IT'S DEJA VU ALL OVER AGAIN

It's déjà vu all over again ... yet, all the U.S. media want to talk about are Herman Cain's girlfriends, while ignoring the GOPs "Just Say No" obstructionism in Congress. Today, with the debt crisis in Europe flaring up again (this time with Italy), we're reminded that there's another world out there that warrants some serious discussion. Yet, America's political burlesque show is mesmerized (again) by sex scandals, and appears more than content pondering why Mitt Romney hasn't caught fire with the GOP (like that's some kind of mystery). Sigh ...

All of this kind of reminds me of all the Gary Condit sightings, and the shark fear mongering off the Florida coast right before 9/11. Seriously, what's happening with Europe's debt-to-default dance is pretty big stuff, and deserves more attention than Herman Cain's predations. Consider the following ...

Here's a statistical table with more countries that could be affected once the financial dominoes begin to collapse in Europe ...

I know, I know. Simply putting figures like these up without context is unfair.

So consider this. When Germany finally defaulted on it's World War I debt obligations after 1929 it had a debt-to-GDP ratio that stood at around 90 percent (they owed about $33 billion, or about $402 billion today, which was a reduction from the original $63 billion, or about $768 billion today). Today Greece's debt-to-GDP ratio stands at 157.7 percent, while Italy is around 120 percent. Is history whispering in our ear, again? I think so.

Relatedly, when Germany finally defaulted the French Chasseurs Alins (elite mountain infantry) had already occupied Germany's Buer (in North Rhine-Westphalia) region in 1923.

Today, instead of sending in the troops to deal with troubled debtors the world's economic mandarins are banking on central bank (or IMF sanctioned) cash. Specifically, they're banking on the Federal Reserve shoving half a trillion dollars or more on to Europe's books (and hoping no one notices). When all is said they're doing little more than pushing the economic debt can down the road.

This is especially not good when you consider that MF Global's recent Chapter 11 bankruptcy was not supposed to happen. Think about it. In our post 2008 market collapse environment, a firm like MF Global wasn't supposed to be able to borrow so heavily (or use investor funds) to make multi-billion bets on European debt. How much did MF Global borrow? It appears that MS Global may have had a 40:1 debt to equity ratio. What does this mean? It means that if you made $40,000 per year at your job, the bank would give you a $1.6 million loan ... three years after doing the same thing and watching previous clients piss it away gambling.

Yet MF Global's private industry regulator raised no red flags about MF Global debt to equity ratios, nor said anything about it dipping into $600 million of investor money to make their bets.

Yeah, it's déjà vu all over again, on so many levels.

- Mark

PAX AMERICANA, THROUGH LATIN AMERICA'S EYES

It's incredible how our world changed in just one generation. It was 1980. I was in junior college when I started studying politics and international relations. The United States was engaged in a cold war, paying for the defense of the west, and staring down the Soviet Union as it was crumbling into history. The American Peace, or Pax Americana, was in full bloom.

South of the border, most of Latin America was dominated by corrupt regimes and crony capitalists. The region's growing debts insured that the United States would wag it's finger at our neighbors to the south, as if they were broken step-children. And why not? The U.S. had a debt to GDP ratio that was just above 30% (we owed about $979 billion then) while most of Latin America had debt to GDP ratios that hovered between 35-60%, which would be even higher when set against declining export earnings in the 1980s. Though debt ratios didn't approach 100% for most of the region in the 1980s, declining export earning contributed significantly to Latin America's Lost Decade.

And we continued to wag our finger through it all.

How things have changed in just one generation.

There's no longer a cold war, but the United States continues to spend lavishly on military budgets like drunken sailors. We are spending far more money on defense than the next 17 militaries, combined. Worse, we spend 6 times more than our presumptive enemies China, Korea and Iran put together (we might be spending more than $1 trillion a year on defense).

And for what? To defend ourselves from terrorists who killed fewer Americans in 2010 (15, most in Afghanistan) than dog bites (34) or lightening (29)?  Combined with the incredibly irresponsible trickle down borrow-and-spend policies initiated by President Reagan (then carried on by both Bushes), and it should come as no surprise that America now finds itself in a financial mess. We've been spending and cutting taxes recklessly, while subsidizing crony capitalists, and pursuing foreign demons that don't warrant the expenditures.

How big is the mess? The U.S. now finds itself with a debt to GDP ratio that hovers over 95%. This is far worse than any of the major economies in Latin America today. Bolivia, run by socialist president Evo Morales, recently posted a 3.7% budget surplus (in 2010) and felt comfortable enough to lecture the United States on it's finances.

And while capacity to pay is as important as ever (the U.S. still retains the capacity to pay), the recent stupidity we saw over the debt ceiling is not encouraging. The Tea Party's fake populism and manufactured rage are encouraging the Barbarians at the Gate to question the credibility of the United States.

Today, even though annual budget deficits in the United States have only averaged about 10% of GDP after the 2008 market collapse (not bad considering what happened) ...

... total debt to GDP ratios in the United States have risen so fast it's now approaching 100% of GDP. This is quite a swing from when it was just above 30% when President Reagan entered the White House. No wonder Ecuador's socialist president lectured the United States on it's finances. Simply put, he can.

Why is all of this important? Because apart from the faux populist outrage we're getting from the Tea Party cranks (where were these guys when Reagan tripled and Bush II doubled our national debt?), we now have to deal with a world that has less confidence in America.

