Economic Dreams - Economic Nightmares

Crash Proof: New Book

Crash Proof: How to Profit from the Coming Economic Crash recently hit the streets. Author Peter Schiff unveils his book with a sigh of angst:

Inflation is the unhappy result of our monetary mismanagement and the ultimate cause of the coming economic collapse. When will the collapse happen? … Unfortunately, it's not the kind of question we can answer with any degree of precision. … Who knows when the breaking point will come? All I know for sure is that it will come and when it does it will be calamitous. For all I know, it may have already happened by the time this book is published. If not, then you're in luck, a there is still time to implement the strategies outlined in later chapters.

Given market jitters around the world in the past two weeks, we must wonder whether Schiff was 'spot on' with his angst. But maybe not, and if not some of the advice in the last chapters of his book may prove helpful now. If so, the advice may prove helpful later on, as the woes of this age give way to the hopes of the next. Either way, Schiff's book, written with John Downs, is worth a look.

I have to admit up front that I was a bit put off by Schiff's title. How could anyone in good conscience knowingly seek to profit from impending calamity? Schiff knows this too, and only wants people to protect what they can to help loved ones and others get through tough times ahead that he and I believe are all but inevitable. And he wants people to have 'enough' to be able to contribute to the rebuilding that inevitably follows a crash.

I have one more quibble with the book, one that oddly enough will endear it to many readers. Crash Proof is written from an Austrian economics perspective: Markets are good, except when they turn to manias, which in turn are blamed on the government. But Schiff, true to his Austrian' roots doesn't lay the blame entirely on the government. He saves some of the blame for Wall Street and other crony capitalists including media moguls. And Schiff includes the usual Austrian' pining for the good old pre-inflationary days of the gold standard.

Never mind that those days were not all that good, and that during moments of irrational exuberance market players found ways to expand credit beyond good sense and create asset bubbles nevertheless. {See Charles Kindleberger and Robert Aliber's Manias, Panics, and Crashes: A History of Financial Crises for more on ever-more-clever financial innovations through the ages to allow over-optimistic and sometimes unscrupulous players to kite credit on top of credit in one form or another.}

Quibbles aside, I'm glad to have had the chance to read Crash Proof. I have a whole bunch of 'Yes' comments in the margins to compliment my few 'No' and '?' comments. And my 'No' comments usually have to do with Hyman Minsky/John Keynes influences in my own economic philosophy that in the end has a lot in common with the Austrians, while still allowing for the possibility of prudently managed fiat currency. And allowing for differing post-Keynesian views as to the impetus for, and workings of market cycles.

Ideological differences aside, both the post-Keynesian and the Austrian schools of economic thought recognize that 'prudence' is the key to proper financial management, and that prudence tends to be in short supply during manias, panics, and crashes no matter who is entrusted with the care of 'other people's money.'

Some quotable quotes to whet the appetite:

According to Greenspan, the Great Depression of the 1930s resulted from the unwinding of the speculative imbalances caused by the excess liquidity created by the Fed during the 1920s. Given that Greenspan created even more excess liquidity during his tenure and that the speculative imbalances that resulted were that much greater, what dire consequences might the Maestro [Greenspan] … believe await the United States today? …

My goal here is not simply to provide an investment guide, but to expose and illuminate the grave economic weaknesses that make survival the issue. A proper understanding of the true state of the American economy is vital to investors and noninvestors alike.

The fatal flaw in the modern economy is that any attempt to save and under consume, which would surely bring about a badly needed recession, is resisted by government policy, the sole purpose of which is to postpone the inevitable day of reckoning. In their selfish attempt to secure reelection, American politicians have persuaded their constituents that they should indulge their every whim and that self-sacrifice or underconsumption are somehow Un-American ….

Baby Boomers Are Consumers, Not Savers

Born to a generation of people who lived through the depressions and then returned from a world war to a victorious country offering the GI Bill and a future filled with possibility, the baby boomers, as the bulging population born following World War II became known, grew up knowing affluence and building it into their life expectations. Those expectations naturally became the promises of the politicians they elected. Amid a business boom driven by leverage and making credit an integral and acceptable part of modern life, financial service organizations, now deregulated and free to expand and diversify, relaxed their lending standards and aggressively foisted auto loans, credit cards, mortgages, and home equity loans on a market as vulnerable as it was demographically irresistible. With personal expectations now tantamount to a sense of entitlement, the next stage was clearly set for the spending binge we have today.

