As the summer wears on and into the fall, housing prices will crash once again. Along with them, this time, durable goods will also crash. You'll see this reflected in the increasing number of "sales" at your local Wal-Mart and other retail stores. Formerly thriving strip malls will start to look like ghost towns, where they haven't already, and you will notice a increase of vacancies at your local shopping mall. Going into the mid-term election things will get bleak.

The elections make things a bit dicey, but I think it's safe to say regardless of the results, by the end of the year we will see another round of "stimulus" using borrowed funds. The size of the stimulus may be mitigated by how the elections are looking, or how they turned out (depending on the exact timing) but I'll give it a range of anywhere from $100 Billion to $600 Billion. It will be interesting to watch sales of treasury bonds after the stimulus is announced to see if there is any creaking in the hull yet. I predict that this round of bond sales will not fail, but will bring us precipitously closer to the point where they will. We may see yields start to spike, and that will be a dangerous sign if they do.

Europe is at least right now talking the talk of austerity. If they actually show they have the mettle to stick with it I predict a turnaround in the Euro and falling bond prices across Europe as investors start to look at the U.S. with a skeptical eye. However, this is a big IF. All the talk of austerity could be just that. Talk. Politicians are well known for saying the right thing at the right time to calm investors nerves. If it ends up showing itself to be just talk then I expect the scrutiny to stay on Europe while we dig ourselves an even deeper hole.

That's how I see it. We'll see what happens.

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The methodology misses stores that went out of business and have no retail sales. Circuit City is a prime example but also note that thousands of small strip mall stores are now shuttered as well. Some of that volume went to the surveyed stores making it appear sales went up.

This is quite typical of the data we frequently see from the government, and is parroted by the mainstream media. "Yay! The economy is recovering! Look at the numbers!" But this is nothing more than an illusion, reported to make you feel better about the situation while keeping you misinformed.

Here is a hypothetical to illustrate how the mirage works. Let's say that your neighborhood has a Home Depot and a Lowe's right next door to each other, and each store does about $100,000 in sales per month. Then the economy takes a downward turn, and both of their sales begin to decline. After about six months each store is only doing about $80,000 in sales per month. Let's also say that for some reason at this location the Lowe's profit margin is a bit tighter than the Home Depot's or the management is a bit more conservative or for whatever reason, Lowe's decides to close the store. After the store is closed, the following month, Home Depot records $150,000 in sales. That's quite a spike for the Home Depot, but the total sales for their type of products in that location has actually gone down another $10,000. So, an area that once supported $200,000 in sales between two stores now only supports one store doing $150,000. The trend is obviously downward. But the Census decides to collect data throughout this period only from the Home Depot location. And they track a huge spike the month after the Lowe's goes out of business and show a "recovery in retail sales."

It's a nice little game if your goal is to make people think things are better than they are.

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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.

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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.

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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 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.

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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.

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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.

Every 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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1. According to Mike Shedlock at Mish's Global Economic Trend Analysis, the most populous state in the nation wants to fund it's budget shortfalls with returnables. Seinfeld jokes aside, when are these jokers going to get it?

   Perez calls his plan "unique and creative approach." Governor Schwarzenegger called it "legal gymnastics." I call it "fiscal insanity".

2. David Hersanyi at Reason.com writes about the controversy surrounding Rand Paul's statements regarding the Civil Rights Act of 1964.

   I wonder if the mainstream media feels like it found a magic bullet to shoot down libertarian-type candidates by raising questions about their beliefs regarding legislation designed to control how citizens behave, when their behavior might not be politically correct. They're smart enough to know that 99% of the public has no idea what the specifics of the Civil Rights Act of 1964 stated, but that most listeners will equate such a statement with thinking that the politician is opposed to civil rights in general. The laughable part of this is that this demagoguery obscures the point that most mainstream politicians couldn't give a rat's rear end about civil rights and the politicians these questions are targeted to discredit would do far more to restore civil rights to this country than any of those crooked hacks currently in office ever would.

