Archive for March, 2009

Is The U.S. Auto Industry Doomed?

March 31st, 2009 Comments off
Detroit has become an urban wilderness. Only a few miles from the downtown core of the Motor City can be found once vibrant neighborhoods that are now devoid of human life. Only abandoned homes remain, extinguished of their occupants by a tidal wave of foreclosures. Recently, the local and even national media have reported on a phenomenon unique in metropolitan America; animals that had not inhabited Detroit for decades, including industrious beavers, were now reclaiming their previous habitat, as more and more areas of urban Detroit have been transformed into pastoral land. No better metaphor can exist to point out what has happened to the heart of America’s once mighty automobile industry.
As the Global Economic Crisis destroys worldwide consumer demand for automobiles, two of America’s three remaining domestic carmakers, General Motors and Chrysler, look to President Barack Obama for salvation. They, however, are not alone. The financial and banking system are first in line, while states and cities starved of tax revenues are also clamoring for help from the Obama administration. No doubt President Obama has many burdens weighing on him as he seeks to provide leadership for a national and global economy in tatters. Obama did not cause the decline of the U.S. automobile industry, and no doubt he is trying to do his best in formulating policy regarding Detroit and well as the many other ailing sectors of the U.S. economy. However, the recent decisions regarding G.M. and Chrysler that Barack Obama has made will not, in my view, do much to reverse the dismal fate that seems irreversible for the once proud car builders of Detroit.
The perspective from the White House appears to be that the two domestic auto manufacturers are in dire straits because they have not formulated a business plan that is viable in current market conditions. They have therefore, in effect, been sent an ultimatum. Chrysler is being told to merge with the Italian automaker, Fiat, while G.M. was compelled to fire its CEO, and must “restructure” radically within two months, or face bankruptcy. Washington will only provide funding for the duration of the ultimatum, with further support only available if the expectations of the Obama administration are met in full.
With respect to Chrysler, the attempt at a shotgun marriage with Fiat is just another failed automotive merger in the making. The record of foreign carmakers buying large or controlling interests in American auto companies has been universally disastrous. One need only look to Chrysler’s relatively recent merger with Mercedes-Benz, at which time the joint company was known as Daimler-Chrysler. Prior to that catastrophic union, which Mercedes-Benz management will forever regret, there was the purchase of American Motors by Renault, the French auto giant. The end result of that merger was the extinction of AMC, with its remnants bought by Chrysler. It should also be pointed out that Fiat abandoned the American car market decades ago, so it is totally unfamiliar with the dynamics of the U.S. auto marketplace.

General Motors is a much larger carmaker, with a global presence and vast overhead. Its very size defines the essence of the problem being faced not only by G.M. but also by other global car builders, including Toyota, Nissan and Ford. Currently the world has the manufacturing capacity to assemble more than 90 million automobiles a year. However, the Global Economic Crisis has created a vortex of demand destruction in the car business, reducing global demand to around 50 million units. The overhead for maintaining this complex, global manufacturing infrastructure is staggering, and can only generate profits if sales match production capacity. With worldwide sales reduced to 50 million cars, no major car company can make money.

The only solution for preserving General Motors is to provide sufficient demand for its manufacturing capacity. This demand need not be restricted to cars; during World War II Detroit became the arsenal of democracy, as its assembly lines retooled to build the weaponry that helped defeat Nazi Germany and Imperial Japan. However, in 2009, political leadership appears to lack the imagination to see the potential of harnessing the productive capacity of the auto manufacturers in other directions that can facilitate global economic development and recovery. What we are left with are ultimatums that provide only two possibilities: bankruptcy now, or becoming “leaner” with the future possibility of insolvency still hanging like a sword of Damocles.

I do not think the Obama plan for preserving a domestic U.S. auto industry, as presently conceived, will work. At most, it may preserve fragments and echoes of what was once the mightiest industrial productive capacity on the planet. Unlike the Great Depression of the 1930s, in which industrial giants such as G.M. and Chrysler did survive and eventually prosper, the Global Economic Crisis is devouring what were once seen as the pinnacles of economic and industrial might. If G.M. and Chrysler are in fact doomed, along with much of what remains of America’s industrial capacity, this will be largely due to a policy decision that establishes the financial sector as the center of gravity for the U.S. economy, reflecting the vastly more significant taxpayer dollars that have been allocated to that sector, with far fewer strings than are being attached to the paltry aid given to Detroit.

How is it possible for the U.S. to rebuild its economy if the industrial sector, epitomized by companies such as General Motors and Chrysler, is largely sacrificed on the altar of Goldman Sachs, AIG, Bank of America and their ilk?



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Global Crisis Threatens Another Economic Pillar: Is Commercial Real Estate The Next Asset Bubble To Burst?

