About one year ago, in a blog narrative (09/27/08), I described discreet phases to the current economic difficulties. Phase One was the bursting of the Credit Bubble. Phase Two began in the fall of 2008 and continues.  I described this phase as Dollar Collapse and Economic Dislocation. Before an update on this phase I want to address the current stock market rally that started in March, 2009. It will likely come to an end soon. Here is why in inverse order of reasons. 

10. Fibonacchi number related time spans, studied by Robert McHugh, show a turn date cluster in mid-November.  

9. The persons who did not see significant financial problems that would impact the stock market in 2007-2008 are the most bullish now. This assessment is based on listening to interviews on CNBC.  

8. The best chart technician I know is Frank Barbera (and I have studied many over the last 20 years). He has several unique indicators that others do not know about or use. They are quite reliable by my scrutiny. Using them it seems the end is near on this great bear market rally. He reasons a major turn will wait until December, and November may end quite strong first.  

7. The rally since March to repeated higher highs is occurring on decreasing volume—historically a big red flag. Down days are tending to occur on higher volume.  

6. The rally is occurring with fewer stocks in the indices making higher highs or staying above their 50-day moving averages. This means fewer stocks than early in the rally last spring are carrying the load.  

5. Other bearish chart patterns are quite obvious on the major indices for many markets such as: head and shoulders on large time scales that project the Dow to near 1000, rising bearish wedges, stock averages in a rounded top, whereby each new higher high is shorter than the previous rally high (i.e., weakening upside momentum), and Elliott Wave counts at terminal phases on various time scales such that a confirmed turn down in stock averages could get very ugly very fast.  

If stocks hold up into the new year and bearish chart patterns dissolve, then the following fundamental reasons will eventually weigh in – big time.  

4. Meredith Whitman, a very smart lady, who nailed the bank crisis well in advance, said on CNBC yesterday (interview available at http://www.thedailycrux.com/content/3401/Financials/eml) that the bank stocks will go much lower from here, and eventually trade at tangible book value. Also, she expects a double dip recession, with the second dip in 2010. Further she thinks the current rally has no fundamental basis. Other writers note that the big bank risky derivative exposure is still in the trillions, a ticking time bomb part 2.  

3. The amount of money that is short the US dollar is very large due to very low US interest rates. This ‘free money’ is being leveraged and used to drive up commodity and paper assets. Even on a daily basis stocks go up when the US dollar goes down and vice verse. If this dollar borrowing should reverse, for example by a flight to the US dollar during to a geopolitical crisis (e.g., Israel bombs Iran’s nuclear facilities), then the unwinding of this ‘carry trade’ could be explosive. The Dow could drop more than 500 points within hours.  

2. The national economy is close to a train wreck, for many reasons: very large national debt (cumulative) and deficits (current year and projections for the next several years), unfounded liabilities in the many trillions for our aging population (social security, Medicare, Drug Program, probably a new Health Plan with universal coverage and too few cost controls, competitive disadvantage in manufacturing, increasing costs for energy and pollution controls (green revolution), and remedies espoused by BOTH parties  for the government and individuals to increase debt (i.e.,  pour more gasoline on the fire)  

1.A political system which is corrupt at its core due to an apathetic public, career politicians that have rigged the system to make incumbents or their like-thinking opposition a lock for election, and powerful money influence on who gets elected, what bills get passed, who gets appointed to influential positions, and what regulations get enforced. Someday the Goldman Sachs—JP Morgan—US government unholy relationship that results in market manipulation and other unsavory actions will be exposed. Is there a whistle blower out there?  

Back in October 2007 I penned the blog entry “An Angry Citizen’s Solution to the Current National Dysfunction” . In a January 2008 blog entry “Why It is Different This Time” I expounded again on the sickness of the US economic situation and made a few predictions on how things might play out. Since that time I have discovered a book titled “The Fourth Turning”. I recommend this to all. It shows how history repeats itself due to unchanging group human behavior. The Web has several sites with good summaries of the major thesis of the book. I suggest that you store several months of extra food and paper money at home, along with ‘real money’ in the form of gold and silver coins or bars. Food and energy shortages are likely, ATM machines may close, and civil unrest may flare up. World wars and radical governments coming to power typically accompany ‘fourth turnings’. The major precipitating event may be either an attack by terrorists or by one nation, or a major currency crisis as the worldwide competitive currency devaluation gets out of hand and confidence in paper money drops significantly. These events will probably take several years to play out but during 2010 the signs of increased national stress should be evident.  

The solution to this mess is for bright honest people to form a new political party that favors less spending, lower taxes, non manipulation of free markets, and policies that encourage savings and investment (e.g., elimination of capital gains taxation). The public will need to be educated on how we got here and the inevitable pain that lies ahead. Due to decades of bad policies and corrupted politicians getting onto a sound footing from here will be very painful. Initially house prices need to find a much lower level, unemployment will continue to rise, the standard of living will fall further, and currencies need to be backed by either gold or a combination of commodities (so that the money supply is limited, not able to be expanded at the whim of government leaders who want to promise more goodies to insure reelection). The alternative is to keep stretching out the same failed policies of both parties until complete economic collapse: government spending without the necessary revenue, increasing taxes on those who produce than on those who consume, promoting policies that penalize savers and reward borrowers, and devaluing the currency in order to continue unfunded programs or ‘fund’ new ones.  

