Economists Announce Biggest US Job Loss Since 1945

The forces of depression are getting a drop on the new year. The bureau of labor statistics announced today that the US had undergone the biggest job loss in the United States since 1945 in 2008. These days people are expecting bad news, but what the questions that we need to ask is how come no mainstream economist saw this coming? How come we don’t see Keynesians falling all over themselves admitting that their phony theory has little predictive value in the face of the tremendous magnitude of this decline? After all, Keynesians tout the stimulating effect of government deficits. How can it be that after eight years of George Bush, who took this country further into debt that all of his predecessors put together, that we are now facing the worst economic scenario since the Great Depression?

Of course, I know how unseemly it must be for me to be attacking John Maynard Keynes on the eve of President-Elect Obama’s inauguration. The man hasn’t even gotten to power yet, and I’m already faulting the underpinnings of his economic bailout plan. And while I’m attacking Obama, what’s up with appointing lobbyist Willian J Lynn III to be the #2 person in the Department of Defense? I thought Obama was supposed to be cleaning up Washington by keeping lobbyists out of his administration. At least, that’s what Democratic talk-shot host Rhadi Rhodes was shoving down my throat back when I called into her radio show. On that particular day Ms. Rhodes was talking about the cronyism going on in the Wall Street bailout and I called in to showcase that this was another case of where the government had proven very ineffective at performing any regulatory function because the oversight boards are inevitably dominated by the corporations they are supposed to watchdog. She fired back how Obama was going to change all that. “Change I could believe in.”

Well, I don’t mean to run the poor man down, but if he’s made a pledge to keep lobbyists out of his administration, then why break the promise? I’m sure there are plenty of other well qualified non-lobbyists out there who can run the post. And this is the Department of Defense we’re talking about. That’s only the nexus of government and the defense industry which President Eisenhower warned about in his farewell address– a warning that has since gone ignored.

When looked at from a purely Libertarian standpoint, the US Government has three branches, but they aren’t the ones you’re thinking of. Instead of the Executive, Legislative, and Judicial, the US Government has the Banking, Defense, and Welfare branches. The Defense industry expands the empire, while the Welfare branch keeps people appeased in the classic Roman “Bread and Circuses” combination. The Banking branch ensures that the other two branches have all the money that they need in order to function by creating money out of thin air and sending the bill to our future generations.

As I’ve said many a time, this story is not going to end well. No amount of bank created stimulus can keep this impossible situation going. It’s going to collapse, and soon.

2009 Off to a Rough Start

For the first five days of trading of 2009, the Dow has fallen from opening around 8800 to closing today at 8750. Gold’s down some $40 too as its Comex price has fallen to $844 an ounce. No Earth shaking moves in these first few days of trading, but the investors are watching each other and trying to gauge the mood. A lot of people are expecting 2009 to be an up year for stocks. The logic is that last year was the second most horrible on record, so this year should see a big bounce after a big fall.

As for me, I feel that making a prediction about how stocks will do in 2009 is a luxury I can ill afford at this point. It just seems so far away and there are so many unknowns that going to have to develop over the course of the year before a clearer picture emerges. Markets are, after all, made of people, and people are unpredictable. At this point in I feel like I’m watching the Super Bowl warm-up show. I’m sure the hardcore football fans will know what I’m taking about- that show that comes on before the Super Bowl where the sport’s commentators fill up airtime talking about all of the players, their strengths and weaknesses, and the game plans they tend to use. Those shows take almost as much time as the Super Bowl itself, because you can endlessly debate how the teams should match-up, but no one will really know until after the fact how they will match-up.

Well, here’s Preston’s pre-Super Bowl commentator show. The players that are going to be squaring off this year are many. We’ve got “Helicopter” Ben who’s certainly proven to be true to his nick name. He’s showering money down upon anyone and everyone who could possibly ask for it. Recently he went so far as to essentially eliminate short-term interest rates and he’s said that he won’t rest until he uses more newly created money to crank down the long-term interest rates too.

Joining Ben’s team are two new players, Barack Obama and Timothy Geither. Both are talking a big game. Obama in particular is saying that he wants to run up the deficit score another trillion dollars over the course of this year and “for years to come.” That’s quite a powerful inflationary combination. The ultimate Keynesian fantasy of monetary stimulus complemented with a strong fiscal stimulus. The classic team of the banking system and government working in combination. One makes the money and the other spends it. Together they represent a potent inflationary team that is dedicated to pumping up the stock market.