March 29th, 2009 Comments off
While the Obama administration and the politically powerful oligarchs of finance focus on so-called public/private partnerships as a solution to the financial toxicity created by securitized subprime mortgages, another sizeable component of real estate securitization on bank balance sheets is on the verge of being the next domino to fall. While residential real estate’s impact on the global financial and economic crisis still retains the spotlight days before the G20 meeting in London, indications are growing that a global commercial real estate implosion is on the verge of becoming the next asset bubble to pop, with devastating consequences. Perhaps it is only because so many fires are already burning amid the rotting timbers of our flawed financial architecture that the impending disaster about to afflict commercial real estate has yet to compel urgent attention. Some, however, are astute enough to see the train wreck that is coming down the track at breakneck speed. Take, for example, billionaire financier and currency speculator George Soros.
Speaking at a conference held in Washington, Soros said, “Commercial real estate has not yet fallen in value. It is inevitable, it is written, everybody knows it, there are already some transactions which reflect and anticipate it, so we know, they will drop at least 30 percent.”
What are the transactions that George Soros is referring to? Some major commercial real estate markets are already pointing towards a catastrophic collapse. The brokerage firm C.B. Richard Ellis Inc. has issued a report on the prime Manhattan commercial real estate market that presents a truly apocalyptic image. The past year saw the value of Manhattan office building transactions decline by a staggering 69%. A high proportion of such sales were of a distressed character, the bulk involving buildings that had been owned and managed by Harry Macklowe. The real estate entrepreneur was forced to deleverage due to his inability to secure financing and meet loan obligations to his creditors, in particular Deutsche Bank. This process of forced deleveraging has had its inevitable impact on the Manhattan commercial property marketplace. Buildings that Macklowe purchased on credit for $1,100 a square foot are now obtaining as low as $778 a square foot, in the diminishing number of cases where buyers can actually be found who still have access to credit.
The contraction of the commercial real estate market in New York is only a harbinger of what is beginning to occur with increasing rapidity in large cities and medium sized towns, not only across the United States but also throughout the world. Two forces are at work in this disaster in the making; frozen credit flows and rising unemployment. Both forces feed on each other in a perpetual negative feedback loop. Restricted access to credit means property owners cannot meet their loan payments or refinance, forcing deleveraging, which in turn further distresses commercial property prices. The increasing levels of unemployment arising from the Global Economic Crisis has unleashed a wave of demand destruction, the likes of which have not been seen since the Great Depression of the 1930s. In major cities and shopping complexes across the globe, retail outlets are bereft of customers, in the process liquidating essential cash flow for these enterprises. This means even where credit might be available, such as through government funded injections of capital into the banking system, enterprises lack the capacity to service loans that otherwise might be accessible. The result is a self-perpetuating meltdown in which commercial real estate increasingly becomes vacant, with few potential buyers or tenants available, further distressing their economic value.
Just as with securitized subprime mortgages, many commercial banks, investment houses as well as the vast shadow banking system invested heavily in paper backed by commercial real estate. For those retaining hope that commercial property mortgages were consummated with more due diligence than was the case with residential borrowing, their optimism will soon be proven to have been unwarranted. Until about 2007, a commercial real estate boom existed in parallel with the residential housing bubble that was being fed in large part by the Federal Reserve and its low interest rate policy. Very often substantial properties were purchased, at the peak of the market, with 90% of the purchase price financed through credit. As these loans become increasingly non-performing, in synchronicity with the diminution in value of the collateral that backed up those loans, another transformation of bank balance sheets into toxic acid will be unleashed, with a vengeance.

How significant is the exposure to the coming implosion in the commercial real estate market? I have seen some estimates in the range of $7 trillion, however, the ultimate number may be significantly higher. Commercial properties encompass a vast array of buildings in developed and developing economies, from small, medium and large sized office buildings to shopping malls of all dimensions. Strip malls and mega-shopping complexes are losing tenants, with no one lining up to replace them as the Global Economic Crisis curtails demand by consumers. With fewer tenants and constricted income, property owners unable to service their outstanding loans are deleveraging, as mentioned above. Keep in mind that this is not just a New York City phenomenon; London and Budapest, Los Angeles and Berlin, Seattle and Tokyo are already seeing this torrent of economic destruction at work. As the implosion in commercial real estate accelerates, the already fragile global banking and credit system will be hammered again. In a worst case scenario, the blow about to be delivered by this next bursting asset bubble may prove to be mortal for the global economy.


For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, 







Dire Warning On U.K. Deficits; What Are The Implications For The U.S. Debt Crisis?

