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WHY CREATE A DEPRESSION?

September 08, 2004

By Bill Clinton, George W. Bush, and Alan Greenspan
(Satire)

We apologize for the depression we have orchestrated to begin by year 2010 or sooner. We recognize this course is the only means by which to cleanse the excesses of monetary intervention, overcapacity, malinvestment, regulations, and government largesse, and return to principles of freedom that created our Republic over 200 years ago. We planned this course to save the Republic and trust history will recognize this bold effort many years from today. Additionally, it is the only alternative that will return us to a gold-based monetary standard, which should prevent the US fiscal and monetary systems from slowly destroying the Republic for generations hence. Had we delayed our initiatives any longer, we feared a greater likelihood of tyranny soon after the US dollar reaches its inevitable collapse. We concluded the alternative of attempting a piecemeal approach in returning to freedom in a Western democracy is impossible.

Our goal was to create a massive economic “wedge” where on the one hand we had to encourage the acceleration of debt at every level (international, federal, state, company, & individual) such that a reduction to a simple sustainable linear increase would dramatically collapse demand. On the other hand we had to encourage an unsustainable level of consumption without savings to ensure the debt acceleration cycle that sustained the consumption was firmly in place. We knew debt and consumption were very seductive and easily sold to the short-term, “sound-bite” oriented American public. We were able to accomplish this by creating equity, bond, and real estate asset illusions via expansionist monetary policy.

TIMING WAS EVERYTHING…
It began in 1971 with the abandonment of any semblance of a gold standard. Thus, the “train” veered off the track. Beginning in 1995 we pushed the “train” completely off the cliff into freefall when we began to consistently address any “mini” crisis with a flood of liquidity or “re-structuring” (see INTERNATIONAL section below). In 2003 we jettisoned the emergency chute from the “train” by flooding the globe with liquidity in support of our anti-deflation campaign.

It was very important that we had the ability and power to artificially suppress interest rates and flood markets with liquidity both before and after the greatest contrived stock market bubble of all time. We needed time to integrate extreme low interest rate levels along with massive “accommodative” monetary expansion to systemically and thoroughly immerse the artificially low interest rate across the housing and financial industries. The greater the artificial vs natural rate spread and the greater the period of time, then the greater will be the magnitude of collapse when the suppressed rates unwind. GSE’s (esp. Fannie Mae and Freddie Mac) proved to be very useful in this effort.

Thankfully, the public bought heavily into the artificial suppression of rates following the equity semi-bust in 2000-2002, which enabled our massive credit expansion to inflate Real Estate and bond values far beyond CPI levels. The massive increase of real estate and bond valuation completely mitigated the $8+ trillion perceived loss in the equity market, thus enabling our total asset illusion plan to continue intact.

We had to time it very carefully such that the Baby Boomers would “buy into” the asset illusions just before retirement. We knew the ultimate trigger for collapse would be the demands of the Boomers as they begin to retire in 2008 and attempt to cash in on the illusory assets. By 2010 or sooner the musical chairs syndrome will be in full effect… All illusions will become visible and there will be a chaotic race to seek real rather than fiat money.

COMPANIES…
We had to ensure we reached extreme growth stress levels in companies directly or indirectly dependent upon sub-natural interest rates. We needed to ensure masses of talent were enticed to these dangerously leveraged companies. It was important to achieve the greatest proportion of dangerously leveraged companies relative to healthy companies, such that the ultimate correction (or, unfortunately, over-correction) would create maximum labor disruption. The Austrian economists refer to this as malinvestment and resource misallocation.

During my first term (Bill C.) in discussions with Alan I realized the earlier creation of GSEs would ultimately lead to a systemic breakdown as they represented an unprecedented vehicle available to disperse liquidity with little or no resistance and enjoyed the implied backing of the Federal Government. These organizations had to be destroyed. Our course included rapid expansion of these enterprises such that during the ensuing collapse they would become clearly visible as key vehicles that empowered the liquidity explosion under the false pretense of helping homebuyers and shifted risks away from Banks to hapless bond and equity holders.

