Economy

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EXTENDED PREDICTIONS '05
January 10, 2005

It appears that a lot of D2 readers are getting some useful feedback from the most recent blog on Predictions 2005. So it's probably a good idea to take this to the next level and ask for more predictions and inputs on issues that got some attention in the first blog.

If you have a moment answer for the group the following questions. Again, I'll tally the results at some point and provide an aggregate view of what you all see coming at us in '05. We're going to get away from pure economic predictions here and mix in some other topical areas.

Here goes:

1. How would you invest $100,000 in '05 to achieve the best gains?

2. Will planet earth be rocked by more record breaking "earth changes" (tsunami's, hurricane's, earthquakes, solar flares) in '05?

3. Will humanity face an epidemic of some kind during the year that will cause massive loss of life?

4. Will the US be struck by another terrorist attack on a scale greater than 9/11?

5. Where will interest rates end the year, will the Fed raise them continually throughout '05?

6. If democratic elections go ahead in Iraq this year will a Shi ite regime come to power?

7. Does Hugo Chavez of Venezuela survive 2005?

8. Will Osama be caught some time during the year?

9. Does the US go to war against another adversary during '05, Iran, N. Korea, etc?

10. Does the Chinese bubble burst in '05?

This is going to be interesting! Let's keep it friendly, but not pack any punches.

Cheers Rich

Economy

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Memo on the Fed
November 22, 2004

Memo:

To: SSU Students
From: Jude Wanniski
Re: The Federal Reserve

Everyone talks about “the Fed” and practically everyone in the world knows the chairman of the Federal Reserve Board of Governors is Alan Greenspan. But very, very few people know what it does, what it can do and what it can’t do. Today’s lesson is prompted by the remarks Greenspan made Friday at a banking conference in Frankfurt. Here is the lead of the NYTimes account today:

Alan Greenspan came to the home of the euro on Friday and suggested that the relentless decline of the dollar might well continue, offering little relief to those here who worry that the United States is seeking to gain a competitive advantage for its industries from a weaker currency. In a speech to a banking congress here, Mr. Greenspan, the chairman of the Federal Reserve, said that ballooning foreign borrowing on the part of the United States poses a future risk to the dollar`s value. He said that foreign investors, who help finance the large American trade and budget deficits by buying Treasury securities and other dollar-denominated assets, would eventually resist lending more money to the United States, causing the dollar to fall further.

When this news hit the wires Friday, the Dow Jones Industrials lost 115
points, the dollar fell sharply against the euro and the Japanese yen, the bond market sank, and the price of gold jumped to $448, up $5 an ounce. Nice job, Alan.

What’s going on here? First of all, the Federal Reserve is the only
institution that now has the power to keep the U.S. dollar from losing its purchasing power relative to both foreign exchange and to gold. Popular opinion believes the Fed can “stimulate” the economy by lowering interest rates and that it can slow the economy by raising interest rates. Ask almost any economist and they will say that is so, but that isn’t so. The Fed only has the power to damage the economy by putting more money into the economy than the economy needs or wants or by putting less money into the economy than it needs. When the Fed opens for business on Monday it could keep the price of gold constant at $448, its close on Friday. It would do so by ordering the New York “desk” to sell U.S. bonds from its portfolio to the banks that are authorized to transact with the Fed in this manner, but only if the price of gold trades higher than $448. If gold trades lower than $448, the desk would know enough to buy bonds from the authorized banks, withdrawing “money” from general use and extinguishing it.

If this were Fed policy, there would be no inflation and no deflation, and the dollar would not weaken against foreign currencies (unless foreign governments made the mistake of not creating enough money to keep their currencies stable against gold). Greenspan could go back to Frankfurt and tell the bankers not to worry, the dollar would not weaken further and that it would be safe to buy U.S. government bonds. As it is, he did not do the American economy any favors on Friday. He essentially advised the world NOT to buy U.S. government bonds because they will suffer capital losses when they wish to sell the bonds, getting back dollars that are not worth as much as they are now. Nor did Greenspan do any favors for American taxpayers. If interest rates are going to go up and up, the U.S. national debt, now $7.5 trillion, will have to be refinanced at the higher rates, and the budget deficit will climb accordingly.

It sounds crazy, doesn’t it? Why does Greenspan do it? And get a round of applause from all the major newspapers?

The fact is, SSU students, is that we live in a demand-side world, and in a demand-side world the Fed can stimulate the economy by lowering interest rates and weaken it by raising them. In a supply-side world, if the Fed does not fix the price of gold at an optimum rate, it can only make mistakes that show up as a higher gold price or a lower price. There are certainly times that feel as if the Fed is stimulating the economy, but that is always because it has been mistakenly starving the economy of money (deflation) and then errs is the other direction by giving it more than it is asking for.

