Inflation or Deflation? Money Supply, Credit Supply

Measure Money and Credit
NOT Prices, Wealth, Assets, Velocity, Transparency

People debating inflation/deflation often take the Austrian economics' definition:

Inflation = Increased supply of money and credit (combined)

Deflation = Decreased supply of money and credit (combined)

Therefore, the following are NOT inflation/deflation:

• Prices: Many deflationists rightly state that price increases are not inflation (such as when gas prices were rising during the current recession). As Milton Friedman and Anna Schwartz wrote, "Inflation is always and everywhere a monetary phenomenon." In contrast, prices can be a lagging-indicator effect of inflation/deflation (monetary phenomenon) or an effect of supply and demand (production phenomenon). The Federal Reserve confuses people by using prices (CPI, PCEPI) as an inflation measure. Actually, prices can rise even during deflation if supply (relative to demand) drops faster than money/credit supply drops (a common definition of "real" (relative) "inflation" (actually, general prices increases) as "too much money chasing too few goods" explains prices by combining the monetary effect with the production effect, money relative to production, but we will stick with inflation/deflation as absolute money/credit supply for clarity). If rising gas prices are not inflation, falling gas prices are not deflation. We saw years of inflation with falling prices in electronics. Beware when people cite falling prices such as gas, wages, and assets (not money/credit supply).
• "Wealth Destruction" ("Asset Deflation"): These terms often misleadingly refer not to actual wealth destruction (your quart of milk spoils), nor to money destruction (burn a dollar bill), nor to credit destruction (pay off your credit card), but to price declines, which we already know are not deflation (see the previous paragraph). First, asset destruction (house burns down) is different from asset price declines (house assessed value declines but is still the same house providing the same housing shelter). Price decline from peak is different from price decline from purchase price (house or 401k goes up 2 pennies and then down 1 penny--despite the "asset deflation," you did not lose a penny, you gained a penny). Prices can decline without practical wealth destruction when dealing with unreal, unrealized "paper" profits/losses. Second, money does not equal asset value even in "normal" markets when house prices do not decline. Someone with a 5% 30-year fixed-rate mortgage (FRM) will pay almost $600k for a $300k house after interest ($280k interest). Third, asset prices can plummet without decreasing the money/credit supply by a single penny. If someone buys a house for $300k, sells it to you for $600k, and then overnight the value drops back to $300k, the $600k is still in the economy (you gave the $600k to the seller, plus you still have $1.16 Million debt payments to give to the bank ($600k + $560k interest @ 5% 30yr FRM) if you used a no-money-down mortgage). That case is wealth transfer, not wealth destruction. Asset price fell (50%), Loan To Value (LTV) ratio rose (from 100% to 200%), and money/credit supply remained unchanged. Assets are not money. Assets are not credit. If you prefer, not all assets are money/credit. Beware when people cite falling asset values (not money/credit supply).
• Velocity: Velocity, the turnover rate or frequency at which people exchange money, is an effect of economic activity, not the cause of it as central planners like to say (people need a productive reason to exchange money and increased velocity is a consequence--but politicians prefer higher velocity even for unproductive make-work because they profit from churning even wealth-destroying transactions). Do not confuse the number (supply) of an item with the number of people using that item. If your street of 10 people shares 1 lawnmower, together you have 1 lawnmower, not 10 lawnmowers (1 "high-velocity" lawnmower that travels a lot, instead of 10 low-velocity lawnmowers that each stay in 1 yard). Velocity is the speed of the money/credit supply. Velocity is not the money/credit supply. Velocity is not money. Velocity is not credit. Beware when people cite the speed of money (not the supply of money). Beware when people cite the number of dollar transactions (not the number of dollars). Beware when people cite decreased velocity (not money/credit supply).
• Hypothetical Transparency (Mark-to-Market Price Discovery): "If credit were marked to market (write-down bad loans), we would have deflation" is not a factual statement, it is a conditional statement (what if). "If pigs had wings, they could fly. Therefore, pigs can fly." That conclusion is wrong because the prerequisite condition does not exist. Pigs do not have wings. Credit is not marked to market. The whole point of government interventions to date has been to prevent accurate mark-to-market of credit and assets (prevent price discovery and transparency). Beware when people cite what-ifs (not actual money/credit supply).

Prices, wealth, velocity, and transparency are important economic factors but they are NOT the money/credit supply.

You can see that these variables are distinct in the modified Quantity Theory of Money formula:

MV=PY

M=Money
V=Velocity
P=Prices
Y=Income (Keynesians replaced T=Transactions with Y)

If you want to know the money/credit supply, measure the money/credit supply.

Measure actual money/credit supply and the jury is still out on the inflation/deflation debate:

