Analyst's Bearish View of the Economy Helps Spark Large Stock Market Rally

Please read the snippet below and then question whether the "stimulus" is primarily about enriching the Merchants of Debt, who have cooperated (conspired?) with the Fed and the Feds to eliminate most competition.

Meredith Whitney Bullish On Goldman,Sees 2Q Above Views
By Ed Welsch NEW YORK (Dow Jones)--

Goldman Sachs Group Inc. (GS) will benefit from being a key player in a "tsunami of debt issuance" by governments as they try to fill gaps in underfunded budgets, financial analyst Meredith Whitney said Monday in an upgrade of Goldman to "buy." . . .

A bullish call from Whitney is rare; she gained renown during the financial crisis for initially unpopular bearish calls on the stocks of large banks that ultimately proved to be correct.

However, Whitney said her bullish view of Goldman is rooted in her overall bearish outlook for the U.S. economy and other U.S. financial companies. While Goldman has made most of its money in the past through a focus on equity markets, Whitney said during the next two years the firm will shift focus to the government debt markets, facilitating new issuance from local, state, federal and sovereign governments as they try to raise money to fill budget gaps. (Emph. added)

So strange is the stock market that these emanations from the digital pen of Ms. Whitney helped stock prices surge upwards Monday. Go figure . . .

Copyright (C) Long Lake LLC 2009

What Does the Mafia have to do with the Debt Crisis?

Bloomberg has quite a read today in Mafia Cash Increases Grip on Sinking Italy Defying Berlusconi. Consider this paragraph:

Unlike overleveraged companies burned in the credit crisis, the Mafia and its cash-based, debt-free business model are breezing through economic hard times. With young, savvy leaders at the helm, organized crime is poised to expand as legitimate companies founder.

The motto of this blog is "In equity, veritas". The word "equity" has a double meaning. Relevant to the current topic is the meaning of ownership (cash) rather than debt. What the lengthy Bloomberg article demonstrates is that Godfather Part III is happening today. You can be sure that this phenomenon is not limited to Italy.

The Mafia has been thrifty. The Corleone family lived below their means. This "debt-free business model" is one that used to be the American ideal. It is not too late for America and the large swaths of the world that have followed our lead to turn their backs on the Merchants of Debt and go back to where they once belonged.

Copyright (C) Long Lake LLC 2009

The Rats Got Into the Grain

Last fall, when it became apparent that most of the giant U. S. financial companies had no "there" anywhere and the stock market was crashing, one of my daughters asked how this came to pass.  I answered simply, "The rats got into the grain."

The "hollowing out" of America probably began with Nixon engaging China.  As China's leaders saw the growth in South Korea and Japan stemming from their roles as suppliers of increasingly value-added products to the U. S. and its allies, they shifted their mindset and joined the team.

The original "good" rationale for outsourcing, as it picked up steam in the 1980s, was as follows.

Let us say that a company wholly owned by Americans has a product (widget) that it sells for $100.  Labor costs are $50.  If labor costs can be lowered to $10 by moving production to Asia, net of other costs let us say that an additional $40 of profit is realized by the (American) owners of the company.  Some of that goes to society in taxes, and let us assume that the bulk of the rest is spent in the U. S.  If the worker who loses the job to the Asian worker finds another job for the equivalent of $35, the total income to America has been enhanced by a net of $25 per widget-- the $40 extra the owner gains, minus the $15 loss of income the American worker loses.

Of course, if the displaced worker could find a job at the same income, so much the better.

As this trend picked up speed, the jobs that were the least able to be exported expanded.  These included retail and construction.  Medical treatment of course has to be generally local, and that expanded as well.  (In the 1990s, building out the Internet and enhancing computer technology were included, but that was an era in time that may prove transient, because no geographic specificity is associated with high-tech skills.) 

Not to forget finance, centered in New York and, almost the same thing in concept, London.

Thus, there were powerful pressures to over-expand the industries of building homes and retail outlets.  Big Finance got bigger and more and more creative to keep what we may call thisrecent American "business model" going and growing.

