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The latest from Stephen Roach at Morgan Stanley

December 01, 2004

Roach is possibly the best contrarian economist within the established order, as Chief Economist for Morgan Stanley. Over the weekend he made his, already "now famous," remarks about the US having a 1 in 10 chance of surviving economic catastrophe in the years ahead.

This is his first column since his weekend lecture. Here he is discussing US Consumers and what a dangerous bunch they are. I think a good debate about exactly how the average Joe Consumer will react to a rapid credit tightening, rapid inflation and basic "pay-back" scenario's might play out would be useful for all D2 readers.

Here is Stephen Roach (from New York)

Global rebalancing has quickly turned into the global blame game. “It’s the other guy,” exclaim Asians, Europeans, and Americans, when the issue of responsibility comes up. America’s Bush Administration views the rest of the world as suffering from a growth deficiency, largely brought about by under-consumption and excess saving. Conversely, Asians and Europeans view the United States as suffering from a saving deficiency brought about by over-consumption and government budget deficits. Who’s got it right?

The truth is, they probably all do. There can be no mistaking the extraordinary disparities in the global consumption dynamic in recent years. Over the 1996 to 2004 period, annual growth in US personal consumption expenditures averaged 3.9% -- nearly double the 2.2% pace recorded elsewhere in the so-called advanced world. Americans, for their part, have spent well beyond their means -- as those means are delineated by the US economy’s internal income generating capacity. Over the 1996 to 2004 period, annual growth in real disposable personal income averaged 3.4% -- fully 0.5 percentage point slower than average growth in consumer demand. As a result, the personal saving rate plunged from an already-depressed 4.6% level in 1995 to just 0.2% in September 2004. At the same time, the consumption share of US GDP surged to a record 71% by mid-2002 -- an extraordinary breakout from the 67% share that prevailed, on average, over the 25 years from 1975 to 2000. Never before has an advanced economy taken consumerism to such excess.

There’s no deep secret as to how the American consumer pulled it off. It’s all about the emerging power of the asset economy -- namely, how US consumers have turned increasingly from income generation to wealth creation in order to sustain current consumption. At work since 1995 has been the strongest and most sustained surge of above-trend growth in real household sector net worth of the modern-day, post-World War II era. American consumers were quick to make use of this windfall as an increasingly important supplemental source of purchasing power.

Moreover, there has been an important shift in the asset economy that took the US consumption dynamic to excess in recent years. The first wave came from the stock market, as household equity holdings surged from about 13% of total assets in 1991 to 35% at the peak in 2000. During the final stages of the equity bubble, individual stock portfolios supplanted real estate as the US household sector’s most important asset. By early 2000, residential property had fallen to less than 25% of total household sector assets, more than ten percentage points below the equity portion. It was only after the equity bubble popped that the asset economy took its most extraordinary twist. The increasingly wealth-dependent American consumer never skipped a beat. In large part, that was because the equity bubble immediately morphed into an even more powerful strain of asset appreciation -- a sustained burst of US house price appreciation that has continued to this very day. As a result, the real-estate share of total household assets rose back to 30% -- recapturing its role as the consumer’s leading asset class. According to Alan Greenspan, American households currently own some $14 trillion in real estate -- almost double their total equity holdings (see his February 23, 2004 speech, “Understanding Household Debt Obligations,” at the Credit Union National Association 2004 Governmental Affairs Conference, Washington, D.C.).

This multi-bubble syndrome was largely an outgrowth of the Federal Reserve’s aggressive post-equity-bubble damage containment tactics -- some 550 bp of monetary easing from early 2001 through mid-2003. Housing markets benefited handsomely from the support of 45-year lows in interest rates. And consumers, who had first discovered the joys of asset-driven wealth effects during the stock market bubble of the late 1990s, quickly put their newfound skills to work in reaping the gains of the housing bubble. Not only did they benefit from the psychology of feeling wealthier, but US homeowners were aggressive in taking advantage of breakthroughs in the technology of home mortgage refinancing. It wasn’t just the reduction in interest expenses, but the so-called cash-outs from rapidly appreciating housing assets enabled consumers to uncover a new and important source of incremental purchasing power. Freddie Mac puts the peak rate of equity extraction and second mortgages from residential property at $224 billion in 2003 -- almost 3% of the total value of home equity investments. Over the 2001-04, annual cash-outs appeared to average around 2% of aggregate home equity -- suggesting that households may have liquidated as much as 8% of their equity in real estate in order to fund current consumption. For an aging US society that needs to build saving in order to fund the not-so-distant retirement of some 77 million baby-boomers, even this partial liquidation of asset-based saving is disturbing, to say the least.

The asset economy does not just have its origins in America. It is very much a by-product of support from global investors and policy makers. One of the outgrowths of an increasingly asset-dependent economy is a shortfall in income-based national saving. America has taken this shortfall to an unprecedented extreme. The net national saving rate -- the combined saving of consumers, businesses, and the government sector after deducting for the depreciation of worn-out capacity -- fell to a record low in the 1-2% range in 2003-04. Lacking in domestic saving, American has had to import foreign saving from abroad -- and run massive current account deficits to attract that capital.

This is where the global enablers enter the equation. First, it was private investors seeking to share in the returns of the world’s greatest productivity story. Then, when doubts surfaced on that front, foreign central banks rushed in to fill the void. Over the 12 months ending September 2004, the “official sector” accounted for 28% of total purchases of long-term US securities -- nearly double the 15% share over the prior 12 months and about four times the portion during the 2000-02 period. This was only the latest chapter in a foreign-inspired dollar-support campaign. Dollar-denominated official foreign exchange reserves surged from $1.1 trillion to $2.1 trillion over the 1998 to 2003 period (as estimated by the BIS at constant exchange rates). That left dollar-based assets with approximately a 70% weight in official reserve portfolios -- more than double America’s 30% share in the world economy and, quite possibly, the biggest overweight in world financial markets today.