• Congress: Spend, spend, spend. Your 2008 Chinese Payday Loan (Bush stimulus package) stuffed everyone's mailboxes with $168 Billion in cash, which is about an extra 1% GDP, an extra 3% of M Prime, or an extra 10% of M1--and remember the fractional-reserve multiplier on the $168B. Many politicians last year called for another stimulus program (another 1% of GDP and 10% of M1? Cumulative +2% of GDP and +20% of M1?), in addition to the federal spending increase for FYE 2009 (early estimated at 7% more than 2008, about an extra 1.5% of GDP). Economist Joseph Stiglitz wants Congress to flood state and local governments with cash to de facto void your state constitutions (balanced-budget requirements). The Congressional Budget Office (CBO) estimated that the Federal budget deficit will be 4% or more per year for 10 years, which is cumulatively extra money/credit/debt of 40% of GDP (that does not count all the compounded interest that you will owe on an extra 40% of US GDP).
• Federal Reserve: Print, print, print. Federal Reserve Chairman Ben Bernanke began his Zimbabwe Plan for America with drastic slashes to the Fed fund's target interest rate and eased his RATE of monetary stimulus only when Congress began its fiscal stimulus in early 2008 (which is partly why Bernanke should resign and we should abolish the Fed). He added a Byzantine maze of experimental, arguably illegal, alphabet-soup programs (TAF, TSLF, PDCF, etc.) to stimulate beyond the scope of traditional Fed funds. He continued to cut the Fed's target interest rate to 0% (turning the long-standing ZIRP jokes into reality, ie turning America into a joke) to add to the fiscal stimuli's fuel. He announced limitless liquidity and quantitative easing. Do not assume that 0% is a floor--Bernanke was hired to innovate, Obama loves conducting hastily and poorly designed "bold" experiments on you, and they might become desperate enough to rig a negative, nominal interest rate (PS: After all, a retail bank's monthly fees in excess of interest paid and a central bank's inflation is each a de facto negative interest rate but people accept it) (update links: Fed claims economy needs negative 5% interest rate, Fail penalty creates negative interest rate in Treasury repurchase agreements (repos), Japan considers negative 4% interest rate by taxing cash, Sweden's central bank Riksbanken cut its repo rate to negative 0.25% (hat tip: bANK fAILURE (sic)).
• Banks: Lend, lend, lend. Consumers: Borrow, borrow, borrow. Has the credit supply decreased significantly, or at all? A decrease in the rate of growth of credit (slower credit growth but still credit growth) is different from a decrease in credit (negative number reducing the total credit supply). Total outstanding credit can increase even while new lending decreases if loan repayments diminish even more (during a recession with job loss and lower income, people might switch to minimum payments or even increase debt). Total outstanding US consumer credit hit a record high in 2008 (9/08) and the latest figures (2/09) show US consumer credit is less than 1% from the highest point in history set during the so-called "credit crunch" (9/08), higher than any month before the so-called "credit crisis" began in August 2007, and higher than any month during the massive credit boom (see graphs and tables, updated).

Deflation would be the natural consequence and beneficial solution to the economic bubble, which is why the government is fighting to prevent the solution--and the charred battleground is your wallet.

Madoff Case Proves Danger of Trusting Government

Bernard L. Madoff's Ponzi Scheme Loses $50 Billion of Investors Money

. . . And Illustrates How Government Regulation Creates/Enables Financial Fraud

Ambulance-chasers who exploit this financial-fraud train-wreck for a power-grab to increase the government regulatory burden fail to understand history and human nature.

Ivar Kreuger "The Match King" created a post-WWI, massive, international Ponzi scheme including mortgage/asset-backed securities that finally imploded during the Great Depression. (hat tip: Energyecon)

• Regulators created the Securities Act of 1933, the Securities Exchange Act of 1934, and the Section 4 Securities and Exchange Commission (SEC) as more "never again" empty promises that were supposed to prevent another Kreuger but failed to prevent Enron, Madoff, etc.
• Regulators created the 1934 SEC and Glass-Steagall Act of 1933 to prevent more financial fraud/collapses but failed to prevent Madoff even during the red flags (or whistleblower Harry Markopolos' complaints dropped in the SEC's lap) in 1992 and 1999 (before the alleged deregulations of pro-regulation George W. Bush (pro-SOX, pro-TARP)).
• Regulators created the post-Enron Sarbanes-Oxley Act of 2002 (SarbOx or SOX) as another "never again" empty promise that failed to prevent Madoff or any of the housing/financial-bubble fraud or the current global financial crisis.
• Regulators not only failed to stop Madoff but instead the SEC lavished him with a special privilege named after him, the "Madoff Exception" (hat tip: Trader Walt):
  Madoff Exception mentioned in: "Regulation SHO, Rule 202T – Temporary Rule related to Establishment of a Pilot Program"
  "The SEC’s Short Sale Rule (Exchange Act Rule 10a-1) states that a listed security must be sold short at a plus tick price or at a zero-plus tick with two exceptions (the equalizing exemption (Exchange Act Rule 10a-1(e)(5)) and the Madoff exception). Rule 2O2T is a temporary rule that creates procedures for the Commission to establish a Pilot Program to analyze the necessity and effectiveness of current tick test restrictions. The Pilot Program established will exclude designated securities from the requirements of the tick test (or any other SRO-specific price test) from May 2, 2005 until April 28, 2006." (CHICAGO STOCK EXCHANGE, INC. MARKET REGULATION DEPARTMENT INFORMATION MEMORANDUM, MR-05-6, 4/27/05)

The SEC's Madoff Exception is a classic example of how government creates/enables fraud by granting ANTI-free-market, ANTI-competitive powers to special interests, even criminals.

Madoff paid political contributions to officials including (home of Wall Street) New York Senators Chuck Schumer and Hillary Clinton.

"SEC Official Married into Madoff Family"
"Madoff boasted of his 'very close' relationship with a SEC regulator, chuckling as he said, 'in fact, my niece even married one.'" Former SEC assistant director of the Office of Compliance Inspections and Examinations Eric Swanson married Madoff's compliance lawyer, niece Shana Madoff.

The SEC then insulted the American public by, after the SEC shepherded the fraud's "stunning . . . duration" through 2 decades of inaction or rewarding Madoff, boasting that it was moving "quickly and decisively":

"Our complaint alleges a stunning fraud -- both in terms of scope and duration," said Scott Friestad, the SEC's deputy enforcer. "We are moving quickly and decisively to stop the scheme and protect the remaining assets for investors." ("Bernard
Madoff arrested over alleged $50 billion fraud," Edith Honan and Dan Wilchins, Reuters, 12/12/08)

Why Government Regulations Fail To Do What They Promise:

When the Insider Trader IS the Government Regulator: HUD/Feds Knew Subprime Mortgage Danger 1 1/2 Years Ago [2005/2006].

