A Fistful Of Dollars
Without Federal Reserve intervention in the financial markets since September 2008, the biggest banks in the world would have entered bankruptcy liquidation. The U.S. economy would have experienced a 10% to 20% fall in GDP. The unemployment rate would have soared above 15%. The stock market would have fallen 70%. Wealthy bondholders and stockholders would have seen their wealth cut in half. Incumbent politicians would have all been thrown out of office. The richest Americans, constituting the ruling class, would have borne the brunt of the pain.
In a true capitalist system, organizations and people who assumed too much risk and made poor decisions would have failed. But the United States does not have a capitalist system. We have a corporate fascist economic system where a small cartel of bankers, military weapons suppliers, and mega-corporations set the agenda for the country through their complete capture of politicians and the mainstream corporate media.
The Global Economy’s Corporate Crime Wave:
Corporate corruption is out of control for two main reasons. First, big companies are now multinational, while governments remain national. Big companies are so financially powerful that governments are afraid to take them on.
Second, companies are the major funders of political campaigns in places like the US, while politicians themselves are often part owners, or at least the silent beneficiaries of corporate profits. Roughly one-half of US Congressmen are millionaires, and many have close ties to companies even before they arrive in Congress.
As a result, politicians often look the other way when corporate behavior crosses the line. Even if governments try to enforce the law, companies have armies of lawyers to run circles around them. The result is a culture of impunity, based on the well-proven expectation that corporate crime pays.
Freidrich Hayek and the Austrian school of economic policy argue for a laissez faire approach to the economy – emphasizing individual actions and criticizing government intervention. John Maynard Keynes acknowledged that economies could, over time, correct themselves, but argued that government had a responsibility to intervene and stimulate demand when the economy is in a slump. This video is a sequel to Fear the Boom and Bust, also produced by Econstories.tv
For my students, see how many of today’s economic issues you can find in this video and compare them to our look at the Great Depression.
Given the massive volume of ridiculous news stories revealing the travesties occurring in this country on a daily basis, I have decided to start regularly posting my thoughts on selected pieces each day. I will continue of course to produce lengthier more substantive pieces as well.
Without further ado, I present today’s Daily Quips:
As Pamela over at Atlas Shrugs highlights, AG Eric Holder gave his opinion on bringing KSM to justice in Manhattan, the site of his heinous crimes. Holder boldly asserted, “we need not cower in the face of this enemy. Our institutions are strong, our infrastructure is sturdy, our resolve is firm, and our people are ready.” In light of the remarks of government officials such as Henry Paulson: “It’s a safe banking system, a sound banking system. Our regulators are on top of it,” Barney Frank (on Fannie and Freddie): “I think we see entities that are fundamentally sound financially” and Barack Obama: “But I do have an unyielding belief that all people yearn for certain things: the ability to speak your mind and have a say in how you are governed, confidence in the rule of law and the equal administration of justice, government that is transparent and doesn’t steal from the people, the freedom to live as you choose. These are not just American ideas. They are human rights. And that is why we will support them everywhere,” all signs indicate that we should be running scared. If a bigwig politician tells you things are safe and sound, things naturally must be in awfully bad shape.
Obama said “if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession.” Thank you captain obvious for the biggest understatement I have ever seen. First off, people are losing confidence in the USD and our economy as reflected in the rallies in foreign currencies and equity markets. Most importantly, the price of gold has been making new nominal highs on a daily basis. You think there might be consequences to quadrupling our deficit in less than a year of being President? You think there might be consequences to the fact that we have unfunded liabilities of over $100 trillion? The One may be the most enlightened President since George W. Bush.
The Press is doing everything they can to bring down Sarah Palin. Regardless of how you feel about her, and honestly I am not close to having fully formed a judgment about the woman, the hypocrisy of the media here is sickening. The double standard that the media employs when it comes to how they treat liberals versus conservatives, and in-particular wholesome middle-American female conservatives is abominable. The MSM has not fact-checked one thing about President Obama, yet they have repeatedly beaten Sarah Palin to death. I don’t care what your political leanings, the behavior of the media towards the former governor has been and continues to be beyond disgraceful.
