One Hand Clapping Theory Analyzed

This article by Chris Martenson is at the core of Obama's,and Harper's economic policy. Pretend that the debt that exists on bank balance sheets and in the books of corporate America, doesn't exist.

This is the foundation upon which the present stock market rally, and all the talk about greens shoots exists. If you have investments in the stock market, they are dependent upon everyone continuing to pretend that all is well. What happens when the pretending stops? Recall that insiders have been outselling outsiders 30 to one over the last months. What happens when the rush to the exits starts? When the herd senses danger. The brokers will probably get out. The big players. The insiders. But what about you, and your measley mutual funds stuck in an RRSP. Think you'll get out in time? Pretend. Pretend you have money in your bank account. Pretend. Pretend your credit cards have zero balances. Pretend. Pretend it all isn't about to come crashing down. Feel better? Peacenik doesn't.

by Mish Shedlock

Numerous people have asked me to comment on Chris Martenson's article The Sound of One Hand Clapping - What Deflationists May Be Missing.

Chris Writes:

The hot topic of the day is "Inflation or Deflation?" and the camps are firmly divided into groups of inflationistas and deflationistas. When asked which camp I am in, I reply "Yes." Some would say that puts me in the confusionista camp, but I actually have an explanation for why are living in a world encompassing both.

From a technical perspective, we are absolutely in one of the most powerfully deflationary periods in history, yet, besides housing prices and a few over-produced consumer goods, we find that stocks, bonds, and commodities are all well-bid at the moment.

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Is the Sky Really Falling?

punditman says...Not quite. But the drunken Superpower Party is starting to peter out. The shindig is not quite over for the United States, but people are starting to leave the premises, the cops have been called several times and big fines have been levied on the partiers. When will this decades-old party end? Will the world turn away from the US dollar as the reserve currency? Not right away, according to Mike Whitney.

Here's the deal: American consumers are in debt and apparently have turned to saving once again. Unemployment is way up, and wages are going nowhere. This makes for less and less American consumer demand in world markets; that is what will eventually cause foreign governments and central banks to run away from the US dollar.

Then again, Americans are the quintessential consumers. Will they come back and live to party another day? When they do, it will be a different world. US "dollar hegemony" will no longer be used as a bully tactic backed up by military might. It's going to be an interesting future.


Dollar Hysteria

By MIKE WHITNEY

Robert Fisk lit the fuse with his hyperventilating narrative which appears in Tuesday's UK Independent which went viral overnight spreading to every musty corner of the Internet and sending gold skyrocketing to $1,026 per oz. Now every doomsday website in cyber-world has headlined Fisk's "shocker" and the blogs are clogged with the frenzied commentary of bunker-dwelling survivalists and goldbugs who're certain that the world as we know it is about to end.

From Fisk's article:

"In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

"Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

“The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. ‘Bilateral quarrels and clashes are unavoidable,’ he told the Asia and Africa Review. ‘We cannot lower vigilance against hostility in the Middle East over energy interests and security.’”

"International cabal"? C'mon, Fisk, you're better than that.

Reports of the dollar's demise are greatly exaggerated. The dollar may fall, but it won't crash. And, in the short-term, it's bound to strengthen as the equities market reenters the earth's gravitational field after a 6 month-long ride through outer-space. The relationship between falling stocks and a stronger buck is well established and, when the market corrects, the dollar will bounce back once again. Bet on it. So why all this bilge about Middle Eastern men huddled in "secret meetings" stroking their beards while plotting against the empire?

Isn't that the gist of Fisk's article?

Yes, the dollar will fall, (eventually) but not for the reasons that most people think. It's true that the surge in deficit spending has foreign dollar-holders worried. But they're more concerned about the Fed's quantitative easing (QE) program which adds to the money supply by purchasing mortgage-backed securities and US Treasuries. Bernanke is simply printing money and pouring it into the financial system to keep rigor mortis from setting in. Naturally, the Fed has had to quantify exactly how much money it intends to "create from thin air" to placate its creditors. And, it has. (The program is scheduled to end by the beginning of 2010) That said, China and Japan are still buying US Treasuries, which indicates they have not yet "jumped ship".

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Debt

Peacenik has been writing about the black hole of debt for a while. Trillions upon trillions of dollars of debt that has to be dealt with. It can't be forgiven. It can't be forgotten. It can't be ignored. But that's what our leaders are doing. Why are governments and corporations and banks and Wall Street ignoring their debt? Because they have no solution....other than going further into debt. Can you ignore your debt? Peacenik can't ignore Peacenik's.

June 10 2009: One simple four letter word.