Common sense will tell you that a strong economy must be built on production of products, intellectual property, and/or commodity resources; not based mainly on creating new leveraged investment products, trading paper investments, servicing each others health needs, creating paper money by the Federal Reserve, passing more government stimulus programs that transfer money from the productive to the unproductive, or opening more coffee shops and fast food restaurants. We have papered over the recent financial crisis with more debt and money creation, used ‘creative accounting’ to convince a gullible public that a recovery is at hand, and falsified economic statistics (on this I refer to the web site ‘Shadow Government Statistics’). The laws of economics, like the laws of Physics, are immutable. When the force exerted on a ball that is pushed uphill wanes, the ball will soon accelerate downhill.

The new President will likely have a whole new style, be more
open,  more innovative,  more enlightened, and foster more
cooperation from diverse interests than his predecessor.  As time goes on  I view him as genuine
and likeable.  However, my thesis all along, which has not changed, is that
he will have much less impact than all would like (including him)
because crisis management and rapidly decreasing government revenue will
dominate the agenda. And, his likely way of managing the economic/financial mess will
be to pour more gasoline on the fire. That is to say a nation drunk on the
consumption of credit and the hangover of debt cannot get anywhere but
more sick when it creates more debt. Sadly, the stimulus program and all the
bailouts, which he endorses, will do just that. There may be a temporary
weak recovery, but in the long run the situation will get worse and the
bad times will just be stretched out. In truth, bad businesses must be
allowed to fail, home prices must be allowed to fall to their equilibrium
level (based on supply and demand), government spending must be reduced,
and savings must increase. Until these things happen the foundation for
true prosperity will not be laid. I think the people, including most
establishment folks, expect the President “to do something”, which means
government activism to spend more and to create bailouts. It is very hard
for the President to say and act to let the chips fail where they may.
Common sense should tell everyone that lasting prosperity cannot be
created by spending money that is created out of thin air (by the Federal
Reserve) thereby further increasing the staggering debt load. Very few
think this matters because it is hard to grasp the consequences that
surely lie out there. The urgent (trying to fix the unemployment or house
mortgage defaults) trumps the necessary (getting the nation on a stable
financial footing). The latter takes time and inflicts pain, not something
politicians can endorse–except in war time.

I pray earnestly that President Obama and his advisers will grasp the
basic principles of the law of economics (i.e., the need for savings and
investment AND the benefit that recessions bring to cleanse the system of
bad investment), but his appointments are the same folks that were either
part of or supported the policies that got us here.

Charisma, intelligence, likeability, honesty, etc. will not change these
truths any more than good intentions can reverse the law of gravity. If we
think so we are just deluding ourselves.

Much has been written and said about Sarah Palin’s lack of foreign affairs experience. In my opinion her answers have been defensive and nonsensical, such as citing the short distance from Alaska to Russia as an example of this experience. She need not be defensive. There is a perfectly good answer that she should be giving to this question. When asked by a reporter or opposition about her lack of preparedness to be President, which is really an implicit question about her lack of foreign policy experience, she should reply in words like this:  

 

Joe [or other appropriate name], that is a good question for which the American people deserve an answer for any national ticket running for the highest executive offices in our great country. Joe Biden has an impressive resume which compares favorably to mine in some respects, but with all due respect to him, my resume is superior to his AND Barack Obama in other very important respects. When Governors run for national office they are frequently criticized for “lacking foreign policy experience” AND Senators are criticized by their opponents also. For example, Joe Biden has never had to balance a governmental budget or administer a multi-billion dollar one. So, in important respects my resume, including service as a Mayor and Governor, is superior to his or Barack Obama, who, by-the-way is a freshman, first term Senator. Historically, Governors from both Parties, running for President or Vice President, have had little foreign policy experience. Jimmy Carter, Ronald Reagan, and John Kennedy are some modern day examples. And let me add this, Joe, A Vice Presidential nominee, has about 9 weeks from Election Day to Inauguration Day to prepare for being President if the need were to arise. And let’s be realistic, Joe, only one Vice President has ascended to the Presidency, in the first 6 months of a new Presidential administration. So it is very likely that a new Vice President has at least an additional 6 months or more for experience and preparation. Lastly, if the Vice President should become President, all of the foreign policy advisers that surrounded the President would continue to advise the new President. So, Joe, the American people need not fear my previous lack of foreign policy experience, any more than they should fear your side’s lack of executive experience. On close examination of both tickets, the American people will see that John McCain and I are the best choice. We have the best combination, with John McCain at the top of the ticket, an experienced Senator with vast foreign policy involvement and an aggressive record of challenging the Washington establishment on matters of corruption in  government and in politics, with me and my executive experience and a proven record of reducing my state’s government size, cutting taxes and taking on the good old boys network to instill confidence and ethics to government.

 

Robert Harnack

Cape Ray, Newfoundland, Canada

harnack@envsci.rutgers.edu

The title suggests discreet phases to the current economic difficulties. Phase One is the bursting of the Credit Bubble. Phase Two has begun.  I describe this phase as Dollar Collapse and Economic Dislocation. The economic events of the past month or so, while stunning to the unaware and surprising in the rapidity of the financial distress, were generally foreseeable once the implications of a credit bubble collapse were understood. Back in October 2007 I penned the blog entry “An Angry Citizen’s Solution to the Current National Dysfunction” which discussed these implications and mentioned that the lowering of short-term interest rates by the Federal Reserve, while cheered by the stock market, was simply delaying and exacerbating the inevitable. In the January 2008 blog entry “Why It is Different This Time” I expounded again on the sickness of the US economic situation and made a few predictions on how things might play out. Since I am on a hot streak I will venture into the prediction game as the primary purpose of this narrative, with the hope that readers will take immediate action to protect themselves.