But the inflationary team is up against some tough competition this year. The biggest concern I’d have for team inflation would be that the other nations of the world refuse to soak up the dollars they are going to throw off. In particular, I’d be concerned about China. China has been the primary consumer of newly created US Dollars over the last few years, but lately, according to a NY Times Headline, China Losing Taste for US Debt. If that’s the case, then I’d say this inflationary team is about to meet it’s match; the Fed can print all the money they want, but if people don’t value it, it’s not going to do a damn thing but cause spawn runaway inflation.

Obama seems to feel that he’s stepping into the shoes of Roosevelt, but Roosevelt ran against Hoover by saying that his policies of taxing and spending were reckless. It was only after he gained power that he developed a taste for it himself. Obama’s coming onto this stage not only broadcasting his love of inflation, but just how much inflating he’s willing to do. For a President-Elect to announce to the world that he intends to run trillion dollar deficits “year after year” is simply unheard of and I’m sure it’s quite a gut-check for the current holders of our debt. Are they really going to just stand by and continue to loan us another few trillion?

Inflation has always needed a bit of subterfuge to exist. In his book, Human Action: A Treatise on Economics, Ludwig von Mises wrote:

Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes.

He didn’t get that exactly right. It would seem that people tolerate a little inflation far more than Mises anticipated. Still, I doubt the Fed is going to be able to keep inflationary expectation well “anchored” with these trillion dollar deficits coming down the pike.

And if our foreign lenders decide to stop loaning us the money, then the whole inflationary plan will be wrecked. Then, and only then, will Ben, Barack, and Timothy, have to contend with how to get us out of this mess without the trusty tool that’s worked time and again since the 1980s. In that eventuality, fasten your seat belts because it’s going to be a bumpy year.

My Investment Scorecard for 2008

I just went through and reviewed how my investments did throughout 2008. I will now reveal my result. Drumroll, please.

In 2008 … my ROI was …

25%!!!

That’s right. While everyone else went broke, I was makin’ bank. How on earth did I do it? Okay, okay, okay — I’ll tell you. But only ’cause I’m a nice guy; I had three investment accounts: a ROTH IRA, a traditional brokerage account, and a Variable-Universal Life Insurance Policy. At the start of the year, my accounts were invested as follows:

* My VUL Policy had roughly $3500 invested in Gold Mining Stocks through the Rydex Precious Metals Fund. (RYPMX)
* My Roth IRA had roughly $17,000 invested in Water Mining Companies (PHO) and gold bullion (GLD).
* My traditional brokerage account has roughly $1500 invested in the Prudent Global Income Fund (PSAFX)

As you can see from the start, I was invested to profit from a falling dollar. Let’s take a quick step back into the recent past; last fall, to be specific.

It’s October, 2007. The stock markets have recently reached their peak with the Dow Jones closing at 14,100 on the 9th, and I just don’t see how stocks will possibly hold any value with all the bad news now coming out. At the dawn of 2008, I want to try and steer as clear of the main stock market as I can; as February ends, I liquidate both of my Roth positions, basically breaking even.

Springtime, and the market’s begun to heavily swoon; I want to reposition myself to profit from the short side. I put my Roth money into the Prudent Bear Fund, (or BEARX) since it’s 70% short the market, and 30% long on gold mining stocks. Now it’s June; I’m investing another $5,000 into my Roth, (my 2008 contribution), and also continuing to invest in Prudent Bear.

Here comes a September to remember. We see the bankruptcy of Lehman, and the stock market rallying on the news. I’m basically sitting flat in my portfolio for the whole year — quite frustrating. I’d positioned myself well to profit from all of the bad news, and despite the copious amount of it, I’ve yet to show a profit. In fact, the stock market’s flaunting its irrationality by rallying strongly on Lehman’s failure. Over the next couple of days, it’ll proceed to fall, only to rally again as a Keynesian trifecta of Paulson, Bush, and Bernanke totally blow my mind announcing the TARP program.

Now, I’m in totally uncharted territory. I knew the period of history I was living in would show a stock market deflation in comparison to gold, but I wasn’t sure if it would from stocks falling, or gold rising. At the time, it seemed the Powers That Be would be combating the falling market with inflation, and so betting the market would fall, wouldn’t be a winning choice. Going forward, I figured that either: inflation would take hold, raising all boats, (favoring gold particularly), or the market would crash, causing people to then rush to gold in the panic. So, either way, gold was the way to go.

But here is where I made a critical error, choosing to liquidate my short positions just prior to the October crash. I wasn’t sure where to put my money, so half of it went into Barrick gold mining stock (ABX) @ $37, and the other, just sat in cash. A week later, the market’s started crashing, as the credit markets freeze. Barrick’s up to $38, but everything else is uncertain. Volatility has overtaken the market, values bouncing all over the place.