Nor is it difficult to discern the motive behind this foreign dollar-buying binge. It’s all about the lack of internal demand in Asia and Europe and the related need to draw support from export-oriented growth strategies. And, of course, central to such growth tactics are cheap currencies that underwrite export competitiveness. Asia has led the way in that regard -- with hard currency pegs in China, Hong Kong, and Malaysia and soft currency pegs in Japan, Korea, India, Taiwan, Thailand, and Indonesia. Asia’s official foreign exchange reserves surged to $2.2 trillion by mid-2004 -- more than double the holdings of early 2000. With the bulk of that incremental surge going into dollars, Americans enjoy a subsidy to domestic interest rates that is very much made in Asia. It’s hard to quantify the exact magnitude of that subsidy but my guess is anywhere from 100 to 150 bp at the intermediate and long portions of the yield curve. That means, in the absence of this foreign support campaign, yields on 10-year Treasuries would have been in the 5 to 5.5% zone -- implying a rate structure that would have been far more problematic in providing valuation support to US asset markets and concomitant wealth-driven support to America’s asset-dependent consumer. With the dollar appreciating over most of the past decade, this was a win-win strategy for Asia -- providing the region with competitive currencies, as well as portfolio gains on dollar holdings. Now that the dollar is going the other way, that calculus suddenly looks very problematic.

As the world now grapples with the imperatives of rebalancing, it is important that all parties understand the roles they have played -- both in creating the problem and in forging the solution. Asset-dependent Americans truly have an excess consumption problem. It is still astonishing to me that the bursting of the equity bubble didn’t spawn a culture of prudence that weaned US consumers from the perils of an all too fickle wealth effect. With US house price inflation now at a 25-year high of 8.8% and with 15 states now experiencing double-digit house price inflation, this voracious appetite for risk is all the more disturbing. Similarly, Asian and European financiers -- be they private investors or central banks -- need to accept responsibility for the important role they have played in keeping the music going for saving-short, over-extended US consumers. They have taken the easy way out -- putting off the heavy lifting of structural reforms needed to unlock domestic demand and choosing, instead, to recycle foreign exchange reserves into dollars and rely on currency manipulation as a means to sell everything they can to America. In my view, America, Asia, and Europe are all equally guilty of opting for an extraordinarily reckless way to run the world.

Financial markets have an uncanny knack in restoring a sense of order to a dysfunctional world. The dollar is now center stage in this global wake-up call -- as well it should be, in my view. But dollar depreciation is not the endgame of global rebalancing. It is the means toward the end -- a potential trigger for a long overdue realignment in the mix of global saving and consumption. By failing to face up to the imperatives of rebalancing, the world has collectively created the ultimate moral hazard -- a US consumer that is now “too big to fail.” This is a serious warning sign. The key to a successful global rebalancing, in my view, hinges critically on facing up to the risks of the world’s most serious excesses. The over-extended American consumer is at the top of that list. And a weaker dollar could well be key in forcing the interest rate adjustments that might well temper the asset-driven excesses of US consumption. This is a shared responsibility that the world must now collectively redress.

Long ago, I learned that most of the time it doesn’t pay to bet against the American consumer. There are rare occasions, however, when that rule doesn’t apply. That was the case in the early 1970s in the aftermath of the first oil shock. Back then, as a young staffer at the Federal Reserve Board, I was chastised by Fed Chairman Arthur Burns for being too negative on the US consumer. He argued that I didn’t appreciate the unflinching cyclical resilience of the US consumer -- a resilience that, ironically, was about to give way to America’s first consumer-led recession. A lot has changed in the ensuing 30 years. But for very different reasons, I now believe that another exception is in the offing. The American consumer is an accident waiting to happen. The sooner the world comes to grips with this problem, the better the chances of a successful rebalancing.

+++++++++++++++++++++++++++++++++

One of the first things that jumped in to my head after reading this was the need to characterize the average Joe Consumer - what do they look like in terms of their consumption, what are they likely to do when the dance stops and what are the ramifications for all of us?

Of key importance is the psychology of it all, for instance; is Joe Consumer, because of his undisciplined ways, more likely to panic early or resilient to impending disaster and likely to sit it out? The mass psyche is going to be the curve ball in future events, no amount of planning or strategizing can accurately predict the fall-out from economic meltdown - so based on what we know do we collectively spin out of control or do we enter an orderly disarray whereby common decency revails?

Cheers Rich

Posted by richardlancaster at December 1, 2004 12:16 AM
Comments

Dang, I had problems with the "Comments" setting for this blog, it wouldn't stay "open."

Seems fixed now though.

Sorry for the delay.

Rich

Posted by: Rich Lancaster at December 2, 2004 05:54 PM

Reposting to this new thread....

IMPORTANT QUESTION PLEASE READ AND RESPOND !!

We are all on this site for a reason. The reasons may be varied but the over riding common thread is that we all know something is wrong with America and we are truly afraid of what's to come.

QUESTION #1 The question is not IF but WHEN it will happen. I have seen 2008 ,next year ,2010 as possible dates. But for YOU, what will you have to see happen for you to pop your chute. What will be the HOLY S%it event that will make you know that it's going down now. Or do you think that there will be no seminal moment and it will just slowly boil us into complacency.

