GOOD NEWS, BAD NEWS ON THE U.S. ECONOMY

This is big picture, long term stuff. OK, first the Good News ...

Good News ...
Because of advances in technology, innovation, and significant improvements in U.S. productivity, America's share of total world output has remained remarkably constant at a little more than 25%, despite the significant increases in output around the world, especially in Asia.

Bad News ...

With the rise of other national economies, our bloated national debt, and the slow collapse of the dollar, the world has slowly dropped it's use of the dollar for trade and as a store of value ...

So, are we on the right track given the rise of the rest of the world (since we're holding steady), or is something amiss?

We'll be discussing this in class on Monday.

- Mark

IS BLACKMAIL BEHIND (IRON) MAIDEN LANE III?

Back in December I tried to outline one of the more complex components of our bailout effort: The Maiden Lane programs. I'm glad I did it, especially now since it appears that the Federal Reserve doesn't seem to want to share information about (1) how one of the programs functions, (2) who it serves, and (3) who's getting the money.

Shedding a little light on the Maiden Lane programs seems more important today given that Super Fed Bailout Recipient, American International Group (AIG),  raised eyebrows by working with the Fed to keep certain aspects of the program quiet. Worse, AIG somehow found it "necessary" to pay out  $100 million in bonuses which would, ironically enough, catch the media's attention.

Because the Fed appears to be trying to conceal what it's doing, I'll briefly try to explain the Fed's Maiden Lane program (again) here.

As I noted back in November, I find it amusing that the Federal Reserve is using the flowery sounding term "Maiden Lane" to classify the three bailout programs: Maiden Lane I (for Bear Stearns), Maiden Lane II (for the general AIG bailout), and Maiden Lane III (for AIG default swaps).

If we cut through the fog, in real simple terms, these Maiden Lane programs forcefully extract money from the American taxpayer and transfer it to America's failed - and incredibly parasitic - financial institutions. Because authorities during the medieval period used torture devices called Iron Maidens to extract goods (i.e. confessions) from unwilling participants (heretics and other "trouble makers") I suggested in November that it would be more appropriate to call the Federal Reserves's Maiden Lane programs Iron Maiden Lanes. Why? Because America's Iron Maiden Lanes also forcefully extract goods (taxes) from unwilling participants (U.S. taxpayers fed up with parasitic sociopaths on Wall Street).

In many ways, the only difference between forcefully extracting confessions and forcefully extracting taxpayer dollars - both used to support crippled systems - is that the U.S. taxpayer is not physically tortured, and is kept alive. The Federal Reserve, after all, requires living taxpayers so that our Iron Maiden Lanes have a continuous source from which it can extract and transfer taxpayer dollars in the future.

If we look at the recipients of Iron Maiden Lane III - bailout money for AIG credit defaults - it seems clear that money is being funneled from AIG to the biggest banks in the United States and across Europe.

If I'm reading my tea leaves correctly, as I suggested here back in December, it seems that AIG may be little more than a slush fund for appeasing European governments and their markets, who once held the U.S. economy and it's regulatory regime in high esteem. Why? Because the Europeans may have made it clear to the U.S. government "this is your mess, you caused it, you clean it up ... or else we're not supporting the dollar." 

Is this plausible? I'm not sure, but until we get some answers from the Fed about the payout and distribution of AIG funds I'm inclined to think so. Think about it. Why would anyone allow, or encourage, AIG to muddy the bailout waters, and then allow them to pay 100 cents on the dollar for collapsed insurance contracts that were little more than failed bets among thieves? Massive payouts on an unpopular bailout program, which makes undeserving incompetents rich(er), is indeed something to hide. But why risk looking naive and incompetent? No one wants that kind of stupid following them around for life.

In fact, I think these guys are pretty smart. This is what leads me to believe that AIG could be a slush fund program designed to help keep the dollar, and European banks, out of trouble. While the background for these kind of financial arrangements differ from agreement to agreement, bargains like this have been struck in the past.

For example, according to political economist Benjamin Cohen, the U.S. struck an "implicit bargain" with it's allies in the 1970s when it ran into balance of payment problems. The United States could act unilaterally abroad, but only as long as it bore the brunt of defense expenditures during the cold war. In return America's allies would continue to tolerate U.S. budget deficits. To be sure, the rationale for this kind of monetary cooperation was much more noble because of the cold war. Still, the intended outcome remains the same. Keep the dollar afloat.