POTUS Obama is “furious” about the leaks coming from the Afghanistan deliberations. I agree with him, these leaks are harmful to our troops. Almost as harmful as the fact that it is taking him MONTHS of playing with our soldiers’ lives to make a decision! Maybe if he had a firm grasp of the situation and acted accordingly there wouldn’t be time for all of these leaks. I am all for taking the time to make a prudent decision but something tells me Afghanistan is more about politics than national defense for this administration.
Barry Ritholtz over at the Big Picture illustrates why we are doomed for a long and painful Depression. The more you see the policies being enacted by this administration, and compare them to those of Hoover and FDR, the more you get the sense that this isn’t Barack Obama merely being naive, but actually intentionally trying to plunge us into the economic abyss.
is an Australian Post-Keynesian
economist credited as having “seen it coming” in this survey
of research by economists or financial market commentators. Keen was one of only eleven researchers who qualified, which included Schiff, Roubini, and Shiller.
Steve Keen is a follower of Hyman Minsky’s “Financial Instability Hypothesis”, which he summarises as:
1) Capitalist economies periodically experience financial crises;
2) These are caused by debt-financed speculation on asset prices leading to bubbles in asset prices;
3) These bubbles must eventually burst because they add nothing to productive capacity while increasing the debt-servicing burden;
4) When they burst, asset prices collapse but the debt remains;
5) The attempts by both borrowers and lenders to reduce leverage reduces demand and causes a recession;
6) If the economy survives such a crisis it goes through the same process again, with another boom driving debt up even higher, followed by yet another crash; but
7) This leads to a level of debt that is so great that another revival becomes impossible since no-one is willing to take on any more debt;
Then a Depression ensues.
A plausible but dismal explanation. Consider this comment on Steve’s latest blog post:
“This is one of the great questions for all of history, how to get out of this. For one thing, one persons debt is another persons asset or in many cases their money. … It is clear that everyone that has something is going to take a haircut on it. Either by a systematic bankruptcy or by a natural one.”
As Steve Keen says:
Some form of price chaos has to be expected though, whatever is done. One side-effect of the bubble has been an enormous dislocation in prices, not just with overvalued financial assets, but also with drastically overinflated incomes for the financial class, and concomitant price distortions all the way through commodities.
How do you protect yourself from this economic World War III? Simply swallow the red pill and step outside the Financial Matrix: bail out of your “has something”s into precious metals and sit by and watch the annihilation as everyone else takes “a haircut”.
One of the puzzling aspects of the current economy is the soaring demand for US treasury bonds. On the face of it, T-Bills seem like a pretty terrible investment. The yields are low and given the massive government and current account deficits being run by the United States, it is highly likely that the dollar will lose value relative to other currencies.
But these loans aren’t investments, they are insurance. With the global economy in free fall nobody knows how bad things could get. There is a non-zero probability that we could be witnessing a true economic collapse. The sort of era defining event that will signal the end of the 500 year march of human progress and plunge us into a new dark ages. How will we know when it’s time to bust out the old amour suit. A good guess will be when treasuries fail. In other words if the US government defaults, we are all finished. The only assets that will be worth anything will be shotguns and canned beans.
Lets say things don’t get that bad, there is still a long way to fall. If the economy continues contracting at its current rate, by the end of 2010 things will be as bad as the 1930’s. An economic collapse of that magnitude will have profound political consequences. Which brings us back to the original topic of the post.
In a climate of extreme uncertainty, the long history of stability is a unique asset of the American economy. The Euro is the most obvious rival currency to the dollar, but with less than a decade of experience the Euro has never survived a severe crises. If this recession hits the depths of the 1930s, politicians in hard hit countries like Spain and Ireland will be under intense pressure to break free of the Euro. During the great depression, countries that abandoned the gold standard benefited immensely from their devalued currencies.
Developing countries don’t offer better security prospects. It is hard to think of a developing country whose economic and political stability wouldn’t be threatened by a severe depression. The communist party is the third largest party in India’s parliament and the nationalist BJP is the second largest. It is easy to imagine a severe downturn tipping the balance of power towards these parties at the expense of international investors.