QUESTION #2 Specifically, what are you doing to get yourself ready in the interim. Paying debt? Downsizing. Or more radical stuff like digging wells and digging food storage areas to hide food?
I would like to know what you are really doing, not just what we should be doing.

I for one am not cinvinced of the imminenacy of the crash and I am paying off debt and trying to build a nice nest egg of both cash(for daily payments) and silver and gold(for value storage). I am hoping that I have at least 2 more years to finish this stage. My next stage is 2 years from now, to buy land far enough from the city(but close enough to work), and start my tranistion to a more self sufficient life style. Planting fruit trees and learning how to bottle stuff. The way I look at it, these are good things to know anyways. So, even if they somehow fool everyone and keep it afloat past my death, I will still be OK with the choices I had made.

Posted by: FeelingWeird at December 2, 2004 08:23 PM

I'm not planning for anything really!interesting to read about the mental gymnastics of fear of lifestyle survival and all that but I'm way past giving a crap!ok,not that far past!ok,still hangin in there and drastically adjusting!I'm figuring if I just dont panic we'll end up beatin our tanks into plowshares and the lions will lay down with the lambs!hehe!

Posted by: numnuts at December 3, 2004 12:16 AM

I think it's bound to happen soon.
I can't see how the bush administration will escape both cut in spending and raising taxes ... I can't see how the US interest rates will escape an inevitable rise (through lack of financing).

So I will try to make some bucks by shorting the market.


Apart from that, I will look for any form of work in non profit networks... Networking is the future. This depression will be the end of corporate and market age and a move to a new ecological, spiritual and networking era.

If necessary, I'm ready to move into chiapas, nicaragua or anyother place where people stand against pax imperium ...

Posted by: DF at December 3, 2004 11:08 AM

"pax" imperium of course.

Posted by: DF at December 3, 2004 11:14 AM

A way to keep it afloat: By Me

I have been giving this some thought lately. It is in no ones best interest, especialy those at the top, for the lid to completly blow off of this thing. So, that got me to thinking about scenarios that the powers that be may use to keep this thing from going into meltdown and keep it going for the foreseeable future.

#1 Save the Stock Market Plan: Bush will push hard and accomplish the partial privitazation of Social Security. This will have the immediate affect of pumping up the markets and keeping up the illusion of prosperity and at the same time paying off the big election contributers on both sides(he needs some democrats to pull this off). There will also be a big push to have at least a small amount of means testing done on the top 1% of SS income earners. I am less confident on this point, but they will try really hard to get their nose under the tent on this one. The Bush administration has to know that they are balancing on a pin head. Any sudden moves now will send us crashing. But, they all have great balance let's remember. Theoretically this should have crashed years ago.

#2 Save the Oil plan: Step 1 is complete;Iraq is now under our influence. Step 2 is to consolodate what we have there. Make sure a Western friendly dictator is firmly in place. And then turn Haliburton loose. There is so much untapped capacity in Iraq. If they can(big IF)get the insurgency back under thumb the added capacity to our daily consumption should be around 3-4 Mbpd in short order(6months), and more importantly in 2-4 years thier short term daily output could rival Saudi itself(somewhere around 8-10mbpd tops). If you check our daily consumption it sits right around 20mbpd and our production is around 6 to 7. Assume we get ANWR on line at about a peak of 1mbpd added to the peak of maybe 8 in Iraq you are only now talking about a 3-5 mbpd shorfall compared with over 14 now. Which leads me to.........

Plan #3 Write off the debt plan: The reason that we are running such trade imbalances is strickly because of our oil dependence and our inability to supply it for ourselves. With the above two plans in place or working to be in place, we will continue our direction of devaluing dollars. This will help us to write off our enormous long term debt. Now if we were still running huge govenmental deficits and trade imbalances this would be a huge problem as our overseas funding would dry up. But, with our oil problem licked and SS(then soon after medicaid) at least temporarily patched(this will take care of the most immediate wave of retirees). Bush or whomever he passes his throne to, will not have to deal with the punishing paralysis that debts create for the short term. This will cause a shift of assets from the USD to some other currency. I don't think it'll be the Euro as they will be in worse shape than us in a few years as they don't have the benefit of a large military to sabre rattle with. I would watch the gold Dinar as a possible long term world reserve currency.

In the end it will still be the same. The American way of life through this process will get harder and harder to maintain as we know it. In the end we will still be knocked off the central stage as lone world super power. The inevitable rise of China as pre-eminent world power is to obvious to avoid. I am mearly speculating above as I don't think they can keep the cherade up much more than 10 years under the absolute best of circumstances. I am still going with the consensus here and say that the crash will be closer to the end of this decade than not. Talk to you all later.

Posted by: FeelingWeird at December 3, 2004 01:49 PM

Has anyone read the From The Wilderness latest report. He evidently has only called for an economic emergency twice in his websites existance. Once in 2003 before the big fall and 9/11. I don't want to pay $50 to read it, so hoping to scam a free read of it....

Posted by: FeelingWeird at December 3, 2004 04:07 PM

Social security reform will INCREASE the need for financing.
Those who will start to invest now, will stop to pay now for the elders.
Besides they are sure to lose cash, since as we all know, the stock market is doomed to crash from where it is now.

So if anything the social security reform can only make things worse.

Whatever untapped oil there may be in Iraq, the problem is the war in Iraq is costing more than it can repay.

Sooner or later, the fall in the dollar will lead to higher interest rates, and so falling asset prices, falling spending and so on...