The now frozen credit market prompts me to look into bonds; and, sure enough, I find some South Trust, rated AAA, maturing six weeks from the day I bought them, yielding an annualized 30%. Having done my homework, I knew South Trust, recently acquired by Wachovia, had now been taken over by Citigroup. Seemed pretty clear from all of the TARP madness that Hank, George, and Ben were peddling that Citi wouldn’t be allowed to go bankrupt. So, I sold most of my Barrick stock (for a small profit) and put the $20,000 into the South Trust bonds.

Turned out, it was a great move. Not only did I make $800 in six weeks when they hit maturity, but I say out the bulk of the decline in Barrick. I’d been actively trading it up and down in my traditional brokerage account, pretty much breaking even once all was said and done. But, as the bonds matured, I was still able to scoop up a ton of Barrick Gold close to the bottom. It was a decision at the time, trying to figure out if I should put the whole $21,000 to work in Barrick, or only half, instead. At this point, Barrick was range-bound between $20 and $25, so I decided to invest $11,000 into Barrick at $20.50, leaving the rest in cash to buy more, should it have fallen any further.

Of course, this was a decision I’d come to regret as Barrick took off — and never looked back.

But, by year’s end, Barrick would be trading in the neighborhood of $36 a share, my $11,000 investment now worth $20,600; had I bought in with everything, knowing I would’ve made even more.

Ah, well. It beats losing money.

As 2008 came to a close, I broke even in my traditional brokerage, (funded up to $9,000), my VUL had fallen to $2,200, or so, with my Roth sitting pretty at $32,000.

Okay, I know my math isn’t exact here, because I’ve not annualized any of these figures to correct for the fact that a lot of the money was added mid-year. If I did, my ROI would be even higher. But why be greedy?

All that being said, my final scorecard was:

Start 2007            Money Added         Subtotal          Year-End
Roth IRA                   $17,000                           $5,000                          $22,000                       $32,000
Traditional                 $1,500                           $7,500                           $9,000                         $9,200
VUL                            $3,500                             $260                           $3,750                          $2,250

Totaling up the subtotal field, I get $34,750 and a year-ending of $43,450. That’s right at 25%. As I mentioned, if I’d have corrected the ROI by factoring in the added money only being used for half the year, that ROI would be even higher.

Furthermore, since the major gains all came in the Roth account (which is TAX FREE, don’t forget) that means that my “tax equivalent yield” is even higher. That’s just a fancy way of saying, that since I don’t have to pay taxes on the gains in the Roth, the return is the same as making a greater amount that I would pay taxes on.

All in all, it was a profitable year.

TIME Magazine Assigns Blame for Financial Crisis

If anyone’s interested, TIME Magazine recently gave its top ten list for who’s to blame for this financial crisis. Without further ado, here it is — (accompanied by additional commentary by yours truly):

1. Good Times.

According to TIME’s Justin Fox, “Blithe behavior begat trouble.”

I suppose that’s true. As Charles Kindleberger documented in his book Manias, Panics, and Crashes: A History of Financial Crises, people will often get swept up in a mania, then look absolutely foolish once the bust hits. Kindleberger himself points out that over all of the financial crises in history, none have happened with the frequency that we have seen over the last 50 years or so. Our current financial crisis has befallen us after the collapse of the Internet bubble, which sunk to its greatest depth in 2003.

Historically, manias don’t happen back-to-back. This crisis was not driven by the madness of crowds on Main Street, but rather the insanity that was going on at Wall Street. So, I’ve got to disagree with Time placing this as the #1 reason.

2. Alan Greenspan.

Bingo! Fox and I agree here; I also commend the magazine for coming forward and naming names. As told most succinctly in William Fleckstein’s book Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve, Greenspan engaged in a campaign to avoid a recession by continuing to keep interest rates low over his tenure. He blew bubble after bubble, and now we are paying.

3. Twisted Regulation.

Again, I can agree with Fox on this one, despite my being Libertarian. Washington helped to foster this crisis by passing the laws that allowed banks to start repackaging mortgages and selling them to investors, and turned a blind eye to the obvious conflict of interests that developed.

4. Wall Street.

We’re in agreement here as well.

5. Home Ownership Obsession.

Fox says, “Homeownership generally is a good thing. Massively subsidizing it via the tax code might not be so smart. And turning a blind eye to crazy lending practices because they seem to encourage it definitely is not.” I agree.

6. Too Much Money.

According to Fox, “Lots of people worried for years that the gigantic trade deficits the U.S. ran up with, first Japan, and then China, were hurting domestic manufacturers. But the flip side of those trade deficits — gigantic capital flows into the U.S. — may have been even more dangerous. It was the capital gusher from China in particular that inflated the 2000s real estate bubble.”

