Do the Depositors Own the Banks?

All the money is all the money. The money in the US is nothing more than the base of collectable assets in the banking system. It isn't the money printed by the Fed or any of that stuff we seem to be told, but this base of collectable assets. The limitation is the amount of money in the accounts cannot be more than the collectable assets on the balance sheet and visa versa, though the imbalance can exist for awhile in the direction that the collectable assets can exceed the money supply, but that the difference is what is perceived as bank capital. Thus bank capital is the collectable assets of the bank or banking system minus the deposit liabilities. If the banks collectable assets are less than the deposit liabilities, the capital has to lie in the deposits and not in the capital accounts of the banks.

The current attempts we are experiencing are to deny this fact and through time and slight of hand, convert the deposit liabilities into bank assets. Thus, we are having government issue plenty of debt which can only be paid by bank deposits, which when bought by banks through government slight of hand serve over a period of time to make the depositors liable to the banks. The purpose of the Fed isn't to give you and I money, but to redeem or liquidy bank assets so the banks can pay each other and for the minimal purposes of you and I having $100 bills we can draw from the banking system as liquidated settlement of our accounts in whole or in part. Even this is limited, as the government always wants to know where you got more than a few thousand dollars.

Everyone is going to have to take a haircut. The question is how large. It appears to me the bankers are getting an opportunity to lessen their haircut while transferring the haircut to their depositors. See, so much of the money in accounts at this time is defacto bank capital, as the truth of the matter is money in accounts does not belong to the insolvents that owe the banking system and thus the debts cannot be paid. The amount of non-self liquidating debt has reached the point beyond critical and the capacity to create new debt at a pace that would result in distribution of money wide enough to current bankrupts to float the system forward. Thus bank capital is in essense wiped out and banks are like Zombies in the "Night of the Walking Dead".

Where does money come from to recapitalize insolvent banks? It can only come from the deposits in the banks. It could come from the government, but if the government securities were matched with money in accounts, it would do nothing to increase bank net worth on a current basis. If it didn't come with deposit liabilities, it would merely widen the gulf between what is owed and what can be paid.

The TARP plan was at least a reasonable idea as to how to solve this problem. Short of closing the banks and making all the deposits good, this was really about all the government could do. How it was administered was a problem, in that Paulson forced all the big banks to take the money to hide which ones were really in trouble. Only a headless idiot couldn't figure out that BAC and Citi were in deep shit by mid 2007 if they only read the quarterly reports, so why the deception? Were they all broke and Paulson wanted to hide that? TARP didn't work because the banks wanted to get back to gambling and Tim "I have never been a regulator as head of the NY Fed" Geithner gave them back their I have money to spin the wheel card through allowing accounting fraud. Now banks are playing poker in an effort to strip as much of the deposit liabilities from their balance sheets as possible.

See, there are only 2 monies involved, bank capital and deposit liabilities and the 2 together cannot exceed the sum of bank assets. If the bank liabilities exceed the real value of bank assets, the bankers have no money and are in essense gambling with the money of their depositors, who are the real owners of all the assets of the bank, including the property that cannot be redeemed through payment. This is important because is really goes to who controls the country and to some extent commerce around the world. Is it going to be us prudent idiots who still have money left or the idiots that gambled and lost in an attempt to earn huge bonus checks and drive up stock prices?

My guess is that if they would close the banks that need to be closed, which is probably most of them, give the depositors a 50% haircut and a prorata ownership in the bank and all the assets, this would be a start to a solution. Most of the depositors wouldn't like it and I believe those that owed the bank money could be given a wash between their deposits and loans to start, but the current game is the bankers are looting the depositors and the game is getting worse, not better. Remember the guys that ran this system into the ground are still running it.

That would be the first step. The outside the banking game is going to take a haircut as well. The biggest danger is that the resulting drop in bank deposits would be a blow to the system, but then again, the banking system would have the room to take a haircut and those that needed money could sell their stock to those that don't. The people with no money and no credit are no longer part of the demand equation anyhow, other than their current earning capacity. Prices would surely drop, but as debt was liquidated, the price declines would eventually not affect debt.

The solutions I have presented are off the cuff. Remember that all the money is all the money and those that have the money are the only ones that can pay. Thus if the government incurs debts (giving government debt to bankers is unconscionable in that it is conversion of their depositors money to their money), those debts can only be paid at anything other than deceit by the money in the system. The question here is who owns the banks and I contend that in more cases than are being admitted, it is the depositors capital that is at risk. Remember what I just wrote that all the money is all the money and the depositors will be liable for the costs of their bailouts.

Bubble Blowing Started with Greenspan and the GSE's

I posted this in response to a very good article put on the market ticker website by Karl Denninger about Clinton trying to redefine his actions in regard to financial deregulation. My point was that even though the result was disaster, by November 1999, it was already clear that the system was going to need even more money creation and financial products to keep the game going and this was going to bring another bowl of punch to the party.


I hate to disagree with some of the points in what is a fastastic writing, but by November 1999, the bubble was hopelessly inflated. The backbone of the bubble wasn't the repeal, but the GSE's FNM, FRE and Sallie Mae. The repeal only brought the crooks into the same room.

There is one thing that creates a bubble, the creation of money. Doug Noland started his Credit Bubble Bulletin around 2000 and repeatedly he went through the 1990's history of FNM and FRE pumping huge amounts of credit into the system every time the economy sneezed. Greenie had his place, but the creation of credit off collateral goes back to John Law and the Mississippi bubble. Each cycle produced more of a bang and Rubin along with Greenspan did everything they could to keep the game going.

Debt in the US has been to the point it could cause a depression for a long time, probably since the early 1990's at the latest. Greenspan did what he had to do at the time, which was ease credit excessively and create the new collateral. Except for a few days in March 1987, mortgage rates had not been down to 9% since 1978 and had resided in the 10% or higher level for over a decade. I opened a 1 man mortgage shop in 1992 to do refinances and was at least a year late. The whole country refinanced and gained immediate access to more credit. Cap rates came down and it ignited a stock market boom which money started chasing. The most marketable paper in the world, save US treasuries was FNMA and FHLMC mortgage pools.

One thing about depressions is when one starts, it is like being seen coming out of a building where a crime has occurred. You become the immediate suspect and politicians get deserved and undeserved credit for booms and busts. By 1998, anyone with economic brains knew they would need more credit to stave off a collapse from the dotbomb bubble and the huge public participtation in the market. The market participation had reached all the way into the pension funds, private and public. The entire game became keeping the bubble inflated. The repeal was merely one more step to avoid being placed at the scene of the crime.

I really don't believe many people at that time realized how crooked Wall Street was. I used to joke in front of others that when Wall Street gave a strong buy on a stock, it meant they still had some left. I knew the whole game was nonsense, in part because I have a financial education. Being Wall Street controls so much of what is taught in college, almost no one had an education on why we had Glass-Stegal in the first place. I believe in part this was due to the fact that few alive had experienced a bank run because of the false security placed on deposit insurance. People thought all this bull market was based on reality and party on and let us all get rich.

