What would a currency crisis in America look like?

I have predicted a currency crisis in America brought on by far too much debt and far too few people or countries who want to lend us money. When I first forecast this, I was alone. Now there is a large number of experts also predicting that it could be as early as this year. What would it look like. Check out this excerpt from a book about the Weimar Republic currency crisis (Germany in the 1920's). There have been many, many since all over the world, but this description is very representative, since these crises tend to look the same wherever they happen. If you think it can't happen here, Google a list of currency crises or hyperinflation episodes in recent history. It is very common, even in modern Europe, or in powerful empires. All it takes is extremely irresponsible leaders. Gee, do we have any of those?

Below is an extract from Paper Money by "Adam Smith," covering Germany's hyperinflation in 1923, which offers a good account of what life is like during a currency crisis (hyperinflation).

The German Hyperinflation, 1923

Before World War I Germany was a prosperous country, with a gold-backed currency, expanding industry, and world leadership in optics, chemicals, and machinery. The German Mark, the British shilling, the French franc, and the Italian lira all had about equal value, and all were exchanged four or five to the dollar. That was in 1914. In 1923, at the most fevered moment of the German hyperinflation, the exchange rate between the dollar and the Mark was one trillion Marks to one dollar, and a wheelbarrow full of money would not even buy a newspaper. Most Germans were taken by surprise by the financial tornado.

"My father was a lawyer," says Walter Levy, an internationally known German-born oil consultant in New York, "and he had taken out an insurance policy in 1903, and every month he had made the payments faithfully. It was a 20-year policy, and when it came due, he cashed it in and bought a single loaf of bread."

…
More than inflation, the Germans feared unemployment. In 1919 Communists had tried to take over, and severe unemployment might give the Communists another chance. The great German industrial combines -- Krupp, Thyssen, Farben, Stinnes -- condoned the inflation and survived it well. A cheaper Mark, they reasoned, would make German goods cheap and easy to export, and they needed the export earnings to buy raw materials abroad. Inflation kept everyone working.

So the printing presses ran, and once they began to run, they were hard to stop. The price increases began to be dizzying. Menus in cafes could not be revised quickly enough. A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. "If you want to save money," he was told, "and you want two cups of coffee, you should order them both at the same time."

The presses of the Reichsbank could not keep up though they ran through the night. Individual cities and states began to issue their own money. …

The flight from currency that had begun with the buying of diamonds, gold, country houses, and antiques now extended to minor and almost useless items -- bric-a-brac, soap, hairpins. The law-abiding country crumbled into petty thievery. Copper pipes and brass armatures weren't safe. Gasoline was siphoned from cars. People bought things they didn't need and used them to barter -- a pair of shoes for a shirt, some crockery for coffee. Berlin had a "witches' Sabbath" atmosphere. Prostitutes of both sexes roamed the streets. Cocaine was the fashionable drug. In the cabarets the newly rich and their foreign friends could dance and spend money. Other reports noted that not all the young people had a bad time. Their parents had taught them to work and save, and that was clearly wrong, so they could spend money, enjoy themselves, and flout the old.

The publisher Leopold Ullstein wrote: "People just didn't understand what was happening. All the economic theory they had been taught didn't provide for the phenomenon. There was a feeling of utter dependence on anonymous powers -- almost as a primitive people believed in magic -- that somebody must be in the know, and that this small group of 'somebodies' must be a conspiracy."

When the 1,000-billion Mark note came out, few bothered to collect the change when they spent it. By November 1923, with one dollar equal to one trillion Marks, the breakdown was complete. The currency had lost meaning.

…
But although the country functioned again, the savings were never restored, nor were the values of hard work and decency that had accompanied the savings. There was a different temper in the country, a temper that Hitler would later exploit with diabolical talent. Thomas Mann wrote: "The market woman who without batting an eyelash demanded 100 million for an egg lost the capacity for surprise. And nothing that has happened since has been insane or cruel enough to surprise her."

With the currency went many of the lifetime plans of average citizens. It was the custom for the bride to bring some money to a marriage; many marriages were called off. Widows dependent on insurance found themselves destitute. People who had worked a lifetime found that their pensions would not buy one cup of coffee.

