Wilbur Ross: Fed Plan Doesn’t Address Root Cause

September 23, 2008


Here’s an article about “bankruptcy expert” and investor, Wilbur Ross, who says that the government’s Wall Steet bail-out doesn’t address the root cause of the problem.

“The reason I think it will take that long (to pull out of recession) is that none of these actions that have just been taken make it any easier for Middle America to meet their mortgage payments — it doesn’t address that whole problem, and that problem is what really caused this to begin with.”

Ross said that in some ways, the financial crisis could be blamed on the American consumer for wanting to improve their standard of living without having the wages and means to do so.

This is exactly right, except that Americans aren’t even able to sustain their standard of living, much less improve it.  And why don’t Americans have the wages and means to make mortgage payments?  Because incomes haven’t kept pace with inflation – real inflation, not the “Pollyanna Creep” numbers published by the government – for decades.  And why is this?  Because free trade with overpopulated nations has robbed us of five million of our best-paying manufacturing jobs, leaving us with a glut of labor that drives down wages.  That’s the root cause. 

If this plan is passed by Congress, the sense of relief will soon vanish as a steady stream of data on falling home values and rising foreclosures drives home the realization that new “toxic debt” is being piled on faster than the government can buy it up.  Then what?

Will Your Life Savings Be Enough to Buy a Postage Stamp?

September 22, 2008
 I couple of days ago I warned about the dangers of hyper-inflation as a result of the government Wall Street bail-out plan.  I think an example may help.  Take a good look at the following stamp:

German stamp
German stamp
This is a postage stamp issued in Germany, sometime around the onset of World War II. The cost of the stamp was five million marks, the cost to mail a letter in Germany at that time. How did it ever come to that? It began with the terms of the Versailles treaty at the end of World War I. Germany was forced to pay war reparations to the Allies as punishment and compensation. With its economy in ruins and no way to maintain any cash flow balance, it had no choice but to simply print more and more money. This drove inflation out of control, eventually reaching the point where a simple postage stamp cost five million marks. As inflation soared, so too did unemployment. The German people were ready for a leader that offered them hope, and the stage was set for Hitler’s rise to power.

This is what happens to any nation that, for whatever reason, finds it necessary to print money to meet its obligations.  In Germany’s case, it was war reparations.  Today, for the U.S., it’s the cost of financing a trade deficit that now totals a staggering $9 trillion since 1975, as is growing by $700 billion per year.  (Hmmm.  Is it mere coincidence that this is the exact figure that Treasury Secretary Paulson has demanded to fund his bail-out plan?  I wonder if the next Treasury Secretary will request another $700 billion next year?  Watch for my 2009 Predictions.) 

This isn’t a scare tactic.  This is for real.  The trade deficit has come home to roost and the only way left to deal with it is to begin printing money furiously, flooding the world with ever more worthless dollars.  Just look at what’s happening to oil prices.  Only a few days ago it was $91 a barrel.  It had fallen to that level because of the recession-driven decline in demand.  Friday, upon announcement of the enormous bail-out plan, it jumped over $10 a barrel – a one day record price rise.  Today, it soared over $16 a barrel, shattering the record set only one business day earlier.  Is this due to expectations of an economic rebound in America?  Of course not.  It’s due to the instantaneous decline in the dollar.  These kinds of price increases will continue and spread through the whole economy. 

Paulson’s Big Give-Away to Wall Street Banks is doomed to failure.  There’s no way it can succeed because it does absolutely nothing to address the root cause of our ills – the trade deficit.  There’s lots of talk on Capitol Hill about modifying “The Plan” to include all sorts of things – more government oversight, help for homeowners, limits on executive pay and so on.  But without linking it to a requirement to balance trade by implementing stiff tariffs, it will all be for nought. 

So hang on to your 401k, your IRA and any other savings you may have.  You’ll need it to pay for the stamp you buy to mail in your bankruptcy papers. 


Examples of “Kooks” We Should Pay Heed

September 22, 2008


 No sooner did I finish my previous post, suggesting that our next president needs to begin listening to economists who, until now, have been dismissed as “kooks” and “weirdos” by the now-discredited high rollers like Paulson, Greenspan and Bernanke, when along comes this Fortune article with a perfect example – economist John Williams of http://www.shadowstats.com/, who coined the term “Pollyanna Creep” to describe the phenomenom of revising economic data to make things appear rosier than they are. Williams contends that today’s economic melt-down has roots that go back much further than the mortgage crisis, that we’ve been deluding ourselves for many years that the economy is in much better shape than it really is.

No shortage of villains stand accused of igniting the brushfire raging across Wall Street: greedy lenders, gullible home buyers, negligent regulators, numbskull credit ratings agencies, and vicious short-sellers, for starters. Maybe they share the blame. But what if the underlying problem goes deeper? What if the reality is that the US economy has been a lot worse than was thought for a long time, and now the chickens are finally coming home to roost?

That’s the dark thinking beyond what is known as “Pollyanna creep,” a phrase coined by an economist named John Williams and supported by a cadre of other macroeconomic dissidents.

Williams, who lives in California, runs a Web site called Shadowstats.com that trades in the idea that key government statistics have become so optimistically misleading as to become essentially useless. Yes, this sounds a bit like the thinking of the black helicopter crowd, or the plotline of a Matrix movie. But given what’s gone on in the financial sector of late, it doesn’t sound quite so fringe.