One hundred years ago, the U. S. had an export-driven business model, accumulating both gold and immigrants who flocked here to prosper.  In fact, it was not all that long ago that there were no limits on the number of immigrants the country would accept.  Fifty years ago, the U. S. had an export-driven business model, picking up ownership stakes in foreign companies or establishing dominant business shares in foreign countries with the trade surplus.

All of a sudden, the U. S.'s business model was exporting future claims on American wealth to foreigners, but as pointed out above, this was a sensible business model so long as productive jobs could be had by the American workers who lost their jobs to foreigners who would do the same job for a lot less money.  Now that the displaced workers have nothing to do, this business strategy does not work, so we are now into government-financed make-work programs.

What has happened is that America went to far in its business strategy.  It overexpanded production of homes and retail space.  It also spends a vast amount on medical care, much of it useful from an individual health perspective; however, treating cancer or blocked arteries in an 80-year old retiree does not pay for the import of a shirt from China or a banana from Central America.

America financed the over-production of domestic jobs that could not be outsourced via the mechanism of over-aggressive credit creation.  One clever way that this was done, and that kept New York as the center of the world's financial industry, was the invention of ever-more complex financial products.  Let us think CDOs squared and even cubed.  Thus, employment in finance mushroomed as well.

Unfortunately, these new complex financial products were defective and have largely been recalled.  They were like a car that blows up while sitting in the driveway.

The manufacturers of these products, let us call them Big Finance, gorged themselves producing, selling and indeed consuming those products.  They were like a moonshiner who was himself an alcoholic.  The more, the better.

It would be nice to think that we simply have the national equivalent of a Sunday morning hangover.  The headache goes away, and you can go back to work Monday.  If the hangover-sufferer were a stock and his stock price dropped that Sunday when his neighbors saw how horrible he looked, but he was not an alcoholic, then a smart bargain hunter would buy neighbor's  temporarily depressed stock, the neighbor would show up for work week after week and earn a living, and the bargain hunter would likely have made a good choice.  If, on the other hand, the hungover neighbor was really a deteriorating alcoholic, then buying his stock would be a mistake.

Big Finance is showing the symptoms of alcoholism.  It will not even admit it has a drinking problem.  It is puffing itself up.  It is in denial of what happened to Fannie/Freddie/AIG/WaMu/Wachovia and innumerable lesser real estate and finance companies.

Over a year ago, I was talking at a party with the man who was about the 50% owner of a large, publicly traded homebuilder.  The stock was down from a high of, say, 40 to about 3.  He casually told me that they were likely headed for bankruptcy.  I asked him why he and his colleagues in the industry had not cut back production given the obvious mania in the industry, and why he had not sold his company when the stock was high.  His answer to the first question was the alcoholic's answer:  they were homebuilders.  If financing was available, they built.  Period.  Addicted.  As far as the second question, he said that none of his competitors would buy them.  Addicts know each other.

Tragically, what has happened in the past 9 months is that Big Finance has, rather than going into rehab, has gotten bigger.  Now that so much of corporate, municipal and especially individual America has lost a great deal of borrowing power, the biggest and most credit-worthy borrower of them all has stepped up to the plate:  the patron of all this, the U. S. Government itself, in whose service all this borrowing really was done.  Thus, the use of Fannie/Freddie to keep the mortgages flowing and the expanded use of FHA; the unbelievable deficits in the name of "stimulus"; the massive expansion of the IMF.

Piling more and more credit upon a collapsing mountain of credit is the alcoholic's "hair of the dog" tactic.  The only real beneficiaries of this maneuver are those who package and sell the credit, meaning Big Finance once again.  Things are so crazy that much of the U. K.'s current deficit is being financed by explicit printing of money by the Bank of England (sic transit gloria mundi), and of course the same thing is happening here to a proportionally lesser extent.  Because Big Finance also makes money from transferring ownership of all sorts of securities from one absentee owner to another (such as a share of a "C" corporation "listed" on an exchange, or the Euro vs. the dollar to a non-commercial enterprise), you can be sure that it will make sure that there will be lots of excitement, lots of trends to follow and go with until they do not work, etc., the only certainty being the profits that accrue to the middlemen handling the transactional work. 