Savings? Who needs savings when you own stocks that can only go up in price and a home that gains equity every year? Let the dismal scientists worry that stock values or home equity might simply be the result of inflationary bubbles created by an irresponsible Federal Reserve, or that when the bubbles burst, all that will remain are the debts they collateralized.

In a chapter titled "What Uncle Sam, the Mass Media, and Wall Street Don't Want you to Know", Schiff introduces us to some prevailing MYTHS:

THE BALLOONING TRADE DEFICIT

The comforting distortion: Large trade deficits are a sign our economy is creditworthy, strong, and growing faster than the economies of our trading partners.

The disturbing reality: Our trade deficit is a huge and growing problem and threatens to ruin us.

INFLATION: THE CORE AND THE BUBBLE

The comforting distortion: Core inflation is moderate and well under control.

The disturbing reality: Core inflation excludes food and energy from producer and consumer price indexes that understate real inflation to begin with. Actual inflation is considerably higher and also exists big-time in the form of a housing bubble being represented as a strong housing market.

THE DEFLATION RUSE

The comforting distortion: Increases in the CPI are an indication that the risk of deflation is being successfully combated.

The disturbing reality: Deflation risk is pure bunk and designed to distract us from the real problem, which is inflation and which the Fed can't effectively counter by raising interest rates because consumers are too close to the edge.

THE PRODUCTIVITY MYTH

The comforting distortion: Productivity gains mean higher sustainable growth rate, lower inflation, and lower unemployment.

The disturbing reality: What productivity gains?

… [Key questions nowhere answered]: (1) how significant a factor higher productivity has actually been and (2) why, if it is true that we are more productive than our trading partners, our trade deficit gets bigger, not smaller.

GROSSLY PADDED DATA, OR AS WE KNOW THEM, GDP NUMBERS

The comforting distortion: Increases in the gross domestic product (GDP) signify a healthy, growing economy.

The disturbing reality: The GDP is too full of fluff to ba an accurate measure of economic health and vitality.

CONSUMER CONFIDENCE: THE CRUELEST IRONY

The comforting distortion: Consumer confidence drives the healthy economy.

The disturbing reality: Consumer confidence drives it the wrong way. The consumer is misdirected and consumer confidence is an utterly useless statistic.

In a chapter titled "For a Few Dollars More: Our Declining Currency", Schiff serves up a problem well-known to those who watch closely and too-little-known by the general American public:

The declining dollar is the result of an American economy characterized by declining production, inadequate savings, reckless consumption, soaring household debt, ballooning federal budget deficits, and an overly accommodating Fed.

… The Fed is now trapped between inflation and recession and it's too late to stop the consequences of either.

… Those of you still holding dollars had better do some serious reflection and ignore the talk about a mythical strong dollar policy. …

Once the dollar loses its reserve currency status and the collapse ensues, the process of returning to economic viability will be a painful one, requiring substantial austerity from both the government and its citizens. Whether the United States is up to the task remains to be seen. … In any event, you can protect yourself from the collapse and prepare yourself to profit in the reconstruction of economic health. I'm going to show you how.

As Schiff tells readers throughout, he concludes the book with some pointers to help people navigate rough financial waters ahead. Before he lays out his 'personal finance' recommendations, however, Schiff spends two chapters trashing the Fed and Wall Street, then another on bursting bubbles in the real estate market, and finally a chapter on debt, and how we became a nation of debtors. On that latter topic, Schiff notes, sagely,

Nineteenth-century America borrowed to produce. Now we borrow to consume. Investment debt is self-liquidating, while consumer debt is self-debilitating.

In the final three chapters Schiff fulfills his promises to help us protect ourselves from the impending "collapse" and to "profit from the reconstruction of economic health." Some will find these chapters too self-promoting. Maybe true, Schiff is president and CEO of Euro Pacific Capital. After he warns us to beware of financial advisors and stockbrokers, Schiff asks us to trust his advice.

Still, I will study what he presents in the next few months as I prepare to help may children and grand children follow this bit Schiff's advice: "Take charge of your own financial destiny before it is too late."

