The Daily Reckoning

Federal Reserve Chairman Ben Bernanke appears before the House Financial Services Committee to deliver his twice-a-year report to Congress on the state of the economy, in this July 2012 file photo. Bill Bonner would like to know whether Bernanke really thinks he, personally, can improve the wealth and well-being of the world’s people by tinkering with his interest rates and bank policies. (J. Scott Applewhite/AP)

On the prowl for insight into economists

By Bill Bonner, Guest blogger / 07.21.12

Yes, dear reader, we are working on a new book. And to save time and effort, we’re working on it right here in the pages of the Daily Reckoning.

What’s it about? Well, you might think that a writer has an idea… You might think he knows where he is going. Then, he sits down to write it. And that is certainly part of the story. But often the idea is more of an intuition…a vague feeling…a hint that there is some place where it is worth going, in hope of finding treasure. Where? What treasure, exactly? Often, the author doesn’t know.

The treasure we’re looking for is insight. We’re trying to understand why it is that the smartest economists in the world are so stupid.  Incidentally, we hope to understand why GDP is a fraudulent measure of prosperity…and why central banking is a failure…and why the governments of the developed countries are doomed.

There is one simple idea that explains all of this…an idea that is both intuitively self-evident…and demonstrably unrelenting. But we’ll come to it in good time…let’s get back to economists:

Does Ben Bernanke really think he, personally, can improve the wealth and well-being of the world’s people by tinkering with his interest rates and bank policies? Apparently so…

Do Stiglitz, Krugman et al really think they can help the debt-soaked economy to grow by giving it more debt at a cheaper rate? Yes…that’s what they say…

Does Jeffrey Sachs actually believe that he and other smart economists can develop a strategy for the entire world economy? That’s the way it looks…

Yesterday, we took up the role of numbers. The greater the precision, we asserted, the greater the lie. Why? Because these economists really don’t know anything for certain. The best they can do is observe…guess…and hedge their bets with a ‘maybe’ or a ‘possibly.’ The more precisely they claim to know something for sure…the greater the distance between what they can actually know and what they claim.

But numbers are to an economist what make-up is to an aging starlet…put on enough of it and maybe the folks won’t see the truth.

Behind every number is a wrinkle… Small numbers hide small ones. Big numbers hide bigger ones. A big number, such as the unemployment rate, has a whole army of other numbers behind it. There are the statistical adjustments…seasonal adjustments…and enough arbitrary definitions to make a corpse look good.

The Bureau of Labor Statistics says that 8.2% of the workforce is unemployed. Simple enough. But what does it mean? What’s the ‘workforce?’ And what does it mean to be €˜unemployed?’ Think of all those people who work for cash…like the Latinos you pick up at gas stations for day work. Are they unemployed? How about the guy who couldn’t find a job, so he went back to school? Is he unemployed? What about the housewife who would like to find a job…sort of…but isn’t actively looking for one? Are these people part of the workforce?

It’s obvious that you can change the assumptions a bit and change the reported unemployment rate a lot. When statistician John Williams looks at the data, for example, he comes up with a real unemployment rate of 23% — almost as high as the jobless rate in Spain.

And yet, the BLS tells us that US unemployment is 8.2%. Not €˜around 8%.’ Not ‘less than one in ten.’ But 8.2%…exactly. And yet, there are so many slippery assumptions lurking in the shadows of this number that it is completely unreliable and practically meaningless. Or worse. It pretends to tell you something…but once you have taken it in you know less than you did before, because what you think you know is largely a fraud.

You could take almost any number used by economists and do the same analysis. Each digit masks a wart…a crease…a frown.

Probably no numerical grease is thicker and less transparent than the GDP. There, the numbers dissemble and mislead, just like economists’ other numbers. But it’s worse than that. The GDP concept itself is a deceit; not just vanity…it is fraud.

Here’s a story from the New York Post:

They take a limousine to McDonald’s, own his-and-her Segway scooters and have designed their new house with 23 bathrooms, each equipped with Jacuzzi tubs.

Time-share magnate David, 77, and his beauty-queen trophy wife, Jackie, 46, were already Orlando’s gaudiest couple when they decided to open their doors to filmmaker Lauren Greenfield as they broke ground on a 90,000-square-foot monster home with a 120-foot Grand Hall modeled after France’s Palace of Versailles.

It’s bigger than a 747-jet hanger. Designs include three swimming pools, 10 kitchens, a bowling alley, a skating rink and a garage that fits 20 cars. The home’s mahogany doors and windows alone cost $4 million.

“We never sought to build the biggest house in America,” Jackie says in the film, titled “The Queen of Versailles.” “It just happens.”

It has been described as tacky, trashy and tasteless, with the top three floors inspired by Las Vegas’ Paris Hotel.

Trashy? Tasteless? Hey, it added to the GDP!

