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It’s the Deficits, Stupid!

By Rick Ackerman Posted on April 18, 2011, 12:54 am EDT Last Updated April 19, 2011, 1:51 am EDT

[My good friend Tom McCafferty is a veteran commodity trader and the author of numerous books about trading, including one of the very best primers available on the put-and-call game, Options Demystified.  More recently, he has written several guest commentaries for Rick’s Picks, among them an upcoming piece in which he will reveal his top choice for all investables – an asset class that has the potential to pay big dividends for generations to come.  In the essay below, Tom explains why he’s bearish on the economy – and on America – these days. RA]

Recently, I was asked why I wasn’t as bullish as some of my fellow traders.  The market has gotten off to a respectable start for the year and I didn’t seem as excited as some of our group.  Short-term, I was as mostly long, but long-term I was Smokey the Bear.  These guys demanded to know why I was so low key.  My answer of course was:  “It’s all the deficits, stupid!”  More definitively, it is all the obstacles that may prevent the United States of America from tackling the problems, i.e.:

•           Bipartisanship—I don’t think this country has been so divided since the Revolution or the Civil War.  Nothing gets done as all the politicians, special interest groups and powerful unions fight for their special interest and neglect the best interest of the overall population.

•           The sheer size of government—you know you are in trouble when twice as many people work for the various levels of government than work in manufacturing, farming, fishing, forestry, mining and utilities combined.  You know you’re in trouble when the salaries and retirement benefits of public “servants” are more lucrative that those producing the gross domestic product.  Fifty years ago, these numbers were reversed.

•           Education—why do less than half our high school students flunk out before graduation?  Why is higher education not delivering the promise of a brighter future for our young people?  Why do we believe the more money we throw at the problem the better the outcome will be, when that has repeatedly failed?  Why do we measure the quality of education, not by the results, by the amount of dollars spent per child?  Why do we let the teacher’s unions run the show?

•           Entitlements—Medicare and Social Security are broke and broken.  It is just financial masturbation to fund the SS Trust Fund with IOUs from a government that is so in debt it risks losing its AAA bond rating.  We are no longer self-dependent.  No one wants to take responsibility for themselves anymore.

•           Federal Budget—it’s a joke to even call it a budget.  We spend more in our Defense Department than any other nation in the world.  Actually more than the top spenders combined.  Funny … I really don’t feel any safer.  I’m sure I’d be safer in many other countries that refuse to police the world and interfere in every crisis.

•           Trade deficit—over the last 30+ years, the US has had only one year with a positive trade deficit number.  How long can that continue?

•           Weak employment numbers—employment just does not seem to improve, while major firms release increasing profits, why?  The better firms produce more and more of their goods and services overseas because the US in not a competitive labor market and the foreign markets are more attractive because they are growing faster.

•           Fiat currency—in all the history of the world, none has survived.  I’m worried history will win out again this time.

Anyway, that’s unfortunately how I see things at the moment. At one time, this country had the strength, the leaders and the will power to face and overcome all these obstacles.  I’m not so sure it does anymore.  We may be heading to where the United Kingdom went following WWI and WWII—a second-rate “nation of shopkeepers” supporting an army of politically supported vampires sucking the last drop of blood out of the economy.  What’s next … deflation?  Run away inflation?  We need change!

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  • bruce April 24, 2011, 3:45 am

    All the talking heads and people doing nothing except stating their opinion, and everyone has an opinion, writes that SS is an entitlement. I’m sorry but that is B.S., I was forced to pay in for the first time in 1962, at the age of 13, I’m now 62 and I very much believe that I am most certainly entitled to the benefit. I really don’t care if the government sells every National Park to live up to the promises of the program, their debtors are going to forclose on them anyway. First, every politican since the Eisenhower admin. should be hauled into court and charged with felony theft, that theft is the only reason a funding problem exists today. Next all politicans vote themselves raises, they should be paid for their results determined by their constitutents, and have absolutely NO pension or benefits after civil service beyond SS.

  • Dale April 19, 2011, 5:24 pm

    Mario,
    You read very selectively. The article, which you quoted, clearly said that “Lin bought a 120-square-meter apartment outside Beijing’s Fifth Ring Road at the end of 2008 for 2.2 million yuan (US$322,000). He had to borrow 200,000 yuan from his father – his father’s life savings. According to a 2009 Sina.com survey, more than half of homebuyers use their parents’ savings to buy houses.”
    I guess you missed that, hey? I am clueless where you are coming from, Mario, and suck it up with the tone.

    How about we all have a read of one of Andy Xie’s articles at: http://www.nakedcapitalism.com/2010/08/andy-xie-on-chinas-empty-apartments.html

    Then we can all wait for Mario to quote this one and leave out the points he doesn’t want to have to comment on, because he’s a cockeyed optimist.
    What else would you like me to bring to your attention?

    I could go on and on about the facade of China’s economic miracle. The facts show that the majority of Chinese are being left behind.

    How may Chinese are living in poverty in the countryside, Mr. Mario. Have you checked those figures recently?

    How about China’s banking system? What state is it in? Have a look at the link here:

    http://blogs.forbes.com/gordonchang/2011/04/17/is-the-peoples-bank-of-china-insolvent/

    Have you heard about China’s ghost cities? No? Take a look at this:

    http://www.sbs.com.au/dateline/story/watch/id/601007/n/China-s-Ghost-Cities

    Okay, Mario, waiting for your reply. I’m sure you’ll come up with something good.

    • mario cavolo April 20, 2011, 7:55 pm

      Ok, let’s skip the tone thing to work through these points more seriously. We seem to be slicing and dicing sectors differently. You seem really pissed about the bottom rung of the ladder, the farmers in the countryside. With inflation rising up, its a real problem for them and for the Chinese gov’t to have to tackle.