The people that did know were Summers (nephew of Paul Samuelson and son of the head of the Princeton school of economics), Robert Rubin, Sandy Weill and his student, Jamie Dimon. Under the guise of deposit insurance (Securities insurance as well)and the lack of experience in runs on banks the public didn't have enough sense to know the difference. Efficient use of credit seemed to be the name of the game, but in reality, it was how to blow a bigger bubble to keep the fake prosperity going.

By early 2001, the system was pretty much insolvent. In comes Greenspan with the means to create another bubble and Bush with tax cuts to give the stimulus. What continued was the mortgage game, a new low rate mortgage interest to give the game another dose of debt relief. Again, it was the FNM/FRE brand name, along with another bubble blower, Franklin Raines. Along comes Armando Falcon of the OFHEO in an attempt to stuff the genie back in the bottle. You can go to youtube and see videos of the attacks the Democratic black caucus launched against this man, an appointee of Bill Clinton, I am sure at the urging of Mr. Raines himself. You would have thought this man was attacking someones mother, but he was really telling the truth. In any case, this was the primary attempt to stem the mortgage bubble. At the same time, it was probably this investigation that opened the door for Wall Street and their private label game.

Now what is the game? Recently some idiot Ivy League professor recommended young people buy stock on margin. Why? They need cash to pump the next bubble. The whole series of crap in this mess has to do with what is going to be the next collateral for the next credit expansion. If this rally goes on much longer, I can see a relaxation of margin requirements on call money. The government desperately needs another money machine outside of deficit spending to keep the game going. The pension systems are bankrupt and have no hope of being funded unless the game goes on. The biggest scandals center around the fictions about owning stocks, financial instruments that have actually not done much better than inflation when valued according to dividend payout. As I have seen Karl point out, risk has a way of catching up with excess return. As long as they can inflate, the truth can be hidden. Once deflation becomes the irresistable urge, there will be a lot of models swimming naked.

Class warfare

About a month ago I was almost kicked off a site because I recommended higher taxes on the rich in order to recycle the interest debt they were receiving through the economy in an effort to assist in paying down debt. I was cited as proposing class warfare as a solution. The warfare started long ago.

The idea that the general fund be used to bail out the bad collateral amassed by the NY banking group of millionaires and billionaires is class warfare in itself. The fact of the matter is that amassing more debt in any form in the current economic environment without a plan to reduce the massive pile that is strangling the economy into depression, therefore bailing out billionaires from their failed enterprise under the threat they are going to plunge us in depression is warfare. It is being waged and it isn't that all parties deserve a handout, because none do.

The US Constitution endowed Congress with the power to coin money and regulate the value thereof, but it has been ceeded to the Federal Reserve and its organized crime group of Wall Street enterprise. Organized crime always operates through the government and in this case we aren't talking about back ally thugs, but Ivy League, conected MBA's and other elite. Granting a private enterprise the privilege to create money is in itself illegal. To bail them out of their failed enterprise is also Anti American and likely Unconstitutional as well. A failed surety is a failed business and those running the game have failed. But, it appears that failure is only for small business and those who got themselves over their heads in debt. I propose that the very problem that was bailed out was those thought of as highly successful and clearly highly compensated commited themselves to debts they couldn't pay. They should have been bankrupted and investigated for criminal activity instead of being bailed out.

To have any understanding as to how this mess can be solved is to understand the nature of debt and credit to start. Michael Hudson of the University of Missouri, KC comes as close to describing what is going on as anyone I have read. His writings can be found at http://www.neweconomicperspectives.blogspot.com/ and http://michael-hudson.com/ . Mr. Hudson understands that non-self liquidating debt cannot be paid and that is has to be systematically eliminated, losses taken and the economy cleaned out. Savings and debt are mirrors of each other.

The equation most of us are familiar with is the compound interest formula. Hudson and Steve Keen both make note that the equation has historically collapsed, but our government and Wall Street is trying to reflate to continue their compound debt peonage on the American economy. Problem is the general population and the borrower on the fringe has broken down and demand for the general economy can only be financed by more debt or by bankruptcy. The losses should be taken, but instead they are bailed out, keeping the rich rich and the middle class in sinking poverty.

In banking, principal is created, put into an account and paid back with interest. The banker keeps this cycle in motion by reloaning his interest after extracting his income. Once a debt bubble has begun, it is dependent on enough rents being collected to pay the note and for the banker to continue to expand debt and inflate values. Once there is more interest and payment due than there is rent, the game begins to crumble. No equity, no loan, no security, bankruptcy.

Wall Street created this mess, paid themselves massive bonuses and went broke. Much of this money was earned financing and packaging fraudulent securities. It is almost assured that many involved knew they were packaging and peddling fraudulent paper, but they continued well after the gig was clearly up. Together with return seeking hedge funds and fraudulent ratings given by S&P, Moodys and others, the game went on beyond where it could have earlier. Wall street was broke and Wall Street was bailed out instead of being liquidated. Legitimate players on the street had plenty of money to recapitalize their own firms, but instead the firms were propped and bailed out by the government. Many of their borrowers are also being bailed out, not to their benefit, but to the benefit of the bankers in continued payment instead of bad debt allowances.

Better yet, the game continues. Wall Street and banks paid out well over $100 billion in bonuses this past year. The bill for the taxpayer will probably exceed the balances on all the mortgages that were in existance when this mess started. People are losing their homes, but Wall Street isn't writing down the loans or impairing their own capital. Instead they are looting the system as it is in slow collapse. The US is probably done as a major economic power now that the entire purpose of the system is to provide income for a few super wealthy families. In the end, the goose that laid the golden egg will have died and even the rich won't be so rich. But, the management of Goldman Sachs and others can't see past the tip of their nose. Most that need to will take flight to greener pastures, but modern economy will be in shambles.

To revive the goose, we are going to need to extinguish the goose poison, the excessive debt load on the working class. The only way I know to extinguish debt is to quit creating it to start, take much of the earnings from it away from those that have the bulk of ownership in it and pay it to the general population where they can then pay it to those that hold the debts and keep the system solvent. Otherwise, if we are going to end up with a poor middle class, then the rest is going with it and all will end up being much poorer.

Saving, Asset-Price Inflation, and Debt-Induced Deflation

I found this posted on a site from China. Dr. Hudson is a guy I am attempting to study closely, as it appears he has been onto many of the big time flaws in credit economies for decades. This is Michael Hudsons site. For those interested in learning more about what is happening and what we must do to save the US economy from ruin, it is well worth studying.

http://michael-hudson.com/

by Dr. Michael Hudson

Michael Hudson’s book Super Imperialism - New Edition: The Origin and Fundamentals of U.S. World Dominance is a critique of how the United States exploited foreign economies through IMF and World Bank. Other books by Dr. Hudson include The Myth of Aid (Orbis Books); Global Fracture: The New International Economic Order (Harper & Row)

As an advisor to the White House, State Dept. and Defense Department at the Hudson Institute, and subsequently to the United Nations Institute for Training and Research (UNITAR), he became one of the best known specialists in international finance. He also has consulted for the governments of Canada, Mexico and Russia. (Dr. Hudson's bio is continued at the end of this article.)