About the New Book originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Paul Thurston, chief executive of Retail Banking and Wealth Management HSBC Holdings plc, reviews documents while testifying before the permanent Subcommittee on Investigations hearing, "US Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History," Tuesday, July 17, 2012, on Capitol Hill in Washington. (Haraz N. Ghanbari/AP)

A crisis veiled in public spectacle

By Bill Bonner, Guest blogger / 07.18.12

You can’t help but feel sorry for the bankers. Yesterday, one of them was so upset and humiliated he tended his resignation — at a Senate hearing.

One after another the bankers mount the scaffold. Goldman, JP Morgan, Barclays…and now HSBC. One loses money. Another rigs LIBOR rates.

One fiddles an entire nation’s books. And another helps terrorists, drug dealers and money launderers with their banking needs.

That last charge is the one leveled against HSBC yesterday, causing the bank’s chief of compliance to quit, on the spot. Here’s the accusation:

…using a global network of branches and a US affiliate to create a gateway into the American financial system that led to more than $30bn in suspect transactions linked to drugs, terrorism and business for sanctioned companies in Iran, North Korea and Burma.

This spectacle may be entertaining, but in our view, it is fundamentally meaningless.

Here’s what really happened:

The feds created a funny money, back in the early ’70s. Unlike the gold-backed dollar, this one was almost infinitely flexible. It would allow the financial system to create trillions-worth of new cash and credit, vastly expanding the amount of debt in the system…and greatly increasing the profits of the banking sector.

The financial industry — the dispenser of the need money — set to work, creating fancy new ways to move the new money around. Each time it closed a deal, it made a profit. Naturally, it was encouraged to find all manner of clever ways to make deals.

Then, when the credit bubble blew up in ’08-’09 many of these tricks of the trade didn’t look so clever. They looked sinister. Stupid. Or crooked.

“When the tide goes out,” says Warren Buffett, “you see who’s been swimming naked.”

It is not a pretty sight.

Billions of dollars were lent to people who shouldn’t have been allowed to borrow lunch money. And now, there are losses — trillions worth.

The real question — the only question of great significance since the blow-up — is: who will take the losses? Or, to put it another way: How will the system be cleaned up? Who will decide who wins and who loses?

Mr. Market or Mr. Politician?

Let investors and speculators take the losses…or put them on savers and taxpayers?

Who will lose? The rich? Or the rest?

We’ve given you our answer many times: let Mr. Market sort it out. He’s completely impartial. He’s honest. He’s fast. And he works cheap.

In a flash, back in September-December of ’08, he probably would have wiped up the floor with the bankers. In a real crash, few of the big banks would have remained standing. Investors and lenders who had put their money in them…and who had invested in the things their phony credits supported…would have lost trillions. The rich wouldn’t be so rich anymore. And we’d now be in some phase of real recovery with many new financial institutions.

But we’re not in a position to impose our will on the world. And the politicians are. So, they’ve decided to do it another way. Instead of allowing Mr. Market to do his work they make their own choices…generally trying to direct the losses towards groups of people who don’t make campaign contributions…and don’t know what is going on. That is, towards the masses…and the unborn…

The idea has been to kick the can as far down the road as possible…borrowing and printing trillions more dollars to prop up the financial system…while also parading a few bankers through the streets with nooses around their necks. The press insults them. The mob spits upon them. The public spectacle continues…

…and nothing really changes.

Regards,

Bill Bonner,
 for The Daily Reckoning

Job seekers wait in front of the training offices of Local Union 46, the union representing metallic lathers and reinforcing ironworkers, in the Queens borough of New York in this April 2012 file photo. US employers hired at a dismal pace in June 2012, raising pressure on the Federal Reserve to do more to boost the economy. (Keith Bedford/Reuters)

Did the Feds rig the system?

By Bill Bonner, Guest blogger / 07.17.12

The Daily Reckoning…proved right again!

We’ve been sticking our necks out. We had a strong hunch that the rich had gotten a whole lot richer not because they were suddenly greedier or suddenly smarter, but because of the feds. The feds were handing out money. The rich were first in line.

But we didn’t have any real proof…until now.

Relatively speaking, the rich have gotten a lot richer over the last 30 years. The whiners and fixers want to do something about it. They say the rich weren’t taxed heavily enough…and they weren’t regulated enough.

That had little to do with it, we pointed out. Instead, the meddlers themselves caused the rich to get richer.

Who’s right? We are, of course…

A report from the Federal Reserve Bank of New York suggests that the bulk of equity returns for more than a decade are due to actions by the US central bank. Theoretically, the S&P 500 would be more than 50 percent lower — at the 600 level — if the bullish price action preceding Fed announcements was excluded, the study showed. Posted on the New York Fed’s web site Wednesday, the study sought out to explain why equities receive such a high premium over less risky assets such as bonds. What they found was that the Federal Reserve has had an outsized impact on equities relative to other asset classes. For example, the market has a tendency to rise in the 24-hour period before the release of the Fed’s statement on interest rates and the economy, presumably on expectations Chairman Ben Bernanke and his predecessor, Alan Greenspan, would discuss or implement a stimulus measure to lift asset prices. — CNBC

How do you like that? Without the intervention of the central bankers, the rich would be about $7.5 trillion less rich. But wait…actually, they’d be even less rich than that. We’ll come back to that, tomorrow…

Let’s look at how the rich got so rich. Did they get a lot smarter in the last 30 years? Did they become a lot greedier? Nah…they were in the right place at the right time. They owned stocks just when the Fed was dumping beaucoup money into the financial system.