There is just no way out. All the asset bubble that could be inflated have been so.

Asians and europeans can step up to delay the big fall a little more... But more than some 3 months ? I doubt.
More than 3 years ? impossible.

I bet the coming budget will bring some great news for the american citizen. cuts cuts cuts.

Posted by: DF at December 3, 2004 05:38 PM

Eventually yes, it will start costing us more to fund SS with current workers having part of their wages going to the market. But, that day is some years into the future. Right now SS on paper is still producing a surplus. And that is really all I'm talking about. On paper they can keep the illusion going by doing this. They siphon off maybe 25% of a wage earners contribution and send it to govenment annoited "fund managers", they in turn invest in govenment appoved companies or funds, thereby increasing dramatically the amount of money flowing to the markets. 75% of the contributions would go to paper over the current SS retiree accounts. Not saying this is some kind of a solution, just the opposite. This is digging us even deeper, but it could give the illusion of things being OK for quite some time longer.

As for Iraq, I think Faluja should be noted as the future of Iraq. Think about it this way. Why is Bush so hell bent on having the elections in January? He wants to get his puppet in charge of the country. Sorry to say Mr. and Mrs. Iraq, Saddam II is coming your way. The CIA and armed forces can only stand in awe at Saddams ability to keep this country under such tight control. They are going to do anything and everything to get control back. Once we have an "election" over there, expect the rest of the country to start to look like Faluja. We most certainly can win the war in Iraq. Up till now though we haven't had the stomoch for it. Now that Bushie is back in office, he can act with impunity over there. This will not look like Vietnam from here on out. It will look more like Japan 1945. Remember the fire bombings of Dresden and Kobi. Slash and burn will be the order of the day.

Control of Iraq is the central over riding goal of this administration. This is the linch pin event of the next 6 months. If they can squash the insurgency and get Iraqi oil flowing back to the pre invasion amounts (about 3-4mbpd), this will be the start they are hoping for. Look for us after the election, to have a hands off approch to what is happening over there as far as security is concerened. Slowly and quietly they will re Bat'h afy the country. The former Bat'hist will be put back into power with a new dictator at it's head, and you won't believe how fast they will put an end to this little insurection..... Hope for the Iraq's sake I'm wrong.....

Posted by: FeelingWeird at December 3, 2004 05:58 PM

The SS surplus is imaginary. Every dollar it brings in is transfered to the gereral fund and spent. Any money little Bush wants to put into the stock market will have to be borrowed or taxed into existence.

Posted by: Loren at December 3, 2004 08:17 PM

I posted this on the 'Petro dollars' forum but I don't think it will be responded to because it seems that portion of the site has been hacked.
>
>

I liken Putin changing the pricing of oil from dollars to euro a lot like Britain going off the gold standard in the late 20's...early 30's.

I've been thinking a lot about the deflation vs. hyperinflation scenario that could the the endgame to all this. At first I thought our path would be similar to America 1930's...deflationary. Then I considered the Weimar republic of the 1920's... hyperinflationary. Now I'm thinking about Britain in the early 30's late 20's. That should be the best recent comparison history can give us. You could also look at the monetary history of the roman empire but that might be for another day.

So what happens to a superpower whose currency has world reserve status on the onset of the deflationary phase in the Kondratieff cycle? Does anyone here know what happened to britain's economy in the 1927 - 1938 time frame. Here are the facts.
1. The pound was the worlds currency convertible to gold.
2. Britain was forced to abandon the Gold standard at somepoint in this time frame...maybe 1928.
3. We know that America had massive deflation but America had mostly internal debt.

Questions.
1. Did Britain suffer deflation or inflation over this time period.
2. What happened to the british stock market at that time?
3. What did the dow look like priced in pounds over this time period?
4. What happend to housing prices in britain over this time period.
5. Were there bread lines like in the US i.e. just how bad was it over there?

Posted by: Michael at December 3, 2004 09:09 PM

Regarding Stephen Roach's article...
Wonderful insight....!
I agree with nearly all stated. However, I respectfully have a few “interpretation adjustments”…

Stephen said: “At work since 1995 has been the strongest and most sustained surge of above-trend growth in real household sector net worth of the modern-day, post-World War II era.”

…… I respectfully disagree…! The growth story of the late 90’s was largely a bubble formation and productivity miracle myth. Real productivity, thus business valuation increase, was closer to 1-2% rather than the BLS released 3-9% increases. Productivity is erroneously calculated due to the overvalued dollar, trade deficit, GDP hedonic adjustments, and use of rental rates to represent housing values in the GDP deflator. Any increases greater than inflation, productivity, and employment growth (total approx. 4%) were adding to the size of our bubble in all financial assets. Therefore, at work since 1995 has been the largest bubble blowing contest the Republic has ever experienced, not “growth in real household sector net worth.."

Stephen said: “…from rapidly appreciating household assets…”

…I suggest you replace appreciating with inflating. Appreciating implies an increase in real value. In fact, notwithstanding capital improvements, a house depreciates in real value. 100 years from now it will be dust. Those holding the securities backed by "inflating" houses will lose in this game.

Stephen said: “…aging US society that needs to build saving in order to fund the not-so-distant retirement of some 77 million baby-boomers….” …

So true, but the implication is that the solution lies in a “communication campaign” to restore America’s interest in saving along with the commensurate reduction in consumption. Not likely....! Seeking the root cause, we know the public is incentivized to spend more via artificially suppressed interest rates (with global cooperation) and disincentivized to save via policies that empower the magic of asset inflation. As long as assets continue to inflate, why save? Again, the root cause is primarily the reserve currency master-of-the-world practicing easy monetary policy.