Latin America has a long history of socialist governments taking power and appropriating private property. It is not hard to imagine these elements gaining strength in countries such as Brazil, Mexico and Argentina. Africa and the Middle East are considered risky places to invest for too many reasons to list here. It is uncertain if the Chinese government can maintain stability through a severe downturn.
That leaves the US and the other wealthy English speaking countries as the most likely economies to survive a severe downturn. The catastrophe in Iceland demonstrates the danger of lending too much to a small economy. Given the quantity of money looking for a harbor it is possible to imagine international capital overwhelming a country such as Canada or Australia. Simply put it is possible to imagine the US economy surviving a complete meltdown in Canada, but there is no way Canada survives a collapse in America.
So what does this all mean for the future. As long as complete systemic collapse remains a real possibility, investors will be rushing to loan money to the US government. But as investors gain confidence that recovery is in sight demand for American debt will dry up. One sign that a recovery is on the horizon will be a decline in the dollar relative to other currencies. As the economy rises from the grave the dollar will steadily weaken.
This should be encouraged. One of the driving forces behind global instability has been the huge amounts of foreign capital entering the US economy and the countervailing large trade deficit that Americans have run. If we emerge from this crises with a more balanced global economy that would be a good thing.
In the midst of this economic turmoil that has shaken the world; we have witnessed gold bounce above $1000 and dip as low as $700 in the same period. Concerns have risen and arguments have been increasing as to the effects of this economic turmoil. It is widely believed that the current contraction facing the US and many global economies is a depression, for the mere fact that the billions of dollars being spent is not enough to create the optimism to jumpstart the economy to the upside. Commodities have taken a major hit in this time period, with the CRB index falling more than 40% since its peak in 2007.
Metals have also taken a major hit in this crisis period. The main question at hand is if these prices would rise again? Clearly commodities across board have impaired fundamentals, the current cost of producing most commodities are currently above the prices at which they are sold, and though demand may have slowed, if prices continue to be this low, the world faces a major food crisis within the next 5 years. Another fact at hand is the likely rise of inflation in the world, most especially the US. The US who seems to be taking probably the largest hit from this downturn has gone into a state of frenzy in trying to stop a complete meltdown of the financial sector and the economy as a whole. The Treasury department has not hesitated much in throwing billions of dollars in tax payer’s money to ailing financial companies. Most famous is AIG who is getting a fourth revision of their bailout package from the government, after declaring an astounding loss of $61 billion. There’s also the talk of US government stimulus to the tune of $800 billion for 2009/2010.
So why is the spending of this money of any concern? Given the fact that the US is not making a lot of money currently, the government will have to issue bonds, increase taxes and/or print the money to fund these projects outlined. From the current increase in interest rates of T-bills, we can infer that the demand for government bonds have slowed down, a part of the stimulus plan is to cut taxes, ruling out the second option for raising money, so we’re left with the government having to print this money. If one reviews the Fed’s monetary base, we will see this chart taking the form of a hockey stick, pointing to the fact that a lot of money has been printed so far to loan to foreign governments, fund internal projects, and make purchase. We will see that the Fed’s monetary base has increased more than fivefold in the past one and a half years. Now except one believes that the government will print “just enough money” that’s needed to revive the economy, then we need not have any concern, however from the past behavior and observed prior behavior, this is never the case. The government has clearly displayed its inability to manage cash wisely (just by reviewing the AIG bailout).
With more cash injected in the system than what is needed, the US dollar will lose its value and the US will be faced with the plight of double digit inflation. Deflation/deflationary pressures is probably the main scare now, but if one takes time to review the fundamentals, especially in commodities which are mainly used as raw material input, with increased availability of cash, prices will have to rise swiftly in order for the fundamentals to align.
click to enlarge
Observing the chart of the gold comex futures, we can spot a clear bull market for gold. Like every bull market, there are huge corrections in the price of the commodity; however something that can be clearly seen is a clear uptrend line. Some may argue that with a recovery in the economy, the concern to hold gold as a safe haven will be reduced, this will be true if it is also expected that US GDP will be able to provide an equivalent strength in supporting the US dollar. However careful research and analysis shows that the fundamentals of the US dollar are currently flawed, and the current spending pattern of the government will push the US into inflation, which will in turn make the dollar extremely worthless, at which point demand for gold would rise given that there is less than 3 ounces of supply of gold for everyone currently in the world, fundamentally, the economics supports the price, expected inflation will also act as a buoy.