The world sees a country that seems more concerned with empty tax cuts, crony capitalism for Wall Street, and endless foreign wars than it is with fiscal responsibility and global leadership. They see a nation run by Wall Street kleptocrats, who are guided by ideologues pushing a failed ideology. Worse, many have a sense that they are seeing an empire in decline.

This helps explain why leftist-socialist presidential candidates have had found success in Argentina, Brazil, Chile, Bolivia and Venezuela. While there's much to admire in this country, it's no longer easy for  Latin Americans to point to the United States' economic model as the path to follow. How can it be when fraud and incompetence on Wall Street are rewarded with bailouts and bonuses?

Yet, the United States continues to prod and push Latin America on issues ranging from drugs to immigration when, as any Latin American will tell you, it's U.S. policies and habits that encourage both. The Bush administration even tried a cold war tactic when they participated in (led?) an attempt to remove Venezuela's Hugo Chavez from power in 2002, even though he had been popularly and legitimately elected president. While it wasn't picked up by America's media, political insiders understood that the U.S. had a hand in the attempt to oust Chavez from power by bankrolling Venezuelan groups opposed to Hugo Chavez.

Then there's the hypocrisy of our response to the 2008 market crash.

History tells us that if any of our neighbors to the south had experienced the same market meltdown that we did in 2008 that our response would have been much different. Apart from demanding strict austerity measures we would have pressured Latin American officials to make big changes in the way government bureaucrats and their crony capitalists did business. Our response to our own meltdown, however, was to spend lavishly and to cover up for Wall Street with taxpayer backed bailout funds.

How we reacted to our market meltdown in 2008 is one of the reasons why I wrote, tongue-in-cheek, that it's a good thing we don't have a U.S. Embassy in the United States.

In the past - using the U.S. Embassy as a base to direct events - the U.S. initiated coups and forced unwanted leaders from power for lesser offenses throughout the world. With this in mind, in 2009, after being asked about the evolving economic mess in the United States, Chile's then President (2006-2010) Michelle Bachelet joked:

The reason why in the United States there has never been a coup d'etat is because, in the United States, there is no United States embassy.

President Bachelet may have been joking (she issued an apology later), but the point was made. After 30 years of pursuing budget busting tax cuts and unrestrained neoliberal policies in the United States, we are now experiencing what Latin America did when it embraced free market policies under corrupt regimes in the 1980s: economic instability and financial collapse.

What's worse, in many ways we've done nothing to rectify the issues that have altered our economic landscape in just one generation. This is unfortunate because, while our media ignores how it's all tied in to the American Peace, Latin America is picking up on the new realities of Pax Americana in the 21st century.

I'll be touching on this, and other issues, in my Politics of Latin America class this winter. Stay tuned for updates.

- Mark

THE COMING CALAMITY ...

In my book and on my blog I've written about the impact collapsing economies could have on global security, and how we can see historical parallels to what we are experiencing today with what happened in the 1930s. It's not pretty. But it doesn't seem to matter.

The Europeans, who should know better - and who have taken steps to rein in some of the stupidity - nonetheless have embraced their own blind alley of debt. Meanwhile, in the United States income inequality, wealth gaps, and personal debt loads continue to grow. America's financial mandarins, however, are doing just fine, which is part of the problem.

All of these developments, as unfortunate as they are, were pre-conditions to the frivolity and stupidity that preceded the global calamities of the 1930s and 1940s.

Those of you who've read my book, or taken my classes, understand what's happening. Even the global institutions that were designed to help avoid these situations are in trouble. But no one seems to be able to piece any of this together. There is no sense of urgency, or instruction. Which is strange, because we've done this before.

As I pointed out in my book, and on this blog, history is now whispering in our ear.

This is why this piece from Market Watch is so interesting. I'm not so much concerned that it's advocating higher taxes on those who got us into - and are now profiting from - our market mess. Nor does it discuss the international implications with any depth. Still, the article is important because it points out how our domestic situation is on a path to blow up in our collective faces. The date the author is point to (2012) isn't as important as the parallels he discusses.

Apart from growing impatience domestically, the author points out that there “are two remarkable similarities in the eras that preceded" 1929 and the market collapse of 2008. Both eras "saw a sharp increase in income inequality and household-debt-to-income ratios” and in each case “as the poor and middle-class were squeezed, they tried to cope by borrowing to maintain their standard of living.” The end results was a market crash. The serpents of Nazism were unleashed, and economic warfare followed.

It's a short but good read. But don't get too caught up in the tax the super rich stuff (as much as I agree with the argument).  Your focus should be on tying what's happening today to what happened 80 years ago.

Seriously. History is whispering in our ear.

- Mark

IT'S AMATEUR HOUR AT STANDARD & POOR'S

Have you ever wondered what the difference is between systemic risk and financial risk? If you don't know, don't worry, you're not alone. Niether does Standard & Poor's.

In very simple terms, Standard & Poor's can't distinguish between political brinkmanship and the GOP's stupidity in Washington (systemic risk) and financial risk (a debtor that can't pay). What pushed the U.S. to the verge of default last week were the political games - and not the financial capacity - of Washington. Standard & Poor's doesn't understand this distinction and, to show they didn't understand it, downgraded the credit rating of the U.S.

Helping us to understand all of this in real simple terms is former Labor Secretary Robert Reich, who penned yet another excellent post on what caused markets to go nuts today. In a few words Reich points out that the Republicans used our nation's debt as an excuse to try and shrink the size of government. In the process they pushed policy goals that they can't pursue - or accomplish - on the merits of their arguments. Put more simply, the GOP's out of control political budget insanity (like Wall Street's gambling and greed) created what we call systemic risk.