It became obvious that rapid monetary expansion indirectly contributed to the artificial explosion of financial asset values. So, we had to orchestrate a plausible spin that could encourage this excess to an extreme so history would easily be able to identify the root cause post collapse. As seasoned political masters (Bill and George W.) we were supreme in this effort.

As asset prices expanded and Ponzi schemes became rampant (i.e. technical momentum; increase begets increase) we knew that CEOs of these companies would receive extreme disproportionately large salaries, bonuses, and options compared to their employees because corporate boardrooms associate stock price with their work contribution thus poured out the undeserved rewards. Our plan ensured significant visibility of this excess along with their creative schemes to generate earnings illusions. This sub-strategy succeeded beyond our wildest dreams. The fever even spread peripherally to our NYSE regulatory board rewarding the Chairman in excess of $200 million. Imagine that….! The root cause (FED monetary expansion) of these excesses would certainly become another target for true correction during the ensuing depression.

INDIVIDUALS…
Further, we needed to encourage the same for our consumers hooked upon excessive debt to income ratios. We knew it would be important eventually to shift ostracizing those who are prudent and save today over to those promoting and partaking in the excess goods saved by responsible people.

GOVERNMENT…
Government debt expansion was relatively easy. It was more within our control so we did not view that as a major obstacle to achieve.

We encouraged passage of significant government programs that would become beacons of largess, thus becoming certain targets to remove while in the thick of the depression.

INTERNATIONAL…We needed their support. It was very important to expand liquidity as rapidly as possible internationally to prevent any true monetary or economic correction efforts by our international friends. Fortunately, by teaching and partnering with numerous others we were able to create “mini” crises (i.e. The Mexican Peso, Asian, Russian default, LTC, Y2K, 9-11-01, and finally domestic anti-deflation in 2002-03). These crises helped engage the world into our strategic plan without even revealing the end goal.

The seductive slogan of “investing in America” was an extremely successful campaign to orchestrate the massive undermining of US manufacturing. The asset Ponzi scheme success ensured an artificially strong dollar, which created the one-way “investment” gradient exchanging their Goods for our “paper” rather than Goods in return. Timing of the Japanese and Chinese Boomer’s retirement will coincide with the US Boomers, thus will initiate or reinforce the illusion discovery and subsequent collapse. The double whammy of an overvalued dollar and overvalued US assets will fill foreign investors with a terrible resolve to dump US assets regardless of the impact upon the market for their products.

HOW EXTREME DID IT NEED TO BE??…
The magnitude of the illusion was critical for success. If the overvaluation gap (the difference between the non-inflated asset market value vs. the perceived value broadly recorded today) was less than 10-15% we might have had the ability to diffuse the overvaluation and excesses via inflation. By accomplishing a gross 25-35% asset overvaluation (approx. $20 trillion) culminating with our last major 2003-2004 thrust in equities, we ensured maximum shock impact when any anecdotal newsworthy catalyst finally triggers the collapse of the massive asset illusion we worked so feverishly to build. Fear and lack of confidence in leadership will become the primary drivers that push all valuations far below normalcy.

FINALLY…Thus, the forming of the New Republic will begin by arming our citizens with maximum motivation. We are now handing off the country to you for a new beginning…..!

Sincerely,
Bill Clinton, George W. Bush, and Alan Greenspan.

