Lehman, Bear, Freddie, Fannie: What Does It All Mean??? by Josh Sidman

Josh

by Josh Sidman
Dandelion Salad
featured writer
Josh’s Blog Post
Sept. 15, 2008

With the ink not yet dry on the massive bailout of Fannie Mae and Freddie Mac, today Lehman Brothers is expected to announce its bankruptcy, making it the second of the top ten American investment banks to go under this year. The numbers involved are so staggering that it is difficult to put them in perspective. How are we to make sense of a $10 billion loss, a $100 billion loss, a $1 trillion loss? For most people these numbers are beyond comprehension, and many Americans are left scratching their heads wondering what it all means.

As John Maynard Keynes – the greatest economist of the 20th Century – remarked after World War I,

“The vast expenditures of the tion of prices, and the depreciation of currency, leading up to a complete instability of the unit of value, have made us lose all sense of number and magnitude in matters of finance. What we believed to be the limits of possibility have been so enormously exceeded. And those who founded their expectations on the past have been so often wrong, that war, the infla the man in the street is now prepared to believe anything which is told him with some show of authority, and the larger the figure the more readily he swallows it.”

The media and government tell us (with as much show of authority as they can muster) that the choices we currently face involve trade-offs between private interests and American taxpayers. This is a misleading oversimplification. After all, when the government backed the $30 billion takeover of Bear Stearns, our taxes didn’t go up. (In fact, the government sent us all a nice tax rebate check right around the same time.)

It is basic common sense that we can’t spend hundreds of billions of dollars on wars while simultaneously bailing out banks without a corresponding increase in taxes. The US government owes almost $10 trillion. It’s the biggest debtor in the history of the planet, so what does it really mean when the Treasury offers to lend money to failing financial institutions? Where does this money come from?

The answer is that the US government has the power to print money, and they have been doing so at an ever increasing rate in order to hold off the financial tsunami that threatens to sink the entire economy. The problem is that doing so does nothing to solve the problems that caused the tsunami in the first place and only makes matters worse in the long run.

So, in reality the trade-off involved when deciding whether to bail out a bank is not between private interests and taxpayers, but rather between debtors and creditors. There is nothing stopping the Treasury from printing $1 trillion every day. With that amount of money they could bail out every bank in the country. Of course, simply adding indiscriminately to the money supply (without a corresponding increase in production of real goods and services) would lead to a massive fall in the value of the currency (i.e. inflation).

Herein lies the real trade-off involved when the government prints money to bail out debtors (whether they be huge investment banks or millions of struggling homeowners). Since debts are denominated in dollars, they must be repaid in dollars. But no one ever said that the value of the dollar must remain the same between the time a loan is made and when it is repaid. If the government decides to drastically increase the money supply in the meantime, anyone who borrowed money will be repaying their debts with depreciated dollars. Thus inflation amounts to a windfall for debtors at the expense of creditors.

Since it is becoming increasingly obvious that individuals, corporations, and the US government have borrowed more money than they can ever hope to repay, the temptation is very strong to debase the currency. Its much more politically expedient than to institute the massive tax increases that would be required to balance our national finances. People don’t like tax increases and vote against them, but how do you vote against inflation? As Keynes said,

“There is no subtler, no surer means of overturning the existing basis of Society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner than not one man in a million is able to diagnose.”

Just consider the uproar over rising gas prices. Everyone in government and the media tells us that it is due to increased Chinese demand, stagnant production, or speculation. Did they ever stop to think that maybe the value of oil hasn’t been going up so much as the value of the US dollar has been going down?

Of course, the financial authorities will always pay lip service to “maintaining a strong dollar”, but actions speak louder than words. For every problem we face today, the government’s response is the same – just print more dollars. The actions of the government make it abundantly clear that they are willing to sacrifice the dollar in order to avert a massive wave of defaults. Unfortunately, the ones who will pay are those who behaved responsibly – those who worked hard, avoided debt, and saved.

And, paradoxically, this state of affairs gives people more incentive than ever to act irresponsibly. If we know that the US government is going to cause the dollar to depreciate severely, the sensible course of action is to run out and borrow money to purchase real assets. After all, if the dollars we have to repay will be worth a fraction of what they’re now worth, that house, car, or gold coin will still be worth a house, a car, or gold coin.

This observation also sheds light on another aspect of the “credit crunch” that the government and the media never talk about. We are told that all of a sudden banks have “tightened up their lending standards”, and this is to blame for the horrible state of the real estate market. Could it also be that those who have money to lend are wising up and don’t want to lend money at 6% if inflation is going to run 10% or higher? (If there’s anyone out there who wants to lend me some money for 10 years at 6% interest, please get in touch!)

As Keynes observed, there is “an almost unbroken chronicle in every country which has a history, back to the earliest dawn of historic record, of a progressive deterioration in the real value of the successive legal tenders which have represented money… The creation of legal tender has been and is a Government’s ultimate reserve; and no State or Government is likely to decree its own bankruptcy or its own downfall so long as this instrument lies at hand unused.”

see

Capital Punishment: Lehman on its way to the Gallows? By Mike Whitney

Marc Faber about Lehman Brothers bankruptcy

Wilbur Ross: Possibly a Thousand Banks Will Close + Nouriel Roubini: If Lehman collapses expect a run

Merrill now in shorts’ sights as Lehman crumbles

“Change” Part I: Has the West Reached Its Limits? by Richard C. Cook

The Economy Sucks and or Collapse

Bambi vs. Godzilla: Bambi Needs Your Help! by Josh Sidman

by Josh Sidman
Dandelion Salad
featured writer
Josh’s Blog Post
Aug. 7, 2008

For those who don’t already know, Cindy Sheehan (a well-known anti-war activist who lost her son in the Iraq War) is running against Nancy Pelosi for her Congressional seat in San Francisco. In my opinion, every American who recognizes the tragic crimes that have been perpetrated by the Bush Administration — and which have not been energetically opposed by the Democratic leadership — should line up behind this courageous woman. She is fighting an uphill battle, and she needs and deserves our support.

We all know that Bush & Co. are evil to the core and belong in jail. That’s old news and doesn’t require any further discussion. But, perhaps every bit as responsible for the terrible situation our country is in are the members of Congress who knew that what was going on was wrong but lacked the courage or conviction to put their careers on the line in order to resist the murderous Administration. And, if anyone is emblematic of the complacent, weak-willed “opposition”, it is Nancy Pelosi.

In addition to caving in to the Administration and enabling it to pursue an obviously unjust war and continuing to fund it for 5 years, Pelosi single-handedly took impeachment “off the table”. Now, stop for a second and ask yourself why she would have done such a thing. Do you think she has any doubt that the Administration has committed impeachable offenses? No. Rather, she has made a cold-blooded political calculation that not enough Americans care about the damage that has been done in our names and that pursuing impeachment would be “politically risky”. In other words, she has condoned and enabled mass-murder because she doesn’t want to risk losing her job, and she is counting on you not to notice or care enough to do anything about it.

