Pelosi shows she is completely out of touch with economics

“Pelosi: Unemployment Checks Fastest Way to Create Jobs”

http://www.foxnews.com/politics/2010/07/01/pelosi-unemployment-checks-best-way-create-jobs/

You can’t make this stuff up.  It is something that I would expect a stand up comic to say in order to elicit belly laughs.  Pelosi says that if you just keep sending unemployed people benefit checks that it will not only “create jobs” but it is the fastest way to do so.  Of course this is typical Keynesian thinking but at some point I expect that people will no longer accept it as fact.  Sending out unemployment benefits simply transfers wealth from workers and savers to nonproducers and spenders.  Bottom line is that government does not create sustainable jobs.  Instead, government creates parasitic jobs.  Some government overhead is unavoidable but we are now at the point where government is a big part of the economy which is to say that the economy is infested with parasites.  If we learn just one thing from this unfolding economic debacle it should be that government should have no role in the economy whatsoever.  Federal government exists because its structure is outlined in the constitution.  That document tells us what federal government is for and what its limitations are.  Of course we are ignoring many of those rules and have been for decades which is exactly why we are in this mess.  The transgressions always start small but once the camel’s nose gets under the tent it is not long before the whole camel is in there with you.  Right now there are as many if not more camels in the tent than people IMO.

More from Davidowitz

Get past Davidowitz’ coarse delivery (in fact, get used to it because the days of fake political correctness and sugar coating on everything are, thankfully, ending quickly) and hear the message:

http://finance.yahoo.com/tech-ticker/howard-davidowitz-u.s.-economy-%22is-a-complete-disaster%22-514505.html?tickers=xhb,tlt,%5Edji,%5Egspc,xrt,TBT,UUP

Everything Davidowitz says is true but I disagree with his implication that Obama is the big cause.  Obama is indeed doing all of the wrong things and I have bashed him many times for it but so did Bush 2, Clinton, Bush 1 before him.  ALL of them did everything they could to kick the can down the road and they did so knowingly in order to buy votes.  Nobody wanted to tell the truth because they knew the people couldn’t handle the truth.  In fact all presidents going back to Nixon and perhaps even before that were part and parcel of the Ponzi.  Was it not Milton Friedman who, as a result of Nixon removing us from the gold standard said, “We’re all Keynesians now”?  http://en.wikipedia.org/wiki/We_are_all_Keynesians_now

Of course what he really meant was that we are all addicted to expansion of the money supply (either by taking on debt or by just printing more dollars) and that if we stop doing things to kick the can down the road that a massive economic collapse would have to be endured in order to pay for all those years of kicking the can down the road and not doing the right thing in real time.  He really meant that from the time of gold de-linking going forward, the economy was a Keynesian con job.

And what about Bush 2 shamelessly telling every renter to go “buy” a home:

http://www.youtube.com/watch?v=QYvtvcBKgIQ

News flash: dum-dum Bush was not smart enough to know that selling houses to people who could not pay was the only remaining strategy to keep the Ponzi spinning as long as possible.  Remember: housing is the largest asset class in the country by far which is why Greenspan told us not to expect a bottom until the bottom had been put in housing.  Bush’s puppeteers put all of this “home ownership society” propaganda together for him in order to maximize profits for the Ponzi operators.  It is absolutely not the place of government to do this but it sounded like something for nothing so the people ate it up.

Obama is taking a whipping like this only because he arrived after the Ponzi peaked and he is in office as the collapse is picking up steam.  Yes, he could have done things a lot differently and the results would have been better in aggregate for the country over time.  But to think that anyone, even Ron Paul, was going to be able to deflate the biggest credit Ponzi the history of man without a lot of pain is to believe in the tooth fairy.  It is to believe that you can just drink as much alcohol and drugs as you like and never get a hangover or experience withdrawal pains.  I’m not trying to relieve Obama of blame here because, unlike Bush, Obama IS smart enough to know that he is trying to prop up a Ponzi.  I just think blaming Obama for everything leads us into the dead end “dem vs GOP” emotional argument that was set up from the very start to obfuscate what is really going on.