Stephen said: “…It is still astonishing to me that the bursting of the equity bubble didn’t spawn a culture of prudence that weaned US consumers from the perils of an all too fickle wealth effect…” ….

I think you’re fibbing here. You really know that, if the US Central Bank brain trust and Government leadership is denying or down-playing the bubble even existed, then the mind-set of “John Q. Public” is the bubbled valuations were real and it’s just a short matter of time before we get back to those legitimate “real” levels, and see 10-20% annual "real" increases forever. Further, as long as policies are in place to continue exacerbating the bubble in bonds and housing (esp. 2000-mid 2004), then again, why save??

Stephen said: “…In my view, America, Asia, and Europe are all equally guilty of opting for an extraordinarily reckless way to run the world.”

… The target of blame is always a mixed bag. I would argue that the American education institutions of advanced economics are largely to blame. They spawned the brain trust that exists in our central bank as well as key “think tanks” around the country. The Austrian Economic Theory holds the answer to all of these macro economic challenges, and unfortunately, most economists do not even know its basic premises..! Politicians are born to lead. Their skill sets are molded to articulate vision. They are generally not schooled or equipped to understand economic theory. Thus, the guiding theory must originate from the “brain trust” parent noted above.

Stephen, please keep up the wonderful work. The sooner people learn the root causes, the quicker we will advance through the likely depression in a better state on the other side….!

Posted by: Russ Randall at December 3, 2004 09:43 PM

Woolsey of " The Capitol Gang " had it right.

His book title says it all.
" The Triumph of Capital Over Labor ".

There is no added value to our economy.
We're just flipping hamburgers and exchanging
dollars...going thru the motions.

Posted by: Robert Herron at December 3, 2004 09:46 PM

I visited Canada this past summer on a vacation. It opened my eyes. Canada doesn't invade foreign countries. They are asset driven. Maybe they aren't the economy that the US is, but it looked like to me that they are doing something right. Lots of energy development, lots of resources to develop. An inexhaustible supply of forest. Wilderness galore. Plenty of land for crops and livestock. It amazed me what they do have. Carpenters in Grand Prairie, Alberta make 55 dollars Cdn. per hour. There was plenty going on. The place is busting out, believe me.

You cross the border back into the US, and the pall of gloom and doom descends back upon you. It is like night and day.

How much energy of what we import comes from Canada?

Answer: Over 1.9 million barrels per day, the most of any country in the world. Iraq is a waste of time, money and military resources. It is also dragging us down into a rat hole

We need to have a favorable rapport with Canada. The information can be obtained from canadianembassy.org.

Jeapordizing our relationship with Canada would be just plain stupid. After listening to a CBC radio news broadcast the opinions of a Canadian politician critcizing the Bush Administration just yesterday, it seems as though that is what has happened.

My suggestion: Stop spending frivolously, buy tangibles of value and stock up.

Houses in the 500,000 USD range and up are now sitting empty and are for sale. Good luck in selling them.

There'll be happier days AFTER the crash. People have gone nuts doing what they're doing now.

Posted by: Ron at December 4, 2004 05:00 AM

Here's the link to the Canadian embassy:

http://www.canadianembassy.org/trade/energy-en.asp

Posted by: Ron at December 4, 2004 05:04 AM

Russ.

Great post!!

I agree, of course Stephen knows root causes, but chooses not to indulge in "conspiracy theory" knowing that it is really fact. It has something to do with who pays the bills, and also probably some need to connect culturally to something big - and most folks I know would struggle with their own identity if they ever faced the truth wholeheartedly and as objectively as possible.

The delusion of the average Northwestern (Rockefeller Uni) economics MBA is complete. Their fundamentalist approach to support of the current Fed Res system and living Constitution form of governance is complete, and the ones I've known are relentless in the face of logical, legal and experiential evidence that easily debunks the system and exposes it as a fraud -- and more importantly a massive train-wreck just waiting to happen.

What is very interesting is that Stephen is an elite but allowed to state his "contrarian" economic opinion somewhat openly, somewhat analogous to Carrol Quigley as an elite historian admitting to so much in Tragedy & Hope. I guess the power structure needs some contrarian opinion and offers an outlet that is somewhat public, but knows that only a tiny minority of us peasants will figure out where the truth really lies, or act on the partial truth they are being offered.

I've found that academia is responsible for so much of the current dumbed down American mindset. When history & economics (and many other areas of study) omit such key elements of the story - like for instance how money is created & who benefits, or what fractional reserve banking is and how small the fraction is now (like zero), or what a derivative is (and why they are unregulated) or where the WTO came from, what the New World Order agenda is, who the Council on Foriegn Relations are, the Bilderbergs, Davos and other secret socities and their role in the building of the USA and its running, which dictators were supported in which causes over how long, or what terrorists/freedom fighters we are responsible for creating and how many deaths they are in turn responsible for, or what our real policy was in Cambodia and the killing of hundreds of thousands of peasants from 30,000 feet, etc, etc. I could go on and on and on with the depth and importance of the lies and the size of the delusion. It is complete!

All of this critical information, that would enable people to form a clear picture of their world, is actually available publicly - - but is buried so deep and steeped in so much stigma, that the people dare not go there, even after they find one of the keys to unlock one of the bigger mysteries of how our world is really operated.

But anyway, we're discussing economics and I'm also in agreement that the Austrian School represents humanities best chance at resurrection from the ashes of our corrupted centralized, corporativist, neo-fascist, pseudo-communistic global financial government.