   Agree or not, shouldn't Americans armed with historical perspective be able to engage in constructive dialogue about the positive consequences—and some of the negative complexities—of legislation from 1964? (I know. Just kidding.)

   Some critics eagerly blasted "naive" libertarians, and others, like Washington Post columnist Eugene Robinson, used Paul's "extremist position" to wring their hands over the coming Republican crusade to overturn the Civil Rights Act—which fits neatly into an arching (and largely imagined) narrative that puts America squarely in the mid-1960s.

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1. Vox Day at World Net Daily writes about republican government, corruption and public unions.
   

   This goes well beyond ideology. Even the liberal media's standard bearer, the New York Times, was appalled to discover that New York is home to several ex-government employees who retired in their 30s whose pensions now pay them more than $100,000 a year. This is legal, contractual and totally unconscionable. No retired policeman can reasonably claim to have ever put his life on the line to the extent that a Marine Corps private making one-quarter as much while stationed in Afghanistan or Iraq does.

2. David Harsanyi at Reason.com has an interesting take on net neutrality.
   

   I know it sounds wonderfully fair. But the reality of net neutrality makes as much sense as mandating that tricycle riders have the same rights and privileges as cars and trucks on our roads—highway neutrality.

   The FCC promises it doesn't have any intention of controlling Internet content, only of making access fair. But empowered with the ability to regulate the flow of online traffic, it offers a semantic, not substantive, excuse for a power grab.

3. Here is an interesting little song by Tim Miller, inspired by a family that fell victim to predatory lending practices.
   
   
4. Karl Denninger at The Market Ticker talks about debt and the economy in Kuttner Has Been Lobotomized.

   We had the inflation. Punishing, cruel, ridiculous inflation. Yeah, I know, you don't think it happened because it was "only" a doubling of gasoline and diesel prices in a five year span (well, actually, it was closer to a tripling, but who's counting, right?)

   Of course this very same inflation showed up in other things, like houses and stock prices. This made people "feel rich", but in fact they were not, because their wages did not accelerate at anywhere close to the same rate, nor could they.

5. Mike Shedlock at Mish's Global Economic Trend Analysis writes today about commercial real estate foreclosures and rental property woes.
   

   Los Angeles City Councilman Richard Alarcon is a complete fool, unless of course he is pandering to voters, perpetually buying votes to get re-elected.

6. Radley Balko at Reason.com points out several lessons police and local governments (and even cable network A&E) might learn from the Detroit raid that resulted in the death of a little girl.
   

   With many of these shows, the police department gets veto power over what footage makes it on the air. So you won't be seeing footage of many mistaken raids. That said, A&E should air the footage of this raid to show that the violent tactics these shows repeatedly glamorize can and do have tragic consequences. If the network has any guts at all, it will make sure the same episode looks at the possibility that the presence of its own cameras contributed to the death of a little girl.

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It will be interesting to see what members of congress support it and what members oppose it.

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Look at what is happening in Greece right now. No one wants to lend them money and their treasury bonds are on par with war-torn Pakistan. Junk. But Greece, though important to the European economy and troublesome to the fate of the Euro, is not anywhere near the size player that the U.S. is in the world economy. You know the saying, the bigger they are...

I was concerned because I didn't see any scenario playing out where our beloved politicians would pull back the reigns before it was too late. I didn't see them mustering the political will to just say, "no". But now, I wonder, if it just might be happening. The housing subsidy, granting new home buyers up to $8000 in tax breaks for buying a new home and $6,500 for non-first-time-buyers, is actually coming to an end. The papers are now starting to warn of the impacts of expanding the stimulus. And Wall Street might just give the politicos the scapegoat they need to end the madness.

Even today, Ben Bernake said, “Achieving long-term fiscal sustainability will be difficult, but the costs of failing to do so could be very high,” Bernanke said in remarks prepared for a speech today to a White House commission on the budget deficit. “Increasing levels of government debt relative to the size of the economy can lead to higher interest rates, which inhibit capital formation and productivity growth -- and might even put the current economic recovery at risk."