TIME neglects to say where all that money came from, though; it was created by the Federal Reserve to help us avoid a recession. Which brings us back to our monetary system.

7. The Myth of the Rational Market.

Wow. Fox and I agree again. I’m happy to see people poking holes in one of economists (Macroeconomists, especially) favorite theories, but I worry that people’s natural reaction will be to call for more regulation.

8: You and Me.

According to Fox, “None of this would have happened if millions of us hadn’t come to believe we could get something for nothing by taking on debts we couldn’t repay. That this misconception was fostered by lenders and politicians is a partial excuse but not a complete one. Thanks to the Panic of 2008, though, we can count on nobody making this mistake again, at least not for a while.”

Man, TIME is starting to sound almost Austrian in its Economic outlook. If people come to realize as Frederick Bastiat wrote that ” … everyone wants to live at the expense of the state, ‘they forget that the state wants to live at the expense of everyone else.’ ” But, despite applauding the integrity of Justin Fox and Time magazine, I think they are wrong in saying that “we can count on nobody making this mistake again…” Indeed, the US Dollar is the ultimate example of something for nothing, and we seem to believe that so completely that the 30-year government bond is currently yielding 3.03%.

9. George W. Bush.

From TIME: “A lot of the government decisions that led to our current pass were bipartisan. Some were the doing of Democrats. But you can’t be a two-term president with your own party in charge of Congress for most of your time in office and escape blame for the economic debacle that unfolds as you prepare to leave town. The specific Bush act that probably contributed most to today’s difficulties? His reckless disregard for sound fiscal policy, as his tax cuts and war spending combined to turn budget surpluses into chronic deficits.”

Sing it, brother!

10. Commodity Futures Modernization Act.

Fox says, “If you had to pick a single government move that did more than any other to muck things up, it was probably this bill, passed by a Republican Congress and signed into law by lame-duck President Bill Clinton in December 2000. It effectively banned regulators from sticking their noses into over-the-counter derivatives like credit default swaps. There’s no guarantee that regulators would have sniffed out the dangers in time, but banning them from even looking sent a pretty clear ;anything-goes; message to OTC derivatives markets.”

This seems a repeat of the ‘twisted regulation’ point they made earlier, but I can’t fault them for recycling material. Especially if it’s valid.

11. Rating Agencies.

Absolutely. When the wizards of modern finance can get together and crank out debt instruments based on subprime mortgages that receive a AAA rating, then something is indeed rotten in the state of Denmark.

12. Letting Lehman Go.

Oh, so close! TIME fumbles the ball while rushing for the touchdown. If banks (particularly investment ones) are improperly run, then they should be allowed to fail. To do otherwise is to court moral hazard.

I’ve gone on about this at length in this blog in previous posts, so I’ll stop here.

Gold Ends 2008 up 5.53%

Not many things made a profit this year, except my old friend gold. Gold started this year priced at $838 an ounce and it closed 2008 at $884. That means that if you’d just bought and held gold all year, it would have gained you 5.53%. That’s an appreciation that is better than money market accounts and government bonds. As I’ve described in these pages many times, gold is the best asset there is for preserving your wealth in these tough economic times. It should also do really well in 2009.

You see, the Fed is trying to reignite inflation and they’ve pumped a lot of money into the system to lower interest rates across the board. When you see thirty year bonds yielding somewhere in the neighborhood of 3-4% you now something weird is going on. I believe that the Fed will be successful in there attempts to blow one last bubble and that we will see consumer spending make a rebound this year, and many Americans will probably breath a sign of relief just to see George Bush leave office. Obama’s probably going to have a celebrated first year and it’s probably going to cause a significant enough rally for people to think that worst of the economic crisis is over.

Of course, all that’s really happening is that the Fed is blowing one more bubble in the bond market. When that one crashes the economy will be even worse than before and we’ll be right back into this same mess, except the Fed will have run out of wiggle room in their interest rate policies. Once you’ve cute rates to zero and lowered the thirty year note down to 3-4%, you’ve started to run out of monetary shenanigans to pull. That’s when things are really going to get interesting.

My regular readers have probably noticing that I haven’t been posting as regularly lately. That’s due to two things: spending time with family during the Christmas holidays and studying for the series 7 exam. I’ve made roughly 20% or more for the last three years and so I’m working to hang up a shingle and start managing money for people. And that’s requiring some study on my part. But fear not. I will be returning to California and my old routine on Monday.

Till then. Happy New Year.