Schiff's advice chapters suggest: First, reevaluate your portfolio, and don't be afraid to invest abroad. But be careful and prudent in these investments. And he gives good pointers if/when you reevaluate. Second, think seriously about putting some of your money into gold, silver, etc. Again, he has good, if a bit self-serving pointers on how to do it. Third, stay liquid and get out of debt! Schiff believes, that we may see some major-league inflation in the not distant future. If we do, you'll want to move from "cash" to "assets" then (not now, since assets, particularly US assets may well be collapsing).

Whether or not you are inclined to agree with all Schiff's negativity and ideology, his ideas are worth a look. He is only the latest to suggest that the road ahead is not going to be an easy one.

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For a bit more perspective on Crash Proof, see/hear Jim Puplava's 3/10/07 Financial Sense Newshour.

US on Slippery Slope: Consuming Beyond its Means

Stephen Roach, Chief Economist at Morgan Stanley, spoke at the China Development Forum in Beijing on March 19:

...The United States is flirting with protectionism at a time when its need for foreign capital has never been greater. At work is a highly combustible mixture of macro and politics. America's saving shortfall has led to a massive trade deficit, and China happens to account for the biggest portion of that deficit. Meanwhile, a growing sense of angst has gripped the middle-class American workers. This has triggered a classic political blame game, with China being increasingly singled out as the scapegoat. The drumbeat of China bashing is growing louder and louder.

There is a very simple and extremely powerful macro point that is being overlooked in this debate: America no longer has the internal wherewithal to fund the rapid growth of its economy. Suffering from the greatest domestic saving shortfall in modern history, the United States is increasingly dependent on surplus foreign saving to fill the void. The net national saving rate the combined saving of individuals, businesses, and the government sector after adjusting for depreciation fell into negative territory to the tune of -1.2 per cent of national income in late 2005. That means America doesn't save enough even to cover the replacement of its worn-out capital stock. This is a first for the United States in the modern post-World War II era, and I believe a first for any great power over a much longer sweep of world history. ...

America, in general, and its consumers, in particular, treat rapid economic growth as an entitlement. That leaves the United States with little choice other than to pursue the second option - drawing heavily on the global saving pool in order to fund economic growth. Once the United States started down the slippery path of consuming beyond its internal means, it got harder and harder to break the habit. Ironically, it has become exceedingly difficult for Washington to accept the consequences of that habit - a nation that has become beholden both to external funding and production. And yet that's exactly how China fits into America's macro equation.

That underscores a key attribute of the savings-short, deficit nation: It is forced to run current account deficits in order to attract the requisite foreign capital. And in the case of the United States, where external funding needs are so massive - now closing in on US$800 billion per year, or about US$3 billion per business day - most of the current account imbalance shows up in the form of a huge trade deficit. In 2005, the trade deficit in goods and services accounted for fully 93 per cent of the total current-account gap. ...

Meanwhile, the United States does next to nothing to shoulder its share of the problem a staggering shortfall of domestic savings.

{Hat Tip to Steve Hsu, Information Processing}

Believing is Seeing: Noland too Sees Iceland as a Bellwether

Doug Noland (3/24 Credit Bubble Bulletin) joins Nouriel Roubini in looking to Iceland for a peek into future possibilities.

If global trade was dictated by the exchange of goods for goods, we would not enjoy the capacity of running massive Current Account Deficits. And there would be no need for the U.S. (and other “deficit units”) to issue new Credit instruments (Credit Inflation) to consummate import purchases. There would be no massive global "liquidity buildup" and no marketplace perceptions of endless cheap liquidity. Central bank policy would not be governed by the fear of bursting Bubbles, and the global financial landscape would be unrecognizable from the present.

Cumulative ongoing (chiefly U.S.) Current Account Deficits are the root source of the unprecedented global pool of liquidity that is today fueling Asset Inflation and Bubbles the World Over. [US Fed Chairman] Bernanke can adhere to a sanguine view only because the current Global Flow of Finance is concurrently financing ongoing massive investment of goods producing capacity (especially throughout Asia) - with attendant restrained goods prices - and almost across-the-board Asset Inflation. He is left to only hope that a "precipitous" decline in the dollar is "unlikely," and that the U.S. economy would withstand a dollar crisis of confidence.