In December 1996, I began warning Greenspan that the decline in the gold price from $380 oz to $360 indicated a deflation was beginning. The economy was asking for more money and it was not being supplied. He did nothing about it and all over the world people who owed money in dollars began going bankrupt at a greater rate, having to pay creditors with more expensive dollars. At first Greenspan was cheered because prices of oil and other commodities were falling. By January 2001, when President Bush took over from President Clinton, the deflation had spread. With the gold price down to $265 oz., businesses that still had to meet payrolls at higher wages and could not raise prices to cover the costs had to live without profits and hope for a quick recovery. Or, they went out of business, with their workers joining the ranks of the unemployed.

With all this bad news showing up, here came Greenspan to the rescue,
lowering interest rates. The Fed hacked away until the federal funds rate (which banks use to lend to each other) dropped to 1% in 2003, the lowest it had been since 1958. Meanwhile, the gold price had begun to climb after 9-11, which caused a decline in the demand for dollars. Because the Fed paid no attention to the rising gold price, it did not realize the deflation was ending. It thus did nothing to keep gold from rising, which was a good thing, although it gave the appearance to demand-siders that the lower fed funds rate was doing the trick. That it was “stimulating” the economy.

* * * * *

Prior to the Great Depression of the 1930s, nobody thought of the Fed as an institution that could or should “stimulate” the national economy, or slow it down. It was only supposed to manage the gold standard, the job it was given upon its creation by Congress in 1913. The price of gold was $20.67 oz., which it had been for the previous century except for the “greenback” years of the Civil War. Prior to 1913, the U.S. Treasury kept the gold price at that rate, issuing new paper dollars when the private banks asked for them in exchange for gold. If dollars became unwanted and in oversupply, they would come back to the banks, which in turn could turn them back to the Treasury for gold. The sole purpose of “monetary policy” was to maintain the dollar at that fixed exchange rate with gold. It was a classical, supply-side world.

The Crash of 1929 and the Great Depression that followed turned that world upside-down. The Crash was caused by the unexpected, anticipated passage of the Smoot-Hawley Tariff Act of 1930 and the worldwide Depression unfolded as countries retaliated with their own higher tariffs, currency devaluations and higher taxes. Because it was not understood at the time why the tariff act had caused the Crash (it was not until 1977 that I made that discovery), conventional wisdom eventually converged on the Fed and its management of the gold standard. The Fed was only doing what it was supposed to do. The demand for dollars collapsed in 1930-32 as the tariff took effect and the Hoover administration raised the income tax to balance the budget. Needing less money as a result of the contraction meant roughly one-third of the money vanished in the bankruptcies. The Fed could not replace it because it was no longer needed, which meant every time it issued dollars, their holders would ask for gold.

This led to the idea that the gold standard was holding back recovery!
President Franklin Roosevelt decided to try the idea that with nominal
interest rates being charged by the banks as low as they could get, the
dollar could be made cheaper by devaluing it against gold. So he simply
announced a change in the exchange rate, pushing gold to $35 from $20.67. Sure enough, there was a little immediate inflation, bringing relief to debtors at the expense of creditors, but the Depression only got worse. The little inflation had made the federal income tax even more onerous than it had become upon the repeated increases by Hoover and Roosevelt in their budget-balancing modes.

It was after WWII the idea took hold that the Fed could stimulate the
economy by printing more money actually adding “liquidity” to their
member banks that could become “money” once it was loaned and became bank deposits. The Employment Act of 1946, passed out of fear that the
Depression would reappear with the end of wartime spending, committed the government to manage the economy as never before during its supply-side history. In this new demand-side world popularized by the British
economist John Maynard Keynes, monetary policy as well as fiscal policy
would be dedicated to keeping the unemployment rate down and economic
growth at the necessary levels. In a sense, all the troubles the U.S. has had with economic growth and unemployment over the last half century can be traced to the Employment Act of 1946.

The fact is, the Federal Government cannot stimulate the economy with
either monetary or fiscal policy. It can only make monetary or fiscal
errors that cause deflations and recessions or the combination of the two known as “stagflation.” Or it can cause the economy to improve by removing barriers that it had put into place in the mistaken belief that it was doing good.

Which brings us back to Chairman Greenspan’s Friday comments in Frankfurt that shook the financial and gold markets. Remember since June 30 that he and his fellow Fed governors have been raising that 1% interest rate “at a measured pace” to where it now stands at 2%, on the theory that it will eventually reach a point where it will strike a balance between inflation and employment, not too much or too little of either. That’s the Employment Act of 1946 you hear in the background. But what has happened during this quest for this rate of “balance”? Instead of holding back an inflation that might occur if too many people went to work, all the signs of inflation are increasing!!! The dollar is getting weaker against foreign currencies, the price of gold is soaring, and employment is lagging. The stock market doesn’t look too bad, having recovered somewhat from earlier trials and tribulations. But that’s only if you count the broad indices in nominal dollars. If you convert them to gold, they are not recovered at all!!