The word "credit" derives from the Latin term credere:  to believe.

Until an alcoholic confesses his condition, nothing he says can be believed.  Thus, suddenly, in the teeth of a Great economic Banana, with loans going bad at a rapid pace, suddenly the accountants at FASB have found a way to pump up "earnings" at BofA, which we are glad to learn has the computing power to report this accounting benefit timely for Q1.  And we have HankTimothy PaulGeith TARPing and PPIPing all over the place with no coherent explanation for the obvious question:  if the banks are really soundly capitalized, why do they need more than the entire cost of the Iraq and Afghan Wars in benefits in less than one year's time?  And if they are not properly capitalized, does not the law REQUIRE that they be shut down?  

The United States, in league with Big Finance, has promised tens of trillions of dollars in future payments to its citizens for medical and other care, and is promising more and more dollars in future payments to foreigners.  The foreigners will not take payment in bypass surgeries for our population.  They will take payment in bypass surgeries for their own people, though, but first they want two or even three meals a day, good roads, etc.  Increasingly they will ignore our military dominance just as they are seeing through our alleged economic dominance.  We will still have our amber waves of grain, but that does not justify Dow 8000 or any particular profitability of publicly-owned companies.

The G20 meeting in London confirms the obvious:  there are too many dollars promising too many goodies to too many creditors.  Until America as a unified whole becomes a credible borrower again (or even a net creditor), its currency will shrink in importance in the world, and the countries that adopted the flip side of America's business model and became creditors by producing goods for U. S. consumers will gradually sell to each other and will consume more and more of their own production.  

There is nothing apocalyptic yet about what is going on in America, but there is simply not as much left of the harvest from years of production and consumption in this country as was thought, and there is too much of the alcoholic's denial with regard to the Debt Addiction; thus one of those who saw this coming, Nouriel Roubini, is essentially all in cash except for his equity in his own business and his academic position.  

In other words, the financial markets are especially unfriendly and unpredictable at this time.  

Copyright (C) Long Lake LLC 2009

Serfing USA

As the stock market parties as though the bear market has ended, it's good to keep track of various facts.

An update on mortgage equity can be found at Calculated Risk's post, "Fed: Household Wealth Cliff Dives in Q4", from which the following is reported and calculated:

In 1952, despite all the tough economic times the country had been through, the average homeowner had 80% of the value in his (her) home as equity, the rest being debt. That percentage stayed as high as 70% as late as 1985. It is now 43%.

Based on various other statistics, I calculate that the homeowners who have mortgages only have at most 18% of the value of their homes as equity, the rest being debt (mortgage(s)).

Worse, for them to realize money from their homes, they will face commissions and other closing costs of (say) 8%. So for the about 70% of homeowners who do not own their home free and clear, if they sell, they will receive almost none of the value of the house.

Thus, the forces that control this economy have seen to it that most homeowners are financial serfs.

Next, on the same debt/credit axis, the Labor Department reported that corporate debt rose at a 2.2% annual rate. (One wonders why it rose at all in a severe economic downturn, and who lent the funds). However, total nonfinancial debt rose at a 6.3% annual rate in Q4 2008 (after rising 8.1% in Q3). Why so much increase in debt? Because the Federal government raised its debt issuance by 37% (following an increase of 39% in Q3), that's why.

Thus, all the talk in the media about "deleveraging" misses the more major point. Yes, it is true that Goldman, Sachs and Morgan, Stanley can now control fewer assets per borrowed dollar. That is a form of deleveraging. The more major form of leverage is debt itself. The Merchants of Debt, led by the Federal Reserve and the Federal Government, with their favored industry of finance, continue to grow. "Reform" is likely to simply mean a greater presence for the Feds, but with institutionalization of the toxic derivatives such as credit default swaps that Nassim Taleb correctly inveighs against rather than the banning of them.

