U.S. Recovery Plan - Turning the Chinese into Americans

There have been many stories in the news lately, detailing statements from the U.S. government about the dollar. Statements known as “talking up the dollar” have been coming very frequently from Geithner, Bernanke and Obama. This, of course, is meant to make people around the world believe that, even though they’re doing nothing about it (and are actually making things worse every day), effective policies to keep the dollar strong will come in the future.


However, this strategy goes deeper than that. The U.S. government has now embarked on some pathetically futile strategy to try to change other peoples’ behavior to suit American economic needs. This is very evident in this recent speech by Bernanke, as reported by the NYT:


http://www.nytimes.com/2009/10/20/business/economy/20fed.html?hp


The problem, in essence according to Bernanke, is that people in Asia, and especially China, don’t spend money like drunken sailors, as is the custom in the U.S.. If the Chinese started consuming their own goods instead of selling them to other countries (and getting rich in the process), then the U.S. could become more competitive on the international arena.


It’s like asking the sports team you’re playing against to bench its best player, in order to make the game more fun for everyone else. How quaint.


The average person might not think much of a statement like “the trade imbalances on the world market are too large, and should be reduced by increased domestic consumption in China”. But it is in its core, a pathetic, vain and useless attempt to deal with the economic crisis in the U.S. by trying to take a non-existent shortcut.


Geithner, Bernanke and Obama know that the U.S. can’t export its way out of the crisis, because American goods cannot compete. If the dollar were to implode, American exports probably would be competitive for a while based on price alone, but the larger implications would unequivocally be irreversible, long-term economic stagnation. So again, the only way to take this shortcut is to tell others to change their ways. Now, how likely is it that that will happen?


Bernanke goes on to say that China should increase its social protection for citizens as a way to increase domestic consumption. Now, I’d be the first to agree with such a policy, but alas, China does not care about its own citizens. China is simply the authoritarian political/economical system it has always been. It doesn’t matter if the country calls itself communist, capitalist or imperial: the outcome is the same (the same goes for Russia, by the way). Much like the United States, whoever grabs the power has the power.


The much criticized “Asian values doctrine” can actually be helpful in this context. This doctrine, much favored by the Chinese government, is influenced by Confucianism and other eastern philosophies, but as applied to modern society, it proclaims that individual considerations, be they materialistic or human rights related, should be sacrificed for the good of the authority. I have myself met many Chinese students who have defended this doctrine vigorously.


Where does that leave the Chinese consumer? When, at any time, your house might be bulldozed for a new dam project, your farm taken away because a local politician sold it, or your salary might be cut in half, what is the most rational thing to do in order to protect yourself from catastrophe? You save money!


American politicians seem to think that Asian people save money as some kind of old, funny habit. In fact, they are just being rational, and Americans should obviously be doing the same thing, considering the fact that there is no social safety net in the U.S., and that we have a casino economy.


The Chinese will probably increase their own consumption eventually, but in order for that to be of any help to the U.S. they would have to start buying lots of American goods, and I don’t see that as very likely.


If the Chinese do increase their domestic consumption of domestic goods, I’m sure that won’t be at the expense of exports to the U.S.. They’ll just make up for that by building more factories and enlisting more unemployed people from the countryside to work in them.


Moving on to those who actually control things in China. Why the hell would they try to export less?? In 2007, George W. Bush asked Hu Jintao if they couldn’t please let the Chinese currency appreciate against the dollar. Jintao simply responded: “Why?”.


Embarking on a policy to export less, when exports have taken China out of the dark ages and into the light, would be something that not even a retarded Chinese equivalent of George W. Bush would attempt.

Advocating that the Chinese should be turned into Americans is so pathetic, I’m almost out of words.


Wait, I have a suggestion: if China actually were a communist country, exactly as described by Marx, then it would export almost nothing. So, the plan is simple: invade China, overthrow the authoritarian capitalist government, and install a philosophically pure communist rule! Then America can have its wonderful bubble/casino economy back on its feet!






Moreover, I advise that the winner-takes-all voting system should be destroyed.

Why Does the World Need the Dollar?

Earlier this year, I wrote a lot about inflation, and whether or not it would occur. I now believe that the dice has been thrown, that there’s no turning back: there will be large-scale inflation soon enough. The reason: the U.S. has spent almost $12 Trillion in an attempt to re-inflate the economy artificially.


To put it bluntly, the U.S. economy should no longer be described as being on a “sugar rush”. A more accurate analogy would be a cocaine high. What else could account for a 60% surge in stocks while the real unemployment rate is 20%?


Related to this is the U.S. dollar. Inflation hurts the dollar, but that’s far from the whole story. The dollar’s future as the world’s reserve currency is at stake. If everyone who holds dollars or dollar-related assets abroad starts thinking that these dollars will be worth a lot less in the near future, there will be no alternative to a currency crisis.


The fact that the U.S. has the world’s reserve currency enables it to spend far more than it makes. As I have mentioned before, this is the reason why a lot of economists, and especially American economists, are of the mindset that macro-economic models don’t apply to the U.S.. I think there’s some truth to that, because if you don’t HAVE TO ever pay back your loans, you don’t really have to worry about them. However, what happens on the day that you have to start paying?


Some prominent economists, most notably Paul Krugman, are currently claiming that a weak dollar is good for the U.S.. This will help U.S. exports, the theory goes. Also, according to Krugman, the U.S. needs to spend money on stimulus to get the economy going again, in other words through Keynesian spending.


Krugman does not address the potential of the dollar losing its position as the world’s reserve currency, but instead focuses his analysis on the short-term perspective of fighting the crisis and unemployment at all costs. What he does not realize is how real of a danger this is, but I’m sure he realizes the consequences if this were to actually happen. That’s probably why he’s not talking about it.


I believe that it actually wouldn’t take that much for the dollar to lose its position right now. Under the surface, many important international economic players have been discussing replacing the dollar with something else. These players include both wishful thinkers and those who would actually be in financial danger in the short term. If a few of these players were to move away from the dollar, it might set off a chain reaction that could crush the currency.


First this spring, people like Vladimir Putin and Hugo Chavez started talking about the need for replacing the dollar, while barely being able to hide their excitement.


Second, shortly after that, the IMF started dusting off the old idea of international drawing rights, or a basket of currencies. This debate was also helped forward by Joseph Stiglitz and Simon Johnson, both formerly connected to the World Bank and the IMF.


Third, and this is one of the most important ones, China started voicing concerns about the dollar. This time, Geithner had to go to China and give a speech about how great the dollar was doing. China buys a third of U.S. debt on the international market.


Fourth, and this one might turn out to be very important too, Japan elected a new non-conservative government for the first time ever. Japan buys about the same amount of U.S. debt as China does. One of the basic premises of the new Japanese government was that it would stop trying to be the U.S.’s lap dog. We’ll see how that goes, but I don’t think we can expect to see Japan follow Geithner’s every whim.


Fifth, rumor has it that the Arab Gulf states want to get rid of the dollar too. Their incomes are down by more than half since the beginning of the crisis, and they’re getting a little desperate. For the dollar to drop drastically in addition would be disastrous for them.


All these economic players are not dumb, they understand, in contrast to people like Krugman, that there are some very real dangers connected to owning dollars at the present time. They may run the risk of losing their savings and day-to-day incomes at the same time.


The number one question then becomes: Why does the world need the dollar?


The dollar was instituted as the world’s reserve currency at a time when the U.S. was a world leader in production as well as consumption. This meant that the dollar was both “as safe as houses” and “as good as gold”. An advanced economy with a competitive industry would be less likely to resort to irresponsible fiscal practices, and an insatiable, highly materialistic American consumer could keep the smoke in the chimneys in factories around the world. In other words, the U.S. was the economic engine of the world, and that’s why it made sense to use the dollar as the reserve currency.


However, the U.S. is not in the same position either in terms of production or consumption, and definitely not in terms of fiscal responsibility. The American manufacturing industry is not competitive, and the American service industry turned out to be smoke and mirrors on Wall Street. There is no way that the American consumer is going to get back to spending the way they used to, because it was all built on credit.


I believe that there is a shift happening in the world economy right now. In terms of the future developments of the balance of power between the big three blocks, Asia, the EU and the U.S., this is how I think about it:


It is clear to see that China will only continue to increase both its sophistication and volume of trade. The recent crisis has only strengthened the country’s position. The U.S. is no longer China’s biggest trading partner, the EU is. Japan is also increasing trade with China, and so is India.


It seems that the EU will continue to do what it is currently doing: to be competitive in very advanced industries, while not growing or shrinking much either way. I’m basing this on a continued focus on industrial policies, a good access to education and in general a less volatile society.


