Friday, August 7, 2009

Cash for Clunkers Hurts Poor, Sick, Unemployed, Consumer, Saver, Taxpayer, Environment, Charities, Recovery, Public Safety: Obama Waterboards Economy

Cash for Clunkers (C4C, Car Allowance Rebate System (CARS)) is anti-poor, anti-recovery, anti-safety, anti-consumer, anti-saver, anti-taxpayer, anti-business, anti-environmental, anti-health, anti-charities, anti-productivity, and anti-economics.

  • Anti-Recovery: C4C is classic wealth destruction. Its Carthaginian scorched-earth policy demands that working engines must be destroyed. Destroy the engine, destroy the transmission, shred and melt the car, and maybe even airbrsuh your car out of any of your family photos. The C4C insanity of literally destroying wealth (throwing away all the work someone did to make that durable good)--intentionally making us poorer (during a recession no less)--has been known for centuries in economics as Frederic Bastiat's Broken Window Fallacy (the misguided idea that a broken window stimulates the economy because you have to buy a window all over again). Maybe your Congressperson will smash your windows and slash your tires to stimulate the window and tire industries. Why doesn't Obama just tell everyone to riot through the streets so we can buy new stuff to replace all the perfectly good stuff we just destroyed?
  • Anti-Poor: C4C is a regressive tax on the poor to subsidize the affluent. C4C requires the death-sentenced cars to have been titled, registered, insured, younger than 25 years old, and roadworthy by definition (as deemed by almighty government's registration of the vehicle). Poor, unemployed, or otherwise struggling Americans need affordable cars and depend on hand-me-downs but C4C makes cars unaffordable by destroying the hand-me-downs. Reducing the supply of used cars and therefore raising prices of the remaining ones is like a regressive tax increase on the poor so Biff and Bambi can preen green in their shiny new hybrid.
  • Anti-Safety; C4C's title/registration/insurance/age requirements guarantee that it destroys moderately used, roadworthy cars (UPDATE: C4C destroyed younger cars but did not accept older cars), so there will be more pressure to put even older cars back on the road as desperate poor people try to survive economically by taking yard cars off cinder blocks and putting even worse clunkers back on the road.
  • Anti-Consumer: Subsidies for any product ultimately benefit the seller, not the buyer. Subsidies tend to inflate prices (college, etc.). If C4C's $4k/car ($3.5k-$4.5k) spending makes a sale that would not have occurred otherwise, that means that the car should cost $4k less but C4C prevents the price decline for the consumer and instead the car dealer just pocketed an extra $4k from the taxpayer, assuming the dealer did not raise the price $4k before giving a $4k discount and therefore pocketing $8k more than the car is worth, and assuming no dealer abuse or fraud such as a dealer making the buyer liable for rejected claims or quoting a lower credit to the buyer but filing a larger credit with the government (it is not as if the government/Fed cares about accounting (The greatest financial scandals and swindles are government-related accounting; Fed is to transparency as lead is to x-rays; SEC rewards Madoff); the government only cares about churning taxable transactions). (UPDATE: C4C raises prices on consumers.)
  • Anti-Taxpayer: C4C tricks the car buyers into paying higher taxes (state sales tax, local property tax) and involuntarily raises taxes on taxpayers (you pay the interest on the federal deficit--you will be paying for 1 month of C4C for decades to come).
  • Anti-Saver: C4C forces you to borrow money (adding $1-$3 Billion to the federal deficit) to pay people to buy something they do not need (the policy presupposes that the buyer was not going to buy without the subsidy) and in many cases to finance the unnecessary consumption with more personal debt (auto loan). C4C forces you to go into debt to pay people to go into debt, during a recession, with people losing their jobs, income, and ability to pay the debt.
  • Anti-Environment: (a) Destruction is the opposite of conservation so C4C's car destruction is inherently anti-environmental. (b) There is pollution in initial production of the trade-in (production now wasted, causing unecessary pollution by raising the pollution-per-use cost), pollution in destruction of the trade-in (melting the metals uses enough megawattage to power a town), pollution in dumping the plastics and other non-metals in landfills, pollution in the production of the new car (C4C's intent is a jobs program to maintain/worsen the oversupply problem, replacing existing cars sold off the lots with brand new production, which means brand new pollution--UPDATE: Spinning our wheels: Instead of using C4C to deplete the oversupply, the Department of Transportation (DOT) boasted that it will (pollute more to) replenish the oversupply and maintain the costly glut, "[C4C w]ill sustain the increase in GDP in the fourth quarter because of increased auto production to replace depleted inventories," DOT 133-09, 8/26/09), and pollution of people driving to an extra job or extra workdays to pay for the extra consumption of the unnecessary new car. (c) The mileage benefit is only the marginal mpg benefit over marginal time period of demand pull-forward (eg, if you buy a car 5mpg better and a year earlier than you would have, the only marginal emmissions benefit is, if 12k miles/yr, traded from a 18mpg car to a 23 mpg car, at $2.50/gal gasoline, only $300 less gas used. Many buyers will finance, in which case add maybe 50% to the sticker price to include finance charges, and people might be going an extra $20k in debt during a recession to to save $300. (d) However, even the $300 benefit evaporates if people drive the new car more miles than they would have driven the old car. (e) Further, since this year's new car is next year's clunker, and if you are locking into a 25mpg car now when without C4C you would have bought next year's 30mpg car (Congress has grand plans for higher CAFE mileage standards but C4C is paying people to buy cars that Congressional leaders have declared to have been built under faulty mileage standards), C4C might be increasing emissions pollution by inducing people to buy this year instead of next year. (UPDATES: C4C was environmental waste: "New UC Davis estimates say the federal government's "Cash for Clunkers" program is paying at least 10 times the "sticker price" to reduce emissions of the greenhouse gas carbon dioxide."; DOT cooked the books to hide SUV sales and make C4C look green?)
  • Anti-Charities: C4C is killing charities which rely on donated vehicles, charities which already suffered donation declines during the redession.
  • Anti-Health: C4C is stealing money from cancer research. The United Breast Cancer Foundation (UBCF)'s fund-raising appeal to donate cars, "Feel GREAT for supporting breast cancer patients and their families!" and $1k of grocery coupons, is outbid by Congress' profligate $4k offer.
  • Anti-Small Business: C4C is killing used car dealers by literally destroying their product (used cars) and stealing their sales (giving them to new car dealers). Germany's clunker policy exposed this consequence but Congress ignored the German lesson and unleashed C4C on America's used car dealers anyway. C4C takes from Peter to give to Paul, transfering sales instead of creating sales (not only used cars to new cars but money spent on cars is not spent on computers, ballgames, etc.). To the extent that C4C does create extra sales now in the present, it does so by stealing sales from the past (people who waited for the C4C) or from the future (people who bought earlier than originally planned). Pulling demand forward (stealing sales from the future) takes from Future Peter to give to Present Peter (imagine your sci-fi "future you" asking why you stole from him/her), artificially inflating sales/income now at the expense of lowering sales/income in the future. Pundits might say we need the extra income now but we will not need it later after recovery. We have seen that lie before: The whole debt bubble was (is) pulling demand forward (borrowing from the future) even during the so-called boom.
  • Anti-Economics: C4C "stimulus" is an accounting shell game. The stimulus is largely illusory and horribly inefficient when you measure true cost against true marginal sales. (a) Subsidies often waste most of their money by paying people who would have done the action anyway (happens with subsidies for college, housing, health, etc.). Many people who took the C4C subsidy would have bought a car then anyway and even pulling demand forward (taking sales from the future) is paying people who would have bought a new car anyway in the near future. (b) The hyped surge in a week or month is largely no stimulus at all in the medium term. (c) If there are any true extra sales at all (marginal sales that people would not have done without the subsidy), the cost per marginal sale can be grossly inefficient because you divide the small number of real extra sales (marginal sales) into the total cost of the program (which should include not only the $1-3B but also the finance costs of deficit-spending, any extra used-car dealerships driven into bankruptcy by C4C, and any extra cancer deaths caused by C4C). (UPDATE: CR estimated marginal cost at more than $7k per car but even that ignores total costs such as the finance charges and opportunity costs that I mentioned.)
  • Anti-Productivity: (UPDATED) C4C kills American productivity with 13-page application forms dreamt up by government drones, computers/websites crashing at the start of the program, computers/websites crashing at the end of the program, dealers claiming that the government is rejecting 80% of applications, and Congressman Joe Sestak (D-PA) claiming that the government is not paying 98% of applications. The C4C boondoggle makes dropping money out of helicopters seem sober and efficient in comparison. C4C is a classic example of malinvestment and misdirection of valuable, time, labor, and money that both brought us to recession and will keep us in recession by rotting real productivity (despite the illusion of GDP $ from make-work activity).
Buying a car every 3 years and a house every 7 seven years is wasteful and unsustainable. The economy is trying to save you and warn you before it is too late (via market signals collectively called a "recession") but Congress and Obama are trying to prevent you from receiving the warning and have captured the economy and are now waterboarding the economy (drowning it in debt) until it recants.