March 27th, 2009 Comments off
As U.K. Prime Minister Gordon Brown goes globetrotting on his mission to spread the gospel of massive borrowing by governments to fund stimulus spending in response to the Global Economic Crisis, setting the stage for the G20 Summit in London, the governor of the Bank of England, Mervyn King, was preaching a different message to members of Parliament at a Treasury Committee meeting. The Bank of England is the central bank of the U.K., in effect the British equivalent of the Federal Reserve in the United States. While accepting the traditional Keynesian view that in times of economic downturn spending must be increased by governments despite reduced tax revenues, creating inevitable budgetary deficits, King went on to tell the parliamentarians that, “Given how big those deficits are, I think it would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits…I think the fiscal position in the U.K. is not one where we could say, ‘well, why don’t we just engage in another significant round of fiscal expansion’.”

In contrast with Fed Chairman Ben Bernanke, the Bank of England governor is watching the accumulating public debt with deep concern, instead of advocating massive quantitative easing, as it is being executed in the U.S. by the Federal Reserve. Mervyn King is clearly worried about the long-term implications of the growing national debt driven by fiscal imbalances, recognizing the future and destabilizing dangers of hyperinflation and national insolvency. Carefully worded and diplomatic as his message was, King’s warning is a clear message to the British political establishment: the current budgetary trajectory is unsustainable.

How bad is the U.K.’s fiscal posture? The true answer is obscured by the accounting rules being applied by the British government, which has assumed the costs and risks of bailing out the U.K.’s largely insolvent banking sector. By some calculations, the loans and guarantees have created a potential public liability of approximately $700 billion that is not reflected in official public debt figures, which stand at about one trillion dollars, or 47% of the nation’s GDP.

In comparison, there are no warnings about massive U.S. budgetary deficits that are being planned by politicians for the next decade, far beyond the three-year time limit King recommended to the MPs on the Treasury Committee. Yet, the United States has an even more daunting debt problem than the United Kingdom. At present, the national debt of the United States exceeds $11 trillion, equivalent to 78% of GDP, a much higher figure than during the New Deal period of the Great Depression of the 1930s. With U.S. GDP projected to shrink in the current fiscal year while deficits add at least $2 trillion to the national debt (my estimate), the ratio of public debt will rise to a point approaching the entire GDP, perhaps within the next five years.

There is another aspect to the U.S. public debt crisis. In 2008, the Federal government spent $412 billion on interest payments for servicing of the national debt. Currently, interest rates are at record lows; the U.S. Treasury has even been able to auction off short-term Treasuries at zero interest rates. However, the inevitable erosion of the dollar’s intrinsic value and changing market conditions will drive up interest rates. That, in combination with the rapid growth in the public debt, could mean interest payments soon becoming the largest proportion of Federal spending, even surpassing military outlays. In a few years, debt-servicing costs may exceed one trillion dollars annually.

As if things were not bad enough, the U.S. government has made massive commitments in terms of direct borrowing and backstop guarantees in the trillions of dollars for bailing out the financial, banking, mortgage and even industrial sectors. Except for the TARP program, these massive fiscal obligations are off the books, but may very well come due, at the expense of the already over-leveraged U.S. taxpayers.

Mervyn King has displayed a rare example of candor and intellectual courage among the central bankers and politicians deciding our fate as the Global Economic Crisis intensifies. If only that same level of civic honesty could be replicated across the Atlantic.






Japan’s Export Trade Has Collapsed

March 26th, 2009 Comments off
Like the implosion of a collapsing solar mass, Japan’s exports are undergoing a calamitous free fall contraction, unprecedented in the annals of global economics and finance. This is not reflective of a mere recession, but rather the decapitation of the nerve center of Japan Inc. Massive exports are the hyper-center of economic gravity in Japan; it has been the post-war exponential surge in value-added products shipped abroad from Japanese factories and assembly lines that transformed the nation into the number two global economic super-power. However, the Global Economic Crisis is shattering the very core of Tokyo’s economic prowess, as reflected in the most recent Japanese trade figures.

According to official statistics, the month of February witnessed an overall decline in Japanese exports of 49.4% from exactly a year ago. In other words, in just 12 months Japan’s most crucial economic activity, foreign trade, has been sliced in half as though with a meat clever. This is an astonishingly bad economic figure, however, it actually gets worse when one peruses the details underlying the grim aggregate export numbers. The United States, which remains the single most important market for Japanese products, reduced its imports from Japan by 58%. Exports to Europe declined by 54.7% while shipments to China plunged 39.7%. When it comes to one of the most important and visible Japanese exports, automobiles, the decline was a staggering 70.9%. These figures are not just indicative of a mere global recession; these are the signatures of worldwide economic depression.