 

Before venturing to the predictions, a commentary on why the recent massive bailout for the financial system promoted by Treasury Secretary Paulson is a waterfall event with enormous implications. The banking and economic system in the US is built on credit AND confidence. They go hand in hand. When top officials of the US government and private sector publicly issue statements with phrases like “financial Armageddon” in order to justify a quick and large bailout, a large crack in confidence has occurred. When investors, like foreign ones, hear this they reassess their massive amount of dollar denominated investments. Reduced buying or outright selling of US Treasury Bond and Note holdings will result, with very significant implications (see prediction #4 below). We have already seen confidence much reduced within the US financial community as the valuation of securities affecting the worth of companies and loan collateral value is not trusted by other financial entities. Once confidence, similar to trust, is lowered it cannot quickly be elevated again. Regarding the predictions, I will start by saying we are still in uncharted waters, only now we are more deeply under than several months ago. The probable outcomes are scary, and the possible outcomes make the Great Depression look like a walk in the park. The reasoning for each prediction is not elaborated in order to maintain brevity.

 

Predictions with a high probability of occurrence:

 

1. The US dollar is on a path to even more devaluation from its current depressed level relative to a basket of world currencies. The implication of this follows in other predictions.
2. Traveling abroad for many citizens will be too expensive and therefore will be curtailed significantly.
3. The price of precious metals is set to skyrocket. My safe prediction is $2000 gold (currently it is near $900 per oz) and $20 silver (currently it is near $13 per oz) within three years. My real belief is that gold will top $4000 and silver $50 within 3 years.
4. Long term government bonds (and most other bonds) with maturities of 10 years or greater will decrease in value (increase in interest rates), so that interest rates currently in the 3 to 4 percent range will double with two years. This has obvious implications. If correct then ……
5. Housing prices will not recover significantly from current depressed levels for several years, certainly not before much further devaluation. Since depressed housing prices are at the core of the manifest financial stress on most large financial institutions the implications of this are very significant (see  #7  below)
6. Increasingly home “owners” will stop paying on their mortgages either because they cannot due to the implication of unemployment or because they will not due to  the government saving their neighbors from foreclosure or eviction. Some will simply refuse to pay on their mortgage again. This is an example of  “moral hazard” manifest.
7. The recession the economy is already in, which is based on the realistic economic numbers published online at “Shadow Government Statistics”, will worsen to levels approaching or exceeding the Great Depression. The reasons are many and self-reinforcing. GDP decrease and unemployment increase are my measuring sticks. Unemployment will grow to near 20 percent.  Again, I am using, and will use, the realistic numbers for verifying this.
8. The major stock indices will fall by at least another 20 percent from current levels over the next 6 months. After that I am unclear whether the massive money creation by the Fed, which may buoy the market in nominal terms, or the continuing economic slowdown, which will tend to push stock averages down further, will win out. In either case, the markets will lose value in real terms, determined after accounting for monetary inflation. Hence, the need for gold, silver, and foreign investments in a portfolio, so the total real portfolio value can be maintained.
9. Sporadic shortages of energy will occur, possibly chronic, such as gas stations closing. Fill your car with gas whenever the tank drops  below half-filled.
10.  The next President will have frequent “emergency” speeches to the nation and imply that the dire economic situation came on suddenly and put the blame on entities at the end of the causal chain. A recent example of this is to blame Wall Street for the credit freeze-up rather than the Federal Reserve (the money machine) and Congress (the spending machine) for irresponsible monetary and fiscal behavior over several decades.

 

Predictions with a low but above 10 percent chance of occurring:

 

1. The dollar may go into freefall in a hyperinflationary environment and the need for a Latin America type revaluation and new currency creation may occur. In fact, a major currency summit meeting of the large economic powers may be needed after the currency chaos begins. The return of the gold standard in some form may be required in order to restore confidence.
2. Civil unrest, like the US had in the 1960s, may occur. Rioting and looting in the cities and increased suburban burglary and theft is a real threat.
3. The US government may use emergency powers to do such things as: Freezing prices, rationing of purchases, confiscation of gold and silver held in US vaults of private citizens, and a limitation of the export of dollar funds abroad.
4. ATM machines will be empty at times and bank deposit or money market funds redemptions may be delayed.  I strongly suggest keeping a hefty cash sum hidden at home and/or in a safety deposit box.
5. Food stores may have empty shelves due to disruption of the transportation system from gas shortages or from food price freezes resulting in farmers reducing production. I suggest keeping the home food panty inventory unusually high.
6. The food lines in charity kitchens may be filled with significant numbers of the unemployed AND some retired seniors who have had inflation, property taxes, and artificially limited Social Security Cost of Living Adjustments (COLA) put them on the street. 

In a future narrative I want to discuss my reasoning for these very negative predictions. The causes are many and have slowly evolved over decades. I will also offer the favorable factors still in place that can result in the US rising from the ashes eventually.

