Just for laughs

Just for laughs I am listing a few webpage links here to poke fun at the global warming political movement. Sixty scientists and a couple thousand politicians against the whole world (and actual science, oh, and against the earth which does its own thing regardless what they think).

Nice article discussing the global warming hoax and where we're at with it.
www.marketoracle.co.uk/Article16126.html

Petition with 34,000 scientist signatures against global warming hoax
www.oism.org/pproject/

Heidelberg appeal signed by 4,000 scientists, including 72 nobel laureates urging reason instead of "irrational alarmism"
www.sepp.org/policy%20declarations/heidelberg_appeal.html

NASA admits 1934 was the warmest year on record
www.associatedcontent.com/article/347541/nasa_admits_th%20at_1934_not_1998_was.html?

Driessen article summarizing where we're at on the warming hoax
www.enterstageright.com/archive/articles/1009/1009nonedarecallitfraud.htm


Quiz: Is Elmer Fudd thinking, "What's that trick Bill used to do to make it seem like he was telling the truth?" or "I should look upset right now that bad light bulbs are murdering polar bears."

Inflation coming?

Picture credit Shadow Stats

I know our government is constantly warning of deflation, but that is becoming more and more puzzling. Look at this chart and explain how we are seeing deflation. At any rate, inflation is an increase in the money supply, which triggers higher consumer prices as more and more dollars are chasing the same goods and services. So, we have set an all-time record in the increase in money supply, literally trillions of new dollars "printed." And here we see consumer prices going up sharply (bought food lately?).

How do we have a deflation problem again? Sure, the asset bubbles have popped, and values are still trying to drop to realistic levels from their previous bubble levels. True asset values are different from consumer deflation of goods and services.

Yes, I know that a trillion dollars of the new money "printed" is bottled up in excess bank reserves instead of circulating through the economy, but still. If money supply is way up, even accounting for the money "bottled up," and prices are rising sharply, where's the deflation?

For the record, this strategy of trying to re-puff up the asset bubbles with air (only to pop later) while causing the rise of the price of everything else is idiotic. Have our leaders ever heard of Japan? This is the exact game plan that has given them twenty lost years so far -- and they're not done yet.

Is there a real reason for this yammering about deflation, or just silliness?

Why exaggerate climate change and ignore peak oil?

I forgot I had this article. The author believes the reason for the global warming scheme is a real problem, peak cheap oil. I think he gives the global warming political movement too much credit, but it is an interesting theory. One has to wonder why that crowd would keep trying to push a totally debunked hypothesis trying to fit man into climate science somewhere (for the last 55 years without much scientific, only political, success) while ignoring a real, looming problem no one can refute. Look at the Copenhagen treaty draft, especially paragraphs 36 and 38 to find their agenda.

"Why Exaggerate Global Warming? Cop15 Failure And Peak Oil Success
Commodities / Energy Resources Nov 19, 2009 - 12:48 AM
By: Andrew_McKillop

Since late summer, several OECD country leaders in the G20 group have stridently backed their proposals for radical cuts in global CO2 emissions, by waving the spectre of 'catastrophic climate change' if we do not achieve rapid, massive cuts in CO2 on a worldwide and uniform basis.

President Obama along with leaders including Gordon Brown, Nicholas Sarkozy and Angela Merkel have proposed CO2 emissions cuts up to 40% by 2020 and 80% by 2050 from a 2005 baseline. To be sure, there is a basic undisclosed driver for this intense concern for the planet and well publicized fears of Biblical-style floods 'by the end of the century'. The basic driver is tight oil supply, high oil prices, and small likelihood that oil prices will follow natural gas prices into 'sweet and low' territory.

The near fantastic CO2 emissions cuts proposed by several OECD leaders for worldwide application might perhaps be possible for the OECD group, especially if OECD total energy demand shrank on a long-term annual basis. They would however be totally impossible in the fast growing economies of China and India, and almost certainly Brazil, Russia, the GCC countries and elsewhere. Chinese, Indian and other APEC leaders have now underlined this, loud and clear.