So, my question to you is, is she right? Is it true that not enough Americans care enough to demand that our government oppose the criminality of the current Administration and hold Bush & Co. accountable for their crimes? Why haven’t you called or e-mailed your representatives in Congress to demand that they support impeachment? Why haven’t you written a check to Cindy Sheehan’s campaign to help her fight for something that is so obviously right?

We have all been asleep at the switch for far too long, and the consequences have been truly horrific. It may not be too late to prevent the collapse of our society, but it is damn close. If you would rather spend that $200 on a new iPhone, or $60 on another eighth of weed, rather than use it to help someone who has paid the ultimate price in her quest to save our country, then you truly don’t deserve all of the privileges and benefits you enjoy as an American citizen — and you probably won’t continue to enjoy them for long.

To join me in contributing to Cindy’s campaign, please visit Cindy Sheehan for Congress.

see

 

This is Horsesh** by Cindy Sheehan

Time for Pelosi to go – Vote Independent Cindy Sheehan

The Most Important Election In The United States of America in 2008

The surge means CHARGE! by Bruce Gagnon

Money Bomb For The Peace Mom Aug 6th! + Help Cindy Sheehan Get On The Ballot

American Economy: “The Veil of Money” by Josh Sidman

by Josh Sidman
Dandelion Salad
featured writer
July 13, 2008

As I have argued in previous articles, much of the recent tumult in the economy – from the mortgage crisis to skyrocketing food and energy prices – is due primarily not to imbalances in individual markets for goods and services but rather to instability in the value of money itself. For example, while we are told that the rising price of oil is due to increasing global demand, it is also true that a large part of the increase is due to a decline in the value of the currency used to purchase oil – i.e. the US dollar. Likewise, the current turmoil in the real estate market stems from causes having nothing to do with the specifics of the real estate market. In fact, both the boom and subsequent bust in real estate were both due primarily to monetary factors and not to anything specific to supply and demand for houses. The reason why prices went up so much in the first place wasn’t because there was a sudden increase in demand for housing but rather because the Federal Reserve, in order to avoid recession in 2000, reduced interest rates to unprecedentedly low levels, thereby enabling the speculative frenzy whereby every Tom, Dick, and Harry was getting rich by simply borrowing money, buying property and flipping it. Continue reading

Rush Limbaugh: Everything That’s Wrong With America Personified

Digg It

Josh

by Josh Sidman
Dandelion Salad
featured writer
Josh’s Blog Post
May 13, 2008

I feel dirty for even stooping to write about this guy (since I know that’s exactly what he wants), but since his latest political stunt is making a mockery of our political system, I feel compelled to speak up and propose an idea to counter his self-aggrandizing, destructive tactics.

For anyone who hasn’t already heard about it, Limbaugh has been making headlines recently with his “Operation Chaos”. The idea is to encourage Republican voters to vote for Hillary Clinton in the primaries in order to extend and deepen the divisions within the Democratic Party and weaken the eventual nominee. Limbaugh is showing his true colors by deliberately undermining the integrity of our system of government in order to boost his own ratings and promote his own political agenda. What could be more anti-American than that?

Not only is it the height of cynicism and anti-democratic sentiment to encourage people to use their votes to support a candidate who they hate, but this self-described “patriot” actually went so far as to state that his goal is to see violence and “blood in the streets” at the Democratic Convention. How can anyone support such a disgusting sentiment? How can anyone consider themselves patriotic when they want to see their fellow Americans suffer physical harm?

So, I am proposing the following plan of counter-attack. Today I listened to Limbaugh’s entire show (I may have to seek psychiatric counseling to help me recover from the adverse effects) and made a list of every company that advertised on the show (see below). I personally vow that I will not do business with any of these companies for a period of at least one year from today.

I ask anyone who feels the way I do to send an e-mail to operationantichaos@yahoo.com letting me know that you’re joining me. (I will contact all of the advertisers and let them know how many people have taken the pledge. Also, I will be making convenient wallet-sized cards listing all of the below-listed companies in order to facilitate the keeping of the pledge. Anyone who would like such a card can simply e-mail their mailing address to the above address, and I will send them one free-of-charge.) I furthermore encourage anyone who wants to join me in “Operation Anti-Chaos” to forward this posting to everyone they know and suggest that they do likewise.

If Limbaugh is willing to compromise the basis of our whole system of government in order to promote his own selfish agenda, the most patriotic thing we can do is to make sure that those who support his efforts suffer the consequences where it really matters – in their wallets.

Advertisers (national):

Netflix
Geico
General Motors/Chevrolet
Wells Fargo
Hardee’s
AT&T Wireless
Kubota
John Deere
CSX
Indiana Jones & The Kingdom of the Crystal Skull
Lendingtree.com
The Mutual Fund Store
Blue Bell Ice Cream
Credit Answers
Legalzoom.com
Lennox Financial (mortgage broker)
Allen Brothers (mail-order meat company)
Goldfellow.com (online gold buyer)
Nomask.com (sleep apnea treatment)
The Scooter Store (senior mobility products)
Audibel (hearing aids)
Super-C (vitamin supplement)
Ameal BP (blood pressure supplement)
Lifelock (identity theft protection)
Lear Financial (gold investments)
TV Ears (hearing aids)
Securemeal.com (diet plan website)
Laser Shield (home security systems)
Carbonite.com (PC data recovery)

Advertisers (local to Tennessee area):

Outdoor Lighting Perspectives
Northern Tool & Equipment
East Tennessee Equipment Co.
Knoxvillehelpwanted.com
Farm Bureau Insurance
Hair Restoration Center of Knoxville
Nama
General Steel
Lifetime Kia of Morristown
Firehouse Subs
Johnson Bible College
Sea Ray of Knoxville
Newport Tire & Service Center
Huntington Learning Center
The Tennessee Lottery

see

Limbaugh named Satan’s employee of the month for 207th time (satire)

.

.

American Economy: Man The Life-Boats! (Part 1) by Josh Sidman

Josh

by Josh Sidman
Dandelion Salad
featured writer
Josh’s Blog Post
Mar. 15, 2008

The announcement today of Bear Stearns’ insolvency was not a small matter. In fact, I believe that when the history books are written, this event may be considered a key sign-post of the beginning-of-the-end. Yes, the Fed can crank up its magical printing presses and pour dollars on the flames, but there is in actuality very little that the monetary authorities can do to fix the problem. In the long-run, the only real effect of the Fed’s actions will be to further decimate the value of the dollar.

In October and November of last year, I advised readers to buy gold and the yen and to sell short the S&P and bank stocks. It was my opinion then (and continues to be now) that after years of economic over-indulgence (the scale of which was made possible only due to the dollar’s unique position as the world’s reserve currency) the wheels were finally falling off the US economy. In times like these, there is little that government or central banks can do to counter the tidal waves that are flowing through the economy. Assurances by President Bush and Fed Chairman Bernanke that we are unlikely to experience a recession are starting to sound tragic-comical. The question isn’t whether we’re in a recession, its whether we are going into a depression.

