Following the Advice of the Gallactically Stupid
In the movie, A Few Good Men, the character played by Tom Cruise rants at his superior officer about the prospect of going after a celebrated colonel because he believed the colonel responsible for the death of a marine, even though he had no evidence to support such a charge. All he had was a feeling that it was true. As it turned out, his feeling was correct and he was able to get the colonel to admit his responsibility. He did, in his words, "follow the advice of the galactically stupid" and it turned out ok.
In the real world this may work from time to time, though it must be exceptionally rare. And as I have been reading this morning of some galactically stupid advice given by Paul Krugman, I am inclined to believe that following it won't turn out so well for the global economy as it did for Sorkin's fictional character.
The Wall Street Journal this morning has a piece outlining the advice, which is a criticism of Germany's Axel Weber. Krugman says, in response to the prospect of Weber taking over as head of the ECB, "If you are looking for someone who is aiming for zero inflation while unemployment is rising to 13%, then Weber is definitely the right guy."
His sarcasm at the prospect is because of his belief that the government needs to keep borrowing and spending to get the economy back on track. The Germans, indeed, all of Europe is now setting on the opposite track. The scare in Greece has shown them that relying on low interest treasury bonds to keep their countries' finances straight is a fools game, and one that will eventually blow up on them. They see that they must cut back their spending. They know that if they don't, they will wind up in the same position as Greece. The problem for Krugman is that this is contrary to his Keynsian faith. Nevermind the fact that it is this precise faith, and following the advice of people like Paul Krugman that got us into this mess in the first place.
A number of blogs are reporting this quote this morning, but my favorite quote about it comes from Mike Shedlock at Mish's Global Economic Trend Analysis.
Bernanke is so dense he could not see the approaching debt tsunami two feet from the shore.
He did not see a housing bubble, he did not see a recession, he did not see unemployment at 10% and he cannot find his ass with both hands and a roadmap. Nor can Krugman.
Unfortunately, though Krugman would like to blame George Bush for all the ill's of the world, he can be no Colonel Jessup in this screenplay. The problem started long before Bush was president. In fact, it started long before his father was president. We've been riding the Keynsian train for decades, and we're out of bubbles to inflate. So, in this case, rather than following the advice of the galactically stupid, I think we're better off listening to it, and then doing precisely the opposite.
by Carlton Smith
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Americano Moderno Fascismo
In the aftermath of World War I, the allied countries burdened Germany with the blame for the war. To exact punishment for it, heavy fines and restitution payments were placed on a German people who had no way of paying it. Under the weight of this debt, its economy collapsed.
In desperation, the German people turned to a party of thugs. Thugs who supported the "working man." Thugs who supported the downtrodden. Thugs who spoke of a great new Germany, created by the modern ideals of socialist economy, and ready to stand up to those who had imposed this burden. The creative minds of those thugs convinced their people that the Jews were to blame for their circumstances. By every right, it seems, those thugs believed this to be true. They didn't understand the economics of debt any more than people here do today. So to them, it was perfectly reasonable to believe that the blame lay with a peaceful, yet separate population that lived among them.
Today, in this country, a burden of debt is weighing down our economy. An economic philosophy largely ignored by our institutions of higher learning explains how this happens, but our "experts" are not familiar with this philosophy. Those who are have seen this situation coming. They warned of the dotcom boom and bust. They warned of the housing bust. Their warnings came true. And today their warnings are more dire than ever. Prevailing economic thought teaches us that we need to "stimulate" the economy to launch into true recovery. However, those who predicted our current predicament tell us that the root of the problem is debt. Stimulus creates more debt. And you can't solve a debt problem with more debt. Not unless your end goal is to go bust.
And that's exactly where we're headed. But going bust for a nation isn't the same thing as it is for an individual, or even a large corporation. When you or I go bust, we file bankruptcy, our creditors don't get paid, we have difficulty getting credit for a while, and our slate is wiped clean. For corporations it is similar. Most often pieces of the corporation are sold off to those that can make good use of it's components. But when a nation goes bust the whole society is left in limbo. Chaos ensues.
Today, across Europe, where the debt crises is even more advanced than it is here, public labor unions are organizing and executing protests against the austerity measures those governments are instituting to avoid economic collapse. Just as we have seen here recently with teachers unions in Illinois and New Jersey, student groups in California and others. These are the forces that are organizing today. They haven't created a scapegoat like the German thugs of the 20's and 30's yet. But the keyword is, yet. They are putting pressure on our nation and the nations of Europe to not cut back spending. They want the debt load to continue, regardless of whose back it's put upon. This debt can only lead to catastrophe.
And when catastrophe is realized and a nation goes bust, someone always rises from the ashes. History teaches us that it's usually those who are already organized. And of those who are organized, usually the most ruthless prevail.
by Carlton Smith Print This Post
Stranger than Fiction
You really can't make this stuff up. From a piece by Calculated Risk over the weekend...
From Danny Hakim at the NY Times: New York Plan Makes Fund Both Borrower and Lender (ht jb)
Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund.And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.
Oh my ...
Really? How does that work? Can I borrow money from my savings account to make deposits in my savings account too?
Where does the madness end?
"Move along folks. There's nothing to see here"
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The New York Times and Willful Blindness
In an editorial piece today, the New York Times warns readers about getting into too much of a tizzy about deficits.