So now, even members of the old guard are beginning to have their doubts as to the wisdom of the current course of action. I can no longer say that I would be entirely awestruck were I to start hearing the politicos and media cheerleaders start trumpeting the line that they need to get out of the way and let the mess the Wall Street banks made clean itself out of the system. Now, that said, I didn't say it wouldn't surprise me, and I don't think it will happen.

I expect that the stimulus will be pulled back for now. And the economy will screech to a grinding halt. Property prices will fall dramatically again (I'm guessing another 25% or so). The commercial real estate bubble, which has been sitting at it's apex will finally burst. People will stop buying things again (with the money they are saving by not paying their mortgages, having caught on to the fact that banks aren't foreclosing). Unemployment will soar again. Then the politicians will start shaking in their boots and start pumping the stimulus prime once again. If they're lucky, the mess in Europe will still be going on and the renewed acceleration in deficit spending won't detonate the U.S. treasuries market. Yet.

The trouble with all of this is that the current deficit spending and the future re-acceleration of it that I predict do nothing but delay the inevitable. There is a ton of misallocated investment out there that needs to fail so that its pieces can be put to productive use once again and the economy can actually recover. All of this stimulus has made it worse. The future stimulus I project will make it worse still.

What we have here are two options. One option is to stop the madness and take the medicine. The economy will fall dramatically for a little bit of time, I'd say between a year and two years, and then it will finally start to climb out of the gutter on a new and healthy footing. The other option is to continue the stimulus madness until the point where the world calls us on our debt and causes a complete system crash, marking an end of the American Empire and the kind of life we've all grown accustomed to.

Of course, while I present this as a dichotomy, there are shades of options between these two extremes. We could spend the next several decades stopping and starting stimulus programs to forestall the pain, hoping for some new magic internet 2.0 type technology which will employ millions of people in some new industry that doesn't currently exist, and grind away in the doldrums in the interim. It's possible that we could keep halting these borrowing spurts before the treasury markets decide to call bull. I don't think it's likely, but it is certainly possible.

The one thing I can say for certain is this supposed "recovery" our politicians are talking about right now is not happening. And it won't happen for a long way off.

"The future's so bright..."

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[Name of Bank] We have money to lend (and the will to lend it)

When a bank can say that it's ability to lend and will to lend separates it from other banks you have to know that things aren't going well.

Even in light of this, though, I have to say that it's probably fool hearty for banks to be lending right now, especially if they are writing mortgages. The housing market has taken quite a hit, to be certain. But one economist that predicted the housing crash in the first place says there is a very good chance that housing will crash again.

By transferring more underwater mortgage balances onto the public books, the plan puts taxpayers on the hook for further losses if housing prices continue to fall. Given the massive support for real estate already afforded by record-low interest rates and massive federal tax and policy incentives, there are very good reasons to believe that home prices will indeed collapse when these crutches are removed. Recent spikes in long-term interest rates warn of this prospect.

If these items aren't enough to make you wonder, perhaps this last item will. Remember all that talk in grade school about this being a free country? Well, it just got a little less free again. Due to a recent law, if you decide you want to put your money in a foreign bank to keep it safe from a falling economy, the IRS wants to know. And if the country you do your banking through has laws that prohibit such disclosures (like Switzerland) they are being ordered to close the accounts.

Because if anyone had read it, the act would have been known as the Capital Controls Act, as one of the lesser, but infinitely more important provisions on page 27, known as Offset Provisions - Subtitle A—Foreign Account Tax Compliance, institutes just that. In brief, the Provision requires that foreign banks not only withhold 30% of all outgoing capital flows (likely remitting the collection promptly back to the US Treasury) but also disclose the full details of non-exempt account-holders to the US and the IRS.

Come, gather 'round people, wherever you roam, and admit that the waters around you have grown...