As I have done previously, I would like to offer a couple of “survival strategies” for those who agree with my analysis and wish to minimize the financial damage in the weeks and months ahead. Unfortunately, it is my belief that the current crisis is of a particularly tricky variety (often described as “stagflation”), which means that virtually all kinds of assets are at risk. In a typical business downturn, one can move money from stocks to bonds and feel relatively secure. Conversely, in an inflationary environment, money can be moved from bonds to stocks and precious metals. However, in a stagflationary environment, there are no safe-havens.

It has become very clear by now that the U.S. financial authorities are willing to throw the dollar to the wolves instead of running the risk of a deflation (i.e. a general fall of prices, which would in this case be led by falling real estate values). In all fairness to those in charge, this is not necessarily a terrible choice at this point. A deflationary scenario would be truly disastrous, given the level of indebtedness of American government, corporations, and individuals. (Keep in mind that deflation increases the burden of existing debts, while inflation reduces them.) And, since the whole world was so willing to enable the U.S. to spend like drunken sailors, maybe it is right and good that they should be made to bear some of the costs by seeing the value of their dollar-denominated investments plummet.

So, how can a person with a nest-egg (large or small) position him/herself so as to not be totally wiped out in the event of a dollar collapse?

Gold is an answer that has become increasingly popular lately. Gold is traditionally considered a last-resort store-of-value. If just a few percent of all of the money currently invested in stocks and bonds was to suddenly be reallocated to gold, it would require all of the gold in the entire world to fill the additional demand.

Of course, there is a risk-factor to investing in gold. The price of gold has risen from under $300/oz. to $1,000/oz. in the last several years. Anything that has risen that far and that fast could be vulnerable to significant corrections. If the “disaster scenario” that I am predicting does not come to pass, gold could potentially get whacked. But, if it does happen, I believe gold could go to $2,000, $3,000, or higher.

In addition, I believe there is a particularly attractive way to bet on gold at this point, due to the fact that the price of gold mining companies have lagged way behind the price of the physical metal. The economics of the gold mining industry are pretty straightforward. A mining company pays for labor, energy, etc. in order to get gold out of the ground and then sells the metal in the marketplace. The difference between the market price and the cost of mining the gold represents the profit (or loss) to the company. So, obviously, if the price of gold rises while the cost of mining doesn’t, the profitability of gold mining companies increases.

In addition, there is another element to the economics of the gold mining industry that is particularly compelling in the event of further appreciation of the metal – i.e. the principle of leverage. Consider the following hypothetical scenario. If it costs a mining company $500/oz. to bring gold to the market and the market price is $600/oz., the company will make a profit of $100/oz. Now, let’s look at what happens if the price of gold rises to $700/oz. This represents a 20% increase in the value of the metal, but look at what happens to the profitability of the mining company. If we assume that the cost structure of the company hasn’t changed, it still costs $500/oz. to bring gold to market, so instead of making a profit of $100/oz., the company will now make $200/oz. So, as a result of a 20% rise in the price of gold, the profitability of the mining company has risen by 100%.

So, while I hesitate to unreservedly recommend that investors buy gold right now, given that it has risen so much already, I do believe that gold mining stocks represent a huge opportunity. Since these stocks have not kept up with the price of the metal, there is both higher potential upside and lower downside in gold mining stocks than there is in the metal itself.

———-

In the second part of this piece, I will describe another, less conventional strategy for preserving wealth in the event of a dollar collapse. Stay tuned for American Economy: Man The Lifeboats! (Part 2)

see

Business

Federal Reserve

Economy

Sidman-Josh

.

.

McCain’s Ethics by Josh Sidman

Josh

by Josh Sidman
Dandelion Salad
featured writer
Josh’s Blog Post
Feb. 22, 2008

As usual, the mainstream media is completely missing the point as it relates to John McCain’s alleged “improper” relationship with a female lobbyist. The main topic of conversation today on the campaign trail was an article in the New York Times which raised the possibility that McCain may have had a romantic relationship with Vicki Iseman, a lobbyist with clients whose businesses fall under the purview of Senate committees that John McCain sits on. Personally, I don’t give a rat’s ass if McCain was getting it on with a lobbyist. What I care about is whether the man can be taken at his word or whether he is for sale to the highest bidder like most members of Congress. And, between all of the sensationalistic nonsense that the New York Times chose to make such a big deal of, I think I found my answer.

By way of providing background, the article reprised the story of the Keating Five scandal that cost three Senators their jobs and nearly ended John McCain’s career. According to the Times, during McCain’s years in the House of Representatives, he became friendly with Charles Keating, Chairman of Lincoln Savings & Loan. Among other things, McCain received large campaign donations from Keating, took free flights on Keating’s private jet (a violation of ethics rules which McCain later claimed was an oversight), and vacationed with Keating in the Bahamas. In addition, the year McCain was elected to the Senate, his wife invested in an Arizona shopping mall along with Mr. Keating. (McCain claimed that there was no conflict of interest due to the fact that he and his wife had a prenuptial agreement dividing their assets.)

During the 1980’s, Keating’s S & L was using federally insured deposits to bet on risky real estate and other investments. McCain and other law makers used their positions to prevent federal regulators from probing the bank’s investments and intervened on behalf of Keating in 1987, shortly before the bank went bust costing taxpayers $3.4 billion. In his memoirs, McCain acknowledged his mistakes and said, “Its recollection still provokes a vague but real feeling that I had lost something very important. I still wince thinking about it.”

So, now fast-forward a decade, and like a reformed-alcoholic-turned-aggressive-teetotaler, John McCain has successfully redefined himself as a crusader against special interests and a champion of campaign finance reform. Another suggestion has now arisen about whether he might have improperly used his position to benefit clients of a lobbyist he is connected with. Obviously whether or not any allegations of an affair are true will boil down to he-said-she-said, and we’ll never know the whole truth. However, there was one line in the NYT article that told me all I need to know about John McCain. When questioned about whether he had acted improperly on behalf of the lobbyist’s clients, McCain told the Times, “I have never betrayed the public trust by doing anything like that.” Um, excuse me?

Once again, my purpose in raising all of this is not to argue about whether McCain acted improperly in relation to Ms. Iseman’s clients. I have no idea whether he did or not. What concerns me is that he is willing to tell a bald-faced lie to the American people. It is demonstrably false that John McCain has “never betrayed the public trust by doing anything like that.” He could have said that he didn’t do anything improper in these circumstances, or he could have said that he hasn’t betrayed the public trust since the mid-80’s, but that’s not what he said. He said, “I have never betrayed the public trust by doing anything like that.” By his own admission, that is a lie. And that tells me all I need to know.

John McCain, like George W. Bush, Dick Cheney, Hillary Clinton, and probably the majority of elected officials in Washington, is willing to tell the American people flat-out, demonstrable lies if he thinks it will serve his purposes. Anyone who is capable of such behavior should be immediately disqualified from the presidency. Therefore, even if I wasn’t already opposed to McCain’s candidacy on the basis of his support of the Iraq War, the fact that he is a confirmed liar means that he does not deserve to be President – end of story.
see

Olbermann: Right Wingers to McCain’s Defense + Punk’D

Olbermann: McCain “Cheats” on Wife (video) + For McCain, Self-Confidence on Ethics Poses Its Own Risk

.