Email the actual author

Posted by manystrom at September 8, 2004 03:55 PM
Comments

2008 is late
Gold standard is no solution. Booms and bust happened during gold standard. They will after. This is related to the optimism pessimism balance in human kind. Unless we all become buddhists ... nothing will save us from manias...
read this
http://www.roubiniglobal.com/archives/2004/09/my_new_paper_wi.html
and visit the website
http://www.stern.nyu.edu/globalmacro/simple_content_frame.php

Posted by: DF at September 9, 2004 04:48 PM

I agree and disagree with DF. There were definitly depressions/recessions etc in the late 1700's through the early 1900(prior to 1912 and the fed reserve creation). The point is, that on the gold standard the amount of inflation and thereby lessens the discrepencies(spelling) that can be accrued over time. The corrections are severe, sharp and short. But in the end the books get balanced and the economy continues on. By taking the money creation away from pseudo-government agencies(fed, GSE, etc), it will at least bring us back into some semblance of balance. The gold standard is not a end all beat all answer. But, it is the best that man kind has found so far. At least until we all become buddhists. For what it's worth.

Posted by: FeelingWierd at September 9, 2004 05:28 PM

All right then ... you prefer short periods of enthousiasm (money extension) followed by short periods of pessimism (money destruction) to long ones ...

The problem with gold standard is well known. If there is growth in goods to be traded (and there has been) since the stock of gold cannot be inflated, prices have to fall ... And humans tend to resist reduction in the prices of goods and especially of wages. All the psychological experiments show it. People will prefer a big risk for a big gain than a small risk of a small gain ... And exactly the opposite when loss is at stake : a big risk of a small loss to a small risk of a big losss...
People don't like losing, basically. THey are loss adverse.

So that's why a fair amount of inflation is good. It allows relative prices to move smoothly.

The problem is not the gold standard. And the austrians form a crazy school. The problem is the sheer idea of a market of assets and of money. Speculation is inherent to the market. That is why regulations are needed.
Of course many times the regulators will be turned into speculators ... They're humans.
That is why the best solution to reduce the speculation is to reduce the market itself.

The problem we face now is the direct product of the deregulation in the 1980's. The fall of "communism" (it's statist application in soviet union) is now to be followed by the fall of "capitalism" (it's market application in the US).
Hopefully something of a mix can be created.

Posted by: DF at September 10, 2004 08:54 AM

I'm not sure if I follow what kind of market you see forming. If I'm correct you are talking about a free market system, with large governmental controls in place to keep the vagaries of the market from causing the populous pain.(I am going to run with this as I think this is what you are saying, forgive me if I'm wrong).

First of all as I look around the U.S. and most western style economies that is exactly what we have (although they definitely err on the side of the companies and not the populous). So, you may want a more stringent control system from the government and more oversight and reorganization. But, this lends itself to a nightmare of problems.

I think what we have now is an absolutely perverted worst of all worlds system in place. We have large bloated companies in place being propped up by big bloated government, and the populous is being placated by big bloated labor and being lied to on a daily basis by big bloated media. We get all the inefficiencies of a large government, the one size fits all treatment from the large companies and get the double screw from the big labor unions (lessening wages and larger contributions)and our precious watch dog media, sit around and watches it unfold before them without so much as a whimper. So, what I think would happen if the government continues to gain more power to control, in this environment, would be nothing less than a recreation of the fascists of the 1930's.(fascism as I'm sure you're aware is a governmental system that allows for a strictly regulated free market, w/the government having the final say). We are already well on our way to that end. Of course history repeats itself but it never looks the same. So, this time it might be Nazism with a smiley face. I absolutely know this is not at all what you want nor is it what you are implying, but If any central authority is given that much power it is always in that authorities best interest to abuse it.

I would suggest going in the opposite direction. A radical reorganization of the economy (dreaming I know, but work with me here). I am somewhat parroting the work of Murray M Rothbard(yes he's an Austrian). He is what would be called an anarcho-capitalist. I would say that the best way to organize an economy would be based on a solid gold standard; this would eliminate the ability of any central authority from inflating away the worth of a paper dollar. But, the most important part of any new economy would be the elimination of the favored status of big companies. In a true free market, all must compete. And as history has shown, as a company reaches the large size needed to dominate and create a monopoly they become bloated and unresponsive. Unfortunately in the U.S. in the late 1800's there were many large bloated companies, who were fighting to stay alive (standard oil is a good example). They couldn't fight against the small producers. They ended up getting the government to step in to help them put the little guys out of business. If the government stayed out of the way of the producers and let companies/employees/consumers/producers hash it out amongst themselves, I truly believe the end result would be far far from perfect. But, would be infinitely better than the unsustainable, inflation fueled system we have created here.

