Sunday, December 20, 2009

GDP growth vs Debt growth:

I listened to an economic debate last night on NPR between Jeremy Siegel and John Mauldin. Jeremy Siegel is a professor of economics at the Wharton school of business at UPenn and has in the past been a perma bull. John Mauldin writes one of the most widely read economic newsletters on the internet and is more of a perma bear. Here is the link if you want to listen:

Each economist gave his prediction of the strength in the economy over the next few years.

Jeremy Siegel predicted that the economy will rebound at a 6% to 7% pace over the next few years. His only premise is that the the current recovery will mirror recoveries of the past after similar deep recessions.

John Mauldin predicted that the economy will rebound at a 2% to 3% pace over the next year with a chance at a double dip recession in 2011. John's premise is that this situation is not like other recessions. In the next few years we as a country will deleverage and will have to start paying off our debt. We will even have to start saving. He also stated that there will be tax increases in 2011 as the Bush tax cuts phase out. His last observation is that it could take a decade or more for unemployment to trend below the 8% range. We are in a new "muddle through" economy.

Who do I think is correct?

It will be directly related to how much we borrow as a nation.

For Jeremy Siegel to be correct the government will have to borrow $2 trillion a year.

For John Mauldin to be correct we will only have to borrow $1 trillion a year.

Either scenario can be correct depending on how much debt our government creates. We could even create other scenarios by borrowing more money. $3 trillion, $4 trillion ... how much GDP growth do you want?

Both scenarios of Jeremy and John use debt, inflation, smoke and mirrors to solve our financial problems. Both of the scenarios will create bloated government and each will create huge distortions in the capital markets.

Why are both outcomes equally distasteful? Because our country's financial problems are already systemic and as a nation we just don't care. We have more debt financed at lower interest rates than anytime in our nation's history. The Federal Reserve has made a huge bet that it can create inflation to get our country out of this monstrous debt. The bet is premised on creating enough additional debt to force inflation so we will be able to pay off the monstrous debt that we already hold.

How monstrous is this debt?

The most recent Flow of Funds information from the Federal Reserve shows that the net holding value of homes with a mortgage is zero. Yes zero. $10 trillion of mortgages netted against a housing value of $10 trillion is zero for homes with a mortgage.

It is very odd to think that if you take out the subset of people that own their home outright then our housing stock is worthless. Of course as an accountant I might tend to value it at less than zero due to the $600 billion in sales commissions to exit this worthless $10 trillion investment.

Strike One.

Presently our banks are allowing hundreds of thousands of speculators to live in houses without paying mortgage payments. These squatters have been living in the homes for as long as two years before the bank will start to foreclose. The banks are doing this because if they foreclosed on everyone right now then their balance sheets would be insolvent. Presently The Federal Reserve is funneling trillions of dollars of taxpayer money(future debt) to the insolvent banks so the banks can allow the speculators to occupy the bank owned homes. This government debt also allows the banks to give out record bonuses this year.

Strike Two.

Presently the banks are not lending enough money to keep real estate prices in a bubble. Wall Street and housing speculators don't want to give back the false profits of the real estate bubble. Therefore the government is creating more debt through Fannie Mae and Freddie Mac to keep the bubble prices propped up. This will cost hundreds of billions in the next few years as Fannie and Freddie make bad loans to the next wave of speculators in this insolvent market.

Strike Three.

So the group of people that have mortgages on their homes are insolvent. The banks are insolvent and our government is insolvent. The only thing that is keeping this game going is debt.

Wall Street economists have already made the policy decisions for our nation. Negative GDP is not an option. Affordable homes are not an option. Lower prices are not an option. Losses for speculators are not an option. Sound government is not an option.

Whatever GDP number we get for the forth quarter will be smoke and mirrors. A large amount of debt by the government to create a small amount of growth for our economy. It really does not make sense. Unless or course you are a Wall Street economist.

Monday, December 7, 2009

Epitaph On A Tyrant by W. H. Auden

Perfection, of a kind, was what he was after,
And the poetry he invented was easy to understand;
He knew human folly like the back of his hand,
And was greatly interested in armies and fleets;
When he laughed, respectable senators burst with laughter,
And when he cried the little children died in the streets.
I would like to dedicate the following thoughts
to my father and his father on this special day.
Thank you both for being part of this country's greatest generation.