Summary

The exponential growth of savings and debt takes the form mainly of loans to finance the purchase of real estate, stocks and bonds. These loans extract interest and amortization charges that divert revenue away from being spent on goods and services. The payment of debt service by the economy’s non-financial sectors interrupts the circular flow that Say’s Law postulates to exist between producers and consumers.

Financial institutions re-lend their interest and other financial inflows as new loans to finance asset purchases. The result is that net savings do not increase for the economy as a whole. Meanwhile, lending out savings helps bid up asset prices, but does not necessarily promote new tangible investment and employment or increase real wages and commodity prices. In fact, new tangible investment and employment decline as investors find it easier to obtain price gains in stocks, bonds and real estate than to make profits by investing in factories and other tangible means of production. The effect is to divert savings and credit away from financing new direct investment, and hence from employing labor to produce more output.

...

The growth of net worth through capital gains

The cumulative volume of savings also grows through a dynamic that Keynes had little reason to analyze in the 1930s: capital gains. Property and financial securities tend to appreciate in price over time. The main cause of this price appreciation is that the physical volume of assets grows slowly, while the financial volume of loanable funds grows exponentially.

Let us return for a moment to Richard Price’s example of a penny saved at the time of Jesus being worth a sphere of gold extending from the sun out to Jupiter. Few investors buy gold, as it does not yield an income. The largest investment – and the most heavily debt-financed asset these days – is land. More credit does not expand the volume of land, which is fixed, but it does raise its market price. A rising volume of savings is channeled to buy a fixed supply of land. The financial system thus creates capital gains as the finite volume of property and supply of buildings and financial securities expands more slowly than the potentially infinite volume of loanable funds.

Keynes did not anticipate that savings would be channeled in a way that bid up asset prices for securities and property without funding tangible capital formation. In the 1930s net worth was built up mainly by saving, not by asset-price inflation such as is occurring today. In traditional Keynesian terms, revenue or credit spent on buying property in place represented hoarding, not investment.

Homeowners and investors imagine themselves growing richer as prices rise for their assets. Their net worth rises without their having to save. However, this rise tends to require more income set aside to pay debt service on the loans taken out to buy their property. Credit lent out in this way does not increase consumption and direct investment. It creates debts whose carrying charges shrink markets. Savings and debts rise together, so that there is no increase in net saving.

New saving does occur as financial institutions recycle the receipts of debt service into new loans, whose carrying charges absorb yet more future income. The result is that gross savings (and hence, indebtedness) rise relative to national income. Stated another way, saving for many homeowners takes the form of paying off their mortgages. This is not the same thing as hoarding (in Keynes’s sense), but it plays much the same function, as it is not available for spending on current output.

As savings rise and are lent out, debt service absorbs more income. But the net economic surplus available to service these savings – by paying interest and dividends on the debts and securities in which they are invested – tends not to keep pace with their stipulated debt service. This debt problem therefore plays the deflationary economic role that Keynes attributed to savings.

How asset-price inflation aggravates economic polarization

Keynes favored inflation as eroding the burden of debt. Calling for “euthanasia of the rentier,” he saw inflation as the line of least political resistance to wiping out the economy’s debt burden. His idea was that inflation would leave more income available for consumption and for new direct investment. But asset-price inflation works in a different way. Instead of eroding the purchasing power of wealth relative to commodities and labor, it increases property prices without increasing consumer prices or wages. At least this has been the pattern since 1980. Wealth disparities have increased even more than have disparities among income brackets. The net worth for the wealthiest 10 or 20 percent of the population has soared, while the rest of the economy has fallen more deeply into debt and many of its gains have turned out to be short-term.

Keynes recognized that rich and poor income and wealth brackets had differing marginal propensities to save. But today’s financial polarization has gone beyond anything he anticipated, or what anyone else anticipated back in the 1930s, or for that matter even in the 1950s.

Long before the General Theory, economists recognized that wealthy people did not expand their consumption in keeping with their income growth. The image of widows and orphans living off their interest was relevant only for a small part of the economy. Rentiers always have tended to save their income and reinvest it in the financial and property markets. This occurs also with savings deposits, which banks lend out or invest directly in financial securities. Most of the interest and dividends credited to savers thus is left to grow by being lent out or plowed back into indirect securities and property investment, increasing asset prices.

The ability to get an easy ride from the resulting asset-price inflation – coupled with an easy access to credit and favorable tax treatment – prompts investors to take their returns in the form of capital gains rather than current income. In real estate, the economy’s largest sector, property owners use their rental income to pay interest on the credit borrowed to buy properties, leaving no taxable earnings at all. The same phenomenon characterizes the corporate sector, where equity has been retired for bonds and bank loans since 1980. Ambitious CEOs, managers of privatized public enterprises and corporate raiders have bought entire companies with debt-financed leveraged buyouts. Interest charges have absorbed corporate earnings, leaving little remaining for new capital investment. The name of the game has become capital gains, which have been spurred more by downsizing and outsourcing than by new corporate hiring.

Prices for property, stock, and bonds have soared relative to wages, forcing home buyers to spend a rising multiple of their annual incomes to buy housing. Also rising has been the cost of acquiring companies relative to corporate profits as price/earnings ratios increase.

Capital gains make the inequality of wealth and property more extreme than income inequality. The wealthiest layer of the population derives its power from capital gains, while using its income to pay interest – as long as interest rates are less than the rate of asset-price inflation. The ratio of wealth and property has risen relative to the value of goods and services, wages and profits, while the debt overhead has grown proportionally.

Does asset-price inflation “crowd out” new direct investment?

The FIRE sector has been expanding at the expense of the “real” economy. It drains revenue in the form of interest, rental income and monopoly profits, which are paid out increasingly as interest and financial fees. This triggers a fresh cycle of saving and re-lending by the FIRE sector itself, not so much by the rest of the economy. The more interest accrues in the hands of creditors, the faster their supply of loanable funds increases, thanks to the “magic of compound interest.” This revenue is lent out and accrues new interest (“interest on interest”), which is recycled into yet new loans.

This growth of savings and loanable funds in the hands of financial institutions is lent out mainly to buy property in place and financial securities, not to fund tangible capital formation. This financial dynamic spurs asset-price inflation, which in turn reduces the incentive to invest directly in capital goods, because it is easier to make capital gains than to earn profits.

These developments have prompted investors to seek “total returns” – capital gains plus profits or earnings – rather than earnings alone. Under Federal Reserve Board Chairman Alan Greenspan as “Bubble Maestro” in the 1990s, stock prices for dot.com and internet companies soared without a foundation in earnings or dividend-paying ability. Balance-sheet maneuvering was decoupled from tangible investment in the “real” economy. Companies such as Enron prided themselves in not having any tangible assets at all, just a balance sheet of speculative contracts. People began to ask whether wealth could go on increasing in this way ad infinitum.

Keynes’s analysis implied that the income “multiplier” (Y/S, or 1/mps) would increase as prosperity increased and people consumed a smaller portion of their income. What was being multiplied, however, was not national income – wages, profits and other earned income – but the volume of credit and hence the pace of capital gains in the asset markets.