…[European Central Bank Chief Economist Otmar] Issing, on the other hand, has very good reason to agonize. He appreciates that this massive buildup of global liquidity is highly unstable and controllable only as long as unsustainable Flows of Finance and asset inflation are sustained. His focus is where it should be, on the intermediate and longer-term. Not only is the primary source of The Flow of Finance suspect (unsustainable U.S. asset Bubbles, American over-consumption and problematic international imbalances, along with global leveraged securities speculation). Inevitably, the ballooning pool of speculative finance ensures that this Flow of Finance becomes over time only larger, more unwieldy and increasingly destabilizing. Observing how abruptly Flows to Iceland have reversed, an arguably unavoidable reversal away from U.S. securities would prove quite problematic to the U.S. Bubble economy. It would also put the entire global Credit apparatus at risk.

There exists today the delusion that the costs associated with dismal U.S. saving and spending habits, as well as financial leveraging, are negligible. The Fed is narrowly fixated on core consumer prices, an essentially irrelevant indicator of both contemporary Credit Inflation and liquidity conditions. Credit Inflation’s prominent materialization is instead the manifestation of today’s destabilizing Flows of Finance at home and abroad. The Fed is pursuing an unachievable goal of sustaining the U.S. boom by raising the cost of borrowing at the margin. But such accommodation of the current Credit boom only ensures self-reinforcing massive Flows of Finance and attendant Credit and Asset Bubbles around the globe.

I find the increasing discussion of the Fed's tendency to "overshoot" misguided. In late-stage Credit and Economic Bubbles, the Flow of Finance dictates system behavior much more materially than interest rates changes at the margin. As we have witnessed, baby-step rate increases are ineffective in restraining the manic frenzy of lending and speculating excess. Instead, it is the Unwieldy Flows of Finance that notoriously "overshoot," inundating sectors and asset markets and introducing problematic speculative dynamics. We witnessed as much during late-1999 and early 2000 throughout the technology Bubble. The marketplace thumbed its nose at Fed “tightening,” spellbound instead by the prospect of chasing hot stocks, squeezing shorts, and with general marketplace shenanigans and manipulation. Amazingly, when the highly speculative and destabilizing Flow of Finance eventually reversed and the bust emerged, many blamed the carnage on the Fed for needlessly raising rates.

It is the nature of the scope and speculative component of contemporary Flows of Finance that dictate that time is very much of the essence. Specifically, it is incumbent upon central bankers to move early and with sufficient conviction to impede speculative leveraging and interrupt the Flow of Finance to asset markets. The alternative is a runaway Bubble, popular delusions of grandeur, and resulting policymaker paralysis and duplicity. With a flawed analytical framework and the wrong policy focus, the Fed is content to move late and timidly. Not only has this not restrained excess, it has in fact cultivated and bolstered Dysfunctional Monetary Processes and their Destabilizing Flows of Finance.

It is my view that the Global Credit Bubble - with the magnitude and mobility of its pool of speculative finance - has reached the point where efforts to stabilize international asset markets are quite likely to prove futile. It’s boom or bust, depending on The Vagaries of The Crowd’s Greed and Fear and the resulting direction of The Flow of Finance. It is also worth noting that liquidity-driven and short-term oriented speculative Bubbles can be expected to be, at least for awhile, oblivious to unfolding geopolitical risks – almost to the point where it is perceived that they don’t matter. They do. Untenable global imbalances, heightened global trade tensions, increased “finger-pointing” and “scapegoating,” and a risky deterioration in prospects for stability throughout in the Middle East, to name just a few, have created a highly uncertain backdrop seemingly on a collision course with global financial Bubbles.

Noland's vision derives from extension of Hyman Minsky's reasoning, as he explains earlier in his 3/24 Bulletin:

Stephen Roach sees "Tripwires" and Fragmentation of World's Geopolitical Order

OK, Stephen Roach isn't newly bearish. And he has before warned of an "increasingly treacherous endgame for the current state of tranquility in world financial markets," e.g. here. Still, I find solace in knowing that others better schooled than I take little comfort in the complacency that has swept over the US in the face of blatant disregard by both the American people and many of her political leaders of the unsustainability of our present US dissaving-led geopolitical order. See also Nouriel Roubini's With the US current account deficit close to a trillion dollars of course foreigners will soon own most of the US capital stock.