The article singles out GDP (Gross Domestic Product) and CPI (the Consumer Price Index) as a couple of macroeconomic statistics that are especially worthy of scorn – overly optimistic to the point that they have been rendered useless, the very point I made in the first chapter of Five Short Blasts. If you’ve followed this blog for any length of time, you know that another favorite of mine is unemployment. To suggest that our unemployment rate is only 6.1% (the current “official” rate) is ludicrous when the annualized rate of weekly jobless claims is closer to 16%. In the past, while still chairman of the Federal Reserve, Alan Greenspan claimed that unemployment rates of 5% or less represented “full employment” and worried about the inflationary potential, all while weekly jobless claims still hovered above 300,000 and while thousands of people in manufacturing were losing their jobs ever week.

Another fringe economist cited in the article is Kevin Phillips, former Nixon advisor and author of Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism.

In his recently-published and rather depressing book “Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism,” onetime Nixon White House adviser Kevin Phillips discusses Pollyanna creep as part of an era of “Bullnomics: the pied-piping of America toward a misleading financial ideology (the efficiency and reliability of markets), buttressed by a spectrum of dubious thinkers, doctrines and enablers.”
Phillips contends that some of the biggest changes to CPI calculation took place between 1997 and 1999, “while the public and the politicians were preoccupied by bull market euphoria and the actions in Congress to impeach Bill Clinton.”
In their effort to reduce Social Security outlays – and buttressed by a belief that CPI overstated inflation – government economists with backing by Federal Reserve Chairman Alan Greenspan implemented controversial modifications to CPI that, among other things, tried to measure increased satisfaction from goods.


This Fortune article may be a good sign that, already, the Paulsons and Bernankes of the world are being pushed aside while we begin to look to the “fringe” economists, the “macroeconomic dissidents,” for real answers.

The Pollyanna creep crowd ….  may have some currency. Amid the talk of hundreds of billions in financial market clean-ups, a debate over the accuracy of economic bellwethers may be a can of worms worth opening.

Fed Bail-Outs Set Stage for Hyper-inflation

September 20, 2008

 Since the announcement of the federal government’s plan to purchase all bad debt from ailing financial institutions, my head has been spinning. I’ve started and stopped this post more often than a driver with a manual transmission in a ten-mile traffic backup. How did it come to this? What does it mean going forward? How much influence did foreign creditors have on this decision? Like the writer with writer’s block portrayed in old movies, I now sit waist deep in the cyber equivalent of crumpled sheets of paper yanked in frustration from my typewriter.

Finally, I’ve realized that there’s no way to do this justice in one post. This fed action has spawned a series of posts that will probably dominate this blog for some time to come. There’s no way to comment on just how this can possibly work because, as I heard Mitch Albom explain on yesterday’s radio broadcast, that’s like trying to analyze how well the toilets flush before the blueprints are even drawn. But what I can tell you already is that it’s a blueprint for a house of cards.

So I’ll begin with the basics, keeping in mind the mission of this blog – to explain these events in light of the theory I’ve presented in Five Short Blasts. How did it come to this? How could we ever have arrived at a point where our federal government repudiates the very principles upon which our economy was built – hard work, investment, risk and reward? Now we learn that it was all meaningless. In the end, good old Uncle Sam will be there to dump a load of cash in your lap, regardless of how lazy or stupid you may have been. It’s as though we’ve all been like Lot, living among the Sodomites while avoiding their wicked ways, in anticipation of our final reward. But in this twisted version of Genesis, upon revealing to the angel his devotion to a good life, Lot receives a one-word reply from the angel: “Sucker!”

How have we come to this? It all goes back to the effects of overpopulation and low per capita consumption – both home-grown and imported through free trade with overpopulated nations. (If you’re new to this blog, the only way you’ll understand this is to read about the new economic theory I’ve presented in Five Short Blasts.) As millions upon millions of our best-paying manufacturing jobs were steadily lost to misguided trade policy, the government looked to the housing sector to take up the slack. Immigration was used to prop up demand. But, as unemployment worsened and dragged down the real median income, lending standards had to be loosened to stoke the supply of “eligible” mortgagees.

As long as this Ponzi scheme was sustained – driving home values ever higher by increasing the supply of buyers, everything would be alright. But, of course, it was never possible that the least qualified of these buyers would ever be able to keep up with their mortgages. The sub-prime mortgage crisis was born and the effects spread like a cancer, slowing the economy, driving unemployment still higher and picking off the next layer of stressed home buyers. Foreclosures escalated, home prices began falling and the assets on the banks’ books began vanishing. An unstoppable downward spiral had begun.

Unstoppable but for one temporary fix: the government had to step in, shovel up the mess, and toss it on the curb for someone else to deal with. That “someone else” is your children and grandchildren. The mess they’re being left is over a trillion dollars, the combined total cost of the bail-outs of the past two weeks – the figure admitted to by the government – which means it’s very likely that it’s at least ten times that amount. The government is now flooding the nation and the world with dollars. Not boat-loads of dollars. Not truck-loads of dollars. But container-ship-loads of dollars. The idea is to restore “confidence,” that false sense of prosperity that potential home buyers need to jump back in the market. This may work for a while, but the exponential growth in the money supply has set the stage for hyper-inflation. Just look at what happened to the price of oil when this deal was announced. It made the biggest one-day jump on record. In the meantime, median income will continue its slow decline, and the downward spiral will soon resume. Then what?

The government’s action has done nothing to address the root cause – the steady drain of wealth from our economy by a $2 billion per day trade deficit. Until this is addressed – until the trade deficit is completely eliminated – the downward spiral of our economy, though temporarily interrupted by the government’s bail-out, will resume and intensify. Bank on it.

More to follow.