We didn’t have much proof for these assertions when we first made them. They just seemed, superficially, correct. The Fed increased the money supply (M2) 13 times since the early ’80s…and the Dow rose about 13 times too. It seemed a little fishy to us.

Wages and prices, meanwhile, were held in check by outsourcing. The US outsourced its consumer and labor inflation to China. So relatively, the rich got richer…leaving the tired, poor multitudes to get even poorer.

And now we have proof. Without the intervention of the central bank, stocks would be at half today’s prices.

One scam after another. It is amazing anyone takes economists or central bankers seriously. And now the same bumblers who caused the rich to get so rich are still on the job…offering more scammy solutions. Here’s The Atlantic Magazine:

…in one of the most famous passages from the Federalist Papers (No.51). James Madison wrote: “If men were angels, no government would be necessary.”

…the issue [is] how to realize the benefits of market capitalism while restraining the powerful impulses to cut corners, cheat, and commit fraud. This ageless question is of special moment in this polarized political season, in which the role of government is central. The cases rebut the assertions of the Republicans, Tea Partyers, libertarians, and corporate leaders who wish to reduce the reach of law and government and who believe that markets will always self-regulate — people from Ayn Rand and Russell Kirk, to Ron Paul and Grover Norquist, to Tea-Party Republican majorities in the House who want to “starve government,” to individual and corporate donors to super PACs, all of whom are today shaping the Republican message.

The cases support people who believe in a mixed economy that gives a central role to economic freedom and free markets — but a system that also places important legal and regulatory limits in order to prevent corruption and protect social goods.

Get it? Businessmen and investors aren’t angels. So government regulators…backed by economists…and opinion leaders…have to step in.

And here’s Jeffrey Sachs calling for major new central planning…

In short, we need new economic strategies to overhaul broken systems of finance, labour markets, taxation, ecological management, budget management and investment incentives. Those challenges cannot be fixed through lowering taxes on the rich or higher fiscal deficits to create aggregate demand. The new approaches must be long-term, structural, sensitive to inequalities of skills and education, aligned with the need for more sustainable technologies and “smarter” infrastructure (empowered by information technology) and congruent with long-term demographic trends. It’s time we moved beyond the Republican Party economics of the 1920s and the Democratic Party economics of the 1930s, to a new macroeconomics for the 21st century.

Never explained is how people on the public payroll got to be such angels…and so smart! If you cut them, do they not bleed? If you insult them, aren’t their feelings hurt? If you wave a $100 bill in front of them, won’t they do your bidding?

Bob Diamond hoped so. Moyers and Winship report:

…the disgraced financier would no longer be hosting one of two Romney fundraising events for American expatriates being held in London later this month. But no worries. The Boston Globe notes that “still among those hosting the events is Patrick Durkin, a registered lobbyist for Barclays… Durkin, who has been a top Romney bundler, is one of seven chairs for the reception and among the 13 co-chairs for the dinner.

Others involved in hosting the events are Dwight Poler, managing director at the European branch of Bain Capital, the firm Romney founded; Raj Bhattacharyya, managing director at Deutsche Bank; and Dan Bricken, a managing director at Wells Fargo Securities. Each guest at the dinner event will pay between $25,000 and $75,000 for the opportunity to sup with the Republican presidential nominee…

More tomorrow…on the whole corrupt and degenerate spectacle. How the feds rigged the system…and how they use the crisis they caused to rig it even more.

Regards,

Bill Bonner
 for The Daily Reckoning

In this undated photo released by the General Dynamics Land System shows the production of an Abrams tank in Lima, Ohio. The Pentagon says it will soon have enough tanks and wants to halt production for several years as it wrestles with deep cuts in military spending over the next decade. (General Dynamics Land System/HO/AP)

How to 'contain the depression?' More credit, economists claim

By Bill Bonner, Guest blogger / 07.11.12

And oh yes…our new book is also going to explain why economists are completely incompetent. They claim to know things they could never really know…and to be able to do things they couldn’t do in a million years. As a result of their conceits and delusions, trillions of dollars have been clipped from the world’s GDP…billions of people are poorer…their lives shorter, meaner…with less stuff.

Economists were largely responsible — usually in their policy-making roles — for the huge credit bubble that took debt to GDP in the US from 112% in 1972 to 296% in 2008. They told the feds that they needed a “flexible” currency. What they got, of course, was one that was flexible in one way only — it stretched out…but never came back. Credit expanded 50 times in the last 50 years.

Then, when the debt bubble blew up in ’08-’09, economists stepped in again…this time to prevent the private sector from setting things right. Instead of letting a crash and quick depression wipe out the excess debt quickly, the feds engineered a “contained depression” which can go on for decades.

What contains the depression? More credit!

Deficits…bailouts…subsidies…and the lowest interest rates ever. You can look throughout the developed world; the highest interest rate offered by central banks for short-term money is only 0.75%.