This would help explain why the Federal Reserve isn't so keen about revealing the details about AIG's Iron Maiden Lane III program. It effectively makes AIG's unfunded insurance program credit default swap program less of a bailout to save the banking system and more of a slush fund to save European banks, which will ultimately help maintain the position of the dollar around the world.

The American taxpayer already isn't happy about bailing out our parasitic banksters. Can you imagine how they would feel if they learned that we're also funneling money into Europe to save governments, and their banksters, who are effectively blackmailing America?

Then again, it is possible that the innocent version of the AIG bailout is behind all of this: The Fed was really trying to save America's banking system. But here's my question. If this is the case, why all the secrecy over Iron Maiden Lane III? No one's that stupid, I think.

Just something to think about.

- Mark

INFLATION MONSTER POISED TO STRIKE?

Yesterday I spoke in front of the Bakersfield South Rotary about my book and recent developments in the market. I used an article I wrote for the Bakersfield Californian (and posted here) as a way of introducing why we should be skeptical of all the "good news" coming out of the markets. In a few words, I argued that we have far too many costly supports, guarantees, and credits out there for anyone to be speaking about "the market" making a comeback.

What usually makes a presentation is the Q & A afterwards. I have to say that the questions I received from Bakersfield South Rotary were top notch. They took me across a broad range of topics that made it abundantly clear that this group understands how deep and complex our challenges are in the future. I was particularly struck by questions that made it clear no one is happy with the status quo and that inflation is on everyone's mind.


I bring this up because I ran across this post from nakedcapitalism.com, one of the better sites to follow if you want consistently good economic analysis. In a few words, the article sustains what I said yesterday and makes it clear that inflationary fears could become "hyper" inflation if we don't do something about the guarantees and credits that the Federal Reserve has extended to our financial institutions (about $12 trillion).

Without getting too technical (I hope I didn't) I said that inflation would come in the form of 1970s-like inflation (8-12%), but that we ran the risk of "hyper" inflation if we didn't do something about our commitments and guarantees to our financial institutions AND if the rest of the world (China, OPEC nations, the Europeans) decided to stop supporting the dollar.

Read the article for a deeper review of these dynamics. While the article might be a bit technical in some places it really is worth read. If you don't make it through, don't worry. I'll break it down on this Saturday's program.

- Mark

UPDATE: This probably doesn't mean much in the short-term, but long-term this can't be good if we continue on our current path.

“There can be no successful currency system, and particularly a global system, if the financial instruments that are used are denominated in only one currency ... Today, this is the case and the currency is the dollar.”

- Russia’s president, Dmitri A. Medvedev, at today's BRIC meeting (a meeting of the four largest emerging market economies - Brazil, Russia, India, and China - who met to discuss ways to reduce their reliance on the United States).

HOW TEABAGGERS WEAKEN OUR NATION

One of the things that draws me to challenge the sincerity of our Teabagging Republicans, and their FOX News patrons, is how their Anti-Tax Jihad not only exposes our country to geo-economic blackmail but how their Teabagging Temper Tantrum fails the "Adam Smith" test.

Think about this. Our nation depends on the good will of others to fund what we do. Currently, the top six purchasers of our debt - China, Japan, Russia, "Oil Exporters", Brazil, Caribbean Banking Centers (i.e. off-shore tax havens) - hold at least $2 trillion of our securities.

Of these only Japan, and perhaps Brazil, can be considered friendly to the U.S. The others could turn on us at any time ... yes, that includes the money that comes from the tax haven Caribbean nations, which are filled with tax cheats, money launderers, and wealthy traitors seeking to escape paying their fair share here. These groups are the real Pirates of the Caribbean.


The interesting point here is that rather than having our nation's richest and most leisure class (the same group who gained the most during the Reagan/Bush Years) pay what they paid in taxes under Ronald Reagan, Republicans and their Teabagging Buddies at FOX News want our nation to continue borrowing from people and nations who aren't our friends. Yes, they want to continue exposing our nation to the threat of economic blackmail. So much for "Country First" ...

As well, the Republicans are completely clueless to the fact that their anti-tax Jihad wouldn't sit right with the founding father of capitalism, Adam Smith.

While writing The Wealth of Nations (1776) the intellectual Godather of Capitalism recommended, and even encouraged, taxing the wealthy at a higher rate than the middle class. He argued, for example, that luxury carriages should pay higher tolls than regular or commercial travelers because he believed that "the indolence and vanity of the rich" should be made to contribute to larger societal goals.