Pearl Buck, the American writer who became famous for her novels of China, was in Germany in 1923. She wrote later: "The cities were still there, the houses not yet bombed and in ruins, but the victims were millions of people. They had lost their fortunes, their savings; they were dazed and inflation-shocked and did not understand how it had happened to them and who the foe was who had defeated them. Yet they had lost their self-assurance, their feeling that they themselves could be the masters of their own lives if only they worked hard enough; and lost, too, were the old values of morals, of ethics, of decency."

Confidence is the thread the economy hangs on

From This Time is Different, an economics book studying 250 economic crises in 65 countries:

"But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked."

"If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is. Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are. Such large-scale debt buildups pose risks because they make an economy vulnerable to crises ofconfidence, particularly when debt is short term and needs to be constantly refinanced. Debt-fueled booms all too often provide false affirmation of a government's policies, a financial institution's ability to make outsized profits, or a country's standard of living. Most of these booms end badly. Of course, debt instruments are crucial to all economies, ancient and modern, but balancing the risk and opportunities of debt is always a challenge, a challenge policy makers, investors, and ordinary citizens must never forget."

"Perhaps more than anything else, failure to recognize the precariousness and fickleness ofconfidence-especially in cases in which large short-term debts need to be rolled over continuously-is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!-confidence collapses, lenders disappear, and a crisis hits.

"Economic theory tells us that it is precisely the fickle nature of confidence, including its dependence on the public's expectation of future events, that makes it so difficult to predict the timing of debt crises.

Look at this gap, as US tax receipts plunge and spending skyrockets out of control. The continued functioning of the economy rests entirely on confidence. The actual numbers and what is happening is horrible and getting worse. The only thing propping things up at all is confidence. That is why the administration is creating the numbers out of thin air. Economists and experts don't believe them, and prove that they are nonsense. Those numbers are so that the average person can feel good and not run for the hills. Check out what this analyst had to say about the latest GDP numbers (which are silly - how can the economy surge forward when the total number of hours worked in the US is going down, unemployment keeps rising, and tax receipts keep falling?):

"Smoke and mirrors" is a common theme directed at the officials who are either woefully ignorant or blatantly lying about the worth of their existing "solutions" to the problems they face. There's a deep underlying suspicion of mainstream media cheerleading. The perception of the informed public is that the government's numbers are about as reliable as quoting the tooth fairy.

Charts like this one aren't fooling anyone (I've helpfully added some extra text as to my opinion

of the latest optimistic numbers)...

The reason this kind of projection has no real credibility is because things continue to go from bad to worse in the real world. Economic pain and suffering increases by the day and I haven't read anyone outside the establishment cheerleaders who thinks things are getting better."

It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world. Thomas Jefferson

The government is swallowing us

My reading of history convinces me that most bad government results from too much government. Thomas Jefferson

Here's a link to a list of lists of predictions from various well-respected analysts and economists concerning the economy in 2010.

www.shtfplan.com/forecasting/2010-predictions-a-list-of-lists-from-around-the-web_12312009

Also, for anyone not paying attention, here's the most recent list of things the federal government is trying to seize from US citizens:

journalism schools

newspapers

medical schools

subway systems

light rail systems

the college loan industry

internet service

radio stations

television stations

cell phone service

the US mortgage industry

The ones in red are already done.

The picture is a nice illustration of socialism, cutting

through the BS.

Just to recap. Capitalism, profits, corporations and all mean free market. People who want government to take over the economy are advocating an UN-FREE market. Why is it unfree? Because it's controlled by bureaucrats like the ones who work at the DMV or Post Office. You take away people's rights to choose freely what to buy and sell and at what price, and put it under the control of far away bureaucrats. What kind of idiot would design a system like that?

Details about psychotic spending spree

Here is some commentary from an article on Market Oracle. He has done the math and gives a more graphic picture about the psychotic spending and debt explosion in the past year than I have. Is there any excuse for thinking our government is trying to do a good job?

Jan 22, 2010 - 02:39 PM

By: Stewart_Dougherty

“One stark and sobering way to frame the crisis is this: if the United States government were to nationalize (in other words, steal) every penny of private wealth accumulated by America’s citizens since the nation’s founding 235 years ago, the government would remain totally bankrupt.