The Economist magazine calls government debt a "Ponzi Scheme"

Wow.  I wondered how long it would take, but one of the most respected magazines in the financial world has finally come to agree with my long standing assessment of government debt:

“Rising government debt is a Ponzi scheme that requires an ever-growing population to assume the burden—unless some deus ex machina, such as a technological breakthrough, can boost growth.”

There it is folks, in black and white.  The shorter paraphrased version I would suggest is:

“Rising government debt is a Ponzi scheme that requires an ever-growing population to assume the burden—unless some unexpected and unlikely magic happens.”

I will officially retire my tin foil hat because calling government debt a Ponzi is now apparently the accepted norm given how mainstream The Economist magazine is today.  If that is the case then it follows easily that our debt fueled economy, including the stock markets and our housing markets are also Ponzi schemes because debt based government spending is propping up all of these.

The article also likens credit to the consumption of alcohol which is a drug.  Drug addiction is another economic analogy that I have often used mainly to point out that drug dependent people will have withdrawal pains if they can’t get more of their drug.  Deflation is withdrawal pain for the addiction to Keynesian credit gone wild. 

Mish adds his own 2 cents which is again something I have written time and again:

“Keynesian fiscal stimulus is nothing but a Ponzi scheme and all Ponzi schemes come to an end.”

http://globaleconomicanalysis.blogspot.com/2010/06/economist-rising-government-debt-is.html

Suspend disbelief and take some time to think about what is likely to happen if the Ponzi finally collapses.  It might be good to start by reviewing what happened to participants in the Madoff Ponzi.  Nobody can predict the future with 100% certainty but historically what happens is that at some point the herd will just wake up and, over a relatively short period of time, everyone will figure out that the whole thing is a con job.  They will run for the exits so as not to be the last one out and the last one out will be left holding an empty bag.

Confucius say "Don't look for red herrings"

There is so much noise and propaganda in the press today that most people are simply overwhelmed and thus they don’t know what to believe.  They don’t have the helpful filters of history and Austrian economics to help them squelch the noise.  Take the situation where Bernanke and Geithner have been trying to vilify the Chinese people for several years now.  Basically, our financial leaders are upset that Chinese rank and file are unwilling to go into deep debt in order to consume American made goods  Instead, the Chinese choose to save for a rainy day.  Geithner and Bernanke have called this “the paradox of thrift”.  They know that without increased debt based spending the global debt Ponzi will collapse.  Thus, anyone that doesn’t engage in reckless spending activity is an enemy of the scam.  The other attack on China is that they have been keeping their exchange rate too low.  While that may be true, the implication has been that if the Chinese let the Yuan appreciate a bit against the dollar, American products will become more affordable for the Chinese people who would then be spending stronger dollars. 

By saying these things Geithner and Bernanke prove that the best con men mix a little truth with a lot of BS.  They imply that a 20% or even 30% appreciation of the Yuan will have some big positive effect on American jobs and on the global economy.  But the Chinese leaders are correctly pushing back on these math-less statements by our leaders because they know 20 or 30% won’t make any difference.  Even 200% or 300% won’t do the trick.  Chinese factory workers make $300/month.  Even if they made 10x more (the equivalent of 3k per month or 36k per year) it would hardly be enough to buy American made goods.  So now the Chinese leaders are calling these currency manipulation assertions by US leadership “red herrings”.  In other words, our leaders are being accused of trying to distract the people from the truth of the matter.

http://finance.yahoo.com/news/China-Flexible-yuan-wont-apf-1572600088.html?x=0&sec=topStories&pos=main&asset=&ccode=

Call me crazy but I’m going to have to agree with China on this one.

Japan warns of risk of Greek-like crisis

First off, what is the real crisis in Greece?  In short, it’s that their debt Ponzi has gone bust.  3 months ago they used to be able to float 3 month bonds for 3%.  Recently investors were demanding nearly 20% because they lost confidence in the con game.   Greece can’t pay out that kind of return on short term debt without wiping out all the businesses and workers.  That’s why they needed a bail out.

