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How Fed Rigs the Economic Debate

Rick Ackerman — Thu, 02 Sep 2010 22:01:28 +0000

[Alan Geik, whose razor-edged essays on our sordid political culture have gained him a loyal following at Seeking Alpha and other popular web sites, has been a lifelong student of frauds and scams, and so writing about this Era of Bailouts comes naturally to him. In the essay below (which contains some great links that we would encourage you to follow, including a video punch line at the end), he explains not only why the global financial crisis is not going away any time soon, but why it is likely to get much worse before it gets better. To bolster his conclusions, Alan draws a bead on some of the bigger-than-life buffoons and greedy political hacks who have helped to amuse and entertain us even as they have unwittingly contributed to the collapse of the global economy. An egregious example of the breed is Fed. Governor Mishkin, who in 2006, with amazingly bad timing and lack of prescience, presented a paper entitled “Iceland’s Financial Stability.” There are also some piquant notes on the recent misdoings of a world-class buffoon who needs no introduction, Sen. Christopher Dodd. Enjoy! RA]

Beginning with this somewhat worn animated video, Worst Slide Story, will hopefully lend a light, amused tone to my few observations about the iCorrosion of the Empire. Also, a bit of light comedy might lessen the appearance that this is just another frustrated Financial Collapse to Come rant. I have written several articles outlining the two major Wall Street conceived scams of the 1980s; the Latin American Debt Crisis and the S&L bailout. Back then lobbyists gave Congress hooks on which to support massive Wall Street loans to Latin American dictators (“we need to help third world(...)
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© Rick Ackerman and www.rickackerman.com, 2010. | 49 comments |

How Dumb Little Laws Hobble Prosperity

Rick Ackerman — Tue, 31 Aug 2010 22:01:47 +0000

[Today’s guest commentary, by Ben Rositas, takes an elliptical path in arguing that dumb little laws and legalistic thinking have helped undermine the sort of self-determination that alone can make real and lasting prosperity possible. RA]

This is probably going to seem off-topic for a Rick’s Picks commentary, but I hope that it becomes clearer at the conclusion. First, a brief history. Most summers, I take on a writing project, usually fiction of one sort or another. I’ve done this for the past 20+ years, and my current project is based on a computer game called Arcanum that was released in the late 90s. I feel kind of silly, being that I’m 34, but when I came across that game recently, I was so intrigued that I bought a copy and spent some time playing it. No wonder the country’s in trouble! But if I could create a rich world and story, I figured it wouldn’t be a total waste. Anyway, as I scanned for material that would help(...)
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It Doesn’t Have to Be ‘Inflation vs. Deflation’

Rick Ackerman — Mon, 30 Aug 2010 22:01:53 +0000

[Many readers have pointed out that our long-running discussion of deflation has tended to overlook the impact of price increases, or at least price stability, on essential goods and services. In the essay below, Robert Moore, a frequent contributor to the Rick’s Picks forum, explains how both type of “flations” can co-exist. That he has done so without using the words “inflation” or “deflation” is not merely clever, but persuasive. Read on to sharpen your understanding of how supply and demand interact in an economy where some debtors are being liquidated while others continue to pay their bills and debts. We will mention up-front that although Robert is no “deflationist,” the economic outcome he predicts is exactly what we have long predicted – i.e., a drawn-out drop in the standard of living until all debts have been paid – either by creditors, or debtors. RA]

Ok, I’m going to try to make it through this entire essay only uttering the words “inflation” and “deflation” in just this one sentence. Why, you ask? Because these terms are just too ambiguous for a productive economic discussion. Each word has two unique, and distinct (some might say polar opposite) definitions when used in the context of money supply versus the context of general price levels. This degree of ambiguity makes both terms completely worthless in an analysis of cause and effect. There must, by necessity, be a dedicated term to describe the cause, and another term to describe the effect; otherwise you find yourself drawn into an analogous discussion where(...)
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The $15 Trillion Home Equity Question