According to the Federal Reserve’s most recent report on wealth, America’s private net worth was $53.4 trillion as of September, 2009. But at the same time, America’s debt and unfunded liabilities totaled at least $120,000,000,000,000.00 ($120 trillion), or 225% of the citizens’ net worth. Even if the government expropriated every dollar of private wealth in the nation, it would still have a deficit of $66,600,000,000,000.00 ($66.6 trillion), equal to $214,286.00 for every man, woman and child in America and roughly 500% of GDP. If the government does not directly seize the nation’s private wealth, then it will require $389,610 from each and every citizen to balance the country’s books.

The government continues to dig a deeper and deeper fiscal grave in which to bury its citizens. This year, the federal deficit will total at least $1,600,000,000,000.00 ($1.6 trillion), which represents overspending of $4,383,561,600.00 ($4.38 billion) per day. (The deficit during October and November, 2009, the first two months of Fiscal Year 2010, totaled $296,700,000,000.00 ($297 billion), or $4,863,934,000.00 ($4.9 billion) per day, a record.) Using the GAAP accounting method (which is what corporations are required to use because it presents a far more accurate and honest picture of a company’s finances than the cash accounting method primarily and misleadingly used by the U.S. government), the nation’s fiscal year 2009 deficit was roughly $9,000,000,000,000.00 ($9 trillion), or $24,700,000,000.00 ($24.7 billion) per day, as calculated by brilliant and well-respected economist John Williams. (www.shadowstats.com)...

Putting Fiscal Year 2009’s $9,000,000,000,000.00 ($9 trillion) deficit another way, 17% of America’s private wealth, accumulated over a period of 235 years, was wiped out by just one year’s worth of government deficit spending insanity.

Given this, is it any surprise that Treasury Secretary Geithner has announced that the release of the nation’s FY 2009 supplemental GAAP financial statements has been delayed? Remember, this is the same Secretary Geithner who bullied people to cover up the sordid details of the AIG, or more accurately, the taxpayer-funded, multi-billion dollar, Santa Claus bailout and bonus bonanza for Goldman Sachs. Do you really think this government, characterized as it is by fiscal and monetary secrecy, lies, chicanery, cronyism and stonewalling, wants the people to know what is actually happening? Obviously, it does not, so it hides from the public the inexcusable facts.”

Two of the dumbest things I've heard in years

Number one: Obama on victory of Scott Brown and American people:

"Here's my assessment of not just the vote in Massachusetts, but the mood around the country: the same thing that swept Scott Brown into office swept me into office," the president said in an exclusive interview with ABC News' George Stephanopoulos. "People are angry and they are frustrated. Not just because of what's happened in the last year or two years, but what's happened over the last eight years."

Translation from drivel to English: The reason the most liberal district in America voted Republican for the first time in 47 years is because they're still angry about Bush. Riiiiiiiiiight.

Number two: The UN International Panel on Climate Change just published its latest report, which contained fifth grade math errors, and various misstatements. Also, they included the nonsense about Himalayan glaciers melting (They said by 2035!), and had to later admit that it was very questionable and they didn't know the scientific basis for the claim. Idiots. Maybe I should send them my phone number so I can explain this stuff to them before they humiliate themselves in public.

I certainly knew the source of that poppycock. It was from a report some years ago by an unknown Indian scientist. He was quoting a casual conversation with a guy he met. The IPCC liked the idea that even the Himalayan glaciers were melting, and included it without checking it at all. How do I know that and they don't? Is there any scientific method tangled up in this global warming hoax at all??? Seriously?

Maybe they should watch the video that I have a link to at right in the Great Websites section. It's labeled "Meteorologist rebuts global warming." Apparently, it contains more information than these "experts" seem to have on hand.

Another expert agrees with my prediction

Not the expert

Katastrophenhausse: “crack-up boom” due to out-of-control government printing of money and the resulting complete loss of confidence in it.