Apart from the looming issue of how credible, or not, global warming really is and what role CO2 has in climate change, per capita emissions of GHG are so much higher in OECD 'postindustrial' countries, than in industrializing China and India which export energy-intense industrial goods to the OECD, that common sense says the OECD 'hyper consumption' economies should cut their emissions first and most. The role of 'exported energy demand, exported emissions' represented by the OECD group importing energy intense industrial goods from China and other industrializing emerging countries, adds more strength to the nonOECD countries balking at OECD leadership proposals for extreme rapid, uniform and worldwide CO2 emissions cuts.
Exaggerated oil and gas dependence

Per capita energy consumption, oil and gas, 2008
COUNTRY/GROUP
Year: 2008 OIL INTENSITY (barrels per capita per year) NATURAL GAS INTENSITY (barrels oil equivalent per capita per year)
OECD 14.5 barrels/capita/year 8.9 barrels equiv/capita/year
EU27 11.5 barrels/capita/year 7.6 barrels equiv/capita/year
Japan 14.3 barrels/capita/year 4.8 barrels equiv/capita/year
China 2.4 barrels/capita/year 0.3 barrels equiv/capita/year
India 1.3 barrels/capita/year 0.2 barrels equiv/capita/year
Average annual consumption data, approx. Sources include BP Stat Review of World Energy

This skewed distribution of world fossil energy consumption, and extreme energy intensity in the OECD countries explains the basic response from lower income and lower energy countries, to OECD calls for massive worldwide cuts in CO2 emissions. It also helps explain much trumpeted details of worldwide CO2 emissions by country: because China and India consume so much lower cost coal their CO2 emissions, for the two largest population countries on earth, are able to rival US or European country emissions. Given that China obtains about 75% of electricity from coal burning, and India about 50% (like the USA) fast growing electric power production in China and India, growing car fleets, increasing transport dependence in the economy and other facets of conventional economic growth lead to fast growing CO2 emissions of the two countries.

The basic retort by emerging and developing countries to strident calls for rapid and massive cuts in CO2 emissions is simple: If there is such urgency, if the 'catastrophic threat' of global warming is as bad as most OECD leaders like to repeat at the microphone, the OECD countries can and should act first and most. GHG emissions per capita are directly linked to energy intensity, making OECD per capita emissions so much higher, because of much higher energy consumption.

As noted above, the 'energy balance of trade' is also heavily in favour of the OECD 'postindustrial' countries importing energy-intense industrial goods from emerging economies, as well as energy-intense raw materials and primary products from low and middle income countries. This in fact further raises per capita CO2 emissions by the OECD countries, and lowers real per capita emissions in the emerging and developing countries. Depending on OECD country and its trade structure, embodied energy in industrial goods and raw materials imported from emerging and developing countries can attain 1.5 to 2 barrels oil equivalent per capita, per year. This energy consumption, and related GHG emissions, is presently not counted as OECD source.

NOT TALKING ABOUT PEAK OIL
OECD leaders go far out of their way to never, ever mention Peak Oil. This in fact is the biggest real world driver for worldwide Energy Transition away from CO2 emitting fossil fuels. Due to limited world oil reserves and production capacity, moving away from fossil fuels is necessary, whether or not there is climate change or global warming. Complicating this, world pipeline and LNG gas supplies are now entering a period of large or massive increase, depending on country and region, perhaps able to last 5 years or more. While oil can get very expensive, natural gas will likely remain cheap, and international traded coal will likely remain low cost on delivered energy terms.

For OECD leaderships seeking rapid transition away from oil, and cutting CO2 emissions, natural gas is cleaner burning, with lower emissions than oil or coal. This is a rational energy strategy - oil substitution by gas - for the short term.
Waiting for the soft energy and electric car revolution will however be long-haul. Growing the role of non-hydro renewables in the energy mix to anything above 5%, by 2030 without also cutting global total energy demand every year by well above one percent, will be costly, complex and slow. Setting policies for non-hydro renewable energy, including wind and solar energy, replacing or substituting large proportions of current fossil fuel demand implies long-term, massive funding, and the related industrial and technical mobilization for the task. To date, no such financing and frameworks exist, OECD leaderships seemingly imagine that 'the market' can be relied to carry out and sustain this massive, long term, high cost task.

More rationally, more realistic and at least as necessary as acting to limit climate change, substituting the loss of world oil production capacity due to Peak Oil, through the next 20 years, itself sets massive challenges. Here again, however, we enter the realms of politically correct censorship, because until late 2009 the IEA and other energy agencies, and most of the major oil corporations stood together in officially forecasting no possible shrinkage in world oil supply, and perhaps 25% or more supply growth over the next 20 years. Periodic market shortfalls, yes, but not long term declining supplies fixing 90 Mbd as the maximum possible oil output the world can achieve.