With respect to the U.S., it is very hard to see what the country has going for it. Where is the growth going to come? What is going to improve? The country has no industrial policy, and will not get one soon. One year at an American University costs as much as a Mercedes E-Class. The political system is deadlocked by lobbyists who bribe individual politicians. Industry resistance to innovation digs the grave of American manufacturing. More importantly: the country is bankrupt.


I believe that the world economy will shift, and that the dependence on the U.S. will have to be lowered. This will mean more power for Asia, and a tighter relationship to that continent on the part of both the U.S. and the EU. This will also mean that the dollar will most likely be given up as the world’s reserve currency.


What will this mean for the U.S.? Simply put: a drastic reduction in material prosperity across the board.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

Secret: No More Money Market Fund Protection - The Illusion Continues

This is just a quick note on the state of the market and the economy right now. I am very bothered by the false spin that has been coming out of almost every media outlet and the government ever since this spring. The absence of reasonable economic analysis is almost complete.


The government and the media are currently putting ordinary people at risk by not telling them that certain guarantee programs are ending. As of last week, September 18, the Treasury Department’s ” Temporary Guarantee Program for Money Market Funds” HAS ENDED.


Click to view: http://www.treas.gov/press/releases/tg76.htm (note that this only says that the program will end on September 18, there is no announcement that it has actually ended, which it has)


They obviously don’t want anyone to know this, because they don’t want anyone to withdraw money from these funds. If you remember, this program was started last autumn, because the withdrawals that were seen during the most chaotic days could have absolutely destroyed the stock market. The program was initiated not out of concern for ordinary people who had money in these funds, but as a way to support stock prices. The consideration is the same today.


I have not seen a single media entry, except one mention on the CNBC website, telling this story. The problem with these funds is that people see them as savings accounts. In fact, a lot of the money is invested in stocks, and although the fund will not swing like stocks, there is a much higher risk of losing all your money. There is no FDIC protection. A lot of people in Britain and The Netherlands lost money in this way last year.

There are a few people who seem to be keeping an eye on things though. The government is about to hit its debt ceiling of 12 Trillion Dollars soon, and the word is that Geithner is about to ask for it to be raised. In other words, the government has spent so much money bailing out anything and everything, that the $700 Billion last year is now like a spit in the bucket. The question will soon become: who will bail out the government? The situation is really serious now. Please take a look at CNBC's Heidi Moore's article on that:

http://www.cnbc.com/id/33019073/

The absolute surge in stocks over the summer was not something that I foresaw. I am flabbergasted at it. Then it came to me; this is the same pattern as during the depression. Here’s what happened back then:


- 1929: crash


- Early 1930: stock market up by 50%


- Late 1930: stock market down 50%


A lot of things are different now, but I wouldn’t be surprised if the same thing happens within 4-5 months. By this I mean, of course, that the crash and the 50% surge has already happened, and we're just waiting for the 50% drop. After that, all the terrible mistakes that the Treasury, the Fed and Congress have made will become very apparent. They have essentially done everything wrong in the handling of this crisis.


This is my basis for this accusation: this crisis has been dealt with as if it were a smaller, cyclical crisis, but the medicine has been administered on a massive scale. I believe that this is a structural crisis, and that none of the cyclical theories apply. Now we will only get debasement of currency, more unemployment, and a downward-spiraling trend.




Moreover, I advise that the winner-takes-all voting system should be destroyed.

Manifesto for a U.S. Parliament - 2009 Update

In light of recent political developments, I am, to my great surprise, no longer alone in calling for an overhaul of the way decisions are taken in this country. So far in the year 2009, we have seen more starkly than perhaps ever before how far away the U.S. is from being a democratic country.


The healthcare debate in particular has raised a lot of questions regarding the decision-making process. More specifically, the role of the Senate has been put into question. The media makes it seem as if any healthcare reform hinges on a small group of senators, lead by Max Baucus from Montana. They may in fact be right, and considering the fact that this man represents roughly 0.15% of the population (90% of which are white), it is easy to see why such a situation might be called into question even in the U.S..


In an excellent article in the Washington Post called The Gangs of D.C., Alec MacGillis explains the strange power of the Senate and the impact this has on democracy at large. Also, focusing on procedural issues, Eric Etheridge of The New York Times writes about the Senate, filibusters and democracy.


I obviously agree with what these writers are saying about the Senate; it is an unbelievably undemocratic institution even before taking into account the tens of millions in corporate “donations” that these individual senators receive. However, neither of these issues can hold a candle to the fact that voters in the U.S. never have any real choice to begin with, because there is no proportional representation.


Before I continue, let me just reiterate what proportional representation is. First of all, it is the system of choice of the vast majority of advanced countries in the world. If a party receives 15% of the votes, it receives 15% of the seats in the legislative body. This inevitably leads to more parties, and a range of views being represented. If 10% of the population is environmentally conscious, there will be a green party, and if 10% of the population are libertarians, there will be a libertarian party in the legislative body. Neither of these things could ever happen in the U.S. because there is no proportional representation.


Instead, the U.S. system has evolved into nothing short of a corporate state. It is clearer than ever that citizens actually have very little say in what happens in their country. This would never happen in a system with proportional representation.


Here is my suggestion for bringing democracy to the U.S.: The U.S. Parliament


The Inception of a U.S. Parliament


The idea behind a bicameral system (the current system) where one body can overrule the other is, in reality, an idea of permanently limiting political change. The result is that it becomes almost impossible to bring about fundamental political change as society changes, and the fundamental situation that existed at the time of the creation of the bicameral system will, in essence, be preserved indefinitely. At the time of the creation of the American political system, wealthy, white, older men were the only citizens who were allowed to, and were ever supposed to be, involved in the political process. That is largely unchanged to this day, all things considered.


In my suggestion, the two houses of Congress would be merged into one unicameral Parliament, with a fixed number of seats, perhaps 501 (in order to prevent a deadlock). Elections would be held every 4 years. Each state would be awarded a number of seats based on population size, in the same way as the present electoral college awards votes for President based on population size. Each vote in the Parliament would be decided by means of a simple majority, with the exception of a vote of no confidence in the President or the governing party or coalition, which would be decided by a two-thirds majority. Filibustering and other abusive tools would be removed entirely.


The fact that all states have an equal voice in the Senate is frankly absurd. I completely understand the need for regional considerations, but the legal independence of U.S. states more than makes up for potential negative effects of populous states being more influential on a federal level. U.S. voters must realize that there is a time and place for everything. The U.S. Senate is not the place to discuss the construction of a local playground, and The Montana Senate is not the place to discuss the moral implications of abortion.


For Montana with 0.3% of the population, to have equal power to California with 12% of the population, is beyond absurd, and deeply undemocratic.


Proportional Representation


What makes the American political system different from most other political systems (save for some other Anglo-Saxon countries) is the lack of proportional representation. If 49% of voters in a given constituency vote for a certain party, those voters could receive 0% representation in the legislature. This is not an anamoly either; it happens all the time.


In a system with proportional representation, if 49% of voters vote for a certain party, that party receives 49% representation from that constituency in the legislature, no more, no less. How could anyone seriously say that proportional representation is unfair, unjustified, or in any way unsuitable? It directly transcribes what the voters want!


The votes would be counted according to the D’Hondt method, and a party must receive at least 8% of the national vote in order to be represented in Parliament. That rule ensures that extremist parties are not represented in Parliament.

The Bill of Parliament


The concept of a “Bill of Parliament” would be very different from a “Bill of Congress”. The problem with bills in the U.S. today is that they lead to corruption through earmarks and lack of coherence. Earmarks obviously lead to corruption by individual Congressmen, when money is being appropriated to corporate donors by the recipient Congressmen. However, the sprawling nature of American bills of Congress also further weakens the small aspects of democracy that do exists in the U.S..


If a bill about, for instance, construction safety is being held hostage by means of a provision about space exploration in the same bill, it amounts to making a mockery of the political system. For a political system to work for the voters, bills must be philosophically coherent and earmarks as we know them must be abolished. It must be this way in order for the most rational, efficient solution to converge with the will of the people.


The Usage of a Mixed Personal and Party Vote – The Party-List Ballot


One of the common objections to a political system that is based on political parties, as opposed to individual politicians, is that such a system takes away the ability of the voter to vote for a politician that he or she particularly likes. This problem can be remedied by the party-list ballot. In such a system, the voter takes a ballot for the party that he or she likes, and on that ballot, the party has listed the politicians that it considers best suited for the job of being a member of Parliament.


The party lists politicians in order, 1, 2, 3, and so on. Any politician on the list can be ticked off, and the vote would go to that party, and that specific politician who has been ticked off. If the voter chooses not to tick an individual off, the vote goes to the party, and the person who is number 1 on the party’s list. When all the votes are counted, the voters may have defied the choices of the party, and number 1 and 2 on the list, may have been exchanged for number 5 and 12 as the party’s representatives in Parliament.