And now economists are warning that the US tax economy could fall off a ‘fiscal cliff’ at the end of the year. Tax rates will go up. Automatic spending cuts will come down hard. This will allow the depression to break out of its cage…or so they worry.

“Stop, before it is too late,” they say.

Over at the Pentagon, for example, contractors are forced to worry that their next boondoggle might be cut off. Military cuts threaten Barack Obama’s program of “Strategic Guidance,” says an article in today’s Financial Times. In addition, one million jobs could be lost! The US would fall into real depression!

If only!

Since the crisis began, private sector debt has gone down…but only to 250% of GDP. That’s still more than 2 times what it was when the US still had honest money. Much of that debt must be “bad” — in the sense that it couldn’t withstand a financial crisis…or wouldn’t still be on the books were it not for the feds’ clumsy meddling. That’s why nature, in her wisdom, provides us with natural debt-cleansing episodes…also known as depressions.

More to come…

Regards,

Bill Bonner
 for The Daily Reckoning

In this June 2012 file photo, Marvin Bourne of Richmond, Va., drives an armored vehicle in Kasota, Minn. For a fee, Drive A Tank gives people a chance to drive a tank. There are times you need to build tanks. But those are not times when you are building wealth and prosperity. Instead, you’re spending wealth in order to protect yourself (Jeff Baenen/AP)

When governments spend wealth, instead of building it

By Bill Bonner, Guest blogger / 07.02.12

“The US seems to have gotten the worst of it,” said a French friend this morning. We were taken aback. Everyone knows Europe is in a state of permanent crisis. The US seems solid by comparison, no?

“Now that the Supreme Court has approved Obamacare, you have the same problems we have in Europe, social welfare spending with no limits…plus you have your colossal military spending. You have both ‘bread and circuses,’ just like the ancient Romans. You are doomed.”

Yes, dear reader, we came to the fork in the road after the 9/11 attack. And the government took it!

And now the feds can fork over whoever and whatever they want. No kidding. They just have to think of it as a tax. Here’s the AP’s report on the Supreme Court’s decision:

Health care law survives with Roberts’ help

WASHINGTON (AP) — America’s historic health care overhaul, certain now to touch virtually every citizen’s life, narrowly survived an election-year battle at the Supreme Court Thursday with the improbable help of conservative Chief Justice John Roberts.

But the ruling, by a 5-4 vote, also gave Republicans unexpected ammunition to energize supporters for the fall campaign against President Barack Obama, the bill’s champion and for next year’s vigorous efforts to repeal the law as a new federal tax.

Roberts’ vote, along with those of the court’s four liberal justices, preserved the largest expansion of the nation’s social safety net in more than 45 years, including the hotly debated core requirement that nearly everyone have health insurance or pay a penalty. The aim is to extend coverage to more than 30 million people who now are uninsured.

The question on the table was whether or not the feds could force people to buy health insurance. The supremes decided that ‘yes they could.’ It was just like a tax, they said. And the constitution gives the legislators the right to impose taxes, as they see fit.

Let’s see…how about forcing all blue-eyed people to go outside, take off all their clothes, and give them to homeless people? That would be a tax too. Guess it’s okay.

While the social-welfare state is expanding, so is the police state. Another measure being discussed in Congress would declare the US itself a battlefield or a war zone. This would give the military the right to do what it does without going overseas…and it would give the president the power to direct his kill list towards his domestic enemies.

Then, drones can fly over Kansas or Ohio…and whack whomever the feds want.

But who are they gonna take out? No one…or almost no one…opposes the military agenda in the US. There are no serious terrorists…and no serious challenge to the spending machine. The two candidates for president agree on the essentials — keep the money flowing to the zombie industries…military…education…health…and finance. Oh yes, and occasionally toss a few bucks at an industrial business — like GM — if it has enough unionized employees.

Wait…the US has no serious enemies overseas either. And that doesn’t make the racket any less effective. On the contrary, it helps. With no serious enemies to worry about the military industry can spend its money on any damned thing it wants. Lots of boondoggles. Wide profit margins. Low casualties. What’s not to like?

But where were we?

We were talking about economists. Specifically, we left off yesterday describing how GDP figures are almost completely worthless. They tell you something; but do they tell you anything important? Apparently not.

You cut our lawn. We pay you. We cut your lawn. You pay us. We both have jobs. And we each pay a portion of our earnings to the government. The GDP goes up. Government revenues increase. And economists tell us we are ‘growing.’

Earlier this week, Paul Krugman cited the experience of the US economy in the early ’40s. A burst of federal spending between ’40 and ’42 produced a 20% big lift in output, he says, approvingly. More jobs…more GDP…according to the economists’ measures, things were getting better and better.

Were they really? Of course not. Government was spending money on the military. An economist can’t tell the difference between a Tiger tank and a BMW. But a passenger can. It doesn’t take him long to realize that a tank is no way to travel.

There are times you need to build tanks. But those are not times when you are building wealth and prosperity. Instead, you’re spending wealth in order to protect yourself (theoretically, in practice most wars are rackets…for both sides). That’s what the US was doing in the early ’40s — spending wealth, not building it.