Global: Tripwires
Stephen Roach (New York)
March 13, 2006

On the surface, the global economy seems to be off to a great start in early 2006. The Great American Growth Machine has revved up again after a Katrina- and energy-related sputter in the final period of 2005. Japan is back, and even Europe is stirring. For China, India, and the rest of the developing world, vigor generally remains the name of the game. The global growth dynamic looks synchronous and increasingly powerful. With inflation remaining low, isn’t this the best of all possible worlds?

Beneath the surface, the answer is a resounding "no." Contrary to widespread expectations, synchronous growth in an unbalanced world compounds the imbalances -- it doesn’t resolve them. When imbalances reach the magnitude they are today, rebalancing actually requires an asynchronous global growth outcome. Excessive growth in the deficit country (the United States) needs to slow, while lagging growth in the surplus countries (especially Japan and Europe) needs to pick up. The latter seems to be happening, but the former is not. America’s record $68.5 billion trade deficit in January 2006 says it all: US imports and exports are now so far out of balance, that sustained solid growth in the US economy can only beget larger and larger external deficits. This could well be a major -- yet largely unappreciated -- point of vulnerability for the global economy and world financial markets. …

The truth as to what lies behind the US external deficit is undoubtedly a combination of the micro [of competitiveness, or the lack of the same in the US relative to trading partners] and the macro [of saving, or the lack of it in the US]. But the bottom line is that these external imbalances are getting worse rather than better -- even in the face of an apparent resynchronization of the global growth dynamic. In my view, that reflects the dominance of the macro aspects of the problem. The income-based saving of America’s asset economy is so low and the import penetration of its real economy is so high, that more growth in US aggregate demand simply begets ever-mounting trade and current-account deficits. This imposes enormous strains on the international financing mechanism to keep the game going. In 2005, the US needed about $3 billion of foreign capital inflows each business day of the year -- up dramatically from the $2 billion daily funding requirement just two years ago in 2003.

Such external dependency of any nation is simply without precedent in the annals of globalization and international finance. Moreover, it is the diametric opposite of the flows that drove the globalization of the late 19th and early 20th centuries, when surplus saving of rich European countries was used to fund the development of newly settled developing countries in the Americas and Asia/Pacific. Today, China -- still one of the poorest countries of the world in terms of per capita income -- has played an increasingly critical role in funding the US hegemon. The rules of engagement in foreign aid have been turned inside out -- rather than flowing from the rich to the poor as once was the case, capital is now moving from the poor to the rich. Nor does the saving-short US seem to have much appreciation for the precarious nature of this arrangement. Not only is China bashing on the rise, but Washington politicians are becoming increasingly heavy-handed in attempting to manage the external lifeline of capital inflows.

…Unless the deficit nation (the United States) starts saving again, a drawdown of saving elsewhere in the global economy will only complicate the world’s current-account financing tensions.

To me, all this speaks of an increasingly treacherous endgame for the current state of tranquility in world financial markets -- especially the all-important expectational underpinnings of the dollar and longer-term US real interest rates. Investors are nearly unanimous these days in dismissing the mounting economic and political tensions of an unbalanced world -- arguing that it is in everyone's best interest to keep the game going. The retort of increasingly smug US fund managers is typically something along the lines of, "What else are the Chinese going to buy -- euros?"

At the same time, I worry about an even more treacherous aspect of the endgame. An earlier era of globalization was brought to a tragic end by two world wars in the first half of the 20th century. While history rarely repeats itself, the rhymes never cease to amaze me. The current wave of globalization is occurring against the backdrop of a very different mosaic of geopolitical risks than those which prevailed a century ago. Nation-specific rivalries have given way to threats coming from the amorphous terrorist ranks. Yet there is a worrisome common thread: In both cases, the integration of economies and capital markets clashed with the fragmentation of geopolitical order. Add in the current tensions associated with widening income disparities, real wage stagnation in developed countries, and the growing outbreak of trade frictions and protectionism, and today's world looks far from secure. The tripwires of globalization are now being set.

Money for Nothin' and ...