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Here's the bottom line:

• If you refuse to buy health insurance, you will be fined on a sliding scale that amounts to 2% of your AGI. So if you make $100,000 a year, you could be fined $2,000 for "refusing" to buy insurance.
• You cannot buy a catastrophic policy any more. The "cheapest" acceptable policy will cost somewhere around $15,000 for a single person, and over $20,000 for a family. This is, for most people, more than five times the maximum possible fine - each and every year. The law makes it effectively impossible to maintain an existing catastrophic policy as they "renew" every year, and should any change be made you are then forced to buy something "acceptable" in the law (or pay the fine.)
• When the "pre-existing condition" bar comes down you cannot be charged more or denied coverage due to pre-existing conditions.
• I fully expect 20-50% premium increases immediately, and for the next three years sequentially, in all existing policies. This is precisely what the banks did in front of the CARD act becoming effective, and it will happen here as well. That is the cause of the short-term rocket shot in the health-related stocks this morning

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That said, it will still be disastrous as it simply can't be afforded. It will undoubtedly cost much more than is projected and we undoubtedly cannot afford yet another huge entitlement program. I've yet to see exactly how it will be funded but I've heard hints at raised taxes, at least to corporations. In a time of economic contraction this cannot bode well for the economy at large. And the added debt will have its own consequences as well.

All in all, we Americans are getting what we deserve for continuing to elect Democrats and Republicans. It will be interesting, and probably painful, to see how it all plays out.

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The Federal Reserve Board must disclose documents identifying financial firms that might have collapsed without the largest U.S. government bailout ever, a federal appeals court said.

The U.S. Court of Appeals in Manhattan ruled today that the Fed must release records of the unprecedented $2 trillion U.S. loan program launched primarily after the 2008 collapse of Lehman Brothers Holdings Inc. The ruling upholds a decision of a lower-court judge, who in August ordered that the information be released.

This would be a major victory for the American people if it holds up. Personally, I don't think it will. I'm quite confident that our government will see clear that this never sees the light of day. One way or another.

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The ideas that begat this nation were born of the age of reason, by the collective yearning of men to be free from tyranny. Free from the coercive hands of the elite class of men, who all through time have forced their lessers into servitude, sometimes by economic circumstance, sometimes by the force of hands, sometimes by the threat of imprisonment. These men attempted to create a government, limited in size and scope, and strictly balanced in power, as they knew the nature of power is to feed on itself and grow. They were educated men, and they knew the tales of history well. Power always grows. And the power of the state is the opposite of freedom. Always. Every time.

Not even 250 years from the founding of this experiment in freedom, the nation it created is gasping for its final breath. In one sense, the experiment was a success. It created an incredibly prosperous nation, with an unprecedented expansion of the standard of living. Nowhere has the world in its history, ever seen an expansion of wealth so thorough, with benefits apparent through all strata of society. Yet in the end it has failed.

Its failure began when it first shed the limits of its Constitution, believing that increasing the power of the central government would allow it to more good for more people. But the lessons of history were lost. The notion that power breeds corruption was ignored. And as the central government amassed more power, it attracted the sharks of great wealth. The more power the central government had, the more it could do for those who were willing to purchase its representatives.

Until recently the depths of the corruption were doubted. Allegations of conspiracy were derided. But now the writing is on the wall. It's as plain as day for all to see. Great financial institutions, having gained control of purse strings of the nation, converted a nation of great production into a nation of great debt. Debt that these few select owned. And now that the people have been bled to their limit, they have written themselves a blank check from the national treasury, hopelessly burying the nation in debt. A debt it can't hope to ever repay. There is no possible way to explain this without the existence of corruption and conspiracy so pervasive that it flows through the system unchecked.

And now the end is upon us. The last great bastion of our freedom is dying an ugly death. Another monstrous law, thinly veiled under the guise of providing health care, but actually intended to raise yet more revenue from the American people. The country is drowning in debt as the Financial parasites feed on the Treasury and more money is needed to keep them going. Now Congress will take it directly from the people. What's worse, is that they will do it without even going through the charade of a vote. Power has grown to a point where the pretense of representation is no longer even attempted.

Once the land of the free and the home of the brave, America is now the land of the tired. And the bankers expect us to bow down to their new rule. They're not even trying to hide it anymore.

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My latest post at RGD is here.