End the Role of Money in U.S. Politics


The financial aspects of U.S. politics are alien and preposterous to most non-Americans. The idea of both local and national politicians going around the country begging for money from wealthy people, corporations and organizations is simply unbelievable. Most U.S. politicians don’t even try to claim that they have guiding principles for the benefit of their voters, naturally because that would be too transparent in light of billions of dollars in campaign donations. In ancient Rome, votes could be bought openly, and it is frankly not much different in the U.S. today. That U.S. voters continue to accept this is beyond me.


As a result of the government in general receding since the days of Reagan, a power vacuum was created. Slowly but surely, aided by both Republicans and Democrats, the U.S. actually turned into something that is very much like a “corporate state”. In some ways, this state can eventually turn almost as bad as a “failed state”, since it may lead to a form of anarchism (a sort of Ayn Rand-style unregulated economy).


All money contributions to politicians must be made illegal immediately. Period. Political advertising on TV and elsewhere must also be ended, and campaigns should be conducted purely through debates in the media. Each political party would be given a set amount of money from U.S. taxpayers, end of story.


Decrease the Power of the President


A U.S. President is the head of state, the head of government and commander-in-chief. No other modern country has this configuration, and for very good reasons. To give one individual such vast powers is simply dangerous, and as we have seen during the last 8 years, it can have truly disastrous consequences. However the role of the President would be changed, at least one of the three roles would have to be given to someone else in order to safeguard the country against a semi-dictatorship. It should be easier to fire the President through a vote of no-confidence.


It is definitely possible to have a significant President, elected in a separate election, as well as a Parliament with proportional representation. Finland is one country that has this.


Homogenization of Voting Cycles - Avoid The Do-Nothing Government

In the current system, as a result of not holding elections for the House and Senate at the same time, those two houses of Congress tend to go to different parties, as the ruling party usually gets punished by voters after a while in the majority. As a result of this, every piece of legislation that politicians try to introduce will be either shot down, watered down or changed beyond recognition. Result: a do-nothing government. In a unicameral system, like the one I'm suggesting, this could not happen, but there could nevertheless be harmful effects of voting cycles via the interaction between local and federal elections.

In a system with a U.S. Parliament, there would obviously still be local elections, with proportional representation of course. Those elections must be held at the same time as the Parliamentary election in order to avoid the situation with the do-nothing government, where local elections are unfairly impacted by national politics, for instance. The goal should be to have as vibrant a political discussion as possible, with the merits of different policies at center stage at all times.

Increase Voter Participation by Practical Means


The United States has, by far, the lowest voter participation out of the OECD countries


This is, of course, a testament to a non-working system. Most U.S. voters obviously feel that there is no point in voting, and many of them are consistently and strongly prevented from voting, legally and illegally. Voter suppression is so rampant that it is worthy of a banana republic. Here are some numbers of voter turnout in OECD countries between the years 1945 and 2005:


The Netherlands: 84.8% (proportional representation)


Sweden: 83.3% (proportional representation)


Israel: 80.0% (proportional representation)


Germany: 80.0% (proportional representation)


Great Britain: 73.0% (fundamentally the same voting system as the U.S.)


Canada: 66.9% (fundamentally the same voting system as the U.S.)


United States (midterm): 40.6%, (presidential) 55.1%


As you can see, the three countries with the lowest numbers all have one thing in common: they all have the winner-takes-all voting system in which very large parts of the population are shut out of the political process completely.


There are a number of practical measures that can be taken to make it easier for people to vote, such as:


- conduct all voting on Sundays


- automatically register every U.S. citizen as a voter on the person’s 18th birthday


- create a national ID card which is sent to every U.S. citizen when the person turns 18


- allow mail-in ballots in every election


- End all electronic voting and create completely uncomplicated, nationally standardized paper ballots

Low-Hanging Fruit

Over the last few months the American media has been reporting that the economy seems to be recovering across the board. The stock market has risen almost 50% on these news, anticipating a full-blown recovery.


I have argued before that the supposed recovery is only an illusion, and I will continue to explain why below. I would also like to remind readers that this year’s pattern in the stock market is actually very similar to the pattern during the Great Depression (I won’t go into that further right now, but I recommend reading John Kenneth Galbraith’s “The Great Crash of 1929).


News stories tend to be self-reinforcing. Journalists feed on each other’s sentiments and the reactions from readers. That is why you get news cycles that eventually peter out, while others take their place. In yesterday’s New York Times, Robert Schiller makes the connection between news cycles and the stock market in the article An Echo Chamber of Boom and Bust.


In my view, what Schiller argues is a somewhat exaggerated view on the impact of news cycles on the stock market, but I think the Schiller’s thesis is nevertheless relevant at this point in time.


Journalists in the mainstream media are generally painfully ignorant of economics as a subject. On the CNBC website, I went through all the profiles of the journalists that I regularly see on the network, and only ONE person, Michelle Caruso-Cabrera, has any sort of degree in economics (she is, by the way, a border-line fascist, so her “insight” should be taken lightly). The so-called “chief economics reporter”, Steve Liesman, seems to have no education whatsoever in economics.


Without really knowing what they’re talking about, journalists have over the last 6 months or so all jumped on the recovery story bandwagon. I’m not sure how it started, but it might have been because of the stimulus money, the supposed optimism of the Fed and other government officials, but the recovery story in its essence is this:


The economic crisis is leveling out


“Leveling out” is a term that usually implies that the worst is over and that a change in direction is about to come. However, I would argue that it definitely does not have to mean that, and in the case of this crisis, does not mean that.


By far the most important measure of how well an economy is doing is employment. The “real unemployment rate” in the U.S. is currently between 16% and 18%. That is basically the percentage of people of working age who don’t have jobs (and who don’t study, are housewives or are on disability). That is in my mind the only relevant figure. One of the most important factors in the “recovery story” is that job cuts are leveling out. In other words, companies are currently cutting jobs at a slower pace.


As the economic crisis has been going on for over a year, this makes perfect sense. What companies have been doing is that they’ve been picking low-hanging fruit. They’ve been laying off staff-members without whom they can still function, in order to preserve cash. They’ve gotten rid of an extra secretary, some superfluous salesmen, and they’ve stopped having donuts delivered every morning.


When companies have gotten rid of all their non-essential spending, they couldn’t possibly get rid of more spending at the same pace without drastically changing their business model and becoming an entirely different company (although this has happened as well). That job cuts are leveling out is an economic inevitability.


To illustrate this, I would ask you to think of the U.S. economy as a regular guy. This guy loses his job. This is what he will probably do:


1. He’ll stop going as much to restaurants


2. He’ll stop taking expensive vacations


3. He won’t buy a new car


What this guy is doing is picking low-hanging fruit. He is cutting down on non-essential things, but, for now, he won’t do something radical like selling his house. As a result of cutting down on expenses, he now has more money than he would have had if he had kept going as if nothing happened, but that does not mean that he is on his way to recovering his old life-style. He has not gotten a new job.


In order for our guy to keep cutting down on expenses, he would have to do something more radical, like selling his house and moving into an apartment. He’s very reluctant to do that, because that would radically change his life-style.


Just like the guy has not gotten a new job, and keeps cutting down on expenses, U.S. companies don’t have any new or improved revenue streams. Demand is not up, domestically or abroad. U.S. exports are not very successful, judging by the trade deficit. For U.S. companies to start hiring again, and for the guy to get a job again, the money has to come from somewhere. you can’t just will it to happen, or magically create it.


The important thing to remember is that companies are still cutting jobs, at a pace that would have been utterly frightening only three years ago. This means that, if anything, demand for goods and services will keep going down and down and down. This will force companies to cut even more jobs, and the cycle continues.


So I ask again: what has improved? A leveling out is not an improvement. This is the basic thing that U.S. journalists do not seem to understand. Journalists have been jumping for joy, saying that the car industry is coming back as a result of the “cash for clunkers program”. But again, where’s the money coming from? It’s coming directly from the government, so the “improvement” is just an illusion.


When the government hires someone, it is not “job creation”, and when the government spends money, it cannot be counted as economic improvement. Government spending can do all sorts of things, but it is a type of economic activity that must not be confused with the market. With respect to the “clunkers” program, government spending is a zero-sum game.


In conclusion: how do you know when the economy is improving? Let me present a few alternatives:


1. You export your way out of the crisis, like Sweden and South Korea did in the 1990s. You sell more abroad than you buy from abroad = more money for the country.