This united front is breaking up, like Arctic glaciers, with Zero Petroleum Growth of supply to 2030 now being hinted at, if not openly stated. Peak Oil analysts present much more radical scenarios, based on real world reserve history and production statistics, extending to a loss of up to 25 million barrels/day (Mbd) of production capacity, around 30% of present supply, by 2030. Under these scenarios, world oil production, and therefore demand could fall to 60 Mbd or so, by 2030.
Entering a period where annual increase of world oil demand is no longer possible, and demand only decreases, is as economically catastrophic in its implications, as mediatic rantings on global warming catastrophe indulged by some OECD leaders, in the run up to the COP15 'climate summit' of Copenhagen. Doing nothing about the real threat of oil decline and high prices to the economy and society, and possible repeats of 'military adventure' in the Mid East and Central Asia, to assure oil supplies, is a bigger threat than of losing face from COP15 failure.

Biting the bit, and facing this uncomfortable reality without the fig leaf of a scientifically shaky and histrionic 'climatic apocalypse' as the prime mover for Energy Transition is the best outlook from the failure of COP15 to achieve an impossible consensus. In the coming weeks, as this failure becomes more certain, we will find out which OECD leaderships care to face the reality of peak oil decline in world supply. Action can focus the creation of multilateral agencies, frameworks and funding for global energy transition on a long-term basis.

WHY IGNORE PEAK OIL ?
The reasons stretch back at least 30 years to the oil shocks of the 1970s. The complete and total dependence on mostly imported oil, of most major OECD consumer societies was heavily underlined by chaotic and unsuccessful attempts at keeping the economy on the rails. The supposed link between oil prices, economic recession, and inflation were established at that time in the mindset of OECD leaders who like the Bourbons have forgotten nothing, and learned nothing since.

Speaking at Jackson Hole in August 2009, The US Fed's Ben Bernanke solemnly warned that oil prices are already uncomfortably high for the US economy. He went on to say oil prices reaching $100 a barrel would be as serious a threat to US economic recovery, as prices hitting $145 a barrel were in 2008 and that he could raise interest rates, despite the impacts of this on the recovery, if they went above his new $100 'pain threshold'. This merely states the obvious, but adds the interesting possibility that the US and other world economies are now more sensitive, not less sensitive to high oil prices. Support to this argument is not lacking, in energy economic studies.

In 2007-2008, however, the US economy soldiered along quite a while with prices above $125 a barrel and little evident inflation, albeit with constantly falling growth rates by quarter. Whether oil prices, or the subprime debt bubble and Wall Street 'exuberant' trading of nearly-virtual financial derivatives in vast quantities were the real cause of the 2008-2009 crisis remains to be elucidated, but Bernanke's new oil price limit leaves alternate theories almost ignored.
In any case, the Keynesian recovery masterminded by Bernanke and the US Fed has included the printing, borrowing, lending and engaging of truly vast sums, probably exceeding $3750 billion for the US economy alone, for 2008-2010. The US Federal budget deficit in 2009 will probably attain or exceed $ 1600 billion, around 12% of GNP. We can note that even at Bernanke's fear price of $100 a barrel, US oil imports costs would struggle to achieve a yearly level above $ 300 billion. This tends to suggest that oil prices, alone, are not the bogeyman they are painted, and also could suggest that any future rise of oil prices and US oil import costs could (at least in theory) be covered by the Keynesian print-and-forget route, in the event of no other sustainable strategies being available or being ignored due to 'market thinking' replacing planning and organization.

One thing is however sure, oil prices remain hard-wired to economic and political decider mindsets as a dire threat to economic growth - this growth always featuring the growing consumption of oil dependent and energy intensive products and services. Unsurprisingly, oil demand tends to increase anytime there is 'classic' recovery. Just as unsurprising, oil prices rise with demand growth and this process shows higher and higher positive feedback in an ever shorter feedback loop. The basic cause is peak oil, reserve depletion, higher costs and longer lead times for raising oil supply capacity, as well as environmental, geopolitical and other causes. As a growing number of well documented web sites (such as The Oil Drum) show, the correlation of declining oil supply growth and higher cost/longer lead times for supply expansion, with oil prices, is high and positive. Any hope that Bernanke or others might have for oil prices staying 'moderate' is likely to be dashed - if there is sustained conventional and classic economic recovery for any period of time.

To be sure, the fond hope is that 'green energy', notably the non-hydro or 'new' renewables, and to some extent energy saving could quite quickly replace or economize oil in the economy. Selling this to a recalcitrant mass consumer public totally hooked on oil-based consumer goods and services supposedly requires the big stick of Climate Apocalypse fantasy, rather than informing the same public of peak oil reality. In turn, this makes the likely failure of the COP15 'climate summit' problematic for the image management of OECD political leaderships, terrified of losing face.

