Archive for October, 2009

Global Economic Forecast 2010-2015

October 31st, 2009 Comments off

This is to advise my many blog readers that my new report, GLOBAL ECONOMIC FORECAST 2010-2015: RECESSION INTO DEPRESSION, is now available. I will have more information available on this report in the next several days. For those who want immediate access to the report, you can purchase it from my e-store at the following link:


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Third Quarter GDP Growth Figures Are Meaningless: Why The U.S. Remains In Recession

October 30th, 2009 Comments off

As if on cue, the Dow Jones index soared to the skies in sequence with the Commerce Department’s triumphant announcement that the third quarter GDP growth in the United States was a robust  3.5 %. After 4 consecutive quarters of economic contraction, the pronouncement that the American economy was now growing, and at a stronger rate than many experts had forecasted, the cheerleaders on Wall Street are celebrating the end of the recession. Hallelujah, the Great Recession is over, the stimulus package has worked!

Not so fast.

Let us journey back into recent history of just over one year ago. It is August 28, 2008 and the Commerce Department has just released its revised growth figures for the second quarter of 2008. It turned out, according to the statisticians at  the Commerce Department, that the American economy grew at a much faster pace than originally reported. The revised Q2 GDP growth figure for 2008 was 3.3%, nearly identical with the Q3 figures now being reported in 2009. The pundits rejoiced at this magnificent economic news, proclaiming that these numbers reflected the success of the $150 billion deficit-driven  stimulus package approved by Congress at the beginning of the year. Analysts proclaimed that the impressive growth figures for  Q2 of 2008 meant that the U.S. economy had dodged a bullet, and thanks to loose fiscal and monetary measures, there would be no recession.

Two weeks after the release of the revised and supremely optimistic quarterly growth figures by the Commerce Department, Lehman Brothers went bankrupt, the global financial system went into cardiac arrest and a synchronized recession struck virtually every economy on the face of the earth.

Before celebrating the glorious Q3 numbers for the U.S. economy, I recommend that prudent observers reflect on the massive levels of public indebtedness required to create the accounting metrics that can demonstrate economic growth simultaneously with the devastation of the real economy  and continuing increases in an already staggeringly high level of unemployment. Furthermore, digest the reality that car sales generated by the recent “cash for clunkers” program contributed nearly  1.7% of the 3.5% growth in GDP in Q3. Then, looking at the recent history referred to above, ask the hard questions on how sustainable the trajectory suggested by the third quarter numbers really is.

In my view, the 3.5% Q3 numbers of 2009 are as reliable an indicator of future economic growth as were the 3.3% GDP growth figures in 2008. As George Santayana stated, those who forget the past are condemned to repeat it.


Global Economic Forecast 2010-2015: Recession Into Depression

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Consumer Confidence in the U.S. Continues to Dip

October 28th, 2009 Comments off

After declining in September, consumer confidence in the United States continued to erode in October, according to the Conference Board. This business organization compiles the Consumer Confidence Index, which declined from 53.4 in September to a sobering 47.4 in September. This dip surprised analysts, who expected to see stability or even a modest increase in consumer confidence.

It really should not have been a surprise to the financial wizards. A disastrous and still increasing rate of unemployment, compounded by record levels of home foreclosures, hardly creates an environment conducive to consumer optimism.

The economic implications of eroding consumer confidence are clear. Prior to the onset of the global economic crisis, the American consumer generated more than 70% of U.S. GDP. Even with massive deficit-funded stimulus programs, the retreat of the American consumer has created a collapse in economic demand that  simply cannot be made up. If there is a recovery, it clearly won’t be led by the consumer.

But without the releveraging of the American consumer, where else can the slack be made up? The bad news is that Ben Bernanke actually has an answer for that economic predicament. It’s called money printing.


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U.S. Bank Closures Now Stand at 106 For 2009

October 24th, 2009 Comments off

Like a thief in the night, the FDIC waits until Friday evenings to announce its latest list of bank failures. This propensity for stealth news on America’s crippled banking system is based on fear that if the information was released to the public in the middle of the week, with news rooms fully attentive, panic might result. This week’s quota of Friday bank follies courtesy of the FDIC is that seven more financial institutions have failed and had to be closed.

This streak of bank collapses posted on late Fridays is occurring with monotonous regularity. Yet, the bank stress tests stage-managed by U.S. Treasury Secretary Tim Geithner last spring were supposed to assure us that the banking system of the United States was solvent and well capitalized. This mythology is increasingly being ripped apart by this never-ending stream of nocturnal end-of-the-week press releases, courtesy of the FDIC.