The large financial institutions are being rapidly recapitalized by such maneuvers as putting Federal money into the vehicles of AIG and Fannie and Freddie, which are losing vast sums on derivatives. Since it is in the nature of derivatives that there is generally a winner for every loser, you can be sure that the winners are the politically favored large complex financial institutions all over the globe. This why Simon Johnson (former chief economist of the IMF and now a professor at MIT) in "Business as Usual", reports that:

If you think that the power of the banking industry may be in decline, or that its leaders are humbled, or that any kind of major change is underway, please review carefully Jamie Dimon’s speech from Wednesday, March 11 (available on Bloomberg.com).

Mr. Dimon, who runs JP Morgan Chase, makes it clear that he has great respect and appreciation for all that Hank Paulson did for the financial sector. He also strongly implies that it is time for the government to stop worrying about what approach to adopt; as far as he is concerned, the time for wrangling and figuring out what went wrong is over and the time for really big transfers of taxpayer value is now.

There is no sense here that anything much has changed. Sure, we’ve lost some banks, we’re in a big recession, and everything we thought sensible for banks in terms of regulation/risk management/corporate governance lies in tatters. But it is obvious, from the words, tone, and body language of Mr. Dimon that he thinks his side has won and it is back to business as usual, albeit now with a somewhat larger market share. On all of this, he probably has inside information.

Considering all the above, it may be that the financial industry is simply consolidating and expanding its hard-won gains and that these gains will be ratified by governments that also like playing the game, while the once-backbone of America- the homesteader/homeowner- is reduced to virtual peonage.

This is change, but not one that ordinary citizens believe in.

Copyright (C) Long Lake LLC 2009

Hey, Big Borrower

Warren Buffett, in Bloomberg.com's "Buffett Resumes U.S. Takeover Hunt as Prices, Competition Ease", reports a Depression mentality among Americans:

“The change in the American consumer’s behavior in the last six months is like nothing that’s ever happened,” Buffett said. “They won’t go in our jewelry stores. They’ve got the money, but when Valentine’s comes along, they think: ‘I still love my wife, you know, but I’ll just tell her this year.’”

In fact, the article reports that he's got the frugality bug himself:

“Frankly, when we had $45 billion, the threshold wasn’t as high for the first deal as it would be subsequently,” Buffett said (ed: Berkshire has $25.5 B now) . “I’m open for business, but it’s got to be the best business in town.”

Bottom line: he's been burned by purchases at bull-market prices. Like Citigroup's former CEO Charles Prince, he too felt he had to dance as the music played.

Meanwhile, Freddie Mac reported that in Q4 2008, it lost thirteen billion dollars on derivative hedges. Taxpayers will make up that loss. However, some other entities made the equivalent profit on the same derivatives. Many of those entities were foreign. In any case, it's just one more example of the taxpayer taking the loss and private entities getting the gain.

The Merchants of Debt are like the Terminator. They will not quit. Their mission is to keep the volume of debt growing, no matter whether there is any logic to it. The President himself has said that the economy depends on credit (which is the flip side of debt). Here are some examples, from today's Investor's Business Daily:

The head of the IMF said "there is still room to have more stimulus" (meaning more deficit spending in almost every country);

Treasury Sec'y Tim Geithner called for an increase in the IMF's emergency fund to help troubled countries. How much of an increase did he call for? 50%, perhaps? Double? No, he called for a ten times increase, to $500 B. (This extra $450 B will of course come out of thin air.)

The Bank of England has begun its announced program to print money and use that "money" to purchase Briatin's equivalent of Treasuries, which the Mother Country calls "gilts". (Gilts, as in gold-edged; this is now derisory, given that the Brits went off the gold standard long before the U.S.)

And Bloomberg reports that the European Central Bank has increased its bailout for the banks, by moving to a lower, 0.5% borrowing rate for banks. The result: higher profit margins to the banks and less money for the rest of us, both depositors and borrowers.

One can go on, but what's the point? The powers that appear to be solidly in control have determined that more debt is the solution for the debt crisis. As for the role of derivatives such as credit default swaps in this crisis, governments will apparently ratify their use and regulate these toxic monstrosities.

What are individuals with capital to do?