The peasants need to take control peacefully through their purchasing power, we need a Declaration of Independence from Central Bankers, bankers in general, corrupt politicians, sold out academics, war-profiteering military men and the fraudsters we have posing as business leaders today!

The people of the world need to come together to defeat these elitist power-hungry megalomaniacs once and for all - - so we can all just get along!!

Cheers Rich

Posted by: Rich Lancaster at December 4, 2004 05:54 PM

Russ.

Great post!!

I agree, of course Stephen knows root causes, but chooses not to indulge in "conspiracy theory" knowing that it is really fact. It has something to do with who pays the bills, and also probably some need to connect culturally to something big - and most folks I know would struggle with their own identity if they ever faced the truth wholeheartedly and as objectively as possible.

The delusion of the average Northwestern (Rockefeller Uni) economics MBA is complete. Their fundamentalist approach to support of the current Fed Res system and living Constitution form of governance is complete, and the ones I've known are relentless in the face of logical, legal and experiential evidence that easily debunks the system and exposes it as a fraud -- and more importantly a massive train-wreck just waiting to happen.

What is very interesting is that Stephen is an elite but allowed to state his "contrarian" economic opinion somewhat openly, somewhat analogous to Carrol Quigley as an elite historian admitting to so much in Tragedy & Hope. I guess the power structure needs some contrarian opinion and offers an outlet that is somewhat public, but knows that only a tiny minority of us peasants will figure out where the truth really lies, or act on the partial truth they are being offered.

I've found that academia is responsible for so much of the current dumbed down American mindset. When history & economics (and many other areas of study) omit such key elements of the story - like for instance how money is created & who benefits, or what fractional reserve banking is and how small the fraction is now (like zero), or what a derivative is (and why they are unregulated) or where the WTO came from, what the New World Order agenda is, who the Council on Foriegn Relations are, the Bilderbergs, Davos and other secret socities and their role in the building of the USA and its running, which dictators were supported in which causes over how long, or what terrorists/freedom fighters we are responsible for creating and how many deaths they are in turn responsible for, or what our real policy was in Cambodia and the killing of hundreds of thousands of peasants from 30,000 feet, etc, etc. I could go on and on and on with the depth and importance of the lies and the size of the delusion. It is complete!

All of this critical information, that would enable people to form a clear picture of their world, is actually available publicly - - but is buried so deep and steeped in so much stigma, that the people dare not go there, even after they find one of the keys to unlock one of the bigger mysteries of how our world is really operated.

But anyway, we're discussing economics and I'm also in agreement that the Austrian School represents humanities best chance at resurrection from the ashes of our corrupted centralized, corporativist, neo-fascist, pseudo-communistic global financial government.

The peasants need to take control peacefully through their purchasing power, we need a Declaration of Independence from Central Bankers, bankers in general, corrupt politicians, sold out academics, war-profiteering military men and the fraudsters we have posing as business leaders today!

The people of the world need to come together to defeat these elitist power-hungry megalomaniacs once and for all - - so we can all just get along!!

Cheers Rich

Posted by: Rich Lancaster at December 4, 2004 05:54 PM

Question:

I sold my home, paid off ALL debt and put money away into Short term CD's, I Bonds and about 10% in gold (initially, I thought of them as safe bets). I now feel unsure of these investment decisions. If the Gvt goes bankrupt and a run on banks transpires (and they themselves go bankrupt and shut-down)what will happen to FDIC insurance? I'd bet my $$ was as good as gone.
Would I be better off cashing out (under small penalties) and socking my $$ away (as cash $ gold) in a secure location?

Posted by: Randy at December 5, 2004 11:32 PM

Hey Randy.

Sounds like you've got a good handle on things.

I've thought the very same thing about 401K and IRA accounts, just how secure are they. Over the years I've had accounts with all of the biggest and worst companies, from Fidelity to Prudential. Clearly most of the biggest players are leveraged and probably hide their true liabilities - they must be heavily involved in derivative trading and I'm sure the corruption and fraud most recently exposed is the tip of the iceberg.

I'm fundamentally opposed to the penalties the govt wants to retrieving retirement savings and then using them for something else. I cannot understand the justification for penalizing me, beyond back-taxes, for accessing my retirement funds - - its MY money, not there's.

So, bottomline is I'm not sure if retirement savings using traditional govt sponsored, FDIC insured (or whatever) IS safe, I suspect that many of the companies readers of this site use are suspect in terms of their ability to withstand a major market meltdown - - but just how you gauge the long-term viability of massive insurance, mutual fund, banking and other financial institutions accurately is a bit of a mystery. Face it, if this was easy to do then Enron would've been known to be on the edge by their tens of thousands of investors.

I say, cash in, buy land and stay out of debt!!!

Cheers Rich

Posted by: Rich Lancaster at December 6, 2004 01:25 AM

Without paper money, expect the thundering hoofs of the fourth horseman of the Apocalypse to revisit Britain again after a long absence, he might not bring with him the sword or pestilence but will probably bring hunger

In Britain we consume and rely on imports. Our Government does not stockpile food and the national reserve is about three months

If the dollar collapses other currencies might tumble paper money would be worthless- If the monetary system collapse then there is a possibility that this will disrupt the worldwide machinery of distribution of food (as exporters will not export without payments) Some Cities have become too large, with huge populations with complex supply chains very much depend on the financial system of money transfers for import of food - this structure will disappear (if only temporarily) the currency becomes worthless.

