The Wrong Diagnosis

News & Current Events Public News & Current Events
21

Hi Joe
 What I see is a widespread ignorance about how capital markets work. The cheerleaders think they can draw capital without thought to the consequences of taking too much. This will adversely affect the tax parasites. In essence, they are destroying themselves.

I understand the political motivation. Without money, they have no power. As their spending ran ahead of them, they found ways to create artificial revenue. Again, with no thought to the long term consequences.  (look up Broken Window Fallacy, Bastiat)

Austrian theorists know that for a long as the politicians prevent the market from correcting itself, the imbalances continue to accumulate. I think that that they have gone to such extremes to prevent the market from correcting that the pressures are building up to a systemic collapse, like a steam engine blowing or the Twin Towers collapsing.

Whether it is stupidity or not, I have to vent my frustration and horror at what I see is going to happen.

22

Mr. Fri
Before the Federal Reserve, debt was drawn from savings. They are two sides of the same thing. If I deposit money in a bank, the bank loans it out to another party. There is no change in the money supply when loans are equal to savings. But under a fractional reserve system, the bank loans out money it doesn’t have. That would increase the money supply. Additionally, the Federal Reserve replaces savings by creating money out of  nothing to loan to government to pay its deficits. The irony is that Fed money gives an appearance of savings when it is in fact a loan.

Before the Federal Reserve, dollars did mean something, because they were literally deposit receipts that a dollar holder could cash in for gold or silver. The inflationists argue that there is not enough gold in the world for a gold standard. But that is only if the gold prices is surpressed. There is always a price where supply and demand are in balance. If the price of gold was allowed to float, there would be no shortages. It’s the reason why I think you are going to see an explosion in the price of gold and silver in the weeks and years immediately ahead.

23

Joe Ponzio of Seeking Alpha has an entirely different perspective. Not saying I agree, but wondered if CM or Davos have reviewed this article yet?
Why This Downturn Wont be Like 1929

http://seekingalpha.com/article/124827-why-this-downturn-won-t-be-like-1929

24

"people think it is stupidity because they think the purpose of the fed and the interests of the financial institutions are the same as their own and the government is looking out for the best interests of the people. once you give up that notion you do not have to buy into any conspiracy theory you simply look at results and see who benefits."
so true Joe

25

Hi Davos,
Your response to Paranoid’s post has got me confused!

So have the markets. The Dow up nearly 120 points in the last 20 minutes or so today. Even with end-of-the-month settling that seems a bit odd. Or maybe we really are in the New Paradigm, the markets are back on track, the banks really are properly capitalised and there are elves at the bottom of my garden.

DavidC

26

There is no contradiction between a short term economic recovery and there still being long term problems. These can both be true at the same time.

However I would not say that the government has addressed even short run symptoms. The economy naturally rebounds after a fall without any action. What they have done is ensure that the long term problems are far greater.

 

27

 Hello David C:
I lean to agree with what CM said as posted above by Ray. Soros says the markets are always wrong. I think if one looks at the actual numbers, how they are calculated and how they are presented in the mainstream media one gets a different picture.

But, like the housing market, markets can only be conned for a short time.

I can go back, I’ll have lost a lot in taxes. I’m not losing anything if they go up becuase there are investment oppertunities that are easier to make minus the 401k and IRA.

Just my take. Simple insurance. We live in the mountains and have quake insurance even though we live on the east coast. When I flew I liked 2 engines, not one. When I went boating in the ocean 2 engines, sound and bay one. Diving, 2 tanks.

28

Hi Davos,
Having been able to see the whole of your post now makes a lot more sense!

For some reason I was seeing a list of xs with each one showing (and linking to) the original seekingalpha.com article link. Maybe I just happened to see your post as it was in the procees of being posted? Suffice it to say, looking at it now, it makes a whole lot more sense! Good responses.

DaviidC

29

Paranoid wrote: 

Joe Ponzio of Seeking Alpha has an entirely different perspective. Not saying I agree, but wondered if CM or Davos have reviewed this article yet?  Why This Downturn Wont be Like 1929

http://seekingalpha.com/article/124827-why-this-downturn-won-t-be-like-1929

Hello Paranoid:

Happy to give you my take on it. I just want to nicely point out that my affiliation with this site and Chris is nothing more than contributing/posting the best of what I read each day. In other words, just because my picture is below Chris’s doesn’t make me smart, doesn’t mean that CM will or won’t agree with my comment, in fact I’m often awed by many of the contributions I read and learn a lot from this comment section.

So here is my (personal) opinion:

"Impossible!" naysayers scream. "Unemployment is 8.1% and rising!"

Right, which means that employment is 91.9% which means that 91.9% of our consumer-driven economy can start saving more. And if unemployment rises to 15%, then 85% of Americans can focus on spending a little less and saving a little more.