So what is a poor Fed chairman to do, but pass the buck? It is the trade deficit and the budget deficit that are causing all these bad things to happen, not the Fed’s policy. And hold onto your hats, folks. If this is true, then the Fed will have to raise rates much higher than they are now, and hope that mythical interest rate will be found sometime soon. But what if he’s going in the wrong direction? Remember the definition of a fanatic… someone who doubles his speed when he loses sight of his goal?

All contents (c) 2000-2004 Wanniski.com

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Economy

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Economic Depression – Precisely Why and Approximately When
November 09, 2004

by Russ Randall

Why Expect an Economic Depression?
Imagine a herd of buffalo that was enticed by a persuasive Mr. “Buffeenspan” to graze in an easily accessible field of sweet weeds that had no food value. Although the activity was enjoyable, the energy they consumed to grasp and chew the weeds was greater than that gained from digesting them. Now thirsty, imagine next that Mr. Buffeenspan seduces the herd with a large sign having a beautiful oasis painted on it to follow him. Of course, the herd follows in an enthusiastic determined fashion having enjoyed the tasty weeds as a result of his initial guidance. After a journey they finally arrive at the destination oasis only to discover a small mud pit. From a weakened dehydrated state of exhaustion, the heard panics and runs away from Mr. Buffeenspan to follow an “Austrian” Buffalo that will lead them to a less convenient grassland near abundant water without the palm trees, knowing some will die along this now much longer journey. For fear of losing the herd Mr. Buffeenspan quickly paints a more beautiful, deeper oasis on a larger billboard asking the herd to stop the panic driven reversal-in-course and continue following him. That did not work, so finally, Mr. Buffeenspan quickly prints millions of dollars and, foregoing the aid of a helicopter at this juncture, spreads the freshly minted bills in a pathway that will encourage the herd to follow him.

Do we have a significant percentage of people employed in companies that would not be profitable under natural interest rate conditions (i.e. grazing in a field of weeds)? Do we have investors with financial and real estate equity assets who believe they are at fair valuations and will return 10-20% annual valuation increases into the future (i.e. the illusion of an oasis)? What should the herd do?

Most economics will argue recessions and depressions are caused by human or negative-shock aberrations (e.g. oil shock), which can be mitigated or prevented by means of “mechanical” monetary and fiscal intervention. The Austrians will argue just the opposite. Significant booms and busts are caused initially by excessive monetary expansion.

I would further suggest there are two clear human perception and behavior conditions that result from the excessive monetary expansion. Once extreme, they cannot be mitigated by monetary or government intervention means. First is aggregate asset overvaluation including equities, bonds (debt), and real estate. The investor’s belief is that his asset or real estate equity represents a perceived real “future stream of goods and services”. Second is that a significant percentage of work activity (behavior) is performed in “Market Unjustified” companies. These are companies that would not be profitable at “natural” interest rate levels. Regardless of asset values, interest rates, treasury spreads, derivative swap spreads, or any other financial instrument or metric, IF THE TWO BEHAVIOR AND PERCEPTION CONDITIONS NOTED ABOVE ARE AT EXTREME ABHORRENT LEVELS, THEY WILL RAPIDLY CORRECT at some point in time. They cannot be quietly diffused through any “mechanical” monetary means of inflation, deflation, or default.

We must search beneath the surface to understand what drives human behavior and fear in our economic world today. If we discover our work activity (behavior) is driven to areas for the wrong reasons on a large scale, and further, if we discover the “future stream of goods and services” that we are expecting to enjoy is largely an illusion, we become fearful and lose confidence in our governing system, our leadership, and ourselves. The more extreme these conditions become, the more severe will be the depression. Currently we exceed any level experienced during the past century in the noted areas.

We know:
· Wealth is created by work; not by artificially suppressing interest rates and increasing bond and real estate perceived valuations, nor by rapidly expanding the money supply enabling Ponzi momentum schemes to inflate equities far beyond real valuations.

· There is financial peace of mind in those who believe they can depend upon a “future stream of goods and services” from financial and equity assets they possess. Equity valuations generally provide a “medium” piece of mind, since we are conditioned to expect volatility. Bond and real estate valuations generally provide “high” piece of mind, since we are conditioned to believe they are stable. Note: An illusion discovery on bonds and real estate would be very unsettling.

· A business enterprise cannot continue indefinitely losing money, unless it is subsidized.

What do we mean by work activity driven for the wrong reasons and what is the result?