      On the other side, the vast majority of my observations and comments on China are macro, on the fact of the rising 300 million or so middle class. That’s no facade either. That’s real, no matter the gov’t and wealthy people here are doing their shenanigans like they all do in the other countries too. Remember they were also poor before. No country, no govt can be expected to magically solve the lower income lives of 800 million people in a couple of years, which ideally is what would happen next. Even if they intently committed to it, it would take years and funds that don’t exist. We can’t 100% blame the gov’t for the lot in life a person was born into. The Chinese go’v’t gets credit for opening up this society and rising more people out of poverty than ever historically. (screw ’em I don’t have any desire to cheerlead for them but the fact is there that this is what has happened.) Now I’m not talking a bout the rich people. This is a population of people the size of the entire U.S. who are now earning 3-15x more per month than they were 5-10 years ago, working for the world’s top companies here in China.

      Gordon Chang? Oh boy, you quote Gordon Chang as a respectable, credible source? He’s had a worse attitude than anyone about China for years. His book that made him famous a few years back was popular crap.

      Empty Apartments? Ghost Towns? No No….man, there are SEVEN very small ghost towns. That’s it, seven. You call that a leading indicator in a country of 1.3 BILLION people with 50 cities over 10 million population? No way. There are now 150 million homes worth $100,000 with NO mortgages on them. I’m not referring to the rich, high priced homes. They are separate. I’m talking about the homes owned by mainstream lower/middle income Chinese in typical Chinese cities like my retired schoolteacher mother in law in Shenyang. That seems alot more meaningful than seven small failed city real estate projects. I wrote into the producers of Dateline blasting that documentary, it was nonsense. China is the largest country in the world rapidly urbanizing. Those people need someplace to live when they arrive in the cities in the coming years. Any overcapacity is short term. Pudong seemed an overbuilt ghost town 3 years ago, now its loaded to the max. The same happening in Shenyang, my wife’s home town.

      My mother in law is one of the lost generation. She bought her home for $15,000 ten years ago. Now its worth $80,000 and there’s a brand new subway line 5 minutes walk away. The streets and sidewalks are being paved brand new. The factories in the city have all been moved outside of the city. There’s a new mall down the street. Tell her life sucks in China. But yes, inflation is a problem that is eating into her budget. Thank God, hospital care is still relatively dirt cheap compared to the West.

      The poor are being left behind? Relative to the rich, of course. The gap will get bigger. How can any country prevent that I don’t know. But I see many of the farmer’s lives improving, on Hainan, I used to drive my motorcycle all over the island. All the county farmer roads where I went over 2 years were paved over, electric lines brought in, the farmers all were building themselves nice new dwellings. (we know they can build them cheap).

      China’s banks – believe it or not, they are earning MORE than even GS and the other U.S. banks. Here from Chinavestor: “Another boost for the Shanghai Composite Index (SHA:000001) came from the financial sector. Chinese banks have been increasingly profitable as the chart on this page suggests, far outpacing U.S. counterparts in terms of profits. China’s big four banks each netted more in 2010 than Wells Fargo (NYSE:WFC) or Goldman Sachs (NYSE:GS). This is in a sharp contrast to 2006 when both U.S. financial institutions returned more to shareholders than any Chinese bank.”

      Mr. Lin – what? It says he HAD to buy a 2.2 million rmb home, and that he had to borrow 200,000rmb from his father. Why did HAVE TO buy a 2.2 million dollar home? He HAD to have it, and so he HAD to wipe out his father’s savings? I guarantee you that is a total fabrication. Do you actually believe two rational human being males sat down together and agreed to wipe his father’s savings so that he could buy a 2.2 million rmb apt? I guess a 1.6 million rmb apt wouldn’t cut it for Mr. Lin? Or an apt that 30 minutes further away which would probably have cost 20-50% less?..same as here in Shanghai And with 40,000rmb he could buy a nice, little Chinese car. People make choices and tell stories.

      I rent. I don’t buy an apt in Shanghai because they’re too expensive. So rent cheap, which is still available. Yes, its unfortunate for anyone who missed the profits from the run up in rising property prices and yes inflation is a concern and yes, the banks have a pretty high load of potentially bad loans from the 2009 period on their books.

      The still poor farmers are BETTER OFF in China than a poor American. Because a poor American is truly and completely screwed. In China, a poor person still has dirt cheap medical care, can rent a room for $75/month, as a farmer they have a roof and plenty of food. I’d rather be poor in China than in America. What I’m saying is that things are alot worse in America than here. The banking system there is in far worse shape and may destroy the whole world. China’s not printing money!

      Both countries have a similar problem in that they the wealth gap is creating two class societies of haves and have-nots.

      I have to give it to you that farmer’s situation is tough and can’t be made better quick enough but you’re not giving enough credit to the incredible improvements and rise of the new middle class here that didn’t even exist at all ten years ago. That’s not a facade. The the wealthy in China are to whatever degree also favoring themselves, being greedy, playing their money game shenanigans, surely yes, the same as all these other countries.

      This past year inflation rising up nasty looks like it is going to spoil it for everyone across the globe. Particularly for the poor people then, here in China and anywhere.

      Stock market earnings are doing very well starting this week. Why? Because many of these companies with global/Asia/China exposure are benefiting from the falling USD. Hopefully they can keep the game going. Chinese imports and exports are up and need to keep rising to keep the growth going. Hopefully the stock market/banking system won’t crash as so many at Rick’s think it will eventually because if it does we’re all totally screwed.

      Cheers, Mario

  • Scott Lindsay April 19, 2011, 5:16 am

    Why do you put down teacher’s unions as if they are responsible for kids who quit school or come out with a diploma that is no good because they never learned anything while they were in there. Look they don ‘t teach kids anything because the teachers are told what to teach and have very little to say about the curriculum.Yes some teachers are better than others but it doesn’t have much to do with them failing. The reasons for poor education has a lot to do with poverty,neighborhood environment, home environment, over all health physically and mentally. Then there is the system itself which has been royally under funded depending on the type of neighborhood your school is in and most public schools are neglected because they would rather support chartered schools instead. Typical right wing jive !

    • Chris T. April 19, 2011, 6:34 pm

      New York city spends almost 20 BILLION dollars on its schools.
      With 1.1 million kids in the system, that is almost 20k per pupil.

      Wealthy communities in NJ, with maybe 3300 kids have a budget of about 60-70 million (Millburn-Short Hills, the #1 high school in NJ. Look up property prices there to see it is upper class for sure).

      So, Millburn spends about 20+K per year and kind, NYC just a little less?
      Underfunded? Poor neighborhoods?