Whether you are a business mogul, a politician, or a rocker… Whether you play the guitar, the lottery, or the speculative markets of high finance the American cultural "winners' game" is pretty much the same, caputured well by lyrics from Dire Straights:

Now look at them yo-yo's that's the way you do it
You play the guitar on the MTV
That ain't workin' that's the way you do it
Money for nothin' and chicks for free

Some of us are pretty tired of it. The whole game of "money for nothin'" and "work avoidance" as a cultural "good" are foreign to principles on which effective culture must be based. A few weeks before he was assassinated, Gandhi had a conversation with his grandson Arun wherein he outlined "Seven Blunders," out of which, said Gandhi, grows the violence that plagues the world. To his grandfather's list of seven blunders Arun later added an eighth, "rights without responsibilities" that is far too pervasive today. The blunders are:

• Wealth without work
  
• Pleasure without conscience
• Knowledge without character
• Commerce without morality
• Science without humanity
• Worship without sacrifice
• Politics without principles
• Rights without responsibilities

Gandhi called these disbalances "passive violence," which fuels the active violence of crime, rebellion, and war. He said, "We could work till doomsday to achieve peace and would get nowhere as long as we ignore passive violence in our world."

Note that wealth without work is number one on the list. Doug Noland has made a career or warning us about the addiction of speculative finance. In his latest, Flow of Funds, Noland gives us graphic evidence of our addiction, as well as a warning, once-again as to where we are headed:

Noland's conclusions:

...We are witnessing – both in the Fed’s "flow of funds" and with real world flows of finance - the consequences of many years of unrestrained asset and speculative-based Credit growth.

Empire of Debt: Small Chance of Imploding?

Today's CBS News Sunday Morning aired a segment titled In Debt . The take-home message is:

The United States is a nation of debt. Americans have accrued billions of dollars worth of personal consumer credit, and the number is rising via credit cards, innovative mortgage packages, home equity lines, student loans, etc. At the same time, the U.S. had a negative savings rate last year. Translation: We're spending more than we're earning. Cynthia Bowers says that's like any bubble: The credit bubble can only end one way -- badly.

Addison Wiggin said, if I heard right, that we have a "small chance" of falling into a banking crisis wherein savers as well as debtors need to worry. My question is, "How does Wiggin or anyone else know?"

I thought about flying blind in a snowstorm, worrying about running into a mountain and not knowing whether you were over Alaska or Nebraska. Or worse still not knowing whether your had, say, one chance in a hundred of being over Alaska v. Nebraska or vice versa. It seems to me that we are so far away from anything that has happened historically, that we don't really have a means to know whether or not the chance of crash-landing our economy is small or large.

Addison: How do you know? I want to know. I would sleep much more soundly if I knew that the chance really was "small." My immersion in Complexity Theory denies me the luxury of making statements like "the chances are small" when dealing with geopolitical dealings. My guess is that either I mistook Wiggin's intent else he spoke in haste. But maybe not.

I have taken to Karl Weick's notion that "believing is seeing" (see also) more often than "seeing is believing." And when dealing with matters economic and geopolitical, I find much more of the former than the latter.

American-Made Pension Problems?

Ford just dumped up to 30,000 employees. GM announced similarly large layoffs last fall. Together the reductions amount to employee numbers equal to Chrysler's US-based hourly workforce. Assuming that Ford can develop reliable, quality vehicles going forward, that have enough sex appeal to get them back into competition with Nisson, Honda, and Toyota things ought to be come up roses for Ford. But only if they have really resolved their pension fund problem. The plight of the workers is another story.

Ford's layoffs were the subject of Monday's PBS Newshour, showing that the world's playing fields are horribly out of whack w/r/t pension fund liabilities. Is this a problem bigger than most of us realize. Is this a problem shared broadly in its creation, and a problem that needs to be shared much more broadly in its resolution? Is it just the tip of a much bigger "entitlements problem?" I have been skeptical until now that the companies didn't just do it to themselves, but I'm beginning to change my mind.

Thanksgiving Caution from Kurt Richebacher

In yesterday's Daily Reckoning Bill Bonner recounts a dinner conversation about America's dreamscape economy and curious realities like, "Everybody says that the U.S. economy is the most flexible in the world. They must be dreaming. The U.S. economy is completely inflexible. It suffers from huge problems that are obvious to any serious economy, mainly the lack of savings and the current account deficit. But the economy is so inflexible; it can't do anything about them. And, even worse, no one can even talk about them."

Bill Bonner with Kurt Richebacher:

... [T]he world's richest people now depend on the savings of the world's poorest. Is that not absurd…? We note also, that the world's greatest military power throws its weight around all over the world - making the world 'freer' and more democratic, we are told and expects the still-Red Chinese to finance it. Is that not mad…?