Easy monetary policy and cooperative foreign central banks will incentivize people to start up companies or change investment strategies in existing companies such that they may lose money under natural interest rate conditions. Two stories illustrate the point:

Junior and the Boomers; a Misdirected Work Activity
Once upon a time there was an island inhabited by a young Yuppie, “Junior”, and ten older men, the “Boomers,” nearing retirement. Junior wanted a $10,000,000 house, so he asked the Boomers to build it for him. The Boomers were discussing concerns about Junior’s ability to repay when suddenly “Godspan” spoke from the heavens and said interest rates are officially 0.1%. Elated, Junior quickly calculated that he could afford the house by paying an interest-only monthly mortgage of approx. $1,000, which he could readily afford. Concerned, the Boomers asked Godspan who was going to buy the mortgage-backed securities to fund Junior’s mansion. Godspan responded reassuringly not to worry…. “You would purchase the securities”. Once the house was completed they would each have bonds worth $1,000,000, thus they could all retire as millionaires. The Boomers expressed concern about the yield on the bonds. Godspan again reassured them not to worry…. Just look at the past 20 years…you will either gain in asset valuation, if interest rates drop, or gain income from higher yields, if interest rates rise. Either way you’ll be fine, if you just keep thinking long-term. Begrudgingly the Boomers agreed to buy the bonds. Keeping the vision of achieving millionaire status soon and having faith in the omnipotent Godspan motivated them.

A year later the Boomers had toiled and used their last bit of working-life energy to complete Junior’s mansion. Junior was ecstatic at closing. He gained ownership of the dream house that he could afford. The Boomers were giddy because they were all now millionaires…!

The next day one of the Boomers wanted to cash in his bond and spend some of his hard earned money. Much to his surprise there was no one interested in buying his $1,000,000 bond. He quickly learned that the $100 monthly stream of income was all that he was going to receive. Godspan was nowhere to be found. Godspan’s replacement, an Austrian economist, quickly calculated the real valuation of his $1,000,000 bond to be approx. $25,000 at market interest rates, and informed the bewildered Boomer that the difference of $975,000 was an illusion.

In fact, the Austrian economist explained to the Boomer that all he might physically receive is his 1/10th share of the future stream of Goods and Services that Junior was willing to pay to his creditors. If Junior becomes ill or loses interest in repaying his debt, then the repossessed house could certainly accommodate the shelter needs for the ten Boomers, but they were wondering who was going to maintain the home, grow and serve food, care for them in times of illness, pump the gas, feed the dog, and change tires on their motor homes…

Further, the Austrian explained, if they had not experienced Godspan’s monetary distortion of low interest rates and an abundance of liquidity, they might have actually calculated in advance the investment in a $10,000,000 home for Junior would have been unsound. Further yet, had they invested their time into building a sophisticated robot company that Junior could have run by himself to provide all the needed Goods and Services in the Boomers retirement, the story would be quite different. Now, instead of having a Goods and Service producing enterprise that could serve their needs, they have a massive depreciating home that produces nothing and needs significant maintenance to keep up.

The Boomers soon perished because they could not physically help themselves. Junior reclaimed the home because the owners were gone, and spent the rest of his life as a slave to his castle attempting to maintain and heat it…

Godspan preserved his legacy because he left a note reminding all that had Martha Stewart been more forthright in disclosing her insider trading source, the economy would not have collapsed, and he would not have been compelled to intervene with a flood of liquidity that encouraged the malinvestment and fatal misallocation of resources…

Blunter, Bow, and Arrow; a “Market-Unjustified Enterprise”
During the early years of man’s existence, there existed a small community surviving by individual means.

One day Blunter, an entrepreneur in the community, approached Mr. Bow and Miss Arrow with a wonderful new idea. He knew Mr. Bow had the skill set to fabricate a fine bow that could be utilized for more effective hunting. He also knew Miss Arrow had the unique skill set to fabricate straight and true arrows with precision crafted tips and feathers. Blunter, in his charismatic and persuasive way, convinced Mr. Bow and Miss Arrow to produce the necessary tools that would empower him to become a much more effective hunter. In fact, so much better that he was certain the rewards from his hunting ventures would significantly exceed the group’s total potential individual spoils of chasing field mice and rabbits with sticks.

They all agreed to the plan. Bow and Arrow completed their parts brilliantly with excitement, and in the process expended nearly all of their energy. Blunter then took the fine bow and arrows on his first hunting venture. The next day Blunter returned with nothing; no bow, no arrows, and no game. Surprised, Miss Arrow asked Blunter what happened. Blunter said he shot all of the arrows (expenses) and wore the bow out (capital depreciation), but was not able to see the game well enough to hit any. Miss Arrow exclaimed, “You’re blind?” Blunter said, yes, he could not see very well so that explains his name.

The rest of the community sympathized with Blunter, Bow, and Arrow and subsidized them until they could re-hone their stick skills chasing field mice and rabbits. What course of action could the community now take?

A. Encourage Blunter, Bow, and Arrow to continue with the same process hoping Blunter will get lucky? In the interim they recognize a subsidy(or a “nothing down; “0” interest loan) will be required to keep them alive.

B. Inspired with the concept, encourage Blunter and his team to keep trying as well as encourage Blunter’s identical twin brother, Blunter II, to organize another team and hope for better luck?