Almost every negative thing that can be said about our pseudo-free market is an end result of the perversion of the true free market. Environmental problems could be traced back to several problems. Oil for one would never be as cheap as it is now, but for the government’s interference in the free market. Oil prices would quadruple overnight if we decided that the oil companies would have to protect their own oil interests. And what about the road systems, if we had said 80 years ago that it is not the responsibility of the government to build roads, do you think we would have so easily moved to the extremely wasteful automobile. I think mass transit and rail would have won that battle. Well I know I'm rambling now, trust me I could prattle for hours. I guess what I'm trying to say is that the 20th century was the century of central authority. As we start the 21st I'm hoping that we learned that centralized governments/companies/schools etc don’t work. It was a decentralized government and society from the late 1700's to the mid 1800's that built the bulk of the capital that this country is still running on. It's an absolute testament to the fortitude and savings of our fore fathers. Since the inception of the Socialist agenda of the early 1900's this country has slowly but surely been committing mass suicide. Because in the end when all the oil that this country is so addicted too (thanks to our government), runs out. We'll see how fast a country can implode. Just sucks because I have two little children and I truly don't think that their lives will be anywhere near as easy as mine was.

Posted by: FeelingWierd at September 10, 2004 04:10 PM

Corporate power is a problem. More competition can help solve it. I grant this.

But the "asset economomy" has other causes than the existence of central banks and big companies.

If you have assets and credit, then you have evaluations of what the asset price will be, and booms and bust.

What I am aiming at is a reduction of the market importance. A world in which economy does matter much less. Mandatory "free" time is the kind of thing that helps this. THe more thing are "forbitten to be sold" the more you move away from a market economy and from it's likewise opposite : controls of the market variation, state and big corporations.

See : companies and markets work hand in hand.
Rules and network work hand in hand.

What we have now, is the power to the haves, in a global market, with less and less law (there's more rules, but less law : the have turn the rules and are legal outlaws) and less and less ties ...

What we need is less power and money (a more even distribution of them and less interest for them) and more love and law ...
We will build a society in which people care for love and honour, not power and money.

So if you want to get what I think ... the market economy is flawed. Gold standard a back to the "old days" is no solution. In money matters I prefer the solution posted by a guy some months ago : a currency taxed so that people can not store it as a value. I'll find the link.

The democratic ideal has to make a big come back. But the years of intense political fighting are over now, from what i see. So the best way is in new networks with help among members ... Non monetary economics if you want.
Money has become the problem. Demonetising the economy will be the solution.

Posted by: DF at September 10, 2004 06:33 PM

I think the only way to cure it is for individual states to withdraw from the federal union.

Posted by: Teddy at September 11, 2004 05:32 PM

I would really like to see an article on what you are talking about. I know in a forum like this, it's hard to express your views. I doubt that I will change my mind, but I am always open to challenging my point of view.