Which just illustrates our point:

If even Nobel prize winning economists cannot tell the difference between building wealth and spending it, what hope is there for the whole profession?

More to come…

Regards,

Bill Bonner,
 for The Daily Reckoning

Nobel Prize winning economist Paul Krugman speaks during an interview in New York, in this May 2012 file photo. the Daily Reckoning's Bill Bonner is not a fan of Krugman's economic analysis, or that of most economists, really. (Brendan McDermid/Reuters)

The biggest fraud in economics is ... economics?

By Bill Bonner, Guest blogger / 06.28.12

Forget ‘peak oil.’ Or so they say. It has fracked its way to energy self-sufficiency.

Porter Stansberry:

… there are roughly 20 major shale oil plays in the US. The largest five of these new reservoirs have more than 20 billion barrels of recoverable oil… meaning that each of these new fields is not only the largest in US history (by a wide margin), but that each of them, individually, would more than double the proven reserves of domestic oil…

That is why America is on track to be the world’s leading producer of oil within the next five or six years… and why the most knowledgeable oil analysts are predicting a new all-time high of American oil production by 2017. In fact, we’ve already become a net energy exporter for the first time since 1949.

The Wall Street Journal tells us that the US will not import a single barrel of oil from the Middle East by 2035.

Hey, wait a minute. Wasn’t that supposed to be why we’re spending trillions on wars in Middle East…to keep vital supplies of black goo headed our way?

Of course, the numbers never really made any sense. Neither did the logic of it. It would have been a whole lot cheaper just to buy the oil on the open market. Trillions cheaper.

But money isn’t everything. The US needs to guarantee access to oil…or its whole economy might be brought to its knees.

Which is probably a good place to introduce a new idea:

The biggest fraud in economics is economics itself.

What’s the point of having an economy? It is so that people will get the stuff they need and want. The more efficient the economy, the more stuff people get with the least effort and expense of resources.

It makes no sense to waste trillions of dollars’ worth of resources just to “protect the economy.” The whole point of an economy is to create more stuff…not to waste it. You might just as well try to protect your health by committing suicide.

Most economists are fools or knaves. The knaves want to get prestigious jobs and Nobel prizes by offering crackpot advice. The fools think it will work.

A few months ago, they were concerned with peaks. There was a peak in oil production. There was a peak in food production. There was a peak in available water coming. Then, a peak in peaks must have been hit.

Now there is a peak in valleys. All of a sudden, the peaks are far away. Commodity prices are falling, not rising. Deflation is economists’ worry, not inflation. Deflation is an impediment to growth; everyone believes it.

The European debate is largely a dispute over which fraudulent solution will cause ‘growth.’ The austerity crowd believes it has to clamp down on government spending. This will give investors confidence in government bonds. The feds will be able to borrow again. The economy will grow. All will be well.

The stimulus crowd targets growth directly. It wants the feds to spend…creating jobs, incomes, spending and so forth.

Paul Krugman is in The Financial Times today.

“At a time when the private sector is engaged in a collective effort to spend less, public policy should act as a stabilizing force, attempting to sustain spending.”

Krugman says the real problem is a lack of demand. People just don’t want to spend their money. This is something that needs to be fixed!

Why? Why not let people decide for themselves when they want to spend and when they want to save? Why let the government do for them what they do not want done? Krugman doesn’t bother to think about it.

He is worried only about growth. He is afraid that the economy will collapse completely before austerity measures lead to growth. The austerity group worries that government-led ‘growth’ will blow up the economy before it has a chance to turn into real, private sector growth.

Neither side doubts that growth is the key. Almost everybody agrees: we have to pursue growth. “The Hero,” Ben Bernanke, does it by printing money. Congress and the administration do it by running trillion-dollar deficits.

Nobody doubts that ‘growth’ is the key to progress, happiness, and maybe even Heaven. But there’s the foundation of the great flim-flam right there.

Why do economists think ‘growth’ is such hot stuff? Because they can measure it…

Economists can measure GDP. They can tell when it goes up…or when it goes down. Generally, more is better…because it means the economy is creating more stuff. So, economists tailor their policy recommendations…their theories…and their editorial page blah-blahs to the goal of stimulating growth.

But is growth a good thing? Is it the same as progress and prosperity? Is more stuff what the world really needs?

Just 5 years ago, TIME magazine thought the US needed more stuff…in the form of houses. Seventy years ago, the US needed more stuff…in the form of tanks and fighter planes.

Forty years ago, US economists — notably Samuelson — were convinced that the Soviet economy would soon be larger than the US economy. Why? It could produce more stuff. They had charts to show how stuff production in the Soviet Union was increasing…and how it would surpass the US in just a few years.

And what happened? It didn’t matter. The stuff was worthless.

More tomorrow.