By the way, "the economy" includes you, and Congress and Obama will waterboard you until you submit to your debt slavery.

Friday, July 10, 2009

Bubble Bailout Glossary of Orwellian Euphemisms

Government Ponzi Bubble Bailout Glossary

Here is your secret decoder ring to decipher the euphemistic jargon used by financial pundits and government officials, particularly regarding the bailouts (to be updated periodically).

"21st Century" (adj.) = Unaffordable
"Accountability" = Plausible deniability
"Asset" = Debt
"Bad Bank" = Taxpayer
"Build America Bonds" = Loot America bonds
"Capital" = Debt
"Create/Stimulate Demand" = Trick the public
"Financial System" = Ponzi scheme
"Green" = Greenwash
"Growth" = Inflation
"Guarantee" = Bailout
"Hedge" = Gamble
"Improving" = Rising prices/costs
"Infrastructure" = Pork
"Innovation" = Scam
"Insurance" = Moral hazard
"Invest" = Spend
"Jobless Recovery" = Stagflation
"Legacy Security" = Toxic waste that nobody wants to touch with a 10-foot pole, unless with taxpayers' money
"Lend" = Give
"Manage" = Lower ROI
"Modernize" = Spend (raise costs)
"National Security Threat" = Saver
"New GM" = Brave New GM
"Normalize" = Inflate
"Off Balance Sheet (eg, SIV)" = Accounting fraud
"Oversight" = Zzz
"Own" = Owe
"Ownership Society" = Communism (ends with state ownership of society)
"Paradox of Thrift" = Inability to milk/loot (tax/skim transactions)
"Pre-Privatize" = Nationalize
"Pre-Recovery" = Recession/depression (from bubble peak)
"Prosperity" = Debt
"Protect" = Milk/loot
"Recapitalize" = Get back on broken rollercoatser, put hand back on hot stove
"Recession/Depression" = Healthy spending levels (not a bubble)
"Recovery" = Bubble
"Rescue Chrysler" = Kill Ford
"Resources" = Credit line (ability to borrow)
"Restore" = Milk/loot
"Rule of Law" = Russian roulette
"Safeguards" = Loopholes
"Save" = Spend/consume
"Simplification" = Complication
"Stabilize" = Sabotage solution
"Standards" = Red tape
"Stimulus" = Malinvestment
"Strategic" = Unexplainable by fundamentals
"Synergy" = Neither understands what the other one does
"Systemic risk" = 'Wrong' person lost money (do over)
"Transparency" = Opacity
"Vicious Cycle" = Recovery (to sustainable non-bubble)
"Virtuous Cycle" = Reflation (inflation to new bubble)

The news makes more sense when you replace the words in government statements to decipher the true meaning.