      What tripe! Mostof NYC kids are from poor to lower middle class.
      Newark, NJ, one of the dregs fo the US, pays its super $263,000 , and the teachers pay is commensurate.

      Pure left-wing denial, get your numbers straight.
      (I use left wing here only because you used right wing above, see my other comments that I actuallydo not believe in the dichotomy at all)

    • Robert April 19, 2011, 8:14 pm

      “The reasons for poor education has a lot to do with poverty,neighborhood environment, home environment, over all health physically and mentally.”

      I passionately, and vehemently disagree. What you are parroting here is the classic progressive diatribe that because person A has enjoyed a privilege, that person B is “entitled” to the same privilege without expending any effort.

      True, environmental conditions make the process of learning and applying what you’ve learned (education) more challenging, but at it’s heart, the ownus of education falls to the learner. The ambition, the motivation, and the incentive to improve one’s life can lie with no one else.

      Scott Lindsey- your statement above that environmental factors should bear the blame for poor education only serves to foster the victim mentality within those who should otherwise look themselves in the mirror and say “my life sucks and I’m going to do something about it”, instead of looking at themselves and saying “my life sucks, and it sucks because my parent’s lives sucked, and so it must be the fault of the people who screwed my parents, so it will do me no good to do anything about it”

      See the difference? I’ve lived on both sides of the tracks, and I’ve seen what the power of that one inherent choice can do for a person, whether they choose to:

      A) Yield that power and make the personal choice to change their life and focus the energy toward outward construction.

      or

      B) Ignore the power of choice and focus the energy toward inward destruction.

    • Chris T. April 20, 2011, 5:01 am

      Exactly!
      The Ingalls Family had no more than most of those Scott is weeping about, and look at that family vs. a similar one today.

  • Chris T. April 19, 2011, 3:29 am

    Oh boy, just read Martin Snell’s second comment.
    “America is NOT socialist …, but its current polices are paying the way for a socialist revolution at some point. For now America looks, in its income distribution, not socialist, but banana republicesque.”

    Sir, you are one of the truly converted.
    It must be assumed that you believe the flaws in socialism/communism are not inherent in the system, but merely its implementation, the “we never really tried it” argument.

    Socialism is the creation of just that elite (and its distribution disparity) which you cite as proof agains stateside socialism.
    It exists only for the benefit of this elite, while hiding its ultimate goal with gifts for the voting masses.

    Proof:
    While, depending on your viewpoint, America may or may not be socialist, it is UNDISPUTABLE that the direction this country has been taking since the progressive era is in a socialist one:
    Unionism, Income Tax (Pseudo) Redistribution, Property Tax, New Deal, Social Securtiy, Public Education, Welfare, Medicare , Medicaid, etc.
    All the while this trajectory was happening, the disparity you mention GOT WORSE AND WORSE.
    But the (m)asses kept voting for it, bought of by the little overt gifts, and not seeing the much larger covert thievery.

    It is when people can KEEP what they produce, in total, when people are free, not when they are being robbed on a daily basis.

    Of course, a believer will never see this, so this comment is to no avail with you, too bad.

    • Martin Snell April 19, 2011, 4:08 am

      Uhm …

      I have lived in and visited places that practice a rawer form of free enterprise. One of those places was Taiwan (many years ago). Back then you could do anything, start any kind of business, a true free enterprise paradise. When I first got to Taipei there were 50,000 trading companies, most run by people who did not want to work for others, risk takers, entrepreneurs.

      It was great except you could not breathe the air from the pollution (industry always won, air quality be damned), with readings occasionally approaching 400 (permanent injury to your health). The traffic was a disaster (who needed planning?). Taxes were low (I paid about 6% on income, but my boss paid me half under the table because he did not want me to have to pay too much tax – yes cheating even at 6%!)
      But with no one paying taxes, the government also didn’t do anything (you get what you pay for).

      Taiwan has now come a long way (though it is by no means perfect). There is a consumption tax (every time you buy something you get a receipt with a number that goes into a draw for cash prizes each month – this helped convert people to paying taxes). It is still entrepreneurial, but the government now cracks down more on pollution. It has also brought in a national health care system that is excellent and covers almost everyone and much better highways and a great subway.

      I have seen what happens without government, and I have seen what good government can do. I do not have a reactionary hatred for government because it does have a role to play (the US health care system being a prime example of a screwed up for profit system that costs too much and delivers sub par results). That doesn’t mean I think governments should do everything, far from it. It is more a question of balance. In a densely populated world some cooperation and sharing with our fellow citizens is required. This is no longer the time of the lone individual in the Wild West. There are almost 7 billion neighbors around you in an increasingly interconnected world. To ignore this is to ignore reality.

  • Chris T. April 19, 2011, 12:13 am

    “Until we all start…”
    oops:
    Until we all stop…”
    sorry!

  • Chris T. April 19, 2011, 12:12 am

    The gist of the article, A OK!
    Especially the teacher’s unions, education, and public sector employment comments.
    BUT:
    “Bipartisanship—I don’t think this country has been so divided….”
    That MISdiagnoses the problem, as does Martin Snell, who appears to blame Reagan/Republicans.

    Until we all start being FOOLED by the supposed Democratic/Republican division, and realize that there is no such thing, that in fact they are either Demopublicans, or Republocrats, we will not get a fix.

    THEY ARE THE SAME THING.
    The proof is in the points you make:
    Whether Democrat or Republican, ever since Roosevelt the First, all that has been on an upward trajectory, a one way street.
    When it suits them, they appear divided, but of course are not.
    Just look at that LAUGHABLE division of these so called sides with the recent budget brouhaha:
    100B, then 60B, then 50B, then 38B out of a 3.7T budget
    IT’S NOISE, even the 100B.

    And now the supposed 4T vs 6T over TEN years.
    Yeah right, like either of these proposals has any validity beyond the 2011-2012 fiscal year!
    How valid are the budget/budget projections from 2005, or 2000, today?

    Thus, AT MOST, they are arguing over 1/10 of this, ie 600B vs 400B.
    If the socalled opposition can barely outdo the in-power party by 1/8th of the total DEFICIT or 6% of the total proj. budget, its STILL NOISE.