It's happened before, and will happen again. Our job is not to lose our heads when it does. Standard & Poor's lost their head.

What Standard & Poor's need to understand is that the GOP's insanity is based on their knowledge that republicans can't convince Americans that they need to give up their Social Security or Medicare benefits (which they paid for). Instead, to accomplish their political goals, the GOP has decided to blackmail America. If effect they said "if you want us to raise the debt ceiling you will have to cut the size of government."

If Standard & Poor's understood this simple fact they would've been able to see that the GOP's game playing - and not America's capacity to pay - is what caused our debt ceiling crisis. It was politically manufactured. A politically astute credit rating agency would've seen this. It would've then issued an AAA rating.

Then (and this is the key point) Standard & Poor's would have explained how the GOPs indulgence of the Tea Party - and not America's ability to pay - created the mess we saw last week. They could have explained, for example:

... like Stalin or Mao in their heyday, the GOP manufactured, and then used, a crisis to try and accomplish policy goals that they can't convince middle America to back on the merits. Perhaps the worst part of this is that, like Stalin or Mao, they're doing this in an effort to create a mythical world that exists only in their crazy little minds.

Instead of distinguishing between systemic risk and financial risk Standard & Poor's went crazy, and simply downgraded America's credit. In the process S&P aided the GOP in their ridiculous goals (which include painting President Obama as a Crisis President), while giving the Tea Party crazies a pass because S&P failed to explain how the Tea Party crazies impact the process.

But wait, it gets worse.

While they won't admit it, Standard & Poor's believes that by downgrading the credit of the United States that ordinary Americans will believe they're making a professional judgment. In fact, what S&P is trying to do is make up for their incompetent grading just before the 2008 market collapse.

If you recall, before 2008 they gave mortgage backed securities (MBS), shady derivative instruments, and the eventually bankrupt Lehman Brothers AAA to A ratings. When the MBS and derivative markets crashed, and brought our economy to brink of disaster, S&P had egg on it's face. Downgrading America's credit is their incompetent way of trying to make amends. Great.

The end result is that America paid dearly for Standard & Poor's financial incompetence after 2008, and are now paying for their political incompetence with a credit downgrade that threw Wall Street into a tizzy today.

Fortunately, while Standard & Poor's told the world to be cautious when considering the purchase of U.S. Treasury Bonds (essentially IOUs issued by the U.S. government) the money world yawned (or laughed?) at S&P's political ignorance and decided to purchase U.S. Treasury Bonds anyways.

It's a mess out there. It has been for some time. Unfortunately, for some analysts, it's also amateur hour. Those analysts appear to be housed at Standard & Poor's.

- Mark

P.S. I'll post Lawrence O'Donnell's "Last Word" commentary on Standard & Poor's incompetence when I find it. He really nails the stupidity behind the downgrade.


UPDATE (8/11/11): Here's the O'Donnell clip, but be sure to take a look at this too.

UPDATE to the UPDATE: Here's the link to the S&P report which lowered the U.S. credit rating down to AA+ from AAA. While it's important to note that S&P is concerned with the Republican party refusing to raise revenues - "We have changed our assumption on this because the majority of Republican­s in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. Key macroecono­mic assumption­s in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade ...")  - S&P took "no position on the mix of spending and revenue measures that Congress and the Administra­tion might conclude is appropriat­e for putting the U.S.'s finances on a sustainabl­e footing." Put another way, it gave the Tea Party a pass, while saying very little about repealing our budget busting tax cuts. S&P can - and should - do better than this.

THE GOP AND THE DEBT CEILING ... ECONOMIC AND FINANCIAL ILLITERATES

If the GOP won't listen to reason on their current threat to ruin America's financial credibility by not raising the debt ceiling, perhaps a word from Warren Buffet will help. Specifically, Buffet discussed our recent political history, and explained, "We raised the debt ceiling seven times during the Bush Administration."

But now, according to Buffet, the Republican-controlled Congress is threatening to "blow your brains out, America" by not raising the debt ceiling. Buffet added that this would ruin America's "debt worthiness over time," and reminded everyone about this bit of financial history too:

We had debt at 120 percent of the GDP, far higher than this [today, about 95%], after World War II and no one went around threatening that we're going to ruin the credit of the United States ... in order to get a better balance of debt to GDP.

Buffet is pointing out one simple fact here. When it comes to our current debt levels (and the GOP's threat not to raise the debt ceiling), we're not near the levels we were at during World War II.

In my view, Buffet is also trying to remind America that, in their quest to discredit President Obama, the GOP has become a party of economic and historical illiterates.

Perhaps Buffet said it best when he commented that if the GOP-led Congress fails to raise the debt ceiling - especially with two wars and the Depression Economic conditions that President Bush dumped on America's lap - it would constitute "the most asinine act" in our nation's history.

Because this debt ceiling game is little more than political theater by the GOP to "get" Obama, I couldn't agree more.

- Mark

CUTTING DEFICITS ISN'T ROCKET SCIENCE

Some times Congress makes things more difficult than it should be. Check out this article from Christopher Hellman at Huffingtonpost.

Hellman's article details how our base defense budget of $558 billion is not even close to what we actually spend on national security related items. What we actually spend is well over $1.2 trillion ... and counting.