Friday, June 26, 2009

Inflation? Americans Pay 300% More: Prices, Rents, Land, Gold, Hedges, Plays, Trades

What are people paying and buying and what does it tell us about prices and inflation?

Are Rents Rising?

Landlord Kyrgyzstan raises rent more than 300% on tenant USA

The United States will pay more than triple its current $17.4 Million annual rent to use the Manas airbase outside Bishkek in Kyrgyzstan in Central Asia.

In addition, Uncle Sam must pay "$37 million to build aircraft parking slots and storage areas, plus $30 million for new navigation systems" (hoping that it does not fall into Russian hands like the base the US accidentally built for the Soviets at Cam Ranh Bay).

Obama says thanks for tripling our rent and having us build a base that might fall into Russian hands:

President Barack Obama recently sent a message of thanks to Bakiyev for Kyrgyzstan's support of U.S.-led military operations in Afghanistan, according to U.S. Embassy officials in Bishkek. ("US, Kyryzstan reach deal on air base use," Leila Saralayeva, Associated Press (AP), 6/23/09)
The 300% price hike is probably a "production" phenomenon (supply-demand), not a monetary phenomenon--it neither proves inflation nor disproves deflation.

Rents Fall across America

Rents from Boston to San Fancisco are falling for several reasons:
  • Building boom creates oversupply of houses (Residential Real Estate)
  • Building boom creates oversupply of apartments (Commercial Real Estate (CRE))
  • Building boom creates oversupply of hotels/motels (Commercial Real Estate (CRE))
  • Housing bust (foreclosures, etc.) decreases demand (increases vacancies)
  • Recession/unemployment decreases demand (consolidates more people in fewer households)
Desperate, often underwater, investors (intentional landlords) face additional competition from "accidental landlords" (people who rent as a last resort after being unable to or unwilling to sell after moving) and hotels/motels with crashing vacancy rates which offer extended-stay discounts to save their crashing RevPAR (Revenue Per Available Room).

Falling rents are probably a "production" phenomenon (supply-demand), not a monetary phenomenon--they neither disprove inflation nor prove deflation.

Some people mistake these falling rents to mean too little money/credit (deflation) rather than the more likely explanation of too many houses/condos/apartments/motels/hotels (where prices can fall in several sectors despite general inflation of the money/credit supply).

Mish argued that there never has been "hyperinflation" with "crash"-ing "home prices"--although Keynesians likewise believed that we could not have inflation will falling employment--until we did (1970s stagflation).
  • Inflation easily can coincide with falling house prices (falling nominal prices and falling real prices).
  • Hyperinflation easily can coincide with falling real house prices (but rising nominal prices). Hyperinflation in Zimbabwe caused a loaf of bread to cost Z$10 Million and obviously one house can cost more than one loaf of bread but investors need to know if houses will crash in real terms, relative to other goods (is it better to invest in houses or in bread?).
Inflation Plays? How To Trade Inflation?

Mish argued that people claiming "hyperinflation" should be advocating "houses"--and he asked who was advocating "houses." The premise is flawed because there is no reason to assume that houses are always the best investment in hyperinflation but to answer the question generally about who is seeing inflation and/or considering real estate:

Jim Rogers sees inflation from central banks "printing money" and he has been buying farmland (real estate, perhaps with a farmhouse) as part of his commodities strategy and in a separate interview (not the one below) he would consider some Asian real estate (not in China/Hong Kong):

Marc Faber predicted possibly 10%-20% (annual?) inflation in the US within 5-10 years and said that he preferred US real estate over US Treasury 30-year bonds (but he recommended other assets or equities):

China's party policy research office economics head Li Lianzhong recommended buying real estate (as well as commodities, energy, gold):
A top Communist Party research chief said Thursday that China should buy gold and U.S. real estate rather than Treasurys . . . the U.S. dollar is poised for a fall, making gold and land better investments for China's $1.95 trillion in foreign exchange reserves. (citing Reuters report, "Chinese official urges buying of gold, U.S. land: report," MarketWatch, 6/24/09)
Note that China mentions US assets because it is trying to recycle its US dollars from its trade surplus and foreign-currency surplus.

Rogers, Faber, and Li at minimum see real estate as a defensive inflation hedge to pace inflation (capital preservation in real terms) under the assumption that, whatever the inflation rate, real estate nominal prices tend to float by a similar amount (Rogers reminded that he wants to make money, not break even, but he also recommended to hedge risk). However, remember:
  • US residential real estate in the last century saw real growth of the sales price only slightly above 0%.
  • Real estate can charge significant carrying costs such as repairs/maintenance and property tax (analagous to mutual-fund/brokerage fees) that can cause real net negative ROI.
  • An alternative to land is cash, if you expect that even during 100% inflation a bank account will pay 101% with FDIC insurance (principal guarantee) and not charge $100k of property tax.
  • Cost-Benefit analysis requires opportunity costs of relative prices and values (price:rent ratio, stocks price: earnings (P/E) ratio).
Beware that many people who talk of acquiring real estate actually mean acquiring debt, using land as collateral to make a leveraged bet which can multiply ROI gains but also ROI losses (leveraged investments gone sour including buying stock with mortgage debt are components of the current financial mess).

What is inflation/deflation, which do we have now, and how to measure it?

Thursday, June 25, 2009

What Leading Economic Indicators Predict Inflation or Economic Growth?

Comrade Coinz asked what leading economic indicators do you watch.

The Conference Board is a good start:

  • The Conference Board Leading Economic Index™ (LEI)
  • The Conference Board Coincident Economic Index™ (CEI)
  • The Conference Board Lagging Economic Index™ (LAG)
The Organization for Economic Co-Operation and Development (OECD) Composite Leading Indicator (CLI) is another source.