 

If you automatically vote Democratic for President or think ALL Republicans are alike then the arguments I make for voting McCain will probably fall on deaf ears. First, I will not make the arguments you hear in the political ads on TV or hear from the candidate stump speeches. Both sides distort or make up what they like about themselves and/or the other candidate. My arguments are more reasoned, realistic, and substantive. I believe that the age, level of experience, and charisma are secondary reasons, at best, for making the decision as to whom to vote. Sure, the next President should be older than the Constitutional requirement of being 35 years old, served at two or more levels in political office, or as a military leader, and/or as a company head. Comparing candidate’s number of years in office, whether they served at the state vs. national level, or whether they inspire you in their speeches, are not so important as assumed. An explanation is offered here in defense of these assertions:

 

1. Experience in national security and defense matters before being President is over-rated. Jimmy Carter, John Kennedy, Michael Dukakis, and Ronald Reagan, to name a few, had little or no such experience. The reality is that a new President can be effective in the Commander in Chief aspects of his office by being well read, well prepared after assuming office, and surrounding him or herself with experienced, knowledgeable individuals in the roles of Chief of Staff, Security Adviser, the Joint Chiefs, etc. Much more important is the ability to absorb information, effectively question advisor recommendations, foster debate within the administration, and be able to make reasoned decisions. Also, he or she needs to be effective at persuading the Congress and the public if the decision is liable to be unpopular. There is no reason at this point to believe that any of the four president and Vice Presidential candidates could not be a good Commander in Chief, despite what the two sides argue publicly against each other.
2. The next several years will not be like any period in our history, except possibly for the Great Depression. All the campaign talk from candidates, especially from the Democratic side, about the federal government increasing its spending on education, job training, and health benefits sounds great but it isn’t going to happen. The government is so broke that if the US dollar were not the world reserve currency it would be considered a banana republic, or at best an Argentina, in terms of its debt load and currency debasement. The total accumulated national debt plus the total future unfunded liabilities for Social Security, the Prescription Drug Plan, and Medicare programs is in the tens of trillions of dollars. The US dollar has lost 30 percent of it value versus a basket of other currencies in the last five years, and despite some recent strengthening, will sink much further since the Federal Reserve Bank has been creating new dollars out of thin air at double-digit annual percent rates for many years. This will only increase since they have signaled that mitigating an ever-deepening recession via money creation takes priority over fighting inflation. Translation: more dollars sloshing around the world, making every dollar worth less—as basic supply and demand works to reduce dollar value just like it does for any over-supply of goods or services. The next President is going to face an unprecedented series of serious crises: energy shortfalls and possible shortages, a dollar collapse, hyperinflation if the Fed keeps pumping out money and the Congress keeps spending at current or increased rates, and infrastructure issues from unsafe or collapsing bridges, roads, rails, etc. Not to mention geopolitical problems involving the usual suspects such as Iran and Russia. Yes, some of these have plagued previous administrations, but the modern US has never been essentially financially insolvent, plus having large amounts of debt owed to foreign powers (many of which are NOT our friends), exporting trillions of dollars to pay for imported oil, a credit crisis that has no end in sight as trillions of dollars of complex financial derivatives remain ready to implode the entire financial system at any time.  Warren Buffet has called the gigantic holdings of derivatives, credit default swaps, and other very complex financial instrument held by our banks “financial instruments of mass destruction.” The underpinning real assets of much of these financial instruments are tied to the real estate market where property values appear to be falling without pause. So, now for the bottom line.

 

If it were a question of experience in and out of government McCain would be the choice hands down. However, the candidates need to be evaluated with a different yardstick than previously.

 

The next President needs to be someone who can keep his own political party at a distance, if necessary, and have credibility with the opposite party in Congress to work in a bipartisan way to begin to solve these very serious, well entrenched problems that have been building for several decades. John McCain has a record of being this type of politician, which is rare in Washington. Forget the noise of the campaign with it charges and counter-charges. Forget the charisma quotient, though this can be a positive for a leader who needs to convince a nation that some difficult painful medicine must be taken. There is going to be spending cuts, not increases, and entitlement reduction, not increases. This will not be a choice, but a necessity, since one way or another the international financial markets will force the issue (i.e., dollar collapse, refrain from further funding our exploding debt, or otherwise). I cannot imagine how Obama is going to be able to come around to government doing less. But I can see McCain taking unpopular, but necessary action, as he did when going against the crowd on the Iraq military surge, and fighting his own party on ethics issues and Political Action Committee (PAC) influence on our electoral process. His demonstrated tenacity shown in military service and while in Washington makes my decision an obvious one, given what lies ahead. After the nation gets its fiscal and financial affairs under control, requiring much tough medicine, then it has the luxury of considering an Obama, but not now.