.

Hillary: The Republicans’ Only Chance by Josh Sidman

Josh

by Josh Sidman
Dandelion Salad
featured writer
Josh’s Blog Post

Feb. 3, 2008

We are two days away from knowing who the Democratic nominee is likely to be. Discussing policy at this stage of the game seems almost beside the point. At this point, if you’re a Hillary supporter, you aren’t likely to be swayed to Obama based on a discussion of their respective health-care policies. So, I have just one last thing to say to voters in the Democratic primary. If you nominate Hillary and end up losing the White House, you will have only yourselves to blame.

Taking the White House back from the Republicans should be like taking candy from a baby after the Bush presidency. In fact, I believe that Hillary Clinton is the ONLY Democratic candidate who could possibly lose to the eventual Republican nominee.

The right-wing is weakened and dispirited after the horrors of Bush. The energy and enthusiasm that made them the most powerful force on the American political landscape has vanished. In fact, if John McCain is the Republican nominee, I suspect that many conservatives will stay home on election day. That is, unless Hillary is his opponent. There is literally nothing, other than the second coming of Jesus Christ, that could galvanize the Right like a Hillary candidacy.

Barack Obama is a solid, intelligent, well-spoken candidate who Republicans have no reason to especially loath. Given the dissatisfaction of the Republican base, I suspect that in an Obama/McCain match-up, many Republican voters would vote for Obama as a protest-vote against the leadership of their party. In addition, there are many voters on the Left who will never vote for Hillary due to her enthusiastic support of the Iraq invasion. Obama has no such problem. Any anti-war voter, regardless of party affiliation, can whole-heartedly support Obama. In a Hillary/McCain contest, single-issue anti-war voters have no candidate.

Hillary Clinton will lose large numbers of voters on both the far-right and the far-left, and all of those voters could potentially support an Obama candidacy. So, if you’re a Democratic voter getting ready for Super Tuesday, I suggest that you think very carefully before voting for Hillary. If there is a Republican sitting in the White House in ’09, it will be because Hillary put him there.

see

The Iraq war could go on for years + Obama vs Clinton on nukes + Pakistan (videos)

No Debate by Ralph Nader

Democratic Presidential Candidates Debate 01.31.08 (videos)

The Evolution of Evil By Joel S. Hirschhorn

Sitting Out the Election By Mary Pitt

Seriously, it’s time to not vote in the presidential election by Lo

Much Ado About Ron Paul by Grim

NATO; Kucinich; Political Intelligence; Keep on Preaching to the Choir by William Blum

Hillary Clinton Again Lies about Iraq By Stephen Zunes

Vote for Change? Atrocity-Linked US Officials Advising Dem, GOP Pres Frontrunners (videos)

Why Obama Can’t Save Us – In the Thrall of AIPAC By Missy Comley Beattie

Would a Democratic President pull out of Iraq? (video)

The Billary Road to Republican Victory By Frank Rich

Why Tax Rebates Won’t Work by Josh Sidman

Josh

by Josh Sidman
Dandelion Salad
featured writer
Josh’s Blog Post

Jan. 24, 2008

Proving once again that public debate in this country is invariably about appearances rather than substance, everyone in Washington has been tripping over themselves trying to push their way to the front of the crowd demanding “swift action” to rescue our ailing economy. No sooner had world stock markets started indicating that the crash was finally at hand than we saw Hillary Clinton calling for a $70 billion stimulus package. Barack Obama, not to be outdone, presented his own $75 billion proposal. And President Bush, fiscal conservative that he is, trumped them both with a $150 billion package, including $100 billion in tax rebates.

Forgetting about the actual numbers for a moment, let’s think about what this all really means. As I have argued in a previous blog, many of the superficially appealing but fundamentally flawed notions that we hear about the economy are based on a basic misapprehension of the nature of money. The failure of the public and our elected leaders to understand what money really is has led to one wrong-headed policy after another. The only long-term solution is for the public to become better educated, so that they won’t fall for the kind of shenanigans that the folks in Washington are hoping will convince us that the coast is clear and that we should all run out and purchase another 110″ flat-screen TV.

So, let’s analyze the logic of a tax rebate a little more closely. First off, let’s simplify the language a little bit. Rather than call it a tax rebate, let’s call it what it really is – i.e. free money. The question, though, is whether its actually possible for the government to create free money.

Since the suspension of convertibility into gold, paper currency has had no “intrinsic value”. The only reason why we are all willing to give real goods and services in exchange for these worthless pieces of paper is because everyone else does likewise. The money itself has no actual value – it is simply a vehicle for facilitating the exchange of valuable goods and services. And, this is the key point for understanding why the government’s free-money policy can’t possibly work.

Let’s imagine a simplified economy consisting of just two people. Due to some combination of superior skill and greater cunning, Person A has managed to accumulate 95% of the total wealth in the system. Unfortunately, due to the fact that Person B has so little wealth at his disposal, both participants suffer, since Person B doesn’t have enough resources to pay Person A to engage in productive activity. If, in this case, Person A were to make a gift of 10% of his wealth to Person B, this would have a stimulative effect on the economy, since Person B would have a greater ability to engage the services of Person A, which would further increase Person A’s ability to purchase from Person B, and so on.

Returning from our theoretical example to the real world, let’s ask ourselves what it means for the government to give away free money. The key distinction to note is that, unlike Person A in the example, far from having excess wealth available, the U.S. Government is the largest debtor in the history of the planet. Yes, the government happens to control the printing presses and can churn out as much of this worthless paper as it wants, but the net result of this additional money cannot be stimulative unless it represents real wealth, which in this case it obviously doesn’t.

To further illustrate the principles involved, let’s imagine that, instead of going through the time and expense of sending out checks to every American citizen, the government decided to make things simpler by just telling everyone to take a number-two pencil and cross out the numbers on all of their dollar bills and double them. In one fell swoop, the government would have doubled the amount of money in circulation. Does anyone imagine that this would have any effect on the real economy other than to cause everyone to double the prices of everything? And, this is exactly the effect that the government’s current free-money policy is likely to have. Since the government doesn’t have any real wealth to put in people’s hands, the only long-run effect this action can have is to accelerate the declining value of the US dollar and push us another step closer to a hyperinflation that is seeming more and more likely with each passing day.

see

How to Sink Americä: Why the Debt Crisis Is Now the Greatest Threat to the American Republic by Chalmers Johnson

The Bush Dollar Trap – Hard Times A-Coming by Dave Lindorff

Is This The Big One? By Mike Whitney

Stock Markets in Europe Plunge 7 Percent (updated)

Bush To Abandon Supply-Side Economics? By Paul Craig Roberts

Will Economic Stimulus Measures Stave Off Recession? by Richard C. Cook

Kucinich: Economic Stimulus Package Needs To Focus On States And Localities That Need Help The Most

Bush’s “Stimulus” Cash Giveaway; “Gentlemen, Start The Helicopters” By Mike Whitney

Bush speech on the U.S. Economy Jan.18, 2008

Economy

A Plea To The Women Of America by Josh Sidman

Josh

by Josh Sidman
Dandelion Salad
featured writer
Josh’s Blog Post

Jan. 22, 2008

A Plea To The Women Of America

All right, ladies, you’ve finally got me where you want me – supine, at your mercy, begging…

The fair-minded people of the United States are about to make a tragic mistake, and, for a change, the charge off the cliff is being led by the women, not the men.