As with other somber news emerging with rapidity as the Global Economic Crisis worsens, there remains a remnant among the financial analysts and economic “experts” who creatively “spin” some good news out of this menu of accelerating disaster. “These numbers are not as bad as we thought,” some are saying, while others claim that the rate of contraction of Japan’s exports is receding somewhat. That is actually technically correct; when an economy witnesses a contraction by almost 50% in its export trade in only one year, the mathematical rate of descent must slow down or else in a few months Japan’s exports would be at absolute zero. Putting aside the intellectual acrobatics of those “experts” trying to diminish our perception of how severe the Global Economic Crisis has become, these chilling Japanese trade figures actually send an alarming message to the entire world, only days before the onset of the G20 Summit being held in London.

The export collapse occurring in Japan is a manifestation of the free fall in world trade. In an inter-linked global economy, a massive contraction of Japanese production geared for exports means Tokyo imports much less in terms of intermediate products and commodities that go into the manufacturing of goods that are shipped overseas. It also means Japan has less accumulation of capital. This latter detail is especially vital, for Japanese savers have enabled Tokyo to join with China in being one of the primary purchasers of U.S. government debt. In essence, what is being revealed is a convergence of dire trends. Global trade is shrinking, the U.S. budget deficit is soaring through the roof, while the overseas capital resources essential for financing Washington’s debt are becoming increasingly scarce in proportion with the diminution in global trade. In essence, as U.S. consumers purchase fewer goods from Japan and China, Tokyo and Beijing are left with a much-reduced capacity to loan Uncle Sam the credit he is now addicted to.

The global economic and fiscal model that currently exists, in the context of collapsing export trade from major sources of credit for the United States, as is the case with Japan, is unsustainable. Will the politicians and their coterie of economic and financial experts realize this fundamental truth and formulate sound policy responses before the entire global economy has fallen into the abyss? Based on their track record to date, I don’t see solid grounds for optimism. What does appear more likely is that the worst is yet to come, and Japan’s trade figures are only a foreshadowing of deeper global economic doom.


Timothy Geithner Proposes A “Cure” For Toxic Assets: Take A Poison Pill

March 24th, 2009 Comments off
In scientific terms, toxins are regarded as compounds that, if ingested in small quantities, can cause severe organic damage and even death. There are in the natural world, however, compounds which in small quantities are harmless; taken in large doses the same compounds can prove lethal. Such is the case with financial toxicity.
Our modern financial system is the creation of fallible human being, meaning there will be encountered in any modern economy a certain degree of mischievous speculation, outright fraud and chicanery. Often these activities lead to the creation of asset bubbles. If the proportion of inflated or fraudulent assets is a trivial proportion of the gross aggregate assets held by the major institutions in the financial system, the damage can be contained. However, when asset bubbles constitute a significant proportion of the paper wealth of a major economy and then deflate, they become toxic in the truest sense of the term. With our current Global Economic Crisis, it is the size of these deflating assets that contributes to their toxicity. However, their impact on the global credit system is virtually identical to that of chemical toxins on biological mechanisms; they are the penultimate monkey wrench that jams up the whole works. The toxic assets sitting on the balance sheets of financial institutions throughout the world have paralyzed the economic heart of the global economy, starving it of the blood and oxygen of normal flows of credit. The result has been economic paralysis more severe than anything experienced since the Great Depression. However, instead of an antidote, or at least a well conceived therapeutic response, U.S. Treasury Secretary Timothy Geithner has offered up more toxicity.
Perhaps toxicology is too clinical for the Wall Street clique that has dominated policy making in Washington as it applies to the economy. By training and experience Geithner is a creature of Wall Street, and has proposed a solution to the disease of toxic assets that is nothing more than the original brainchild of former Treasury Secretary Hank Paulson. Yet, even Paulson retreated from his original idea of buying up the toxic assets on the balance sheets of U.S. banks, choosing instead to purchase equity in these institutions, an approach that was just as ill conceived.
There are many weaknesses to the Geithner plan, not the least being that it is simply Paulson redux. It pretends that U.S. banks are essentially healthy except for the fact these toxic assets are not really toxic but are in fact “under-valued” by the market. Accordingly, Geithner wants to use taxpayer money to re-inflate the value of these assets, by encouraging private investors to buy them through auctions, thus bidding up their price. This will be accomplished by Treasury using the balance of the TARP money, $75-100 billion, to match private investors direct stake in the purchase of such assets, and then provide cheap loans to the private investors through the Federal Reserve and FDIC to buy up to $1 trillion of the toxic assets. The private investors will only risk the small proportion of their own capital being utilized in the transactions, as the U.S. taxpayer loans will be “secured” by these same toxic assets, which will be the collateral.
Rather than toxicology, Geithner is resorting to folktales and alchemy in providing this witches brew of a curative. The Geithner plan is not only bad in terms of its philosophy; have the taxpayers take almost all the risks, with the private investors subsidized to the tune of nearly a trillion dollars, while these same investors are assured of the great bulk of any upside. There is an even more fundamental problem. Most of the U.S. banking system, and much of Europe’s, is effectively insolvent. Other than radical surgery, which recognizes that maintaining on life support zombie banks can only prolong the Global Economic Crisis, any other solution is doomed to failure.
Geithner is proposing to place U.S. taxpayers at severe risk, by in effect borrowing money to purchase these toxic assets on behalf of hedge funds and other private investors. Yet, as massive a sum as Geithner’s plan envisions, it is not nearly adequate towards addressing the full dimensions of the problem. NYU economics professor Nouriel Roubini has estimated that the U.S. financial system is sitting on $3.6 trillion of bad assets. A leaked document from the European Commission assesses that banks across Europe hold up to $24 trillion in bad assets, suggesting that even Roubini’s gloomy analysis may be unduly optimistic. It is already clear that the banking system in the United Kingdom is comatose. Yet, Geithner asks that we suspend disbelief, accept that the U.S. financial system’s toxic asset exposure is limited to $1 trillion, and we should allow the private sector to do its thing, subsidized by the American taxpayers. Far from being thoughtful, insightful and analytical, Timothy Geithner offers a dish of warmed-over free market cliches and Hank Paulson inanities, avoiding at all costs even a hint of bank nationalization and radical financial surgery.