 

Robert Harnack

Cape Ray, Newfoundland, Canada

 

 

Often investors justify high stock or other asset (e.g., real estate) valuations by thinking “it is different this time”. Usually they are wrong as the natural or group psychological pendulum swings from greed to fear and back again. The recent real estate bubble is a good example of this mindset. However, the ground has been laid by persistently bad US monetary (money creation) and fiscal (spending above revenue) policies over the last half century, at least, so that the current economic state we are in will likely evolve into the worst crisis the US has ever faced, leaving past wars aside. First I will summarize the current state and give how each aspect will likely evolve: 

1. House prices and construction spending are down dramatically from the peak in 2005 and the decrease is accelerating. While the acceleration on the downside may end soon it is likely that the decrease in the real estate and construction sectors have years to run. The excess building inventory, rising unemployment, interest rate resets, and contracting credit (i.e., lenders are tightening loan standards) are some of the reasons.
2. The real cost of living is increasing at about 10 percent per year. This stealth wealth eroding process is not likely to improve in the near future as the supply of commodities continues to come under pressure (i.e. shortages) and federal money creation continues unabated. Gasoline pump prices should hit $4 per gallon before 2008 is finished. Any significant oil supply disruption from the various unstable portions of the world, where most of the oil reserves are located, will push the price at the pump to $5+. A severe global recession could negate this prediction until further into the future. Food prices are also rapidly increasing with the help of corn and other grain shortages, which in turn are caused by the government promotion of ethanol—possibly the dumbest policy of its size ever federally mandated.
3. Fixed income folks that do not have much in the way of other savings are feeling the pinch due to Social Security cost of living adjustments(COLA) remaining below 4 percent, as their expenses increase at twice that amount year after year. In general, they get little relief from stable or decreasing property taxes. As the recession takes hold, and other revenue received by governments decrease, this situation will not likely change. As a result you will see more senior citizens back in the workforce doing menial work at low wages.
4. The US is in an unofficial recession currently, defined here as negative year over year GDP growth, and has been for several months. Keep in mind that the government issues phony economic statistics, especially the inflation indicators (3 percent reported—they got to be kidding!) so they can claim the economy is growing and COLA can be kept low.
5. Stock indices have decreased from 10 to 15 percent from their peaks in 2007. Sectors such as banking, finance, construction, and retail have done much worse. Many financial commentators who either have no knowledge of stock market history or are deliberately deceiving their audience and clients say the “market is already pricing in recession” so the bottom in stock prices is near. The fact is that stock averages decrease about 30 percent from peak to trough in the average recession. The current evolving recession is not likely to be just average, but considerably worse. Why? In brief, excesses are normally following by strong reactions in the opposite direction. Assets of almost every kind have gone through very large, sometimes record, increases in nominal value. This includes stocks, bonds, real estate, and commodities. All, except possibly the latter are, or will be, swinging in the opposite direction. Decreasing wealth from asset devaluation and practically zero national savings rate is more than enough reason to believe the current recession will be a severe one. If that is not enough also consider that debt levels are historically high at every level, except corporate.
6. The federal government has unfunded liabilities in the tens of trillion dollars due to continuing budget deficits year after year and staggering costs going forward for Social Security and health care related payouts for the rapidly increasing number of seniors. This fact plus the very likely politician remedy to cries from the public “to do something” about the economic woes will exacerbate the buildup of debt. Congress will either increase spending for some new program or offer tax cuts which may decrease overall tax revenue. Revenue tends to decrease anyway in recessions. What it all means is: a continuing devaluation of the US dollar as the currency market senses more and more dollar supply and a weak US economy. More dollars means each is worth less. The increasing supply is facilitated by the Federal Reserve creating more dollars to cover and “diminish” the government debt load. This is called monetizing the debt, which is probably the only way this debt can ever decrease significantly, given the demographic changes and entitlement increases. As the dollar value decreases the flight to gold and silver is assured. I strongly recommend that every investment portfolio include as least 20 percent in these assists. Today this is easy to do via purchase of CEF, GLD, or SLV shares on the stock exchanges. Also, an organization called Goldmoney makes the conversion from dollars to gold and back again from online accounts very easy. The best bet for gold and silver bullion is the purchase of CEF shares since it holds bullion outside the clutches of the US government and is denominated in Canadian dollars—a stronger currency. In the 1930s the US government confiscated gold, so it could easily happen again. Look for gold to go over $1000 and silver to $20 per oz. within a year, and eventually to $5000 and $100 respectively, as people all over the world come to recognize that fiat (paper) currency, not backed by anything, is being devalued at a rapid rate. Most of the large economic entities (i.e., nations) are increasing their money supply at 10 to 20 percent on an annual basis. This is nothing more than adding more of their currency to the market, thus decreasing its value.

So, I believe it IS different this time—worse than any financial circumstance in the nation’s history, including the 1930s. Further, it is NOT a replay of the 1970s when significant inflation, recession, and a bear stock market also occurred. Back then the nation recovered from these with help of a Federal Reserve which did the right thing by raising interest rates to cool inflation pressures, that in turn helped defend dollar value. As I scan the current political and economic landscape  I see: 

• Weak, self centered political leadership in the White House and Congress
• A Federal Reserve which is failing to use its independence to do what is in the nation’s best interest in the long term
• A national savings rate near zero
• Current and projected national debt loads at mind boggling, unsustainable levels
• Financial products created in the last 20 years that have underestimated risk, have current total global value in the hundreds of trillion dollars, AND are intertwined in the financial fabric of all global markets such that a domino effect could occur which would bring the whole global economy to a standstill as fast as you can say “stop loss” to your brokerage.
• The increasing influence of hedge funds on financial markets many of which employ client money to invest in financial derivatives using various levels of leverage. When the unintended or unpredictable happens, as in the recent sudden devaluation of mortgage backed securities, some of which were rated AAA (highest safety rating) by rating agencies, will result in the forced liquidation of other financial holdings such as stock shares. This deleveraging could precipitate a ‘crash’ in the related AND unrelated financial markets.
• A US economy which has been growing less productive year after year as more goods are imported and each unit of new debt incurred produces less and less increase of GDP (i.e, less bang for the funny money buck).
• Real inflation at high levels, but not recognized by most of the public, allows our political leadership to continue the ‘big lie’ that all is basically well and will continue without significant sacrifice or pain, thereby promoting their reelection. (As an aside presidential candidate Ron Paul, a non-charismatic congressman from Texas is the only candidate who seems to have a clue about the real state of affairs. His grilling of Ben Benanke at a recent Congressional testimony was the highlight of my day and reportedly resulted in cheering on the floor of the Chicago Board of Exchange).