2. You inflate a new bubble of some asset class and try to convince people that the price of this asset class will continue to go up forever. It seems to work for about 5 years and then do a lot of damage, while the elite has gotten richer. This is the traditional approach in the U.S., and the one that seems to be in the works right now.


3. A massive technological leap forward radically improves productivity, like it did during the industrial revolution, and to a smaller extent, in the 1990s with the PC revolution.


4. You permanently re-align the economy at a lower place with lower amounts of consumption compared to before, as Great Britain had to do when the empire slowly crumbled over a few decades. This is also a possibility for the U.S..






Moreover, I advise that the winner-takes-all voting system should be destroyed.

The Output Gap - A false and Dangerous Theory

Please click on image to see details.

In my last post, I talked about the likelihood of inflation in the U.S. in the near future and I was trying to debunk some of the theories that claim the opposite. I will continue on that note today and talk about one issue that is supposed to make inflation an impossibility during an economic downturn: the output gap.


The “output gap” is a measure of the difference between economic activity in an economy when times are sustainably good, and when there is a downturn. A lot less goods and services are produced during an economic crisis, for obvious reasons, and that is what accounts for the output gap.


Most economists who are currently advising the Obama administration or who are given time in the media are pointing to this output gap. They are saying that the current level of production in the U.S. economy is “unnaturally low”, and hence there is a lot of “slack” in the economy.


This slack, it is thought, can simply be filled in by printing more money, in order to save the economy. Because of the slack, inflation will not be created because the money printing is simply making up for the consumption which has disappeared, but should still be there, it is thought.


In other words, they are saying that the level of production today in the U.S. is not as high as it’s “supposed to be”.


In reality, they are saying that factories are “supposed to” produce more cars, TVs and clothes, and that people are “supposed to” get more haircuts and eat out more often.


But why should this be? Who says that there’s a “natural level” at which consumption should be? Definitely not me…


Please take a look at the model that I drew up in the beginning. This is an illustration of the U.S. economy. The important thing to see in the model is that both consumption and economic output will very likely be lower in 2009 compared to what they were in 2006. My model explains the very simplest of economic linkages: output follows consumption, or put in other words: supply follows demand.


Since the crisis started, demand has gone down rapidly all across the economy. Demand for houses, labor, haircuts and basically everything else has gone down. Naturally, there would be no point in producing any of those things if nobody wants to pay for them, so production goes down.


In order to find out what happened to the demand, what made it go down, one must look at what was fueling it, where the money was coming from.


Maybe the country had an export good, the price of which suddenly dropped like a rock. This recently happened to Russia and its oil. Consumption in Russia consequently went down because a lot of money disappeared.


Maybe the country had a brain drain of people which made key industries less productive. This happened in Zimbabwe when the country expelled its white farmers. A lot of money disappeared, and, incidentally, the Zimbabwean government tried the trusty method of printing money, with less than fabulous results.


There are many ways in which an economy can get in trouble, but no matter what, during times of crises, consumption and output will go down. Where was the money coming from in the U.S.? The answer is: credit.


Wages in the U.S. have been stagnant for over 30 years, and in order to make up for that, Americans have been taking loans to fuel consumption. Credit is the very thing that disappeared in this crisis, and that is what is decreasing demand.


In order for the output gap to be closed without anything radically changing in the economy, credit would have to come back as an economic force just as strong or stronger than before. We all know that that is not going to happen, so where does that leave us?


If there are no prospects of this gap being closed by new credit, then there is no slack in the economy, and money printing will simply be the futile and devastating activity it was in Germany and Zimbabwe.


The gap would have to be closed by something else, such as a more successful export industry. If, by some miracle, the U.S. export industry were to become extremely successful within a matter of months, so that the trade gap could be closed and turned into a surplus, then maybe the theory of the output gap could be relevant. The U.S. would have to stage an unprecedented economic miracle. Somehow I don’t see that as very likely.


The theory of the output gap can be relevant in normal economic times, when simply analyzing small ups and downs. But this theory is wholly irrelevant in a structural crisis or a depression.


In conclusion: the theory of the output gap is false and irrelevant because it is based on a notion of the imminent return of the credit-fueled good times. Using this theory as a justification to print money has been done before, with disastrous inflation as a result.

The economy is not "supposed to be" anything. It is only what you make it in to!




Moreover, I advise that the winner-takes-all voting system should be destroyed.

The Inflation Riddle

The single most important discussion in economics at the moment is whether or not there will be inflation in the U.S., and if so, when that will happen. The Bush and Obama administrations along with the Fed and the Treasury have made their positions crystal clear: they believe that inflation is a near impossibility in this economic environment.


The government, the Fed and the Treasury have for months now been trying to tell the world that things are getting better and that the measures they have taken to ease the crisis are working. Geithner even went to China and gave speeches telling everyone how much confidence the Chinese still had in the U.S. economy, even as the Chinese sold long-term U.S. Treasuries and bought short-term U.S. Treasuries instead (which is a clear sign of a loss of confidence).


Governments around the world are currently engaging in what they call “quantitative easing”, otherwise known as money printing. The most famous example of this is probably Germany after World War I. Germany had a huge war debt to pay, and that debt was strangling the German economy. The Germans decided to simply print more money and be done with it. After that policy was implemented, people started using money to light fires in their furnaces because it was worth so little.


Nowadays, even the Bank of Switzerland is printing money. The U.S. government is the worst offender, and is currently flooding the U.S. economy with money. In a matter of months, the Fed has suddenly expanded its balance sheet 40 times, after having stuck to a policy of stability for six decades. This is truly revolutionary and truly disturbing.


Take a look at the recent expansion in the Fed's monetary base:

http://research.stlouisfed.org/publications/usfd/page3.pdf

Why are governments doing this? It has to do with the theoretical approach to the creation of inflation.


For people who are unfamiliar with a range of theories in economics, such as the entire economic team of the Bush and Obama administrations, there is a dogma concerning inflation:


Inflation can only be created by a wage and price spiral


This is what the government believes, or at least is strongly hoping for. In other words, for inflation to start growing, people would have to start demanding higher salaries (which is not exactly easy in a country essentially without unions or labor laws) and people would have to start consuming goods and services to a much higher degree. So, all of a sudden, we would have higher salaries, more consumption and the good times would again start to roll. The government sees this as an unlikely scenario. On that point, I absolutely agree.


So, if you believe that the preceding scenario is the only scenario under which inflation can be created, printing money might make sense for a while. However, I, and many others, do not believe that this is the only scenario under which inflation can occur.


You can look at the problem of what inflation actually is in 2 ways:


1. inflation is ONLY a wage and price spiral where too much money is chasing too few goods and services, OR


2. inflation is an excess of money in the economy


In order to find out which of these two statements is true, a simple theoretical model can be constructed. If statement 1 were true, there would be no examples in history where inflation was created without a wage and price spiral. Is that so? The answer is unequivocally: NO.


Inflation has been created without a wage and price spiral countless times in economies around the world. Some examples are: Argentina at the end of the 90:s, Zimbabwe currently, Germany in the 1920:s and 1930:s, and so on and so on.


However, what these countries do have in common during the abovementioned crises is money printing. For different reasons, these countries have been printing money in order to get out of a crisis, and that has created massive inflation. This is exactly what the U.S. is doing today, so why should the U.S. be different?


The statement that inflation can only be created by a wage and price spiral is most certainly untrue. It has no basis in empirical evidence, and in fact, much evidence to the contrary exists.


I believe that inflation is simply an excess of money in the economy. Is an excess of money being created by the Fed right now? You would have to be some sort of lunatic to answer "no" to that question.

People tend to focus too much on microeconomics when thinking about inflation, which is what makes them believe in the wage and price spiral theory. They believe that consumers tend to steer the economy with their spending. This does not have to be true in many cases, though.


If a central bank such as the Fed starts printing money and flooding the economy with it, that money is going to go somewhere. It does not have to go to consumption of goods and services, it can go to the financial markets and spur speculation.


That this happened in the last few months would be a good bet, because the recent attempts to save the economy has mainly been a huge bailout of financial companies, transferring massive amounts of wealth over to them.


If all this money had been transferred to American citizens in the form of living allowances or something like that, we might have had some sort of price spiral, but that didn’t happen. When Wall Street got all the bailout money, it started to push up prices of stocks again in the early spring, and a massive stock rally occurred.


So, I believe that the rise of the stock market has to do with an inflation of prices brought on by the financial bailout. This will most likely put additional upwards pressure on inflation. This is a kind of price spiral too, and this taken together with the excess of money in the economy makes inflation even more likely.