Included in Hellman's numbers are our costs in Iraq and Afghanistan, veteran benefits, homeland security, the CIA, the National Security Agency (NSA), military aid to foreign countries, and an entire group of categories that most Americans are too busy to think about or follow on a regular basis. Worse, billions of our national security expenditures - perhaps $200 billion - is simply overlap and waste.

Considering the $1.1 trillion in tax breaks (write-offs) we give to ordinary Americans, the $100 billion we give to corporations to locate off shore for tax (avoidance) purposes, the $88.7 billion in tax breaks that are dedicated for America's wealthiest class, the unnecessary hundreds of billions given away by the Bush tax cuts, and the trillions in profit subsidies we've handed over to Wall Street (with no tax claw backs), it appears that Congress simply isn't trying hard enough.

Put another way, when Congress says it's trying to cut the fat from the budget it needs to look beyond the chump change it will save by simply cutting public employee benefits and pay. We need to start rescinding tax cuts that don't work, eliminate write-offs that undermine the integrity of the market, abolish subsidies that distort incentives, and do away with other tax breaks that favor the wrong people in America.

Oh, and there's much to be saved by paring down the budget expenditures of our national security state too.

This isn't rocket science. Seriously.

- Mark

THE GOP'S 30 YEAR RACE TO THE BOTTOM

In an early James Bond classic the evil villain, Goldfinger, concocts an ingenious evil plan (aren't they all?). Goldfinger intends to irradiate the U.S. gold supply at Fort Knox with an atomic device. The goal is to render the U.S. gold supply useless for decades. This, in turn, will make the value of Goldfinger's own gold holdings surge.

Achievement through sabotage - as opposed to achievement through hard work - is Goldfinger's way of helping us understand the Republican's decades long race to the bottom.

For the better part of thirty years the Republican strategy for acquiring power has been to dismantle and discredit the state by depriving it of cash, while dumping the worst mistakes of the market on to its books. Tax cuts for the rich and bailout politics for their political supporters have become the GOP's "irradiate the state" tools of choice.

Contamination by deliberate sabotage - like Goldfinger's irradiation plan  - allows the Republican Party to criticize a bailout saddled federal government and cash-strapped states who are increasingly unable to make even the most basic repairs.

Market players, who are made fabulously wealthy through continuous bailouts, reckless deregulation, and favorable legislation, grin and then make outlandish claims about the superiority of the private sector. That America's super wealthy have gotten even richer after thirty years of favorable legislation and the GOP's tax-cut-jihad is simply icing on their "hate-the-state" palooza.

The rationale for the Republican's Goldfinger-like irradiation policy today is really quite simple.

Recognizing that the Great Depression revealed the weaknesses of an unfettered marketplace the Republicans second bite at the "magic of the market" apple under Ronald Reagan exploded in their face. Thirty years of deregulation and tax cuts for the rich have pushed America's national debt from about $950 billion in 1980 to $14 trillion today (almost $11 trillion when President Obama was inaugurated). It also contributed to biggest market collapse since the Great Depression in 2008.

But it has also paid political dividends.

Today, with cities and states cash starved, and America's richest class getting even richer, the Republicans continue to harangue a discredited and "broken" state for shortcomings that their policies have made worse. Like Goldfinger's gold stock, the GOP's political stock rises every time they get someone in America to believe the state is the enemy.

Collapsing infrastructures and failed government responses have become the poster children of debt-strapped states that are increasingly burdened with challenges they don't have the resources to deal with (unless, of course, Wall Street needs trillions of dollars for wrecking the economy).

By squeezing resources from the state - and transferring them to America's richest class - the Republicans are on the verge of breathing political life into Grover Norquist's infamous quote, "I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub."

The fact that the state appears incapable of responding - or seems tone deaf - to natural disasters is beside the point. As long as the state gets blamed, the point is made. And like Nero fiddling while Rome burned, the Republicans party on through it all.

As Americans become increasingly frustrated with a toxic political environment, the state's problems are made worse by its seeming incompetence in the face of natural or market driven disasters.

Meanwhile, the ideas of the Republican Party, like Goldfinger's gold stash, have not been improved upon. In fact, they're not even trying. Think about it. The Republican Party voted to repeal President Obama's health care legislation last week - only to acknowledge that they had nothing to replace it ... The GOP complains about deficit spending, but continue to push for irresponsible tax cuts for the rich which make our deficits worse ... The current GOP leadership once proposed a budget with no numbers ... After railing against government spending for decades the new Speaker of the House, John Boehner, couldn't think of a single program he would cut from the budget during his first week as Speaker.

Under the GOP's race to the bottom approach our future - like America's Gold reserves in the Goldfinger movie - is in trouble. Only this time it is being hijacked by ideologues who have no other strategy but to deprive and discredit the state. This race to the bottom has been going on for the better part of thirty years and - with the 2012 presidential season around the corner - won't be getting any better.

It's really that simple.

- Mark

UPDATE: I adapted this post for publication in our local paper, the Bakersfield Californian, which you can find by clicking here.  As well, this bumper sticker seems to fit in with the piece ...

FREE MARKET MY ASS ... WALL STREET'S BAILOUT IN PERPETUITY PROGRAM CONTINUES

This is why Main Street is pissed off ...

The Federal Reserve is going to spend about $600 billion to purchase Treasury notes (our debt), which will help keep our unfunded obligations (war, corporate bailouts, tax cuts for the rich, etc.) going. Then, for good measure, the Fed will use it's financial muscle to boost the stock market's performance. They're doing this because, you know, we didn't use enough taxpayer money for Wall Street's Bailout in Perpetuity Program, which we made official in 2008.