Federal Reserve Blind to Housing Bubble: BLS OER V. Case Shiller HPI.

Did Government Create Mortgage Securities Mess? Is It about To Repeat Its Mistake?

SEC NRSRO Causes Asset Mispricing?

New Deal, Sarbanes Oxley (SOX), Homeland Security, Resolution Trust Corps (RTC) Recidivism: Financial Regulation Stupidity Roundup.

FDIC Fails. WaMu Bank Refuses to Cash Federal Check.

Abolish the Federal Reserve Central Bank: Declararation of Financial Independence.

Detroit Big 3 Bailout Misses Supply-Demand Big Picture

Rescue Chrysler/GM = Kill Ford

Auto Dealerships Offering Buy-One-Car-Get-A-Second-Car-Free Expose Bailout's Folly

The people crying that the automobile industry is X-million jobs or X-percent of the economy should have bought a controlling interest in GM a decade ago and reformed it, instead of trying to rob the public today.

The odds that every single job would evaporate are remote.

There are 2 basic possibilities:

1. If bankruptcies collapsed production below demand, other companies would hire new employees or contract new parts suppliers to pick up the slack. Jobs could shift to a remaining US legacy company (Ford?-which said it does not need the bailout), or Toyota (in America), or new electric vehicle (EV) startup companies such as Tesla Motors, or new industries not anticipated by the Luddites.

2. If current capacity/supply/production is higher than demand, then a reduction in production is welcome and a reduction in producers is understandable (actually, even with higher production, it is better to make more things with less labor—have you noticed that 98% of Americans are not farmers (not in an agricultural job of the labor force)?). Treating the current automaker size or number as a static, sacred, magic number is ridiculous. People allege that autos and “related” companies take-up 1/7 of the economy—but trying to freeze that number in a dynamic economy can damage you and the whole country if the proper, wealth-maximizing proportion is only 1/21 of the economy (1/3 of the current size).

Weeks of public debate overlook the main point:

GM exists to provide cars to consumers, not jobs/health-care/pensions to employees.

If we have an automobile oversupply (do not need new cars):

• Making more unwanted cars is a waste of resources, including unnecessary pollution and oil depletion for the workers to drive to work to waste resources.
• Any car sale that the government guarantees for Chrysler or GM probably steals that car sale from Ford.
• Any Chrysler or GM job the government saves probably takes a job away from a Ford worker.

Automobile Oversupply Indicators:

• Japanese car makers’ sales slid about as much as US car makers’ sales did (which might indicate comparable car value, but the Japanese companies apparently put themselves in better financial shape in the good times to ride-out the bad times). 6 companies at 2/3 capacity equals 4 companies at full capacity and 2 companies obsolete.
• Automobile backlogs already are piling up in ports (note the probable typo "spurn" at the end).
• US and European auto dealers already are offering buy-one-get-one-free offers on automobiles.

We already have an oversupply. Why build more? Why bailout Chrysler/GM by killing Ford?

If Detroit had a solid plan to make and sell good cars at a good price, it would attract private investors (dismiss the "only government can do it" ploy and look at the dollar amount of money on the sidelines that pumps even a +1% stock-market rally).

Imagine if Detroit’s auto executives and the United Auto Workers (UAW) union spent as much time trying to build good cars as they spend trying to break into your bank account for a bailout.

Big Lie of "Credit Crunch"

Market Says We Need LESS Credit but Government Continues Its Force-Feeding to Cram Debt Down Your Throat

The Wall Steet Journal's 12/11/08 "Freight Haulers Slam on the Brakes --Expecting the Weakest Year in Three Decades, Truck, Rail and Ocean Shipping Firms Are Cutting Back" (hat tip: CR):

“In a normal year, Gordon Trucking Inc. might replace 20% of its fleet of 1,500 big rigs with new trucks. But given the bleak outlook for the freight business, the Pacific, Wash., hauler doesn't intend to buy a single new truck next year.”

“’We're settling in for nuclear winter in the first half of 2009,’ says Steve Gordon, operating chief for the company, which hauls everything from paper products to electronics.”

"Some industry executives and analysts predict that 2009 could be the worst year for freight-transportation volume in three decades or more." (emphasis added)

Less VOLUME is less DEMAND.

• The companies do not NEED more trucks.
• The companies do not NEED more credit to buy trucks.

Business-investment increases typically signal economic recovery but the current investment reduction is healthy because demand for trucks is less.

• The problem of business overinvestment (overcapacity) is solved by less investment.
• The problem of overconsumption is solved by less consumption.

American consumers apparently do not need to replace their 30" TVs with 35" TVs after all.

Government/media propaganda about “lack” of credit is false.

We need LESS credit SUPPLY because we have LESS credit DEMAND--as in truck companies needing less credit because they need fewer trucks because they have less freight to move.

This is not rocket science.

We DO need transparency and price discovery, which is the exact solution that the government bailouts are designed to prevent.

Obama=Bush: Infrastructure Alternative-Energy Bubble Economics

Obama Essentially Pledges To Be Bush’s 3rd Term and Perpetuate Bushonomics "Guns & Butter" Bubble Economy

Barack “Bubbles” Obama follows his bellicose, chest-thumping "We will kill bin Laden. We will crush Al Qaeda" announcements to escalate the “Global War on Terror” and order his own troop surge in Afghanistan and raise a massive "civilian national security force that’s just as powerful, just as strong, just as well-funded [as the military]" with a hundreds-of-billions-of-dollars deficit-spending “infrastructure” stimulus to perpetuate the ponzi bubble economy at all costs and bury you in hyper-debt.