Jan 21, 2010

By: Bob_Chapman

“We forecast this two years ago while most economists were sleeping. This past year the Fed bought 80% of new government debt or $1.2 trillion worth as foreigners bought only $300 billion worth. To think this program will end is pure folly. There will be no one to buy the debt, which grows larger with each minute. Deficits will run more than $1.5 trillion a year as far as the eye can see. Revenues continue to fall and spending to rise. Foreigners are dumping dollars not accumulating them. Worse yet many other nations have similar problems. They have to raise money as well. Who will accommodate them? We are talking $10 trillion alone for the G20 countries, some of which are on the edge of bankruptcy. Then again where will the money come from to bail out the likes of California, New York, New Jersey, Florida,Nevada, Arizona, etc.? There just isn’t enough money to go around. The Fed has to increase printing money and issuing credit; there is no other choice short of economic collapse. The price to be paid for this Keynesian profligacy is hyperinflation and you can be sure it is already in the money pipeline.”

Also, let me point out the link in the Great Websites section at right for "Hyperinflation Nation," which shows one world-class expert after another predicting a hyperinflationary depression in the United States soon.

Government fixing things is absurd

I don't normally post things like this, but this is one of the points I have written about before. Government take-overs of any part of the economy never works well. It's as predictable as gravity. It never did work. It is a transfer of power and money from the people to the ruling government class. A few get to dip into the new slush fund. Everyone else suffers.

The following is a letter.

"To President Obama and all 535 voting members of the Legislature,

It is now official you are ALL corrupt morons:

The U.S. Post Service was established in 1775. You have had 234 years to get it right and it is broke.

Social Security was established in 1935. You have had 74 years to get it right and it is broke.

Fannie Mae was established in 1938. You have had 71 years to get it right and it is broke.

War on Poverty started in 1964. You have had 45 years to get it right; $1 trillion of our money is confiscated each year and transferred to "the poor" and they only want more.

Medicare and Medicaid were established in 1965.. You have had 44 years to get it right and they are broke.

Freddie Mac was established in 1970. You have had 39 years to get it right and it is broke.

The Department of Energy was created in 1977 to lessen our dependence on foreign oil. It has ballooned to 16,000 employees with a budget of $24 billion a year and we import more oil than ever before. You had 32 years to get it right and it is an abysmal failure.

You have FAILED in every "government service" you have shoved down our throats while overspending our tax dollars.

AND YOU WANT AMERICANS TO BELIEVE YOU CAN BE TRUSTED WITH A GOVERNMENT-RUN HEALTH CARE SYSTEM??

Paul S. Laskodi

U.S.M.C., Retired"

Healthcare from the same people who run the DMV, FEMA, and the post office???

Great article about China

This is a link to a great article in the Financial Times about how China and the US may soon have a different relationship because it has become clear that they are not less repressive and totalitarian as a result of free market reforms. They tolerate free market reforms to improve the country and keep the people happy, but socially prefer to have their boot on the peoples' neck.

www.ft.com/cms/s/0/e9306da0-0461-11df-8603-00144feabdc0.html

Top economist agrees with my predictions

Here is a LINK to a very well-respected website and an article including predictions about the US economy by one of our leading economists, John Williams. His predictions are quite similar to mine. In another interview he said he had moved up his timeline for the collapse from the period 2010 through 2018 to this year, which is what I'm predicting. His predictions are from December of 2009.

Here is another link to another top economist forecasting US national debt default. Though he believes it won't come this year, he believes that outcome is certain. LINK

Note, the big problem is on the chart above where the budget goes A MILLION MILES BELOW ZERO then stays in the sub-basement for years. Unless it starts snowing money EVERY DAY, we can never pay all that.

Quotable

Margaret Thatcher: "The trouble with Socialism is, sooner or later you run out of other people's money."

"When you subsidize poverty and failure, you get more of both." - James Dale Davidson, National Taxpayers Union

"The more corrupt the state, the more it legislates." - Tacitus

"A Liberal is a person who will give away everything he doesn't own." - Unknown

The democracy will cease to exist when you take away from those who are willing to work and give to those who would not. -- Thomas Jefferson

I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them. -- Thomas Jefferson

Link: Americans want less government www.cnsnews.com/news/article/59933

Remember what Plato said over two thousand years ago in Republic? He warned that democracy is a nice idea but has a potentially fatal weakness. If the leaders have the means to take from people and give to other people, they will inevitably do this more and more to solidify their own power, to the point that the democracy is bankrupt. Just because we have a new trillion dollar program proposed every twelve minutes, Plato would say we should be alarmed? Why, just because we're already broke? That was ancient Greece. I'm sure it's different now.