Re stocks, a classical rally off a bottom shoots up with good leadership on day 1, steadies or corrects on day 2, then takes no prisoners and shoots up on day 3, squeezing the shorts and drawing new money in as glamourous leading stocks break out to new highs. Japan collapsed down over 2% today; Europe's bourses are down 1-1 1/2% today. Today could be important here in the former citadel of capitalism.

Nouriel Roubini the analyst (rather than the policy wonk) has come back into EBR's good graces with the following post from last night:

"Bernie Madoff is the Mirror of a Made-Off Ponzi Economy". (No link as subscription required)

Roubini sums things up with:

Madoff may now spend the rest of his life in prison. The US household and financial and non financial firms and government may spend the next generation in debtor's prison having to tighten their belts to pay for the losses inflicted by a decade or more of reckless leverage, over consumption and risk taking.

DoctoRx here again. As the reckless borrowing shifts to the nation-state and its handmaidens, the allegedly once-independent central banks, the stock market fades into irrelevancy. The greater issue for investors is how the governments will deal with their own debt burden. Will they inflate it away, and if so when and how? If so, with what asset class will the insiders protect their gains? What asset class will see confiscation?

An outsider can stay informed; think independently, which may be helped by avoiding mainstream media with its proven ability to affect one's thinking and emotions; have no religious-type belief in any particular financial asset class; and adjust to the major trends and facts "on the ground".

The current trend is for increasing state control of the means of production through the credit-creation and debt-destruction mechanism, with "equity" such as that of GM, Fannie and Freddie, Citi, etc. potentially disappearing almost overnight with the state determining what use it wants to make of the carcass of the company.

The current fact is that Federal Reserve notes, commonly called "dollars", remain generally accepted as "money" as of today.


Copyright (C) Long Lake LLC 2009

Nothing Fails Like Excess

In "Summers calls for boost to demand", Barack Obama's lead economic adviser and Robert Rubin protege/ally Lawrence Summers bizarrely recalls the single most ridiculous quote to come out of the Vietnam War, which was made by a U.S. Major named (itself bizarrely) Booris: "We had to destroy Ben Tre (the village in question) in order to save it".

From this Financial Times article:

The US administration had no choice but to take strong public action to “save the market system from its own excesses”, he said.

The article goes on to quote Mr. Summers as follows:

“The old global imbalances agenda was more demand in China, less demand in America. Nobody thinks that is the right agenda now,” said Mr Summers.

“There’s no place that should be reducing its contribution to global demand right now. It is really the universal demand agenda.”

While the US and other western nations should return to living within their means in the medium term, everyone should raise spending sharply now.

“The right macro-economic focus for the G20 is on global demand and the world needs more global demand,” said Mr Summers.

He also said:

“This notion that the economy is self-stabilising is usually right but it is wrong a few times a century. And this is one of those times . . . there’s a need for extraordinary public action at those times.”

Let's comment, starting with the last first.

The idea that what's going on is a rare event is an endlessly repeated misstatement; some might call it a lie. This crisis began in 2007. Exactly 100 years earlier, the U.S. Government suffered a financial crisis in the "Panic of 1907", where J. P. Morgan banged the heads of other bankers to cobble together financing for the Feds.

The U.S. suffered intermittent booms and depressions, culminating in the major post-WW I Depression of 1920-21. Banks failed regularly in the 1920s. Then came the Depression. The smashing victory in WW II gave a quarter of a century of breathing room. Starting in the 1970s, we have had crisis after crisis. Third-world countries required money-printing to deal with oil price surges. Citibank was insolvent in 1980, as were other money-center banks that did the Fed's bidding in recycling the printed money to these countries. They were allowed to earn their way out of insolvency. Every Texas bank went under in the oil bust of the 1980s. Vast amounts of S&L equity vanished in the 1980s, all over the country. Many money center banks were in deep doo-doo in and after the 1990-91 recession.

Bottom line: The U.S. regularly suffers from economic busts and banking crises. What's different now is how politically well-connected the losers are this cycle, and how much they lost outside of traditional activities involving depository functions.