Tax policy and financial bubbles

Unlike the industrial sector, real estate does not report a profit – and hence, pays no income taxes. Property owners do pay state and local real estate taxes, to be sure, but they have been joined by the financial and insurance lobbies to shift local government budgets away from the land and onto the shoulders of labor, through income taxes, sales taxes and various user fees for municipal services hitherto provided as part of the basic economic needs and infrastructure.

Although land does not depreciate – that is, wear out and become obsolete – by far the bulk of depreciation tax credits are taken by the real estate sector. This is because the economic theory underlying tax obligations has become essentially fictitious. Each time a property is sold, the building is assumed to increase in value, rather than the land’s site value generating the gain.

Nothing like this could happen in industry. Machinery wears out and becomes obsolete. (Think of computers and word processors bought a decade ago, or even three years ago.) Technological progress reduces the value of physical capital in place. But the prosperity that progress brings increases the market price of land.

In calling for “euthanasia of the rentier” Keynes pointed to the desirability of preventing the diversion of income into the purchase of securities and property already in place. He hoped to restructure the stock market and financial system so as to direct savings and credit into tangible capital formation rather than speculation. He deplored the waste of human intelligence devoted merely to transferring property ownership rather than creating new means of production.

Today’s financial markets have evolved in just the opposite direction from that advocated by Keynes. New savings and credit are channeled into loans to satisfy the rush to buy real estate, stocks and bonds for speculative purposes rather than into the funding of new direct investment and employment. Matters are aggravated by the fact that financial gains are taxed at a lower rate, thanks to the growing power of the financial sector’s political lobbies. This prompts companies to use their revenue and go into debt to buy other companies (mergers and acquisitions) or real estate rather than to expand their means of production.

Going into debt to buy assets with borrowed funds experienced a quantum leap in the 1980s with the practice of financing leveraged buyouts with high-interest “junk” bonds. The process got underway when interest rates were still hovering near their all-time high of 20 percent in late 1980 and early 1981. Corporate raiding was led by the investment banking house of Drexel Burnham and its law firm, Skadden Arps. Their predatory activities required a loosening of America’s racketeering (RICO) laws to make it legal to borrow funds to take over companies and repay creditors by emptying out their corporate treasuries and “overfunded” pension plans. New York’s laws of fraudulent conveyance also had to be modified.

Tax laws promoted this debt leveraging. Interest was allowed to be counted as a tax-deductible expense, encouraging leveraged buyouts rather than equity financing or funding out of retained earnings. Depreciation of buildings and other assets was permitted to occur repeatedly, whenever a property was sold. This favored the real estate sector by making absentee-owned buildings and other commercial properties virtually exempt from the income tax. To top matters off, capital gains tax rates were reduced below taxes on the profits earned by direct investment. This diverted savings to fuel asset-price inflation. By the 1990s the process had become a self-feeding dynamic. The more prices rose for stocks and real estate, the more mortgage borrowing rose for homes and other property, while corporate borrowing soared for mergers and acquisition.

Meanwhile, the more gains being made off the bubble, the more powerful its beneficiaries grew. They turned their economic power into political power to lower taxes and deregulate speculative finance – along with fraud, corrupt accounting practices and the use of offshore tax-avoidance enclaves – even further. This caused federal, state and local budget deficits while shifting the tax burden onto labor and industrial income. Markets shrank as a result of the fiscal drain as well as the financial debt overhead.

Abuses of arrogance and outright fraud occurred in what became a golden age for Enron, WorldCom and other “high flyers” akin to the S&L scandals of the mid-1980s. But free-market monetarism draws no distinction between tangible direct investment and purely financial gain-seeking. Opposing government regulation to favor any given way of recycling savings as compared to any other way, the value-free ethic of our times holds that making money is inherently productive regardless of how it is made. “Free-market fundamentalism” came to shape neoliberal tax policy in a way that favored finance, not industry or labor.

Can economies inflate their way out of debt?

Only a limited repertory of opportunities for profitable new direct investment exists at any given point in time. The exponential growth in savings tends to outstrip these opportunities, and hence is lent out. This lending – and its mirror image, borrowing – may become self-justifying at least for a time to the extent that it bids up asset prices. Homebuyers and investors feel that it pays them to go into debt to buy property, and this is viewed as “prosperity,” although it is primarily financial rather than industrial in character.

About 70 percent of bank loans in the United States and Britain take the form of real estate mortgages. Most new savings and credit creation thus enables borrowers to bid up the price of homes and office buildings. The effect is to increase the price that consumers must pay to obtain housing, as new construction loans account for only a small proportion of mortgage lending. Over-extended families become “house-poor” as rising financial charges for housing diverts income away from being spent on new goods and services, “crowding out” consumer spending and business investment.

Governments may try to mitigate the inflation of housing prices by raising interest rates. But this will increase the carrying charges for borrowers with floating-rate mortgages, as well as debtors throughout the economy. (Also, as Britain discovered in spring 2004, the increase in interest rates also raises the currency exchange rate, making its exporters less competitive in world markets.) For fixed-rate mortgages, higher interest rates may squeeze the banks, leading to losses in their portfolio values and prompting calls for the government to bail out losers (at least depositors, if not to rescue S&Ls and commercial banks).

Perception of this problem leads central bankers not to raise interest rates and take the blame for destroying financial prosperity by pricking the bubble. Instead, they try to keep it from bursting. This can be done only by inflating it all the more. So the process escalates.

Balance sheets improve as the pace of capital gains outstrips the rate of interest. Debt service can be paid out of rising asset values, either by selling off assets or by borrowing against the higher asset prices as collateral. The problem occurs when current income no longer can carry the interest charges. The financial sector absorbs more income as debt service than it supplies in the form of new credit. Asset prices turn down – but the debts remain on the books. This has been Japan’s condition since its bubble peaked in 1990. It may result in “negative equity” for the most highly leveraged mortgage borrowers in the real estate sector, followed by debt-ridden companies.

When interest charges exceed rental income, commercial borrowers hesitate to use their own money or other income to keep current on their debts. The limited liability laws let them walk away from their losses if markets are deflated, leaving banks, insurance companies, pension funds and other financial institutions to absorb the loss. Sell-offs of these properties to raise cash would accelerate the plunge in asset prices, leaving balance sheets “hollowed out.”

Savings do not appear as the villain in such periods. The zero net savings rate has concealed the fact that gross savings have been relent to create a corresponding growth in debt. America’s national debt quadrupled during the 12-year Reagan-Bush administration (1981-93). This increase in debt was facilitated by reducing interest rates by enough so that the unprecedented increase in credit rose without extracting more interest from many properties.

The natural limit to this process was reached in 2004 when the Federal Reserve reduced its discount rate to only 1 percent. Once rates hit this nadir, further growth in debt threatened to be reflected directly in draining amortization and interest payments away from spending on goods and services, slowing the economy accordingly. Further debt growth would require a rising proportion of disposable personal income to be spent on debt service.

How long can bubbles keep expanding?

The potential credit supply is limited only by the market price of all existing property and securities. The process is open-ended, as each new credit creation inflates the market value of assets that can be pledged as collateral for new loans.