For as long as we see corrections in the price of gold, we should probably welcome these as opportunities.
I really hate shoveling snow. I live on a large corner lot with lots of sidewalk, so the job can take me over an hour. Snowblowers, I’ve found, are overrated. I’ve had two and neither did a very good job and both had maintenance issues. I bought both used, so that might be part of the problem, but when faced with buying a new one (after my 2005 model died this past week), I thought about how much I hated dealing with the snow and questioned the economics of hiring someone to do the shoveling for me.
It’s a little embarrassing. I’m thirty and work from home. I guess I could be considered “lazy” for not doing my own snow removal, but I prefer to think of myself as an ardent believer in the economic concepts of comparative advantage and the division of labor . So I went on Craig’s List and posted a job for “Regular Snow Removal, Good Pay” with all the details. Since there was only one local posting offering snow-removal service, I didn’t know if I’d get a response… But I didn’t have to wait long to find out.
Almost instantly, I got two emails. By the time I woke up the next day, I had ten. By the end of the second day, more than twenty. Two people stopped by my house to introduce themselves. And after about eight inches of snow rained down last night, a third young man showed up, unannounced, to take care of it for me.
I paid him $40 and he did a great job. Was this worth it? Well, consider this: as a freelance writer, I typically earn between $25 and $50 an hour. My average is probably around $40. So, assuming I can find an extra hour of work to do, I just have to think of it this way: would I rather spend an extra hour writing or shoveling snow? It’s an easy decision for me to make. In fact, even if I earned only $20 or even $10 an hour, I still think it’d be worth it — that’s how much I hate dealing with the snow.
The exuberant responses I’ve gotten from people wanting to shovel my sidewalk and driveway have me thinking of other ways I can kill two birds with one stone: help people who are out of work and lessen the number of unpleasant tasks I have to perform. I’m thinking of hiring someone to do my family’s laundry, for example. It’s the type of thing that always seems to get only half done (i.e., all of my clean clothes are still in the basement, not hung up in my closet) for one reason or another. Perhaps picking up an extra hour or two of writing work (which I enjoy) could save me and my wife from having to do the laundry (a constant source of marital strife) and help someone put food on the table too. Capitalism is win-win.
The day that the $700 billion bailout bill went down to a shocking defeat in the House of Representatives, the Dow Jones Industrial Average suffered a record 777 point one-day crash. “Something must be done!” bellowed the bureaucrats and billionaires. But following the passage of the bailout, the Dow and the broader S&P 500 index each lost 22.1% in just a little over a week. Yes, the markets roared back the following Monday, with the Dow gaining a record 936 points. But those 936 points aren’t worth as much as they were a week ago.
What Really Caused the Great Depression?
Fed Chairman Ben Bernanke is considered by many to be one of the foremost experts on America’s (first) Great Depression. In fact, it’s his analysis of the Depression that has led to his nickname “Helicopter Ben.” Bernanke believes that the Depression was caused or prolonged by deflation—falling consumer prices—and that it could have been easily avoided if the Federal Reserve just created more and more money. Flooding the economy with new money—as if it were dropped from a helicopter—would reduce the dollar’s purchasing power and keep prices rising: the key, in Bernanke’s view, to avoiding economic calamity.
But the Austrian school of economics offers a much different analysis of the causes of the Great Depression. Ludwig von Mises, Murray Rothbard and other notable Austrians argued that it was the Federal Reserve’s expansion of the money supply during the “Roaring Twenties” that caused the stock-market bubble that finally burst in 1929 and that it was increased government intervention into the economy that intensified and prolonged America’s misery.