Already this year the federal government has taken on more than $200 billion additional debt. While President Obama notes that we can’t keep spending the way we have, the current budgets before congress propose to greatly increase spending and further increase the deficit. While state and local governments are feeling the pinch throughout the nation and cutting back spending, it doesn’t appear that the federal government plans to follow suit any time soon.

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(It)...will happen - an "unexpected" recognition of the reality that what is being done today both is unsustainable and won't work, but we will do nothing appropriate about any of it until we find ourselves well-off the cliff and furiously pedaling in the air like Wile-E-Coyote - and at that point it will be to late to avoid the ugly consequences.

Read the whole article here. It's well worth the time.

UPDATE:

It's been pointed out to me that while Denninger's post is very well to the point, the actual consequences of these things are not specifically articulated. If you read the Market Ticker, you'll note that he has gone into more detail in other articles, but still, it's worth pointing out here to save you the trouble of reading through hours of archives.

Water always finds its level. This works in the physical world as well as within economics. If there is a supply of a scarce resource, and a demand for it, some system must be used to distribute it. For most goods and services in the U.S. we use the price system. We use it because it works. It isn't always fair, but saying so is like me saying that my ruler isn't fair because it never tells me that I'm over 6 feet tall. Price is simply a measure of the supply of a scarce resource and the demand there is for it in the market place. The millions of people making transactions over that resource are what set the price. Charge too much for it and you'll have a surplus (note the empty seats at Ford Field circa 2008). Charge too little for it and you'll quickly run out. Try to sell your mint collection of bootleg Beatle's LP's for a buck a piece on Ebay and see what happens.

This all makes sense to most people. But then, we don't think of things like interest rates as being prices. The interest rate I pay on my mortgage is the price of borrowing the money I used to purchase my home. But we don't use a normal price system for setting interest rates. We use a bunch of powerful people in Washington who have set up a very complicated system to set interest rates where they want them. One key to how this system works is the continued expansion of bank credit. By this I mean that over time banks have to lend more and more money to keep this system working.

However, some very thoughtful people like Ludwig von Mises and F.A. von Hayek, quite a long time ago pointed out that if you use the expansion of bank credit to expand an economy you will create inflationary bubbles in that economy, which will, by definition, at some point burst. Over the past couple of years we have seen some very big bubbles burst. First with the housing market, and then within the banking system itself. Water is finding its level. These things we are borrowing money for are going back to their true value, and we are helpless to stop it.

If you look at the statistics lately, the one statistic that really stands out is what the Federal Reserve calls Z1. It is the total amount of money being lent in the economy. In a debt based system such as we have, Z1 is the real money supply. This has contracted by more than 10% over the past two years. A 10% contraction of money supply is the textbook definition of a depression. What is happening is banks are scaling back the amount of money they are lending.

Why?

Why are banks scaling this back? This is a point that seems lost on many economists, but seems fairly obvious to me. Banks are keeping large amounts of cash reserves on hand instead of lending the money out. I've heard the President and Treasury Secretary complain about this on the news. The reason is that the banks know they are in trouble. These banks own the paper on the loans that have been drawn to purchase many things (mostly houses) that are now worth much less than the loans given. Every time one of those loans goes bad, the bank is unable to recoup the difference and that money simply disappears as tribute to the economy gods. It goes "poof". So, in order to keep from going under, the banks are not lending money, lest their asset bases evaporate. Though, it's recently been pointed out that if these banks had to mark their assets at the true value of the properties they have mortgaged, there isn't one bank in the U.S. that would currently be solvent. This is a problem.

So, in a debt based economy with lending contracting, less "stuff" is being purchased. The government is trying to counterbalance this effect by borrowing a bunch of more money itself and pumping it in to the economy. The trouble is that this never works. Government doesn't spend money the way that you and I spend money. So when government pumps money into the economy it makes it look like demand for certain goods and services is higher than it actually is, and when the water finds its level again, the producers of those goods and services find that they have over-invested in production and the bubble bursts again.

Yet Washington continues to try. Now, finally, they are running into the final problem. They can put as much money out there that they want banks to lend and they want people to borrow, but people just don't want to borrow it. People are at their limits with debt. They are concerned about their jobs. They just don't want to borrow anymore.