In his column in The New York Times, Nobel prize-winning economist Paul Krugman summed up the fallacy of Timothy Geithner’s toxic assets rescue plan as follows, “But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus-for that is what the Geithner plan amounts to-will change that fact”

Unfortunately, hocus-pocus is exactly what has been proposed by Geithner, to the delight of Wall Street. It will prove as effective an antidote to our economic and financial crisis as the toxins injected through the fangs of a cobra.







U.S. Budget Deficts Are Exploding

March 23rd, 2009 Comments off
Amid the worsening Global Economic Crisis, the Congressional Budget Office fired a lead cannon ball over the bow of the Obama administration’s ship-of-state. Contradicting the claim by President Barack Obama and his economic team that the monstrously huge federal budget deficits would be reduced in half by the end of his first term of office, the CBO is projecting that from 2010 through 2019 the accumulated Federal deficits will reach$9.3 trillion dollars, a sum that exceeds the Obama administration’s own ten year forecast by $2.3 trillion dollars. Peter Orszag, who serves as President Obama’s budget director, is sticking behind the more optimistic projections of the White House. So who is correct?
In my opinion, they are both wrong, though the CBO is closer to reality. In fact, the current fiscal trajectory of the U.S. government promises only an ocean of red ink, with deficits soaring through the stratosphere. To begin with, the Obama administration is projecting an end to the recession by the end of the year, with growth returning in 2010 and becoming increasingly more robust. This is sheer fantasy; the U.S. is only in the earliest stages of the worst economic crisis since the Great Depression of the 1930s, with government tax revenues set to contract at unprecedented rates just as Federal government expenditures are ballooning through the proverbial roof. As for the CBO, a year ago they forecasted that the U.S. budget deficit for 2009 would be “only” just over $200 billion dollars, versus the current Obama administration’s “optimistic” forecast of $1.7 trillion. In addition, prior to George W. Bush assuming office as America’s 43rd president, the CBO was assuring policymakers that they could count on budget surpluses far into the future.

In earlier posts I projected the U.S. budget deficit for 2009 at above $2 trillion, with a good chance of exceeding $2.5 trillion. If anything, the fiscal posture of the United States continues to deteriorate, as her economy sinks into free fall collapse, dragging much of the world down into this economic death spiral. In effect, the U.S. budget has become a candle burning at both ends, as a convergence of dwindling tax revenue and exploding expenditures on banking and corporate bailouts and so-called “stimulus packages” becomes a deadly embrace. On top of this apocalyptic news, the U.S. has more than $60 trillion in unfunded social security and Medicare obligations.

The U.S. budget deficits, and the cascading national debt that is resulting from this acute fiscal imbalance, may create an irreversible slide into national insolvency. It could be that the “good faith and credit” of the U.S. government will not survive the Global Economic Crisis.



IMF Forecasts First Global Economic Contraction In 60 Years

March 19th, 2009 Comments off
The International Monetary Fund has joined the chorus of organizations and economic think tanks that have concluded that the Global Economic Crisis is unprecedented in its repercussions. In a report prepared in connection with the G20 Finance Ministers meeting held in London, the IMF offered an economic forecast saturated with gloom. For the first time in 60 years, the IMF report states, the entire global economy will experience a net contraction. The current IMF estimate is negative growth in 2009 of between .5 and 1 %, compared to a forecast of only two months ago still projecting net global growth, though at anemic levels. Thus, the IMF mirrors a similar forecast issued by the World Bank only a few weeks ago.