And what do our economic elites do when confronted with the prospect of helping to put our nation's economy on firm financial footing? They send their money off-shore. According to recently released reports the United States loses up to $100 billion a year in tax revenue to offshore tax havens (the cost to individual states can be seen here).

Who do you think has to make up the difference? Yes, that's right, you and me. Worse, we're forced to go to the Chinese, tax cheats, and OPEC & other oil nations to fund our debts so that we can fight wars Republicans don't want to pay for, and refuse to fight.

This, my friends, explains what the Teabaggers at FOX & Republicanlandia want to promote with their political temper tantrum.

- Mark

DER SPIEGEL: "THE WEST'S FATAL OVERDOSE"

Scanning the news from Europe, I ran across this "Fatal Overdose" piece from Germany's Der Speigel contributor, Gabon Stiengart. First, Steingart's comments on the Bush administration's reckless deficit spending ...

No other president has ever printed money and expanded the money supply with such abandon as Bush. This new money -- and therein lies its danger -- was not backed by real value in the form of goods or services. The measure may have had the desired effect -- the world economy revived, at least initially. And US consumption kept the global economy going for years. But the growth rates generated in the process were illusionary. The US had begun to hallucinate.

From there, Steingart offers a quick panorama of what this means for America and the American consumer/taxpayer ...

The addiction to new cash injections was chronic. The US had allowed itself to sink into an abject lifestyle. It sold more and more billions in new government bonds in order to preserve the appearance of a prosperous nation. To make matters worse, private households copied the example of the state. The average American now lives from hand to mouth and has 15 credit cards. The savings rate is almost zero. At the end of the Bush era, 75 percent of global savings were flowing into the US [my emphasis].

Whose to blame? Der Spiegel's Steingart starts with one of the stars of our spending and borrowing binge, Alan Greenspan ...

The president and the head of the Federal Reserve, Alan Greenspan, knew about the problem very well. Perhaps the Americans even knew just how irresponsible their actions were -- at any rate, they did everything they could to hide them from the world. Since 2006, figures for the money supply -- in other words, the total number of dollars in circulation -- have no longer been published in the US. As a result, a statistic which is regarded by the European Central Bank as a key indicator is now treated as a state secret in the US.

What Steingart is referring to here is the Bush administration's decision to discontinue publishing the figures for M-3 (total money supply, or demands on) back in 2006. Seriously, we're not sure how many dollars, or how the claim on dollars, stacks up (I discuss this in my book; Chps. 9 & 12).

Then the Der Spiegel's Steingart turns his review on President Obama ...

But the change of government in Washington has not brought a return to self-restraint and solidity. On the contrary, it has led to further abandon. Barack Obama has continued the course towards greater and greater state debt -- and increased the pace. One-third of his budget is no longer covered by revenues. The only things which are currently running at full production in the US are the printing presses at the Treasury.

At the summit in London, delegates talked about everything -- except this issue. As a result, no attention was given to the fact that the crisis is being fought with the same instrument that caused it in the first place. The acreage for cheap dollars will now be extended once again. Only this time, the state is also acting as the dealer, so that it can personally take care of how the trillions are distributed.

I can't say that I disagree. But it really doesn't matter for the Obama administration because we're pumping so much money into the economy that markets will most likely stabilize and President Obama will win a second term. Inflation will no doubt follow, but that means the burden of our debts will slowly diminish.

We don't have a program this Saturday, but I'll be sure to discuss the pros & cons of this on our next program (April 11).

- Mark

BUSH FAILS IN OIL ... AGAIN

Everyone in America knows that George W. Bush was a failure as a businessman in the oil industry. Well, in spite of touting his oil credentials as a potential plus with OPEC members when he ran for the White House, it turns out that he's an abject failure at Oil Diplomacy too.

Here's a quick overview of President Bush's most recent efforts at "jawbone" diplomacy, which he claimed he would bring to the White House.

For the second time in two months, President Bush's efforts to "jawbone" his Saudi friends over the cost of oil fell on deaf ears. On Friday, oil surged to a record $127 after Bush's meeting with King Abdullah failed to secure a production increase beyond the meager 300,000 barrels the Saudis previously committed to on May 10th. In all, it was just the latest dismal failure for the jawbone of the Texas oilman who campaigned on his powers of persuasion when it came to OPEC ...

... For its part, OPEC brushed off Bush's feeble entreaties and rejected calls for an emergency meeting ahead of the cartel's next scheduled gathering in September. On Saturday, the Qatari oil minister put it simply, "The oil market is balanced...There is no threat to or crisis in supply."