These two posts from zero hedge help explain what's happening ...

First up, let's take a look at the Federal Reserve's balance sheet through 2012. It appears that the Federal Reserve, in an effort to pump more money into the economy (called Quantitative Easing, II), will purchase about $75 billion in Treasury notes every month for the next 8 months. This will help the U.S. taxpayer government surpass China as the top holder of U.S. Treasury notes (China holds about $868b in Treasury notes) by the end of THIS month (click graph to enlarge).

In real life this is what were doing ...

I know, the picture's ugly. But it's about as good as any to drive home the point that we're taking on debt to continue policies that maintain: (1) unfunded bailouts for Wall Street, (2) unfunded tax cuts for the rich, (3) unfunded wars, and (4) a hyped up war culture that doesn't want to touch national security budgets (even though we spend more than all of our enemies, combined!).

The next Zero Hedge post makes it clear that the Federal Reserve isn't even trying to fake it any longer.

Specifically, as opposed to guarding the integrity of the dollar - a job every real central bank is supposed to take seriously - the key goal of the Federal Reserve's easy money policies, according to both Alan Greenspan and Ben Berananke, is to boost stock prices. No magic market pixie dust here. U.S. taxpayer government money is necessary to make sure Wall Street prospers.

That's right. We're using debt and easy money to maintain unfunded policies, and to inflate stock prices so Wall Street feels better about itself.

To hell with debt that lead to inflation threats ... To hell with debt that undermines global confidence in the dollar ... To hell with debt that brings on the threat of currency wars ... To hell with debt funded policies that undermines the integrity of the market ... To hell with debt that shackles the American consumer and taxpayer to an uncertain future. Job One for the Federal Reserve is to help an already bailed out Wall Street, by using Fed money to boost stock prices.

This, my friends, is the magic of the market at work in modern America. And Wall Street just loves it.  

- Mark

AMERICAN DECLINE ... THE CYCLE OF EMPIRES CONTINUES

This was sent to me from a student who remembered some of my lectures (a nice compliment; thanks), and thought it hit on many of the same themes I discussed last year. I agree ...



While the ad definitely captures the empire-in-decline narrative, the story-line, unfortunately, is incomplete. Generic spending on government programs and "waste" aren't entirely to blame for our nation's debt problems.

Government bailouts for the private sector (which really took off under Reagan), favorable legislation for the rich (which undercuts our tax base), and a culture of war (fomented by the war crazies) have as much to do with our current financial mess, if not more, than expenditures on services and waste. Indeed, President Reagan effectively tripled our national debt, while President Bush doubled it (then he poisoned the financial well by setting up a trillion dollar bailout and government guarantee program for good measure).

Still, the ad is vivid, and sends a message about our nation's decline, and our seeming inability to do anything about the root causes of debt.

- Mark

BANANA REPUBLIC HERE WE COME ...

While the previous post outlines the lunacy behind the Republican's "pledge" to relive the Bush economic years, this post draws your attention to Paul Krugman, who does an effective job of walking us through the GOP's policy proposals here. In a few words, he makes it clear that after 30 years of wishful thinking (that tax cuts will pay for themselves) the Republicans are't even trying to make economic sense now:

... Ronald Reagan’s claim that cutting taxes would actually increase revenue was wishful thinking, but at least he had some kind of theory behind his proposals. When former President George W. Bush campaigned for big tax cuts in 2000, he claimed that these cuts were affordable given (unrealistic) projections of future budget surpluses. Now, however, Republicans aren’t even pretending that their numbers add up.

Thirty years of tax cuts for the rich, deregulation, and corporate bailouts have done little more than add $12 trillion to our national debt, subsidize corporate profits, and produce what may be the largest transfer of wealth in human history. The nation's richest have gotten even richer ...

... while the rest of America has seen it's wealth and economic security collapse (things aren't much different in other parts of the world either).

The Republican's Pledge for America says, "I'll see your record debt and increased wealth gaps (caused by our policies), and raise you a national bankruptcy."

The fact that a large chunk of the American public doesn't understand this helps explain why our nation is in trouble and, as Paul Krugman put it, has put our nation on the path to becoming a Banana Republic.

- Mark

LESSONS FROM PETER THE GREAT (for President Obama, and our pampered elite)

In 1696 Peter the Great decided he was going to turn Russia into a modern power, capable of competing with Europe's best. To do so he determined that he would need access to Europe's greatest minds and to its ports. Because feudal custom and traditions prevailed at the time turning Russia into a modern power required calling on outsiders to bring new ideas. It also meant challenging entrenched conservatives (who hated foreigners) and confronting financial elites, who not only hated the idea of paying taxes but believed they deserved special privileges in Russia.

While Peter the Greats commercial goal was to gain access to European ports and it's trade routes through the Sea of Azov ...

(... which accesses the Black Sea, the entrance point to the the Mediterranean Sea ...)

... the real goal was to modernize Russia's military, solidify Russia's southern flank (raided regularly by the Tatars), and to build it's first navy.

Building a navy and waging war meant Peter the Great would have to secure the funds that would eventually help make Russia a modern nation-state. And this is where it gets interesting.

Every group that could afford to help - the church, rich landowners, and merchants - would be forced to help Peter the Great bring the nation into the modern era. For example, while the government would provide the timber, and brought in expert shipbuilders from abroad, every great landowner, church officials/monasteries, and the merchant class were forced to pay for building and supplying sea going vessels.

Compliance was demanded by the state.