Rick Ackerman — Mon, 30 Aug 2010 02:44:23 +0000

[To broaden the conversation, Rick’s Picks inaugurates a two-week series of commentaries today from guests who have contributed regularly to the daily forum. I can promise that you’ll enjoy these essays, which cover topics ranging from the peculiar economic boom in Germany, to the failure of New Jersey’s casinos, to the possibility that the global economic breakdown has been meticulously engineered by financial and political sociopaths. This morning we proffer the always-sunny thoughts of Mario Cavolo, an expatriate who lives in China. His very bullish outlook for the global economy contrasts with some of the gloomier think-pieces that have appeared in this space. In the essay below, Mario extrapolates a very positive economic outcome from the $15 trillion of unencumbered equity that Chinese property owners currently have vested in their homes. Will the eventual leveraging of this still debt-free sum, together with the irresistible power of China’s growing economy, be sufficient to pull the world out of its funk? Read on for Mario’s optimistic answer. RA]

Current United States home mortgage debt: $15 trillion. Current China home equity: $15 trillion. Mortgage debt on those homes? Zero. It is easy to suggest that this insight, which reveals a $30 trillion spread between U.S. home mortgage debt and Chinese home equity, better enables us to grasp the underlying forces impacting the economic power shift we are seeing from West to East. While it might be in vogue these days to criticize the United States for being built on a mountain of debt, I’d rather not. Let’s first take a moment to remember the positive effect the world over which(...)
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The Fallacy of ‘Bailing Out’ U.S. Cities and States

Rick Ackerman — Thu, 26 Aug 2010 22:01:08 +0000

Amazing how far a really stupid idea can travel. Warren Buffett helped spread and legitimize one a couple of months ago, and now the Wall Street Journal has pitched in on the same topic with an op-ed piece written by one Eden Martin, a lawyer and Chicago muckety-muck. Here is what Mr. Martin wrote: “The next big issue on the national political horizon may be whether the federal government should bail out the many budget-strapped states and municipalities across the country, especially their overly generous and badly underfunded pension plans.” And here’s Mr. Buffett on the same topic, testifying before Congress in June on the role the credit rating agencies played in nearly bringing the banking system down: “I mean, if the federal government will step in to help [states and major municipalities], they’re Triple-A. If the federal government won’t step in to help them, who knows what they are.” Buffett himself should know the answer to the question he has(...)
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Credit Card Rates Push the Envelope

Rick Ackerman — Wed, 25 Aug 2010 22:01:27 +0000

You’ve got to wonder what the banks have in mind now that they’ve raised credit card rates to an average 14.7 percent, up 160 basis points from a year ago. Are lenders perhaps trying to tell us that they are no longer interested in advancing cash to users of plastic? After all, what shopper or diner would borrow a dime with a credit card if it carried such an exorbitant interest charge? And even if there were borrowers at such usurious rates, how many of them could be counted on to service their loans indefinitely (which is how long it would take to pay off such loans)? It’s not as though(...)
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Few May Imagine What Is Coming

Rick Ackerman — Tue, 24 Aug 2010 22:01:22 +0000

[From self-described, “radical ol’ gloom-and-doomer” and frequent Rick’s Picks forum contributor Steven George Fair, here’s a tormented essay on why most of us are too far removed from the experience of the 1930s Depression to have any idea or imagination about what is coming. And make no mistake, he warns: Bears who think their timing and strategy will be good enough to gloat about are the most delusional of us all. RA]

There seems to be a single constant in the financial world, and those who play. There are few if any perma-anythings, with most chasing the bull, or chasing the bear as a bear-bull in the moment. It looks like the last of the Perma for Life people are dying off as the last of the generation that endured the Great Depression find their rest in the soil.