"It's unbelievable," said Kurt Richebacher last night. We dined with Dr. Richebacher, who made one of his rare trips to London.

"I'll tell you what is really crazy," he began. "Everybody says that the U.S. economy is the most flexible in the world. They must be dreaming. The U.S. economy is completely inflexible. It suffers from huge problems that are obvious to any serious economy, mainly the lack of savings and the current account deficit. But the economy is so inflexible; it can't do anything about them. And, even worse, no one can even talk about them. Well, I shouldn't say no one. There are a few of us. But we are outsiders. We are marginal. The people on the inside do not even seem to recognize that there is a problem.

"In the last five years, the US economy has lost 3 million out of 17 million manufacturing jobs. This is almost the definition of an economy in decline. It is an economy, as Hayek would say, that is shrinking. Of course, the people who call themselves economists in America - with the exception of Stephen Roach - say that the trade with China is symbiotic. The Chinese send the Americans goods; the Americans send the Chinese bonds. No serious economist would say that this is a healthy situation.

"What they did was to stimulate the economy more than any government had ever done. The tax cuts were worth about $860 billion. And the low interest rates brought $3 trillion of new credit into the system. But even all that didn't create a boom. Take out all the lies and measurement nonsense and you see an economy that has never recovered. Talk about jobs? America has 1.2 million real estate agents. It's all a housing boom...caused by the credit expansion.

"And you know why profits are up in the United States? It has nothing to do with healthy, growing businesses. Just the opposite. These businesses have stopped investing in new plant and equipment. So they have much less capital equipment to depreciate. As depreciation collapses, profitability goes up - especially when they're making money from financing activities. But this can't last.

"It's unbelievable. I grew up in a time when you wanted to save so that your children would have a better life than you had. Now, in all the Anglo-Saxon economies, people don't seem to want to help the next generation, they want to cheat it, by leaving a legacy of worn-out capital...and debt.

"I tell you the whole thing is a monumental fraud. And Mr. Alan Greenspan is merely an extraordinary criminal. Here is something for Americans to think about as they celebrate their Thanksgiving Day. Why is it that we Europeans have a higher standard of living than they do? Yes, it's true. My son works in America. He barely gets any time off. He has hardly any vacation to come to visit me. In Europe, we get at least 6 weeks, sometimes much more. And people don't have so much debt. Property prices have risen in France, for example. But they rise on savings, not debt. And everybody is always saying what a mess the German economy is in. But when I look at it carefully, I see that it is solid. And growing. It has a positive balance of trade. And the Germans' saving rate is going up - above 10%.

"I like the European model much better." ...

American Schizophrenia: Glum in Opinion Polls, Gleeful at the Mall

Americans seem so confident at the malls and so glum in opinion polls. Why? In Worry While You Spend, Newsweek, Nov 14, Robert Samuelson says we have a "hangover from the 1990s boom. We subconsciously compare everything now to what happened then; and the comparison automatically favors the past and disparages the present. Almost nothing looks as good as it did then." But we continue to spend based on our circumstances that aren't as gloomy, for the most part, as are our perceptions.

Still, warns Samuelson (at least in my interpretation), if certain things continue on present paths—e.g. automobile and housing sales stagnating or imploding—we may well see a convergence between what we think about our circumstance when polled and what we do when at the mall. In that convergence, if it happens, things will indeed be as gloomy as is now seen in opinion polls. Snips:

…The central fantasy was that we could dispense with uncertainty and anxiety [based on "new economy" notions, and so on]. Now they've reasserted themselves with a vengeance. We fret about China, a housing "bubble" (remember the stock and tech "bubbles"), huge trade and budget deficits, oil—as well as terrorism, Iraq and possible pandemics. The return of worry partly accounts for the weakness of consumer-sentiment polls. People are less confident about the future. But what then explains the strength of actual consumer spending? The answer is that Americans' personal spending decisions depend less on their general view of the economy and more on their personal circumstances—and these haven't shifted so dramatically.

Although our mood went on a roller coaster, changes in our well-being (income, wealth) were less erratic. In the late 1990s, some Americans did fabulously; but most simply did well. Since 2000, many Americans have done poorly; but most (with jobs, solid incomes and refinanced homes) still did well. In many ways, the economy is stronger now than it was then. Here are two examples. First, household net worth—what people own minus what they owe—is about $50 trillion, up from $42 trillion in 1999; gains from homes have more than offset losses on stocks. Second, per capita incomes (after inflation) grew almost 9 percent from 1999 to 2004. Living standards haven't stagnated.