The End of Deflation

About a month ago I made a prediction that the whole deflation story was done and that we would start to see a rise to inflationary expectations once more. I’m feeling pretty good about that prediction despite the price cuts many retailers were making during the holiday season. I even experienced one myself in going to get a last-minute Christmas gift for my mother. So, dropping by Best Buy and picking up Curb Your Enthusiasm – The Complete First Season, I went to the cashier expecting to pay the full $36 retail; unbenknownst to me, they were instead running a half-off all HBO-series sale — I got out of there for less than $19. You might say I experienced a bit of holiday deflation first hand.

You know, I have to say, it actually felt pretty good. Suddenly, I wanted to buy every season they were selling past the first I was already getting. That just goes to validate one of the oldest truisms in Economics:

The Law of Demand.

When the price falls, demand increases. So, you can ignore all of those Macroeconomic wonks who tell you that deflation causes people to hold off spending in anticipation of lower prices. It, and almost every other aspect of Macroeconomics, is just not true. The real reason central bankers hate deflation is because it’s primarily caused by people going broke from overextending themselves in credit, and now can’t afford to pay. That would be a tragedy for the bankers; because they’re the ones who made the loans to begin with, now they would be looking at losses. Bankers hate losses. They hate them so much, they’d much rather hide behind some cooked-up lie about the harmful effects of deflation in order to call for bailouts.

Going forward, we may see some prices fall, but the deflationary scare of October and November is starting to fade. With Obama coming in and promising to stimulate the economy by deficit-spending some $1 trillion dollars or so, in combination with our pal Ben cutting interest rates to zero, we can expect that the spectre of deflation has safely been put to rest.

Although, I am expecting one more strong down leg in the market in the next few months: expect to see the Dow approach 5000 or so in 2009. What’s going to be curious to see is if gold follows it down, as it did in October, or instead, rises as gold is supposed to do. It can be hard to figure these things out, but I’m expecting it to rise this time. There should also be less forced liquidation by hedge funds, because I figure they got rung out of the market already.

Gold stocks, like Barrick, aren’t nearly as cheap as they were in October and November — when it was trading at a PE of roughly 10. It just ended the year trading at a PE of 18 or so. That stock rewarded me greatly this year. I was able to buy in at close to the bottom and nearly double my investment.

I think I’ve got the fever of just sitting on my cash and waiting for the next plunge. Of course, the problem with that is, you never exactly know when it’s going to come.

An American Christmas Carol; Part III; A Ghost of America’s Future

So where will all of this lead? Should we believe the Chairman of the Federal Reserve when he says that his policy of lowering interest rates should ease us through this crisis? Or, perhaps we should believe our new President who’s promising to make the economy his top priority and, through a combination of stimulus and bailouts, guide America back to the path of prosperity? And even if they are right in the short-term, and we do make it out of this recession — what is the ultimate path that our nation is on? Where is it heading?

The thing is, no one really needs to ask. You already know. It’s uncommon that I meet someone who doesn’t seem to know that:

Our country is broke and only the kindness of strangers keeps it from being bankrupt
We are losing our competitive edge to overseas competition
That we are an empire in decline

And so you don’t have to ask me where our country is going to end up. It’s obvious to any who dare ask the question and ponder the answer with any amount of objectivity. We are going to witness a collapse of our currency and, possibly with it, the corrupt body that serves as our government. We may not revolt and overthrow the government; perhaps we will only revolt against the taxes it levies as it tries to keep itself afloat for just a little while longer. But right now, the whole apparatus of the US Government is made to spend other people’s money in large quantities: the lobbyists are there to ask for it; the politicians usually got there to begin with on the backs of campaign promises to spend money; the Federal Reserve is there to create it; and the Congress is there to spend it.

Once the magic fountain of being able to print unlimited quantities of the world’s reserve currency has ended, we are left with a very different picture. If the government is to spend money, it must borrow, raise or print it. Given that we will have all but exhausted the printing and borrowing option, we will be left with a situation where money spent must come from current revenue. In other words, every dollar spent by the government must first come from someone else.

In that scenario, I doubt that politicians will get elected on platforms of how much money they’re going to spent to try and improve the economy. People will inherently understand the absurdity of that statement; money spent by the government to benefit the economy must first be removed from the economy. Thus, I think it highly possible that the government will be forced to suddenly discover frugality not soon after the voters pay more attention to their representatives actions and start holding them accountable. The entire scenario would reflect a far different kind of government functioning than we see today, and a better one.

Henry Hazlitt wrote a novel entitled Time Will Run Back that featured characters in a fully Socialist society “rediscovering the wheel” of capitalism and implementing it to improve their society, and I would love to think that this would happen. Perhaps after completing The Road to Serfdom as outlined by Hayek, we will once again heed the words of Jefferson who wrote:

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

It would indeed be a shame that Jefferson had the answers to all of these questions back when our nation was founded, but that we chose not to listen.