Specific Predictions for 2010

My reading of history convinces me that most bad government results from too much government. -- Thomas Jefferson

It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world. -- Thomas Jefferson

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved. -- Ludwig von Mises

My predictions for 2010

Ones that are already happening or just starting are in red.

1. Residential real estate prices in general will drop at least another 10 to 20%. Despite what many optimistic experts say, banks are holding onto 1.7 million houses and pretending they’re not in default. These will have to be recognized and sold this year. There are millions more technically defaulting, but no one is calling them defaulted. The Alt A and Option ARMaggedon will be made worse by large scale prime defaults. Interest rates will be going up, which will finish off many with adjustable rates. Starts in the spring.

2. Commercial real estate will lose a lot more value and default like crazy. This is not a surprise. Millions will have to refinance this year with much lower valuations, tougher requirements, and possibly higher rates.

3. Unemployment, even the official rate, will hit at least 11%. Real (U-6) unemployment, meaning the number of people actually not working is over 20%, but even the official reported number should be 10.8 right now. The employment situation is getting worse, and small businesses don’t expect to be hiring.

4. Personal bankruptcies will continue to set new records. Why would they not?

5. The value of the dollar will continue to drop, driving up prices of gold, gas, oil, food, etc.

6. It will become clear that inflation has arrived, despite official denials. They can debate whether it’s true inflation caused by monetary expansion, but things will cost people more.

7. The stock market will drop by a few thousand points. I would guess to the 6000 range. Where the Dow is now doesn’t make any sense and is based purely on some professional traders taking what they can get with free money (ours) from the government. It’s a deliberate policy meant to be an invisible bailout.

8. Small banks will fail in droves. Hundreds of them are technically bankrupt, but refuse to admit the losses, as noted above in #1. I don’t believe they will be bailed out. In a normal year 12 banks fail. This year I would expect from 500 to maybe up to 2,000!

9. Talk of a recovery will evaporate as people realize unemployment is still rising, bankruptcies rising, defaults and foreclosures rising, and Christmas sales were dismal.

10. Gold will continue to rise as people run to it as they worry about paper money and putting money in things of dubious value. If we see sovereign debt defaults (see below), gold will be looking very good to people.

11. We will see the default/ bankruptcy of at least a couple of countries. There are about eight teetering on the brink in Europe right now, including England, Ireland, Greece, Spain. Some will be allowed to fail.

12. Commodity prices will continue to rise, as free government money all over the world is chasing investments. Government debt isn’t a great investment now; neither are stocks; currencies are iffy; real estate is scary. Commodities are always needed, and will probably be king, since money needs a place to park.

13. Despite what most experts say, China’s economy will prove to be a bubble if they don’t rein it in soon. Real estate is selling for 80 times average incomes in some cities, while whole sections of cities sit empty for lack of buyers. Building has gone out of control, as have the prices of commodities. It’s an easy-money bubble, same as we just crashed from.

14. This is the big one, the big show. Some experts would call me an idiot for this one. Oddly enough, it is probably the most mathematically certain. As I have mentioned in previous posts, LINK, I don’t see how the federal government is going to finance its debt. What they are trying to borrow this year is far, far beyond what any government has ever tried to borrow before. Americans are likely to lend about 5% of it. Foreigners, based on current trends, won’t lend any of it. That’s kind of a problem.

It sounds fine that our government would run out of money and have to stop spending like drunken sailors. In reality, a debt auction failure would send the US dollar into a tailspin, massively increase the cost of government borrowing and completely destroy the budget, starting a complete meltdown. People who had dollars and US debt would race each other to get rid of it at any price. The value of a dollar could become almost zero within days.

It sounds crazy, and seemed so to me a few months ago, but consider these recent developments:

• The government is forced to borrow from itself to keep bond auctions from failing.
• This borrowing from itself policy had to be extended.
• Our Federal Reserve twice has coordinated sell-offs of gold to make it look less attractive and prop up bond auctions – kind of like if you owned a restaurant and stooped to putting cockroaches at a competitor’s place
• They are now talking about forcing people to convert their 401(k)’s to government bonds to prop up the bonds – buy our stuff or else!
• There has even been talk of suspending the bond auctions temporarily to avoid a failed one (even with the government itself being one of the main buyers!). Remember, without these auctions the government runs out of money.
• A month ago, economist Paul Krugman said that the idea of a bond auction failure was ridiculous because we’d see yield spreads of 4.5 and bid-to-ask ratios down near 2. If we saw that, then we should build a bunker in the back yard. Take a guess whether the yields spread is now 4.5, and bid-to-ask near 2. Ok, well bid-to-ask is at 2.16 and falling.