To sum up: the U.S. will experience massive inflation soon as a result of the money printing activities and the recent stock rally is an illusion brought on by the financial bailout.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

A Job That Doesn’t Need Doing - The Structural Crisis of 2009

A structural economic crisis is very different from normal economic crises. With an astonishingly accurate history, they come around just about once every 40 years. When a country slips into a structural crisis, it means that there is really nothing that can be done about it, except to plan for a new future when the crisis is finally over.


Put more simply, a structural crisis means that the way in which a country has previously built its prosperity has come to an end. This is because the country has become dependent on a certain type of industry that has become obsolete, unable to compete or can no longer grow.


The following is a timeline of structural economic crises in America over the last 120 years:


1890 - The Long Depression


For a few decades, the U.S. economy had been growing rapidly as a result of the development of natural resources and huge investments in infrastructure, most notably railroads. This ultimately made the entire economy dependent on the continuation of this rapid growth, because so much money had been invested the driving forces behind it. When the crisis came, mines, railroads, factories and farms closed on a large scale, and unemployment eventually reached close to 20%.


Fast forward 40 years:


1929 - The Great Depression


In my view, the Great Depression was caused by a combination of a tech bubble and a real estate bubble. These bubbles were inflated with the help of too much credit and speculation with borrowed money. The U.S. economy had become dependent on the continuation of these bubbles, and the high value of the stock market, and when that was no longer sustainable, everything came crashing down. The outcomes are well known: unemployment of 25%, bread lines and lost savings.


Fast forward 40 years:


Early 1970s - Oil, Gold and Manufacturing Crisis


Another classic type of structural crisis is when an industry becomes completely unable to compete, seemingly over night. This happened all over the Western world in the early 1970s in the apparel sector. Huge numbers of people used to be employed in this sector prior to this time, but Asian competitors took over the market completely. This was only a part of a series of Asian manufacturing takeovers that continues to this day.


The 1970s crisis was multifaceted, and not as severe in the short term, although it could be argued that it partly set the stage for the next crisis. The 1970s crisis also involved the end of the Bretton-Woods system and the oil embargo.


The most notable long-term outcomes in the U.S., though, was a decline in manufacturing of apparel, steel, ships and many other industrial goods, because American companies were unable to compete with imported goods. This crisis permanently changed the make-up of American employment in general, as manufacturing jobs kept getting lost (in relative terms) even after the crisis had passed.


Fast forward 40 years:


2008 - Subprime/Derivatives/Credit Crisis


Out of the three structural crises I have briefly described, the current crisis is certainly the most similar to the Great Depression. The similarities keep adding up every day, but the most striking similarity is the fundamental causes: a real estate bubble (preceded by a tech bubble), built on too much borrowing and speculation with borrowed money.


Put in other terms, the dependence on Wall Street in particular really unite these two structural crises. Speculation with borrowed money, the government’s vested interest in the continuation of the bubble, ordinary people’s reliance on the bubble itself: the situation today is almost exactly the way it was in the 1930s.

What I'm actually saying by giving the example with the 40-year cycles is that it seems that it takes 40 years for an economy to develop different types of imbalances. These imbalances can take different forms, but all lead to the same thing: a structural crisis.

For a polticial discussion, imbalances that lead to structural crises are very helpful tools in trying to figure out the best way forward for an economy. There are distinct imbalances that can develop both on the left and on the right. Today's crisis is one that developed on the right, and the crisis in the 1970s was a crisis on the left.

Put simply, when an enormous accumulation of capital occurs in the financial sector, or in an oligarchy, a severe imbalance in the economy has developed. That was the case in the 1930s as it is today. This leads to a structural crisis.

Conversely, when the government tries to steer the economy too much in an artificial way, the industry usually becomes uncompetitive. This was the case with the British auto industry in the 1970s and the Swedish shipping industry in the 1980s. This also leads to a strucutural crisis.

What we see in this pattern is another example of a political pendulum swinging back and forth. Judging by this pendulum, the next structural crisis in the U.S. will occur in 2050, and it will be a structural crisis coming from the left.



When an economic system becomes reliant on speculation alone, which is the case now and in the 1930s, I believe that the crisis will be more severe.

Before the Long Depression and the crisis of the 1970s, the U.S. had overextended itself in particular industries, but there was at least something to show for it at the end of the day. There were goods and infrastructure available that people legitimately needed, but a crisis which has Wall Street speculation as its main feature leaves only a black hole.


Financial speculation is a job that doesn’t need doing. It benefits no one in the long run. Speculation inflates bubbles that in the end do a lot more harm than good, particularly to ordinary people who don’t see them coming.


Speculation doesn’t provide a good source of funding for businesses and their new ventures, both venture capitalists and businesses can attest to that. Most importantly, as we have seen now, it can bring down an entire economy if it goes on for long enough.


Whether you are on the left or on the right, financial speculation is your enemy. I believe that the U.S. will fall into a depression either this year or in 2010. History is screaming it from the roof tops.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

Geithner's Lies - A Preview

The famous “bank stress tests” are in their final stages right now. On May 4, Geithner is going to present the results, and those are certainly rather predictable.


The tests were created in order for the Treasury to be able to paint as rosy a picture as possible, of the situation that the country’s banks are in. This has not been denied, and in fact, it has been confirmed, although using different words.


“The point of doing this is to avoid a panic, not cause one”, said Geithner recently.


What happens if the government finds something that is worthy of a panic (which it probably has)? That’s where Geithner’s lies and acting skills come in.


Early this week, results of the tests started to leak out. The rumor on Wall Street is that 16 of the 19 major banks are actually insolvent. If that shouldn’t cause a financial panic, I don’t know what should.


I don’t know if this is true, but it certainly could be. Like I said, it’s a rumor.


The government released the details of how the tests were conducted today. This is how the stress test works:


The banks have to figure out what would happen to them if:


1. unemployment went up to 10.3%,


2. home prices fell an additional 22%, and


3. the economy contracted by 3.3% and remained flat in 2010.


Note that the banks are conducting these tests themselves, and it is not exactly in their interest to tell anyone that they’re insolvent. Supposedly, if the government does not find the information coming from the banks to be credible, the banks will have to explain themselves.


In short, there is no independent auditor, only two vested parties who both want to paint a rosy picture and reveal as little as possible.


So, Geithner’s speech on May 4th is rather predictable, no matter what the government finds. In fact, I can give you the short version right here right now, so you won’t have to spend time listening to it on May 4th.


Dear members of the press, (this is Geithner speaking)


For three months, the U.S. government has been conducting stress tests on the nation’s major banks. I’m here today to present the findings of these tests.


The tests were conducted in the most stringent of ways, in order to make sure that the nation’s banking system can hold up in our current economic times. We tested the banks under fictitious, harsh economic scenarios that are very unlikely to become a reality.


Our findings show that despite continuing difficulties in our economic system, and even under a scenario of significant further deterioration, our nation’s banking system remains safe and well capitalized.


In recent months, the banks have taken unprecedented steps to shore up their liquidity positions by writing down legacy assets and by attracting new capital. This, along with an apparent improvement in the overall economic condition of the country, makes it clear to us that our financial system is on the road to recovery.


Blah, blah, blah, banks are great and Wall Street should love me…


Thank you, and no questions please.




I have a strong feeling that the actual speech that Geithner will give, is going to consist of absolute rubbish. Everybody on Wall Street knows he’s lying, but they don’t care, they only care about how convincing his lies are, because that is what will move the market in the weeks to come.


For ordinary people, all this means that even more vital information is being swept under the rug in order to preserve the financial oligarchy, which is the mission that Geithner seems to think that he was given by the American people.




Moreover, I advise that the winner-takes-all voting system should be destroyed.

Wall Street Calls Bank of America's Bluff

On Monday, Bank of America presented a fantastic first quarter result with a profit of $4.2 Billion! In the face of insolvency, losses that amount to 20 years of profits, and purchases of Merrill Lynch and Countrywide that very likely doubled the bank’s exposure to toxic assets, how is this possible??


With such great news, Wall Street must have gone crazy, because Bank of America’s stock went down by 24% the same day. What happened??


The answer is as simple as it is predictable: Bank of America’s report is utterly fraudulent.


I looked at the SEC report myself, and found that a little over $2 Billion of the “gain” is a result of the fact that Bank of America has decided, with no basis in reality, that its toxic assets are now worth a hell of a lot more than what they were only a few weeks ago. They can do this because the rule known as mark-to-market has been repealed.


Also, Bank of America makes reference to other new GAAP rules (rules that govern accounting), which apparently (according to them) enables them to put assets in “special purpose entities”, away from the balance sheet. This is what Enron pioneered, and it is what eventually brought down that company.


I could find no numbers concerning how much had been hidden away from the balance sheet this time, but the bank obviously doesn’t want that to be found. This makes me believe that the real number is very big.