Some things I agree with (there's more rules, but less law), most definitely. This is a creation of the state and big companies working in conjunction with each other. As a person who grew up in a small business situation, I saw first hand how devastating these "laws and rules" are, they are designed with one thing in mind. Cutting the rungs off the ladder behind them. They are the Haves, you are right about that, but in a true free market, their money is only theirs at our(the buying public's) discretion. What they have successfully done over the past 150years is to construct a system whereby those who somehow make it through their system and establish themselves as a big company, become part of the club. Those in the club actively seek to destroy the ladder behind them. I doubt that there is any way in our current environment to stop this short of a revolution(which would never end in the end result I would hope for, as it would undoubtedly be spear headed by a more socialist agenda), or more likely will be a collapse of the whole inflation based economy. All I can hope is that when it crashes this time(and trust me, it will crash hard and fast when it goes), is that we build it back up with a sustainable system. Gold is wonderful in so many ways. It is the traffic cop in a world of speed daemons. When left to work in the free market, gold pulls us back from inflation driven madness of speculators and wanabee government overseers. Most of the history of the booms and depressions of the late 1700's and through the creation of the federal reserve in 1912 were created by paper money as it related to the gold reserves that back them. Banks would continually try and push the reserve of the paper they created vrs the amount of gold they held. They inevitably would be busted by gold and paper speculators, looking to make a buck on the ratio. I am saying NO PAPER MONEY. Gold is abundant but limited. It's transportable, malleable, and long lasting. It's the perfect trading medium, and best of all, most people on the planet view it as that.

I have a real problem with a few of the things you had to say. I don't know you, but from your posting I gather you are intelligent and are a thinker. So please tell me where I am wrong about some of the things you said.

"The more thing are "forbidden to be sold" the more you move away from a market economy".

"Demonetizing the economy will be the solution"

As I said at the beginning, I would like to read something of what you are talking about. Is there anyone who kinda champions this thought process?
But, the BIG problem I have with the above statements is that they imply a form of force. Who will do the forbidding, who will demonetize the economy? To get to a point where someone has the "power" to do such a thing, is the one point we absolutely don't want to be. For someone or someone’s to be able to make such a proclamation would in and of itself say that we are living in a dictatorship. And yes I have read civics books and I know that an omnipotent dictatorship would probably be the best form of government. But, to give anyone person or people that much power would be to great a risk. Please let me know what you think ?

Posted by: FeelingWierd at September 13, 2004 04:25 PM

To: DF and Feelingwierd

I penned the depression article and find both of your views very interesting...!

I'm a passionate Austrian economic believer as well as an engineer, and have developed a metric dimension to the Austrian logic dubbed "Austrian Enginomics". Those metrics convince me a depression is imminent within 4-5 years.

I view Gold as a commodity first and money second. In that context, it carries its own weight in valuation. Never should a government intervene with its market valuation.

From a practical standpoint I believe there are 2 challenging issues to utilize Gold as a monetary base without fractional reserve expansion leverage:
1. Psychologically, the impact of getting no salary increase every year.
2. Liquidity

Ref #1: Assuming the gold mined and processed is roughly equivalent to the population increase, then the "gold/head" in the world remains the same. Further, assume a company can only give a portion of its "2%" productivity increase to each employee each year, as the balance must go to company stakeholders. Therefore, the average employee might receive a -1% raise, which should make them content. It is a paradigm shift, but I think would be very valuable. We already experience the expectation of computer price reductions today, which gives you more goods for today's money. It would be real, and therefore something that people would accept in time.

Ref #2: Possibly the greatest illusion scam today is the perceived need for adequate liquidity. As you know, wealth is only created by human activity (work). If an entrepreneur needs more work activity to grow his business, he must enter the marketplace and bid for those resources away from another. Since labor and gold are essentially finite, they make a perfect match in this exchange process. If the entrepreneur does not have gold, he must borrow it. The act of creating liquidity out of thin air guarantees excess paper will chase finite human resources. This creates inflation, but worse, it shifts labor from market justified companies to market unjustified companies. This movement must ultimately reverse.

Look forward to your comments..!


Posted by: Russ at September 13, 2004 05:54 PM

Great comments Russ. Love your site by the way. I'm glad you have re enabled this comment section, i missed it.