Both organizations also track international data.

The Conference Board LEI components are summarized by
  1. The average manufacturing-worker workweek (from the employment report)
  2. Initial jobless claims
  3. Manufacturers' new orders for consumer goods and materials (from the factory orders report)
  4. Vendor performance (from the Purchasing Managers' Index report)
  5. Manufacturers' new orders for nondefense capital goods (from the factory orders report)
  6. Building permits (from the housing starts report)
  7. The level of the S&P 500
  8. The inflation-adjusted measure of the M2 money supply
  9. The interest-rate spread between the 10-year Treasury note and the fed funds rate
  10. The expectations portion of the University of Michigan's Consumer Sentiment Index
Consumers often reduce durables and big-ticket items before non-durables (including services) and small-ticket items.

Companies often increase/decrease hours before they increase/decrease people.

Unemployment is more of a coincident (on recession start) or lagging (on recession end) indicator and unemployment insurance benefits claims do not count the armies of ineligible workers:
  • Self-employed
  • Sub-contractees ("independent contractors," freelancers, nonemployee compensation, 1099 IRS tax form)
  • Underemployed workers (part-time instead of full-time involuntarily)
  • Discouraged workers (unemployed and stopped looking)
  • Expirees (unemployed but benefits ran out after time limit)
I also might note (if reliable data):

For economic growth/decline:
  • Energy consumption (volume, not cost)
  • Miles driven
  • Shipping (retail package volume (UPS, etc.), port activity, Baltic Dry Index (BDI))
  • Garbage volume
  • Inventory (housing inventory, manufacturer inventory, retail inventory, food-bank inventory and turnover)
  • Production (percentage of industrial capacity utilized)
  • Productivity (labor productivity and capital productivity)
  • Stocks Price/Earnings ratio (P/E ratio) (S&P500 real P/E debate)
  • Business capital investment (ex commercial real estate (CRE), which lags residential real estate)
Housing inventory declines precede/determine significant new residential construction starts, although even high inventory will see some new starts because of custom dream homes, location assymetries, or regulatory devaluation of older homes (environmental, health, or energy-efficiency taxes/subsidies, etc.).

For prices:
For inflation:
Bubble Mafia Wrongly Call for High Prices under Guise of "Stabilization"

Increased productivity is the true source of real growth and real wealth and naturally results in lower prices (the falling real price for the Ford Model T or an IBM laptop computer).

"[S]table" real-estate or stock prices might mean a freeze at 2005 prices or a freeze at 80% below 2005 prices but most people who say "stable" want bubble pricing.

Increasing stock prices, home prices, or home construction (none necessarily a good thing) might be an indicator of "recovery" but not causal of recovery ("bullish" as consequence, not cause, of underlying/preceding real growth).

Confusing cause with consequence is like Homer Simpson using pliers to force the temperature-gauge needle to a safe reading even as the nuclear reactor melts down.

Bad information causes bad decisions.

Central planners tried to pump the housing indicator artificially through inflation, debt, and regulation--and catastrophically brought the world financial system to its knees.

Tuesday, June 23, 2009

Housing Wealth Effect on Non-Housing Consumption: MEW Credit Bubble Vs Real Estate ROI

Ringing in the MEW Year and the Illusion of Real Estate ROI

A recent Wall Street Journal (WSJ) article hints at but underdevelops a crucial distinction (the first point is closer to a psychological wealth effect while the second point is more likely to involve a functional change in credit access):

  • Fixed income, increased wealth: Spending more of your current income by decreasing your savings rate (but not your total savings), because of feeling richer from an appreciating asset but without tapping that asset.
  • Increased income, fixed/decreased wealth: An increase in current income via an increase in credit/debt on the appreciated asset, tapping the asset, negating the appreciation, leveraging/mortgaging the appreciated asset, spending the nest egg.
The WSJ article is correct that a policy to try to prop up housing prices is a mistake--but for many reasons well beyond the article's argument:
Many economists have stated that consumer spending can’t rebound until house prices stop falling. But Charles W. Calomiris of Columbia University, Stanley D. Longhofer of the Barton School of Business and William Miles of Wichita State University argue that the wealth effect of housing has been overstated. ("The (Mythical?) Housing Wealth Effect," Wall Street Journal, 6/22/09, hat tip: CR)
However, this next statement confuses a credit boom with real estate Return on Investment (ROI):
[A]n increase in house prices raises the value of the typical homeowner’s asset, but such a price increase is also an equivalent increase in the cost of providing oneself housing consumption. In the aggregate, changes in house prices will have offsetting effects on value gain and costs of housing services, and leave nothing left over to spend on non-housing consumption. ("The (Mythical?) Housing Wealth Effect," Wall Street Journal, 6/22/09, hat tip: CR)
The flaw confuses immediate lump-sum consumption with postponed financed payment--a flood vs. a drip.

If all houses increase $100k, both the Mortgage Equity Withdrawal person (MEWer) and the new house buyer are consuming an additional $100k each while paying only an extra $500/month ($100k @ 5% 30yr Fixe-Rate Mortgage (FRM), rounded off), so the new non-housing consumption from $100k MEW is only partially offset by $12k/year finance payments (extra $6k each from MEWer and new buyer)--and that does not even consider if the number of MEWers (seller pawning his/her house back to the bank) exceeds the number of house buyers.

The home ATM (MEW) accounted for 75% of GDP growth between 2003 and 2006.

The WSJ article's argument that higher house prices constrain renters' non-housing consumption overlooks that a key feature of the housing bubble was the massive divergence in the house-price:rent ratio.

The WSJ article tries to address housing as consumption but still seems to confuse houses with housing (asset vs. consumption).