Old Wine in New Bubble:

Obama Incubates a New Host for the Ponzi Parasite

Do you believe “it’s different this time” as long as we say “infrastructure” and “alternative energy”?

• We just finished the largest infrastructure-building bubble in history. It was called the housing bubble. It was government policy. It caused the current global financial crisis. It indicates that the government is horrible at picking worthy infrastructure projects (leading to impoverishing malinvestment). Obama wants to do it all over again like it is a Disney ride.
• We just finished a PUBLIC/GOVERNMENT infrastructure-building bubble fueled by the housing/finance bubbles, as state/local coffers overflowed with property/income/sale taxes.
• Governments just finished proving the waste of public infrastructure programs. The always pork-ridden federal transportation bills reached new infamy with the Ketchikan Alaska "Bridge to Nowhere." The state of Minnesota raked in $13 Billion in surpluses 1997-2001 (during the dot.com bubble) and another windfall during the housing bubble, including a $294 Million surplus in the end-of-session 2007, the same year that 13 people died when the 35W St. Anthony Falls Bridge collapsed (8/1/07) after the cash-flush state government ignored “clear warning signs -- such as corroded, buckling gusset plates.” The federal and Louisiana state governments similarly botched New Orleans levee infrastructure with catastrophic and deadly results during the 2005 Hurricane Katrina. People died while governments spent their bubble revenue on “infrastructure” projects similar to more teachers' lounges (will they soon add granite countertops and stainless-steel appliances?), high-school "senior balconies," swimming pools, Maryland Department of Natural Resources (DNR) Project Open Space (POS) for “conservation areas” or Portland Oregon Bureau of Parks and Recreation’s $250,000 study for a 4-mile scenic bike path (the quarter-million dollars does not build anything, it just “studies”).
• Obama’s alternative-energy Green Bubble (the Grubble?) is a Trojan Horse to misrepresent more consumption as conservation (saying the US government "pays the highest energy bill in the world" and then demanding yet more spending on government buildings--"greenwashing" spending--instead of downsizing) (Update: Obama gives lip service to fuel-efficient vehicles but then uses his first major press conference as president to push gas-guzzling 5mpg RVs) and a recipe for malinvestment (subsidizing inefficient but politically-correct boondoggles) and pork-barrel spending for politically-connected, insider, special interests. Venture capitalist Bob Metcalfe embraces the dot.com bubble as a business model and recycles erstwhile dot.commers into the new Green Bubble, “there is a bubble. And it’s great.”
• Obama’s final attempt to assure the public that his policies will remain unsullied by reason is his “use it or lose it” criterion to force ill-considered spending decisions. Crash-spending programs cause massive waste, such as 1980s Defense Secretary Caspar “Cap” “the Ladle” Weinberger’s profligacy, the infamous $436 hammer and $640 toilet seat, and the post-9/11 security bubble including Newark NJ buying air-conditioned garbage trucks with Homeland Security money.
• Obama might be giving away your tax dollars to support drug-trafficking, prostitution, and human trafficking because of mob/mafia ties to construction. "Organized crime controls 75 percent of the construction industry in New York City through its control over the concrete industry and construction unions, an admitted mob captain told Senators [in 1988]." "New York Public Works Projects Saddled with ‘Mob Tax’." FBI investigations implicate the Gambino crime family in a 21st Century I-95 interstate highway construction project.
• Expect all the housing-bubble excesses (waste, fraud, cronyism, etc.) to continue, since Obama's "let's take this party back to my place" announcement merely shifts the bubble from residential infrastructure (housing) to non-residential infrastructure (schools, roads, or anything allegedly "civic").

Bubbles Obama seems intent on copying FDR’s folly of wasting scarce resources on parks and wall murals while people starved.

The New Deal failed to end the Great Depression.

The Greaty Society failed to end poverty.

Entombing Japan in concrete failed to end Japan's 1990s "lost decade" (more like 2 lost decades now).

Why would anyone believe today's Keynesian stimulus-addicts who promise, "but this time it's different"?

Obama's concrete will build America's mausoleum.

• The solution to a debt crisis is NOT a spending spree.
• The solution to a debt problem is NOT more debt.
• The solution to a bubble is NOT another bubble.

Is spending less money, both as an individual and as a nation, such a crime that Obama will destroy America’s finances to avoid the “horror” of spending less?

Consumer Credit Hits Record HIGH, Belying “Credit Crunch”

The “Credit Crunch” that Wasn’t

US total consumer credit hits record HIGH after a year of the so-called “credit crunch,” according to the Federal Reserve’s latest provisional figures released November 7, 2008.

The graph shows that 3rd-quarter 2008 total US consumer credit grew 3.7% above 3rd-quarter 2007, when the “credit crisis” began.

Not only did consumer credit not shrink, it grew.

September 2008 consumer credit is higher than the same month of any year prior, higher than the housing-bubble peak.

Index of US total consumer credit, growth year-over-year (YoY), September-September:

1998 = 1.00
1999 = 1.08
2000 = 1.19
2001 = 1.30
2002 = 1.40
2003 = 1.47
2004 = 1.54
2005 = 1.62
2006 = 1.69
2007 = 1.79
2008 = 1.85

Consumer credit expanded to 4 TIMES the Fed’s claimed 2% per year target for core inflation, which, after 10 years, would be a 2008 index of only 1.22.

A 2% growth rate will not double the initial amount until 36 years yet consumer credit nearly doubled in 10 years and continued its nearly relentless expansion during a year of what was supposed to be the worst credit crunch in memory.