Those who failed to go along had their property confiscated. When the merchants of Moscow and other major cities balked at building 12 ships, and then petitioned the Czar to lighten their burden, Peter the Great ordered them to build two more than scheduled. National greatness would not tolerate petitions from would be lobbyists.

I bring all of this up because - like Peter the Great - our country is confronted with serious problems that threaten to drown our nation in petty provincialism (racism and xenophobia) and financial irresponsibility. Like Peter the Great we're confronted with an entrenched elite who believe their station in life grants them special privileges that absolves them from contributing their fair share to the nation.

Challenges of Modernity in America
In 2009 the American Society of Civil Engineers (ASCE) issued it's annual report on America's infrastructure. In 15 categories that range from airports and bridges to schools and solid waste facilities the highest grade received was a "C+" (Solid Waste), with 5 categories receiving a "D-".  Overall our nation's infrastructure received a "D" from the ASCE. This is what it looks like when we don't do the maintenance ...

The ASCE estimates that it will take $2.2 trillion over a five year period to repair what we haven't been paying to maintain in the past. This is only the beginning.

Like in the period before Peter the Great, we've also been indulging the wishes of our wealthiest class. For reasons that can be explained by looking at people who embrace a conservative but failed ideology (trickle down), we've been steadily reducing the percentage that the rich pay ...

... and what corporate America contributes to our nation's tax base.

In the process they've become richer than they ever were, but our nation's finances have suffered. We now owe $11 trillion more (and counting) than we did in 1980. Worse, we're engaged in wars that we believe we don't have to pay for in the present. Like Peter the Great we face a dilemma.

We can continue to indulge a conservative, pampered, and increasingly clueless elite who believe custom, tradition, and xenophobia are the path to our nation's future. Or we can force them to pay their fair share as we try to pay our debts, pursue war, and rebuild our infrastructures for the 21st century.

The choice, in my view, isn't difficult.

- Mark

GREENSPAN vs. GREENSPAN CAGE MATCH ... WE LOSE

"... A New Paradigm
of Active Credit Management."

- ALAN GREENSPAN (October 5, 2004)

Translation: "I don't see no credit 
market Chernobyl-like meltdowns in America."

One of the things you get when you follow free market ideologues long enough is that their words come back to haunt them. In this case former Federal Reserve Chair (1987-2006), Alan Greenspan, claimed in 2004 that credit markets were just fine. Big private market players, rather than "over regulated" banks, were spreading money and credit around efficiently.

Private market players (our shadow banking system), Greenspan argued, know what they're doing. Even if they were funding the purchase of toxic assets, and providing easy money that helped create our housing bubble, they were the ones who were on the hook if they lost money -- so the argument went. The market not only knew best according to Greenspan but, in this case, had created a "new paradigm of active credit management."

No Chernobyl-like credit market meltdowns were on his horizon.

Then the September 2008 credit market meltdown happened. Ooops.

Mr. Greenspan spoke up again on Sunday (Aug. 1). He claimed that we should repeal President Bush's tax cuts for the rich because we can't afford them. Specifically, he said (in typical Greenspanspeak):

"We believe it is appropriate to let those tax cuts that go to the most fortunate expire,"

I have only one question. Where the hell was this Alan Greenspan when President Bush said we needed tax cuts for the rich in 2001?

If  you recall, when George W. Bush ran for president in 2000 he gained considerable support telling America that the surpluses generated during the Clinton administration was "your money." It didn't matter that we had a $5.6 trillion national debt to pay down. In his mind budget surpluses should be given back to the American taxpayer in the form of tax cuts. So, instead of paying down our national debt (where were the Tea Bag crazies then?), President Bush proposed tax cuts, most of which would go to the nation's wealthiest Americans.

As he pointed out in his book The Age of Turbulence, Greenspan supported tax cuts at the time because "chronic surpluses could be almost as destabilizing as chronic deficits." We have two problems here. First, while we had a budget surplus in 2001, we hadn't started to run "chronic" surpluses. Second, Greenspan ignored how previous Republican tax cut policies had effectively quadrupled our national debt between 1981 and 1993.

What's key here is that Alan Greenspan knew all of this. Yet he still supported tax cuts that would primarily benefit the wealthy (yes, he understood the Bush proposal) to deal with "chronic surpluses."

To be sure, Greenspan was careful to say at the time that he supported tax cuts in general, and not necessarily President Bush's tax cut proposal. But he was being politically naive, at best. More probably, as an Ayn Rand sycophant, Greenspan was using his position to help get more money into the hands of private market players. More bluntly, he was playing a parlor game and was deliberately disingenuous.

Whatever inspired him, with decades of experience in Washington, Greenspan had to know that his congressional testimony supporting tax cuts would give President Bush the political gravitas - or greenlight - he needed to ram his tax cut program through congress. Ten years later, and with an additional $5 trillion added to our national debt, Mr. Greenspan is now saying "Hey, I think we need to pay for these tax cuts."

Still, perhaps we shouldn't be so hard on Greenspan and his sudden fiscal two-step. As chair of President Reagan's National Commission on Social Security Reform (the "Greenspan Commission") Alan Greenspan supported raising social security (FICA) taxes on the middle class in 1983 to help pay for projected social security shortfalls.

Got that? To deal with looming deficits in 1983 a tax hike on middle-class America was fine. This helps explain why the payroll (FICA) tax was raised in the 1980s (yes, President Reagan raised taxes). But to deal with real deficits in 2001 ($5.6 trillion) Mr. Greenspan was fine with tax cuts, most of which would go to America's wealthiest class.