Ilargi: You can talk about the economy till you’re blue in the face, make a case for or against a possible recovery, bottoms and tops, green shoots, yellow weeds, whatever tickles your fancy and your preferred belief system. And you're sure to find at least a few handfuls of kindred souls and spirits while you’re at it. After all, with worsening data continuing to spout from the real economy, the one that pays your salary if you still have one, which pays your mortgage if you still have one and so on, while stock markets seem to be going up, there is enough confusion to go around for everyone.

But in the end, when all the convincing sounding arguments have been made in the heated discussions that fill hour after hour of street corners, TV screens, worried kitchen tables, barrooms and bordellos, day after confusing day, it all comes down to one simple four letter word. Debt.

Read on...

Surviving the Great Collapse

by Robert Kuttner

This economic crisis doesn't have to be a second Great Depression - if government does nearly everything right, and soon. But if government doesn't do more, and fast, this could be worse than the 1930s. Why? Three big reasons:

Finance: A Doomsday Machine. The financial system is in far worse shape than it was when the stock market crashed in October 1929. In the 1920s, there was a stock market bubble, mainly because people could play the market "on margin," borrowing to invest in stocks. There were also scams like the original Mr. Ponzi's. Like in the present decade, the Federal Reserve helped to enable the game, with low interest rates and few rules.

But today, thanks to "securitization" of loans and the ability of insiders to create exotic and unfathomable financial instruments, the speculative system makes buying stocks on margin look like child's play. In the aftermath of the crash of 2008, the process of sorting it all out and getting banks functioning again is something that markets simply cannot do.

Read on...

After Punditman's interesting post about Ann Rand yesterday, Peacenik feels almost crass to be bringing up the collapse again. When this is all over historians may view Ann Rand as the 12 Monkeys of the present crisis. (12 Monkeys reference too obscure to explain. Rent the movie)

Today the Globe and Mail headlines "IMF dashes hope of short recession." Chrysler has threatened to pull out of Canada. Nortel may be breaking up. Its funny how quickly our lovely corporate citizens turn to threats as soon as the going gets tough. AIG: save us or we'll destroy the world. GM: save us or we'll be back in the stoneages. And on and on. Reading about Ann Rand and how Alan Greenspan was part of her "collective" made Peacenik want to ralph, again. And reading that Bernie Madoff is off to jail does not make things right. There are many more Benie Madoffs who should be in jail. And there are many more Ann Rand devotees pulling the strings in government and corporate America.

Decade at Bernie's

by PAUL KRUGMAN
Published: February 15, 2009

By now everyone knows the sad tale of Bernard Madoff’s duped investors. They looked at their statements and thought they were rich. But then, one day, they discovered to their horror that their supposed wealth was a figment of someone else’s imagination.

Unfortunately, that’s a pretty good metaphor for what happened to America as a whole in the first decade of the 21st century.

Last week the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.

Read on...

Peacenik is thinking some people think Peacenik is a Doomsdayer. Particularly after Doomers made the front page of Sunday's Toronto Star and Peacenik sometimes uses the language of Doomers. But as Peacenik said, Peacenik just reads the news and comments. Here we have Krugman again talking about the illusory surge in asset values over the last decade. And the simutaneous real surge in personal and corporate debt. Peacenik asks everyone to read Dan's post at theautomaticearth. Everyone is broke. Every state. Every city. Every town. Every business. And every individual. Peacenik asks the reader to just scroll through Illargi's post at theautomaticearth. Read the red headlines. GM and California and Ireland and Latvia will probaby declare bankruptcy this coming week. Peacenik read the headlines. Peacenik thinks this is the worst economy anyone living has ever seen. Imagine that. The financial industry has created more debt than the world's GDP. Banks, pension plans and countries are broke. These are facts. Does that make Peacenik a Doomer?

Wages, It all gets down to wages

by Mike Whitney

A strong economy must be built on a solid foundation of steadily rising wages. If wages don't keep pace with production, the only way the economy can grow is through the expansion of debt, which leads to disaster.

Consider this: the US economy is 72 percent consumer spending. That means the Gross Domestic Product (GDP) cannot grow if salaries don't keep up with the price of living. Low Income Families (LOF)--that is, any couple making less than $80,000--represent 50 percent of all consumer spending. These LOF's spend everything they earn just to maintain their present standard of living. So, how can these families help to grow the economy if they're already spending every last farthing they earn?

They can't! Which is why wages have to go up. The cost to short-term profits is miniscule compared to the turmoil of a deep recession which is what the world is facing right now. The present crisis could have been avoided if there was a better balance between management and labor. But the unions are weak, so salaries have languished while Wall Street has grown more powerful, stretching its tentacles into the government and spreading its anti-labor dogma wherever it goes.

The investor class has rejiggered the system to meet their particular needs. Financial wizardry has replaced factories, capital formation and hard assets while real wealth has been replaced by chopped up bits of mortgage paper, stitched together by Ivy League MBAs, and sold to investors as priceless gemstones. This is the system that Bernanke is trying to resuscitate with his multi-trillion dollar injections; a system that shifts a larger and larger amount of the nation's wealth to a smaller and smaller group of elites.