Until bubbles burst, they benefit investors who borrow money to buy assets that are rising in price. Running into debt becomes the preferred way to make money, rather than the traditional first step toward losing the homestead. The motto of modern real estate investors is that “rent is for paying interest,” and this also applies to corporate raiders who use the earnings of companies bought on credit to repay their bankers and bondholders. What real estate investors and corporate financial officers are after is capital gains.

There is no inherent link with making new direct investment. Indeed, the after-tax return from asset-price inflation exceeds that which can be made by investing to create profits. Retirees, widows and orphans do best by living off capital gains, selling part of their growing portfolios rather than seeking a flow of interest, dividends and rental income. The idea begins to spread that people can live off capital gains in an economy whose incomes are not growing.

Asset-price inflation would be a rational long-term policy if economies could inflate their way out of debt via capital gains. The solution to debt would be to create yet more debt to finance yet more asset-price inflation. This dynamic is more likely to create debt deflation than commodity-price inflation, however. It is true that a consumer “wealth effect” occurs when homeowners refinance their mortgages by taking new “home equity” loans to spend on living, or at least to pay down their credit-card debt so as to lower the monthly diversion of income for debt service. If this were to lead to a general inflation, interest rates would rise, prompting investors to shift out of stocks into bonds. Foreign investors and speculators bail out, accelerating the price decline. This threatens retirement funds, insurance companies and banks with capital losses that erode their ability to meet their commitments.

The more likely constraint comes from asset-price inflation itself as price/earnings ratios rise. Interest rates and other returns slow, making it difficult for pension plans and insurance companies to earn the projected returns needed to pay retirees. In any event, asset sales exceed purchases as the proportion of retirees to employees grows, causing stock and bond prices to decline. Pension funds must sell more stocks and bonds – or employers must set aside more of their revenue for this purpose, in which case their ability to pay dividends is reduced.

Asset-price inflation reaches its limit when interest charges absorb the entire flow of earnings. Debt-financed bubbles remove more purchasing power from the “bottom 90 percent” of the population than they supply. Debt spurs rising housing prices but reduces consumer demand as a result of the need to service mortgages. Likewise, financing for leveraged buyouts, mergers and acquisitions may increase stock prices, but the interest charges absorb corporate earnings and “crowd out” new direct investment and employment.

The drive for capital gains thus complicates the traditional macroeconomic Keynesian categories. Although these gains are not included in the national income statistics, they have become the key to analyzing how asset-price inflation leads to debt deflation of the “real” economy. One thus may ask what sphere of the economy is more “real” and powerful: that of tangible production and consumption, or the financial sector which is wrapped around it.

Can the debt and savings overhead be supported indefinitely?

Richard Price’s illustration of the seemingly magical powers of compound interest is a reminder that many people saved pennies (and much more) at the time of Jesus, and long before that, but nobody yet has obtained an expanding globe of gold. The reason is that savings have been wiped out repeatedly in waves of bankruptcy.

The reason is clear enough. When savings, lending and “indirect” financial investment grow by compound interest in the absence of new tangible investment, something must give. The superstructure of debt must be brought back into a relationship with the ability to pay.

Financial crashes occur much more quickly than the long buildup. This is what produces a ratchet pattern for business cycles – a gradual upsweep and sudden collapse of financial and property prices, leaving economies debt-ridden. Many debts are wiped out, to be sure, along with the savings that have been invested in bad loans – unless the government bails out savers at taxpayer expense.

Financial crises are not resolved simply by price adjustments. Almost all crises involve government intervention, solving matters politically. As the financial and property sectors gain political power relative to the increasingly indebted production and consumption sectors, their lobbies succeed in lowering tax rates on rentier income relative to taxes on wages and profits. Tax rates on capital gains have been slashed below those on “earned” wages and profits, whereas the two rates were equal when America’s income-tax laws first were introduced.

Financial lobbies also have gotten law-makers to adopt the “moral hazard” policy of guaranteeing savings. Debtors still may go bankrupt, but savings are to be kept intact by making taxpayers liable to the economy’s savers. Ever since the collapse of the Federal Savings and Loan Insurance Corporation (FSLIC) in the late 1980s a political fight has loomed over just whose savings are to be rescued. Unfortunately, the principle at work is that of “Big fish eat little fish.” Small savers are sacrificed to the wealthiest savers and institutional investors.

The mathematics of compound interest dictates that such public guarantees to preserve savings cannot succeed in the long run. Financial savings and debts tend to grow at exponential rates while economies grow only by S curves, causing strains that cannot be supported as credit is used to buy assets rather than to invest in capital goods or buildings.

Financial strains become further politicized as large institutions and the “upper 10 percent” of the population account for nearly all the net saving, which is lent out to the “bottom 90 percent” and to industry. The balance-sheet position of the wealthiest layer increases as long as capital gains exceed the buildup of debt. The bottom 90 percent also benefit for a while during the early and middle stages of the financial bubble. Workers are invited to think of themselves as finance-capitalists-in-miniature rather than as employees being downsized and outsourced. But much of what they may gain in the rising market value of their homes (for the two-thirds of the U.S. and British populations that are homeowners) is offset by the debt deflation that bleeds the production-and-consumption economy.

Throughout history societies that have polarized between creditors and debtors have not survived well. Rome ended in a convulsion of debt foreclosure, monopolization of the land and tax shifts that reduced most of the population to clientage. Third-world countries today are being stripped of their public domain and public enterprises by the international debt buildup, while industry and real estate in the creditor nations themselves are becoming debt-ridden.

Today’s bubble economy is seeing interest charges expand to absorb profits and rental income, leading to slower domestic direct investment and employment. Much as classical economists believed that rent would expand to absorb the entire economic surplus, it now appears that interest-bearing debt will play this role.

Why no prosecution, but instead bailouts?

Hopefully I won't get thrown off this page for this, but every valid conspiracy theory I have ever seen involved the Wall Street banker class. Why is it that the biggest fraud scheme in the history of the world has not only not been investigated or prosecuted, but the perpeptrators of the fraud bailed out and massively rewarded? This is like going to Federal prison, finding the convicted bank robbers, throwing the judge and jury in prison and giving the convicts the key to the bank and releasing them. This is only about a $5 trillion fraud when you sum it all up and it touches all corners of the world. Guys like Blanfein should be charged and tried. If they are innocent, they have a huge pile of money for a defense, but someone should act. As Karl and others write over and over again (William Black cites the same study), the FBI warned that massive mortgage fraud was going on as early as 2004. What is it that has put the power structure in the US in position that simple shoplifting can get you prison time while massive financial fraud gets you another huge bonus?

I have recently been trying to trade the oil markets short. Once the volume dries up, the robots take over. If there was only one form, trading these markets would make you rich, but the form changes. In order to sell into a market, you need bids and the machines line the bids up to where there is always 1 contract in the front and never over a few behind it. The large bids are phonies and they disappear when the line comes to them. I suspect the bids and the asks are put there quite often by the same entities. You see market orders go right through bids to the bid behind it over and over again, meaning the computers are getting the signals and moving the pawns before the orders hit them. Not only are our securitization markets rife with fraud, our other markets are being manipulated for the profit of the very operations that owe the public fidiciary duty. It is no wonder that Goldman and the other banks are reaping massive trade profits out of the markets. Bull the oil market up $1 or so with minimal cost so you can play the other side after squeezing the ones that are on the right side. You have to watch this a few days to realize what is going on. These guys are more than making the markets. You might as well be playing the roulette wheel and giving the house the vig. The copper market is the same and I am sure the SPX overnight is also manipulated. I doubt there is much left in NYC that isn't some kind of organized crime. Organized crime starts within the government.