Likely the most basic reason for studiously ignoring peak oil and making sure any comment or data on this subject can be contradicted or denied derives from the real world, real economy dependence on oil of the 'postindustrial' consumer societies of the OECD. Today, compared with 1979, this remains high, even if oil's part in total energy consumption has slipped, as gas, coal, hydro and nuclear energy, and to a small extent the non-hydro renewables have reduced the percent share of oil. This however sidelines one major fact which can be measured. Total oil consumption, and total oil imports of the OECD economies have in general and on average increased since 1979, in some cases doubled (100% growth), sometimes in less than 15 years. Those countries that have decreased their oil consumption in absolute terms are the minority. This reinforces the careful ignorance of oil dependence and the reality of peak oil, but in no way prevents (in fact guarantees) the coming progressive and long-term reduction in world oil supply. Replacing or substituting oil with 'other energy sources' will soon need open and real debate, when the sideshow of Global Warming apocalypse collapses from lack of public conviction, and lack of fact.

MOVING FORWARD
With the failure of the COP 15 conference now almost programmed in advance, but oil prices showing little signs of following traded natural gas prices into 'sweet and low' territory, the time may be ripe for OECD leaderships to bite the bullet on coherently moving to Energy Transition. The tapering down of world oil export supply, called export 'offer', may be faster than world oil production capacity decline. Conversely world gas supplies face a short-term and large scale bulge. Coal supplies on the same horizon are limited by export and transport infrastructures, not reserves.

The net effect of oil being shortest-fuze energy resource, this can only refocus geopolitical rivalry and tension to the Middle East and Central Asia, and African oil exporter countries. IEA scenarios for 2030, we can note, are forced to claim that OPEC could or might produce 55 Mbd by 2030, quite close to 100% above present production, simply to balance out demand forecasts, with supply. This will again refocus and concentrate oil drive tensions and rivalries in the above cited regions. Believing in the above cited IEA miracle, OPEC led by the OAPEC group practically doubling production in 20 years, is comparable with believing in Al Gore stories of coming global warming tsunamis, and Biblical Floods which can sweep all before them.
OECD leaderships can now begin to blend in real world facts to their energy speeches, with the same target: mobilize their consumer publics to accepting energy saving and non-oil energy sources on a constant and long-term basis. Enabling transition from oil, followed later by gas and coal, is the most serious and basic challenge faced by leaderships in the 'postindustrial', but not post-oil or post-carbon consumer societies. Facing this reality is one of the largest tests of leadership quality that we face in the short term.

Energy Transition is both a policy challenge, and a necessity that will not go away. While we still have time, this challenge should receive the attention it needs, not hidden behind a cloud of global warming rhetoric. Failure of COP15 conference will therefore be the chance for a new departure, facing real world limits, and moving the world forward.

By Andrew McKillop

Can more debt fix too much debt? World outlook

This guy has said this better than I could, so I'll let him say it. He is a UK finance expert who writes a blog.

“The world economy is being kept alive by the constant infusion of massive doses liquidity by the central banks at abnormally low costs alongwith stimulus packages aimed at revival of certain selective industries like housing, auto etc. The effects of these are being seen in the form of huge fiscal deficits in most of the countries or drawdown on reserves in some countries like China. The effects of these actions on Governments, Banks, Businesses and Consumers are discussed below and an attempt is made to outline the future path of the world economy.

The Governments around the world this year have given unprecedented stimulus packages to try to stabilize their economies and capital markets from the effects of bursting of the Biggest Credit Bubble worldwide in 2008. Their main aim appears to be postponing the effects of the same without initiating any cure for the root cause of the problem i.e. excessive debt and leverage which led the whole world to the brink of failure of the financial markets. They are experimenting with the idea that a problem of excessive debt in comparison to the earning potential of a household / business / government can be solved by taking up more debt and leverage…

The costs of maintaining and running the governments have gone up substantially worldwide due to their increase in size and the tax revenue collections have fallen sharply due to the recession or deflation in the asset prices. This has resulted in a loop whereby the government has to increase its borrowing or money printing in order to sustain itself or in other words living beyond its means to a great extent something that the consumers were doing for last so many years. The government has picked up the baton of living the life of financial irresponsibility from the consumers which had landed them in such a mess in the first place…

The world governments are basically running a Ponzi Scheme whereby they take up new debt and pay back the old debt with it, something that Madoff did but on a much larger scale. As long as they are able to raise new debt or get investors to invest in their sovereign bonds things will keep on rolling, the moment the ability to raise new debt goes below the amount of old debt and the interest on the same, a domino effect of defaults gets unleashed.