Moving on to the beginning quotes, let's leave matters at this:

The U.S. Government is going to excess with massive deficits and general histrionics. There was NO panic till the Government panicked late last summer and fall and began with a "sky is falling" attitude, rather than having worked out a plan last year when the Bear, Stearns failure should have awakened everyone. This business that in the short term, we should stay addicted to debt, but we'll detox in the medium term is too ridiculous to dignify with much more commentary. Just try saying that sort of stuff in an Alcoholics Anonymous meeting and see what sort of comments you get!

Larry Summers' solution is the classic solution of the financial industry: more borrowing, with the U.S. Government more or less the only allegedly credit-worthy borrower left, and more consumption from the "shareholders" of this entity. The Merchants of Debt will if possible suck the taxpayer dry till the Federal Government is on the brink of default.

A more prudent solution is to start living within our means, consume less than we produce so that we can actually rebuild our savings as a society, and "come reason together" LBJ-like to quickly have a fair and comprehensive resolution of the debt situation.

And do away with the bear-villains such as Citigroup and AIG who in this fairy tale are eating Goldilocks up.

Some un-asked for and of course to-be-unheeded advice to Mr Obama: you need a new economic advisor. Try Paul Volcker. Send Tim Geithner packing, either to State or to Goldman, Sachs or Citi.

And, especially, don't ever again "dis" bloggers (per the recent interview). The blogosphere is the only part of society that foresaw this financial mess. Try reading us. For a change. In which you can believe.


Copyright (C) Long Lake LLC 2009

Debt Watch

"Things they do look awful c-c-cold (Talkin' 'bout my generation)

Yeah, I hope I die before I get old (Talkin' 'bout my generation)"

-The Who, "My Generation"

The babies born in the 1910s and 1920s lived in such dread of another Great Depression that they acted in such a way that, despite periodic fears of one, it never occurred.

And due to Social Security and Medicare, those of that era still alive are relatively well protected from the current economic mess.

The post-WW II "Boomer" generation took prosperity, including guns and butter, for granted.  Too many people in government, the media, the economics profession, and in business drank the permanent prosperity Kool-Aid that all sense of history was dispelled.

A rickety financial structure of every-increasing indebtedness was created, with repeated bank crises, along with the greatest spreading out of military personnel the globe has ever seen from one country.

The "Merchants of Death" (arms dealers) were joined by "Merchants of Debt".  The Boomer generation and the subsequent one were induced in a million ways to want own a stairway to heaven- but with borrowed funds.   The generation without direct experience of the errors of the Great D is in danger of causing one for the same basic reason:  debt piled upon debt.  

We are seeing the historical theme of alternation of generations play out in a smaller scale in the stock market.  For all the fraudulent aspects of valuation of "growth" stocks in the 1990s and to a lesser degree in this decade, at least the tech stocks had a culture of ownership as opposed to debt.  Their VC's and managers knew how risky and cyclical the high-tech business is, and built companies with no or limited debt, such as Microsoft, Intel, and Cisco, along with a host of others.  These companies may well continue to have overpriced stocks, but none of them have imploded as have the leveraged ones such as Fannie/Freddie, AIG, Citigroup, and many smaller ones.  The tech stocks had their quasi-destruction in the 2000-2002/3 bear market; the theory of alternation of cycles suggests that they will lead the market up if and when we ever see an up-cycle again.  The same theory of alternation of cycles suggests that real estate will sit out the next bull market in financial assets to an extent, which is to say that it will be pulled upward in the next strong bull market but just as with the NASDAQ, it will ultimately move back toward its bear market lows.

Now that everyone sentient fears another Depression, the long-term odds are finally more balanced toward equities than they have been for many years, no matter the historical fact that another 80% down from here would match the 1929-32 experience and therefore would not even represent a record bear market.  One wants to follow stocks and markets that have structurally strong or relatively strong chart characteristics.  This includes precious metals and well-run purveyors of timeless necessities, such as Wal-Mart and McDonald's.