There is not even a glimmer of optimism in the IMF forecast, except in the sense that some regions will contract at slower levels than others. Japan is projected to decline by 5.8 %, with lower but still shattering levels of economic contraction in the United States, the United Kingdom and Eurozone. Emerging markets, especially Eastern Europe, are assessed as being particularly vulnerable to the turbulence being unleashed by the Global Economic Crisis. “The risks are largest for emerging countries that rely on cross-border flows to finance current account deficits,” concludes the IMF in reference to the impact the global financial crisis and credit crunch have had on the debt-dependant economies of Eastern Europe.

Reading between the lines of the IMF forecast, it is clear that the contraction ratios would be even more severe, but are in effect being masked to a certain degree by so-called economic stimulus programs. In effect, future tax money is being borrowed to artificially create employment in the near term. However, the IMF report alludes to the challenges to be faced in 2010, when less stimulus spending is projected, especially in Europe. This is already a source of contention between the United States, which is currently projecting a deficit of 12% of her GDP, and the European Union where, in comparison, a much lower ratio is being allocated within the Eurozone. The UK, however, is forecast by the IMF to have attained a fiscal deficit in 2010 that will comprise 11% of her GDP, nearly the same percentage as is the case with the US federal budget.

With deficits soaring and projections of global economic contraction multiplying, the U.S. Federal Reserve has made its own unique contribution to the toxic brew being stirred in the midst of our worldwide economic catastrophe. As I have previously warned in my earlier blog comments regarding Ben Bernanke and quantitative easing, the Fed has now officially announced that it will fire up the printing presses and conjure out of thin air $1.2 trillion of freshly minted fiat currency, which it will utilize for purchasing Treasury bonds and mortgage-backed securities. This is an act of desperation, devoid of any long-term strategic framework. In a panic to achieve a short-term reversal of economic fortunes in the U.S., the all-powerful Federal Reserve has embarked upon an experiment in quantitative easing and government debt-monetization that will inevitably unleash the dangerous prospect of hyperinflation. Defenders of the Fed’s reckless gamble with America’s fiscal and monetary health will argue that currently deflation is a much greater danger than hyperinflation. This is accurate only in a very short-term time horizon. If anything, the Global Economic Crisis has shown how powerful financial and economic currents can be turned around on a dime. Last summer, the price of oil skyrocketed, reaching levels of nearly $150 per barrel, with serious financial analysts projecting a much higher price in the near future. Within a matter of weeks, the world witnessed a radical reversal in the price of oil and other commodities. I mention this as a warning that disastrous policy measures being enacted by the Fed can transform deflation into hyperinflation much more rapidly than can presently be envisioned.

Between news bulletins concerning the IMF and World Bank reports that are forecasting the most severe global economic contraction in 60 years, and the $1.2 trillion in make-believe money being manufactured by the Fed, it is inexplicable why major stock markets are undergoing a rally of sorts. Could this be the calm before the storm?




AIG To American Taxpayers: Drop Dead

March 17th, 2009 Comments off

AIG and its recklessly greedy and stupid executives are ample proof that modern American capitalism is not an impartial economic system based on rewards for performance, with no guarantees and safety nets for risk takers. Winners take all; losers surrender everything. That was the story we have all been told, but it has been proven time and time again during the Global Economic Crisis that this is a myth. If anything, the reverse is the case. AIG is a textbook study in how communism has infected the boardroom suites of corporate America, with the old-fashioned cold capitalism left for just the dumb middle-class taxpayers. Privatize the obscene profits, but socialize the corporate losses, especially if they are the result of reckless stupidity and massive greed.

Greed and recklessness are certainly at the root cause of the AIG implosion. Though the insurance arm of the company was solvent, a derivatives trading unit of AIG, based in London, came up with the ingenious idea of selling credit default swaps as insurance to banks, Wall Street, pension funds and other investors, public and private. These CDS products were, among other things, insurance against losses on investments in mortgage-backed securities. The AIG geniuses thought they had a whopper of an idea; mortgage-backed securities will never lose money, so therefore the insurance premiums will be an easy cash flow for AIG. Accordingly, since these CDS products will never fail, AIG had no need for a substantial reserve against losses. That was the theory. In practice, we all know what happened with mortgage-backed securities, and AIG’s unique strategy of not maintaining reserves to cover claims.