Think of Bank of America as a regular guy. This guy has a yearly salary of $30,000. He has a credit card debt of $2,000. He also owes a loan shark a further $10 Million, and he lives in his aunt’s house.


The guy prepares a loan application to buy his own house, and in it he states that his income is $100,000, that he has a credit card debt of $2,000, and that he already owns his own home.


The only thing that’s accurate in his application is the credit card debt. The reason for that is that it can be checked by the bank. Everything else is pure fantasy.


It is the same way with SEC filings. You can bend the rules so much that SEC reports hardly mean anything anymore. You can’t trust ratings agencies or auditors either, because they get paid by the companies that they are supposed to be scrutinizing.


All this makes Wall Street look at a certain metric: quality of earnings.


“Quality of earnings” is not mentioned very often in financial journalism, probably because it seems to suggest that not all profits are actually a reflection of a company doing well. Quality of earnings describes to what degree the earnings of a company can be attributed to actual sales, as opposed to accounting wizardry.


I have over the last year argued that there has been an alliance between politicians, Wall Street, banks, regulators and the media to cover up the true extent of the financial crisis in order to preserve the financial oligarchy. By doing this, they have been able to uphold the illusion that everything is fine.


Even though Wall Street traders are not saying it out loud, they seem to be breaking ranks. They can no longer push up the prices of bank stocks and other financial stock in the face of such obvious and rampant fraud.


Expect stock markets to go much lower in the coming months.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

What Actually Caused the Great Depression?

During times of economic crises, wacky theories concerning the origin of the crisis tend to spread like wildfire. That was the case during the great depression, and that is the case now. Some people might include my theories in that category, but that is, of course, purely based on ignorance.


At present, there are literally hundreds of theories about the crisis out there, and discussions about the great depression have also resurfaced.


With respect to the great depression in relation to the current crisis, almost all the arguments can be boiled down to the following question:


Was the great depression caused by the easy access to cheap money?


As President Obama has noted, the discussion about the great depression is far from over. The factors behind that crisis are very complex, and far beyond the understanding of most politicians. Obama recently spoke in disbelief about the continued disputes over this.


There are a few things that I believe are beyond discussion:


- The stock market crash set off the depression because so many had so much invested in the market.


- The stock market crash was caused by overly inflated values of stocks.


- The overly inflated values of stocks were caused by an unprecedented amount of speculation with borrowed money.


Following this line of reasoning, the question remains: what causes speculation? If we can nail down what causes large-scale speculation, we might be able to answer what causes depressions.


More specifically, circling back to my initial question, “was the great depression caused by the easy access to cheap money?”, the question becomes:


- Does easy access to cheap money cause large-scale speculation which in turn causes depressions?


The answer to this question can be found more easily than one would think. If you can identify periods of time in history when money was cheap and abundant, and ascertain that rampant speculation always occurred during such times, you have your answer.


A quick look back in history tells us that this is not so. There have been many periods in history when borrowing money was cheap, but when speculation was minimal. This is noted in what is widely considered to be a standard work on the depression, “The Great Crash”, by John Kenneth Galbraith.


During several periods in the 19th century, cheap money was available, but without the result of large-scale speculation. This was also the case in the 1950s and 1960s. So, to say that cheap money alone causes large-scale speculation would be erroneous from a scientific standpoint.


I tend to believe that speculation can trace its roots to something far more basically human. I believe that speculation does not occur just because it CAN occur, but because there seems to be a reason to for people to speculate.


Greed is a human emotion that can never be extinguished. Everyone is guilty of it, and when a human sees an opportunity to make a quick buck without effort, whether this is prudent or not, he or she often takes that opportunity.


The most classic example of speculation is the tulip bulb speculation in Holland in the 16 Hundreds. This business went so far that a single tulip bulb could be worth an entire year’s salary at the time. What this speculation frenzy also featured were contracts with rights to buy bulbs in the future, trading fictitious bulbs that had not yet been grown, and all the other classic speculation behaviors that we see again today.


We may think we’re so advanced today, but greed, this inescapable human emotion, has already conjured up the complicated schemes of speculation many times before in the history of man.


If you can buy a tulip bulb and sell it the next day, and then not have to work for the rest of the year, who wouldn’t do that? If you can buy a house in Florida, sell it within weeks for a comparable profit, how could you resist?


In short, humans need a reason to start speculating, and in the case of the great depression, people got excited about mainly two things which will sound familiar to everyone today: real estate and new technology.


People started buying second homes to be resold shortly afterwards, and stocks in new technologies like radio and automobiles.


Speculation frenzies will probably always exist, but when such a frenzy gets out of control, it can shake the very foundations of society. When too many people start getting in to the frenzy, perhaps even the government (by relying on the stock market to provide basic public services, such as pensions, infrastructure and, of course: jobs), the country becomes utterly dependent on the continuation of the speculative bubble.


A speculative bubble can never be upheld forever, and it can never be re-inflated, so when a bubble of sufficient proportions is created, a country will not be able to avoid a depression.


In the decade before the depression, President Coolidge repeatedly praised the wonders of the stock market. In addition, most of the powerful politicians in Washington, and the members of the Federal Reserve Board, were themselves highly vested in the stock market, and were hence not at all interested in reining it in, even though they could see ominous signs.


It seemed at this time that all of America could become prosperous without any effort on the part of Washington politicians. This is extremely similar to how the Reagan, Clinton and Bush Jr. administrations operated. Hands off, hope for the best and leave the provision of American prosperity to private corporations.


Then as now, the United States was utterly dependent on the upholding of the inflated values of the stock market.


The question then becomes whether the current speculative bubble is large enough to cause a depression. I believe that the answer is, unequivocally: yes.






Moreover, I advise that the winner-takes-all voting system should be destroyed

Another Financial Atom Bomb

I simply cannot fathom the stupidity of American lawmakers anymore. For months now, they have been lobbying for mark-to-market accounting to be suspended, cheered on by Wall Street. On Thursday, they got their wish.


The Financial Accounting Standards Board decided on the change after Congressional hearings during which they had been severely pressured by politicians from both parties.


Mark-to-market means that banks have to value their assets at market price. When banks have worthless assets that nobody wants to buy, that used to mean bad news for the bank, as if a fruit stand were full of rotten apples. Not anymore.


Thanks to this change, banks can just make up what they think the assets “should be” worth. This will make it seem as if the banks are doing much better, and we will most likely see a big change already in the first quarter reports that are coming out soon.


This change is nothing short of ridiculous. Is anyone going to believe that the trouble that the banks were in is all of a sudden over? Did the rotten apples become red and shiny again?


Another reason for the change is that Geithner thinks he has come up with a round-about way of giving more taxpayer money to individual bankers. It works like this:


1. the banks are allowed to decide themselves what assets are worth and put that on their books


2. when the recently announced "public-private partnership" to buy toxic assets (to the utter detriment of the taxpayer) will start, the government will be able to grossly overpay for the toxic assets, because by that time these assets will have been marked up dramatically by the banks themselves.

It looks like the government is not overpaying, because they're just paying what's on the books...

3. again, an enormous transfer of wealth from taxpayers to bankers has occured.


The most significant factor in all this is not that one would be well advised to stay away from bank stocks; it is the implications for the whole economy. Until the problems at the banks are exposed, we cannot solve the financial crisis.


What the suspension of the mark-to-market rule will do is to bury the toxic assets even further away from sight of regulators and the public, and enable banks to go on with their zombie existence until its time for the next bailout.


And there will have to be more bailouts as a result of this disastrous policy.


This policy change is, in essence, a complete endorsement of the “Enron Accounting” that has already brought the world financial system to its knees. Why U.S. politicians have decided to legitimize it is totally beyond me, and it is an unbelievable outrage.






Moreover, I advise that the winner-takes-all voting system should be destroyed

Financial Minority Reports

Since taking office, Timothy Geithner has been an absolutely appalling Treasury Secretary with only one strategy: to pamper and protect Wall Street as much as possible with taxpayer money while opposing legislation that would hold Wall Street accountable for having run the economy into the ground.


I was thus highly surprised when he on Thursday came out with a sweeping program to deal with the deadly mess in the financial markets, a program that was meant to deal with both long and short term problems.


The most important suggestion in the program presented by Geithner is the creation of a single regulator, “with responsibility for systemic stability over the major institutions and critical payment and settlement systems and activities”.


This may not sound like much on the surface, but it actually deals with some of the central problems in the American financial system, as well as problems in the academic world of economics.


It is a well-known fact that the American economy is a so-called “boom-and-bust” economy. It cannot seriously be denied that this is a result of the fact that the U.S. has an essentially unregulated economy. The lack of a social safety net is also a significant contributing factor.


Geithner’s new, single, regulator would actually, according to him, continuously research the dynamics of boom and bust, and try to prevent the harmful results.