C. Encourage Hunter, a clear-sighted hunter, to work as a team with Bow and Arrow to improve the likelihood of success (a “Market-Justified Enterprise”). Blunter would be encouraged to work in some other capacity and generate another idea that might have a successful outcome.

Clearly, market-unjustified enterprises (businesses that do not make a profit under “natural interest rate” conditions) exact a toll on the community. Our hearts and spirits go out to them. However, the guide for their survival should be based upon the successful return of more goods and services than would be generated if the enterprise did not exist. By the way, “C” is the best course of action.

In our two stories the Boomers, Mr. Bow, and Miss Arrow were incentivized to perform the wrong activities. The Boomers trusted Godspan, and Bow and Arrow trusted Blunter. The Boomers’ construction company and Blunter’s hunting company were Market Unjustified. Neither company, each for different reasons, will survive long term.
Either:

1. They must stop the work activity they are doing and redirect to a Market Justified enterprise (i.e. profitable at "natural" interest rates). The Austrian economists refer to this as malinvestment and misallocation of resources. When easy monetary policy is in force long enough to become systemically imbedded into our financial infrastructure (e.g. GSE's), then extraordinary numbers of companies spring up or change to become dependent upon artificially low interest rates. The transition return to economic health will be a long and painful process as all economy metrics overshoot their averages in negative directions before returning to normalcy

OR…

2. The balance of the community must agree to permanently subsidize them. A critical point here is that during the formation stage of these companies a future subsidy by the community is not anticipated, thus there is no structural support planned in the community budget. An eventual tax increase must pass. Of course, another alternate is to subsidize them via inflation, such that all holders of dollars and dollar-based assets indirectly fund the subsidy.

Why Did Such an Extreme Bubble Form?

· Political survival. The collapse of a bubble would be devastating to a party in power; so all efforts are directed to avoid such.

· Federal Reserve Bank directives. Their directive is to adjust monetary policy to achieve stable employment and prices. Unfortunately, the money supply expansion has channeled into financial and real estate equity assets globally, and has not become visible in our CPI indexes due to competitive pricing pressures.

· The inherent optimism of people. Our natural tendency is to believe asset valuations will only increase in the future, even if we are in extreme bubble conditions.

Graphically, What Does the Illusion Look Like?

Note: There are two key issues: One is asset overvaluation, and second is the overly optimistic expectation of annual asset value growth. The conditions combine to create a “double whammy” expectation of future wealth.

Assumptions:

“Expected” by the Average Investor:
· An expected “real” asset valuation growth of 5% annually; excluding inflation.

“Reality Based upon History”:· A -21% current asset base adjustment to reflect historical asset-to-GDP ratios.
· A real productivity increase of 1.7% annually going forward
· An annual employment increase of 0.57% (1.0% increase in population less a 0.43% dependency ratio adjustment).
· An annual repayment of foreign investment and debt beginning in 2009 @ 2.0% of today’s outstanding net direct investment and debt.

What Conditions Were Necessary for Our Bubble?
There are three key conditions that were critical to be in place for the upcoming depression, which enabled our asset valuation illusion, and our extreme work activity misallocation into Market Unjustified businesses:

· Fiat money. It would be virtually impossible for a significant bubble to form, if money was based upon a commodity of value (e.g. gold, silver, etc.) without a fractional reserve system.

· Cooperative foreign central banks. As long as their countries are motivated to produce goods and services to satisfy an endless US demand for their products, and their citizenry is content to accept US "paper investments" with higher perceived yields and valuation increases than alternatives, then they will remain invested in US dollar based assets

· A baby boomer population profile. A substantial support base of working people supplying those not working enables a condition where a financial asset bubble may form without being tasked or tested for value. Once the ratio of dependency shifts, and the real goods and service production capability diminishes, then there will be a more realistic valuation placed upon assets based upon the actual profit increment of the stream of goods and services they produce.

When Will the Depression Start?
Why will the illusion discovery happen in 2008?
As long as the ratio of those not working to those working is decreasing or stable, then it is possible to have an ever-expanding bubble. The stream of goods and services may continue unfettered transferring at modest CPI increases as long as most excess money created expands financial asset and international reserve asset bubbles instead. When the dependency ratio begins to increase in 2008 as the Boomers start to retire, the attempt to cash in on the illusory assets will bring the bubble to light. The actual profitable stream of goods and services yielded from an asset will be surprisingly low, thus the recognition of a lower valuation will become apparent.

What will be the expectation of foreigners holding US assets?
They will begin their attempts to cash in the "fruits of their labor" beginning in 2008 as well because of their own "Boomer" population profiles. They will expect to receive the same real value in return for goods that they have shipped to the US, plus a reasonable return.