We have a real economy and a rhetorical economy: what's actually happening and what we say is happening. The first is often more stable than the second. I wouldn't hang too much on this distinction. It certainly doesn't preclude an economic slowdown or even recession. Economist Levinson thinks consumer spending will weaken; so does Richard Curtin, who runs the Michigan surveys. The recent declines in confidence reflect real events (hurricanes, higher oil prices, rising interest rates). But I would argue that the distinction helps explain the one adjective that's often been applied to American consumers in the past five years: resilient. They've been unexpectedly resilient in part because they've never been quite as desperate as common wisdom-buzz, chatter, commentary-holds.

Another Day Older and Deeper In Debt

I remember as a child listening to Tennessee Ernie Ford belting out lyrics from the classic "Sixteen Tons." One stanza goes:

You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store

Today it isn't the company store, but rather "the system." According to the Federal Reserve (via Forbes), today’s household debt is over 10 trillion, up from just over 4.5 trillion ten years ago. A house of cards? Certainly. At some point we can’t keep piling up debt, consumer debt or public debt. When might the cards tumble down? Or will we find some means to curb our consumption appetites and begin to whittle down our debt.

Each of us gets to decide as to when and/or whether. Personally, I’m leery of October and markets. Perhaps I’ve read too much about Oct 1929 and Oct 1987. Martin Zweig's Winning on Wall Street tells me I’m being irrational about my October fears since on average September (after Labor Day, since holiday moods are optimistic) and February are the worst performing months, with Septembers only accounting for S&P 500 rises 40.4 percent of the time from 1897 to 1996. October is just beyond average at 54.4 percent. March, July, August, November, December, and January seem to be the most optimistic months on Wall Street.

As I began writing this I didn’t yet know that Ben Bernanke had been nominated to succeed Greenspan as Fed Chairman. So I suppose we’ll all now get to see just what the econ bloggers have to say about that. Already the markets seem gleeful.

I maintain my "market cycle theory" skepticism. While Googling "another day older and deeper in debt" or "October 'market declines'" I somehow happened onto Dan Blatt’s Futurecasts . In his latest Blatt reiterates his belief that naïve Keynesianism has led us to a point where Liquidity Traps may eventually force monetary authorities to take responsibility for ever-greater ever-more-scary bubble scenarios going forward, threatening the very underpinnings of our frequently proclaimed "resilient economy." Like me, Blatt is an admirer of John Kenneth Galbraith, and like me he wonders for how much longer our economic systems can remain resilient.

Blatt snippets (2/1/05):

It is thus déjà vu all over again. We again find ourselves in a situation similar to that of the early 1970s - when the Fed had the power to influence the nature of the economic problems arising from Keynesian policies, but did not have the power to avoid them.

As in the 1970s, monetary and economic volatility will increase. The resulting increase in perceived risks will reduce price/earnings multiples and make it increasingly expensive to raise equity capital. The stock market may again become range bound, with its high points little better than previous highs - if it even reaches that level. The lows have yet to be indicated by the next recession.

These problems have not yet developed to anything near the severity of those in the 1970s. Not yet! They are still arising gradually because the dollar is now a floating currency. It devalues gradually rather than suddenly as it did as a fixed currency in 1972 and 1973. This permits the economy to begin its adjustment process earlier - and hopefully forces the restoration of monetary and budgetary discipline at an earlier stage.

The Fed is now acting, and the Bush (II) administration is now giving lip service to efforts to materially reduce budgetary deficits. FUTURECASTS would love to be pleasantly surprised, here. It anxiously awaits the details of the Bush (II) budget plans.

Indeed, it is only by very substantial reductions in the nation's budgetary deficits that this increasingly dismal outlook can be materially altered. Unfortunately, such reductions would require a degree of budget cutting that seems like a practical impossibility in the current political climate - and with the current financial demands of homeland defense - and military conflicts - and entitlement welfare programs - and massive subsidies for wealthy agribusinesses, etc.

Of course, the current economic recovery will appreciably increase government revenues. However, this increase will not nearly be enough. …