Unfortunately for the American taxpayers, the Federal Reserve, utilizing its massive powers, deemed that AIG was too big to fail, concluding that its collapse would create systemic risks to the entire global financial system. In essence, the Fed decided that AIG must be propped up at any price, and that decision was made with no input from Congress or the American people. At first, the American people were told that AIG required a “loan” of $85 billion, and that the taxpayers would get their money back-some day- when the “healthy” parts of AIG could be sold for reasonable market value. Now, however, the AIG bailout cost has climbed to $185 billion, and it should be clear to us all that the American taxpayers are not “loaning” their money to AIG. They are funding a flow-through of payments to clients of all kinds of insurance “products” and bets that the brilliant executives at AIG chose to underwrite, with the end nowhere in sight. Not even the Federal Reserve and U.S. Treasury knows what the final bill will be, but it is likely to exceed a half-trillion dollars.

The same brilliant executives at AIG who were the architects of the near-meltdown of the financial world, the acceleration of the Global Economic Crisis and the transformation of their company into a zombie entity, only kept alive by transfusions of taxpayers cash, still think they are entitled to large bonuses for their masterful work. Bonuses beyond their already excessive compensation. With the same temerity they displayed in conceiving of their credit default swaps, the top management of AIG decreed hundreds of millions of dollars in bonus payments be made to the firm’s executives. This included $165 million in bonuses to the derivative traders at the AIG business unit responsible for our current global financial calamity. However, not even the arrogant management of AIG could justify these bonuses as “performance payments.” So, in their typically dexterous mode, they simply did a word substitution and called these bonuses “retention awards.”

Paying $165 million to retain the reckless, incompetent and greedy architects of a major cause of the Global Economic Crisis? It would appear that the AIG executives either think the American taxpayers are utterly dull-witted and stupid, or they simply could not care less.

With corporate leadership of the caliber being displayed at AIG, does anyone still wonder why American capitalism is in trouble?


Ben Bernanke Heavy On Quantitative Easing: Is The Federal Reserve Unleashing Hyperinflation?

March 17th, 2009 Comments off
A vast television audience undoubtedly tuned in to watch and listen to Federal Reserve Chairman Ben Bernanke’s profile on the CBS Sunday news show 60 Minutes. And despite the reputation that 60 Minutes has garnered and claimed for itself as a vigilant investigative reporting arm of CBS News, the program actually broadcast comprised some of the most self-serving propaganda ever to appear on television. When the super-secret Federal Reserve “acquiesced” to having its Chairman interviewed, it should have been apparent what the agenda was; Bernanke wanted a highly visible platform to communicate a deliberative (and unchallenged) message. The management of CBS and producers of 60 Minutes were only too happy to oblige.
The message to the American people and indeed the whole world being impacted by the Global Economic Crisis was: A) Boy, is Ben Bernanke brilliant! And B) The Fed Chairman knows how worried the American people are about the prospects of unemployment and personal bankruptcy, in fact he is one of them! Bernanke is just one of the common people, not a lackey of Wall Street, so we must trust him when he tells us he has to bailout out the bankers and financiers to save the rest of the American economy. Otherwise, economics is too complex for mere mortals to comprehend, so we should just all have blind faith is his intuitive genius to “fix” the financial system. Besides, a lot of the bailout money is not coming from the American taxpayers but rather from the Federal Reserve. And yes, the Fed is generating the capital through its printing presses, but please don’t ask any more question about this, just trust us.
As ludicrous as this may sound, that was exactly the essence of the 60 Minutes portrayal of Ben Bernanke. It was classic public relations messaging, almost devoid of any real content. But not entirely.

The brief reassurance from Bernanke that the Fed’s printing presses were contributing most of the bailout money being injected into Wall Street as opposed to taxpayers was the single most important revelation from the otherwise monotonous propaganda broadcast on 60 Minutes. For those familiar with technical terminology as applied to monetary policy, Ben Bernanke was indirectly conceding that America’s semi-private central bank was engaging in quantitative easing, on a massive scale.

What is quantitative easing? In essence, it is printing money. In other words, the Federal Reserve, by virtue of the congressional legislation that led to its establishment in 1913, has the sole power and authority to print U.S. currency, at will. At any time. Without congressional or even presidential supervision or consultation. In unlimited quantities. There are some of us that believe that the power to engage in unregulated quantitative easing by the Fed amounts to nothing more than legal counterfeiting. Yet, that is exactly what is going on at the Federal Reserve, and Ben Bernanke confirmed it, though the meaning of his admission was probably rendered opaque to many viewers due to the saturation of praise heaped on the intellectual acumen of Chairman Ben Bernanke.

Largely unseen by the American public, their nation’s Federal Reserve is engaged in a massive expansion of the U.S. money supply. No one outside the Federal Reserve knows all the details, probably not even President Barack Obama. But it must be in the hundreds of billions of dollars, and perhaps in the trillions.