Problems of countries like Dubai, Greece, Iceland, Ireland and some other countries in the Baltic states are now very much discussed in the media. There are other countries in queue who are living way beyond their means like Ukraine, Venezuela, Argentina, Spain, U.K., Japan to name a few. The problem is that if one country defaults on its debt it triggers off a chain of defaults across the world sending ripple waves all around the financial markets and currencies because of the linkages in global finances. The problems so far have been contained but its only a question of time when a default occurs, which is unavoidable and all hell will break loose...”

Akhil Khanna

I could add about ten more countries to this list, mainly in Europe. Many are teetering on the brink.

Chart of second real estate crisis wave I've mentioned

Here is a good chart that shows one of the many waves about to tsunami us in the next few months. As you can see, this one is about the size of the one that caused the problem last year. The big problem is that this is only one of six to ten different waves next year (depending how you look at it). It won't be the end of the world. It'll only look like it.

Economic guru finally says it

Here is an excerpt from Market Oracle:

By: Gary_North

Niall Ferguson is an academic hotshot. He is a professor at both Harvard University and the Harvard Business School. This is unique. He is both an economist and an historian. This is rare. He writes very well. He writes widely respected books and very readable articles.
“Of course, history offers more than just the lesson that financial accidents will happen. One of the most important historical truths is that the first draft of history – the version that gets written on the spot by journalists and other contemporaries – is nearly always wrong. So though superficially this crisis seems like a defeat for Smith, Hayek, and Friedman, and a victory for Marx, Keynes, and Polanyi, that might well turn out to be wrong. Far from having been caused by unregulated free markets, this crisis may have been caused by distortions of the market from ill-advised government actions: explicit and implicit guarantees to supersize banks, inappropriate empowerment of rating agencies, disastrously loose monetary policy, bad regulation of big insurers, systematic encouragement of reckless mortgage lending – not to mention distortions of currency markets by central bank intervention.”

Finally an economic guru puts it all together and says the obvious. Despite all the liberal blather about "capitalism failed," out here in the real world we see that massive government intervention was required to cause capitalism to fail in this way. Screwing with capitalism so much then blaming it is like filling up your Corolla's gas tank with maple syrup then complaining that Toyota's suck because your car won't even start. It's ridiculous. Ultimately, the world sees through the anticapitalist gibberish and follows the track record. In the last year 131 countries became more capitalist.

Capitalism isn't perfect, but it has clearly proven throughout its history that it is by far the best we have. If someone comes up with something better, let's take a look at it. For now the main alternatives are based on Marx, which in terms of results is not even funny to bring up.

Pointed questions for socialists

A few pointed questions for the last die-hards who think socialism can work out ok.

1. This one is from Ludwig von Mises, because it has never been answered: How do you solve the price discovery problem? If everything is command and controlled from above, how do you determine how much to make or what to charge? This has never been solved academically or in reality. The lack of an answer results in ridiculous inefficiencies like high unemployment, low wages, shortages or excess inventory, etc.

2. This one is also from von Mises and arises from the first one. It is the central planning problem. How does anyone ever have enough information in a central location to know everything about supply and demand, since all of these things have to be decided by bureaucrats in a little room somewhere instead of letting all of the individuals and businesses decide for themselves and collect the information they need?

3. The free rider problem has always been one of the biggest for socialist economies. Even the countries in Europe that function the best (by piggybacking socialist programs on the efficiencies of capitalism) have a huge free rider problem, with up to 40 or 50% of their populations free riding on others. They brought in millions of immigrants they didn't really want in order to solve the problem and ended up with more free riders. How can you solve this?

4. The nature of government is another huge problem. The more money and power is centralized in a few hands, the more corrupt it tends to be. As Plato predicted over two thousand years ago, if huge government programs are combined with democratic elections the natural result is that more and more is promised until the country is bankrupt. How do you avoid this escalation of costs?

5. How can you avoid the inevitable results of the disincentives forced on people to beat them all down to the same level? Why would anyone under that system ever excel and create when any incentives will be stripped from them to try to make things more "fair?" If no one excels or creates, how can the result be anything other than lack of productivity and prosperity for all?