I am in Love with The Great Depression

I started gaining my affection for The Great Depression as The Tech Bubble was ending. My stock account was going to astronomical amounts. I bought my dream house. My financial life was fantastic in every way but in the back of my mind I knew something was very wrong. I soothed myself at night with investment books like The Intelligent Investor by Benjamin Graham and books of the Great Depression such as The Great Crash by John Kenneth Galbraith. I didn't read these books for knowledge or insight because I was very clear on the inevitable path of our country. I read them for purification and to calm my worried soul. Thoughts of The Great Depression have become my economic "Waldon's Pond" during this period of government mandated excess and speculation in our nation's financial markets.

As the 1990's were winding down I would compare the 90's to the 1920's. They are very favorably compared. The roaring 20's saw the advent of the radio, the auto and the airplane. The roaring 90's brought about home computers and the Internet. Both period's had massive speculation stoked with easy money by The Federal Reserve. The 20's of course ended in The Great Depression.

I had hope that the 1990's would end in the same way and that our nation would come to it's senses and stop living so far beyond it's means. I realized that our government and The Financial Elite would make the same mistakes as The Great Depression and turn a deep recession into a depression. But I also knew that the people of this country were resourceful and could come out of the ten year depression in 2009 with the same independent, hard working attitude that created my grandparents' generation.

My grandparents' and their contemporaries are considered our nation's greatest generation. I had equally high hopes for my own generation. I wanted to feel the same pride that my grandfather felt as he passed the economic torch to my dad.

But something odd happened after The Tech Bubble. There was just a very, very mild recession. There was practically no real unemployment. A pipeline was created between the government and the moneylenders. A pipeline full of gold that from the outside smelled of filth. No one noticed. No one cared. I can't compare it to anything that has occurred in our country before. One would have to go back to the times of Rome under Nero to find a similar totally self serving act. Our Empire is ablaze and our leaders are responsible!

A recession is a natural event. An economic Winter that follows an overabundant Summer. A cleansing that removes speculation and greed from the system and passes along fairly priced assets and a sound government to the next generation.

Business cycles have been recorded since the beginning of the industrial revolution and probably occurred even in primitive societies. Economies move from overproduction, excess and speculation to underproduction, prudence and saving. This cycle can't be regulated because it is tied to the avarice of being human. Recessions will occur even in a tightly controlled society, as we are seeing today. The only difference is that in a free society everyone is aware of what is happening and can react accordingly. In the tightly controlled society The Financial Elite are able to mask the business cycle. This allows the Financial Elite more power and with this power the ability to choose the winners and losers in our economy.

Our Financial Elite have pilloried The Great Depression and made it a priority to protect us from recessions at all costs. The costs that we are presently incurring are massive debt to future generations and the destruction of sound government. This is the antithesis of the business cycle. It is not sustainable in the long run.

The reason that I love The Great Depression is that in spite of massive government intervention the people of this nation were able to survive and then prosper. The Great Depression forged a generation of fiercely independent, highly productive, family and community oriented households. This was the most productive body of citizens any nation has ever known. This was the Middle Class. My grandparents' generation.

The antithesis of my grandfather's generation is my generation. We robbed trillions of dollars of our children's inheritance to prop up stock values after the Tech Bubble which sent our housing market into a bubble. We are presently borrowing tens of trillions of dollars from foreign nations to prop up inflated housing prices that occurred during the housing bubble. We have created the biggest government in our country's history with borrowed money.

So we have spent the savings of our grandparents' generation and borrowed more. We have used this money to inflate asset values and create bigger government. We are passing the debt, the inflated asset values and the government boondoggle to our children. My generation will go down in history as this nation's most selfish generation. It is a very helpless feeling being carried by this ravel of avarice.

I don't blame our people, I blame the tyrants, The Financial Elite. They are far to cunning for our pampered populous. My lament is that we are appeased by bread and circuses as our country is being looted and then burdened with stifling debt.

I am very sure that my grandfather's generation would never have allowed this to happen. A generation that formed massive strikes against unfair employment, rallied against unjust government and to a man gladly sacrificed their lives to keep this country free.

My hope looks to the future as my mind dwells in the past. I await the glory that my children and grandchildren will feel as they slay this dragon of debt. Like my grandparents did before me. I bide time in between two great generations. "They also serve who only stand and wait".

A recession is a natural event. An economic Winter that follows an overabundant Summer. A cleansing that removes speculation and greed from the system and passes along fairly priced assets and a sound government to the next generation.

I am in Love with The Great Depression