Unemployment: In reality closer to 19.8% and increasing with losses of 1/2 to 1 million jobs per month. The number of unemployed workers during GDI was 25% but, if you worked one day a week you were considered employed.

Or look at it like this. Unemployed 13,700,000 Part time but trying to get full-time 8,900,000 and marginally attached and discouraged 2,100,000 for a whopping total of 24,700,000

So, in reality and I’m going to use really rough numbers here, if I recall, in 2006 (pre-GDII) there were about 80,000,000 men working and 70,000,000 women working, totaling about 150,000,000. Now we are down to about 125,000,000.

Put simply, the entire state of Texas has about 25,000,000 people in it.

So to say 91.9% are employed is erroneous. To say if it goes to 15% that 85% will focus saving more and spending less doesn’t take into account systemic risk. U3 and U6 numbers of this magnitude have a systemic impact on the economy.

In the fourth quarter of 2008, personal saving exploded — from 0.4% a year earlier to 3.2%, a hell of a jump in just one year. In fact, at no other point in the past fifty years have Americans increased their savings as a percentage of disposable income as quickly as they have in the past year
If you look up the way savings rate is calculated you will see the BEA once again uses some Enronesque accounting. Also, the don't count 401k and a real property. I go by debt loads not savings. Savings should not be called savings inside the BEA.
Add income of all types, and then deduct amount of personal taxes equal disposable income. Total amount of expenditures including rent, food, clothing and trivialities deducted from disposable income equal total amount for personal savings.
 
In addition, non mortgage interest payments started plummeting, down 13% from a year earlier. In the past fifty years, the amount of non mortgage interest paid by consumers has never dropped so quickly. In fact, from 1948 to 1987 — pretty damn good years in this country— this number neverfell.

This has little to do with low interest rates. We know that credit card companies have dramatically increased rates over the past two years. So…people are saving more and paying off debt.

I'm not certain how they deleveraged. Cashed in 401k's? Bankruptcy? Sold their house paid off debt? Lost their house and didn't pay the second mortgage? I don't know. But by now the author has me questioning everything.
If you look beyond the numbers, 91.9% of American consumers have, in the aggregate, been paying off debt and saving more and more in recent months. 
One in 8 are late on home payments or in foreclosure. The Alt-A's and NINJA wave starts this summer, prime foreclosures outnumber sub-prime now with the systemic fallout wave 1 caused. Wave 2 is the same size. Credit card defaults are up, I doubt 91.9% of American consumers are in this fine shape. Is the 91.9% the number he thinks are working?
The American consumer spent $240 billion less last quarter than in the previous quarter.
And for me, this is the key. American consumers didn't borrow because their house isn't appreciating and the 401k/IRA is tanking and they are petrified by the unemployment numbers or are unemployed or underemployed. Consumers, not all, but many, felt rich, planned on selling their home and buying another and took on a lot of debt. 

I don’t think we are going to ever see that again. Not for 50 years. Not until we manufacture more than we consume. Without that willingness to borrow I think we will drive older cars, eat home more, buy less stuff despite what Mr. TV tells us to buy and that is going to really slow down recovery.

 

But This Spending Is Different! It's Too Much!

In 1929, non-defense federal spending was just 0.77% of GDP. During the first three years of the Depression, the government did nothing to help curb the decay, actually paring back spending while Americans were losing jobs. Enter Roosevelt, the New Deal, and deficit government spending. (Roosevelt took the country off the gold standard to fund the recovery. Imagine what the headlines were back then!)

Roosevelt more than quadrupled non-defense federal spending to where it would ultimately become more than 5% of GDP in 1936. In essence, Roosevelt and the US Government filled the void when businesses couldn’t or wouldn’t put people to work. By 1942, unemployment was back below 5%, private investment was back on track, having grown tenfold since the 1932 low, and the consumer was healthy again.

One could argue that today’s proposed spending is too much. I’m not going to speak to the fundamental policy changes they’re proposing; but, I’ll tell you this: When Joe American loses his job and can’t find work, he’ll gladly help the government build the high speed train from New York to LA so that he can put food on his table.

Our debt, $80,000,000,000.00 is now being paid by printing money since revenues are down. That is like someone counterfeiting money to make a credit card or house payment. That funny money devalues our dollar and makes gas, food and anything and everything else more costly.

GDP is another Enroneque number. Cooked by about 40%. Our GDP/Earnings are 1,600% of what we owe. And, oh by the way, we don’t even take enough in each month to make the minimum payment, so we counterfeit it and shaft our kids and grandkids with the tab that we will never pay off. This is akin to a family earning $50,000.00 and buying an $800,000.00 house and telling the banker that his kids would have to pay what he can’t and some money each month will be printed on the HP printer.

Sorry, I would not read Joe’s book, visit his blog and I certainly wouldn’t invest with his company. Nothing personal, just don’t think he gets it.

IMHO this is and will be a depression, the likes of one this world has never seen.

Take care