Bernanke and most mainstream, non-Austrian economists are obsessed with the idea that falling prices must be prevented at all costs. But in fact, falling prices are the natural result of progress in a free-market economy. From the end of the Civil War to the birth of the Fed in 1913, prices actually went down, not up. But in the 95 years since the Federal Reserve Act, the dollar has lost 95% of its purchasing power—and that’s according to the government’s own numbers, which are questionable at best.
Inflation: The Fed’s Real Mandate
Financial pundits are fond of spreading the lie that the Federal Reserve System was created to combat inflation. The obvious fact of the matter is that it was created for the explicit purpose of inflating. Inflation—that is, the expansion of the money supply—is the only real tool at the Fed’s disposal, and when you have a hammer, all problems look like nails. Bernanke believes he can keep prices from falling by creating new money, and in the long run, he’s undoubtedly right. But at what cost?
On September 29, the day the bailout was temporarily blocked, the Federal Reserve thwarted the public will and issued a $630 billion “bailout” of its own by expanding the money supply. The next day, Bernanke and Co. lowered their target for the fed funds rate from 2% to 1.5%. But the fed funds rate is not an interest rate that the Fed can set by decree. As the rate banks charge one another on overnight loans, it is set on the open market and only “targeted” by the Fed. When the target rate was 2%, the real rate was 7%. How does the Fed try to get the real rate to match its target? By doing the only thing it can do: creating money out of thin air and funneling it into circulation.
There is a rate that the Fed does set by decree: the discount rate. This is the rate at which troubled banks can borrow directly from the Fed. The week before the bailout, banks borrowed a record $262 billion from the Fed, but that record was shattered just one week later as banks tapped Bernanke and Co. for a cool $409.5 billion more. And then last week, the Fed offered to put up as much as $1 trillion to purchase the short-term “commercial paper” debt of private corporations. This all in addition to the $85 billion the Fed used to “rescue” bankrupt insurance giant AIG.
And where does all of this money come from? The Fed has the legal authority to create it by fiat!
The Redistributive Effects of Monetary Expansion
Not to be outdone, the Treasury used its newfound powers to extend the bailout by taking a $250 billion step towards the complete nationalization of the banking system. Where will this $250 billion, or the $700 billion for the bailout, come from? Obviously, the federal government doesn’t have a hoard of money lying around—it’s broke. In fact, the national debt clock in New York City has run out of digits! The only way for the government to pay its bills is to issue new debt, most of which will be “monetized” by—you guessed it—the Federal Reserve. This is a fancy way of saying that the government will use its intermediary, the Fed, to simply print the money needed to fund its socialization schemes.
With all this new money in circulation, the purchasing power of the money in your pocket is going to go down. It will take more dollars to buy a gallon of milk, and, yes, it will require more dollars to buy a share of stock. But the “gains” in the market have been and will be illusory and, contrary to the Ben Bernanke/Milton Friedman “helicopter” theory, the government doesn’t drop new money from the sky. Unless you’re an old buddy of the Treasury Secretary Hank Paulson, chances are you won’t be one of the first beneficiaries of the funny money, but that gallon of milk will still cost more at the store.
This, in a nutshell, is the Fed chairman’s strategy to prevent a second Great Depression. Does it sound like a good plan to you?
When Adam Hammond went skydiving in 2006, he thought it was something that was going to end the same way as the 1,000 jumps before. However, when this U.S. Army “Golden Knight” pulled his parachute, nothing happened. Hammond hit the ground at over 45 miles an hour and broke his leg, pelvis and spine. Hammond woke six weeks later in the hospital with his father by his side. He considers himself “very lucky to be alive, [for] no one expected [him] to live1.”
After two years of therapy and surgeries, the pain was still so intense it was hindering his recovery. To combat this, Hammond was recommended a spinal cord neurostimulator. This device is only the size of a U.S. silver dollar and emits an electrical pulse to the spinal cord, disrupting the pain signal and replacing it with a pleasant one. After using this for one week under trial conditions, Hammond said, “The week trial was amazing. I didn’t expect those results at all. The day I got back…I was walking twice as far…without any pain at all1.”