• “Current” (2008Q3p) consumer credit would have to crash 12-13% simply to return to the 2005 level near the housing-bubble peak.
• “Current” (2008Q3p) consumer credit could crash almost 1/4 (24%) and still be higher than the 2002 level during Greenspan’s slide toward 1% Fed funds benchmark interest rate (dropped 50 basis points (bp) from 1.75% to 1.25% on 11/6/02).
• “Current” (2008Q3p) consumer credit would have to crash over 1/3 (34%) simply to reach the 10-year trend line for 2% annual growth from 1998 (22% higher than 1998--and we already were awash in credit in 1998).

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Update

Latest figures show total outstanding US consumer credit of $2.564T (2/09) at less than 1% from the highest point in history set at $2.583T (9/08) during the so-called "credit crunch," higher than any month before the so-called "credit crisis" began at $2.481T (8/07), and higher than any month during the massive credit boom.

8/07 "Credit Crunch" allegedly begins
2/09 Total outstanding US consumer credit is 3.3% higher than 8/07

Lending Keeps Growing, Growing, Growing

Total credit of all commercial banks (TOTBKCR), percent growth, Year over Year (YoY), remains well above 0 at about 2.5% growth (similar to the 1990s and 2001 recessions):


Total credit of all commercial banks (TOTBKCR), absolute levels show recent volatility but so far remain well above the pre-"Credit Crunch" levels of the massive global credit bubble:

Fed TOTBKCR

Even if consumer or bank credit does decline, does it decline by more than government debt increased or by more than money increased?

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The notion that we lack credit now is madness.

I explained over a year ago that we have no credit-supply crunch, but we do have a number of other crunches that policymakers ignore or misread.

The government continues its misguided bailouts and hyper-debt policies.

What This Means for Inflation Vs. Deflation

How To Vote Today: Last-Minute Information

Bi-Partisan Threats to You

What to do when both major candidates make a mockery of “change” and “reform.”

Barack Obama married into the infamous Chicago political machine (his wife Michelle was a Mayor Richard M. Daly staffer), built his career on corporate-welfare tax subsidies (the Annenberg Foundation, Chicago Annenberg Challenge (CAC), pushed the risky mortgages that contributed to the current global financial crisis, put former Freddie Mac chief executive and corporate lobbyist in his inner circle (vice-president (VP) selection advisor James A. "Jim" Johnson), picked a Republican John McCain clone for his VP (Joe Biden, an elderly, entrenched, establishment figure with some foreign-policy credentials), pushes Republican Mitt Romney’s health-care socialization, pushes his cousin George Bush’s tax cuts for "95%" (instead of "100%"), pushes his cousin George Bush’s wars in Afghanistan and the global war, and Obama thinks your biggest problem is that he has not been regulating you enough while he rejected regulations on himself and evaded federal campaign finance regulations (one rule for you, a different rule for him).

John McCain is one of the Keating Five scandal from the housing bubble and Savings & Loan (S&L) banking bailout of 20 years ago, sat and watched it happen all over again with the current mortgage/banking/financial crisis, picked a vice-presidential (VP) candidate (Sarah Palin) who rode the gravy train as mayor by hiring a lobbying firm to funnel your money to her small Alaska town of Wasilla (why not go all the way and pick "bubbles are for bathtubs" Kendra Todd as your VP?), talked about fiscal discipline and balanced budgets while he spent like a drunken sailor on the budget-busting $700 Billion Wall Street bailout—and the only thing that happened after he raced to DC to ram the bailout through is that his (and Obama’s) Senate larded the bill with even more pork (including rum, racetracks, and tax breaks for wooden arrow shafts), attacks Obama for being a socialist while comrade McCain pledges to socialize American housing by having the federal government go around the country buying houses--spending another $300 Billion of your money on bad mortgages, and he admitted he knows little about economics (neither does Obama) but that does not stop him from monkeying around with your economy, from the vast economic regulation of campaign-finance "reform" to the 2008 bailouts and nationalizations that will reverberate in your wallet for decades.

Libertarian candidate Bob Barr at least had the common sense and fortitude to take a stand and properly declare the McCain-Obama corporate payoff as “the bailout from hell."

It looks like people are even voting for Ron Paul (who warned us of Fannie Mae and the housing bubble at least as early as 2002) as a write-in candidate (check your local laws), where Ron Paul this morning won 7% in Hart’s Location, NH (AP, 11/4/08).

Financial Bailout, Hyper-Debt, Preemptive War, Bankruptcy

Dark Helmet: "Light speed is too slow... We're gonna have to go right to... LUDICROUS SPEED!"

(The video is down farther.)

Ben Bernanke Goes to Plaid:

Central Banks Will Provide Unlimited Liquidity (Ludicrous Liquidity)

"In order to provide broad access to liquidity and funding to financial institutions, the Bank of England (BoE), the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank (SNB) are jointly announcing further measures to improve liquidity in short-term U.S. dollar funding markets. . . ."

"Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets." ( Board of Governors of the Federal Reserve System press release, 10/13/08 )

Into the Hyper-Space of Hyper-Credit and Hyper-Debt: The Great Global Monetary Easing

Our global leaders' complete abdication of responsible finance has been planned at least for months. Not satisfied with the $516 Trillion in derivatives in the world (several times larger than total world GDP, which itself would be more properly called GDC for Consumption), Morgan Stanley's London co-chief economist Joachim Fels said back in March 2008:

"We're inching closer to the great global monetary easing."