There is an offset (cancelling out) with a trade-up house buyer who both buys a house and sells a house at the same time but that situation says more about the illusion of real estate ROI:

In other words, when you [a trade-up house buyer] calculate your real appreciation from your house-sale as investment, the proper deflator for the first house is the replacement house’s appreciation over the time period that you lived in the first house (do not use a CPI deflator). Many people will learn that trading keys is like getting a 10% raise to buy items which cost 10% more--they realize no real net gain from appreciation. The profit truism is “Buy low. Sell high” but sell-high-then-buy-high makes no money. You are running yourself ragged on your hamster wheel. ("Homeowner Profits Ignore Huge Costs: Housing Myths Part 4")
High house prices are bad policy and good policy would be to let the housing/credit bubble deflate.

Wednesday, June 17, 2009

Great Depression: Bernanke Krugman Learn Wrong Lesson

Federal Reserve Chairman Ben Bernanke learned the wrong lesson on the Great Depression from Milton Friedman and Anna Schwartz, citing fascism, war, and inflation as cases of succesful monetary policy.

Economist Paul Krugman admitted that the economy would fix itself with no government intervention yet still learned the wrong lesson from Japan's Lost Decade, calling for bridges to nowhere and irresponsible monetary policy.

Ben Bernanke and the Great Depression

Bernanke claims to follow Friedman and Schwartz but Schwartz recently criticized Bernanke's actions.

Bernanke said:

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again. ("On Milton Friedman's Ninetieth Birthday," Remarks by Governor Ben S. Bernanke At the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois, November 8, 2002)
Milton Friedman and Anna Schwartz's Monetary History of the United States 1867-1960 did conclude that the Fed's tight monetary policy caused or exacerbated certain downturns but (despite at one point writing that there was no inflation in the 1920s by confusing money supply with wholesale prices) their data also show that first the money supply (stock of money) soared almost 50% 1921-1929:

Bernanke seems to have learned only half of the lesson, how to inflate to stimulate the economy through a crash, but not the more important lesson, not to cause a crash in the first place by having overinflated an overheated bubble that pops.

Bernanke's "won't do it again" seems to refer not to blowing another bubble--he has no qualms about that--but to a confidence that he will not allow the bubble to deflate.

Bernanke's mental toolbox contains only 2 tools, inflate and inflate more.

Bernanke is so paranoid of deflation and the gold standard that he does not seem to notice how many of his "successful" inflation cases involve fascism and/or war (1920-30s Germany, Japan, Spain, China . . . and even 1930s Sweden embarked on a military buildup and eugenics program of forced sterilizations).

Bernanke also failed to learn the lessons about transparency and consistent rule of law (a nation of laws, not of men):
Anna Schwartz stepped forward to rebuke Bernanke and insist that he failed to learn her and Friedman's lessons:
SCHWARTZ: [T]he trouble with the way the Fed operated when it rescued Bear Stearns, the market then believed this was a signal of the way the Federal Reserve would perform. If the Fed and the Treasury made a candid statement to the market: We will help a bank, which basically is solvent. We will not do that for a bank, which is on the verge of bankruptcy. And then the market understands there are principles. That's why when Lehman Brothers was permitted to fail, the market was simply bewildered. Because here you had treated Bear Stearns in this kindly fashion, and what reason was there not to do the same when Lehman Brothers arose?

...The market is just bewildered. Bernanke came into office insisting that the Fed would be much more transparent than it had been in the past. But I don't believe that it's lived up to that. If the market understood what the Fed was planning in each case, and could see a design, then I think the market would have reacted much more positively.

Ryssdal: It sounds like you're frustrated with Chairman Bernanke and the White House, that they maybe haven't learned the lessons of history that you and Milton Friedman wrote about.

SCHWARTZ: Well, I think that that's a fair statement. Considering Bernanke's background, you would have expected a much more, should I say a tidy kind of performance by the Federal Reserve. Seemed to be something that was ad hoc and introduced without considering all the implications.

Ryssdal: You know, Alan Greenspan was lionized in this country for many years. And then a year ago went up to Capitol Hill and said, "You know what, I blew it." Does he get the appropriate amount of credit and/or blame for this whole thing?

SCHWARTZ: Well, I think the verdict of history will be different with regard to his stature than it has been so far.

Ryssdal: When an economic historian comes along in 25 or 30 years and tries to do for this episode what you and Professor Friedman did for the Great Depression, what's their verdict going to be on the monetary policy that the Fed has been following?

SCHWARTZ: Well, there has not been a straight line in the programs that the Fed has introduced over this period. So, I don't know whether the verdict will be charitable. It's always possible to find reasons why other alternatives were not really available. But I think on the whole the performance has been disappointing. Because now two years and more after Bernanke came into office we don't see visible signs of change for the better.

("Taking Stock: Lessons from History," Marketplace radio, 6/9/09)

Schwartz also condemned Bush and Obama for the bailouts.

Paul Krugman, the Great Depression, and Japan's Lost Decade

Krugman admitted that economies would fix themselves yet he remains a compulsive debt addict and serial bubble blower.

Economist Paul Krugman in 2002 gave a nod to the 2002+ Greenspan-Bernanke debt bubble as a "solution" to the previous debt bubble (1990s stock/, when Krugman wrote about the 2001 recession and official policy to create a housing bubble intentionally:
To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble. ("Dubya's Double Dip?" Paul Krugman, New York Times, 8/2/02, hat tip: Mish)
Update 6/18/09: Krugman is now trying to deny that he supported the housing bubble as stimulus. He argues that the quote is analysis, not endorsement. However, his analysis of the possible pushes a binary choice: If fighting the recession requires a housing bubble (which is what his 2002 quote says), then no housing bubble means not fighting the recession. Was Krugman pro-recession?