Will the “X” and “Y” “Gen’s” be able to repay the foreign obligations or expectations in real terms?
No. Since we are operating at a current deficit rate of nearly 6%, the US dollar is at least 100% overvalued based upon empirical experience from the Plaza accord where the dollar exchange value dropped 50% (I.e. 100% overvalued) from 1985 to 1988. As a result, the current account trade deficit reduced from 2.8% (in 1985) to 0% (in 1991). Additionally, the US equity, bond, and real estate markets are approx. 35% overvalued. Combining both factors, the foreign investors will only receive 20-30% of their investment in real terms, and will become extremely upset.

What Can We Do?
Can the asset illusion be diffused over the next 26 years when the last Boomer retires?
Not likely. Once it is discovered, people will tend to "run for the gold" or tangible assets in place of fiat currency or "paper assets" depleting in value. Bubble formations can be gradual, because the conditions that create them are very popular, and resistance to their formation is easily suppressed. However, upon discovery it is a natural human reaction to act quickly and liquidate the paper assets before value drops significantly.

“To Do” List:
· Consider elimination of the Federal Reserve Bank.
· Recognize we have approx. 30% of our employees working in Market Unjustified enterprises, thus….
· The noted employees will have to either stop what they are doing and go work for a Market Justified enterprise, or reduce their wages to become a Market Justified enterprise. As with any bust, there will be a devastating impact on nearly all companies. Unfortunately, the economic chart trends will swing far below the historic median for most metrics before legitimate recovery begins.
· Get out of the business of interest rate manipulation by letting the free market set rates.
· Return to a gold and/or silver based monetary system with no fractional reserve. This will have a devastating impact on the dollar exchange rate, but must be done.
· Above all, do not continue with the traditional Keynesian government intervention means that created the bubble we now have to diffuse, and the fatal misallocation of resources that must be corrected.
· “Fasten your seatbelts” and support a rapid malinvestment and resource misallocation cleansing that will get us back on track as quickly as possible without deteriorating to a permanent socialistic, tyrannical, or chaotic state. Hopefully, a renewed respect for capitalism, property rights, rule of law, free markets, and a cooperative spirit of pursuing a common purpose will flourish…!

By by Russ Randall

Economy

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Wake Up America! Bush Playing Right into al Qaeda's Plan
November 02, 2004

Tuesday, November 2, 2004 Posted: 0107 GMT (0907 HKT)
Full Link: http://edition.cnn.com/2004/WORLD/meast/11/01/binladen.tape/index.html

(CNN) -- The Arabic-language network Al-Jazeera released a full transcript Monday of the most recent videotape from Osama bin Laden in which the head of al Qaeda said his group's goal is to force America into bankruptcy.

Al-Jazeera aired portions of the videotape Friday but released the full transcript of the entire tape on its Web site Monday.

"We are continuing this policy in bleeding America to the point of bankruptcy. Allah willing, and nothing is too great for Allah," bin Laden said in the transcript.

He said the mujahedeen fighters did the same thing to the Soviet Union in Afghanistan in the 1980s, "using guerrilla warfare and the war of attrition to fight tyrannical superpowers."

"We, alongside the mujahedeen, bled Russia for 10 years until it went bankrupt and was forced to withdraw in defeat," bin Laden said.

He also said al Qaeda has found it "easy for us to provoke and bait this administration."

"All that we have to do is to send two mujahedeen to the furthest point east to raise a piece of cloth on which is written al Qaeda, in order to make generals race there to cause America to suffer human, economic and political losses without their achieving anything of note other than some benefits for their private corporations," bin Laden said.

Al-Jazeera executives said they decided to post the entire speech because rumors were circulating that the network omitted parts that "had direct threats toward specific states, which was totally untrue."

"We chose the most newsworthy parts of the address and aired them. The rest was used in lower thirds in graphics format," said one official.

U.S. intelligence officials Monday confirmed that the transcript made public Monday by Al-Jazeera was a complete one.

As part of the "bleed-until-bankruptcy plan," bin Laden cited a British estimate that it cost al Qaeda about $500,000 to carry out the attacks of September 11, 2001, an amount that he said paled in comparison with the costs incurred by the United States.

"Every dollar of al Qaeda defeated a million dollars, by the permission of Allah, besides the loss of a huge number of jobs," he said. "As for the economic deficit, it has reached record astronomical numbers estimated to total more than a trillion dollars.

The total U.S. national debt is more than $7 trillion. The U.S. federal deficit was $413 billion in 2004, according to the Treasury Department.

"It is true that this shows that al Qaeda has gained, but on the other hand it shows that the Bush administration has also gained, something that anyone who looks at the size of the contracts acquired by the shady Bush administration-linked mega-corporations, like Halliburton and its kind, will be convinced.

"And it all shows that the real loser is you," he said. "It is the American people and their economy."

As for President Bush's Iraq policy, Bin Laden said, "the darkness of black gold blurred his vision and insight, and he gave priority to private interests over the public interests of America.

"So the war went ahead, the death toll rose, the American economy bled, and Bush became embroiled in the swamps of Iraq that threaten his future," bin Laden said.

U.S. government officials said Friday that the tape appeared to be authentic and recently made. It was the first videotaped message from the al Qaeda leader in nearly three years.