We have a chance this year to put the brakes on an out-of-control monster called the United States Government. If there is any bright spot in the experiences of the past 7 years, it is that we saw the worst of ourselves and we have learned something about the consequences of negligence. We were all asleep at the switch in 2000 and 2004, and we are all responsible for the bloody aftermath of those failures.

We are now faced with a Presidential election in which most of the viable Republican candidates remain criminally complicit in their support of Bush’s on-going despotic behavior (Ron Paul being a notable exception) and a two-person Democratic race between Hillary Clinton and Barack Obama.

Hillary Clinton is an unrepentant enabler of the Bush Administration’s murderous foreign policy. She strongly supported the invasion of Iraq. She recently voted to declare the Iranian army a terrorist organization – a prelude to war. She is not a candidate of peace, plain and simple.

Barack Obama is, at least potentially, a candidate of peace. If we choose Clinton over Obama, we will be saying to the world, “You know what, we’re real sorry about all those people we killed, but if you don’t mind, we’re ready to move on now…” We owe the world more than that.

So, my plea is to those women (and men) out there who are planning to vote for Hillary. I’m not telling you who to vote for. I’m just begging you to ask yourselves why you are voting for her. If you’re voting for her because she’s “electable”, you are a dupe of the mainstream media. If you’re voting for her because she is a woman, you are making a terrible mistake.

Women have been horribly mistreated for most of human history. But to make a monumental decision, like the one our country now faces, on the basis of past injuries is to perpetuate a vicious cycle.

A vote for Hillary will, in the long-run, do nothing to further the cause of women’s equality. If anything, it may end up harming it irreparably…

see

SC Democratic Debate 1-21-08

Dream versus Nightmare: Pick One – An Open Letter to Barack Obama by The Other Katherine Harris

Bill Moyers Journal: Clinton, Obama, King & Johnson (video)

Obama’s Dubious Praise for Reagan By Robert Parry

 

Crank Up The Printing Presses! by Josh Sidman

Josh

by Josh Sidman
Dandelion Salad
featured writer
Josh’s Blog Post

Jan. 15, 2008

Crank Up The Printing Presses!

After several years of ominous but murky financial conditions, the last couple months have served to make the writing on the wall much clearer. With the US real estate market in freefall, large banks facing enormous losses which will force them into bankruptcy or restructuring, a rapidly depreciating currency, and debt, debt, debt as far as the eye can see, something has to give. Basically, the financial authorities are faced with two undesirable alternatives. The first is to let things take their natural course and tolerate a painful recession. The other option is to crank up the printing presses and flood the market with dollars.

In ordinary times, it is usually the case that tolerating a recession is the more prudent (but less politically popular) option. However, the current crisis is not a typical one, as more and more people are coming to realize. Given the extraordinary amount of leverage and debt that resulted from Alan Greenspan’s ruinous policies of the early part of this decade, the prudent course of “taking our medicine” may simply not be a viable option. In past business cycles, it was possible to allow a recession to run its course, punishing the most imprudent market participants without threatening the foundations of the “blue chip” institutional players. However, this time around the blue chips themselves are in danger of collapse. The incredibly complex web of indebtedness is such that once the process of reckoning begins, there may be no effective “fire-wall” to prevent the decimation of the entire financial system. That being the case, the other alternative may be the only real option, and recent policy moves seem to indicate that the government and the Fed realize this.

A big part of the problem lies in our collective lack of understanding of the nature of money itself. The relative stability of the US dollar over the past 60 years has served to obscure the fact that few people really understand what money is. We use phrases such as “medium of exchange” or “store of value”, but do we really understand what we mean by such terms? If money is a “store of value”, how much value is stored in one dollar? The US government decrees that its currency is “legal tender for all debts public or private”, but it doesn’t tell us how much a unit of currency is actually worth. And, since money has had no “intrinsic value”, why are we all willing to give goods and services in exchange for these worthless pieces of paper? The best answer I am aware of is that we do so because everyone else does. Money, therefore, essentially boils down to a collective leap-of-faith that we all subscribe to because it benefits us to do so. However, it is important to keep all of this in mind and to never allow force of habit to prevent us from being aware of the true nature of money.

The ability of paper currency to serve its purpose is therefore predicated upon two basic requirements. First of all, everyone has to agree to use the officially designated currency as the primary medium of exchange. Secondly, whoever has the task of regulating the quantity of currency must do so in a way that keeps the purchasing power of money relatively stable. The first of these requirements is straightforward and comprehensible to virtually everyone. The second, however, is incredibly complex, and it is debatable whether anyone completely understands it. As a result, the realm of monetary policy presents endless possibilities for manipulation and deception. We are currently witnessing the consequences of decades of abuse on the part of the authorities and ignorance on the part of the general public.

The magnitude of the monetary system is so far beyond the comprehension of the average citizen that the authorities are free to tell us anything they think we’re likely to believe, regardless of whether or not it makes real sense. As John Maynard Keynes observed during the financial devastation following World War I, “the vast expenditures of the war, the inflation of prices, and the depreciation of currency, leading up to a complete instability of the unit of value, have made us lose all sense of number and magnitude in matters of finance. What we believed to be the limits of possibility have been so enormously exceeded, and those who founded their expectations on the past have been so often wrong, that the man in the street is now prepared to believe anything which is told him with some show of authority, and the larger the figure the more readily he swallows it.”

These episodes of collective delusion, however, cannot last forever. Even if we don’t understand what we’re doing, financial realities are inexorable. For example, it was possible for many people to believe that by using subprime mortgages they could “save” thousands of dollars and that they could thereby “afford” to buy houses that cost twice as much as what they could afford using standard mortgages. Their belief was the reason why so many people were willing to agree to such perilous financial terms. However, their belief does nothing to change the fact that they are indebted beyond any possibility of repayment. And, the same applies to matters of government finance, although the magnitude and duration of the episodes of delusion can greatly exceed those of individuals.

Does anyone really understand what it means that our national debt is $9 trillion? Does anyone understand the financial consequences of spending over $1 trillion on an unproductive war? Probably not, but that does nothing to change the inevitable financial consequences of such unbridled profligacy.

So, where do we go from here? If my initial analysis was correct, we may already be beyond the point at which “taking our medicine” (in the form of a traditional recession) is even an option. The other alternative is to allow the currency to completely collapse. Inflation of the currency is a windfall for anyone who owes money, since the money they use to repay the loan is worth far less than the money they borrowed. And, since the whole world has been willing to lend money indiscriminately to American government, corporations, and individuals, we are now in a position where the only course available to us (given that we can never hope to repay what we owe) is to deliberately destroy the value of the unit in which our debts are denominated. Of course, this approach doesn’t come without significant costs. For starters, anyone who has acted responsibly and foregone current consumption in order to save will see their hard-earned savings rendered worthless. Additionally, our ability to access credit in the future will be greatly diminished. Nevertheless, if the only other alternative is a complete collapse of our economy, this course may indeed prove to be the lesser evil.