So now the Japanese PM is saying “our finances could collapse if trust in national bonds is lost and growing national debt is left alone”.

http://finance.yahoo.com/news/Japan-PM-warns-of-Greecelike-apf-4204817830.html?x=0&sec=topStories&pos=1&asset=&ccode=

For those that haven’t been following things, Japan is in debt to the tune of about 220% of its GDP.  This is far worse than Greece and more than 2x as bad as America.  Typically when a 3^rd world country goes 130+% of GDP into debt then it begins to fall into default.  Japan is the world’s 2^nd biggest economy and a manufacturing powerhouse so investors are still buying its debt but how long is that going to last given that Japan’s exports are weakening?  The article states that “Japan is on firmer financial footing than Greece because most of its debt is held domestically”.  I guess that means that Japanese people are so patriotic that they are willing to let their retirements collapse just as they begin to need them?  That is lunacy.  At some point Japanese people will flee the collapsing debt and Japanese government debt will be rendered nearly worthless just like Greece.  The main difference is that Japan is far too big to bail out.

If you read the article you will also note that the author writes about raising taxes into a declining and aging population in order to pay service on the debt.  Suuuuuure they will.  How can you tax less people and get more revenue?  How can you tax people who are going into retirement and get more revenue?  It just doesn’t work like that.  Government needs to get smaller but the debt it has taken on ensures that it cannot get smaller without defaulting.  Japan is no better than Greece and America is only a little better than Japan.

You want to see the dollar skyrocket?  If the Yen starts to plummet on fears of Japanese government default then the Yen will behave just like the Euro has: it will plummet as everyone sells it to buy “safer” dollars. If the dollar gets stronger the stock market is going to plummet.  All of the pieces are in place for the markets to tumble to new lows IMO.

Bernanke talks about gold

At the real risk of being exceedingly redundant I will start off by reminding what Mr. J.P. Morgan said about gold which was that. “Gold is money, and nothing else is”.   In the following article, Bernanke admits that gold is not behaving like a commodity.  Other commodities, including silver – a metal that is part commodity and part historical money - are not reaching new all time highs while gold continues to poke higher.

http://globaleconomicanalysis.blogspot.com/2010/06/bernanke-says-gold-acting-differently.html

The US dollar is strengthening because people are fleeing risk assets of all kinds – real estate, stocks, bonds, etc. They are going to cash to ride out the turbulence.  Gold is also rising because people are beginning to remember that it is historically the only real money.  As Mish says at the end of his article, even gold could get swept down in a real deflationary crash but such a dip would represent a buying opportunity, not cause to flee.  IMO the mechanics of a potential gold price dip are twofold:

1)       Gold is a store of wealth.  If nobody has any stored wealth then gold has little purpose.  If times get really hard then people pull from their savings to get by and that includes selling their gold if gold is where their savings are stored. 

2)       The gold market is infested with counterfeit gold/promises of gold/paper gold.  Many people think they have bought gold by buying the GLD exchange traded fund (ETF) or by buying gold certificates from banks, etc.  But in a real crisis all of these promises could evaporate and the people who thought they owned gold could be left holding an empty bag.  If this happens then the media will likely paint physical gold with the same risk laden brush as paper gold.  Many people would be left with the impression that all gold is risky.  This has happened many times before in many different ways.  For example, capitalism has been under fire during this crash even though we have not been practicing true capitalism for many years.  Instead we have had crony capitalism where the elite get to print money from thin air to invest while the rest of us have to work for it.  Also, if we lose, we lose whereas if they lose we still lose.  This is not capitalism; this is not a meritocracy.  Real capitalism can only occur when nobody has special economic privilege which is to say, when there is no “rubber band” money supply enabled by fractional reserve banking.  

Keep an eye on the price of silver.  It has historically served as a good canary in the deflation/inflation coal mine.  If silver is in a downward trend then the economy is most likely in deflation overall.  I like to use triggers and so do many other people.  The current market thinking is that as long as silver cannot create new highs (i.e. more than $20.50 spot), there is no way that the deflation is over and that the ensuing massive inflation has begun.  If silver begins to break out to new highs then worries about hyperinflation are on the rise and holding dollars becomes a risky position.  People have to really internalize the fact that paper money and electronic money have zero intrinsic value.  It will only trade for what some greater fool will give you for it.  At some point in the life of every fiat currency the people decide it is worth very little or in fact nothing at all.  That’s what hyperinflation really is – an awakening by the people to the fact that something they have trusted for so many years is in fact a vaporous lie which can evaporate literally over a matter of weeks under the correct circumstances.  Once the confidence in the trust Ponzi is gone, so is the value of shares in the Ponzi.