It IS different this time, as the current “slowdown” is going to be much worse than anything experienced before, and the consequences of past government policies and our own collective greed will have very significant social consequences as well as economic ones. Batten down the hatches—the next decade is going to be very unsettling. 
 

Commentary written by Robert Harnack on Jan.13, 2008. The research and insights provided by many experts outside the Wall Street mindset is greatly appreciated. They include Frank Barbera, Jim Puplava, Peter Shiff, and many others which have their commentaries available at Financial Sense Online. This site and the publications and web sites of all of the foregoing are highly recommended to all.

Ten myths from the fields of finance and science  

1. The increasing use of ethanol will significant help mitigate the harmful effects of the coming energy crisis. 

Experts who calculate the fossil fuel energy needed to grow the corn, and to produce and transport the blended fuel say there is not a significant net savings in the use of fossil fuel. And some argue that more energy is consumed in the process. The ethanol policy is principally aimed at helping farmers under the guise of a supposed emerging national energy policy. First, using vast acreage for corn is resulting in higher overall food prices and second, the US has no coherent policy or plan regarding the pending energy crisis. Ethanol not only does not help matters, but it helps delay the implementation of measures that are really going to help.

  2. A myth of those who essentially believe the expert reports regarding global warming and its cause: Extreme weather events of the last few decades such as killer tornadoes, strong hurricanes making landfall, floods, and drought are evidence of increased greenhouse gases such as CO₂ in the atmosphere AND are related to global warming. 

There is confusion between the terms climate and weather. History is filled with extreme weather events like we observe in modern times. They have occurred long before CO₂ emissions from the human burning of fossil fuels became significant. Humans tend to think that whenever extreme weather occurs that ot is evidence of climate change. The fact is; EXTREMES ARE PART OF OUR CLIMATE. Hurricane Katrina, nor any other major storm, is caused by increased CO₂ in the atmosphere. Global warming is all about changes in the AVERAGE temperature of the entire planet or major sections thereof. There is no credible information, as of now, to indicate how global warming is or will affect the location, timing, or frequency of extreme weather events. Those that suggest otherwise are either ignorant of how the climate system works or choose to take advantage of the average persons ignorance to help convince  them of impending disaster from global warming if remediation measures are not taken. I consider the latter to represent intellectual dishonesty. It reduces the credibility of those advocating societal changes to mitigate the real, predictable warming effects that may come.

 3. A myth of  those who believe global warming is mainly a concoction of liberal elites and extreme environmentalists: The prediction of future climate conditions is not possible (since good weather forecasts for even next week cannot be done) and any warming could occur from many causes such as those which caused very warm periods in pre-human history. 

Day to day weather prediction beyond 7 days has no skill and meteorologists do not pretend otherwise. However, the prediction of very large scale (e.g., global), and long term (such as annual or decadal average temperature) is a different matter. Computer models which are validated by producing realistic current observed climate are used to forecast future climate conditions. What they tell us is consistent with what we are already observing such as the most warming will be in the polar latitudes. As to warm periods in the past climate record, we know what causes them. Known changes in the earth’s axis tilt angle and planetary orbital changes that are always occurring, albeit slowly, are responsible for the alternation of glacial and interglacial periods. The latter periods sometimes being warmer than today’s climate. Lastly, we should not let the fact that Al Gore or someone else, who we may not normally agree with, is a proponent of a reduction in fossil fuel emissions, cause us to dismiss the issue. Both sides in this debate believe or promulgate erroneous information.

 4. Increasing the proportion of fat in human diet is a principle cause of gaining weight. 

Fat build up in the human body is a complex issue, but it is now clear that increasing carbohydrates in the diet are more important, in most cases, for human weight gain. Dr. Atkins, long vilified, was essentially correct. Even the mainstream nutrition community has begun to concede this point. As a footnote, many of the edicts and warnings that have come from the nutritional community in past years represent the worst ‘science’ from any field, bar none. Remember the food pyramid, with carbs at the base, and the egg scare?

 5. The US stock market averages are a result of the trading of stocks among market participants whose motivation is to make money for themselves or their clients.

 It is very likely that the Federal Reserve Bank, the Treasury Department, and others working together, perhaps involving surrogates within the financial community, enter the market by using created money to support stock prices whenever they deem it necessary. The details are not known but we do know that as result of the stock market crash of 1987 President Regan created the Working Group on Financial Markets (a.k.a. Plunge Protection Team) for “enhancing the integrity, efficiency, orderliness, and competitiveness of [United States] financial markets and maintaining investor confidence” (an excellent article on this can be seen at: http://www.financialsense.com/editorials/reality/2005/0403.html) In addition, Executive Order 12631 specifically authorizes them to coordinate activities: “The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.” In a 1989 Wall Street Journal article, then Federal Reserve board member Robert Heller even suggested a market intervention strategy: “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole.” When there is a large amount of short interest, which tends to occur whenever stock averages have moved lower, significant buying of stock index futures can initiate a short covering rally that reverses the downward plunge. Market manipulation is not limited to the stock market—it also includes the gold market (www.gata.org) and especially the bond market. 