The Obama administration has warned that the new austerity drive could undercut economic recovery and has pressed the case that stronger countries, such as Germany, should not slam on the brakes. In a letter to G-20 colleagues, Treasury Secretary Timothy Geithner warned that budget cutting won’t work “unless we are able to strengthen confidence in the global recovery.”
What the New York Times needs to get is that Keynsian economics has failed. There is no recovery. The so-called stimulus has done nothing but prolong and deepen the economic pain our modern economy is only beginning to realize. We're replacing demand with debt. Debt that will have to be repaid. Debt that caused the problem in the first place. You can't solve a problem caused by debt with more debt.
The longer we cling to this pipe dream of recovery and the efficacy of stimulus, the longer and deeper this crisis will be. The New York Times is willfully blind to economic reality. They show their hand when they state, "nearly 1 in 10 are out of work," using the rosiest unemployment statistic around, which ignores those who have fallen off the unemployment rolls, stopped looking for work or accepted part time work in lieu of badly needed full time work.
The New York Times wants us to believe that it will all be better if we just stick to the plan. Follow their advice to all of our peril.
by Carlton Smith Print This Post
Time to Pay the Piper
From this piece today at the Market Ticker, Denninger is once again on his soap box warning of things to come...
The so-called "bailout" of Greece will soon be exposed as not really a bailout but rather an unfunded mess that cannot be funded. When that realization enters the investment consciousness I fully expect the equity and bond markets to undergo a cataclysmic upheaval far worse than Lehman Brothers, as there is literally nothing that can be done at that point beyond a default on the unpayable obligations and the resulting impact on balance sheets - which will render major financial institutions insolvent...
The inevitable consequences of this decision cannot be avoided. They can be and have been delayed for two years, but we can't prevent them from being manifested.
The nations that decide to do the right thing first will be the ones that emerge with their governments and societies more intact than the others. This does not mean pain avoidance, but it may well be the difference between lots of pain and loss of national sovereignty - or worse.
We looked at the socialist Utopia in Europe and pined for an enlightened government that would afford us the same laundry list of benefits. We said, "If they can do it, why can't we?" Well, as we are seeing now, they can't - and neither can we. The trouble is that the end game to this is not a matter of a little bit of time collecting unemployment and then ready for the high times again. It's much more serious than that. We're playing with history here. If you have never spent much time wondering what hungry people rioting in suburbia would look like, you may want to ponder it. And you may want to figure out what you might do to protect yourself if it happens.
I have seen no evidence that our government is willing to stop it.
by Carlton Smith Print This Post
Silver and Gold
Here is an interesting piece by Karl Denninger at the Market Ticker from over the weekend about gold and silver and their value as currency. I've heard all the rants telling everyone to buy up as much gold as they could and the hyperinflationists all tout it as the one thing you must have to protect yourself.
My personal take has been that gold is currently bubbled and will soon collapse, leaving those that buy it now with far less than they paid. Since I believe what we are currently in is a deflationary spin, gold will not serve as a hedge. I have, though, advocated buying gold as a hedge against a complete systemic collapse because it will give you something of value to trade that people will trust - but certainly not as an investment or hedge against inflation.
Denninger's piece has me thinking now that silver is probably the better metal to have as a hedge against a systemic collapse, though I still believe that even in such a situation gold would still retain what Denninger calls "credit value" sufficient to be tradeable for hard goods.
This is a very interesting read if you are at all interested in currency valuations in speculative vs intrinsic contexts.
by Carlton SmithEvery man has the ability to create wealth and most can create credit, which is the essence of money. When Wimpy promises to pay for that hamburger next Tuesday he has created, in point of fact, both credit and (by common definition) money. But only government has the authority to use force to extract both from you - that is, to force you not only to turn over current production but to compel you to produce in the future as well. You have your balance of powers exactly backwards sir.
Moreover, even though most people don’t realize it, even today the dollar is only acceptable as money because it is indirectly “backed” by Gold (via the derivatives market) i.e. you can get Gold in exchange for paper dollars on the open market. The proof of this lies in the fact that were, for some reason, the convertibility of Gold into dollars suspended today [on the open market], the dollar would instantly collapse.
Absolute and abject nonsense. The convertibility by law was disposed of by Richard Nixon. The dollar did not "instantly collapse" (although many said it would.) In addition there was no right of exchange during the period after FDR's confiscation through the repeal of those regulations and laws, and again, the dollar did not "instantly collapse." This claim is utter and pure horsecrap as the dollar was maintained through forty years of being non-convertible.
This is also exactly why the founders of America prohibited anything except Gold and Silver to be used as money, and why the governments go to great lengths to suppress their price.
The founders based our monetary system on silver, not gold. The reason for this is quite simple - silver is both consumed and thus has industrial purpose - that is, it has significant intrinsic value.
Indeed the banking cartel in London tried after the Revolutionary War to change this, going so far as to bribe Congress. Why? Because with gold-backed money and the control of said cartel, along with the lack of utility (intrinsic) value, gold supplies and the speculative premium in its value (its "moneyness") could be easily manipulated. With silver being an industrial metal this was dramatically more difficult to accomplish; ergo, silver was seen as undesirable by the banking cartel - and no wonder.
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