Arizona government nearing serious desperation

As Mish points out in this article: http://globaleconomicanalysis.blogspot.com/2010/06/arizona-sells-supreme-court-building-in.html, Arizona is in the process of selling off public assets on the cheap in order to keep its debt Ponzi going.  It used to just be able to sell bonds that were backed by the good word of the state.  In other words, non recourse loans; If the state failed to repay then there would be no recourse for the investors but to eat the losses.  State default was considered so unlikely in the past that investors would go along with this.  But now investors have figured out that the word of the state isn’t much good anymore so they are now demanding that the loans be backed by collateral, most recently, state buildings such as the supreme court building.

As usual, those at the top of the Ponzi don’t care if they piss away tens or hundreds of millions of other people’s money if it means they can make a few hundred thousand or a few million in the deal.  They are selling the whole state down the river in order to keep their high paying jobs for another few months or a handful of years.  Absolute power corrupts absolutely.  The deals being made are ridiculously bad for the people of the state who will be asked to pay for these missteps long after the short term benefit has completely evaporated.  At some point there will be nothing left to collateralize new debt with – all the worthwhile stuff will already have been committed to existing debt.  At that point the state will either have to downsize massively, raise taxes dramatically or default on the bonds.  Unfortunately for Arizona, it is just a state within a larger country.  It cannot easily close its borders to the flight of people and capital as many countries have done in the past when posed with similar financial collapse.  The rancher has no control over its livestock, they are free to roam and mingle with the herds of other ranchers.  If the state tries to raise taxes too much, people will just relocate to other places that are more tax friendly.  The harder the empire squeezes, the more the people will slip between its fingers.   Thus the most likely course of action is to default on the bonds sending the collateral into the hands of the investors.

We are entering some entirely unprecedented times in the US.  I wonder what will happen in Arizona as investors take control of its justice system.  I see it as no accident that first the prison system is bought and then the means to send people to prison (or to keep elite out of prison for that matter) are set up to be acquired once the bonds backing the supreme courthouse default.  Once investors own the buildings they will have incredible sway over the activities of the tenants IMO.  After all, judges feel more powerful and lordly when they practice their trade from plush settings. Anyone in a position to threaten their working environment wields more than a little influence on the legal system IMO.  If this sounds outlandishly tin foil hat/conspiratorial, please consider that profit seeking investors are not doing any of this randomly or without some type of strategy.  The quest for profit and power knows no bounds. 

If the people of the state were in any way smart they would wait until the bonds default, let the courthouse building fall into the hands of the investors and then set up more modest facilities and demand that legal bureaucrats (judges and their staffs) take up residence in what amounts to a Wal-Mart warehouse building with modest cubes instead of plush offices with granite and marble inlay.   Once the people of power are separated from the fancy building, the building becomes nearly worthless to the investors who would then likely sell it back to the state a few years down the road for pennies on the dollar.   But judges and people of power would fight that tooth and nail so it will not happen.  It is much more likely that they will instead become the willing captives of those who are responsible for maintaining their lavish work environment.

Taking a big step back to look at the longer term picture, where might all of this lead?  Every state is having problems but some are much worse off than others.  The most likely outcome is that people move from the weaker states into the stronger states as the herd flees the snapping jaws and gouging claws of increased taxation and tyranny.  Direct and highly visible competition between states for the best people (the most productive, taxable livestock) may become the order of the day and states within the union could begin to act a lot like bickering sovereigns in the EU (or like the 15 individual Soviet Republics which formed the now defunct USSR).  An eventual Soviet style breakdown of the United States is not out of the question and in fact is practically assured if the US dollar collapses as a viable fiat currency.  In that case each state or aligned region will want the right to print money from thin air just as the US does at the federal level today.  I can already envision Arizona and New Mexico issuing currency with a picture of the Grand Canyon (representing the bottomless pit of big government ; ) on the back.  I’m not predicting all of this will certainly happen, but if it came about in the next 1-2 decades I would not be terribly surprised either.