6. The Federal Reserve Bank changes the cost of money to individuals or business by setting short term interest rates.  

Several writers have shown that each interest rate change by the Federal Reserve has already occurred in the short term Treasury bill market. They follow what has already occurred in the market, they do not lead it (see www.financialsense.com/Market/wood/2007/0907.html)

 7. In summer on hot muggy days the temperature and relative humidity can both be above 90 (Fahrenheit and percent respectively). 

The relative humidity has not and cannot reach above about 70% when the temperature is above 90F. Relative humidity decreases as temperature increases, though the actual water vapor in the air can be greater at higher temperatures. On a summer afternoon, with a temperature of 95F the relative humidity may reach 60%, providing a very uncomfortable situation.

 8. It’s not the temperature it’s the humidity [that makes us so uncomfortable]. 

It is both. A cool foggy night with the temperature at 65F and relative humidity at 100%, is not as uncomfortable to most folks as a day with the temperature at 95F and relative humidity at 60 percent.  Clearly, temperature has the major influence, though humidity is also a factor in perceived comfort.

 9. In baseball a runner being called out after being tagged by a fielder occurs because the ball inside a baseball glove touches the runner before he reaches a base. 

Slow motion replay of tag plays shows that the runner’s foot or hand often touches the base before the fielder’s glove with the ball inside touches the runner. Umpires normally call the runner out if the glove hand containing the ball is between the base and sliding runner.

 10. The inflation rate of about 3.5 %, as reported by the US government, means that the average annual cost of living increase for US citizens is about 3.5%. 

This one makes me angry, since the official inflation rate (CPI) directly affects the Social Security payout and the reported GNP number that the financial community factors into their decisions. The reported inflation rate is a major fraud. It is calculated with the intent to keep the number low so that effects of the massive increase of the money supply (think money printing press) are not discovered and SS payments are substantially reduced. A calculation of the CPI using the formula and adjustments of 15 years ago results in an inflation rate of more than 7 percent. And a simple comparison of the cost of a basket of  goods and services from year to year yields similar, if not larger, real cost of living increases. The ramifications of this fraud perpetuated by our government are enormous. See www.shadowstats.com for an excellent site that exposes the misleading phony government issued economic statistics and recalculates them without an agenda.

The decision by the Federal Reserve on Sept. 18 to lower Fed Funds and Discount Rate by .5% was the last straw in terms of holding in my personal frustration regarding the state of things in the US. Their mandate to contain inflation, which has been quietly put aside now for years (i.e., the government printing presses have been working overtime to increase the money supply, now increasing by roughly 15% annually), is now out in the open.
Of course the fact that the US dollar purchasing power is down by about 97% since the Federal Reserve came into existence tells you all you need to know about the effectiveness of this institution. The continuing, and now accelerating, trashing of our currency is more than a disgrace—we may very well be on the way to a major currency revaluation (think Argentina) and a major breakdown of the economic system. How is the housing market helped when mortgage rates, closely related to long bond rates, climb? And why shouldn’t they rise? Is any knowledgeable financial entity going to accept the current negative real rates (actual rate minus the inflation rate) on their investment in treasury bonds?

What the Fed needed to do was to raise the Fed Funds Rate in light of rapidly increasing commodity prices, especially on food and fuel. In a recent study of 80 commodity prices, the year over year average change has run near 90 percent. That is staggering—but since the Fed says there is little in the way of inflation to worry about we can all sleep better. NOT! The only conclusion I can draw is that they are either stupid (not likely), lying to us (likely), or figure that we can’t handle the truth (also likely). Instead they chose to bail out the bank cartel, under the cover of helping the distressed homeowner and real estate industry and mitigating the possible consequences of the credit crisis, while hoping that the bad consequences of their move could be contained.

The currency, commodity, and bond markets are already rendering their verdict on this. I believe that before this chapter of history is closed, the Federal Reserve decision will be deemed one of the worst in its mixed history. I expect that the history of this present period will knock Greenspan from his current rock star status to the Fed Chairman that laid the groundwork for economic calamity of the early 2000s period.

The generation in schools today will not likely have anything resembling the older generation’s quality of life going forward. Every citizen should read the reports posted at http://mwhodges.home.att.net/ You will not view the state of affairs in the same way after reviewing the material contained therein. The list of significant national ills is a long one, so I describe a relatively few, then I propose some revolutionary solutions.