The thousands of containers arriving at UK ports will quickly cease as individual exporters will take decisions to stop supply until they are sure of being paid. UK government will try to establish a system of payment in gold but this will take many months.

With food running out people will start hording and food stockpiles will disappear out of supermarkets and warehouses very rapidly in about a week. During the tanker drivers strike in 2001 supermarket shelves rapidly emptied.

A huge city like London will find its population leaving for the countryside to forage for food this will destroy the countryside and farms and create a law and order problem.

UK government will try and stop this exodus in order to save the limited agricultural food and the countryside community by setting up roadblocks preventing the people from swamping the countryside.

UK Big cities will begin to starve and many of the ill prepared will die

There might be some rioting although there might not be a severe law and order problem, a study of famines found that people die peacefully even if there is food around denied to them. Bengal famine, Irish Famine. The Soviet famines The Great Plains of the U.S dust bowl, China Famine Biafra, Africa (present-day Nigeria)over 80 millions cumulative deaths only from these few famines

Famines are not new there have been many thousands in massive scale in the history of civilization they were commonplace in Europe, many were caused by the inequalities of distribution amidst plenty of food.

Gradually a solution will be found and imports will resume but a few million people would have perished of hunger in Britain.

contact us on de95@dial.pipex.com

Posted by: a huxley at December 7, 2004 08:50 AM

A public company issues shares, but the shares aren't worthless. If you take the value of the company divided by the number of shares, you get the worth of each share.

A share is worth more than the paper and ink of the share certificate.

Similarly, a US dollar is approximately worth the value of the economy divided by the number of dollars in circulation.

A dollar is worth more than the paper and ink of the bill.

By and large, if you lower interest rates or the government borrows in a big way, you create more dollars and they are worth less.

If you raise interest rates, dollars disappear and you have more.

If there aren't enough around to facilitate liquidity, the economy goes into a depression.

If there are too many, then the economy goes into overdrive and you get hyperinflation.


Posted by: fiat at December 9, 2004 03:57 AM

I recently came across this site as an offshoot of Safe Haven. I have read many of the articles (and posts) and must say it is very refreshing to see that there are at least a few folks out there that "get it". It never ceases to amaze me how the average "Joe" or even the, supposedly, "educated Joe" doesn't have the slightest clue as to what has been happening to this country since the mid 60's.

Mind you, I only had a couple of economic classes in college and most of what I have learned since then has been through my own drive to understand "the big picture". In sales, I traveled to many countries in Latin and South America as well as Europe. What astounded me the most was the level of knowledge most lower middle class people have about their country's political and economic systems and their desire to be integrally involved in improving them.

Yet here in the U.S., where we have had the greatest freedom and prosperity of any nation in the last 100 years, our average citizenry not only has no knowledge of what is going on politically and economically, but they have no interest in knowing what is going on. Of the thousands of people I have tried to discuss these issues with over the last 30 years, less than a couple of dozen people had any knowledge or concern about what was happening outside of their little utopia. What is worse is that most people don’t want to know. It is almost as if they are saying, “Listen, if you don’t tell me, then I won’t know…and my little world, as I know it, will continue on.”.

It used to be that the driving consumer force was keeping up with the “Jones”. With today’s herd mentality, it seems as if the masses are just trying to do what the “Jones” do (and it is different). It is no longer about an ambition to produce or achieve, but almost like a protection mechanism so as no to be seen or singled out. Like living below the radar.

I was fortunate enough to remove myself from the markets in late 1999 and tried to tell all those close to me to do the same. Unfortunately, no one did. I put the majority of my liquid resources in 6.5% CD’s (some in metals) and outperformed the market by almost 35%. After the fact, all my “friends and family” wanted to nail me to the cross as if I had somehow let them down. I tried to get them to look for answers to a few simple questions:

1) Why would anyone continue to pour money into any company with a 400 P/E that would never have a chance to make money?
2) Why did Clinton bring in Robert Rubin (the Wall Street Golden Boy), in late 1995, as Secretary of Treasury?
3) Why would Rubin risk taking the position, divesting himself of all his financial holdings, and placing them into directed trusts (he could not touch)?
4) Having taken the Dow from around 3600 (in early 1996) to nearly 12,000 by 1999, why did Rubin suddenly resign?

In order to really understand the genius behind the move, one needs to understand how the Office of Budget Management functions. Essentially, the OBM has the power to include items it expects to receive as receipts and carry those forward to future years as surpluses. So, if in a particular year, you forecast capital gains receipts from stock market gains, you can carry those forward as budget surpluses. The really amazing math in all this is that the OBM then makes a linear, forward projection encompassing an additional 4 years.

The fact is that the OBM has never been within 10% of its projection for any one year in the last 30+ years, so any projections it makes into the future are absurd (at best).

Now comes the magic of the Clinton/Rubin/Greenspan slight of hand. What if we could control interest rates and liquidity, convince Wall Street and the general public that Al Gore has invented this wonderful internet money making machine, fix it so that only certain of our buddies can get into the IPO’s (thus creating a greedy, frothing at the mouth public waiting to jump on board after the fact), show massive projected capital gains and Social Security receipts, and then carry those projections forward a few years? Why we would have a huge “forecasted surplus” in the budget!! Hence, you begin the wealth effect and ultimately carry the Dow to a 327% gain in 3 ½ years. The projected surplus is going straight up and we now appear to have a huge surplus. The consumers are buying like crazy and everyone is happy in the “excess”. Big mistake.