There isn't much Karl wrote that I either haven't written myself or that I disagree with. The smokescreen nonsense that heads up every major election always covers up what is really going on. There are also myths about who is who. Bernanke either hasn't a clue what caused the Great Depression (over extention of credit) or he is doing the opposite of what he knows would cure it. Bernanke didn't cause this mess. What caused this mess was the idea that the supply of credit was infinite and it was only a matter of debt service itself that determined how much debt one could take on. This would only be true if it wasn't necessary for some to act as creditors. Thus only a minority few could ever pose at any given time as major debtors. It is clear that one more time we are being forced to bail out our own creditors. FDR bailed out the banks in 1933 along with the Fed. Wall Street created the mess that time as well, but we had one problem then we don't have now, gold. FDR had to devalue gold to balance world financial flows. But, he confiscated gold from the American public in order to relieve the Fed of its duty to redeem all its paper in gold. The Fed was broke then. We will find it broke again.

Why is it that everything seems to be on the table but banking? The compound interest equation always eventually collapses and causes a depression and most likely has for 3000 years or more. It is clear that in order to produce a real return that the yield on loaned funds has to exceed the inflation created by such lending. Once lending becomes speculative, the bubbles arise and then burst. Every form of protection ever created has collapsed into a pile of economic ruin. For some reason, this is a mistake made over and over again by man. Any other form of business that caused such problems would be outlawed immediately, but this one is always deemed essential to the continued operation of the world. The idea that one group gets to draw an income out of the very existance of money while the others pay a penalty and provide the property to create the money/debt is beyond me. It is clear that this seemingly benign operation could be the very synagog of Satan spoken of in the bible. It is also clear that bondage in Egypt was a lien against the entire population for 20% of its income. Moses prohibited usury for the very reason that it would eventually enslave and destroy the society in which it was practiced.

Does Economics Deserve a Nobel Prize

By Michael Hudson Written and published December 18, 1970

I moved this here because I couldn't get it all to show up on the windown on his site.

It is bad enough that the field of psychology has for so long been a non-social science, viewing the motive forces of personality as deriving from internal psychic experiences rather than from man's interaction with his social setting. Similarly in the field of economics: since its “utilitarian” revolution about a century ago, this discipline has also abandoned its analysis of the objective world and its political, economic productive relations in favor of more introverted, utilitarian and welfare-oriented norms. Moral speculations concerning mathematical psychics have come to displace the once-social science of political economy.

To a large extent the discipline’s revolt against British classical political economy was a reaction against Marx¬ism, which represented the logical culmination of clas¬sical Ricardian economics and its paramount emphasis on the conditions of production. Following the counter­revolution, the motive force of economic behavior came to be viewed as stemming from man's wants rather than from his productive capacities, organization of pro­duction, and the social relations that followed therefrom. By the postwar period the anti-classical revolution (curiously termed neo-classical by its participants) had carried the day. Its major textbook of indoctrination was Paul Samuelson's Economics.

Today, virtually all established economists are products of this anti-classical revolution, which I myself am tempted to call a revolution against economic analysis per se. The established practitioners of economics are uniformly negligent of the social preconditions and consequences of man's economic activity. In this lies their shortcoming, as well as that of the newly-instituted Economics Prize granted by the Swedish Academy: at least for the next decade it must perforce remain a prize for non-economics, or at best superfluous economics. Should it therefore be given at all?

This is only the second year in which the Economics prize has been awarded, and the first time it has been granted to a single individual—Paul Samuelson— described in the words of a jubilant New York Times editorial as “the world’s greatest pure economic theorist.” And yet the body of doctrine that Samuelson espouses is one of the major reasons why economics students enrolled in the nation's colleges have been declining in number. For they are, I am glad to say, appalled at the irrelevant nature of the discipline as it is now taught, impatient with its inability to describe the problems which plague the world in which they live, and increasingly resentful of its explaining away the most apparent problems which first attracted them to the subject.

The trouble with the Nobel Award is not so much its choice of man (although I shall have more to say later as to the implications of the choice of Samuelson), but its designation of economics as a scientific field worthy of receiving a Nobel prize at all. In the prize committee’s words, Mr. Samuelson received the award for the “scientific work through which he has developed static and dynamic economic theory and actively contributed to raising the level of analysis in economic science. . . .”

What is the nature of this science? Can it be “scientific” to promulgate theories that do not describe economic reality as it unfolds in its historical context, and which lead to economic imbalance when applied? Is economics really an applied science at all? Of course it is implemented in practice, but with a noteworthy lack of success in recent years on the part of all the major economic schools, from the post-Keynesians to the monetarists.

In Mr. Samuelson’s case, for example, the trade policy that follows from his theoretical doctrines is laissez faire. That this doctrine has been adopted by most of the western world is obvious. That it has benefited the developed nations is also apparent. However, its usefulness to less developed countries is doubtful, for underlying it is a permanent justification of the status quo: let things alone and everything will (tend to) come to “equilibrium.” Unfortunately, this concept of equilibrium is probably the most perverse idea plaguing economics today, and it is just this concept that Mr. Samuelson has done so much to popularize. For it is all too often overlooked that when someone falls fiat on his face he is “in equilibrium” just as much as when he is standing upright. Poverty as well as wealth represents an equilibrium position. Everything that exists represents, however fleetingly, some equilibrium—that is, some balance or product—of forces.

Nowhere is the sterility of this equilibrium preconception more apparent than in Mr. Samuelson's famous factor-price equalization theorem, which states that the natural tendency of the international economy is for his wages and profits among nations to converge over time. As an empirical historical generality this obviously is invalid. International wage levels and living standards are diverging, not converging, so that the rich creditor nations are becoming richer while poor debtor countries are becoming poorer – at an accelerating pace, to boot. Capital transfers (international investment and “aid”) have, if anything, aggravated the problem, largely because they have tended to buttress the structural defects that impede progress in the poorer countries: obsolete systems of land tenure, inadequate educational and labor-training institutions, pre-capitalist aristocratic social structures, and so forth. Unfortunately, it is just such political-economic factors that have been overlooked by Mr. Samuelson’s theorizing (as they have been overlooked by the mainstream of academic economists since political economy gave way to “economics” a century ago).

In this respect Mr. Samuelson's theories can be described as beautiful watch parts which, when assembled, make a watch that doesn’t tell time accurately. The individual parts are perfect, but their interaction is somehow not. The parts of this watch are the constituents of neoclassical theory that add up to an inapplicable whole. They are a kit of conceptual tools ideally designed to correct a world that doesn’t exist.

The problem is one of scope. Mr. Samuelson’s three volumes of economic papers represent a myriad of applications of internally consistent (or what economists call “elegant”) theories, but to what avail? The theories are static, the world dynamic.