1. There is no real recognition, let alone a policy, regarding energy needs for the future. Clearly, society as a whole is in denial about how much longer ‘energy use as usual’ can continue. The ethanol ramp up, an obvious mistake discredited by almost everyone who has analyzed it, illustrates how our national political system is defective. At any moment gas lines, and worse, can occur. The trigger will likely be our attack on Iran, probably coming in early to middle 2008.
2. The infrastructure is rapidly deteriorating. Billions need to be spent and soon.
3. Our national elected office holders are a disgrace. They mainly work to get re-elected, so they cannot be counted on to advocate difficult remedies to maintain or improve the long term national quality of life. Congress is filled mostly with bodies which take up space, send useless propaganda mailings back to their constituents, and appear in the media posturing on the issue du jour with solutions that unrealistically require no sacrifice, work on fundraising for the next election, and meet with lobbyists on how to pay them back for the past and future contributions. Add to the Congressional mix a few out and out crooks, liars, and egotists and you pretty much sum up our legislative body. The amount of useless expenditures on pet projects is legendary and well documented. I should add that the Office of the President is no better.
4. Another disgrace is the Federal Tax Code and the IRS that enforces it. I do not need to say more on this—it is too obvious.
5. Our leaders in government, finance, and business talk about the ‘free enterprise system’. However, market manipulation, special subsidies, tariffs and bailouts undermine this concept. On the first point it is very likely that the Fed, Treasury, and/or surrogates (think Goldman Sachs) take newly created money and ‘buy the (stock) market’ when the stock averages look like they are about to fall significantly. It will take too much space to justify this, but a read at www.gata.org will be an eye opening to those of you who have not immersed yourself in financial matters.
6. The fiscal irresponsibility of the Congress, the President, AND the people is enormous. Personal and government debt loads are large and growing. Savings in aggregate are close to zero (it was near 10 percent around 1980 and has been decreasing ever since). The overuse of credit is clearly having consequences, and there is much more to come. And the national debt issues have perhaps much larger consequences—they affect our foreign policy. Do you think the US can alter what the Chinese might do (militarily or otherwise) when they can sink our financial system by dumping on the market all the Treasury debt of ours?

OK, so what could be done to solve these enormous problems and issues? First, there needs to be recognition that ‘we the people’ need protection from ourselves so that greed and fear, the biggest drivers of behavior, are contained. Second, some of the most far reaching solutions require constitutional changes, so I am under no allusion that anyone in power will agree to them anytime soon. But, as a thought process think about the following.
National leadership needs to be vastly improved. How?

1. Term limits for Congress are needed, requiring an amendment to the Constitution. The Founding Fathers probably did not foresee that career politicians, instead of citizen politicians, would evolve.
2. Take all the need for fund raising and influence peddling out of the system, as much as possible. Presidential and congressional campaigns should only be funded from federal grants, with an equal amount to all candidates for a particular office. All contributions and use of personal money should be prohibited.
3. All campaign ads on radio and television must have only the candidate speaking and equal amounts of time for all sides should be mandated. The amount of negative campaign ads would drop substantially if candidate A has to appear, not just someone narrating, to talk down candidate B. And non-information, but currently effective image-making commercials for candidates would be gone.
4. The President should have the line item veto, this time for good. This is the last defense against the pork barrel, but a constitutional amendment may be required.
5. The federal budget should be required to be balanced. Exceptions should occur only when a recession is declared (by whoever officially does this now, but using the real estimates of inflation and GDP) or when a declaration of war (by the Congress) is made. And special purpose funds such as Social Security taxes should not be used to count on the revenue side.

The economy needs to grow in real terms without phony government issued statistics¹ making it seem better than it is. How?

1. Eliminate the IRS code and replace it with a consumption tax. (or national sales tax). This will flush out the underground economy in terms of tax collection. I recognize that a bureaucracy to run this is still needed, but compliance will be much improved. The only federal tax would be on purchased, non essential, items. The exact percentages for various items would obviously need much study so that the total revenue collected is sufficient to balance the budget and fund the needs of the nation. Low income folks that purchase mainly food, energy, housing, and clothing would have little if any tax. But the tax on items such as jewelry, boats, and marble countertops (to name a few) would be high compared to the typical current state sales tax. BTW, the typical sales tax in Canada is 10-15 percent.
2. Eliminate the capital gains tax. This tax change will increase the creation and funding for new business enormously.
3. Take the collection and reporting of economic statistics out of the Labor Department and any other politically influenced entities. Grants to universities to do these tasks might be best.
4. Eliminate the Federal Reserve Bank. First, its creation to control money supply is unconstitutional, since the Constitution says only Congress shall control the money supply. Second, let the free enterprise system actually be tried. Yes, there will be recessions, failed banks and businesses, and perhaps worse. So be it. The best thing that could happen right now would be the cleansing that economic recessions bring. Rational, risk adverse economic decisions would tend to follow at all levels from the individual person to companies and to government when everyone knows there is no bailout coming.
5. Pass a bill into law that prohibits any trading in public financial markets by federal government entities or their surrogates. This means the Working Group on Financial Markets would be disbanded. (For a description of this see http://www.marketoracle.co.uk/Article464.html)

We need more ‘ask what I can do for my country’ mentality. How?

Make military or other national service mandatory for all able bodied men and women. A five year college deferment would be allowed and the service length could be as little as two years (more for non-military service). Service organizations that perform duties such as cleaning up litter to landscaping on public property to the repair of hiking trails (this one is close to my heart) are some of the many examples. The more skilled among us could be enlisted to help improve the infrastructure before more bridges and roads collapse.
There needs to be a narrowing of the rapidly evolving class distinction between upper management and the low level employees. How?

Require that all public companies issue stock shares as part of the compensation to all employees on an annual basis after five years of service. A suggestion is to give the equivalent number of shares equal to 5 or 10 percent of the individual’s salary. The shares must be held for three years from the date of issuance.
Well, I will end this diatribe at this point, but at least I feel better having written it down instead of holding it all in!
¹ see www.shadowstats.com

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