Despite the record profits being posted by bailed out financial institutions, and the vast bonuses they are awarding to their top executives, I believe the growing list of bank closures, and the depletion of the  FDIC`s fund for paying depositors of these same banks, is a more reliable indicator on the state of banking in contemporary America.

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Bank of England Governor Versus Gordon Brown

October 22nd, 2009 Comments off

A fundamental dispute over financial policy and regulation in the UK has burst into the open. The Governor of the Bank of England (the UK’s central bank), Mervyn King, delivered a speech that, in effect, called for a British version of the Glass-Steagall Act of 1933, which separated commercial banking from more speculative investment banking in the United States. The Glass-Steagall Act was a product of the Great Depression, which witnessed the mass closure of U.S. banks. By creating a firm Chinese Wall of separation between commercial and investment banking, America was spared a repetition of the financial disaster that followed the stock market crash of 1929, that is until the Clinton administration decided to “modernize” the U.S. financial system by repealing Glass-Steagall. This dose of legislative idiocy was a major cause of the financial meltdown of 2008.

Mervyn King has stated on the public record his belief that commercial and investment banking must be separated in the United Kingdom, or the nation risks a repetition of the recent disasters which have led the British taxpayers to spends hundreds of billions of pounds to prop up their insolvent banks. He feels the Brown government has not gone nearly far enough on banking reform. In his recent public discourse, King said, “To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.”

Gordon Brown, it would seem, thinks King is going way too far.  The embattled British Prime Minister was most accommodating in bailing out overleveraged UK banks, but is not so keen to impose the degree of regulatory supervision and restrictions that the Bank of England governor feels is necessary to avoid a future financial disaster. Using his chancellor of the exchequer,  Alistair Darling, as his mouthpiece, Brown rebuked the Bank of England chief for his public expression of concern on banking reform.

In addition to his concern on financial regulation, King has also voiced repeated distress on the growing size of the UK’s structural deficit and national debt. Other economists have warned that the United Kingdom is losing control over its fiscal destiny. In my opinion, without radical changes in the very near future, the next PM of the UK (almost certainly Brown will not be re-elected in next year’s general election) will inherit an insolvent nation.


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Is the U.S. Dollar Decline Good For The American Economy?

October 20th, 2009 Comments off

As the  American dollar slides inexorably downward  in value relative to other major currencies, there are those heralding this  development as marvellous news. Many of these cheerleaders can be found within the camp of the Federal Reserve and U.S. Treasury, despite their public protestations that they are true believers in a strong U.S. greenback. But away from the T.V. cameras and open microphones, these guardians of American finance and economics believe that a weak dollar means an improved balance of payments. American exports are helped by being cheaper for overseas customers, while imports become more expensive, dampening the American appetite for goods originating from foreign sources.

Actually, a balanced dollar is good for the American and global economy, but a weak dollar in the long-term is not such good news. True, American exports become cheaper, initially. However, commodities and value add derived from overseas sources comprise a large component of American exports, so in the long-term a weak dollar does not provide a permanent advantage in terms of cost-competitiveness.

More important than exports, the center of gravity of the American economy is foreign-sourced oil and natural gas. With more than two thirds of American oil consumption based on imports, a collapsing dollar will raise energy prices in the United States to a level that is not sustainable for many consumers. Now, Messrs Geithner, Bernanke and Summers; tell me how this benefits the U.S. economy?


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More On Fed Chairman Ben Bernanke and His Disastrous Economic “Forecast”

October 17th, 2009 Comments off

It is said that those whom the Gods intend to destroy they first drive mad. Is it not madness to reappoint to a second term leading the most important financial and economic institution on the planet, the Federal Reserve, a man with a forecasting record as disastrous as that of Ben Bernanke?

As a follow-up to my recent post on economic forecasting, below is the original Washington Post article by staff writer Nell Henderson, describing the intellect of Ben Bernanke in action during his presentation before Congress just prior to his nomination by President George W. Bush to succeed Alan Greenspan as Fed Chairman.
Read this article in wonderment, and try to comprehend how the author of such a catastrophic forecast on the implications of the housing price boom in the U.S. could be chosen by President Barack Obama to serve another term.



Bernanke: There’s No Housing Bubble to Go Bust
Fed Nominee Has Said ‘Cooling’ Won’t Hurt
By Nell Henderson
Washington Post Staff Writer
Thursday, October 27, 2005; Page D01
Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.