As for what might come after a dollar collapse, it is beyond my ability to say with any certainty. For one thing, I believe it is possible that within the next decade the US dollar may cease to exist and be replaced with a new currency (a la Germany in the 1920s). While this may seem far-fetched to people who have lived their whole lives convinced of the absolute solidity of the dollar, historical precedent argues otherwise. To return to Keynes, a man who understood monetary issues as well as anyone in history, “there is no record of a prolonged war or a great social upheaval which has not been accompanied by a change in the legal tender, but an almost unbroken chronicle in every country which has a history, back to the earliest dawn of economic record, of a progressive deterioration in the real value of the successive legal tenders which have represented money… The creation of legal tender has been and is a Government’s ultimate reserve, and no State or Government is likely to decree its own bankruptcy or its own downfall so long as this instrument lies at hand unused.”

see

Bush’s Voodoo Stimulus Package: $250 “freebie” for every taxpayer By Mike Whitney

Ooooooh Shit! No…. Shit. Economic Rollercoaster by Stephen P. Pizzo

Toward Militarism, War, Empire, Caskets & Bankruptcy By Jacob G. Hornberger

Grasping at Straws: Hillary on the Ropes by Josh Sidman

Josh

by Josh Sidman
Dandelion Salad
featured writer
Josh’s Blog Post

Jan. 7, 2008

It appears that Democratic voters (at least in Iowa) aren’t as stupid as we thought. Enough people saw through Hillary’s charade to hand her a devastating blow last week. Now a desperate Clinton is showing her true colors by predictably telling the people of New Hampshire exactly what she thinks they want to hear.

The message coming out of Iowa was clear. Voters want change, and young voters in particular showed up in record numbers to support Obama, who they see as the most likely candidate to achieve real change. So, what do we hear the very next day from Clinton? She tells us that she’s been “an agent of change for 35 years” and that the young people of New Hampshire are near and dear to her heart.

Now, granted, this kind of crap has worked for Hillary (and Bill) for years, but as she becomes more desperate, it becomes more unlikely that anyone is going to miss the obvious truth – i.e. Hillary has no core beliefs whatsoever, and everything that comes out of her mouth is a direct reflection of what the polls tell her Americans want to hear.

The problem now, though, is that its hard for someone who has been the epitome of the lame, do-nothing Democratic establishment for years to convince anyone that she’s the outsider who can be counted on to deliver real change. And, by attempting to make such a transparently false representation of herself, she makes it obvious to more and more people just exactly how she operates – tell the people exactly what you think they want to hear, regardless of what is right or true, and hope that enough people are stupid enough to believe you. Well, it appears that America’s Stupidity Quotient may finally have fallen to the point at which the Clinton Formula doesn’t work anymore. All I can say is its about time…

If You Vote For Hillary… by Josh Sidman

Josh

by Josh Sidman
Dandelion Salad
featured writer
Josh’s Blog Post

Dec. 22, 2007

…you will be hammering the last nail in the coffin of American respectability.

…you will be passing up your last opportunity to make a wholesale repudiation of the disastrous war in Iraq.

… you will be supporting the notion that the “ends justify the means”, no matter how horrible the means.

… you will be confirming your complicity in the senseless deaths of thousands of American service members and hundreds of thousands of innocent Iraqis.

The 2008 election should be about one thing and one thing only. The fact that we have in the past 7 years become a murderous and criminal member of the world community means that we must put every other issue on the back-burner and correct our horrible mistakes.

Hillary Clinton made a self-serving political calculation in the days leading up to the invasion of Iraq that she was not willing to take the risk of standing up to the Bush Administration’s fraudulent push for war. In fact, not only did she not resist, she pushed her way to the front of the bandwagon and became one of its most vocal supporters.

If we now make her our President, we will be saying once and for all that we are OK with what has been done in our names in Iraq. We will be saying that, although everyone realizes that the war was a mistake based on lies, we are willing to turn a blind eye to our mistakes and “move on”. Well, the families of the dead are surely not so willing to move on, and if you cast your vote for Hillary, you disrespect the lives that have been lost. A vote for Hillary is a vote to confirm that the USA is nothing but a Machiavellian, power-driven monster that is willing to spill innocent blood in the name of money and power.

If you are willing to make such a choice, God help you…

Humpty Dumpty Economics by Josh Sidman

Josh

by Josh Sidman
Dandelion Salad
featured writer
Josh’s Blog Post

Dec. 12, 2007

Lately, it seems that every passing week provides new examples of “emergency medicine” by governments, central banks, and corporations to fix the problems of the financial system. Whether it be interest rate cuts, mortgage bailout schemes, or creative juggling of corporate balance sheets, a pattern is becoming increasingly clear – namely, there is no avoiding the law of cause-and-effect, and any attempts to do so inevitably create larger problems than they are intended to fix.

We must, in one way or another, pay the costs of the excesses we have indulged in over the past decades, and any form of “emergency medicine” aimed to avoid this harsh reality will simply delay (and magnify) the eventual reckoning. If we were smart, we would have learned a lesson from Japan, which experienced a spectacular crash of real estate and financial assets beginning in the early-90s. By failing to acknowledge the extent of their problems and trying to prop up the eroded foundations of their financial system, the Japanese authorities only managed to prolong the suffering, producing a period of economic stagnation that stretched out for over a decade. And, we now face the same daunting choice – i.e. come to terms with the realities of a dangerously overextended financial system and tolerate a period of economic hardship, or continue to administer emergency measures which will solve nothing and will only prolong and magnify the problems. Unfortunately, it seems we are opting for the latter.

The most recent batch of emergency measures includes a three-pronged attack – i.e. rate cuts by central banks, a mortgage bailout scheme, and emergency injections of liquidity into the financial system. None of these measures are likely to have a significant impact in terms of long-term healing of the financial system, and all three present significant risks of causing even bigger problems.

Let’s consider the recent proposal by the US Treasury to freeze rates on adjustable-rate mortgages. As we all know, millions of Americans face the prospect of losing their homes as a result of “exploding mortgages”. It seems to make sense that one way of solving the problem is to defuse the ticking bomb by preventing upward adjustments in mortgage interest rates. However, this logic is superficial and fundamentally flawed. The fact is that many of the millions of jeopardized home-owners never should have bought their homes in the first place. If it wasn’t for the newfangled mortgages introduced in the past decade, these people never would have been able to buy their homes to begin with. Only by means of teaser-rates and negative-amortization were they convinced that they could “afford” to buy their homes. The truth is that they never could afford the homes they bought.