The generation who made roads in the dirt, flew paper airplanes, and dreamed the impossible dream are now gray haired, and either broke or millionaires. There is little ground in between the extremes that was once a maxim 20-60-20 rich/middle class/poor. What seems to exist today is a younger generation with no imagination, incapable of taking a block of wood and shoving it around the dirt pile in dreams of logging trucks, and crawler(...)
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Far Too Many Bears for Stock Market to Crash?

Rick Ackerman — Mon, 23 Aug 2010 22:01:44 +0000

[Against our own concerns that a stock-market crash is imminent, and that it will not wait until after the November elections, we must weigh the obvious fact that we have plenty of company – perhaps too much company – in the chicken-little camp. In the think-piece below, Cam Fitzgerald, a frequent contributor to the Rick’s Picks forum, expresses similar, contrarian reservations. RA]

There is just so much talk of a crash that it has almost become anti-climactic. The thing is that with so many mutual fund redemptions having taken place and so many more 401-Ks being shifted out of equities, it does seem surprising that markets keep floating, range-bound. We obviously have our suspicions. [Forum contributor Mario Cavolo] mentioned an article that suggested that as many as 70% of all stock-exchange transactions are being attributed to high-frequency trades. Off-hand I don’t know if that is true. However, I will say this: If such trades and the insiders (you know who(...)
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Treasury Sales Hum, Even Without China

Rick Ackerman — Mon, 23 Aug 2010 05:42:35 +0000

Who’d have believed that small investors have deserted the stock market in droves this year? We’d thought just about everyone but Larry Kudlow was out of shares by early 2009, and that the only players left were the high-speed trading computers maintained by the likes of Goldman Sachs and J.P. Morgan. Apparently not. Investors pulled $33 billion from equity mutual funds so far in 2010, according to the New York Times. If they keep up the pace, it would be the biggest run on mutual funds in more than two decades, not counting the panic stirred up by the banking crisis in 2008. The little guys appear to be “losing their appetite for risk,” a spokesman from Credit Suisse told the Times, putting it mildly.

They’re in good company, it would seem, since money managers appear to have thrown in the towel on shares too. Take a gander at the chart above if you want to see where all of their cash has been going. The chart should hearten those who are worried the U.S. Government’s recent decision to embark on a second round of quantitative easing will require a blowout of printing-press money. In fact, the demand for Treasury debt from sources other than the Federal Reserve seems all but insatiable at the moment. Are we being churlish to suggest this mania will not last forever?

What Scares Geithner

Keep in mind that the T-Bond rally has occurred even as China has turned net seller. You heard that right. Their holdings peaked for the year in April at $900.2 billion, down from a record $939.9 billion in July of 2009, when Europe’s supposed debt crisis was peaking. China reportedly held $843.7 billion worth at the end of June, but what is most significant – or perhaps scary if you are Tim Geithner — is the pace at which the blowout has accelerated. “In the ten months between July 2009 and April 2010, Chinese holdings fell by $US $39.7 billion,” reported the Australia-based Privateer, one of our favorite newsletters. More recently, though, Privateer editor William Buckler notes, the selloff quickened at an alarming rate. “In the two months between April and June 2010,” [the reserves] fell by $US $56.5 Billion.”

No one could accuse the Chinese of being indecisive. In the meantime, domestic buyers have taken up much of the slack, as we noted above. Is it possible the Chinese know something that they don’t?

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Are Your Ready for the Big One?

Rick Ackerman — Thu, 19 Aug 2010 22:41:26 +0000

The Dow looks to be in the throes of a 420-point plunge, even if sellers were unable to deliver the haymaker yesterday that would have put bulls down for the count. At the final bell, the drop amounted to only 144 points, although it would have been closer to 200 points at the day’s lows. If our prediction of a further 276-point fall over the very near-term pans out, pushing the blue chip average slightly below 10000, that would be just a very small downpayment on all of the plunging the Dow will still have to do to catch up with a U.S. and global economy that have begun to relapse into deep coma. Dow 5000, anybody? Whatever happens, it seems clear already that the highs(...)
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