There's no secret to what's happening here. OPEC members do not respect, nor trust, the capabilities of George W. Bush. And they're particularly not happy with the Bush administration's dollar policy (there is none). As Fadel Gheit, an oil analyst at Oppenheimer & Company in New York, put it: "It's really not surprising that they have ignored [Bush]" when you consider the collapsing value of the dollar.


Indeed, while Saudi King Abdullah has "shut down grandstanding talk from Venezuela's Hugo Chavez and Iran's Mahmoud Ahmadinejad" (which focused on moving OPEC away from the "worthless piece of paper" this past February) OPEC Secretary-General Abdullah al-Badri is still suggesting that the oil cartel might switch to euro-based pricing.

My guess is that this will become a real issue some time during the next administration. When this happens it will be yet another tattered feather in President Bush's lifelong headban of failure.

- Mark

PRESIDENT BUSH'S HIDDEN TAX

The Bush administration is taxing the hell out of America. And they’re doing it the same way medieval monarchs and petty tyrants have done it through the ages – by forcing you and I to cover their debts. Here’s how it happens.


Whenever you create or produce too much of anything its value goes down. Today America prints and spends more dollars than we can back with the goods we produce (or the gold we have on hand). Hence, the value of the dollar has gone down. This is how President Bush’s policies make this situation worse.

Since George W. Bush came into office we have added over $3.8 Trillion to the national debt. Today we owe roughly $9.4 Trillion (when Jimmy Carter left office we owed about $979 billion).

Every time President Bush spends money we do not have he's telling the American taxpayer "I'm irresponsible. But you still have to pay this back ... today and well into the future." This, my friends, is a hidden tax.

But it’s also the simple part of our hidden tax.

As the Bush administration continues to send dollars out to the rest of the world the value of the dollar declines. Over time people and countries, like our rich Arab friends, who use the dollar to purchase stuff eventually start looking around and say to themselves, “Hey, this Lexus costs me more in dollars.” But they can’t really complain because our Japanese friends are saying, “There are too many dollars out there. They are not worth as much today. Let’s raise the price of our Lexus.”

Our Arab friends, in turn, raise the price of their product (in this case, oil) so they will have more dollars to buy the Lexus they want. This helps to explain the surge in gas prices (and rising prices elsewhere).

The fact that Americans have to fork over more money – for petroleum and a Lexus (among others) – is a direct result of the falling value of the dollar. Simply put, rising prices (or inflation) constitutes a “hidden tax” on the American consumer.

The worst part? The hard-working American consumer is paying this hidden tax so President Bush can pursue his Blundering Wars Project and, incredibly enough, so he can cut taxes on his rich friends.

Nice.

John McCain, and the Bush administration, are banking on the fact that Americans won't figure this out.

- Mark

SOLVING THE ENERGY/OIL PROBLEM

Here's Robert Reich on President Bush's weak (and pretty lame) comments regarding the price of gas during yesterday morning's press conference.

The President criticized Democrats in Congress today for barring oil drilling on the Alaskan tundra. If he thinks that will bring down oil prices, he's even farther out of his mind than I feared. Even if such drilling were environmentally safe (and it's not -- remember BP?) it would amount to a miniscule addition to global oil supples.

Reich's also on to the Snake Oil that Hilary and the increasingly out of touch McCain are pitching.

So what else can we do? McCain and HRC are proposing a tax holiday on gas - so this summer you wouldn't pay the 18 cents a gallon that would otherwise go to Uncle Sam. Talk about dumb ideas. This will only encourage Americans to drive more, thereby increasing demand and causing gas prices to rise even higher ... It's a cheap political gimmick that does nothing to stem the rising price of oil.

Reich's solution? It's pretty simple, and very doable.

You want to hold oil prices down? In the short term, strengthen the dollar. Part of the reason oil prices are soaring is because the dollar is tanking [which we discussed on Saturday]. The Treasury and financial ministries of other rich countries should buy back dollars to stop speculators who are bidding the greenback down.

Over the longer term, though, China and India's insatiable demand for oil will continue to drive oil prices up, and turmoil in the Middle East will keep them up. So there's really only one way for us to go: Alternative sources of energy - wind, solar, biomass, water, and if we can make it safe enough, nuclear.

The only drawback is that there's too much commons sense involved. It might even force the Bush administration to answer for its history of saying one thing on alternative energy while doing another - like gutting renewable energy programs.

But that's alright. I'm sure OPEC and/or these two guys will figure it out for us, right? (and, yes, that's Venezuela's Hugo Chavez).



- Mark