Are you kidding me? How do you go from, "Let's raise taxes on the middle class to pay for projected shortfalls" in 1983 to "In spite of an actual $5.6 trillion debt, let's take projected surpluses and use them for tax cuts, which will go primarily to the rich" in 2001?

Now, in 2010, we have Mr. Greenspan saying that we should allow tax cut legislation that benefitted primarily the richest Americans to "expire" because we can't afford them. I guess you're never wrong if you're an intellectual schizoid ...

So, which Mr. Greenspan should we go with? Mr. We-Should-Pay-Our-Bills-So-Let's-Tax-The-Middle-Class? (1983), or Mr. To-Hell-With-the-Deficits-Taxes-for-the-Rich-Are-OK-by-Me? (2001), or Mr. Ooops-Now-We-Should-Pay-Our-Bills? (2010). Will the real Mr. Greenspan please stand up. Cue the music...




For my money, we also run into problems when we sit down and do the math.

What we find is that the billion dollar surpluses, generated in part by the social security tax hike, were effectively handed over to America's wealthiest during the Bush years -- making it one of the greatest transfers of wealth in human history. No wonder the far right is afraid of discussing class warfare. They're winning, and they don't want America to find out how it happened.

Today America finds itself staring at bloated budget deficits (a product of Bush's failed policies), more than $12 trillion in debt (due to a failed trickle-down theory), and another social security hole that Republicans claim can only be fixed with more tax cuts and deregulation.

(To be sure, the vast majority of our projected social security short fall is attributed to slowing wage growth and increased inequality in America. These are two economic shifts that Greenspan's commission didn't anticipate. Then again, they probably didn't anticipate the Republican Party tearing up the post-war social contract, which helped slow wage growth and increased income gaps in America.)

In all cases, Mr. Greenspan now concedes there was a flaw in his model, and that he was shocked by the results of the casino mentality that he helped create.



Incredible. Still, the damage has been done. And Alan Greenspan was there egging it on, every step of the way.

While Greenspan 2010 seems to be channeling Greenspan 1983, the reality is Greenspan 2001-2006  -- and the policies he rubber stamped during his time at the Fed -- is emerging as the winner in this Greenspan vs. Greenspan Cage Match.

Unfortunately, that's bad news for the rest of us.

- Mark

UPDATE (12/17/12): I just found this Tom Tomorrow cartoon. It pretty much explains the post ...

THIS IS WHY REPUBLICANS ARE CRAZY STUPID ...

“The definition of insanity is doing the
same thing over and over again and
expecting different results.”

 

- ALBERT EINSTEIN

 

 

 

Want to see logic taken into a back alley and get mugged by a crazy ideology? Check this out.

Senator Kyl (Lunatic-AZ) belongs in a political straight jacket. Seriously.

As I've pointed out over and over again, the Republican ritualistic-like chant that tax cuts for the rich will cure what ails the economy, and create budget surpluses, began in 1980 during Ronald Reagan's run for the presidency. With over 20 years of evidence I say we take a look at the record.

Under Ronald Reagan's tax cuts for the rich program ...

1980 National Debt: $ 930 billion

1988 National Debt: $2.68 Trillion

In 1988 George H.W. Bush said we had to continue Reaganomics …

1989 National Debt: $2.69 Trillion

1992 National Debt: $4.17 Trillion

This means that after 12 years of Reagan-Bush, Republicans had effectively quadrupled our national debt by 1992. Still, in 2000 George W. Bush said we had to cut taxes on the rich, again. What did we get in return?

2000 National Debt: $5.66 Trillion

2008 National Debt: $10.6 Trillion

So, let's recap ... after adding more than $5 Trillion to the national debt, and creating a recession-drenched economy with jihad-like tax cut policies under President Bush (where's the outrage Tea Bag People?), and we get Senator Kyl saying that the country needs to maintain the Bush tax cuts for the rich ...

There's no other way to put this. When it comes to tax policy, Republicans are simply crazy stupid.

- Mark

FROM GREEK TRAGEDY TO HISTORICAL FARCE ... THE DEBT-DRENCHED LESSONS OF GREECE

History repeats itself,

first as tragedy, second as farce.

- Karl Marx

After World War I the victors assembled in France to assess the future. In Article 231 from the Treaty of Versailles (1919) - the infamous "war guilt" clause - Germany was obligated to pay the equivalent of $32 billion (about $389 billion today) to their former enemies. Famed economist John Maynard Keynes would refer to the terms as a Carthaginian Peace, a phrase now used to refer to any punitive pact or treaty that does little more than impose brutal terms, and remind a defeated party that they are in an inferior position.

At the time many economists, including Keynes, viewed $32 billion as excessive. Keynes, and other Versailles participants wanted the slate wiped clean. In their view, little was to be gained - and much would be lost - if the punitive terms of Versailles were pursued. The League of Nations agreed, and supported the reduction of Germany's war reparations to $28.3 billion.

But the debt burden was still too much. Early in 1929 the Young Plan was introduced, which reduced Germany's war debt to about $713 million (about $9 billion today). But the dye had been cast. The political environment that would nourish the likes of Adolf Hitler had been created.

When the Great Crash occurred in 1929, it insured that all discussions surrounding The Young Plan for Germany would be akin to rearranging the deck chairs on the Titanic. The plan emerged, but it was still-born. There was no turning back the clock.

The lesson from this period is clear: Debtors should not be driven into a blind alley. This appears to be a lesson the world seems to have forgotten, or is too tone deaf hear.