Are we supposed to believe that Krugman is a liquidationist? No, Krugman rejected 1929 Treasury Secretary Andrew Mellon's advice, "Liquidate labor, liquidate stocks,liquidate the farmers, liquidate real estate . . . purge the rottenness out of the system." Instead, Krugman in 1998 advocated fear to spur inflation and spending:
The only thing we need to fear is the lack of fear itself. ("Don't Panic Yet," Paul Krugman, New York Times, 8/30/98)
Krugman in 2002-2003 used fear and an "analysis" that bubbles were necessary to create a false choice between a housing bubble and dying children:
This is not just a recession, . . . Not just an economic challenge. We've gone off the rails. . . . you want to think Charles Dickens. It's going to be poverty of a kind that we don't think of as happening to people in America. If you look at the things that are actually being severely underfunded now, the biggest burden seems to fall on children. We're stripping away programs that provide that basic floor for medical care and for nutrition. I'll bet we're going to see a substantial rise in infant mortality and more low-birth-weight infants. We'll see more children dying because their illnesses were untreated. It's gonna be a pretty harsh place. You can come back to me in fifteen years and see if this is right. (Paul Krugman, quoted in "Voodoo Economics," Will Dana, Rolling Stone, 5/29/03)
If we needed a housing bubble to fight a recession that was barreling toward Dickensian poverty and dying children, and Krugman refused to support a housing bubble, is Krugman now saying that he preferred dying children?

Be careful when you claim that we have no choice but to "need" bubbles.

Are the bubbles in our stars, or in your heart, Dr. Krugman?

Krugman in 2009 is pushing yet another debt bubble as a "solution" to the housing-bubble crash, citing both the Great Depression and 1990s Japan's Lost Decade:
The second example is Japan in the 1990s. After slumping early in the decade, Japan experienced a partial recovery, with the economy growing almost 3 percent in 1996. Policy makers responded by shifting their focus to the budget deficit, raising taxes and cutting spending. Japan proceeded to slide back into recession. ("Stay the Course," Paul Krugman, New York Times, 6/14/09, hat tip: CR)
Can you find Krugman's draconian frugality in these graphs of Japanese deficits and debt?

Japanese budget deficits as a percentage of GDP show only slight bumps on a decade of descent into red ink:

Japanese gross government debt as a percentage of GDP skyrocketed toward 200% of GDP:

Krugman in 1998 called for wasteful bridges to nowhere (long before other people attached the term to the Gravina Island Alaska "bridge to nowhere" in 2005) despite the failure of fiscal stimulus:
Japan has already engaged in extensive public works spending in an unsuccessful attempt to stimulate its economy. Much of this spending has been notoriously unproductive: bridges more or less to nowhere, airports few people use, etc.. True, since the economy is demand- rather than supply-constrained even wasteful spending is better than none. ("Japan's Trap," Paul Krugman, May 1998)
Krugman in 1998 literally called for irresponsible monetary policy and negative interest rates:
The way to make monetary policy effective, then, is for the central bank to credibly promise to be irresponsible - to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs. (original emphasis, "Japan's Trap," Paul Krugman, May 1998)
Instead of learning not to do drugs, Krugman and Bernanke think they have learned how to stay permanently high.

Bernanke and Obama are trying to concentrate even more centralized authority even though Bernanke knows Friedman and Schwartz's analysis that the DEcentralized pre-Fed system would have resulted in LESS of a banking crisis in 1929-1933:
[U]nder institutional arrangements that existed before the establishment of the Federal Reserve, bank failures of the scale of those in 1929-33 would not have occurred, even in an economic downturn as severe as that in the Depression. . . . Before the creation of the Federal Reserve, Friedman and Schwartz noted, bank panics were typically handled by banks themselves--for example, through urban consortiums of private banks called clearinghouses. If a run on one or more banks in a city began, the clearinghouse might declare a suspension of payments, meaning that, temporarily, deposits would not be convertible into cash. Larger, stronger banks would then take the lead, first, in determining that the banks under attack were in fact fundamentally solvent, and second, in lending cash to those banks that needed to meet withdrawals. Though not an entirely satisfactory solution--the suspension of payments for several weeks was a significant hardship for the public--the system of suspension of payments usually prevented local banking panics from spreading or persisting (Gorton and Mullineaux, 1987). Large, solvent banks had an incentive to participate in curing panics because they knew that an unchecked panic might ultimately threaten their own deposits. ("On Milton Friedman's Ninetieth Birthday," Remarks by Governor Ben S. Bernanke At the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois, November 8, 2002)
Krugman admitted in 1998 that economies auto-regulate to fix themselves:
Even without any policy action, price adjustment or spontaneous structural change will eventually solve the problem. In the long run Japan will work its way out of the trap, whatever the policy response. ("Japan's Trap," Paul Krugman, May 1998)
The next time anyone says that the economy would have been even worse without the government policy, remember that even Paul Krugman said that economies tend to fix themselves, despite whatever headless-chicken government policy delayed the recovery.

Someone should tell Obama and Bernanke that economies do fix themselves after all.

Monday, May 18, 2009

US Government Spending Consumes World GDP

The final bill for the Global War on Savers will be vastly larger than the final bill for the Global War on Terror.

Peak Nominal GDP
Ballpark figures rounded to nearest Trillion (T) to ease understanding

(updated figures)

World’s 10 Biggest Economies
$17T = EU
$14T = US
$4T = Japan
$3T = China
$1T each(descending) = Canada, Brazil, Russia, India, Mexico, S. Korea

$55T = World
$20T = World except top 3 (EU, US, Japan)
$11T = World except top 10

First, think of all the Chinese things you buy, the jokes that “everything” bought in America is made in China, and think of the total labor of 1.3 BILLION people in China:

US 2009 federal budget ($3T) = GDP of China

The problem with consuming China is that half an hour later Nancy Pelosi is hungry again.