6. What is the basis for optimism about socialism's future? What we know is that socialist/ Marxist governments have murdered 275 million of their own people. We also know that hundreds of millions have lived in grinding poverty until they shook off socialism. The only ones who have come close to making it work are western Europeans. Even they called the results they were getting under socialism "Eurosclerosis." Starting in 1978 they spent billions of dollars and millions of hours shaking off most of their socialism. Based on the historical record, even last year during the recession, 131 countries became more capitalist and less socialist. Normally, when a country escapes socialism and starts getting stellar results with capitalism we call it the “________ miracle.” (as in the Chinese miracle, Chilean miracle, etc.) How many times will we have to see this before it stops being seen as a miracle? What is the excuse for thinking socialism is worth trying just one more time?

Many more shoes to drop in 2010

Next year, 2010, should be pretty interesting. Let’s review the problems that our hard-working government has been industriously ignoring for the past year, waiting for them to explode.

1. Commercial Mortgage defaults: expected to be a multi-billion dollar tsunami that will start in a couple of months and last for about two years.

2. Alt A home loans: ultra-high risk loans which will start to have huge default rates in 2010.

3. Option ARM home loans: ditto.

4. Credit card and consumer credit defaults: The pace is alarming and expected to pick up in 2010.

5. Residential “hidden inventory”: as banks are forced to declare and try to sell all of the homes that have defaulted, which they are currently ignoring in order to make their books look better in the short term, the number of houses on the market will make prices plunge another 10-20%.
6. The federal government needs to refinance about $2 trillion in the next few months, but there are few buyers of their debt. The most recent debt auction didn’t go well at all.

7. The interest rates the government will have to pay will be rising towards more normal levels, causing the out-of-control debt to snowball.

8. If the dollar continues to fall in value, since oil is priced in dollars, there could be an oil price shock, which normally causes recessions.

9. The end of the fake “Viagra recovery” of the economy as the government is forced to end stimulus because of being broke (and inflation fears).

10. With the insanely loose monetary and fiscal policies of the last year, we have the perfect set-up for some of the highest inflation in history (if banks start lending).

11. We are starting to see asset bubbles, from Asian real estate to many types of commodities. The danger is that they will either burst, or continue for a while and cause general price inflation.
12. With our government offering essentially free money, it has spurred a global “carry trade” as investors take almost free money and buy investments. If the dollar suddenly goes up in value, the bubbles caused by cheap money will collapse, causing huge losses around the world. If the dollar drops too fast, the current walk on the dollar could become a run, where people are scrambling to get rid of their dollars while they’re still worth something, driving the dollar’s value through the floor.

13. Social Security is now expected to go broke in 2010. Fixing it will mean probably a large increase in taxes, which will hurt the economy.

14. There is no combination of taxes (which would have to rise by 68% to even stabilize the situation) or cuts (the federal budget would have to be cut by 97% to stabilize the situation) that will be able to pay off the debt mountain built up in the last year. Now what?

15. The stock market is overbought and weak. A large drop is expected, probably after the holidays. Among professional traders, they are selling 30 stocks for each one they buy – the professionals are taking their money and running. What will happen to confidence and economic activity in general if the Dow drops 4,000 points?


Let’s review the primary causes of the meltdown last year, and what has been done to improve the situation since then:

1. The nine hundred pound gorilla is the Community Reinvestment Act, under which Fannie Mae and Freddie Mac, then all other banks were forced to offer ultra-high risk mortgages, or they could be prosecuted or fined, and/or their branches shut down. Once serious enforcement started in 1999, an explosion of ridiculously bad loans resulted (obviously, it was government mandated). This year the CRA has been beefed up to be much riskier, with more money involved.

2. Looser finance rules allowed much more risk and leverage. A bill addressing this has just come out. It remains to be seen whether this will be an improvement.

3. The integration of global finance meant that a problem in one place affected everyone. There has been increased integration this year through the G20.

4. Rating agencies were asleep at the switch, and should be prosecuted. Nothing has been done about this that I know of.

5. Easy, cheap money encouraged people to spend more and take more risks. This, of course, is now far worse, since money is cheaper and the Fed is flooding us with it.


Hmmm. Almost everything has been made worse since the last collapse. So, There are fifteen huge problems about to converge in 2010, and our government has done nothing to prepare for or prevent them, plus they have worked hard to do nothing about the original causes of the problem. Interesting strategy.

I guess the take-aways are that anyone buying stocks now, or real estate, or new cars and such are crazy. We have seen no desire by our government to improve things. They are very keen to bail out their friends and spread money around to their supporters, but head off huge problems or make the economy more sound? Absolutely not.