I am an avid Austrian and have been for about 13 years. I have changed my thought process around quite a bit in the past year or so though. I have complete faith in the free market system. It's just that we don't live in a free market system. It infuriates me to no end when people in the media or in acedamia say that all the problems we face are a product of the failed free market system. I just want to scream "THIS IS NOT WHAT A FREE MARKET LOOKS LIKE". What is truly ironic is that many of the hippie's(read socialist) who follow the Greatful Dead around have a better vision of what a pure free market would look like. They sell thier wares and food with no govenmental oversight. They price their products to best maximize their profits while at the same time keeping them low enough to keep the public happy. Again the system of free markets are far far from perfect, but they are the best thing we have. Sure we could institute a system where we take all of what is available out there and spread it accross the whole and we would all be pretty comfortable. But, the problem is not now, but the future. If we were to somehow, without declaring a dictatorship,able to take all the wealth that exists and spread it across the whole, within one generation the wealth and production would be used up, and there would be little or no new wealth and production created. This is the achile's heel of socialism. It depends on outside production to fuel it, as a socialist means of production cannot possibly know what the whole wants, needs, or must have, short of a return to serf status for the populous. Where all we get is our daily ration of food and shelter in exchange for 100% of our production.

I know I am a pessimist in thinking this, but we are in a box canyon(to coin someone elses article) stupid! We have painted the western world(we being the western democracies)into an unrecoverable corner. Because of all the socialist tinkering and playing with the system, they have created a situation where a huge number of retirees are going to stop producing at about the same time, while they did a great job at making sure that the number of productive people being produced were kept below the replacement rate. They have made it so hard to have kids that people have opted to only have one or none. What did they think was going to happen? So, I agree Russ that at best we are looking at the end of the decade, before things start to unravel. Could be a hell of allot sooner though. This is a case of the emporor wearing no clothes. All it's going to take is for the right person to stand up and say that we are all naked. Then we'll see how fast those old geriatrics run for the exits as they cash in their "assets" and try to sell or extract "equity" from their overvalued homes. The only thing that I hang my hat on, is that they always seem to find some new tactic or scheme to keep it afloat. Don't know what trick they could possibly use at this point, but I know they have allot of people working double overtime trying to come up with it. Oh wait, I think they are working on it, it's called Iraq and Afganistan. If we can't produce it here, why not take it from someone else. Oldest trick in the book.......

Posted by: FeelingWierd at September 13, 2004 07:27 PM

FeelingWierd.... Interesting... Timing??
As long as we have a relatively stable dependency ratio (as we have had for the past 20+ years), then an asset illusion can continue. The key ingredients are sufficient support from our Central Bank (to continue with debt expansion policies), as well as debt purchases from key foreign trading partners. Short of either of those ingredients abruptly stopping, the next trigger is father time. In 2008 there will be a global attempt for boomers to realize the beginning fruits of their next egg. As in any bubble, if the gas gauge says full and you discover it's half empty, fear and panic begin. Soon a herd will be unstoppable by any "mechanical" monetary or fiscal means. Human herd behavior will trump all.

The two overriding key metrics are:
1. The extreme percentage of market unjustified businesses (would not make money if interest rates were instantly at a natural level) relative to market justified businesses.
2. Aggregate asset overvaluation or bubble.

Both of these metrics are currently at all time highs compared to ANY TIME in US history.

I fully anticipate a dollar crisis within 2 years. This will be followed by an emergency G-7 summit meeting where we will pressure our partners to engage in the same monetary "medicine" we have been prescribing for years. This might last 1-2 years, then a total collapse will follow when the boomer begin to retire....

Thanks...

Posted by: Russ at September 13, 2004 09:42 PM

Greenspan continues his economic Kabuki dance while across the Pacific, China's ruling elite pretends there are no possible negative outcomes to the uncontrolled growth in that country. Both economies are now linked by debt and consumption so that a failure in one will surely be reflected in the other. Japan and the EU are frozen in place. Russia stumbles toward totalitarian rule once again.

An unexpected disruptive event -- North Korea, Taiwan, Iran, etc., will be the pin that pops the balloon. There will be a bare-knuckles brawl for resources and power not seen since WWII.

Posted by: TJK at September 20, 2004 07:13 PM

Because obfuscation always leads to wealth.

Posted by: bob Herron at September 27, 2004 12:21 AM
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