    They always “compromise” by having the R’s “give” in on any and all social spending, and the D’s “give” on defense, other repressions (DEA, TSA, FBI, etc, etc).
    End result:
    Even larger spending across the board, bigger agencies, and on, and on.

    There is only one party, stop fooling yourselves, all pulling on the same string.

    • Martin Snell April 19, 2011, 3:22 am

      Just a point of clarification.

      I do not blame any party, I merely blame an attitude that is widely held (and played to by politicians). That attitude is that we don’t have to deal with reality, we are America after all.

      America has been unable to adjust to the fact that it now imports most of its oil. It acts as though it is still self sufficient, pricing oil lower than any other advanced economy, including Canada which is an oil exporter. The result is a trade deficit that does not have to be (1/2 is oil), a bigger than necessary military to protect shipping lanes for oil, and a society based on commuting everywhere because oil is too cheap.

      I have less trouble pricing oil cheaply if one is self sufficient, but when one is a major importer it just makes no bloody sense. – and hence the source of my above comment on attitude.

    • Chris T. April 19, 2011, 6:23 pm

      “… blame an attitude that is widely held (and played to by politicians). That attitude is that we don’t have to deal with reality, we are America after all.”

      Here I fully agree with you. If you look around at people you know, they still, despite all of the last years, have not accepted their declining lot, and still spend, spend, spend — on credit of course — on stuff that they don’t need.
      Whether it’s the update to the 15 year old kitchen with formica (still perfectly servicable, but all the friends have granite, so it has to go), or the larger gas grill, or the third – gen plasma TV (with the ones bought only a few years ago still doing full well), or the idiots camped out at the Apple store to stroke their ego for a day by being the first in the office with the newer iPad, iPhone, etc, there is no change in conduct.
      Actually have an excess of monthly income after spending left, who could be so stupid?

      “America…. pricing oil lower than any other advanced economy…
      …result is a trade deficit that does not have to be…”

      America prices oil pretty much exactly as anyone else. Except for possible purported manipulation of WTI (as compared to Brent viz. long run WIT/Brent ratio), it is a global competitive market.
      What we don’t do is RIP OFF consumers with exorbitant taxes on oil products, taxes that in the EU are as much as 400% of the actual oil-component.

      With the amount of oil the US uses as compared to how much we produce domestically, NO AMOUNT of taxation (that wouldn’t totally cripple us) can reduce that to no imports.

      Do you really see anything good in the taking, and REGRESSIVE at that, from the average Joe via the horrendous oil-taxes abroad? This only hurts the little guy.

      “… pricing oil cheaply if one is self sufficient,”
      Prices are not set by fiat in a market economy, and the other systems have been shown not to work.
      That is also why the price fixing of fiat via the FED is doomed to fail.

      “…a bigger than necessary military …”
      Fully agree, we haven’t waged an honest war, meaning one where our claimed reasons or goals were actually stated, in a very long time, if ever.

      And this just goes to show the dishonesty of the system:
      Where are Obama’s anti agression actions? None, all promises from 2008 broken.
      McCain would have done no different, different face, same conduct.

  • dennis April 18, 2011, 10:54 pm

    I continue to be amazed how in this forum the terms “politician” and ‘government’ get used to support the ideological position that both are inherently bad and the root of all of our problems. For example, “politicians” debase the currency. No, the currency is debased by the Federal Reserve which is a private entity, debasing the currency to enrich private individuals running private banks who use the banking system as vehicles to perpetrate fraud. One way they do that is of course to recycle the free money they are given to bribe hapless and/or corrupt politicians to write or re-write laws that either make what they are doing legal or impossible to prove as fraud. Much of it they recycle into ‘investment” —now principally in the form of commodity speculation, which raises the price of basic inputs and impoverishes everyone else here and in the rest of the world whose must use the greater part of their income to purchase those commodities.
    So what we really have is a predator and prey relationship between the private and public sector, respectively. That’s the ‘system’..a corrupt and ingeniously integrated private and public sector partnership designed to obscenely enrich mostly those at the top of the predatory food chain in the private sector– and reward those who are more than willing to be preyed upon in the public sector. So, while I am no fan of “politicians’ or ‘government’ I think we would do well to define our terms a little better and always examine both sides of the equation that is driving the current and very dire predicament we find ourselves in.

    • Rich April 19, 2011, 3:35 am

      Except for our Constitution saying The Fed reports to Congress. One of these years Congress may do something about it if the government does not default first…

  • Rich April 18, 2011, 7:06 pm

    Prophetic timely piece by Tom:
    “It is just financial masturbation to fund the SS Trust Fund with IOUs from a government that is so in debt it risks losing its AAA bond rating.”
    Is anyone still buying the dip after the S&P Treasury Negative Outlook announcement?…

    • Rich April 18, 2011, 7:08 pm

      Dollar actually up after UT took delivery of $1 B in gold before COMEX defaults and has to deliver in dollars to doughnuts…

  • Aussie Mick April 18, 2011, 6:50 pm

    From the outside..looking in…get your problems in perspective…those with real problems ….are as follows…the countless millions around the world, men, women and CHILDREN who have been on the receiving end of the USA war machine, or the lowest form of life on the planet, more commonly known as the CIA…both of which are ‘tools’ being used by the ‘elite’….Bilderberg group, big banks, Wall St…the Federal Reserve, the CFR, the Govt. For allowing your country to rape, rob and burn the rest of the world…there is a price to pay. The trouble is …the biggest criminals will go underground and leave decent people to pay the price. The New World Order / The Govt and Homeland Security have your accomodation ready for you. Can you not see that your country is being DELIBERATELY bankrupted to hasten the collapse? Turn off the TV…tighten the belt and use the ‘balls’ that built America to save it…you are running out of time. Aussie Mick.

    • Steve April 18, 2011, 9:36 pm

      Aussies are so down to earth it hurts. Thanks for the outside perspective.

  • Hue of Man April 18, 2011, 5:17 pm

    It all boils down to debt. It doesn’t matter if we have a fiat money system, gold standard or use gold coins as legal tender because at the end of the day politicians will print, reduce weights and measures or add base metals to coins, ingots or bars debasing the currency. Bad money drives good money out of the system and leads to the hoarding of good money, think about it.