Anyone who buys the government’s pap about “Gee whiz, the recession is over and that was a close one.” is going to make a lot of bad decisions based on that viewpoint. This is the time to get your money out of dollar-denominated assets, out of stocks, out of real estate, and hunker down. Doing otherwise will put you in a lose-lose situation later. There is a way to win in a collapsing economy, but doing the same things as you did in 2007 is not it.

Year two of two lost decades?

John Maynard Keynes was a brilliant guy, but his socialist big government ideas are going to be responsible for a lot of our suffering for many years to come. Specifically, his ideas for government stimulus to "fill the gap" left by not enough consumer spending are being used in this "balance sheet recession." There's no need to go too deeply into this in order to see the folly. I might as well lead with the fact that it has never really worked before. Japan is in its 18th year of suffering due to this theory. They have tried it every which way to somehow make it work. And we're only in year two of following in their footsteps!

The gist of it is that money was cheap and credit was loose, so Americans spent like drunken sailors, even when it came to purchases like cars and houses. They paid way too much for things they couldn't afford. So they then have a balance sheet problem. When the values of things head back to normal levels, they suddenly owe far more than they have or can pay. This is the crazy part: What our government is actually trying to do now is to reinflate prices to the previously absurd levels. I think I understand. The prices were abnormally high due to cheap, easy money that couldn't last. So, you cure it with far more cheap, easy money? But that can't last, so then what? Won't the prices go even higher to more ridiculous levels? Of course! And what happens when it doesn't last? They are worried about deflation, but mass inflation is no picnic either.

So, the view from 10,000 feet is that people owe far more than they have. The government thinks Keynes would want them to send people a few bucks and the problem will somehow go away. The idea is to get people spending, and the money will cycle around. Let me ask you, if you are $80,000 upside down on your mortgage and the government borrows money in your name and sends you a few extra bucks, is your situation fixed? What are you likely to do with it? Save it or pay off something small, right? Then your taxes go up to pay for the money borrowed in your name. What is fixed? I know it's a simplistic view, but I think people get too wrapped up in the elegance of Keynes' ideas and forget to step back and realize that they have never worked so far, though they have caused a lot of horrendous messes, usually starting with inflation.

It is worth mentioning that inflation has started, though the government still publicly frets about deflation. Assets are going down, but commodities from metals and oil to food are all going up and up. Due to wildly loose monetary policy, there are enough extra bank reserves to loan $154 TRILLION dollars. That is one fact to illustrate the problem of too much money in the economy. If people do start to spend and banks start to lend, what will that look like? It normally takes 18 months for monetary policy corrections to be felt. Consider this, until now a big reaction to a recession would be to increase the money supply by six or eight or twelve percent, and even that could cause a nasty inflation problem. This time the money supply has been increased 220%. Yes, I typed that right.

How can we move forward until prices have dropped back to reasonable levels? Using more of the same easy money to con people into continuing to pay too much for things seems to be just a way to delay the inevitable and make it much worse. I believe it's worthwhile to realize that Keynes wrote his General Theory of Employment in 1936. At that time the whole world thought Adolf Hitler had pulled off a big government miracle to create low unemployment. As we now know, it was part government controlled propanganda, part preparing for war, and part socialist make-work programs. Germany under Hitler never was a model of peace and prosperity as was believed by socialists such as Keynes at the time. There was subsistence for all and a modicum of peace from about 1935 through 1938. Hardly inspiring in hindsight. I certainly wouldn't base economic theory for the next seventy plus years on it!

Dollar Pessimism

People wonder why I am so pessimistic about the fate of the dollar. One person recently told me that currencies fluctuate, and the dollar was overvalued anyway before this latest slide. I plan to studiously avoid being very technical in this blog, but I’ll quickly lay out some of the basic reasons.

The US dollar is the world’s reserve currency. A lot of the demand for dollars is based on this fact. Foreign central banks hold dollars as part of their reserves. Five years ago, central banks held 67% of their currency reserves in dollars. Today it’s 37%. China, Russia, Switzerland, India, and others have even announced that they are moving out of dollars, “because we need to diversify, and that has always been our strategy.” I guess that “always” started this year.

China and others have actually called to replace the dollar as the reserve currency; they have been making moves to do it. They are now trading with some major partners in their own yuan instead of dollars, allow some import/export to be done by private companies in yuan, etc. In all, so far they have made nine moves this year to get themselves out of the dollar (slowly), and replace the dollar as the reserve currency. They are even encouraging their citizens to put their savings into gold or silver instead of dollars. Since half of all dollars are held outside the US, should other countries decide not to keep them, demand for them will plummet, as will the value.