THE BLIND ALLEY of DEBT
While the lessons of World War I are many, they are clearly being ignored today. Domestically, in the United States, Wall Street has been allowed to profit from scurrilous and ethically challenged contracts of dubious utility. Meanwhile brutal and draconian terms are being prepared for taxpayers, workers, and (former) homeowners. This is happening on many levels across the globe.

Abroad we're now watching a Greek Tragedy unfold. Today, Greece's financial problems are being driven by debt to earnings ratio of approximately 113% in 2009. Put another way, for every Euro Greece earns they owe 1.13 (for purposes of comparison, the debt to GDP ratio for the United States today is about 87%). Interest and penalty fees will compound Greece's problem, with one report suggesting that Greek debt levels in 2010 will reach 125% of earnings (of GDP). Things could get worse.

This helps to explain what's been happening in Greece. Riots, the likes of which we haven't seen since Argentina in 2001, have become standard fare. They're even eliciting fears that things will get worse should tourists decide to stay away from the cradle of democracy for a long period of time. At the heart of the protests are concerns over belt-tightening measures - wage cuts, higher taxes, spending freezes, etc. - imposed in Greece, which Argentinian President Cristina Fernandez de Kirchner said were "almost identical" to the ones imposed on Argentina in 2001.

The Argentinian President added:

“The international multilateral lenders, which keep offering the same old prescriptions, still don’t understand what’s going on in the world.”

To be sure, debtors should be responsible for their obligations, but only to a point. The road to the free market is a two-way street. Little is ever said about the reckless lenders and their dependence on favorable legislation, or how government strong-arm tactics impose draconian terms on the middle-class.

The dependence of market players on favorable legislation seems to have reduced their commitment to perform simple due diligence, or to exercise simple common sense. Just because you create a highly profitable but market destroying investment instrument doesn't mean you deserve to get paid for it - especially if the instrument turns out to be crap. What about credit write downs? When do we start winding down the expectations of arrogant lenders and the financial leeches who gamble on their activities?

Then we have the global and domestic double standards, which are increasingly obvious for others to see.

THE EMERGING DOUBLE STANDARD
As evidence of the emerging double standard, consider what a collapsing Greece is being asked to do in return for a 110 billion-euro loan package from the euro zone countries and the IMF.

* Freezing public sector pay until 2014
* Reducing allowances in the public sector by 20%.
* Increasing VAT from 19% to 23%
* Raising excise taxes on fuel, alcohol and tobacco by 10%.
* The imposition of new gambling, property and green taxes.
* Slashing or freezing state pensions.
* Increasing the average retirement age from 61 to 63 years.

Now consider what happened in the United States when Wall Street blew itself up, and the financial markets collapsed:

* Public sector borrowing increased.
* Budget deficits grew, which are now supercharging the national debt.
* Government bailout loans, plus tax payer-backed trillion dollar guarantees for Wall Street.
* Tax cuts for the middle class (in spite of what the Tea Baggers want you to believe).
* Health care reform that expands coverage to millions of more Americans (while this is on mark to reduce budget deficits, the symbolism of increased government assistance is not lost on others).
* Continued favorable legislation for the financial sector that continues to subsidize profits, and doesn't walk back deregulation policies from the 1980s & 1990s.
* Wage cuts, but only for certain public sector employees in many states.

To be sure, I understand the Golden Rule (He who has the gold makes the rules). But the United States no longer controls it's financial fortunes, as this graph depicting total debt in America (Federal, State, Local, Personal, etc.) indicates.

Nor is the United States in a position to help manage a debt-drenched world (Federal Debt to GDP ratio) that, for some, may look like a bad pre-quel to 1929.

In case you're wondering, after Germany was granted better terms in the 1920s it's Debt to GDP dropped to roughly 85% (about where the United States is at today).

CONCLUDING REMARKS
In his book The Economic Consequences of the Peace John M. Keynes points to Vladimir Lenin, who remarked that the best way to destroy the capitalist system is to debauch the currency. In Keynes' view, standing by while debt obligations pile up and become burdensome only leads states into continuous cycles of borrowing and printing money. This creates the conditions for inflation to flourish. He was predicting Germany's hyper-inflationary period years in advance.

As noted above, the lesson is clear: Debtors should not be driven into a blind alley.

What's happening in Greece today, and with the world doing little in the way of reigning in Wall Street's gambling on debt (or disciplining firms like Goldman Sachs), there's little hope that any kind of discussion on credit write downs will occur any time soon (though these guys seem to have some good ideas). In fact, it appears that the European Union only has "procedures" for excessive deficits, and not for those who seek to cannibalize it.

Simply put, there's too much money to be made on debt, even if it means the staggered collapse of the European Union.

If there's any truth to what Karl Marx said about history, we need to take a hard look at the debt-drenched position that Greece, the rest of the so-called PIGS, and the developed western states now find themselves. As Keynes noted after considering the dire straits Germany would find itself confronting in the 1920s, there will come a breaking point: " ... who can say how much is endurable, or in what direction men will seek at last to escape from their misfortunes?"

What's occurring in Greece today may be the first act in a larger tragedy. Still, we know one thing. The financial games the world played (the Dawes and Young plans) after Germany ran into financial trouble in 1922 may have granted the world a temporary reprieve. But it also allowed the serpents of fascism and Nazism to escape and prey on weaker souls.

With the historical lessons clear, and with EU regional repercussions on our radar screen, one thing is certain: This is not just Greece's problem.

- Mark