German Totalitarianism Ascendant

NPR's appallingly biased coverage labeled the stock market's long overdue move downward toward realistic pricing as "irrational" (implying that the "mark to fantasy" bubble pricing was normal). Abandoning any shred of journalistic scrutiny, NPR obediently and unquestioningly repeated the world governments' spin that they "have no choice but to intervene for the good of the world economy."

Perhaps the translators butchered the language of Goethe but German Chancellor Angela Merkel issued this chilling declaration:

"In a social market economy, the duty of the state is to have control. The state is the guardian of order."

"An offer you can't refuse": Bailout Mafia force companies to take bailout.

Europeans Push Bush Doctrine of Preemptive War on Savers

The "crisis" does NOT justify the planned government ownership of companies, even if we accept the premise that people spend more carefully when they are not sure of price accuracy (which simply will not do, according to the bailout mongers):

• The preliminary necessary step of price discovery eliminates the purpose of the $700-Billion bailout’s existence before government buys a single mortgage.
• The governments' growing list of insurance guarantees against losses in case an asset/stock fails eliminates the purpose of government preemptively buying questionable assets/stocks before the asset/stock fails.

"Free To Choose": Sovkhozy Shares or Kolkhozy Shares?

• If I had wanted to buy stocks, I would have bought them. I do not need Bush and Merkel hacking into my E*trade account to buy stock for me.
• George Bush, Barack Obama, John McCain, Barney Frank, Gordon Brown, and Angela Merkel ran the global financial system into the ground and now they fancy themselves to be "masters of the universe" who can outsmart the market by actively trading and timing stock picks. I would ask if you are ready to bet your own money on their abilities but the bailout means that you already are betting your own money on their stock wizardry.
• The completely unnecessary expansion of government ownership will leave the stock market comprised of 2 components, the sovkhozy (government owned shares), and the kolkhozy (ostensibly non-state shares but yoked to the "public good" of governments' hyper-debt policy).

Repeat Soviets' Price Policy, Repeat Soviets' Fate: Fantasy to Oblivion

The bailouts completely cut the economy loose from its moorings and cast you adrift in a sea of unknown values. Ludwig von Mises wisely predicted that the Soviet Union would collapse because its centrally-planned fantasy prices destroyed the information about value that market prices provide to you throughout your day, whether it is to buy a soda or a house.

Once the bailouts' unlimited liquidity (cash, credit, and debt) and unlimited insurance (increasing bad risks by hiding their costs) destroy price accuracy, wealth destruction and malinvestment will run rampant (as they did in the Soviet Union).

If you think a free-market bubble correction is risky, wait until you have experienced the government's continued enforcement of "mark to fantasy," Ponzi-scheme, bubble price-fixing.