Bernanke’s thinking on the housing market did not attract much attention before Bush tapped him for the Fed job Monday but will likely be among the key topics explored by members of the Senate Banking Committee during upcoming hearings on his nomination.

Many economists argue that house prices have risen too far too fast in many markets, forming a bubble that could rapidly collapse and trigger an economic downturn, as overinflated stock prices did at the turn of the century. Some analysts have warned that even a flattening of house prices might cause a slump — posing the first serious challenge to whoever succeeds Fed Chairman Alan Greenspan after he steps down Jan. 31.

Bernanke’s testimony suggests that he does not share such concerns, and that he believes the economy could weather a housing slowdown.


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Dow Jones at 10,000: Is History Repeating Itself?

October 15th, 2009 Comments off

First there was the dotcom bubble. When it deflated, the U.S. Federal Reserve set interest rates at historic lows for far too long, in turn giving birth to a new asset bubble; residential real estate in America. We all know what happened to that asset bubble, and our world is still gripped with the consequences of its implosion.

How has the Fed responded? By establishing a near zero interest rate policy (ZIRP), which in turn has created a new asset bubble; equities. With the Dow Jones surging past 10,000 for the first time in a year, and Wall Street handing out executive bonuses at a rate that exceeds the  previous best year for their self-congratulatory excess, 2007, by 10%, one would think that the global economic crisis is over.

Perhaps we are just witnessing a new and potentially more dangerous asset bubble being inflated by government bailouts and monetary policy courtesy of the Federal Reserve that has gone berserk. With the U.S. dollar plummeting like a lead weight falling off a cliff, and banks providing depositors with virtually no interest, it seems that it is a matter of policy to encourage stock market trading and speculation.

The question that must be asked is this; when accelerating levels of unemployment, contracting consumer spending and elevated levels of loan foreclosures make it clear that the real economy is still in deep crisis, how sustainable will this latest asset bubble prove? I think recent history has already provided an answer.


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Predicting Economic Trends From Nostradamus to Ben Bernanke

October 13th, 2009 Comments off

History is littered with flawed forecasts on economic trends. And where some have proven to have been surprisingly accurate in their glimpse into the financial and economic future, these projections have usually been scorned, until too late. Our current global economic crisis is a case in point.

In  my view, the most accurate long-term economic forecast of all time was provided by the legendary Renaissance French seer, Nostradamus, usually more renowned for his prophecies on the end of the world. In 1548, Nostradamus predicted, “From Albion’s shore shall come a marvellous contrivance: a carriage of silence bearing the arms of Rolles de Roi.”  Apparently, Nostradamus saw the creation of the Rolls Royce motor car in England, and its reputation for silent and prestigious personal transportation, more than three centuries before the invention of the internal combustion engine.

In contrast, one of the most inaccurate and inept economic forecasts of all time was delivered relatively recently, by the Chairman of the U.S. Federal Reserve, Ben Bernanke. In October 2005 Bernanke, who had recently succeeded Alan Greenspan as chairman of the Fed, issued a confident prediction that the unprecedented rise in U.S. home prices did not constitute an asset bubble, and was based on sound economic fundamentals. Oh well.

Forecasting economic trends is both highly difficult yet absolutely essential. Operating complex economies and businesses without accurate trend analyses is like flying blind without instruments. A major difficulty with many recent economic forecasts is that they are mired in ideology.

In the near future, I will be offering my own long-term economic forecast. It should be finalized within a few weeks. Readers of my blog should stay tuned for further information.

California’s Fiscal Crisis Continues its Dire Evolution

October 10th, 2009 Comments off

The fiscal crisis in California continues. Despite a last-minute bipartisan budget agreement last summer, which supposedly resolved the state’s acute budgetary deficit-temporarily, largely through accounting gimmicks and major program cuts in essential areas, such as education and prisons-the state’s Controller, John Chiang, is now projecting that California’s tax revenues are already $1 billion below what they were forecasted at for this point in the fiscal year.

With America’s most populous state continuing to shed jobs at a rapid pace, it is no surprise that the state’s coffers are taking in significantly less tax revenue. There are already doomsday forecasts for another massive deficit for next year’s budget.

What is significant about California’s plight is that it is a harbinger for what lies ahead for America as a whole. With the U.S. national debt and annual deficits skyrocketing, it seems inevitable that at some point in the future Washington will be left in the place that Sacramento currently finds itself; down a fiscal rat hole, desperately trying to pay its bills with IOUs.