Regards,

Bill Bonner
 for The Daily Reckoning

This May 2012 file photo shows French president-elect Francois Hollande reacting to supporters with his companion Valerie Trierweiler while celebrating his election victory in Bastille Square in Paris, France. The president's romantic life seems to be overshadowing the eurozone metldown for some French citizens. (Francois Mori/AP)

C'est la vie: French emphasize food, gossip over economics, war

By Bill Bonner, Guest blogger / 06.26.12

One of the advantages of moving overseas is that you see home more clearly. We came to France last week. Already, America comes into clearer focus.

The French press seems fascinated by the relationship between Francois Hollande’s two mistresses. The former — a candidate for president herself — dumped him when he took up with the latter. The former is also the mother of Hollande’s 4 children, which complicates things further.

The latter hates the former. The former hates the latter.

We learned all this at dinner last night with a charming French couple we have known for years. They spent half the dinner telling us about the presidential ménage…the other half was spent telling us about what they had eaten recently. They seemed to recall the details of every meal. How it was prepared…what mistakes the chef made…and what the weather must have been when the grapes were picked for their wine.

As to the imminent financial catastrophe in Europe they were sanguine…even blasé.

“Every week we’re told the end of Europe will arrive next week. Frankly, we don’t care anymore.”

What Europeans care about is their vacations! After decades of social and political struggle, the working classes of the Old World won the right to at least 4 weeks of paid vacation. Bosses could not stand in their way. And now Europe’s highest court has ruled that even nature cannot be allowed to spoil a vacation. The New York Times is on the case:

BRUSSELS — For most Europeans, almost nothing is more prized than their four to six weeks of guaranteed annual vacation leave. But it was not clear just how sacrosanct that time off was until Thursday, when Europe’s highest court ruled that workers who happened to get sick on vacation were legally entitled to take another vacation.

“The purpose of entitlement to paid annual leave is to enable the worker to rest and enjoy a period of relaxation and leisure,” the Court of Justice of the European Union, based in Luxembourg, ruled in a case involving department store workers in Spain. “The purpose of entitlement to sick leave is different, since it enables a worker to recover from an illness that has caused him to be unfit for work.”

So, you see, things in France are as they should be. People are delusional. But not deadly.

Back in the United States of America an ill wind blows. Our president is a portrait of failure and homicide. As far as we know, he doesn’t even have one mistress…which is probably why he has so much time on his hands. According to The New York Times he personally approves the list of unfortunates his drones will assassinate. And for what? Philip Giraldi does the “Terrorism Arithmetic”:

Only three American citizens were kidnapped by overseas terrorists in 2011 (in Somalia, Afghanistan, and Iraq, all of which were war zones), and only 17 were killed in foreign lands (15 in Afghanistan, a war zone)…. Micah Zenko of the Council on Foreign Relations has determined that the number of Americans killed in terrorist attacks is comparable to the number crushed to death by falling television sets or furniture each year.

But every president wants to be a war president. War is America’s #1 zombie industry.

The federal government employs 2,100,000 today compared to 1,500,000 in 2001, not including the military, which has itself grown by 100,000 personnel to 2,300,000, including reserves, with more increases planned through 2013. Most of the new hires were directly related to the War on Terror for manning the 200 new military and CIA bases that have sprung up around the world and to serve as Fortress America’s defenders. The number of reported federal employees does not include contractors, who add considerably to the payroll. More than half of the employees in key sectors within the intelligence community and at the Defense Department are contractors.

What does it cost to keep these zombies fed? Giraldi continues:

Uncle Sam will spend $3.796 trillion in 2012 compared with $1.863 trillion in 2001…

There is full-time security manning the entrances of nearly all federal and state and even some local office buildings. The total costs of state and local expenditures to counter the essentially bogus terrorist threat might well exceed the federal expenditures, and then there is the spending on security, often mandated by the government, in the private sector. But as bad as all those numbers are, consider for a moment the legacy costs and institutional damages that are not so readily visible. Professor Joseph Stiglitz of Columbia University estimates that Iraq will cost as much as $5 trillion when all the costs, including interest paid on borrowed money and medical treatment for life for the tens of thousands of wounded soldiers, are paid off. The bill for Afghanistan will be proportionate, depending on how long the US stays there and at what commitment level. All of the deficit-feeding spending for the War on Terror and associated military actions has gone down into a deep, dark hole….

But what’s new? War is a racket. Always has been. Major Gen. Smedley D. Butler explains:

[War] is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives.

A racket is best described, I believe, as something that is not what it seems to the majority of the people. Only a small “inside” group knows what it is about. It is conducted for the benefit of the very few, at the expense of the very many. Out of war a few people make huge fortunes.

Sooner or later, almost every country makes war its major racket. Then, after they are defeated and bankrupt…people are sick of it and want to string up the people who got them into it in the first place.

Regards,

Bill Bonner
 for The Daily Reckoning

Nobel-prize winning economist Joseph Stiglitz delivers a speech during an economic conference in Athens in this February 2010 file photo. Stiglitz has a new book out, but we can pretty safely assume The Daily Reckoning's writers will not be purchasing it. (Yiorgos Karahalis/Reuters)

Are ready for this? Time for round two of the Fed's stimulus plan

By Bill Bonner / 06.21.12

Are you ready for this, dear reader…? Well hold onto your hat because here comes another round of QE…stimulus…money printing…! Société Générale economist Michala Marcussen says it’s coming. Today! Here’s Bloomberg on the case:

A third round of quantitative easing is coming this Wednesday, top Société Générale economist Michala Marcussen says.