Bank Wall Street Bailout Unnecessary: You Lose

• PT Barnum must be laughing at us. There’s a sucker born every minute: Never buy something you don’t understand. People ignored that advice with complicated mortgages and--learning nothing--now repeat the mistake on a national scale by buying a complicated government bailout that they don’t understand.
• The Blind Leading the Blind: Congress does not understand the problem any better than the Wall Streeters. Many Congresspersons probably do not understand the bailout that they voted for. Senator Chris Dodd (D-CT) and others cry lack of regulation, except that Dodd incriminates himself, because he as Chairman of the Senate Banking, Housing, and Urban Affairs Committee is the very one who was supposed to have been doing the regulating and oversight all these years, except Dodd, Congressman Barney Frank (D-MA), and others were too busy pocketing cash from the banking/financial lobbyists. President George W. Bush said that "Wall Street got drunk" but his bailout pours whiskey down the drunkard's throat (the problem was too much cheap money in Wall Street, and the bailout pumps more cheap money into Wall Street). Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry “Hank” Paulson suddenly declared the need for a government takeover of Fannie Mae and Freddie Mac only a couple months after declaring them fit as a fiddle. I would not trust them to change a light bulb, much less tinker with the world’s largest economy.
• The World’s Most Expensive Telegram: So what then is the purpose of the $700 billion bailout? House Speaker Nancy Pelosi explained her intent, "Please be assured that we will have a package that will speak to the issue in a very substantial way to send a message to the markets of our seriousness." As movie mogul Samuel Goldwyn said about misusing a medium, "If you want to send a message, call Western Union." Ms. Pelosi, next time you want to send a message, get your hands out of our pockets and type an email.
• Guaranteeing that You Overpay: The bailout’s government purchase of risky mortgages with your money is a classic case of asymmetric information where the seller knows much more about what is being sold than the buyer does (as NPR noted today). That observation should result in “no sale” until the seller discloses sufficient information—but it won’t with these people at the helm. Not only is the bailout not going to require sufficient disclosure, one of the reverse auctions designed by University of Maryland professors for the bailout intends to rig the results so that the government does NOT pay the lowest price. That’s right, the plan is not only to force you to buy bad mortgages, the plan is to force you to OVERPAY for bad mortgages, on purpose.
• Bailout’s Own Premise Disproves the Need for Bailout: The bailouters allege that we need the government takeover because banks won’t buy/lend because banks don’t know the value/price of each others’ mortgages, so the bailouters claim that the government has to buy/lend in their place. The fundamental flaw in the whole bailout logic is that government doesn’t know the price either, so the bailout solves nothing (if banks can’t buy because there is no price, then government can't buy because there is no price). Therefore, the bailouters--without any inkling of their own absurdity--declare that the bailout cannot work until we know price, so the first step is a massive program to determine prices before the government can buy anything. However, once the government determines the price, the government bailout is no longer necessary, by its own premise. The preliminary necessary step of price discovery eliminates the purpose of the bailout’s existence before government buys a single mortgage.
• The government is not ending the scam. The government is taking over the scam: Dodd’s, Frank's, and others’ bailout sales pitch that you will make a killing in the real estate market when prices turn around should sound awfully familiar because it is the same "housing can only go up" pitch used by the hustlers shilling risky mortgages, except re-packaged on a vast national scale. Scams appeal to the victim’s greed or self-interest so it is no surprise that the pro-bailout crowd tell you that they are only looking out for your best interests and you have to bailout the banks for your own good and you have to buy now or lose out forever (the oily saleman's high-pressure sales tactic) and besides you will make a profit from the bailout--the only thing they didn't promise is to include a set of free steak knives if you "act now!" The bailout is NOT solving/preventing the bad practices. The bailout magnifies the bad practices exponentially. The only thing worse than the door-to-door huckster is when the real-estate huckster is the federal government. If you were smart enough to have avoided the bubble, you lose because the government is forcing you to participate in the bubble by funding the bailout. You are now the sucker in the newspaper who fell for the bad deal. If wannabe-real-estate-tycoons Dodd, Frank, and Paulson want to play Donald Trump, they should do so with their own money, not yours.
• Inviting the Foxes into the Henhouse for Another Feast at Your Expense: The government probably will hire the same highly paid mortgage/financial people who made the mistakes during the bubble and caused the credit crisis as the ones who will decide the prices in the bailout—and this time they are spending your money.
• The Money Pit: The 1980-90s Savings & Loan (S&L) bailout final cost of $125 billion was 4 times the first estimates of as low as $30 billion (contrary to recent media propaganda to try to burnish the S&L bailout's reputation). If Paulson’s $700 billion underestimates the final cost by a similar factor, the current bailout will cost almost $3 TRILLION.
• Monopoly Money: The government does not have the money. It was running deficits and putting you in debt to foreigners before the $700 billion bailout. Bush ridiculously claimed that "government is the only institution with the patience and resources to buy these assets at their current low prices and hold them until markets return" but everyone with a 401k has the patience to wait decades, the government has no patience as its instant gratification is what put us deeply in debt and caused the problem, and its only "resource" is the ability to borrow and put us deeper in debt. The federal government matched its short-term impulsiveness with shorter-term debt. The FDIC insurance increase from $100k to $250k is grossly irresponsible because, not only does the FDIC insurance subsidize insolvency and make zombie banks by design, the FDIC does not have enough money to pay for coming bank failures at the $100k level, much less $250k, so they might as well have completed the fantasy and raised the promise to $250 Trillion per depositor. Your head should be spinning that your leaders arranged/are arranging to add an astonishing $2 TRILLION to the national debt in little more than a year (original deficit, stimulus packages, bailout, and they’re not done with you yet). Add to this crushing debt its inflation (counter-deflation) and dollar depreciation.
• For the Children: Someone out there must have a little daughter named Suzie so, given politicians’ penchant to exploit children to shill bad policy, you can call the bailout the How To Financially Ruin Suzie Act of 2008.
• Irony: "Ownership Society"=Government Ownership: While Fidel Castro’s communist Cuba begins to privatize, Comrades Bush and Pelosi continue to Sovietize the American economy, centrally planning the price of individual houses, taking over the real estate market, seizing banks, nationalizing mortgage giants Fannie Mae and Freddie Mac, etc. Viva Hugo Chavez.
• Government Should Do Nothing. It Has Done Enough Damage Already: Reject the propaganda that the economy will stop. The same greed that caused the problem will solve the problem. No one can make money if the economy stops. Therefore, the economy will not stop. Even if credit did stop, that would not stop the economy. People who saved (yes, there are more than a few) can buy houses. Millions with home equity can buy houses any time they please, as long as the new house does not exceed the equity in the current house (no trading up but plenty of trading sideways if you need to move for your job). Developers who overbuilt will be selling houses one way or the other (bankruptcy liquidation). Houses will become affordable to millions as long as the government does not prevent prices from falling (trying to stop houses from getting cheaper is as stupid as trying to stop gasoline from getting cheaper). If a business cannot make payroll without a loan, it does not need a loan, it needs a better business model (What happened to the revenue? Hint: revenues should exceed costs. Subsidizing money-losing businesses does NOT help the economy). Moreover, credit has not stopped, despite the hoopla about frozen credit markets (hat tip: Joe), according to the Fed's own FRB Volume Statistics for Commercial Paper Issuance. Further, the Fed's 10/7/08 G.19 Consumer Credit report shows that consumer credit continued to GROW during the "credit crisis"--still at a 2.4% annual rate in July 2008--and the decrease of 3.7% finally showing in August 2008 still puts total consumer credit AT BUBBLE-YEAR LEVELS. The misleading 10/11/08 media headline "Lenders say Days of Easy Loans Are Over" leads to an article which warns that car-dealership "tight" standards "often can mean a downpayment"--you MIGHT need a downpayment, but you still might need nothing more than to scratch your X on a scrap of paper to get a shiny new automobile. Media claims about inter-bank lending that "Banks won't lend to banks" is incomplete when the full statement is, "Banks won't lend to banks for garbage collateral." Bring good collateral to the table. In the days of better loan standards, a bank understandably would refuse to loan to an applicant who refused to disclose financial information. Likewise, banks now are understandably refusing to lend to other banks that refuse to disclose financial information about their MBS or their solvency. Simple, if you want a loan, show your books. Buyers will buy and lenders will lend when the price seems right. Warren Buffet recently bought $3 billion of GE. Wells Fargo and Citigroup recently engaged in a $11.7 billion bidding war and lawsuit over who would get to buy Wachovia. Cerberus Capital management might buy GMAC Financial Services. General Motors (GM) might buy Chrysler (hat tip: CR).