The real trouble is just beginning. As the government borrows more and more money to fund its stimuli and the economy refuses to recover, the ability to pay it back will come severely into question. When investors in that debt (people that hold treasury securities) begin to doubt it will be paid back, they will begin to rush to cash those securities in. And then the government will be forced to inflate more to pay it back (see Weimar Republic, circa 1930) or they will default. If the government defaults on its loans, the currency will tank. The best case scenario is that this will cause imported goods (including oil) to shoot sky high. The worst case scenario is that no one will be willing to take dollars in payments, as it has become virtually worthless. In any of these cases what will result is catastrophic. It doesn't make sense to go to work if they can't pay you in anything of any value. If you can't get paid you can't eat. Then you have to find a way to survive.

What we have at risk here is a systemic crash. The falling of an empire. The end of the U.S.A. So, when you read Denninger's piece, you can see why he's so upset. You can see why he calls for jail sentences for the offending parties. This isn't just a slump we're talking about here. It's survival.

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An Open Letter to President Obama
by DON BOUDREAUX on MARCH 8, 2010
in HEALTH, PRICES, REALITY IS NOT OPTIONAL, SEEN AND UNSEEN
8 March 2010

Mr. Barack Obama
President, Executive Branch
United States Government
1600 Pennsylvania Ave., NW
Washington, DC 20500

Dear Mr. Obama:

CBS radio news this morning ran a clip of one of your recent speeches. In it, you criticize insurance companies because they “ration coverage … according to who can pay and who can’t.”

My first thought was “not exactly; coverage is rationed according to who pays and who doesn’t.” Ability to pay isn’t the same thing as actually paying, and what insurers care about is the latter. Many folks – especially young adults – have the ability to pay but choose not to do so. They get no coverage.

But further pondering of your point leads me to look beyond such nit-picking to see fascinating possibilities. Not only insurers, but all producers who greedily refuse to supply persons who don’t pay should be set aright. Now I’m sure that you don’t ration the supply of the books you write according to any criteria as sordid as requiring people actually to pay for them. But our society is full of people less enlightened than you.

For example, the typical worker rations his labor services according to who pays and who doesn’t. That must stop. Oh, and supermarkets! Every single one rations groceries according to who pays. Likewise with restaurants, clothing stores, home-builders, furniture makers, even lawyers! You name it, rationing is done according to who pays. Indeed, my own county government has been corrupted by this greedy attitude: if I don’t pay my taxes, the sheriff takes my house – effectively booting me out of the county merely because I didn’t pay for its services.

Preposterous!

I look forward to your changing this selfish and unfair system of rationing that for too long now has kept Americans impoverished.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030

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The National Credit Union Administration (NCUA) and FDIC parasites siphon off deposit insurance money from good institutions not willing to take risks, to support institutions taking excessive risks.

In turn, banks and credit unions sitting with high levels of cash lose money on deposits and the customers make zero percent interest, thanks to the Bernanke Fed holding interest rates at zero.

Priceless.

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Greece is now whining that their "austerity" should bring gifts - from Germany:

“We have fulfilled to the utmost all that we must from our side; now it’s Europe’s turn,” Papandreou told his ministers, according to an e-mailed transcript. “It is a historic moment for the European Union.”

No it's not.

Honest accounting is its own reward. So is fiscal prudence.

You're owed nothing Greece.

More importantly, there's no money. Not just there - here too. Witness the layoff/hirebacks in California and New Jersey's new governor - the latter who told the truth for the first time by a state politician in 30 years.

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Amid these turbulent economic times we have seen many changes, not least of which is the change in the U.S. National Debt. The debt, which has been steadily climbing since the beginning of the last century, has, of late, taken an unprecedented surge.

We don't often think too much about the national debt. After all, if you are like me, in your mid thirties, then the fact that the government is in debt and the debt is growing is a fact of life. It's been that way all your life, all your parent's lives and all your grandparent's lives. You hear some noise about it now and then, but it hasn't seemed like anything really bad has ever come of it.