According to Dr. Tim Deer, the president and CEO of the Center for Pain Relief, this device could be described as “pacing the nerves of the spine like you would for a regular heart beat, [except] we are going to pace the nerves that control pain1.” With this stimulator now permanently in place under Hammond’s skin, Deer hopes to increase his activity and decrease his dependence on medication. “That’s our main goal, to get him to be vital in his own life and his family’s life,” Deer commented1.
A New Industry
More than 50 million people in the U.S. suffer from chronic pain like Hammond3, and almost 300 million suffer worldwide4. Yet, only 100,000 patients are using this type of spinal cord stimulation technology. Part of this is due to the fact that the medical device industry is only just coming online. Even though it is growing at 20% or more each year5, the industry is far from saturated and is expected to have room for growth of 90%6. By the end of 2008, 44,600 spinal cord stimulation devices are expected to be sold7, but that barely begins to help the millions of people that could benefit from it. Luckily, the medical device industry is predicted to grow from $1.7 billion in 2008 to $4.3 billion in 20128. Growth of this nature will ensure more chronic pain sufferers have access to this type of management system, especially since most health plans reimburse patients for this type of therapy5.
The widespread acceptance and use of this technology is even more desirable when one considers chronic pain costs the U.S. $100 billion annually from lost time at work, healthcare costs and lost productivity9. Of this, $2.6 billion was spent on over-the-counter pain medication and $14 billion in prescription medications in 20044.
Chronic pain due to spinal injuries is not the only problem that can be ameliorated with electrical pulses. Other problems such as severe depression, tremors, Parkinson’s Disease, epilepsy, pelvic pain, angina, vascular disease, occipital headache, obsessive-compulsive disorder, motor dysfunction, brain injury and cortical stimulation are all being studied as potential benefactors of electrical pulse therapy5. One human trial is already underway to see if deep brain stimulation can resolve severe and lasting depression in patients unable to find relief through other methods.
Hope for Depression Sufferers
On June 26, St. Jude Medical issued a press release stating that two patients with severe depression were to undergo surgery to implant a small device near their collarbones. This device will release electrical pulses near the collarbone and travel up wires that are connected to an area of the brain thought to control depression10. According to the National Institutes of Health, 21 million people in the U.S. are depressed in some way. Although mainstream treatments are effective for 80% of these, they fail for the other 4 million in our population. “This…is an important step in…a neuromodulation therapy that…will treat this debilitating form of depression,” stated Chris Chavez, president of the St. Jude Medical ANS (Advanced Neuromodulation Systems) Division.
If the study goes as hoped, it may mirror results found in a Canadian study of 20 patients. This found that, after six months, over half of the patients felt a 40% or greater decrease in their depression. Currently, almost 80% of the patients feel relief, and 40% have began participating in social activities such as employment, dating, education and travel10. Furthermore, 15% were medically deemed to be completely free from their depression.
The improvements made to this type of therapy along with its increased use has the possibility of helping billions of people whether they suffer from depression, pain or disease. In the future, the boom in this industry could lead to a boom in the economy, allowing those held back from work and productivity the ability to regain their life, employment and security.
1 – Video with Adam Hammond and Tim Deer, M.D.
2 – Press Release: Former U.S. Army Parachutist Becomes First Person Implanted with the World’s Smallest Neurostimulator to Treat Chronic Pain. Sept. 17, 2008.
3 – National Institutes of Health; National Institute on Drug Abuse (NIDA) Notes, Vol 23, No. 3.
4 – National Institutes of Health Office of Technology Transfer (NIH-OTT)
5 – ANS Medical Implantable Therapies
6 – The Goldman Sachs Group. Americas: Healthcare, Medical Devices. New York, NY: February 2007.
7 – Millenium Research Group. U.S. Markets for Neuromodulation Devices. Toronto, Ontario: 2006.
8 –Neurotech Reports. The Market for Neurotechnology, 2008 – 2012, San Francisco, CA: 2007.
9 – NIH Guide: New Direction in Pain Research I. Sept 4, 1998
10 – Press Release: St. Jude Medical Announces First Patient Implants in Clinical Study Evaluating Deep Brain Stimulation for Depression. June 26, 2008.