At any rate, our near term future is very dark for those of us who are not prepared for it. For the majority of America’s citizens this will serve as a rude awakening. They will discover that borrowing for the purposes of consuming is second only to war in terms of its economic destruction. I am sure that by that time we will have had our fill of both war and borrowing to consume, but this newfound austerity will be a forced one. Like many empires before us, we will stop attempting to conquer because we can no longer afford to support an army capable of the attempt. Like many peoples before, we will discover that we were not really entitled to the wealth of the world as we had deluded ourselves into believing.

The specifics of the future are impossible to predict, but I am sure that It will prove a very harsh awakening.

An American Christmas Carol: Part II; A Ghost of America’s Present

Today, we are a people that would best be characterized as sheep. Having taken control of our money as well as the most important functions of our Government, the banking sector is fulfilling its traditional role in support of it by creating all the money it wants to spend. The two major political parties of our nation have lost any meaningful distinction, and both favor a strong central government that oversees most areas of American life underneath layers of bureaucracy. They only differ in terms of how that power should be used: Republicans favoring the traditional fascist agenda of allowing government to work closely with large corporations to enhance their profits, while leveraging the military to open up and further expand the influence of both. Democrats favor using the power of government to reallocate wealth and correct for the errors of a free market. Both seek to expand government powers that were never granted by the US Constitution to begin with.

Instead of being outraged at the continual depredation of the American Government and way of life by moneyed powers and power-hungry politicians, Americans look to television to tell them what they should care about and how they should feel. Television serves to do little but distract them from what’s going on around them; even the news channels do little outside of featuring infotainment designed to titillate our infuriate its viewers regarding some contrived controversy epitomized by Fox News’ “War on Christmas.” And so Americans have come to look at politics much as they do sporting events: they have the team they’re rooting for and sympathize with, and the opposition they love to hate. They don’t seem to care whether the party sticks to its principles or not. Sometimes they don’t even know what those principles are.

In the midst of these sheep, the banking industry is content to make itself the power behind the curtain. Let Americans look to their government for guidance; they’re happy to just keep creating the money and lending it at interest for all of our ridiculous wants.

And why shouldn’t they? It’s not their money, after all. It’s ours.

The US Dollar is our obligation, and the bonds we take out to finance the whole circus are our childrens’. Why should the banking industry care if we spend it frivolously? It didn’t cost them anything — and they’re happy to make the interest.

At every turn in American political life, the banking industry is there to guide us. And, when it turns out that they’ve loaned Americans money they can’t afford to pay, they’re ever quick to exert their influence with Washington politicians to receive a bailout — courtesy of the tax payers, of course.

The game bankers play reminds me a bit of how parents pacify children; they know that children have short attention spans and a primitive understanding of the world, and so are happy to play on both in order to mold their behavior towards the parent’s own ends. And so it is with bankers and the American people: bankers know that Americans’ eyes roll into the back of their heads when they mention interest rates or the mathematical models of Keynes and his almighty multiplier effect, so they make what they’re doing artificially complicated as to purposefully misdirect everyone away from the obvious scam being perpetrated against us. And when they need to translate it out of economistspeak and into ordinary terms, they always do so with the most dire of warnings: Ben Bernanke himself told Congress that if they did not act to save the economy this week, that there might not be one to save come Monday. Of course, there was, but people were still scared enough to grant the Treasury and the Federal Reserve additional powers.

This can only go on for so long before we lose our prosperity and complete, in the words of FA Hayek’s book, The Road to Serfdom. And here we are, at the end of the road. Looking to our shepherds for guidance as we face a crisis that they previously promised us would never happen. Today our shepherd is Barack Obama and the Democratic party, and they are convinced that they can spend enough money to stimulate us out of the hole that naturally resulted from all the previous efforts at stimulus. As if to somehow show solidarity with Socialism, Dick Cheney recently scolded Congress for not bailing out the auto industry.

And so, we again are ready to rally around the leader and follow whatever plan he outlines to get us out of these dark times. We march forth, not really understanding the problem we are facing, but determined to do our best to fix it anyhow. Ben Bernanke has said that we have to lower the value of our money in order for us to beat this recession, and he has offered to do that for us by creating money out of nothing and loaning it out until interest rates fall to absolutely nothing. I’m sure that the average American feels somewhat suspicious of that course of action, just as they were somewhat suspicious of the Wall Street bailout, but they figure that the middle of a crisis is no time to question the orders being handed down. If the plan is to devalue the dollar, then here we go:

Printing presses: maximum warp!

This can only lead to one inevitable destination. We’ll look at that in the final installment of this series, when visited by the Ghost of America’s Future. Until next time.