More specifically, the new regulator would try to find out when an asset bubble is building, such as the tech bubble in the 90s, or the housing bubble of today, and then try to stop it in its tracks.


This is critically important, and it is a strategy that can prevent financial crises, similar to the murder prevention strategy in the movie “Minority Report” with Tom Cruise.


In that movie, some type of psychic people called “pre-cogs” can see into the future, and they can see who will commit murders in the future. The would-be perpetrators of murder are then arrested and jailed in advance, so that the murder never actually takes place.


There is no ”pre-cog” needed for the new regulator, nor will anyone have to go to jail for crimes not yet committed, but studying emerging asset bubbles in the economy and acting on the findings will produce a functionally similar result: preventing pain and suffering in the future.


The way this could be done is rather simple. The new regulator would study anomalies in the market. If the price of an asset, say real estate in Florida, starts rising unusually quickly and without a clear reason, that would be a strong indication of a bubble.


This would then be made widely known, the public would be strongly cautioned, and perhaps some temporary legislation could be put into place in that region (temporary changes in zoning laws to prevent over-building maybe). The regulator would immediately look for evidence of predatory lending and other fraud in Florida, and act on anything it would find.


On the other hand, let’s say there were an area in Florida where new and profitable industries were being built. Jobs were being added and the population was growing. At a time like that, it would make perfect sense for real estate values to go up, so an instance like that would be ignored by the regulator after an investigation was done.


Unfortunately, asset bubbles are poorly understood among academic economists in the U.S. today, or at least they are said to be poorly understood. In reality, asset bubbles are products of simple, basic human behavior. To understand asset bubbles, you need to know only 2 things:


1. When everyone else is doing something, people in general will automatically think that it’s a good thing to do. It’s a basic function of being a pack animal.


2. When it seems that there exists a real possibility of making money quickly and easily, even the smartest people get sucked in to, for instance, a speculative bubble. This human tendency is the reason why some of the most successful investors on Wall Street invested their own money with Bernie Madoff.


However, these facts are rarely recognized by American economists because they defy free-market orthodoxy.


Hence, Geithner’s new program of establishing a single regulator is a big step away from the free market orthodoxy that is prevalent among the vast majority of public and academic officials in the United States.


I believe that the program could become an extremely important tool in a sustained economic recovery in the United States.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

The Geithner Plan - Same Old Crap

Geithner’s new plan was presented with a complexity that seemed engineered to fool people into believing that it was not what it has always been: a direct continuation of Paulson’s original Wall Street give-away plan.


The CEO of an investment firm called “Fusion IQ”, Barry Ritholtz, said it best yesterday when he was commenting on the stock market rally:


“This is the free-money rally. Traders like the fact that there’s a boatload of cash headed their way”


At least he’s being honest about what’s going on. The “boat” is being loaded up with cash by docile American taxpayers, who have never stood up for themselves to claim their rights as citizens.


Now we're seeing the results. J.P. Morgan Chase is, again, planning to expand it's fleet of corporate jets while tent villages are growing across the country and the number of Americans without health insurance is nearing 100 million.


I would like to offer a condensed version of the plan for those who have not kept up with Geithner’s change of vocabulary (which is all it is). The plan has the following features:


- HUGE subsidies for hedge funds and other similar entities to buy toxic assets


- potential for these buyers to get almost all the gain if there eventually is one


- minimal potential for the taxpayers to get any gain if there eventually is one


- minimal risks for these investors if the investments don’t work out


- enormous risks for the taxpayers if the investments don’t work out


- borrowing from the FDIC to finance the hedge fund subsidies. This is a truly desperate move, and one which actually threatens the safety of money in everyone’s bank accounts. The FDIC is already under funded, and this move could be disastrous down the road


The government is really getting desperate. Borrowing from the FDIC is something I never imagined would happen.


By the same token, for the government to buy its own treasury bills, which was announced over the weekend, is a very desperate move, that has only happened in times of really severe crises before (like when the U.S. felt it was going to be attacked with nuclear warheads by the Soviet Union in the 60s).


I’ll make a few predictions: In a couple of years, we will have interest rates above 10%, housing prices 20% lower than today, a stagnant stock market, inflation above 5% and unemployment at sustained high levels.






Moreover, I advise that the winner-takes-all voting system should be destroyed

AIG Bankrupting Cities Across America?

Although the news about AIG bonuses yesterday was disturbing, it was not nearly as disturbing as some of the other news that came out at the same time.


Up until a few days ago, the names of the institutions that AIG had paid with bailout money were kept secret, but when we found out who they were, there was one category that stood out starkly: municipalities in California.


I decided to do some research on how much money belonging to cities and municipalities AIG is holding. What I found out was frightening.


Municipalities all over the country have evidently handed over money to AIG from their municipal bonds. This means that cities across America are at risk of losing billions of dollars, and risk going bankrupt if AIG does!


AIG states on its website that it directly manages $72 Billion of these assets that belong to cities across America.


At the end of the day, these assets are actually made up of schools, hospitals and libraries in towns everywhere. It is almost for certain that we’re talking about much more than $72 Billion being at risk, which is a staggering number to begin with.


In addition to handing over immense amounts of cash to AIG, cities have been making extremely risky financial bets through Credit Default Swaps, which is evidenced by the payments to municipalities in California, as I mentioned in the beginning.


AIG owes a lot of people money for these swaps and is like a bookmaker who can’t pay the people who all bet money on the winning horse that nobody thought was going to win. The difference here is that all those people who are supposed to be paid money by AIG have decided to keep quiet about it, presumably so as to not create a panic.


With respect to all the cash that was handed over, everyone may not know what the so-called “municipal bond market” is, or how that relates to AIG, but it works something like this:


- individuals or corporations give money to, for instance, the city of Los Angeles for the construction of a school


- Los Angeles promises to pay a 5% return on the money 10 years in the future. That is “the municipal bond”


- Los Angeles hands over the money to AIG, in order for AIG to make that 5% for the bond holders. The section of AIG that does this is called the “Fixed Income” unit


You may realize where I’m going with this: AIG hasn’t exactly been the best or wisest investor over the last few years. AIG is now a black hole of losses, and it almost doesn’t matter how much taxpayer money you put into the company, most people who are owed money by AIG will not be paid.


For now, AIG is on life support with taxpayer money and with the temporary illusion peddled by Washington and Wall Street that everything is going to be just fine. It won’t.


There is a strong possibility that problems with municipal bonds will add a whole new dimension to the crisis, and that cities across America will have to choose between closing schools or paying bond holders when AIG eventually files for bankruptcy.


I have argued before that the main difference between the United States and other industrialized countries is that the U.S. does not safeguard a standard of living for its citizens, and that basic services are, like everything else in this country, a gamble for everyone. If the gambles at 70 Pine Street in New York (the AIG building) don’t work out, kids in California may not go to school.






Moreover, I advise that the winner-takes-all voting system should be destroyed

AIG Can't Believe We're Letting Them Do This

As several newspapers have reported, AIG has as of Sunday, March 15, paid out an additional $165 Million in bonuses to its executives and other employees.


This money is obviously coming right out of the pockets of taxpayers, and the situation has now gone from ridiculous and criminal to something worthy of a march with flaming torches.


When will the American people wake up!!?? The United States is being robbed in the most real sense of the word. The executives of AIG have no intentions of cleaning the mess up, nor could they, nor would they ever even know where to begin.


What is happening now is pure and simple theft, and it is happening as the amount of unemployed Americans is nearing 15% (counting those who have given up looking for work, who are curiously not included in most official statistics), and the number of Americans without health insurance is nearing 100 Million.


America’s big corporations have been laughing working Americans in the face for decades, and are continuing to do so even as those Americans lose their jobs, their homes, their health insurance, their very way of life and hopes for the future.


How far are working and formerly working Americans willing to go in order to protect the incredible transfer of wealth to the top 1% of the population?


How far are they willing to go to stand up for the right of robber barons to rip everyone off by staving off regulation, labor rights and consumer rights?


Pretty far it seems, if you are to believe what the Obama administration is saying. Even though Obama received the strongest of mandates for change in decades, particularly with respect to social justice, he has apparently decided that that mandate meant something completely different.


Obama’s mandate apparently meant galvanizing the rights for robber barons to rob, not giving Americans an actual healthcare alternative (this can be solved by private means alone, according to Obama) and continuing bonus payments to bankers who brought the world economic system down (don’t even think about firing them, they must be retained with bonuses for their great skills…).


AIG has received $170 Billion in taxpayer money already, which is money that will definitely never be seen again. That money went to satisfy claims for a fraction of the speculation insurance payments called “credit default swaps”.