    • Hue of Man April 18, 2011, 5:30 pm

      So if the problem is debt and politicians, what real solution are we left with for solving tomorrows crisis? think about it.

    • Carol April 18, 2011, 5:38 pm

      Hue I have to agree with you. I have stated this point repeatedly. This is why mankind has been abused and enslaved for 3000 years or more. There is no getting away from bad money or politicians as long as we have either!

      As you to Greg “Our problems will be fixed when it is unavoidable” I wish I was such an optimist. Our problems are so numerous and gigantic they will never be “fixed” weather it is unavoidable or not.

    • Steve April 18, 2011, 9:35 pm

      Agreed DEBT !

      Disagree – politico

      The problem is the People, the representatives a mere reflection of the character of the masses.

      There are GOOD people out there. Like on this forum. The problem is that there just isn’t 50% GOOD as defined by a Law far more ancient, and antecedent to the current democracy form.

  • Dale April 18, 2011, 4:24 pm

    Mario,
    “and head to Asia, where society is rising.” What a croc of BS.
    I live in Asia, have for 91/2 years, in China specifically.

    China’s “rising” is a facade. The real estate market here is going to “bust big time.” Sure, we can’t predict when, but when it does, look out. Millions of people here are leveraged to the hilt as they have continued to believe, just like Americans did, that the market for real estate will continue to escalate and never end.

    It will end.

    China’s GDP figures are “super fixed.” If you don’t know that, then you are clueless. You must know about the “ghost cities” in China, if you don’t, then you’re “super clueless.”

    The middle class in China, which most people believe is rising, is actually disappearing – right now. Everyone can take a look at the link below.

    http://www.china.org.cn/china/2010-01/21/content_19282590.htm

    Where I live in China, as in every other city in China, there is a ton of construction going on – apartment buildings and office towers – but at least half of all this space, both residential and commercial – is empty!

    Get you head out of your rear end, Mario. You’re not fooling anyone who lives here and really wants to admit what’s going on.

    • mario cavolo April 18, 2011, 5:58 pm

      My view is that you’re both rude and wrong.

      Oh, I forgot, tell the millions of middle class
      Chinese who are now earning 5 – 30k rmb per month, instead of 1500rmb per month that their life is now in decline. I read this in your article “Lin, who has a bachelor degree in marketing from Renmin University of China, earns 12,000 yuan (US$1757) a month as a senior sales manager for a well-known foreign company. He has been an enviable white-collar worker living a middle-class lifestyle for the past 10 years. But his apartment purchase was the beginning of nightmare.

      In 2005, a year in which housing prices increased 20 percent, Lin’s middle-class lifestyle included a car purchase, dining out, purchasing luxury goods on sale and traveling around China with his girlfriend, Yufei, who makes 3,500 yuan (US$512) a month.”
      ____________________________
      Where did I miss that they are now earning $2500/month when ten years ago it was five times lower and their lives are in decline because they can’t afford to buy a home in Beijing!!! They can go one hour outside of Beijing and buy a house for 3 x less! Same for Shanghai…go buy a new apt in Kunshan 30 minutes away for 6-8000rmb psqm. What’s wrong with that? People in America don’t COMMUTE 45 minutes each way everyday???? Oh gee, that’s a tough life because poor Mr. Lin can’t afford a home in Beijing!!! THAT means that the middle class life is in decline? The kid is bitching because he HAD to buy a home worth $320,000? Nobody asked him to, nobody forced him to!! He can rent a nice place for $600/month.

      I am clueless where you are coming from Dale and I don’t appreciate the tone.

      Mario

  • Greg Palmer April 18, 2011, 3:59 pm

    All of our problems can easily be fixed. The reality is that it’s not the politicians who are to blame it is the people who have stood by and watched this happen. Our problems will be fixed when it is unavoidable. Alot of pain is heading our way. Maybe this is what this country needs to remember where we came from.

  • roger erickson April 18, 2011, 2:43 pm

    > The sheer size of government

    I hear you, but it’s still a tangential argument. Does an elephant complain that the sheer size of it’s circulatory system is larger than that of a mouse? Coordination costs scale with scale. The question is what better/faster/cheaper methods will get us even further?

    > Education

    Agreed. We all have the same frustrations. What should we do about it? Run away? The only rational thing to do, ever, is make a suggestion.

    > Entitlements

    Acknowledged. We all share these frustrations. How do we create more coordination and higher margins, from the product of more people with more complexity? There is so much misinformation, especially that constantly confusing currency issuers with currency users. Part of responsibility for self is responsibility to build coordination with neighbors. They can’t be avoided any more than the pavement can be avoided. Responsibilities fuse in a need to not bruise your nose on either. Best use for self & neighbors is productive commerce.

    > Group budget

    Agreed. Yet there are always options. We have an unlimited public-initiative budget, and denominate it by issuing enough sovereign currency to meet our ambitions. We can’t run out of either, but we can, through sloth & ignorance, refuse to issue enough of either. Anything that limits any US budget is limiting Yankee public initiative. Once admitted, the sky’s the limit, and the problem is ourselves.
    (Just quit calling creation of fiat currency a “debt”. Call it private savings instead. And just quit issuing T-bonds. A fiat currency issuer does NOT derive it’s currency as revenue. We can always issue as much as we want, whenever needed. The meaningful budget of a fiat currency issuer is it’s Output budget, linked to it’s public initiative budget. We need group-intelligence able to manage public initiative FAR MORE than we need accountants to tally nominal numbers. Off the gold std the two professions are completely separated. Fiat currency does NOT denominate either national success or private wealth, only nominal transaction events.)

    > Trade deficit

    Also acknowledged. Yet there are easy options. All empires take & use more than they nominally give. That’s the definition of empire, and excellence. The tally not counted is design know-how. Everyone on the planet wants to send us copies of things we figured out how to do decades ago & now license to indentured servants. Obvious solution is to keep inventing, not just store nominal wealth in “bankipose” tissue! That only leads to “die-abankese”, an insidious social disease where we become unresponsive to our own entrepreneurs. The cure is less consumption of SWDN (s**t we don’t need) and more exercise of innovative activity.