Marcussen writes that if anything, the boost will help “only at the margins.”

“We have long held the view that each new round of QE comes with diminishing returns,” she says. “We nonetheless see the impact as positive — if nothing else giving the reassurance of a pilot in the plane.”

On how the Federal Reserve will announce and implement QE3:

With economic data signalling stall speed growth for the US, we expect the Fed to lower its current 2012 growth outlook from 2.7%, narrowing the gap to our own forecast of 1.8%. This — and the risks from the euro area debt crisis — will allow the Fed to adopt QE3 at the June 20 FOMC. We estimate the Fed could extend twist by another $150bn, but our expectation is that the Fed will instead allow its balance sheet to expand a further $600bn, with purchases split 40/60% between MBS and Treasuries.

We wouldn’t want to be on that plane! There are a bunch of clowns at the controls. And the motors are sputtering.

Reassurance? We’d be more reassured if we saw the pilot and co-pilot both bailing out.

But they’re determined to keep flying… until the wings come off.

Lest you think the Fed is doing some kind of public service…like delivering the mail to far outposts in Alaska…you should realize that they’re delivering money…cash…to their friends and business partners. RT reports:

Bank Board Gave US $4 Trillion in Loans to Its Own Institutions

A report just released by the US Government Accountability Office explains how the Federal Reserve divvied up more than $4 trillion in low-interest loans after the fiscal crisis of 2008, and the news shouldn’t be all that surprising. When the Federal Reserve looked towards bailing out some of the biggest banks in the country, more than one dozen of the financial institutions that benefited from the Fed’s Hail Mary were members of the central bank’s own board, reports the GAO. At least 18 current and former directors of the Fed’s regional branches saw to it that their own banks were awarded loans with often next-to-no interest by the country’s central bank during the height of the financial crisis that crippled the American economy and spurred rampant unemployment and home foreclosures for those unable to receive assistance. — RT

But most people don’t know or care. They’re still lining up to get on board. No kidding.

Even with all that new money filling the bankers’ pockets, apparently it ain’t enough. Again, Bloomberg is on the story:

…there may actually be a shortage of dollars to meet demand as Europe’s debt crisis deepens and the global economy slows. The dollar has risen 3.5 percent since the end of April against a basket of the most-widely traded currencies even amid speculation that the Fed, which meets this week, may undertake the type of stimulus measures that weakened it in the past.

“The market often assumes that people are long dollars, but many of those dollars are held by central banks, which are unlikely to move out,” Ian Stannard, head of European currency strategy at Morgan Stanley in London, said in a June 13 interview. “That leaves us with the private sector, which is short,” meaning they don’t have enough of them, he said. “In an environment where we see a global slowdown, the dollar will be well supported.”

Morgan Stanley says the potential scarcity of dollars among foreign private borrowers represents the US’s net position with lenders abroad of minus $2.4 trillion, adding $4.8 trillion of US financial assets held by central banks, and subtracting $500 billion of foreign official assets held by the US.

That equals about $2 trillion of demand from foreign private banks and companies. The gap has expanded from $400 billion in 2008, according to the New York-based firm. In 2002, there was a dollar surplus of $900 billion, the data show.

“We expect the dollar to continue to strengthen in the coming months on risk aversion stemming from the euro crisis,” strategists at the investment banking unit of Charlotte, North Carolina-based Bank of America Corp., wrote in a research report dated June 15.

But we’re an equal-opportunity blog, here at The Daily Reckoning. So let’s hear from the other side…

What’s wrong with these Nobel Prize winners, anyway? Does the award cause brain damage? Inquiring minds want to know.

Take Paul Krugman…please!

And here comes Joseph Stiglitz. He’s got a new book out. Here’s an extract:

Markets have clearly not been working in the way that their boosters claim. Markets are supposed to be stable, but the global financial crisis showed that they could be very unstable, with devastating consequences.

Huh? Who said markets were supposed to be stable? Did Stiglitz just notice that prices go up and down…sometimes in a very robust way.

Here, at least he is on more solid ground:

The bankers had taken bets that, without government assistance, would have brought them and the entire economy down. But a closer look at the system showed that this was not an accident; the bankers had incentives to behave this way.

Then, he seems to get in over his head…

The poor man seems to have no interest in how those incentives came to be. A dear reader might want to pass this along to him:

Wall Street’s perverse incentives…inequality…and the financial markets’ recent extreme instability all have the same source — the feds. Their ersatz money led to an extreme increase in the amount of credit. Total credit in the US rose 50 times in the last 50 years.

Wall Street had an incentive to peddle credit to everyone — even those who couldn’t pay back their loans.