An American Christmas Carol: Ghosts of Our Past, Present, and Future; Part I: The Past

Christmas; a time of friends, family, and ritual. Many religious, many secular. Among the latter, are TV showings of It’s a Wonderful Life and various versions of Charles Dickens’ A Christmas Carol.

Well, in the spirit of the season, I thought I’d write a blog series in the spirit of the Dickens’ work. This is the first of a three-parter regarding our current American crisis. In this, the first, we are going to take a look at some of America’s past ghosts that are still haunting us.

The figure of Scrooge is an unhappy one; he has used greed to fill the void left from the emptiness of his existence. In this way, Scrooge is personifying what Scott Peck would later write in The Road Less Traveled that most neuroses are caused by a person’s attempt to avoid legitimate suffering. If Scrooge had but properly grieved the pain and loss that the Ghost of Christmas Past came to show him, then he would not have become the twisted and hated figure upon which the story opens.

It’s ironic that that hated figure actually had a lot of virtues that we as Americans lack; Scrooge was tight with his money and always in search of prudent ways to invest it. Americans seem to work more hours than Europeans, and in that way we should be able to identify with Scrooge’s desire to lose himself in his own work. But it seems we are not using the work as a means to gather financial security (which was his obsession.) Instead, it seems we work to pay off the debts that nevertheless seem to grow year-after-year. In that way, we’re a bit like Jacob Marley; having lived lives absent of the proper virtues, and are now so chained to a hated existence we cannot escape.

While Marley was forced to walk the afterlife in chains of his own making, our nation has gone into debt to foreign creditors. We have lost our willingness to save, and with it, our competitive edge. And now, even our industries. Our only strength now lays in our military superiority — and, unfortunately, history is rather mute of any empires that were able to pay for themselves off of foreign tribute alone. Bereft of owning our own capital, we cannot compete on the world stage, and so we will increasingly be forced to work for our foreign masters in an attempt to pay off our debts.

How did we get here?

Let’s talk a walk with the Ghost of Christmas Past and see if we can figure it out.

When our nation achieved independence, it featured a manufacturing and financial North complemented by an agrarian South. The North and South were natural complements to each other, but over time, their differences got the better of them. A war was fought to determine whether the South would be allowed to become independent from the North, or whether the North would be able to use its expanding influence to dictate terms to the Southerners.

The war proved expensive; far more expensive than either side anticipated. The Northern Government turned to the financial centers to loan it money, but that proved insufficient as the war drew on. So, they returned to the bankers, who then asked them for a favor. The first national banks were chartered during the Civil War, and the act that chartered them gave huge advantages over state-chartered banks. So much so in fact, that several banks switched their charter to become national banks. Next, the Government floated the idea of issuing unbacked fiat money, and which point the bankers asked for another favor: Greenbacks, the first ever fiat money issued, were declared to be legal tender for all debts public and private … save two. According to the laws then, interest or import duties had to be paid in gold coin.

The bankers knew fake money when they saw it, and they were content to let its inflationary power slowly deprive the people of their wealth — as long as the bankers themselves were able to increasingly acquire gold. By allowing this law, the US Government was giving the bankers a mortgage on the future earnings of Americans — and, to top it off, demanding that it be paid in gold.

After the war was won — thanks in no small part to the financial maneuvering of these newly-created national banks — the balance of power continued to shift in their direction. The Republican Party was dominant both during and after the war, and it had a very cozy relationship with banking interests. More legislation was passed under President Grant by which the US Government abdicated controlling its money supply to the national banking interests who were now allowed to expand or contract the amount of bank note currency in circulation according to whatever reasons they say fit. The power to create monetary-based booms and busts had been handed over to the bankers who quickly recognized it as yet another tool for influencing public policy. More than once, the national banks would greatly contract the money supply to incite a panic if they were not pleased with what the politicians in Washington were talking about.

The industrial revolution started booming, and with it came increasing worry regarding the power of large corporations. People grew especially fearful that large corporations would begin conspiring amongst themselves to confiscate wealth from the people. Consideration of antitrust legislation started being brought to the table; the most threatening trust of them all was the national banking system — dubbed by its opponents as “the Money Trust”; which was too smart, too powerful, and too subtle to be undone by a simple act of Congress. Instead, the Money Trust conspired to arrange for the formation of a government-sanctioned banking cartel — its crown jewel being a US Central Bank; privately owned, yet solely responsible for control of the US debt obligation: the US Dollar.