The real trouble here is not only the fact that we're in debt, but how much the debt has grown recently. It's very difficult for us to think in terms of trillions of dollars. The number is so large that our minds can't really grasp it. The closest I can come to getting a feel for it is when I think of a trillion dollars as being a million million dollars. I still don't think it really gives you a powerful enough grasp of it, but at least you can begin to taste it. And now we're adding trillions of dollars to the debt as if there were, literally, no tomorrow.

And that's where the question comes in. Will there be a tomorrow? Not included in this article because I couldn't find any corroborating sources (I couldn't find any contradictory sources either, I'm finding this information very difficult to come by) was a report I saw on Max Keiser where one of his guests states that the bulk of the debt over the past 18 months has been comprised of two year treasury bills. Now, just because the bill matures in two years does not mean that the owner will attempt to cash it in in two years, but as our economy worsens and holders of debt begin to doubt the ability of the borrower to pay, the likelihood that these will be cashed in greatly increases. And with over $2 Trillion in debt incurred over those 18 months, that is an awfully big price to pay in a very short time.

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Yes, I know all about the stock market rally from last March. I know all about the claimed GDP "improvement." But I also know that we got both by adding more than $2 trillion in debt to the United States - or roughly 14% of GDP - over the space of the last 18 months. That's about 10% of GDP annualized, and incidentally, a 10% GDP contraction is the common economist's definition of an Economic Depression.

So let's cut the crap - we are in a Depression right now. We are pretending we are not, just like you can pretend you didn't really lose your job so long as your credit card does not reach its limit. We have been in that depression for about 18 months and there is no evidence that we will exit it, as we have yet to find a way to pull back the deficit spending without an instantaneous collapse in the economy.

Yet at some point we must and will stop. We will either do so of our own volition, or we will do so when the cost of borrowing skyrockets, as others get tired of funding our profligacy. If we attempt to "print" our way out of it the cost of petroleum products will shoot the moon and destroy our economy anyway.

Follow this link to read the whole article. It will be time well spent.

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The FDIC announced last Tuesday that the number of troubled banks has risen from 552 in the third quarter of 2009 to 702 for the fourth quarter and that the fund may have to cover up to $20 billion in additional losses by 2013. If the economy worsens, this number could rise. The New York Times reports that Sheila Blair, FDIC chairwoman, said Tuesday that it was unlikely the FDIC would need to tap its emergency credit line with the Treasury Department, but she would not rule the possibility out.

The FDIC is losing money hand over fist. The only way they could possibly become solvent again is if the economy makes a remarkable recovery, soon. However, property prices are not rising and the only reason that foreclosures aren't still dumping on the market is that banks aren't kicking people out of their homes when they don't pay their mortgages. When you add the coming Commercial Real Estate mortgage crises to all this, it doesn't look good.

Banks are failing one after another and the FDIC covers the deposits. They have asked financial institutions for advance fees to stay afloat, but are running low again. And that well can only be dipped once. Once the fees are paid, they are paid. Now the only thing left for it to do is go to the Treasury, and the FDIC doesn't operate with a guarantee that the Treasury will back it. Personally, I don't see the Treasury turning them away, given the uproar that such an action would cause.

One has to wonder, in the end, how much this will cost. I'm curious to find out, if when all of this is over they figure out that Federally insuring the deposits of bank customers allows banks to take on more risky positions, resulting in a greater possibility of going bust. Or will they just keep scratching their heads.

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I confess that I prefer true but imperfect knowledge, even if it leaves much indetermined and unpredictable, to a pretence of exact knowledge that is likely to be false.

F.A. von Hayek, in his Nobel Prize lecture in 1974, shares some insights it would do well for all of us to take to heart. It doesn't seem like the numbers they are plugging into their equations in DC are causing the results they expected.

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You can look for 3 to 4 posts per week from me of some deeper substance along with daily posts to news items with a bit of detail. I will post excerpts of my longer pieces here, perhaps with a bit of commentary. Look for my first post to go live at 1:15 PM EST today.

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