Economy

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AMERICA’S ADDICTION TO ASIAN CREDIT
October 13, 2004

Todd Stein & Steven McIntyre
The Texas Hedge Report
October 11, 2004
Courtesy of www.texashedge.com

“Now, how do they pay for that deficit? They have to go borrow money. Most of it they borrow from the Chinese and the Japanese government. Sure, these countries are competing with us for good jobs, but how can we enforce our trade laws against our bankers? I mean, come on.” - Bill Clinton at the2004 Democratic National Convention

This quote by former President Bill Clinton was perhaps his most important quote in several years, yet the media didn’t give it much attention. While Clinton’s intentions were no doubt entirely political, it is worth some time to give a little thought to the growing purchases of US Dollars by Asian central banks.

Asian central banks have been financing America’s $500 billion current account deficit mostly via the purchasing of US Treasuries. To get a better grip on this number, try to understand that America needs $1 million of Asian capital every minute in order to maintain its current standard of living. Asia presently holds over $2 trillion in foreign exchange reserves and shows no sign of reversing this trend.

While it is not news that Asia's reserves continue to increase, it is worth nothing that Japan, China, South Korea and other countries have started to reassess their appetite for US Treasuries. Some Asian finance ministers have spoken out openly about diversifying out of dollars and plowing reserves into alternatives such as gold and euros. As the dollar has fallen to record lows against several currencies, more international scrutiny has been applied to how the United States would fund its fiscal and current account deficits without Asian credit. If America doesn’t decrease its dependence on foreign capital, the dollar could weaken further, forcing the Federal Reserve to choose between (1) protecting its currency by raising interest rates and choking off economic growth or (2) continue debasing the dollar which could potentially result in hyperinflation.

Unfortunately, American businesses, consumers and governmental organizations show no signs of reducing their addiction to foreign capital. Eventually, however, the pace of dollars pouring into Asian coffers will slow or, even scarier, reverse. And with a global dollar glut becoming reality, it will take an increasing amount of currency to purchase the same goods and services. When this happens, we expect to see rising prices at Wal-Mart stores, gas stations and grocery stores as tanker loads of dollars end up back on our shores.

The fact is that Japan and China have America by the throat economically - although a dollar crisis here will have adverse effects everywhere. While America’s military power is undisputed, there have been signs of China flexing its economic might in order to contain the United States militarily. Our government’s stance on Taiwan, for example, has changed significantly in China’s favor over the last decade. It was only eight years ago when the U.S. responded to Chinese missile threats by sending warships to the Taiwan Strait, in what would become the largest show of naval force since the Vietnam War. It will be interesting to see what America’s reaction will be to Chinese aggression in the future as its leaders have clearly stated that Taiwan is next in line for reunification. During the past few years, reports have surfaced that China has deployed hundreds of short-range ballistic missiles opposite Taiwan. According to the Asia Times, Pentagon officials told Taiwan that by next year, China might be able to deter US counterattacks as “China is adding not only 75 short-range missiles against Taiwan each year but also an inventory of amphibious carriers and light tanks, cruise missiles, unmanned aerial vehicles, and a network of surveillance satellites.”

So while President Clinton points out America’s inability to enforce its trade laws against its creditors, we suggest readers read the military and monetary tealeaves as well. If tensions arise with Japan or China, then we expect to see massive dollar selling as a result.

October 11, 2004
Todd Stein & Steven McIntyre
Texas Hedge Report

Todd Stein & Steven McIntyre are internationally known analysts and editors of The Texas Hedge Report, a market newsletter that highlights under and overvalued securities in the equity, bond, currency, and commodity markets

For more information, go to http://www.texashedge.com

War

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Team America '04 - Leaders in War Profiteering
October 06, 2004

The United States has been the foremost exporter of weapons of all kinds of destruction since the end of WWII, Britain is close behind in second place. War is a massive economic driver, has been since the First Great Depression - think about it........we've been at war since the 1940's. War is now perpetual.

Profit is critical in a fractional reserve banking system that depends on a central bank. So war and driving profit and growth are very synergistic. When you add perpetual growth, war and taxes together you get an amazing soup of global dysfunction that now spans decades, if not century's.

Wouldn't you like to see just how many tax dollars have been spent on the Cold War, the Vietnam War and now the War on Terrorism since 1940. It'd staggering.

And now the current "Team America" seem hellbent on breaking all previous world records for creating mayhem, violence, terror and therefore war profits. Lets take a look at some of the basics:

Carlysle Group connections to current and former world leaders are now well known. The Bin Laden family were investors in Carlisle, which is run by such notables as Bush Snr, James Baker, former Prime Minister John Major, Frank Carlucci, among others. These guys have stakes in the Unocal pipeline in Afghanistan, the Anthrax vaccine (which we don't hear much about right now), some of the latest, most expensive weapons systems - like the Crusader - and a number of other massively profitable businesses that are flourishing with the massive injection of freshly printed cash this government is flooding in to the domestic defence economy - let the good times roll!