Not only is this manufactured money being used to recapitalize Wall Street firms and cover AIG payments to counter-parties; it may be the means by which the Fed and Treasury Department collaborate in covering the cost of America’s massive and never-ending budgetary deficits. As foreign sources of credit dry up in the midst of the Global Economic Crisis, the Treasury Department seems to be working with the Fed to monetize the debt. This is in essence a Bernie Madoff form of national finance. The U.S. Treasury Department sells its Treasury bonds to the Federal Reserve, and in return receives the output of the Fed’s printing presses.

What is so dangerous about the path that Bernanke seemed to hint at during the 60 Minutes profile of him is that the inevitable outcome is hyperinflation. In fact, behind the scenes, a growing number of expert economists are suggesting that the accumulating national debt of the United States will be so titanic in scope due to the multi-trillion dollar annual deficits the Obama administration is planning for years to come, the only means of rendering such a debt burden sustainable will be to use inflation as a tool to significantly erode its real value.

This approach, in a word, amounts to hyperinflation. It is a road to fiscal calamity, being cheerfully mapped out by Ben Bernanke and company. If anyone still thinks Bernanke’s path will lead to economic recovery, just look at the German Weimar Republic of the early 1920s or Mugabe’s Zimbabwe of today, to comprehend how bad an idea this really is.

Perhaps it would have been best not to have had Ben Bernanke and the Federal Reserve propagandized on 60 Minutes. Far from being reassured as to the competence and skill of the men of destiny leading the U.S. economy, I am even more convinced that the outcome that awaits the U.S. economy is not a happy one. Perhaps this is what Chinese Premier Wen meant when he suggested at his recent news conference that he was worried about the safety of China’s investment in U.S. Treasuries. If the Fed is planning to engineer hyperinflation through quantitative easing and debt monetization, China’s trillion-dollar investment in U.S. public debt could loose most of its value. However, China won’t be alone. As history has shown time and again, a nation’s middle class and many of its wealthy citizens stand to loose much of the real value of their assets denominated in currency undergoing quantitative easing.

Does anyone serving in the U.S. Congress actually understand what the Federal Reserve is planning for the U.S. economy?




Wall Street Is A Ticking Time Bomb

March 16th, 2009 Comments off
Webster’s Dictionary offers the following definition for a ticking time bomb: an explosive device connected to a timer that will set it off at a given moment; any potentially destructive state of affairs. I believe that this is an accurate definition for the current state of Wall Street. Despite last week’s “sucker’s rally,” there can be little doubt as to the fragility of The Street in the wake of the raging Global Economic Crisis.

Since the onset of the global financial and economic crisis, there have been a number of these fool’s rallies on the stock markets of the world, led by Wall Street. These rallies have not been based on market fundamentals, but rather largely on the political prowess of Wall Street in its ability to intimidate decision-makers in Washington, compelling them to cobble up whatever stratospheric amounts of money have been demanded by them to “repair” the financial system.

Back in October, former Goldman Sachs chairman and then current U.S. Treasury Secretary Hank Paulson warned Capital Hill that unless Congress immediately allocated $700 billion to bailout Wall Street, the entire global economy would collapse, literally within hours. Congress, however, voted down Paulsen’s TARP boondoggle. In response, The Street mobilized its lobbyists, and pressured Congress into “reconsideration” of its vote. Congress conducted another TARP vote, and Wall Street got its $700 billion bailout. However, the rally from the initial losses incurred by rejection of TARP was short-lived and shallow. That has also been the pattern with similar rallies as the Global Economic Crisis has accelerated in its devastating impact.

The most recent sucker’s rally that elevated the Dow Jones from its depressing lows was sparked in large part by “leaked” memos from the CEOs of Citigroup and Bank of America, claiming that these insolvent institutions, only still in existence due to massive infusions of taxpayers bailout money, had actually returned to profitability in the first two months of 2009! It seems some creative bookkeeping went into that calculation.

The facts remain unalterable; American and global macroeconomic data points to massive demand destruction, rapidly rising rates of unemployment and the collapse of world trade. Enron-style accounting can only postpone the inevitable, not stop it. Since the Dow Jones hit its peak in October 2007 of just over 14160, it has lost approximately 50% of its value. This collapse in equity prices mirrors the Dow Jones contraction experienced during the Great Depression. However, with much worse economic data likely to emerge over the next several months from all corners of the globe, further massive losses on Wall Street are not only likely; they are a metaphysical certainty.

Wall Street has perpetuated a myth that it is a manifestation of market rationality, rather than a man-made construction infused with irrational exuberance, Machiavellian greed and outright manipulation. Despite all the bailouts Wall Street has secured for itself, at the expense of intergenerational debt that will burden the American taxpayers far into the future, it is heading into the abyss. Wall Street is indeed a ticking time bomb, set to detonate with full destructive yield. Don’t expect Timothy Geithner or a thousand leaked memos from American CEOs to disarm this financial time bomb.