This is the real game-changer NO ONE talks about – except a few dozen cranky economists. If this happens, all of the other stuff above collapses, everything collapses and it ripples through the whole world, taking down every major country. See the quote at the top by one of the greatest economists of all time, von Mises. These credit expansion boom-busts are very ugly, especially if for example, you have a new president who has been delaying the ultimate bust and making it much bigger.

I will be writing more about this in the future. Hopefully I’m wrong. If so, my predictions will have to stop being true, and I’m running at about 90% accurate, 100% recently.

Interesting charts and national debt clock

The image above is so that you can look at it and relax before looking at this other very interesting but unpleasant stuff.

This is an interesting way to put the current unemployment in context.

This is the problem right now, the gap. Tax receipts are dropping like a rock while spending shoots for the moon.

One more thing. Here is the link for the national debt clock, in case you haven't seen it.

http://www.usdebtclock.org/

Check it out. It's very interesting

Prediction came true

I just want to note that another of my predictions has come true. I said that, despite all the spin and hype, this Christmas season would be lower even than last year, which was horrible. I said I was guessing that sales would be good for Black Friday, then wither away. That turned out to be the case. I based it on the fact that incomes are down, unemployment is up, savings rates are up, consumer confidence is still low, and credit card companies were clamping down on credit at the beginning of December to meet a dealine.

The people who thought sales would be up (all the experts) cited the "wealth effect" because the stock market is up. This didn't make sense to me, since few individuals are participating in the market right now. It is primarily companies that are getting free money from the government (banks receiving our tax money) and using it to speculate. It has been estimated that 40% of all stock market activity right now is just five big banks. And the professional investors are 30 to 1 more likely to be selling than buying. That should inspire confidence in the masses? The link is below.
www.finance.yahoo.com/news/December-retail-sales-drop-03-apf-3350007934.html?x=0&.v=9

Also, according to a new National Federation of Independent Business survey, sales are down 43% for small businesses. Oh, that's why they're not hiring. Here's a link to a summary. www.marketoracle.co.uk/Article16489.html
On a more upbeat note, check out the picture.

Big Brother chooses, you pay

Think about this trend we are seeing playing out. The ultimate causes of the Great Recession are that government wanted to be able to choose who gets what, and give goodies to people. They made a bunch of rule changes so their friends on Wall Street could do whatever they wanted. They didn't require that rating agencies do their jobs.

They even put a gun to banks heads and told them who they needed to give loans to, or else! By forcing banks, under threat of fines, jail, and closing their branches, to lend to people who couldn't afford loans and would have never been gifted them otherwise, government got to choose who got the goodies (houses the recipients couldn't afford) while banks had the risk stuffed down their throats. People were handed houses that would only cause them suffering and embarrassment later when they got foreclosed on, and government house fairies got to walk away clean. Oh, and we pay for the mess -- and pay for the mess on Wall Street too.


Why am I crying about this tomfoolery from the recent past? Well, it's still going on. Have you noticed that these same government "big brother knows best" types are still deciding which companies and industries get to live and which die? Coal must die. Wind farms must live. Goldman Sachs must live. Lehman Brothers must die. Some banks get unlimited cash. Others get none. Banks are all important. Investment banks are evil. Newspapers must live; talk radio must die. Labor unions must live, small businesses...eh, whatever.


Our federal government is in the process of taking over 71% of the economy (like old-school Europeans did before they learned better and fixed most of it). This is the era of vast market manipulation and the government gets to choose and distribute everything.


How's it working out for you? Not only is virtually every economic indicator still heading down or teetering on the edge, all those trillions disappeared with virtually no trace. Hundreds of billions are unaccounted for, and the Treasury and Fed are blocking legal efforts to find out where it went.