To attempt to paper over this problem by freezing interest rates is another instance of treating the symptom rather than the disease, and, as with all such attempts, the medicine is likely to prove worse than the disease. The long-term effects of such an unprecedented governmental interference with the market could be tremendous and long-lasting. Our whole financial super-structure is based on the rule of law and the stability of the purchasing power of money. Without either of these ingredients, holders of wealth will not feel secure enough to commit large amounts of capital to productive uses and will therefore refrain from long-term investment. When governments step in and simultaneously undermine both of these pillars of the global economy, the likely result is a reduced sense of security and a consequent fall in overall productive investment. So, even if we succeed in preventing some people from losing their homes (homes, keep in mind, that they never should have owned in the first place), the cost in terms of long-term economic prosperity is likely to be far greater than the short-term economic benefit.

Especially at a time when the functioning of the global economy is predicated upon the ongoing ability of the US government to borrow enormous sums of money to service its growing debt, such a measure could send a message to investors that contracts are not inviolable and the US government is willing to change the rules whenever it suits its aims. If the commitment of the US government to honor its obligations were ever to come into serious question, the likely effects would dwarf our current problems.

Likewise with the attempts of central banks to solve our problems by flooding the market with liquidity. I don’t remember where I first heard the distinction made between illiquidity and insolvency, but this is a key point for understanding the nature of the current economic crisis. Illiquidity is when a fundamentally sound economic entity finds itself endangered by a short-term shortage of funds. For example, if a company will be paid for its products a month from now but needs to pay its employees today, this is a liquidity problem, and it can be addressed by means of a short-term financial infusion. Insolvency, on the other hand, is when an entity is built on a fundamentally flawed economic foundation – e.g. when a person earning $30,000 per year buys a $400,000 home by means of a high-risk mortgage. In this case, no amount of additional short-term liquidity is capable of bringing the long-term imbalances back into equilibrium. And, this is exactly what is happening in the realm of central bank policy these days. Entities across the board – from governments, to banks, to private citizens – have built upon flawed economic foundations, and no amount of short-term liquidity can solve these fundamental problems. Additionally, the negative effects of unrestrained liquidity pose an even larger risk to the financial system than the problems it is supposed to fix.

The proof, as they say, is in the pudding. All of the emergency measures employed by governments and banks have thus far failed to solve the systemic problems we face. The problems remain, while the dollar collapses and central bankers deplete their diminishing supplies of ammunition. A perfect case-in-point is provided by the announcement today that the Fed and the European Central Bank will jointly act to inject $40 billion in emergency funds into the financial system. An Associated Press article describing the measures states, “The European Central Bank said Wednesday it would make as much as $20 billion available to European banks, in part to fill their demand for scarce dollars, as part of coordinated action with the U.S. Federal Reserve and other central banks.” But, if “scarce dollars” are really the problem, why has the dollar plummeted against other world currencies? The answer is that the problem isn’t illiquidity, it is insolvency, and no amount of additional short-term liquidity can help. The only likely consequence of this move is a further erosion of the value of the dollar.

America is sick right now – everybody knows this. Everybody also knows that long-term health is achieved not by ever-increasing medication, but by treating the causes of disease and restoring the health of the organism. Our current economic sickness may not be fatal, but the medicine may very well be.

When Disasters Become Commonplace by Josh Sidman

Josh

by Josh Sidman
Dandelion Salad
featured writer
Josh’s Blog Post

Nov. 1, 2007

Did you know that the Federal Reserve pumped $41 billion into the US financial system today? Did you also know that this is the largest single-day infusion since September 19th, 2001, when the Fed injected $50 billion following the attacks on September 11th?

The amazing thing is that nothing happened today, yet the Fed needed to pump nearly as much money into the financial system as it did right after the worst terrorist attacks this country has ever seen. This is a startling commentary on the current state of the US economy. As I have observed in previous articles, our financial system is coming more and more to resemble a drug addict in the last stages before hitting rock-bottom – i.e. the stage at which ever increasing amounts of drugs are required just to avert a total collapse. The fact that a cash infusion of similar size to what was required in the immediate aftermath of our country’s greatest disaster is now a commonplace, daily occurrence indicates just how far gone we really are. The image that keeps coming to mind for me is from the Road Runner cartoons of my childhood, in which Wily Coyote runs off the edge of a cliff but doesn’t actually fall until he looks down and notices where he’s at. In a similar manner, the US financial markets continue to chug along with only minor hiccups, still safe in blissful ignorance of the fact that the ground beneath its feet has long since disappeared.

Yesterday the Fed cut rates yet again, and the market predictably staged an anemic rally, only to be followed today by a sharp sell-off. One thing is certain in financial matters – no matter how hard you try to ignore the cold, hard facts, debts don’t just go away (in fact, they grow), and you can’t get something for nothing. Try as we might to ignore these realities, there comes a point at which any remedial measures produce less and less positive results. And, in addition, the measures themselves entail significant costs of their own. After all, where do you think the $41 billion came from? In a monetary system where a rapidly increasing supply of dollars must compete for a stagnant (or slowly increasing) supply of real goods and services, the consequences are obvious. Prices must rise – i.e. inflation. And, no matter how the financial authorities fudge their numbers in order to avoid admitting that inflation is actually occurring (e.g. with the change from use of CPI to PCE as a measure of “core-inflation”, thereby conveniently removing food and energy prices from the official measure of inflation – after all, who needs food, gasoline, and heating oil?), it is becoming increasingly obvious to the average American that the official story just doesn’t add up. After all, when you’ve seen gas prices double, housing costs double, and medical expenses skyrocket, who really cares that the government tells us inflation is under control?

When Wily Coyote will finally look down and realize his plight is anybody’s guess. The ability of the US financial markets to persistently ignore reality has been remarkable, but that does nothing to change the fact that the ground beneath our feet isn’t there anymore. The debts keep mounting, the currency keeps depreciating, and eventually people will start running for the exits. In the meantime, I will reiterate my recommendations from a previous article and add a new one.

I continue to expect gold to appreciate. In an environment where nothing seems safe, a huge amount of money is going to be looking for a safe-haven. Traditionally, gold is considered the safest of safe-havens, and there’s not much of it around in comparison to the amount of money that could soon be looking for a home.

Secondly, buy the yen against the dollar. Other world currencies have already risen to record levels against the crumbling dollar, but the yen hasn’t yet. With US short-term interest rates falling, the “carry-trade” (whereby investors can make easy profits by borrowing yen at low rates and investing in dollar-denominated assets at higher rates of interest) will become increasingly unattractive, and once the dollar begins to fall vis-à-vis the yen, the huge amounts of money that have been put into the carry-trade over the past decade will start to reverse directions, thereby exacerbating the slide of the dollar.

Thirdly, sell US bank stocks short. Despite the fact that everyone now acknowledges that the housing market is crashing, prices haven’t fallen by much yet. Nevertheless, leading financial institutions have racked up huge losses already. Merrill Lynch’s recent write-down of $8 billion and the resignation of its CEO is just the beginning. After all, if firms are feeling this level of pain from a real estate market that has only experienced single-digit declines so far, what’s going to happen if prices fall 20 or 30 percent? (Hint: bankruptcy.)