Unfortunately, right now stock markets as a whole across the board look poised for collapse and are thus very risky. Vast amounts of debt need to be rationalized.  Tragically, governments across the world and their central bank enablers persist in trying the hair-of-the-dog that bit you strategy by increasing debt loads rather than reducing them.  If the owners of capital see governments finally reject the Merchants of Debt, they will put money to work and the world will see its next cycle of prosperity.  

Unless that happens, investors in corporate stock and most bonds will do well to recall the immortal words of Chauncey Gardiner:  "I like to watch".

Copyright (C) Long Lake LLC 2009

Keynes Is Dead

The financial markets, which have no ideology, have rendered their short-term verdict on the alleged resurrection of John Maynard Keynes' thinking.

Since the sweeping Democratic victory on Nov. 4, the Standard and Poor's 500 stock index is down 23%. Investors and speculators have placed their bets not in the resurgence of business anywhere in North America, Europe or Japan, but on gold and silver, as well as on Government securities.

This is in part because The American Recovery and Reinvestment Act of 2009, aka the "stimulus" bill, is an odd mixture of tax cuts, multi-year spending plans, and non-job related priorities such as expansion of Pell grants for students. None of this is funded.

The markets see that the Democrats, who rushed the unfunded TARP bailout legislation into law last fall to spend nearly a trillion dollars without paying for it, have a President of their party who is going to hold on Monday a meeting at the White House on fiscal responsibility and who is intent on blaming George W. Bush for the deficits, notwithstanding that his party controlled Congress and passed every spending bill and that rushed the "stimulus" bill into law this year. Whether Mr. Obama can fool the people is irrelevant to the markets, which see through the rhetoric of any politician to the facts. The facts are that if the Feds run gigantic deficits, there is little left over to finance private business growth other than from retained profits, which look to be in short supply.

In the Great Depression, when actual production was down well over 20% and prices were down similarly in addition to physical output, leading to an enormous depression in the nominal value of output, Mr. Keynes theorized that Government could help revive "animal spirits" by temporarily taking on debt, thus making the private sector feel richer, thus helping the business cycle move upward. Keynes felt that in good times, Government would then retire its debt by damping down the economic expansion and perhaps even go into a surplus financial position, thus moderating both the booms and the busts. President Roosevelt and the Brits adopted some of his policies. After Lord Keynes passed on, a bastardized version of Keynesianism was adopted by Government. This version involved permanent Government deficits.

What markets know is that the current mess globally has nothing to do with insufficient demand. What may or may not have been true at the depths of the Depression- a deficit of demand- is untrue today and is an unnatural concept. The debt deflation theory of Irving Fisher and Garet Garrett rein triumphant. That is why the current carnage is in financial companies.

"Stimulus" cannot stimulate when the "stimulator" is as poor a credit risk as the Federal Government, which even when it was running nominal surpluses in the 1990s was running large deficits under Generall Accepted Accounting Principles.

What is really happening in the markets and the economy is what Newsweek celebrated on Feb. 7: "We Are All Socialists Now".

Markets see that the sham arguments propounded by Democrats trying successfully to regain control of Congress in 2006 and early on in 2007 that they were the fiscally responsible party that would reinstitute "Pay as you go" fiscal policies have given way to the greatest orgy of deficit spending in the history of the Republic outside of major wars, probably greater even than during the Great Depression.

Rather than letting the debt-based companies such as AIG and Fannie/Freddie fail and be liquidated, the Government has helped destroy investor faith that traditional business models built on equity are preferred. By going all out to fight for the continuation of the financialized economy, culminating in the "stimulus" package which is entirely financed by more and more borrowing (or money-printing) that no one expects ever to be paid back, Government has helped create one of the greatest stock market crashes in history. Every important long-term trend line for the S&P 500, NASDAQ and Dow Jones Industrial and Transportation Averages has been violated. Worse, the fact that the S&P 500 went to a new high in 2007 and then undercut the 2002 low last week is a horrible technical indicator.

There is now no obvious bottom for this stock market or for the economy. In fact, it serves the purposes of the "We Are All Socialists Now" econo-political model to have a poor economy. In this way, Government can masquerade as the savior of the economy and thus fulfill the long-held goal of the Left to increase Governmental power.