    > Unemployment

    Exactly. What good are kids, neighbors, siblings, even twins, if not put to coordinated use? Return-on-coordination is real wealth. Letting unemployment float in order to stablize entirely nominal Fx rates is about as ass backwards as a nation can get. Let bank employment & income float so that we can keep more citizens employed increasing Output of the USA inventions.

    > Fiat currency

    I can understand your frustration. The solution is to see this as the root cause of all the other pain. If you recast fiat currency as the nominal denomination of growing public initiative then it becomes the inevitable, trival solution rather than the problem. There is no way to fight change, there is only the option to select carefully. In all the history of the world all attempts to scale up have failed – except the current one! Instead of beating your head against the wall, admit it’s a wall and climb to the top of it.

    When you can’t get your car engine tuned properly, it’s always something you’re already doing wrong, not the engine’s fault. You have to change the tuning method, and let the engine work as emerging self-design mandates. That means letting go of old ideologies when they become self limiting. If we hadn’t crossed past lines in the sand, we’d still be stuck on the wrong side of them.

    • warren April 18, 2011, 5:03 pm

      Tom says he is “worried” that history will repeat. I say just accept. It is only a matter of time.
      You say “all attempts to scale up have failed – except the current one!” I say, prove it, the test is not over yet.
      The engine metaphor is cute but, sometimes the engine needs to be torn down and rebuilt. They do wear out and fail as all things do that are man made.
      Have a good one. Warren

  • jeff kahn April 18, 2011, 1:59 pm

    That about sums it up.

  • Rick Alexander April 18, 2011, 1:43 pm

    If I’m not mistaken, I think there is a relevant omitted word in the above sentence: “Weak employment numbers—employment just does seem to improve, while major firms release increasing profits, why?”
    Surely he means to write: “employment just does NOT seem to improve…”?? Does nobody (author or Rick himself) check before posting? Otherwise, a perfect post!!

    %%%%%

    Correction made — and thanks for the heads-up. RA

  • donniemac April 18, 2011, 5:51 am

    This article pretty much sums up the whole economic problem. One may nitpick the thoughts behind the points, but overall, a very good summary of my concerns. And I am sure many would agree. Prepare for the worse and hope that the future will not be nearly that bad.

  • mario cavolo April 18, 2011, 5:26 am

    Thanks for contributing your knowledge and experience!

    It is America: The Next Great Schism

    Focusing on the two key points that the idea govt is bigger than ever, and that the wealthy are wealthier than ever, which reaches down into the in the upper middle class level, America is becoming the socialist republic more and more as first seen on the Newsweek cover a couple years back. I am still having trouble finding the words to express the point. America is not ruined, it is not broke. One cannot in any way make such a mushy, inaccurate generalization.

    America I is doing better than ever, its corporations are doing reasonably well, its govt is busy, and everyone is being paid very well, better than ever! This is America the 150million.

    America II is the jettisoned flotsam, the damage, the wreckage of the banking industries latest scheme. It is a degrading socialist republic more than ever dependent on a broke govt to enable it to survive. It is a group of 100-150 million marginalized lower/middle income citizens suffering the societal backward return to the socialist two class systems of the haves and have nots.

    Martin, let me suggest the crisis and its results already came and went, it is the schism that has solidified. The new order is settling in. The current state of affairs is the result though it will continue to fester over the next few years. If and until the lower/middle class Americans do possibly rise up to rebel against what has happened to them, this is the new state of America. This is a deep, societal shift that started a couple of decades ago but has accelerated and solidified to finality. Education is close to irrelevant regarding careers/professions when your few options are low-paying jobs.

    By the way all, I watched “Inside Job” last night to clarify some of the points in my mind as to what’s been going on in the banking/political system. Maybe that’s why I fell asleep angry, frustrated and woke up nauseous.

    Is all really that lost? For many yes, for those with entrepreneurial spirits and “cahones”, make your move. Figure out what products/services you can sell to the wealthy, that is your ticket to the future. Use the internet, figure it out. You have to.

    Or well consider packing your bags, make up your mind as the European immigrants including my family did back in the late 1800’s/early 1900’s that its time to pack the bags, get out of dodge, the family future continues in another country another place, and head to Asia where society is rising. Such is life.

    Cheers, Mario

    • Martin Snell April 18, 2011, 2:10 pm

      Hi Mario,

      I really question the use of the word “socialism”. Americans seem to overuse it and misunderstand its meaning. It is used as a “scare tactic” designed to generate a Pavlovian response against any kind of reform.

      America is NOT socialist (Obama is annoyingly centrist/right – at least to anyone that looks at the rest of the world), but its current polices are paying the way for a socialist revolution at some point. For now America looks, in its income distribution, not socialist, but banana republicesque.

      As for Asia I hope to retire there (in Taiwan) where they have socialist health care, great food, and friendly people. As their population declines (starting in the next couple of years, land should get cheaper, hopefully making a nice place in the mountains quite affordable.

    • mario cavolo April 18, 2011, 3:53 pm

      Hi Martin!

      Thanks much for clarifying.

      On Taiwan, every foreigner I’ve met who lived there were very positive about the experience.

      Cheers, Mario

    • warren April 18, 2011, 5:37 pm

      Wow, I hope you get to read what Dale said before this session is over.

    • Steve April 18, 2011, 9:29 pm

      Martin, How does the U.S. compare to the 10 Planks of Marx, and the definition of mobocracy, anarchy, discontent, communistic toward property that the Federal Government described as the definition of DEMOCRACY ? Can we use Federalist Paper #46 ?

  • JohnJay April 18, 2011, 4:43 am

    We no longer have anything the rest of the world wants.
    No more crude oil, which we used to export many moons ago.
    No flood of high quality manufactured goods, a la post WWII.
    We now ship out dollars, MBS, Treasury debt, and death and destruction, which have limited demand at this point.
    We are a nation of grifters, top to bottom.
    Big grifters: the Federal Reserve, GS/JPM/C etc.
    Small grifters: NINJA homebuyers, credit card defaulters, section 8 housing dwellers, public sector pension gougers, etc.
    And every manner of grifter in between.
    22 million government workers, 11 million manufacturing workers.
    That’s my short and sweet analysis of the USA.
    Not enough “marks” left to keep all the “grifters” in business too much lomger!