Lastly, although I am hesitant to bet against the stock market’s persistent ability to rise in the face of bad news, it is my feeling that the Fed has shot its load for the time-being in terms of monetary policy. Yes, the Fed Funds still stands at 4.5%, so they could keep cutting, but at this point they’re not getting any bang for their buck, and its becoming increasingly clear that the costs in terms of undermining the value of the dollar are outweighing the stimulative effects to the financial system. I can’t remember where I read it, but I recently saw someone make the distinction between illiquidity and insolvency, as it relates to the efficacy of monetary policy. The point is that if a crisis is caused by a short-term liquidity crunch but corporate finances are otherwise healthy, an injection of money by the central bank can be an effective remedy. If, on the other hand, firms’ long-term financial positions are fundamentally unsound, measures aimed to shore up short-term liquidity (e.g. cuts in short-term interest rates) can’t do anything to solve the problem. This is why it is my belief that the Fed is becoming increasingly impotent to solve the deepening crisis. Short-term liquidity won’t do anything to bail out companies (or individuals) who have fundamental, long-term financial imbalances. There is nothing in the monetary tool-box that can solve such problems (with the exception of a wholesale devaluation of the currency). Therefore, I believe that the ability of the stock market to hold up based on expectations of future rate-cuts is nearing an end, so I recommend shorting the US stock market at this point.

Good luck…

Stagflation: The Two-Headed Monster by Josh Sidman

Josh

by Josh Sidman
Dandelion Salad
featured writer
Josh’s Blog Post

Oct. 18, 2007

Stagflation: The Two-Headed Monster

In previous articles (“Big Ben & The Shit-Cloud” and “The Perfect Storm”), I discussed the possibility that the American economy may be headed for a rare and highly problematic situation in which we experience economic stagnation and erosion of the currency at the same time. In ordinary times, economic crises usually take one of two forms – i.e. either recession or inflation. Since these two phenomena normally spring from opposite causes, they rarely occur concurrently. However, if an extended period of bad economic decision-making is combined with unfavorable world conditions, it is possible to have both at the same time. This extremely destructive phenomenon is called stagflation. The unique challenge posed by this economic two-headed-monster is due to the fact that the cure for either of the two problems is likely to exacerbate the other, and vice versa.

Recent headlines seem to indicate that stagflation is increasingly likely. A Reuters news story today entitled “Housing Starts Skid, Inflation Flares” highlights the developing conundrum facing the financial authorities. Housing starts last month fell 10.2% to an annualized rate of 1.191 million. (A level of 1 million is consistent with past recessions.) Meanwhile, spiking prices in commodities and an accelerating increase in the Consumer Price Index indicate that inflation is a growing concern. The threat of inflation couldn’t come at a worse time from the point of view of the Fed, since just when it would like to have a free hand to cut interest rates further in order to bail out the real estate market, rising prices and the eroding dollar may severely limit the extent to which monetary policy can be used to address the threat of recession.

So, what does all of this mean for the average Joe? How should one manage personal finances in such a tricky environment? Unfortunately, there are no easy answers, since in a period of stagflation virtually every form of wealth is vulnerable. Investing in the stock market (which is still near record-high levels) while the economy may be on the brink of recession is obviously not a good idea. On the other hand, conservative investments like bonds and other fixed-income instruments are problematic due to the falling value of the currency.

While I do not profess to be an expert on the subject of investing, I would like to offer three investment ideas that I think will outperform if stagflation becomes a reality. The first is one that I have discussed before – i.e. gold. Gold has historically been considered one of the safest stores of economic value. The one drawback of gold is that it doesn’t yield any return (like a bond or dividend paying stock). However, at a time when bond yields are low and stocks look vulnerable, this aspect of gold is less problematic. Gold has increased dramatically over the past couple years, and while I am usually wary of investing in anything that has already gone up a lot, in this case I think gold has a lot further to go. Since the Fed seems to be taking the “easy” approach to our current difficulties (i.e. loosening monetary policy), the recent trend of weakness in the dollar is likely to continue. Since for most of the last century, people all over the world have used the dollar as the primary store of value, once people start questioning the wisdom of continuing to do so (a trend that is already underway), an enormous amount of wealth will start to exit the dollar and look for alternative stores of value.

Given that other countries are likely to follow the Fed’s lead in terms of monetary policy (since allowing their currencies to appreciate excessively versus the dollar hurts their abilities to export their products to the US), there is no guarantee that simply switching out of dollars into other world currencies will be a successful strategy for preserving wealth. If there is a “race to the bottom” in terms of central bank policies, currencies could lose value across the board. It is for this reason that I believe gold still represents a huge opportunity. The amount of gold that exists in the entire world is tiny in comparison to the amount of wealth that could soon be looking for a safe haven, so I think it is not unlikely that the price of gold could double or triple from its already high levels.

Another investing strategy that is based on similar reasoning would be to invest in the Japanese yen. The dollar has already slid significantly against many world currencies (most notably the Euro and the Canadian Dollar), but it has so far held its value against the yen. One factor that I believe is likely to lead to a significant depreciation of the dollar versus the yen is what is called the “carry trade”. In response to Japan’s decade-long recession during the 90s, the Japanese central bank cut short-term interest rates to near-zero. This created a hugely profitable opportunity for investors to borrow yen and convert them into dollars, where they could then invest the money at a higher rate of interest. The enormous amount of money that was put into the carry trade represents a tide that at some point is likely to start flowing in the opposite direction. Once interest rates in Japan are no longer low relative to rates in the US, and once the value of the dollar starts to erode vis-à-vis the yen, all of the money that was put into the carry trade over the years is likely to be unwound.

When I was employed as a derivatives trader in Tokyo in the mid-90s, I used to exchange my yen-denominated salary for dollars at rates as low as 80 yen per dollar. I see no reason why we might not see the yen trading at 100 to the dollar in the medium-term. I also see little reason to fear that the dollar might appreciate significantly vis-à-vis the yen. I therefore believe that buying yen represents a very good risk vs. reward scenario at this point.

Lastly, for those who want to get a bit more aggressive in their investing, I would suggest selling US bank stocks short. The recent troubles in the sub-prime mortgage market highlighted the extent to which US banks are vulnerable to declines in real estate values. Yet, to date, bank stocks by and large haven’t fallen very much. It is my opinion that the bear market in real estate is just beginning and that property values have a lot further to fall (an opinion that is increasingly echoed even by the “official authorities”, who are occupationally obligated to be unrealistically optimistic). When this happens, I think the extent of bad-debt exposure of the large banks is likely to prove to be very large. I wouldn’t be surprised if we saw a large bank or two go bankrupt or be forced into merger or restructuring.

The problem with any prospective short-sale is that timing is everything. You can be exactly right in your analysis but just be too early and end up getting wiped out before the stock falls. For example, if the Fed moves to aggressively cut rates again, the stock market in general, and financial stocks in particular, would likely rally, and a short-seller would lose money. That being said, I don’t think there is a large amount of risk on the upside in these stocks, so if this trade is implemented in such a way that it represents a small percentage of one’s overall portfolio, I think it will prove to be a good countermeasure if the dreaded stagflation rears its ugly heads.

see
Big Ben & The Shit-Cloud by Josh

American Economy: The Perfect Storm by Josh Sidman