of services exports. Our political class, which increasingly impedes us from taking coal out of our mountains, irrigating our farmlands, and manufacturing products with processes that are not squeaky clean, has long promoted clean, non-polluting financial services, and it has prospered as the industry prospered.
However, I believe that too much money in an economy based on financial services has given us a condition akin to Dutch Disease. It could probably be shown that the maintenance of the U.S. as a financial center has made the American dollar stronger than it would otherwise have been, reducing our competitiveness in global markets. Moreover, the high level of compensation in the financial industry and supporting services has probably driven up wages and benefits throughout the U.S. labor economy, another blow to the competitiveness of any entrepreneur who wants to defy the odds and manufacture a product for our own use.
While the American political class stands in the way of development of (real) natural resources and domestic manufacturing, it does see the residual financial wealth of the nation as a resource that it can cut and drill and strip mine – endlessly, in fact, as it recognizes no restraint on the size of resource, but treats it as infinite. The people entrusted to run the country reckon without the necessary diminution of the resource as taxes, penalties, and compliance costs leave less and less to reinvest, even as the potential returns on investment are inevitably being reduced. Their static models fail to capture the fact that producers will not produce – or innovate, or hire – out of sheer altruism even as the returns on their capital and labor are stolen.
The impoverishment of the United States by the Argentine model is thus well under way.
Oh, and why do I say California has the most advanced case of the “2009 American Disease?” Well, just look at the Golden State. There is oil offshore, but its development is not permitted. Manufacturing is being driven out. And the Central Valley is experiencing 40% unemployment in agriculture in order to mudfish habitat; but the fiscal position continues to deteriorate as California’s political class absolutely will not live within the means of the state’s reduced circumstances.
As California is the United States only more so, California’s political class is America’s in microcosm, with all its pathologies subjected to magnification. It puts me in mind of the passage from Atlas Shrugged:
As they proclaim that the only requirement for running a factory is the ability to turn the cranks of the machines, and blank out the question of who created the factory—so they proclaim that there are no entities, that nothing exists but motion, and blank out the fact that motion presupposes the thing which moves, that without the concept of entity, there can be no such concept as ‘motion.’ As they proclaim their right to consume the unearned, and blank out the question of who’s to produce it—so they proclaim that there is no law of identity, that nothing exists but change, and blank out the fact that change presupposes the concepts of what changes, from what and to what, that, without the law of identity no such concept as ‘change’ is possible. As they rob an industrialist while denying his value, so they seek to seize power over all of existence while denying that existence exists.
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By Ajay Shah, on August 26th, 2009
The Bank of Israel has become the first central bank worldwide to raise interest rates.
A few weeks ago, I wrote an elongated blog post titled Does unconventional monetary policy and unusual fiscal policy presage an upsurge in inflation?. This was partly motivated by the concerns of the time (this was in mid-June) about the exit strategy of central bankers. I had argued that inflation targeting gave the right framework for all three phases: the sharp drop in the policy rate, the shift to quantitative easing when the short rate fell to zero, and the eventual rise of interest rates. It is not surprising that the first mover on the exit process is an inflation targeting central bank.
A Taylor rule with an inflation coefficient of 1.5 and an output coefficient of 0.5 gives us a rough approximation to the thinking of inflation targeting central banks. The puzzle then lies in forecasting the extent to which inflation will exceed the target and forecasting the extent to which output will be below the target. These two forecasts are hard to make. But as I said in the above article:
As the financial system comes back to life, as the money multiplier comes back to normal values, the intellectual framework of inflation targeting will shape the responses of the central banks. There will obviously be some mistakes in forecasting inflation, given that the parameter estimates in our models are driven by normal times. But one can expect an average error of zero in the sequencing through which unconventional monetary policy is withdrawn. And when mistakes are made, when de jure inflation targeting is in place, the bond market will know that these are mistakes of execution and not a change in strategy.