Ultimately, the problem resolves to a basic difference between economics and the natural sciences. In the latter, the preconception of an ultimate symmetry in nature has led to many revolutionary breakthroughs, from the Copernican revolution in astronomy to the theory of the atom and its sub-particles, and including the laws of thermodynamics, the periodic table of the elements, and unified field theory. Economic activity is not characterized by a similar underlying symmetry. It is more unbalanced. Independent variables or exogenous shocks do not set in motion just-offsetting counter-movements, as they would have to in order to bring about a meaningful new equilibrium. If they did, there would be no economic growth at all in the world economy, no difference between U.S. per capita productive powers and living standards and those of Paraguay. Mr. Samuelson, however, is representative of the academic mainstream today in imagining that economic forces tend to equalize productive powers and personal incomes throughout the world except when impeded by the disequilibrating “impurities” of government policy. Empirical observation has long indicated that the historical evolution of “free” market forces has increasingly favored the richer nations (those fortunate enough to have benefited from an economic head start) and correspondingly retarded the development of the laggard countries. It is precisely the existence of political and institutional “impurities” such as foreign aid programs, deliberate government employment policies, and related political actions that have tended to counteract the "natural" course of economic history, by trying to maintain some international equitability of economic development and to help compensate for the economic dispersion caused by the disequilibrating “natural” economy.



A Revolution

This decade will see a revolution that will overthrow these untenable theories. Such revolutions in economic thought are not infrequent. Indeed, virtually all of the leading economic postulates and “tools of the trade” have been developed in the context of political-economic debates accompanying turning points in economic history. Thus, for every theory put forth there has been a counter-theory.

To a major extent these debates have concerned international trade and payments. David Hume with the quantity theory of money, for instance, along with Adam Smith and his “invisible hand” of self-interest, opposed the mercantilist monetary and international financial theories that had been used to defend England’s commercial restrictions in the eighteenth century. During England’s Corn Law debates some years later, Malthus opposed Ricardo on value and rent theory and its implications for the theory of comparative advantage in international trade. Later, the American protectionists of the 19th century opposed the Ricardians, urging that engineering coefficients and productivity theory become the nexus of economic thought rather than the theory of exchange, value and distribution. Still later, the Austrian School and Alfred Marshall emerged to oppose classical political economy (particularly. Marx) from yet another vantage point, making consumption and utility the nexus of their theorizing.

In the 1920s, Keynes opposed Bertil Ohlin and Jacques Rueff (among others) as to the existence of structural limits to the ability of the traditional price and income adjustment mechanisms to maintain “equilibrium,” or even economic and social stability. The setting of this debate was the German reparations problem. Today, a parallel debate is raging between the Structuralist School – which flourishes mainly in Latin America and opposes austerity programs as a viable plan for economic improvement of their countries – and the monetarist and post-Keynesian schools defending the IMF's austerity programs of balance-of-payments adjustment. Finally, in yet another debate, Milton Friedman and his monetarist school are opposing what is left of the Keynesians (including Paul Samuelson) over whether monetary aggregates or interest rates and fiscal policy are the decisive factors in economic activity.

In none of these debates do (or did) members of one school accept the theories or even the underlying assumptions and postulates of the other. In this respect the history of economic thought has not resembled that of physics, medicine, or other natural sciences, in which a discovery is fairly rapidly and universally acknowledged to be a contribution of new objective knowledge, and in which political repercussions and its associated national self-interest are almost entirely absent. In economics alone the irony is posed that two contradictory theories may both qualify for prizeworthy preeminence, and that the prize may please one group of nations and displease another on theoretical grounds.

Thus, if the Nobel prize could be awarded posthumously, both Ricardo and Malthus, Marx and Marshall would no doubt qualify—just as both Paul Samuelson and Milton Friedman were leading contenders for this year’s prize. Who, on the other hand, can imagine the recipient of the physics or chemistry prize holding a view not almost universally shared by his colleagues? (Within the profession, of course, there may exist different schools of thought. But they do not usually dispute the recognized positive contribution of their profession’s Nobel prizewinner.) Who could review the history of these prizes and pick out a great number of recipients whose contributions proved to be false trails or stumbling blocks to theoretical progress rather than (in their day) breakthroughs?

The Swedish Royal Academy has therefore involved itself in a number of inconsistencies in choosing Mr. Samuelson to receive the 1970 Economics Prize. For one thing, last year’s prize was awarded to two mathematical economists (Jan Tinbergen of Holland and Ragnar Frisch of Norway) for their translation of other men's economic theories into mathematical language, and in their statistical testing of existing economic theory. This year’s prize, by contrast, was awarded to a man whose theoretical contribution is essentially untestable by the very nature of its “pure” assumptions, which are far too static ever to have the world stop its dynamic evolution so that they may be “tested.” (This prompted one of my colleagues to suggest that the next Economics Prize be awarded to anyone capable of empirically testing any of Mr. Samuelson’s theorems.)

And precisely because economic “science” seems to be more akin to “political science” than to natural science, the Economics Prize seems closer to the Peace Prize than to the prize in chemistry. Deliberately or not, it represents the Royal Swedish Academy’s endorsement or recognition of the political influence of some economist in helping to defend some (presumably) laudable government policy. Could the prize therefore be given just as readily to a U.S. president, central banker or some other non-academician as to a “pure” theorist (if such exists)? Could it just as well be granted to David Rockefeller for taking the lead in lowering the prime rate, or President Nixon for his acknowledged role in guiding the world’s largest economy, or to Arthur Burns as chairman of the Federal Reserve Board? If the issue is ultimately one of government policy, the answer would seem to be affirmative.

Or is popularity perhaps to become the major criterion for winning the prize? This year’s award must have been granted at least partially in recognition of Mr. Samuelson’s Economics textbook, which has sold over two million copies since 1947 and thereby influenced the minds of a whole generation of—let us say it, for it is certainly not all Mr. Samuelson’s fault—old fogeys. The book’s orientation itself has impelled students away from further study of the subject rather than attracting them to it. And yet if popularity and success in the marketplace of economic fads (among those who have chosen to remain in the discipline rather than seeking richer intellectual pastures elsewhere) is to become a consideration, then the prize committee has done an injustice to Jacqueline Susann in not awarding her this year’s literary prize.

To summarize, reality and relevance rather than “purity” and elegance are the burning issues in economics today, political implications rather than antiquarian geometrics. The fault therefore lies not with Mr. Samuelson but with his discipline. Until it is agreed what economics is, or should be, it is as fruitless to award a prize for “good economics” as to award an engineer who designed a marvelous machine that either could not be built or whose purpose was unexplained. The prize must thus fall to those still lost in the ivory corridors of the past, reinforcing general equilibrium economics just as it is being pressed out of favor by those striving to restore the discipline to its long-lost pedestal of political economy.

MICHAEL HUDSON is Visiting

2010 here we come

I guess I will be stuck as a bear for the next several years. But, unlike the past, I think I have a good chance to be right. 2010 holds a lot of interest for us that love markets and economics. It also is leading right into disaster. The end of the world in 2012 could get a real boost this year.