Obama is actually working on a plan with the International Monetary Fund to slowly replace the dollar as the reserve currency. They have worked together to construct a system of Special Drawing Rights (so far half a trillion dollars), that is a fake currency based on a “basket” of various currencies. It will take time, and at the moment the SDR’s are only used for loans (more like gifts) to poor countries, but my point is that our government is cooperating with it.

Oil sales are denominated in US dollars. OPEC has plans to replace the dollar by 2018, but many experts think it may be much sooner. As the dollar slides downward, it causes the dollar price of oil to climb to levels that hurt demand. Remember last year when oil hit $147 a barrel, but then demand dropped 5.8% and the price collapsed to thirty-something? That was quite a blow to some petro-dictators who are propped up by oil revenues. They can’t have that happening again because the dollar is weak. They plan to also go with a basket of currencies.

Ultimately, the strength of the dollar depends on strong demand either because of attractive interest rates being paid on dollar investments, very solid fundamentals of the US economy that make it seem trustworthy, or both. Interest rates on dollar investments are expected to “remain very low for an extended period of time.”

And the fundamentals? Ouch. US debt is now so out of control that there is no combination of taxes and spending cuts that could pay off this debt. At the moment, our government is borrowing half of the money it’s spending, and that is with rates very low. When it has to raise interest rates, the interest on the debt alone each year will cost far more than both wars currently do. The debt is projected to go through the roof even with the administration’s rosy projections, and that’s without factoring in their mountain of new debt from coming up with new trillion dollar programs every fifteen minutes. That also doesn’t factor in the suffocating effect of bills like cap and trade (intended to send 2.5 million jobs overseas per year before settling down to “only” a million jobs lost per year), card check (which is an attempt to aggressively re-unionize America at great cost), or alien amnesty (When we don’t have nearly enough jobs, adding millions of people will help, right?).

Quite a lot of experts will tell you right now that when the country is in a hole it can’t dig out of, it should stop digging at ninety miles an hour, and that if it doesn’t, there are only three realistic options: 1.) We can try this Keynesian model of throwing money at the problem until we have lost 20 years like Japan has. (I will probably write later about the insanity of trying to fix a “balance sheet recession” with a Keynesian money tsunami.) 2.) The US government can just default on its debt by not paying, or actually repudiate its debt. That’s game over. 3.) It can debase its currency until its worth so little that a mountain of debt doesn’t look too bad. What’s a trillion dollar debt if a loaf of bread costs a billion dollars? Yes, that’s possible. In 1923 Germany was making five billion Deutschmark postage stamps.

Any of these options is bad for the dollar. Option one, with the economy on the floor in a fetal position for twenty years, will give people no confidence in the dollar. Option two, default or repudiation obviously will kill any confidence in the dollar. And option three clearly is bad for the dollar, if we’re wheelbarrowing money down to the corner store to buy milk.

What about the recovery, you say. Won’t we begin a steep climb out of this hole and there will be plenty of money for paying down debt? I plan to write about the phantom recovery, the Viagra recovery. For now, suffice it to say that almost one hundred percent of the fundamentals of the economy are still heading downwards, many of them about to go off a cliff, and the few sparks of life we’re seeing are absurdly little considering that the Fed is drowning the country in money. Think about it. The various bailouts alone were enough money to completely pay off every mortgage in America, with a warehouse full of money left over. And you’re encouraged that manufacturing is up one percent?

Right now there is a steady large flow of money out of dollars. I believe that what strength the dollar has is based not even in confidence in the dollar, considering that foreign leaders have called Obama’s and Bernanke’s monetary and fiscal policies “reckless,” “irresponsible,” and “endangering the world economy.” That doesn’t sound like confidence. I believe that it is only confidence in China’s confidence in the dollar that is propping up the dollar at all. I would characterize what is happening now as a brisk walk on the dollar.

Confidence is a fragile thing, as we saw last September. In an era when the only way the government can pay for itself is to loan itself money because the usual buyers don’t want to, it may not take much for a walk to turn into a “run” on the dollar, with countries and investors scrambling to get rid of dollars before they’re valueless. The reason I took our money out of US dollar denominated assets is not because I think by the end of the year a dollar will be worth a penny, but because everything is in place for that to happen, and right now ther is not much to stop it.