When Alan Greenspan appeared before Congress a few months ago, he admitted that he had discovered a "flaw" in his theory of how markets operate. The former Fed chief was referring to his belief that investment bankers could be trusted to regulate themselves. Whether one believes Greenspan was telling the truth or not is irrelevant. What really matters is that the wily Maestro managed to skirt the larger issues and stick to his script. Congress never challenged Greenspan's discredited, trickle-down economic theories which guided his policymaking from the get-go. Nor was he asked to explain how a consumer-driven economy can thrive when salaries stay flat for 30 years. An answer to that question might have exposed Greenspan's penchant for low interest rates and deregulation, the two fuel-sources for the massive speculative bubbles which emerged on Greenspan's watch. These are the tools the Fed chief used for 18 years to enrich his buddies at the big brokerage houses while workers slipped further and further into debt.

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Punditman says..

As usual, Mike Whitney cuts through all the doublespeak about what is wrong with the economy, who caused it and what to do about it. He notes that salaries (thus wages) have basically stayed flat for 30 years. Punditman has noticed that the cost of living hasn't. I am assuming Whitney is excluding the parasitic financial sector from his generalization—the geniuses who got us into this mess—as well as professional athletes and a few other obscenely paid "employees" such as lying media anchorpersons and loud-mouthed blithering sportscasters—but I digress.

To stimulate the economy, the answer is not to keep the average worker one paycheck away from the homeless shelter by allowing them to accumulate more and more unsupportable debt. The answer is (wait for it)...more income at the bottom end of the economy! Imagine that. To get out of this mess, all households that make under 80 K need a raise. I find this oddly optimistic (now: how do you un-brainwash and politicize this huge constituency?).

Debt Rattle, November 30 2008: How to Build a Lifeboat

Stoneleigh: Yesterday we talked about why we are facing deflation and today I wanted to review and explain the suggestions we have made previously for dealing with a deflationary scenario. In short, this is the list we have run periodically since we started TAE (with one addition at the end):

1) Hold no debt (for most people this means renting)

2) Hold cash and cash equivalents (short term treasuries) under your own control

3) Don't trust the banking system, deposit insurance or no deposit insurance

4) Sell equities, real estate, most bonds, commodities, collectibles (or short if you can afford to gamble)

5) Gain some control over the necessities of your own existence if you can afford it

Read on...

Peacenik finally found a clear, lucid, set of instructions and explanations on how to survive the current financial crisis. Of course the ability of anyone to get beyond point one is questionable given the fact that governments and businesses have been encouraging just the opposite for more than 20 years. Is Stoneleigh anti-American? Is Stoneleigh a commie?

Impacts of the Financial Crisis: The U.S. Is Becoming an Impoverished Nation

by Richard C. Cook

Everything the Federal Reserve and the U.S. Treasury Department are trying to do to stem the tide of the self-destructing U.S. financial system is a stopgap. They are locking the barn door after the horse—many horses—have already escaped, and they know it.

They also know the cause of the crisis is not subprime mortgage lending—that was just the trigger. Cries to re-regulate the failed financial industry are coming from Congress, the media, and investors around the world. But lax regulation is not the cause of the problem either.

For now, all the Federal Reserve can do is loan more “liquidity” into the system that must eventually be collateralized by Treasury debt—that is, debt incurred by taxpayers—to cover bad loans made previously with credit which the banking system created out of thin air.

The Federal Reserve and Treasury are trying to forestall and cover up the bankruptcy of the entire U.S. economy, which already is looming. But the injection of liquidity into the system only means more loans and more interest. With more foreclosures and bankruptcies, it also means that more assets pass into the bankers’ hands.

No doubt the decision makers hope to prevent a cataclysmic meltdown, at least until after the November presidential election. President George W. Bush is being deeply discredited, because it happened on his watch. Republican presidential candidate John McCain looks more out-of-touch and clueless with each passing day.

But even though all the attention has been focused on “Wall Street”; i.e., financial institutions such as Fannie Mae and Freddie Mac, along with Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, Washington Mutual, and AIG—with more to come—none of these would have gotten into so much trouble without the nation’s banks having acted to leverage speculative investments with money they themselves generated as electronic ledger entries.

And it’s the banks—or at least some of them—that may be the next to go.

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punditman says...

This article sums up what has been happening to the US economy and lays the blame squarely where it belongs: on the "geniuses" who run the country. It is they who created a "debt-based monetary system, with a debt pyramid in the tens of trillions of dollars...made even more dysfunctional with our loss of societal purchasing power due to the outsourcing of jobs to cheaper labor markets."

It's all connected. Expecting war as diversionary tactic more than ever.