Dick "Halliburton" Cheney has now helped his former employer to more than $4.2 BILLION of tax payers money. Of course now Kellog, Brown & Root have been busted they are being left out in the cold, they will probably even make a temporary loss before being re-made in another image, re-branded and re-launched. Look at the history of war profiteering with US companies since WW II (even before that back as far as the Civil War) it is disgusting.

Buy a copy of "Trading With the Enemy" which tells the story of the Bush family connections to the Nazi's and how they profited in prior generations. This is not a new phenomena - they are dynasty's built around war profiteering.

But it's not just about directly profiting, someone has to do some of the dirty political work.

Remember Paul Bremer, former Sultan of Baghdad and longtime Kissinger protege? He has now made public that he needed more troops to win the peace in Iraq - now there's a concept. He took over Iraq "after" the war and needed more troops to police the Iraqi people than were needed to win the war in the first place. Someone screwed up somewhere!

Rumsfeld, aka Skeletor from the old Masters of the Universe cartoon show, has now admitted that there is no provable link between the Saudi Arabian terrorist group called Al Qaida and the former US-backed dictator (turned rogue) Saddam Hussein. Well most of us knew that before the war - why didn't they just ask some of us?

First British President Tony Blair has now formally apologized for his lies about weapons of mass destruction (blaming the intel community). Now the world is forgiving him for at least being man enough to finally tell the truth, in the old days he would've been voted out of office - but the elite in Britain have decided not to offer up any credible opposition to Blair so the people continue along the road towards a Fascistic Monarchy, somekind of new political entity!

The whole notion of WMD in Iraq is intriguing - IF they found WMD where would they have been manufactured??? Who would've been the suppliers? Well I think we know the embarassing answer to these questions - labels on the sides of those cannisters would've said "Made in the USA by Team America."

Cheers Rich

Economy

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Monster Budget Deficit
September 09, 2004

By Alan Fram, Associated Press | September 8, 2004

WASHINGTON -- The Congressional Budget Office is projecting this election-year's federal deficit will reach a record $422 billion, congressional aides said yesterday. The figure, provided by aides who spoke on condition of anonymity, is sure to provide political fodder for both parties during the remaining two months of the presidential and congressional campaigns.

''This is by far the biggest deficit in American history," said Thomas Kahn, Democratic staff director of the House Budget Committee. ''There is no credible way Republicans can portray the record deficits they have created as good news."

But Sean Spicer, Republican spokesman for the committee, said: ''Deficits are going down, jobs are going up, the economy continues to improve. I don't see how you can't be happy with that news."

The number was being released later yesterday in the annual summertime forecast issued by the nonpartisan Congressional Budget Office.

The projection by Congress's nonpartisan budget analysts would surpass last year's $375 billion shortfall, the current record.

The Budget Office report also said next year's deficit would shrink to $348 billion, which would be the third largest ever in dollar terms. That would be $15 billion less than it projected last March, but $17 billion higher than the White House estimated in July.

Yesterday's Budget Office estimate should prove fairly accurate because the federal budget year, which runs through Sept. 30, has less than a month to go. But it does not include the $2 billion in aid for repairing hurricane damage in Florida that President Bush requested Monday.

The government is expected to spend $2.3 trillion this year, which means it will be borrowing about one of every five dollars it spends.

The $422 billion projection for 2004 echoed a preliminary estimate the budget office made last month. It was an improvement from its $477 billion forecast in January, a revision the office attributed mostly to stronger than anticipated revenue collections.

Just last month, the White House forecast a $445 billion deficit for this year, though administration officials acknowledged the figure could be too high because of overestimates for spending.

After a fleeting four-year return to annual budget surpluses under President Clinton, deficits have returned under Bush.

Republicans who spent the 1980s and 1990s railing against shortfalls have argued that fighting wars in Iraq and Afghanistan, battling terrorism, and righting the economy are higher priorities.

They also argue that today's deficits are no reason for panic because as a percentage of the overall economy, they are smaller than the largest shortfalls under President Reagan. Many economists consider that ratio the most significant measure of the harm deficits can cause.

Democrats say the shortfalls are forcing policy makers to restrain spending for schools, domestic security, and other priorities, while driving up the government's borrowing costs. They say deficits have worsened because of the price tag of the tax cuts that Bush and his GOP allies have pushed through Congress.

Most analysts agree the budget picture will worsen considerably within a decade. That is when the huge baby boom generation will begin relying increasingly on Social Security and Medicare, driving those programs' costs upward.

© Copyright 2004 Globe Newspaper Company.

Economy

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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

Economy

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Auto Sales Crash
September 02, 2004

Uh oh. And they're cutting production further: More details:


http://www.washingtonpost.com/wp-dyn/articles/A54798-2004Sep1.html