Quoted from Fortune Magazines Dec. 2003 issue, “In fact, Rubin himself asks today the very large question of why he—along with many others, including the media—did not recognize earlier the investment-banking and research conflicts that have led to so many scandals. His answer, not too satisfying, is that perhaps the great bull market masked many sins or created "powerful incentives" not to dwell on problems when all seemed to be going so well. He calls that a "natural human inclination." Yes, and ones I’m sure he profited on very handsomely. Wouldn’t you like to get out at the top before the house of cards came tumbling down and take back control of your assets?

Chuck Prince of Citi, says of Rubin’s (a member of Citi’s Board of Directors since 1999) value to him in his initial months after taking office as CEO, “that Rubin's enormous contribution was his steady insistence that the people meeting get beyond the nitty-gritty of the moment and instead be forward-looking in their thinking.” (Also quoted from Fortune.)

Almost makes things sound like the end justifies the means. Doesn’t it?

It reminds me of a program I saw recently on the Discovery Channel showing the “talking heads” of the day constantly trying to convince people to buy the dips as the market was falling from its 1929 high through its 92% drop. The brokerage houses made money on every trade until America was finally broke. By the time things hit bottom, real estate lost an incredible 94% of its pre-crash value. Oh, and let’s not forget the current generation of Wall Street blood suckers that continuously say that, historically, the market “always” averages a 10% gain. I guess that depends a lot on where you start history! The numbers I have seen show that the Dow didn’t make it back to its 1929 peak until around 1965 (inflation adjusted). Odds are, if you were 40 and invested in the markets in 1929, you were probably dead before you ever saw your original investment return to you.

Just a little food for thought. More about the Real Estate Bubble another time.

Ciao!

Posted by: Realist at December 9, 2004 10:01 PM

- privatizing Social Security will add more fuel to the fire - the Bushites hope to take this "dead capital" and allow banks to further inflate the money supply by loaning against it (currently, about a 99:1 loan/reserve ratio).

- must admit, most of the dummies I know who a few years ago poured into techs, and then jumped into real estate a few years back have done rather well. Meanwhile, the gold crowd is jumping for joy over a measly 30% appreciation - keep dreaming if you think gold will ever pay off - if there is major deflation, gold goes down hard; if theres hyper-inflation, property is the place to be.

- I just can't see a Depression happening. The present economy is far too efficient, regardless of whether people think we're all flippin' burgers or reviewing DVDs. The present economy continues to churn out more than enough A)products, and B) money to purchase those products. Sure, the relationship between the two is in balance using a valueless "fiat" money system, but using gold to set "value"? might as well use the amount of crap NY city poos out in a year - just as arbitrary and just as unrelated to capital needs as gold.

- sure, a few people have done well in gold lately, but for the same reason investors did well with Amazon back in 98' - the bigger fool theory. Gold is still just a commodity, and rather useless one at that.

- I still favor the theory set forward by an Indian economist (I don't recall his name) back in the late 80's, in books like "Depression: 1990" or "Why trade is bad for America" - he believed when the gap between rich and poor grows too wide, markets which have taken decades to create, collapse from lack of buying power. a simplistic and meaningful explanation. Debt does not cause problems - lack of money causes the problem. In practice, we could go on doubling our debt every 8 years (just as we have since 96') forever, as long as no major player panics and the world's resources don't give out. of course, that's a scary thought.

- in my opinion, the damage has already been done - Americans have already enslaved themselves to their careers and have stood by silently as our free press has descended into FOX NEWS. We've already entered the next Depression - we're just too distracted and sure of ourselves to realize where we are.

Posted by: steve mann at December 13, 2004 02:19 AM

Talking about inflation take a look at these beauties. Once the realm of peoples hopes and dreams now just a collectable relic. Weimar notes included


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Posted by: Lindy at December 14, 2004 08:13 AM

"The present economy continues to churn out more than enough A)products, and B) money to purchase those products. "
The problem is who get's the money ?
As inequalities widen, the only way for spending to go up is with even more debt.

we could go on doubling our debt every 8 years (just as we have since 96') forever,

meaning that in 8 years, the debt will be 4 times larger than revenue, in 16 : 8 times and so on.
Mean while, deficit and international debt will explode similarly.

as long as no major player panic

Which is precisely the risk ahead now.

Posted by: DF at December 16, 2004 02:54 PM

Inflation..... deflation........What's it gonna be folks?

Be certain, satus quo ain't gonna continue too much further........ Quite simple,over time, there's NEVER 'free lunch'.........Reckless expansion of money supply and debt ALWAYS ends up bad.

So the debate as to whether or not our little upcoming 'correction' will manifest itself in a inflationary (ala the Ravi Batra campers, the above mentioned'Indian economist') or defalationary (ala Robert Prectorites.....).

Many good points from both perspectives but I am now of the opinion that it's going to be the defaltion thing........

My 2 cents worth...... While I know money 'velocity' has been molases slow in the U.S. for at least 10 years, one must still question as to why hasn't significant inflation been experienced since the money supply has doubled in just the last decade? Near zero interest rates and my cat being approved for a VISA Card would also make one to believe that the fed and banks have, for a relatively long time now, been printing up free money. My take on things is that if we haven't seen inflationary growth yet, even helicopter dumps of cash ain't gonna do it at this point. So it seems to me that the personal and commercial loan default snowball will keep rolling and quiclkly become a defalationary avalanche.

Problem is how does one prepare since wealth retention strategies differ considerably under either scenario? Cash? Gold? Property? Bunker? Private Idaho? Good bootle of Scotch?

Suggestions? :)

Bud Buddy

Posted by: bud buddy ('red state') at December 16, 2004 04:33 PM
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