The Trust went to work; in no time at all, they had their allied Republicans in the House and Senate considering a plan to create the Federal Reserve. Surprisingly enough, President Taft took a rather un-Republican stance on the banking bill, refusing to support it, so, the bankers waited until the next administration. Do-gooder Woodrow Wilson defeated Taft to become one of the first Democrats since the Civil War to win the Presidency, and the bankers soon brewed a tempest in a teapot by having Congress call hearings meant to expose the abuses of the banking industry. What would happen next was a foregone conclusion; Congress found that the banking industry was abusive, in need of being cleaned-up — by the creation of a central bank and entrusting the bankers with its ownership.

From there we start to get to the history we all know. Under the Federal Reserve, the boom and bust cycle got much more exaggerated, and soon we had our first “Great Depression.” This prompted the bankers to again ask the Government for more power, and FDR was happy to comply in whatever ways they deemed necessary. And soon, it was insuring banking deposits, declaring bank holidays, even outlawing gold ownership by American citizens — but not American banks.

The bankers found a friend in Macroeconomists such as John Maynard Keynes who legitimized their control by theorizing that the operation of the free market was too unstable to be allowed to function on its own. But really, they were so powerful at this point that all that they had to do was pick the right person for their spokesperson. If Keynes hadn’t been around, they’d have found another patsy.

Keynes told a lot of lies in his theory. Chief among them was that savings was a vice, not a virtue, and that and investment funded by newly-printed money was just as good as an investment funded through odious savings. The bankers now became the national heroes of our society, ever-ready to stand firm in the face of market downturns and do what they have always done naturally anyway — create money in massive quantities.

(Most of the information I used for this blog post came from the excellent book, The Coming Battle: A Complete History of the National Banking Money Power in the United States which details the activities of national bankers in perverting our republic to further their own ends.)

Next time we’ll take a trip with the Ghost of Christmas Present and really assess how far this system has taken us. Until then.

The Logic of the Auto Bailout

Today it was announced that George Bush was extending $13.4 billion of the $750 billion in bailout money to the auto industry: $9.4 to GM and $4 to Chrysler.

Let’s take a closer look at that. According to GM’s balance sheet, it’s currently worth, oh, -$60 billion dollars. That’s not good credentials to secure a loan, but maybe their income can make up for it. Hmm, GM’s income statement shows that GM lost -$38 billion in 2007, -$1.9 billion in 2006, and -$10.5 in 2005.

Hmm. Well, that’s none too encouraging, either.

I suppose there is some good news in all of this, though. The -$60 billion that GM’s currently worth has largely all come about in the last three years or so. Although, if you go back to when they were earning money, the company made $3.6 billion in 2004 (2.9 of which came from GMAC), $3.8 billion in 2003, and $1.7 billion in 2002.

Hmm. Well, that’s not looking so good, either.

2003 seems to be the only year where GM actually made much money manufacturing (as opposed to loans for) cars, and the profit they made in that year was roughly $4 billion. Even if the company were to restructure to produce $4 billion in profits every year from here on out, it would take 15 years for them to have a net worth of zero, and an additional 3 if we now factor in paying back the government loan.

That’s close to 20 years down the road before this company even achieves a net worth of zero.

I don’t know about you folks, but that seems highly unlikely, and even if it is in the realm of possibility, I still have to ask: “So what?”. Should we celebrate that GM might someday work and plan hard in the hopes that it someday might achieve the honor of being worthless?

And, if we step back from this rosy scenario of $4 billion in profits per year, the situation looks ever more bleak.

I’m here to tell you that next year will not feature a sudden bounce back in the demand for GM cars, and the year after that’s not looking too good, either. As I describe in my book, we are looking at the tail end of a multi-decade expansion in consumer spending. Consumers at this point are completely and totally buried in debt; they too hope that someday they may be able to work and save and someday be able to call themselves flat broke.

In fact, debt is everywhere we look today: car companies, consumers, governments — all are hopelessly indebted. And, really, all we’re talking about doing here is creating some money out of nowhere (which is where this whole “bailout” is going to come from to begin with, in case you didn’t realize) and loan it out at interest to someone who has no real hope of ever paying it back, in the hopes that the benefits of keeping GM around will outweigh the costs.

Not likely.

Let’s face it, folks. As Peter Schiff says, the US government can’t even afford to bailout a lemonade stand at this point. No one has any real money. Everyone’s broke, and the only money that can be used to remedy the situation has to be printed and assumed as someone’s debt. Which is really an exercise doomed to fail. The American automakers are in as bad a shape as the rest of us. I see no reason we should use fiat money to try to redistribute wealth away from one group of broke people and towards another.

All of us have to realize that true wealth can’t be created from thin air, and you can never borrow your way to prosperity.

Until we release those delusions, we’ve got a long hard road to the bottom to look forward to.