US 2009 federal deficit ($2T) = GDP of India and Mexico combined (or GDP of wealthy Italy, a G7 country)

The $2T deficit is not the US federal government total spending, that $2T is only the EXTRA spending beyond the federal government’s income (overdrawn your account), as in:

“Oops, silly us, we accidentally spent an extra Italy."

That is a deficit nearly equal to every single item produced by Italy, down to the last ravioli.

Remember, an Italy here, an Italy there, and pretty soon you are talking real money.

US 2008 government spending (federal/state/local) ($5T) = GDP of China, India, and half of Russia combined (about 2 ½ billion people) (or GDP of wealthy Japan and S. Korea combined)

US governments spent 5 TRILLION dollars of your money in 1 year alone (more than the total annual output/income of 2 ½ BILLION people) yet moan that they didn’t have enough money to fill potholes or fix leaky school roofs. They accidentally must have misplaced the $5T, or spent the $5T on something else--they can’t quite remember--so this year they helped themselves to another $5T--plus a 6th trillion of your money--just, you know, because.

US 2009 government spending (federal/state/local) ($6T) = GDP of China, India, Russia, and a quarter of Brazil combined (or GDP of wealthy Japan, S. Korea, and half of Canada combined)

US debt today ($11T) = the entire world’s GDP except the top 10 economies (counting the EU as 1 economy), greater than the entire annual production of several continents including all of South America, Africa, and Australia combined.

Obama plans to almost DOUBLE that debt to $20T.

US debt after Obama’s plan ($20T) = the entire world’s GDP except the top 3 economies.

Remember to include US unfunded liabilities that you owe (Social Security, Medicare, etc.):

US Unfunded liabilities ($50T-$70T) = the entire GDP of PLANET EARTH

Obama Fiddles while Rome Burns:

The U.S. Government's unsustainable debt-spending overconsumption and consumer-debt overconsumption policies will cripple not only the US economy but also the world economy.

Sunday, May 17, 2009

Obama's Personal Bailout By Taxpayers?

Debtor in Chief Obama failed to manage his own household family budget well.

Barack Obama ran his own household family budget like a stereotypical overspending, over-indebted yuppie:

It is no surprise that President Obama supports unprecedented spending and borrowing in the federal budget since he has never suffered any consequences from the excessive spending and borrowing in his private life.

And I'm not just talking about the First Lady's $540 sneakers.

A close examination of their finances shows that the Obamas were living off lines of credit along with other income for several years until 2005 . . .

This means they spent perhaps $80,000 beyond their income from 1999 to 2004. ("President Obama's troubling mantra: In debt, we trust," Richard Henry Lee, Daily News, 5/2/09)

Obama's "Home ATM": Equity Harvesting with Mortgage Equity Withrawals (MEW)

The Obamas took out so many loans that their mortgage exceeded the purchase price of their home, because they used their home as an ATM and ate their home equity via a MEW to cash in on the housing bubble to finance things like $10k in piano and dance lessons and other consumption.

The "home ATM" (MEW) was a major cause of the bubble and, after house/asset prices inevitably contracted to saner levels, the resulting underwater borrowers (owing more than house is worth), foreclosures, and economic crash.

The home ATM (MEW) accounted for 75% of GDP growth between 2003 and 2006. (Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy, Barry Ritholtz 2009, hat tip: Eddy Elfenbein, Seeking Alpha)

That unhealthy "growth" was overreaching people overheating your economy by overextending themselves with debt.

Obama is the type of person who CAUSED the foreclosure mess yet somehow he has been promoted to be in charge of fixing it.

A classic political platitude is to say that the government budget should be run like a household budget. If Obama runs the federal budget like he ran his own finances, we are all in deep trouble.

Obama's financial fortunes did not turn around until he became a US senator and cashed in on his new national celebrity:

But in 2005, Obama's book sales soared and the royalties poured in. Michelle explained, "It was like Jack and his magic beans."

Yes, a taxpayer-funded job can be quite a cash cow.

Maybe Obama's next economic recovery plan will make every American a senator.

It is no wonder that Obama's federal budget plans assume that money suddenly will appear out of nowhere sometime in the future and make our deficit problems vanish.

Sudden multi-millionaire Obama again cashed in (now on the presidency) with a lucrative $500,000 book deal signed only 5 days before his inauguration and took a trip to Europe to hobnob with European royalty while mocking average American workers by starting their paltry $13/week tax cut on April Fool's Day.

Ask not what your government can do for you, ask what you can do for Obama.

Taxpayer-funded tourists Barack and Michelle Obama in Europe pose with British Queen Elizabeth II.

Friday, May 15, 2009

The Great Pre-Recovery and other Orwellian Newspeak

Satire Becomes Reality in Our Economic Theater of the Absurd

I previously satirized the fanciful, pollyanish economic spin of the bubble bulls by coining the following phrase:

The Great Pre-Recovery

The Great Pre-Recovery is an Orwellian euphemism for The Great Depression II (our current economy).


The Great Pre-Recovery satirized the real attempt to push nationalization with the term, "pre-privatization"--shamelessly using the term "privatization" to describe the opposite of privatization, the end of private property (government siezure).

Pre-privatized is like a bank robber demanding a pre-deposit at gunpoint.

Bush could have described his Iraq invasion as a pre-withdrawal.

Pre-recovery is the opposite of recovery, before recovery, the lack of any recovery.

Now, truth is as strange as fiction as a real financial analyst uses the "pre-recovery" term:

“The data says contraction is slowing,” said Andrew Richman, who oversees $10 billion in fixed-income assets as a strategist in West Palm Beach, Florida, for SunTrust Bank’s personal-asset management division. “It’s a sign of pre- recovery and it’s negative for Treasuries.” ("Treasuries Fall as Reports Show Improved Manufacturing Outlook," Susanne Walker, Bloomberg, 5/15/09, Hat tip: Mish)
Parody is difficult when real-life "experts"/"leaders" reach new levels of absurdity every day.