    • roger erickson April 18, 2011, 3:03 pm

      > We no longer have anything the rest of the world wants.

      Au contraire!
      They mostly still want to come here.
      They mostly still are desperate for some of our (more trusted) fiat currency.
      They are all desperate for our design-knowledge.
      (And they even wish THEIR politicians were as clueless and as easily manipulable as OURS are.)

      The list could go on, but the point is that we’re seen as a huge sitting duck, with the gates now unlocked, doors ajar, windows open, etc, etc … with a big sign out front saying “Please Rob Me!” Point is that they still see plenty worth stealing.

    • Steve April 18, 2011, 9:25 pm

      I’m thinking Yup! Right On!

    • Steve April 18, 2011, 9:27 pm

      That is JJ, I’m thinking Right On, Yup !

    • fallingman April 19, 2011, 5:57 pm

      Precisely John Jay…as always.

  • A. Rand Fan April 18, 2011, 4:42 am

    Here’s a terrific article with an apropos title to the image chosen for today’s commentary. http://dont-tread-on.me/the-silver-bullet-and-the-silver-shield/

    • roger erickson April 18, 2011, 2:59 pm

      When oligarchs who used to control commodity-money figure out how to control the issue of fiat-money, the solution is not to go back to the prior form of serfdom (they’d actually welcome that). The solution is to move forward and outsmart the parasites. Any form of money is simply denomination of individual and public initiative. Simply insist on accurate terms for your real transactions and you cannot be cheated by charlatans.
      As the marines say, “there is a better way”.

  • Terry S April 18, 2011, 4:21 am

    Lord… how quickly the discussion becomes partisan; I must have missed that in today’s essay.

    • Chris T. April 19, 2011, 3:13 am

      see my post below. Not partisan, misguided, hope you don’t believe in the dichotomy that isn’t

  • ClayW April 18, 2011, 3:41 am

    Oh yea, Carter was the master economist, if only we could bring him back. Boy could he ever inspire confidence. Does anyone remember the “Misery Index”?

    The Democrat-controlled Congress, with help from President Obama’s big government vision, is on track to double the national debt in four years. This was not necessary and has been a major contributor to all the obstacles mentions by Mr. McCafferty. Granted we were in dire straits in 2008 but but the current administration and his band of minions have accelerated the misery.

  • Martin Snell April 18, 2011, 2:21 am

    Let’s remember where this “attitude” started. Carter told American’s to put on another sweater to fight the energy crisis. Reagan said “Morning in America” and “deficits don’t matter”.

    The funny thing is that if you have a big enough of an inheritance you can squander it for quite a while before you notice the effect, but by the time you do it is way past the time to be able to do anything about it.

    America had an inheritance. It has squandered it, but stills wants to live like the trust fund check will keep on coming like it always has. The best examples are the ridiculously low gas mileage cars people drive around in (these would have been okay when the US was oil self sufficient, but way out of line now that the US is a huge oil importer – half the trade deficit), defense spending (more than 50% of world defense expenditures), and for profit health care (paying almost twice what anyone else pays and getting worse results).

    All of the above can actually be fixed quite easily, in theory. Unfortunately the mind set is still – “we are God’s gift to the world”, and with that mindset nothing will change very quickly.

    A crisis is required and will come (probably soon). The shame is that by having the world’s reserve currency this crisis has been put off so long that by the time it does come it will really really hurt.

    • roger erickson April 18, 2011, 2:54 pm

      Reserve fiat currency is not the problem. Reserve public initiative was our real wealth, and we’ve let it dwindle.

      Nowadays, it matters less daily which fiat currency gets used in transactions, since it’s all done electronically. As Warren Mosler keeps saying, what matter’s is what fiat currency people are most comfortable holding for awhile, to keep liquidity. Every fiat currency is just the mid-point of real-asset swap. Some of those real assets are pure know-how, otherwise known as advisory, instruction, training & consulting assets.

      Remember Teddy Roosevelt’s axiom?
      “A man who has never gone to school may steal from a freight car; but if he has a university education, he may steal the whole railroad.” Theodore Roosevelt
      http://www.brainyquote.com/quotes/authors/t/theodore_roosevelt.html

      The obvious corollary is: “A man who has never gone to school may be offered a job on a train; but if he has a good education, he may asked to run the whole railroad.”

    • Larry D April 18, 2011, 7:07 pm

      Teddy Roosevelt: the Trustbuster.

      In our day, the Administration seems to be hell bent on creating them, not busting them.

    • Steve April 18, 2011, 9:02 pm

      Based in the advancing ability of the human persona, Cousin Teddy is correct. The ability of thieves to thieve has never been greater. Education – there sure isn’t any growing “standard” of advancement within the U.S. Basically, there are a number, maybe 5, universities all teaching the same thing, which is not responsible rugged individualism. Take an honest man over a high I.Q., highly educated one from the BIG 5 any day. Poorly educated, bigotry thinking Ph.D.’s are a problem, never a solution. And there I believe we have it. Ph.D.’s., especially in economics, and on population mind control, are a dime a dozen, and the real hope for the future minimalized by the masses via manipulation, false figures, and skewed theory. F.D. Roosevelt was a usurper, and abuser of powers, who’s debt theories and executive money thought give us what we have today, DEBT; 14T in ‘book’ debt, in excess of 14t off budget debt, and then there is the bailout boondoggle which is reported to be many time more. So much for the social advance of Man toward something known as honesty, morality, and respect.

    • Robert April 18, 2011, 10:21 pm

      Roger: “Every fiat currency is just the mid-point of real-asset swap. Some of those real assets are pure know-how, otherwise known as advisory, instruction, training & consulting assets.”

      Roger, your definition above is pertinent to ALL forms of currency, whether they be fiat based (no intrinsic value of their own), or whether they be real money (posessing value as medium of exchange, AND useful in their own right- read: silver)

      I agree with you that Fiat currency is not the problem. The problem is fractional reserve lending.

      Everyone bashes the Fed for “creating” too many fiat dollars, but the Fed is not the beginning of the process, the Fed is the end of the process.