Here's my point. Governments have never been good at commanding and controlling economies before, choosing every winner and every loser, and staying ahead of the curve. Remember, these people who want to control every molecule of the economy had no idea one of the biggest crashes in history was coming. I knew! And I'm just...me. These are the people who feel confident they can micromanage every transaction? The people who run FEMA and the DMV and the Post Office? Seriously?

The track record of government bureaucrats doing this stuff is too humiliating to mention. I don't want to embarrass them. Watch how this pans out for the economy. It won't take long for the distortions and waste and fraud and inefficiencies to show up. Mark my words. Government micromanagement doesn't work and we will pay...and pay...and pay.


To read about how Ludwig von Mises destroyed the whole idea of command and control economies working out, just Google him and read about "the central planning problem" and "price discovery problem." It's tragicomic that some people still haven't caught on.

The Fed broke with $45 billion?

The photo has nothing to do with anything.

The other day I wrote that the Fed is broke, then the next day they announced a record profit. What gives?

What gives is I'm unimpressed with their measly $45 billion. Take a look at what analyst Mike Shedlock wrote about it:

“Yesterday the Washington Post reported Federal Reserve earned $45 billion in 2009.

I have a few questions.

Really?!

Does that count the $185 billion the NY Fed crammed down taxpayers throats over AIG?
Does that count the real cost of any of its other inane off-balance-sheet recommendations approved by Congress at taxpayer expense?
Does that include a marked-to-market accounting of Mortgage Backed Securities on its balance sheet?
Does that include a marked-to-market accounting of anything other than specific items the Fed wanted marked-to-market?
The Fed conveniently ignores all of its recommendations that cost taxpayers hundreds of billions of dollars, some done illegally, and then has the self-serving, selective-myopia gall to talk about "gains".Bloomberg argues that the public has the right to know basic information about the “unprecedented and highly controversial use” of public money. Anyone thinking clearly has to agree.”
By Mike "Mish" Shedlock, Jan. 13, 2010http://globaleconomicanalysis.blogspot.com/


The comment above is what I was talking about the other day. Among other things (many), the Fed has $1.25 trillion of mortgage backed securities on its books. That is those garbage home loans. Experience so far tells us they're worth at least 30% less than the original value. That implies a loss of around $400 billion just on those securities.

I'm supposed to be impressed with a $45 billion surplus?

'If you don't read the newspaper you are uninformed, if you do read the newspaper you are misinformed.' -Mark Twain

Broke, but not broken

Sometimes it's good to step way, way back and look at what's going on. In this case, let's zoom up to 30,000 feet and take a look at our economy. We keep hearing about all the recovery -- sure foreclosures, bankruptcies, and layoffs are skyrocketing, but nothing's perfect.

If individuals are still clearly suffering, who is leading this recovery, and with what resources? Banks are broke. Hundreds will likely go bankrupt this year. Most are engaging in "extend and pretend" by constantly postponing the day the have to admit many of their loans are in default.

For that matter, FDIC is broke. They are on the hook for up to $5.1 TRILLION. Ask me how much money they have set aside for that. Go ahead and ask me... Close to zero.

Businesses are broke. Tax receipts from businesses are down more than 90%.

The Treasury is broke. Remember this chart that shows tax receipts more or less steady, but spending exploding?

Social Security is far beyond broke. So is Medicare.

The Fed is essentially broke. They only have 6% reserves and hundreds of billions of dollars of toxic assets. If the toxic assets are worth 7% less than they are supposed to be worth, the Fed is upside down. Do you suppose toxic assets are worth at least 7% less than they were originally supposed to be?

Our government is printing money to loan itself money. I ask again, who is leading the "recovery" and with what resources? Printing presses and stacks of paper?

"Predicting" the past, hot enough for blizzards

Below is a link to a very good article from a UK newspaper about gobal cooling. It gives a nice overview of the current debate about the causes of the most recent cooling cycle, 1999-present. Incredibly, they also reveal that a top global warming scientist "predicted" in 2008 that we would be in a cooling cycle, a mere 9 years after it started.

www.dailymail.co.uk/sciencetech/article-1242011/DAVID-ROSE-The-mini-ice-age-starts-here.html

Where can I sign up to make money predicting things that have been going on for almost a decade? It sounds like no brain cells were harmed in the making of that prediction. At least, after a decade, they have started to give a halfway intelligent reason for why their models were completely wrong and we are cooling at the time they said we would be boiling alive. The whole "so hot it's cold" thing wasn't working for them.