More surreal analogies:

A Christman Carol: Ghosts of Christmas
(May 2009)

Orwellian Newspeak (Doublespeak): Doubleplusgood (July 2008)

Vietnam War 5 O'Clock Follies (Nov. 2007)*Correctly Called Recession

Alice in Wonderland (Oct. 2007)

Science Fiction analogies:

Brazil (1985): Spoor and Dowser "fix" the ductwork (May 2009)

Star Trek (1966): Evil-Twin Captain Kirk Asserts Command (May 2009)

Spaceballs (1987): "Lord Dark Helmet" Bernanke Goes to Plaid (October 2008)

Thursday, May 14, 2009

Stimulus Bailout Malinvestment Nightmare To Come

You will be haunted by 3 ghosts, the Ghost of Malinvestments Past, the Ghost of Malinvestments Present, and the Ghost of Malinvestments Yet To Come.

GHOST OF MALINVESTMENT PAST (Pre-Peak Housing/Credit Bubble)

Past is Prologue: America learned nothing from the 1990s Asian real estate bubble and 1997 Asian financial crisis that left Asia littered with derelict"modern ruins," the "ghost towers":


We instead launched our own stock and housing bubbles even as the Asian bubble imploded.

The massive oversupply of residential buildings (houses/homes, condos) and commercial real estate (CRE) (malls, auto dealerships, coffee shops) not only wastes resources in their initial construction but further wastes resources when the resulting infrastructure is destroyed, either by negligence (frozen water pipes in abandoned buildings), vandalism, or deliberate economic decision.

Bulldozing Brand New Houses

The classic joke about the malinvestment of make-work, the absurdity of paying people to dig holes and then paying people to fill those holes, is now a reality as owners are bulldozing brand new houses in Victorville California.

If there is a picture in the dictionary for malinvestment, bulldozing Victorville's housing-bubble homes could be it:


Apocolypse Now Lt. Col. Bill Kilgore says,
"I love the smell of malinvestments in the morning....Smells like...Victorville."


Obama embraces the Vietnam War cliche, "to destroy the village in order to save it" (often attributed to a US major regarding the destruction of Ben Tre, 1968):
Dozens of US cities may have entire neighbourhoods bulldozed as part of drastic "shrink to survive" proposals being considered by the Obama administration to tackle economic decline. . . . The US government is looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature. . . . Local [Flint Michigan] politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area. ("US Cities May Have To Be Bulldozed to Survive,", Tom Leonard, 6/12/09, hat tip: Beemer)

GHOST OF MALINVESTMENT PRESENT (Post-Peak Housing/Credit Bubble)

Sob stories about alleged credit crunches and tight budgets do not match ongoing profligacy.

Multi-Million-Dollar School Swimming Pools Despite Financial Crisis

NYC Co-Op City Harry S. Truman school is trying to spend at least $3 million dollars on an olympic-sized swimming pool:
"People keep thinking of having a pool as a luxury, but it's not," said Truman Principal Sana Nasser. "It's just as crucial as learning arithmetic and reading, as far as I'm concerned." ("Co-op City calls for restoration of Harry Truman High School pools," Tanyanika Samuels, New York Daily News, 6/16/08)
Painting Ourselves into a Corner with Multi-Million-Dollar Art Subsidies Despite Financial Crisis

A public-radio commentator suggested that stimulus should subsidize public-radio commentators, citing New Deal subsidies for writers and artists.

Another public-radio ( NPR) commentator talked of an "arts czar" and "arts corps," praising $50 million for 14,000 NEA art jobs.

During the [Obama] transition, arts advocates floated some big ideas—including the creation of an arts corps to bring young artists into underfunded schools, the expansion of unemployment support and job retraining to people working in creative industries and the appointment of a senior-level "arts czar" in the administration. . . . In January they lobbied for $50 million for the NEA in the stimulus package and prevailed over Republican opposition. The one-time allocation will preserve more than 14,000 jobs, allow for new stimulus grants and leverage hundreds of millions more in private support for the arts. Two million Americans list "artist" as their primary occupation. Nearly 6 million workers are employed in the nonprofit arts-and-culture complex. In the words of the NEA's Patrice Walker Powell, the stimulus vote finally "dignified [them] as part of the American workforce." ("The Creativity Stimulus," Jeff Chang, NPR, 4/22/09)

Strangling the Economy in Red Tape and Parasitic Grants

The "recovery" programs are preventing recovery by converting all economic activity into begging for government hand-outs ("rent seeking"--transfering wealth made by others instead of creating wealth).

Cumberland County Maine grants coordinator Elizabeth Trice (?) is “spending a lot of time” on groping for stimulus funds and wading through a maze of mostly irrelevant material.

Hundreds of county and city officials attended a 9-hour White House Recovery and Reinvestment Act Implementation Conference in Washington DC.

National Association of Counties President-Elect Valerie Brown called the byzantine welfare mess“exciting” and “wonderful.” ("Local Governments Tackle Federal Grant Process," Elizabeth Blair, NPR, 3/25/09)


The grants and other "stimulus" programs will have the opposite effect and mire the economy in a morass of fraud, corruption, rent seeking, squandered labor, wasted resources, misallocation of capital, crowding-out (government spending monopoly starves productive investments of funds), and hyper debt.
The FBI is bracing for a wave of fraud and corruption cases stemming from the government's multitrillion-dollar effort to get the economy moving again, the agency's chief told Congress Wednesday. ("FBI: Stimulus, Bailout Will Lead to More Fraud," 3/25/09)
UPDATE 9/16/09: I hate to say I told you so but Congress presented Malinvestment Exhibit A, Cash for Clunkers.

Obama is trying to perpetuate Bush's "guns and butter" debt bubble while pretending to favor sound economic policy and pretending to solve the economic crisis.

What will America's epitaph be?