      It used to be that banks could not lend in amounts exceeding what they held in deposits. This basic principle of “keeping your own house in order” is fundamental that it should be academic, and yet the academics (beginning with Keyenes) instead decided that they could re-write the natural laws of economics by suggesting that demand for anything could be stimulated by flooding the universe with supply. That’s why today any bank can fund any loan that it takes on, regardless of the banks underlying reserve levels.

      The Fed only jumps into monetization mode when bank reserves erode to the point that they can no longer support the edifice of outstanding debt (which is constantly since the banks maintain no restraint to new lending)

      The whole process is a death spiral. To call it a Ponzi scheme is almost too polite.

      Now, to your point about real assets (pure know-how, otherwise known as advisory, instruction, training & consulting assets.)- I agree that these are the purest elemental assets that the human animal has to leverage to their advantage, and yet they are willingly traded for faith in paper and digits.

      Fiat currencies all fail because people eventually realize that FAITH should be in themselves, and in their own abilities. Faith should not be granted to those who wish to erode the value of said faith through currency debasement… right?

      I mean, why should people trust (place their faith) with the issuers of the faith based currency, when those issuers consistently betray said faith by debasing the currency egregiously?

      “Fool me once, shame on me, blah blah blah…”

      Faith belongs with ourselves, and with whatever infallible superior power we honor as the source of our motivation to be better people…

      Faith does not belong with bankers…. at all.

    • Roger Erickson April 23, 2011, 8:22 pm

      > I agree with you that Fiat currency is not the
      > problem. The problem is fractional reserve lending.

      Was. One point that most seem to miss is that fractional reserve lending applied only to gold-std monetary regimes. In a fully fiat currency regime, loans are never restricted by reserves at all – unless you call zero reserves one limit of fractional reserve lending. In fact, in our system since 1933, loans create reserves, not the reverse.
      Remember that the reason for going to zero-reserve, fully fiat currency distribution was to achieve national policy agility. We couldn’t have mobilized as effectively as we did during WWII if we’d remained shackled by the gold std. Admittedly, that move requires a lot more responsibility, but there’s no shirking that, unless we want to go back being a 3rd world instead of a 1st world country.

      Example of loans create reserves: When JD sells his farm to MJ, one or more bank’s instantly credit JD’s account with the agreed upon transfer price, and immediately debit MJ’s account with the same (minus any down payment, etc).

      At that point the Treasury hasn’t created any new currency, the banks has only denominated the transaction and notified the FED, which thereupon declares that JD’s bank reserves are marked down while MJ’s bank receives the demanded reserves, now in that bank’s account at the FED (loans create reserves).

      As JD actually spends down his credit, someone else is getting debited in the exchange, so no new currency is created. As MJ slowly pays off her mortgage, someone is paying her, so the credit/debit between JD/MJ is opened & eventually closed by moving around existing debits/credits in return for distributed transactions.

      The only way actual new currency supply is ever created is when the US House mandates some public initiative, instructs the Treasury to write de novo public checks for the amount required, and the FED credits the Treasury’s acct with the requested amount. At regular intervals the FED also matches the Treasuries new credits with T-bonds that Primary Dealer banks are required by law to hold.

      A T-bond is just a fixed-term currency note, so in effect the FED & Primary Dealer banks simply get a nominal guaranteed fee in return for managing the Treasuries checking account, and local banks get an interest cut for managing everyone else’s checking/savings accounts.

      All that could & should work fine, and is the least of our worries. It’s no different from paying teachers & professors for educating everyone’s kids. It works out.

      Where things really go south is when an electorate doesn’t do some spectrum of the following:

      a) the electorate doesn’t demand it’s public delegates generate enough activity, & thereby an adequate circulating currency supply (we’ve left out scavenging currency back to the Treasury, which, post the gold-std becomes just another way for a fiat currency issuer to regulate Aggregate Demand; the issuer sure as hell doesn’t need “revenue” in the form of it’s own monopoly $)

      b) the electorate doesn’t subsequently “shape” those ongoing public expenditures & efforts to adaptive use
      (the inviolable rule of all complex systems is “generate activity first, then shape it by selecting what does vs what doesn’t work”; we have no predictive power so have to rely on our adaptive power – by distributed trial & error)

      Fully fiat monetary regimes simply follow national outcome practices. Do a bunch of stuff, then constantly keep what works and discard what doesn’t … ASAP. Doing less is like sitting in the road waiting to be run over.

    • Alchemisteve April 23, 2011, 10:08 pm

      I remember Ronald Reagan. Isn’t he the one who wanted a balanced budget amendment? His tax cuts started the great bull market of 1982-2000 that made Bill Clinton look good. He was largely responsible for the rise of Silicon Valley and the fall of the Berlin Wall. We need to look for a new RR instead of joining the Liberal Media demonization of the old one!

    • roger erickson April 24, 2011, 1:23 pm

      > tax cuts

      Exactly, Alchemisteve. There’s a tiny subset of useful methods, sprinkled randomly across the spectrum of people claiming and/or decrying conservative vs liberal trappings. They appear randomly because so few on either side understand much, and of those that do, there are always some trying to take the $ & run. Not all conservatives are honest, nor are all liberals. I’ll always take an honest person over an unreliable member of either category alone. Our lack of predictive power makes any ideology useless. Operational excellence requires honesty over any/all ideology. We desperately need an Operational Honesty Party [OHP], instead of the arbitrary GOP/DEM groupings.

      Public initiative => public spending => currency creation.
      Tax cuts = public freedom to spend => less currency destruction.

      I’m all for both adequate public spending plus adequately low taxes plus adequate regulation, which at least leaves a lot of circulating currency for diverse honest people to experiment with. We always have diverse assets, so why limit access to fiat currency that eases distributed asset transactions? It’s easier to practice selection from a rich, sloppy palette than from an empty one.

    • roger erickson April 24, 2011, 1:27 pm

      should have said:

      Public initiative => public spending => currency creation.

      Tax cuts => [private] freedom to spend => less currency destruction.

      this follows, of course, the accounting identity that
      Public currency creation = net private savings

      not only does that identity hold, public spending is the ONLY WAY to generate net private savings; people lose track of that little fact


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