Government Prevents the Solution: The dirty secret is that we still have super-lax credit, but the government prefers mega-super-lax credit, which is why the federal government nationalized GSEs Fannie Mae and Freddie Mac to stop a prudent deleveraging runoff--effectively making that smart market solution illegal until 2010--and instead ordered those 2 GSEs combined to buy $40 Billion of "toxic waste" mortgages per month (hat tip: Mish) to add to the bailout's and the Fed's desperate attempts to pump-up the mega-bubble at your expense.

Why are there no lemon laws against bad legislation?

Why did the public buy the bailout?

Abolish the Federal Reserve Central Bank: Declaration of Financial Independence

The US Federal Reserve central bank does the OPPOSITE of fundamental central-banking principles.

A central bank should:

• Remove the punchbowl before the party gets started (tighten monetary policy before inflation/bubbles start). Instead, both Greenspan and Bernanke spiked the punchbowl with whiskey, cocaine, and LSD, kept everyone’s glasses overflowing, and injected any flagging raver with amphetamines to keep the party going at the cost of long-term health. Greenspan and other Fed apologists repudiate this basic tenet of good central banking when they argue that they cannot foresee and cannot prevent bubbles.
• Raise interest rates during a credit crunch to protect the currency. Instead, the Fed LOWERED interest rates to UNDERMINE the currency (US dollar). The 2007-2008 credit-DEMAND crunch (savings/solvency crunch) is about pricing and transparency (solvency) and the market will clear at a HIGHER interest rate, which is exactly what the effective funds rate began to do in August 2007 before the Fed intentionally SHORT-CIRCUITED the free-market solution and crashed the dollar, repudiating Baghot’s classic solution and basic tenet of good central banking.
• Lend freely at HIGH interest rates for GOOD collateral. Instead, the Fed is doing the OPPOSITE of both criteria by lending freely at LOW interest rates for BAD collateral: (1) setting the target Fed funds rate and lending to banks at NEGATIVE real interest rates and (2) taking BAD (“toxic”) collateral such as questionable Mortgage-Backed Securities (MBS). The Fed created new “facilities” precisely to take the toxic collateral that other banks would not accept as collateral in the open market. The Fed is taking bad collateral and in exchange is handing out “good” collateral (Treasuries, which other banks will accept in the open market . . . for now).
• Protect price stability. Instead, the Fed practices intentional price INstability with planned price "inflation" and planned currency depreciation. Expanding the money supply in perfect relation to the economy would yield 0% real price growth (if productivity increases, individual product prices should DECREASE while the money supply matches the new total of all production--the legendary "get more for less"). A 2% price-growth target rate is PLANNED INSTABILITY that intentionally destroys half your purchasing power every 36th year (by the "Rule of 72")—even if everything goes according to plan. The fact that today’s dollar is worth less than a 1913 nickel proves that the Fed failed disastrously at price stability.
• Reduce risk. Instead, Fed intervention is one of the greatest sources of risk in the markets. The Fed CREATES financial instability. The Fed’s very existence creates political risk as markets waste productive resources in the Kremlinology of Fed-watching. The Fed INCREASES risk during crisis because, rather than mitigating the higher than normal risk of a crisis, it ADDS risk by engaging in unpredictable behavior (emergency cuts between scheduled FOMC meetings, arbitrary bailouts for some companies and not others, sudden use of arcane powers not used in generations such as lending to non-banks, novel experiments of dubious legality).
• Increase transparency. Instead, the Fed actively thwarts transparency and increases opacity. A basic tenet of rational-actor economics and even Fed recommendations for the economy is transparency--yet the Fed does the opposite with its own operations and books, and Fed opacity further increases risk and instability. Presidential candidate Ron Paul noted that conducting Congressional oversight of the Fed is even more difficult than conducting oversight of some secret intelligence agencies. President George W. Bush blocked the International Monetary Fund’s (IMF) Financial Sector Assessment Program (FSAP) audit of the Fed to guarantee that the IMF FSAP audit results would not appear until after he left office (due 2010). When the 2007-2008 solvency crisis looms and the need for transparency is even more urgent than usual, the Fed again REDUCES and OBSTRUCTS transparency and price discovery by its new mortgage-laundering operations (TAF, TSLF, PDCF, etc.) so insolvent firms can bury the bodies in the Fed’s garden. When the markets vitally need to know the mark-to-market values of the MBS, the Fed strikes with surgical precision to PREVENT the precise solution needed. The Fed is to transparency as lead is to X-rays. (UPDATE: As if on cue to mock the American public by screaming accounting chicanery, the Fed hires ex-Enron lobbyist Linda Robertson for its Congressional liaison and, by extension, public-relations image.)
  

The Fed’s repudiation and violation of basic best practices for central banking and economics mark the Fed as a failure even by the standards of central banking, and mark the Fed as one of the greatest dangers to a healthy economy.

Inflation creates profit opportunities for a favored few speculators in churning and pump-and-dump schemes that put average people on the hamster wheel of trying to earn X% just to break even after inflation, fees, commissions, market risk, political risk, and taxes. However, the average Joe and Jane’s financial and political independence requires stable money, as defined by stable prices of 0% change over the business cycle. An American should be able to stick his/her nest egg under his/her mattress (the assets insured by homeowner’s insurance if desired, no FDIC needed), and a $100 bill should be worth a $100 even 50 years later. That system would avoid the information asymmetry, risk, moral hazard, malinvestment, and wealth destruction of unnecessary middlemen and would achieve predictable stability for long-term planning in the rational-actor school of economics.

Be a signer of the Declaration. Put your John Hancock in comments.