FDR took office many months after the economy bottomed. He pronounced in his First Inaugural Address that the only things Americans should fear was being fearful. The Dow Jones Industrial Average proceeded to triple in FDR's first term. In contrast, President Obama has predicted catastrophe if ARRA/"stimulus" was not passed. It was passed. The markets have responded.

Keynes is dead. The classical economics that he built upon remain for us to rediscover. There is no free lunch. One way or another, everything has to be paid for. The debt-based economy of the last many years is imploding because it was built on a lie, in part by misrepresenting the thinking of Keynes.

In equity, not debt, lies the economic Promised Land. The Establishment in Washington is fighting tenaciously to continue the debt-based economy. GWB or BHO are the same in that regard. They were/are in league with the Merchants of Debt.

Moving to a culture of equity, not debt, will take sweat and toil.

A peaceful mass movement is needed. Please spread the word.

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It's Now or Never: Breaking the Debt Cycle

The banking crisis continues to elicit conflicting signals out of the Obama Administration as to its solution. One part of the solution will apparently not be to encourage thrift. The support of frugality is absent from the "stimulus" bill that apparently will pass the Senate today, perhaps having undergone cosmetic surgery to make its obesity less obtrusive.

The real heart of the matter, the functional insolvency of certain money center banks, remains without a plan. So many trial balloons have been launched by the Administration that plan fatigue has set in the blogosphere, and perhaps in the public at large.

Even those who feel that Mr. Obama is being too cautious on the stimulus plan agree with him that thrift is not a priority. For example, an antagonist on this matter is the Nobelist Dr. Paul Krugman, who pens in "On the Edge" in today's NYT:

It’s hard to exaggerate how much economic trouble we’re in.

DoctoRx here. I disagree. Bad as things are, one can always exaggerate their severity. Right now, I call this a Great Recession, not a Great Depression. We have not even reached the unemployment level of the depths of the 1982 recession, adjusted for population growth.

Consumers, their wealth decimated and their optimism shattered by collapsing home prices and a sliding stock market, have cut back their spending and sharply increased their saving — a good thing in the long run, but a huge blow to the economy right now.

Philosophically, this point is the crux of this matter. The growth-at-any-price crowd can't stand it that individuals are responding logically and prudently to a dangerous time and would rather strengthen their own fiscal situation than the amorphous, non-flesh and blood thing that Dr. Krugman studies, the economy. Perhaps he has forgotten that the original meaning of the word "economy" is "thrift"?

The meme all over the media and in elite circles such as Dr. Krugman's is the same thing I heard treating obese patients or those addicted to cigarettes. They wanted to stop smoking or lose weight- but just not now, doctor. There was too much stress right now, or something. But come a heart attack, and it is amazing how easy it can be to break the addiction to smoking! Or to lose weight.

If consumers can't break the cycle of debt when it's in their individual interest to do so, they will never do it. It's now or never.

This is the medical analogy to our debt situation. Americans, chastened by the Great Depression, foreswore debt for a generation. And the economy did great once we won WWII. (Of course, winning the deadliest war in history helps!) But the Merchants of Debt came back with a vengeance. They need to be routed again. Dr. Krugman certainly believes he is a populist. But the greatest victims of the debt culture are the poor, working class and "middle" middle class. Once, people used the term "usury" for the rates these people have to pay to become unsecured borrowers.

We are not exactly in a Marxian crisis of capitalism. We are in a crisis caused by the emergence of a finance-driven economy. Thus we are supposed to "love it" when the GDP rises. It will rise one day, but without real structural change, it will be just more of the same.

The "stimulus" bill is going to be financed by more debt, and thus is a "hair of the dog that bit you" strategy; or by printing money, which takes us straight back to the 1970s. The only good reason to "go there" is to help those needing acute help due to the recession, including numerous suffering individuals and states and localities, I believe.

Tending to those obvious and acute needs, plus finding funding to get through the banking crisis, is more than enough for any Administration to do and do right.

Copyright (C) Long Lake LLC 2009