AIG could be on the hook for, literally, trillions of dollars for these swaps. What is important to understand is that AIG has, for a long time, not had any intention of running a successful business.


When you run a successful business, you carefully consider the pros and cons of a certain investment, and act accordingly. AIG, Lehman Brothers, Bear Sterns and many others had a different plan: shuffle money through the company, take a fee, and let the government hold the bag when the party’s over.


The largest banks and financial institutions in the U.S. knew that they would be bailed out when the shit inevitably hit the fan, and that is what Lehman Brothers was counting on, but didn’t receive.


These companies acted accordingly: they enriched themselves for as long as they could, and would run for the hills as soon as it all came crashing down.


AIG is still in the process of being bailed out, so naturally, the executives are still trying to enrich themselves until the very end. They probably can’t believe that we’re still going along with this.


What the hell is wrong with people? Is there nothing left of self-respect in Americans? Is there no sense of justice left? Is there no pride?

It is your duty to claim your right.





Moreover, I advise that the winner-takes-all voting system should be destroyed.

Libertarianism and the Crisis

As the economic crisis continues to deepen, a lot of Americans are questioning the system that allowed it to happen, for good reasons. The writing was on the wall when Barack Obama was elected President, in a move that sent a very strong signal of the desire for political change in America.


As the U.S. government has struggled to deal with the economic crisis, the American public has grown more skeptical of the ability to solve it, when it seems that bailouts, stimulus packages and housing programs have little effect on economic recovery.


If an economic recovery is unattainable, then the only alternative is economic restructuring, meaning that current systems will have to be replaced by new ones. The Obama administration’s response has recently been to move left on the political spectrum, for instance by proposing national health care (as an eventual goal) instead of privately provided health care. This is actually a type of restructuring, as it amounts to the replacement of a system.


The response from Republicans has been confused and offered little else than calls to curb spending. With respect to the economic structure that allowed the crisis to build up, Republicans were the ones to create it (along with Clinton). As a result of that, the incumbent American right has little to say in terms of criticisms of the economic structure, and that is where Libertarians come in.


Voices from the Libertarian movement have grown stronger in recent months. the reason for that is simple: Libertarians advocate economic restructuring from the perspective of people on the right that is unrelated, and in some cases goes in contrast to, the views of traditional Republicans.


To sum up so far, Libertarians and Democrats currently claim to have economic solutions, whereas Republicans, in essence, don’t.


The Libertarian movement in The United States is multifaceted and sometimes confusing. The thinking behind the philosophy is always based on individual liberty, if you leave aside some more unusual philosophical currents such as “communist libertarianism”. The libertarian movement is by far the strongest in the U.S. out of any country, and perhaps as many as over 10% of the population describe themselves as libertarians.


Libertarians don’t like to be placed on the traditional political scale, but I would argue that there is no problem doing that, and that anything else would be philosophically incoherent. The political scale is rather simple: the more government intervention one supports, the further left one is, and the less government intervention one accepts, the further right one is. The furthest right is an anarchist, and the furthest left is a communist.


The reason that libertarianism in America is surrounded by confusion is that cultural issues have a much stronger position in politics than in most other countries. In the public consciousness, things like abortion, gay marriage and drug politics have been thrown into the traditional political scale. This however, is not philosophically coherent. The traditional political scale is based on notions of government intervention, or lack thereof.


Both Libertarians and Republicans support a hands-off approach to income distribution and the economy in general, but Republicans do not support a hands-off approach to cultural issues, which Libertarians do. That fact sometimes makes Libertarians appear, in the eyes of Americans, to be further to the left than Republicans. I argue that this cannot be so.


You cannot create a working political scale based on inherently different and complex issues such as abortion and gay marriage, which is why you must break such issues out of the political equation in order to reach philosophical coherence.


Libertarians support even less government intervention than Republicans, often dramatically so, which makes them further to the right than Republicans, and indeed further to the right of any other significant political movement in the world.


As I mentioned earlier, the reason that Libertarians have come into the spotlight more recently is that they have offered different ideas as solutions to the economic crisis. These ideas are meant to deal with the problem that there is an enormous mountain of debt in America, and that the current state of the economic system is unsustainable. The ideas are not without merit, considering how deep the crisis is, but I believe them to be far too dramatic, and very misguided.


A lot of Libertarians believe that the gold standard should be re-introduced, and that the Federal Reserve should be abolished. The results of doing that are very complex, but it has to do with the money supply.


By re-introducing the gold standard and getting rid of the Federal Reserve, the government would be much more constrained in its spending, and the size of government programs would have to be dramatically reduced. In other words, such a move is completely in line with the philosophy of as little government as possible.


Citizens would, for the most part, not rely on the government for the stability of their money, they would rely on gold itself. If the gold standard were introduced today, either the value of everything in society would have to go down dramatically, or the price of gold would have to go up dramatically. Either way, it would completely change the country.

Making these suggestions a reality would almost amount to a dismantling of the government as we know it. This in addition to the further and dramatic deregulation in most areas of economic, financial and private life that Libertarians support can only be described as anarchism. “Freedom of choice” can usually be translated as “every man for himself”, but that doesn’t sound as good.


It is therefore strange that Libertarians should come into the spotlight during this crisis, which was created to a large extent by deregulation, weak government oversight and a weak government in general.


Furthermore, Alan Greenspan, whom many today recognize as one of the major culprits of the crisis, is a life-long libertarian and follower of Ayn Rand’s philosophy. And although he was working within an institution that Libertarians wish to have abolished, he was doing so in the most Libertarian way he knew how: by deregulating and supporting an unfettered market in any way he could.






Moreover, I advise that the winner-takes-all voting system should be destroyed (which, by the way, would almost certainly lead to The Libertarian Party becoming much more influential in U.S. politics. But that’s OK, because all I care about is that every vote is counted!)

Decoupling America from Wall Street

Wall Street is a barometer for the health of the U.S. economy. Not because it has any credibility in predicting anything related to finances or the economy, but because Americans have allowed their fates to become inextricably shackled to that of Wall Street. All over the country, people are suffering, even starving and dying, as a direct result of the crisis and the societal structure in which Wall Street once flourished.


The commercial media is not reporting on it, but National Public Radio has been covering bread lines in Florida, fenced-in plots of land where people can live in their cars in California, and hundreds of people in the Midwest lining up to receive food packages from Save the Children. This is the reality of the crisis now.


We all know how it started by now. A long time ago, I wrote that institutions like AIG were like black holes, that the amount of debt in the U.S. exceeds the global GDP and so on and so on. Nothing can be done now to save the financial system as we know it, and that realization will come to everyone soon enough. America must start over. The country must be restructured.


The U.S. is not ready for this crisis, and this fact is intimately linked to the creation of the crisis 35 years ago, when America embarked on the road to anarchy under Nixon.


The real winners in the culture wars of the 60s were the libertarians. As cultural issues took over national politics, the traditional core of national politics: income distribution and societal economics, were swept aside, not to be seen again for a long time (at least not from the perspective of those who were not wealthy).


Somehow, the anarchistic libertarian way of organizing society became the norm for the U.S. government. “Every man for himself” and “the law of the jungle”, were not slogans in this process, but they might as well have been.


It was slowly decided that the U.S should follow its own route to prosperity, and one that entailed: no health care system, no elder- or childcare system, no real pension system, no real unemployment benefits, no labor rights, no consumer protection rights, no mass transit, no financial regulation, the world’s lowest taxes etc etc…


How could a country possibly make up for the lack of all these things that all other advanced countries have? The answer is: Wall Street. The free market was thought to be able to take care of all these things, which arguably make up the bulk of societal success and overall well-being of its people.


In other words, Americans didn’t just gamble their savings on Wall Street, they gambled everything. At this point, the country has only two choices: rely on Feed the Children or decouple from Wall Street.


Decoupling from Wall Street means purging the influence of speculation from the daily lives of everyone who does not actively seek it out. It means introducing stability and predictability for Americans who so direly need it. It means guaranteeing prosperity in the richest country in the wolrd. It means:


- providing national health care and collective bargaining for drugs, making private health insurance and expensive drugs obsolete. This would be a huge relief for both the public and corporations


- providing a good pension after a life of work through a national pension plan which is not subject to speculation


- heavily regulating the financial sector, and especially the mortgage sector, so that real estate price swings will be far less likely to occur in the future


- introducing much needed labor rights, including a much higher minimum wage and much stronger job security for everyone who is gainfully employed


- providing as close to free University education as possible, taking away the burden on families to save for college. (in most advanced countries, University is free, unbeknownst to most Americans)


The structural shift is absolutely inevitable. It is only a matter of time before the libertarian anarchy is a thing of the past.





Moreover, I advise that the winner-takes-all voting system should be destroyed.