Just for fun, let's review their excuses so far for the unexpected global cooling:

1. It's not happening, not real.

2. It's part of a natural cycle.

3. It's happening because it's so darn hot that it's cold. (Haven't you heard of freezer burn? Duh. Cold but still burns.)

4. Just because it's colder all over the world doesn't mean it's colder globally. (Huh?)

5. It has actually gotten much hotter except for a few select spots, namely over the land...oh, and over the oceans.

We don't want your debt!

Above is a nice chart showing what I have talked about in previous posts about lack of foreign demand for US debt (unwillingness to loan us money). Even this chart looks a lot better than reality. In reality, this little bit of "demand" is where the Fed is paying foreigners in full for their worthless Fanni Mae and Freddie Mac holdings. Then they are supposed to use the money to buy our debt, which is better than the garbage they were holding.

Real demand is less than zero right now -- net selling.

To recap, the US government needs to borrow far, far, far more money than any government in history has ever tried to borrow in a year. US citizens want to lend a tiny bit; foreigners want to lend none. So that leaves the other 90% to sell. A lot of records for demand will have to be completely shattered to keep the federal government and economy going until summer. Have a good day!

Why socialized medicine always leads to rationing.

Some may be thinking, "How could it not?" this article is probably not for them. There are some people who don't see why such a system has to lead to rationing. Let's take a look.

A socialized system means that huge amounts of money pour into, for the sake of simplicity let's say "the government." That is how it works in other countries and will here before long. So the money pours in ahead of time. In our case WAY ahead of time. We start paying next year and no one sees a speck of benefit until 2016. So the money is paid in and gone. Then everyone wants to get there money's worth, plus it doesn't really cost any more to get a lot of care than to get a little. That's the beginning of the problem. This is what happened in Massachusetts when they had this system inflicted on them, to England, Canada, etc. In Massachusetts the average wait to see a doctor went from one week to six weeks in a couple of months. The percentage of people satisfied with the socialized plan quickly dropped to 23%. But I digress.

So, demand goes way up for the reasons mentioned above. Somehow, government types never anticipate basic reactions of the market like this. So they panic. "The cost is doubling, tripling. Let's do something." The obvious thing is to stick it to the evil doctors and nurses. They charge too much, so won't mind having their pay cut in half. That'll teach them a lesson, and solve the problem...

As it turns out, doctors and nurses are among the types of people who don't like to be paid half as much for the same work. Doctors retire early, go into another line of work, prospective doctors leave medical school and choose something else, etc.

So now there is far more demand than before, and far less supply. This is how you get the situation like you have in Europe. You may have heard of the eight week waits to get medicines, and the 31 month waits for routine procedures and surgeries.

Don't worry. Politicians and bureaucrats can fix that too. They declare that the waits are intolerable and mandate that they stop. In England emergency room waits were running three or four DAYS before seeing a doctor. A law was made mandating that patients must be seen within four hours of walking in the door, or there will be a fine. (There, that'll teach them.) Since demand was still far too high and demand too low, take a guess what happened next.

Five hour waits in ambulances outside the doors of the emergency room. Remember, they had only four hours once they passed through the doors. Lines in the rain for endless hours if you weren't sick enough to wait in style in an ambulance.

This is one of the top one hundred failures of socialism, and why it's illogical. In a free market, how people respond to incentives and disincentives shapes goods and services to what people desire at a price they can live with. Under socialism there is no accounting for what people want, only more and more mandates that cause all kinds of weird, distorted results. There must be rationing because people are still people, even under socialism, and still respond to incentives. When people don't feel any additional cost of using the service, demand goes sky high. When wages are slashed, people do something else.

When high demand and low supply collide, there has to be a mechanism to decide who gets things. It will either be decided by age, income, loyalty to the government, how sick you are, how long you're willing to wait in the rain, or something. There has to be a mechanism for dividing up supply because it's not unlimited. Typically, in socialist systems the mechanism is rationing based on either willingness to wait hours or days, loyalty to the ruling party, or knowing the right people. We don't have that sytem here...yet. It's something to look forward to.

Here's an article that is kind of related:
www.biggovernment.com/2010/01/04/medicare-is-already-rationing-care/