By Trace Mayer, on August 26th, 2009
[Editor Note: The administration is exacerbating the greater depression by (1) preventing and delaying liquidation of toxic assets, (2) inflating the illusion currency supply beyond recognition, (3) attempting to keep wage rates up by bailing out structurally challenged industries, (4) attempting to keep prices up for example by destroying supply of old working cars and restricting demand through taxes and tariffs, (5) stimulating consumption and discouraging saving and (6) subsidizing unemployment by not stopping unemployment benefits; as outlined by Rothbard in America’s Great Depression.
Because these measures are massive interference with the free market, lead to gross misallocations of capital and for other reasons therefore there is a market crash coming and these green shoots are really red roots; in many ways.
The chart at the end of this article by Casey Research is particularly insightful regarding context and scope. There is too much debt and too little income; Americans spend too much and earn too little. They do not abide by provident living principles. Change is coming and has only begun.
I have added emphasis to the article regarding critical issues.]
GREEN SHOOTS OR GREATER DEPRESSION?
By: Bud Conrad and David Galland, Editors, The Casey Report
While we aren’t contrarian for the sake of being contrary, more often than not that is the position in which we find ourselves. Today, with the media falling all over itself to paint a rosy outlook for the economy while simultaneously voicing encouragement to the new administration in its remake of the nation in previously unimaginable ways, it’s hard not to question our conviction that the worst is yet to come.
Could the economy really recover this quickly from the traumatic trifecta of a record real estate bubble, leviathan levels of debt, and a global credit collapse? We don’t see it as remotely possible, but yet… but yet… there for everyone to see are countless happy headlines and breathless exhortations that the worst is behind us.
So, is it Green Shoots or Greater Depression?
Getting the answer right is critical, because from it flow serious consequences to each of us. And not just in our investment portfolios but in how we organize our lives.
Looking for an evidence trail leading to the correct conclusion, Casey Chief Economist Bud Conrad once again put in very long hours digging through the data. Here’s what he uncovered, about the claims of green shoots, and what may actually be in store for the economy moving forward.
Rather than accepting the many commentaries that our economy may be improving, for a minute on the important forces that will play out over the decade ahead the minor improvements – from disastrous levels – that have given commentators such hope that the worst of our problems are behind us.
What Do the “Green Shoots” Really Look Like?
While some individual measures of economic activity appear slightly less dire than previously, it’s important to understand that most improvements are largely attributable to government intervention.
For example, at the onset of this crisis, commercial paper spreads rose to the point that this important source of corporate short-term funding had virtually shut down. Today, those spreads have returned to almost normal levels. But the bulk of this improvement is not due to a return of confidence in the economic system but rather to the Federal Reserve directly intervening in the market with several hundred billions of dollars.
And mortgage interest rates, which briefly dropped into the 4% range, did so not because of a surge in creditworthy borrowers or eager lenders… but rather because the Federal Reserve launched a program of buying $1.25 trillion of mortgage-backed securities. Doing its part, the Treasury has poured billions into Fannie and Freddie and provides guarantees for their mortgages.
In these and many other instances, the “green shoots” that optimists have spotted are really just the visible manifestations of the massive interventions by an increasingly bankrupt government [Note: Bankrupt fiscally, economically, morally and politically.].
Indeed, the massive fiscal stimulus provided by the federal government – and by the Fed, which has slashed interest rates to near zero, purchased mountains of toxic waste, and bought up Treasury debt with billions in freshly printed money – are unprecedented in the history of the U.S.
But even a cursory review of key metrics reveals continuing declines in housing prices, rising unemployment, and slowing consumption as measured by falling retail sales, GDP, and the collapse of world trade. Sure, housing unit sales recovered a little recently, but that’s due mostly to the distress sales of foreclosed homes and houses worth far less than the outstanding mortgage. These are not signs of a strong economy.
The only rational conclusion to be drawn is that the crisis is far from over and that we are not likely to see a strong recovery anytime soon. In fact, things are likely to get much worse before they get better.
The massive debt expansion that played a crucial role in creating the disastrously overleveraged economy is not shrinking. As you can see in the chart here, it’s growing ever bigger.
That debt growth was fostered by U.S. government debt growth, which is now getting out of control.
Don’t just believe what you hear about “green shoots,” or you could lose some serious money. To find out what’s really going on and where all this is leading then read the rest of Bud’s in-depth article or The Great Credit Contraction.
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