Wall Street makes money by dishing out credit…the more they dispense, the more they make. A disproportionate amount of this new credit goes to their customers, their clients, and their cronies — that is, to the ‘rich.’ That’s why the rich are so rich. Because their financial assets went up in price faster than consumer prices or labor rates (both held down by outsourcing to emerging markets).

As for instability, what do you expect when you have a monetary system that allows credit to expand many times faster than the real economy? And what happens to an economy when money itself can’t be trusted? Try this experiment; let carpenters build your next house with an elastic tape measure…or let pilots fly planes with whacky instruments…or set the escalator at the shopping mall to go faster and faster. You’ll see plenty of accidents there too.

What is wrong with Stiglitz? Markets soar when the Fed hints at more money…and crash when it hints that it will sit still. And Stiglitz blames the markets for instability! When you operate with an elastic currency…and you expand credit 50 times in 50 years…you have to assume that the financial world will get a little ‘toppy.’ Then, when it falls over, he seizes the opportunity to tell us that markets need to be controlled by the same people who gave us the credit bubble:

…markets once again must be tamed and tempered. The consequences of not doing so are serious: within a meaningful democracy, where the voices of ordinary citizens are heard, we cannot maintain an open and globalized market system, at least not in the form that we know it, if that system year after year makes those citizens worse-off. One or the other will have to give — either our politics or our economics.

That’s chutzpah…that’s cheek…that’s brass! Or brain damage.

Regards,

Bill Bonner
 for The Daily Reckoning

Undated handout image courtesy of the U.S. Air Force shows a MQ-1 Predator unmanned aircraft. Some economic minds believe the US's current "Big Stick" mentality will hamper economic recovery. (Lt Col Leslie Pratt/U.S. Air Force/Handout /Reuters)

Washington elites talk the new 'US empire'

By Bill Bonner, Guest blogger / 06.19.12

We went to a delightful garden party in Washington. Everybody had an idea. Some smart. Some stupid.

These were bright, well-educated people. Many had gone to Harvard or Yale. Many held high positions in the government. Others were successful lawyers, businessmen, or entrepreneurs. Some thought the key challenge of the 21st century is protecting the environment. Some thought energy scarcity was the most important thing. Still others were worried about saving the European experiment.

What held this diverse group together? Why was your editor invited?

“We all hate the empire,” said an attendee. “It’s the only thing that we agree on.”

One gave a little talk, explaining how America’s imperial spending endangers the Rooseveltian social welfare state. After you pay for so many drones and waterboards there is no money left for a New Deal or a Great Society, he pointed out.

Another was concerned that we were all becoming slaves in our own country:

“The constitution has been suspended. Habeus corpus denied. The president seems to take pride in approving the ‘kill list’ personally, just like Richard Nixon chose the bombing targets…or Josef Stalin selected those to be purged. Future historians will have their work cut out for them, explaining how Barack Obama, who promised to bring the Pentagon under control, then became the biggest pusher of America’s imperial wars…”

Another was worried because the nation was going broke:

“I don’t care what you say. You can’t spend money like this without going broke.

“And the logic of it is completely ridiculous. The neo-cons say we need to project American power in order to protect American power. They say, for example, that we need bases in the Mideast…and we needed to go to war with Iraq…in order to protect the vital flow of oil to the US. So they ended up spending something like $3 trillion in order to protect about $350 billion worth of oil imports. That is the kind of math that puts you in the poorhouse.”

Or worse.

It’s the kind of logic that sends you to hell. Japan’s “co-prosperity sphere” was based on the same imperial reasoning. In order to maintain its power, Japan had to control the flow of energy and raw materials to the home islands. That meant it had to build up its military machine. Then, it needed more resources…to support its military machine!

And so…the US swaggers to its ultimate comeuppance.

“The US has set a dangerous course,” said another guest. “It is one thing to walk softly with a big stick in your hand. It is quite another to use it to stir up a hornet’s nest. Then, the big stick doesn’t do you any good. The bees sting you.

“The US has a big stick — the biggest, most expensive military in the world. But you can’t hit bees with a stick. And they are learning how to attack us. They can make drones — which are cheap — too. They are learning how to conduct internet warfare too — which is also cheap. The big stick doesn’t help. You can take your big stick and whack a foreign government, but while you’ve got your trillion-dollar military machine swinging its big stick, some small group launches a small, next-generation drone attack and takes out your aircraft carriers. It spends $1 million…you spend $100 billion. You go broke. And you’re dead too.

“Same thing with this Internet war that the Obama administration launched. You can swing your big stick, but you can’t hit a computer virus with it. When one of these groups…and it could be funded by Russia or China, for all we know…comes up with a ‘killer app’ virus, life as we know it in the US comes to a stop. And then the big stick stops swinging too…because it depends on the US economy.

“It’s really sad the way this has evolved. Back at 9/11 there were probably only a tiny group of real fanatics who wanted to do harm to the US. Everyone was on our side. Everyone wanted to put the terrorists out of business.

“Now, the US has been killing innocent people…and the world doesn’t like it. I don’t blame them. And I’m afraid the next time there’s a 9/11, millions of people all over the world will cheer…”

Regards,

Bill Bonner
 for The Daily Reckoning