First, there won't be a double dip recession because there really isn't a recovery. There were over 26 million first time claims filed for unemployment in 2009 and yet all we heard about since May was we had a recovery on the way. In examining the consumer confidence numbers last week, which were reported to have improved, I found much of what I found back in the middle of the year, hope 6 months out and a horrible present reading. In fact, the reading for December for the present was so bad it was the worst number in 26 years. That didn't make the bullish news, but it was on the conference board page for the index none the less. 6 months ago, the reading looked the same, a real bearish current reading and a more optimistic 6 month from now reading. So, the 6 month expectation turned out to be a dud.

They had a great housing number, but housing collapsed with boom time sales numbers all the way to the bottom. What is going to happen with housing once they get the last first time buyer to the closing altar? New home sales are at depression levels, so the game is buy a house on the courthouse steps and flip it to a first timer complete with a free downpayment from Uncle Sam and a guaranteed mortgage from FHA. Time is running thin here, as there are too many losses in the system to save it.

Factory orders or something of that sort came out today. They beat expectations, but these orders had fallen a sum of nearly 30% during the period between July 2008 and January 09 and the sum of the rebound has been about 5% since the bottom. Bulls are claiming the numbers indicate a boom, but the sum so far has been a dead cat bounce that is at best a weak inventory rebuild effort. Some boom for $800 billion plus the TARP.

I think the economy just continue to recover until it is discovered to be in a depression. There is too much debt and too much damage and not much other than the desire of China to buy up American goods to put in their empty array of buildings so they at least have the appearance of maintaining a nice group of museums can change this. Just like I heard the Ocean was the icebox in Hawaii, the homestead is the ATM for the US consumer and it has been overdrafted. We had record level auto sales and record level home sales in the US for a good part of a decade and we are still showing high levels of preowned home sales. This pool of autos and homes will carry the US consumer a long way while he gets his house in order. Credit is tapped and card companies have their share of high losses. Not many people that can avoid it are going to pay the rates on these cards, save those that can't pay the debt back.

Forecast: Real US growth will be negative, but reported growth will be around 2%. Real growth is negative because dead cat bounces and government gifts don't count.

China. I don't know what it is going to take to knock over China, but from what I can read, what they call growth is not what I would call growth. If building capacity and buildings that won't be used any time soon is growth then I buy into it. As a result of this policy, China has pinned the price of commodities to the ceiling. Because their necessity is they keep the public employed and the money flowing, this could go on for awhile. Their government isn't much different than ours in this matter. The longer this goes on, the longer the bust will be that follows.

Forcast: China probably reaches its growth goals, but they won't be real. Cracks are already showing in China in the eyes of a lot of analysts, but the public is being told they are hot. I think by the end of the year, the construction industry in China will have officially hit the rocks and the commodity producing countries, namely Australia and Brazil will be having a hell of a hangover. A crash in the stock markets in those 2 countries could very well occur

As a result, world growth will have spent itself. From what I can read, India is a better long term play than China, but it is clear that India will have its own bust. Deflation will have re-established its grip on the US and this will be devastating to world demand. Growth is more than a word, but a business around the world. It must be 30% of the economy around the world. The portion that puts an economy on the plus side is about to vanish.

The financial sector will do well for another 3 months. Though I don't expect another large failure in the US this year, there will be a restart of the crisis. The worst probably hits in 2011. 2 or 3 large US banks will be taken over and broken up before 2012 is over. Their condition currently is being concealed in hopes something doesn't get worse in the meantime. The US isn't the only part of the world that has to liquidate debt and it is quite conceivable that 30% of the worlds supply will be defaulted or liquidated in the next 5 years. This is not conducive to putting things on the installment plan. One of the major Japanese auto companies will be in GM/Chrysler land by mid 2012.

The stock market will finish 2010 lower than it started 2009.

It is quite likely that it could recapture the entire loss that followed the bankrupting of Lehman Brothers. The Dow is already near the bottom it made in July 2008, but the S&P still has another 7% or so to go to make that bottom. The difference is likely due to the fact that the Dow lost points from AIG and Citi while the SPX lost value and the replacements put the points back in the Dow on the rally, but Citi and AIG never came back. There isn't a lot of promise for stocks due to a lot of reasons, but mainly to the fact that the credit flow that created the earnings in the market isn't coming back. Being able to borrow money at less than 1% doesn't make up for the lack of cash flow that is going to continue with the market. The customers are lacking the most important feature of all, credit and cash. Once the market reverses, the liquidity crunch is going to return with vengence, as there won't be a takeout.

The sovereign debt market will get interesting.

I don't believe Greece and Italy will default this year, but I do believe that as time goes forward, these countries are going to default or better yet, repudiate their debt. Currently we are seeing Iceland being tossed a bargaining chip of membership in the Eurozone in order to get them to agree to assume the losses of European investors in their 2 failed banks. I don't believe it is possible for that few people to agree to assume that much debt, nor should they. That will be an early story this year, a sign of things to come, but not much of an event at this time. It will be when Greece, Spain, Italy or Ireland tells them to stuff it.

Funny financing will cease

The focus seems to be on the Fed and the US, but the wildest financing is being done by China and other Asian countries. I do believe we are going to find out there is less to these sovereign wealth funds than has been mentioned. I wonder what kind of duds they contain that we haven't seen. China contains entire vacant cities that must cost tens or hundreds of billions to build. Dubai is todays tower of Babel. Much of the money of the middle east is tied up there. London is going to have its share of problems, especially if they drive their financial mob out with taxes. American commercial property is going to weigh on the US banking system and some are going to begin to question the US commitment to FNM and FRE. It is possible that the US will have to withdraw from its Asian wars.

The Democratic Party will lose one of the houses in Congress

This seems next to impossible at this time, but this economy is going to be hung around the neck of Obama and people are not very interested in the goals of the liberals in Congress. States are about to have to dump a massive number of employees and maybe sue to get out of some union contracts. The Republicans and other parties, should there be other parties, are going to hang the unemployment is going to stop at 8% with this stimulus around the necks of Democrats. The requirement to get health insurance is going to be one more boat rocking event.

Bernanke will be approved, but he will resign by years end

I have contended for some time that the dollar plays too big a role in the world economy to be treated in any fashion imagined on the whim of an economic tyrant. This goes for the government of the US as well. I can see the government being such a burden on the debt market that the private sector will be short of capital. the market will raise rates and the Fed will have to follow. The world will experience another liquidty crisis and that will prevent a dollar collapse.

The economic problems will become officially knows as Depression II

This downturn will become worldwide and it will become significantly worse. The only thing that will prevent collapse of governments will be the fact that money and credit are so short that governments will be able to stimulate without the money collapsing. China and India will join the depression, which will seal the deal.

So much for my bearish predictions. Everyone that was going to survive will. There will be benefits and opportunties for those that have the right strategy and the idea that something can't go on forever will sink in as the truth. There will be a lot of bankruptcy and a lot of liquidation. Unfortunately for most of us, we are going to be wiped out financially either way we go. We should all recognize that any one of us may be anothers only means of survival on a given occasion, so lend a hand if you can.