We Need to Fire Our Economists and Replace Them with Astrologers

Once in a while in a news article I see the phrase “the science of economics”. It always makes me laugh.

Currently political economics is no more of a science than astrology.

It has no predictive value when extreme debt is involved.

Economists presently have no way to measure the unsustainable debt in our economy for four reasons:

1. Neoclassical(Wall Street) economists are not trained to look at total debt. They are only able to quantify the debt payment. Therefore if interest rates are placed at zero, then in theory our country can have unlimited debt.

2. To make matters worse, the public sector does not use real accounting standards. Neoclassical economists use Enron accounting to measure the public debt. Economists say that our federal government has about $13 trillion in total debt where in reality the liabilities of Uncle Sam are 4 times this amount.

3. To make this situation even worse, instead of comparing liabilities to income like an accountant, economists compare government liabilities to the total GDP in our economy. This avoids comparing the liability to the income that will eventually pay off the debt.

4. The craziest part of this situation is that Wall Street economists don't understand that the government's Enron liability must be paid off by the private sector in the future. It is indirectly a liability of the taxpayer.

The federal government has $60 trillion in liabilities and real income(without deficits) of $4 trillion. This is liabilities to income of 15 to 1.

Add this to the monstrous liability of our private sector and there is very little hope of taxpayers paying off this debt in real dollars.

This unsustainable debt is a problem. But the bigger problem is that our government subsidized economists don’t see it as a problem.

We are flying toward a mountain in zero visibility without an altimeter. We just asked our navigator how he is planning to circumvent the mountain.

Our navagator responds, “what mountain?"

Our navigator economists have no clue how to measure our nation's mountain of debt. They are blindly flying our economy straight into Mt. Fuji.

Economists are dead set on avoiding the pain of private sector deleveraging. This is exactly the policy mistake that Japan made 20 years ago.

Japan is experiencing 'death by a thousand cuts' instead of the debt amputation that would heal the economy immediately.

We are using the same flight plan. Our nation has incurred 3 years of moderate economic pain and only reduced debt in the private sector by 5%.

The government has increased its Enron balance sheet by 15%. This is trillions of dollars that the private sector will be required to pay in the future.

So after 3 years the mountain has grown larger and our airplane has not changed course.

Instead of looking at our private sector's mountain of liabilities our economists are dead set on keeping us from repeating the Great Depression.

Let me describe what happened during the Great Depression. We had 4 years of pain from 1930 to 1933. Most of the pain was caused by bad economic policy by our government. But even with the extremely bad government policy our private sector was allowed to deleverage.

This directly caused the greatest boom in our nation’s history.

From 1934 until 1953 our GDP grew a total of 580%. This was a compounded growth rate of over 10% a year for 20 years.

Our country has never grown that fast for that long.

Our incompetent economists are desperately trying to keep us from reliving the Great Depression. The goal is to become like Japan.

Their goal is 20 years of economic stagnation.

So instead of recreating the greatest period of growth in our country’s history our economists are intending to lever up our government 30 to one, without deleveraging our private sector.

This will slow the economy to a crawl so it will be impossible to pay off our government’s debt without destroying our currency.

Our private sector desperately needs to deleverage. Economists are manipulating markets to force people to borrow more money and spend it on speculation.

I suggest that we fire all Wall Street economists and hire astrologists to make policy decisions in the future.

Let us not forget,

Astrology worked out pretty well for Ronald Reagan.

Fine Tuning my Snap Trades

A year and a half ago I suggested that it was a great time to buy into the stock market as equities were making new lows. But I did suggest that I wanted to be out of the market by the end of 2010 as the stimulus started to run out and as corporate earnings peaked.

I have suggested that for at least the next 5 years there will be no long term gains in the stock market but there could be monumental short term volatility. In my post Snap Trading I suggested how I will manage my retirement account and my Virtual House Equity.

http://taxhome.blogspot.com/2010/03/snap-trading.html

The market is getting close to the peak earnings so this current rally seems to be a good opportunity to sell my snap trading gains of the last few months and move to a market neutral position.

I have been selling my equity investments and I am buying into ETFs: FXP, PST, SRS, SH and VXX.

I am almost market neutral. If the market goes up I will happily trade into a small short position to weather the economic storms ahead.

Today the stock, housing and bond markets are more dysfunctional and volatile than anytime in history thanks to monumentally bad government policy.

Anyone 100% long in any of these markets is a fool.

The Desperation in the Housing Market

I talk to a lot of people about housing. Many that I speak with are frantic to buy a home. Also when I check the current housing stats, I see some buyers biding over the asking price on homes that have been on the market for months.

There is desperation in a number of people that are looking to purchase a home.

When I talk to people about real estate I will spend ten minutes explaining how our banking sector is insolvent and many of our nation’s households are insolvent.

How there is a historically high inventory of homes listed with an equal size shadow inventory held by the banks that are not even listed yet.

Also, there are tens of millions of families that will put their homes on the market once prices stabilize. We have double the amount of any previously recorded inventory levels, while home sales amounts are at historic lows.

I explain how buying a home in many areas doesn’t make sense because rents are historically low compared to house prices.

We are in the most unsound economy in our nation’s history as interest rates and markets are being desperately manipulated by the government to force many people into buying homes that will absolutely go down in value.

I will sometimes be honest and say that most of the people today that are buying houses are not financially qualified to own. The government has created another bubble that is allowing many people through government subsidized loans to stretch to buy a home. These are people that have no concept of budgeting or saving or anything other that living paycheck to paycheck. They are renters that are being pushed into buying overpriced real estate. So if we consider that their 3% down is wiped out with purchase costs, these glorified renters are starting out home ownership with less than zero equity.

If I have time I might say that as a nation our savings rate and taxes must go higher making it harder for families to afford a higher priced home. And that our nation’s debt is mathematically impossible to pay off.

There are the demographic issues of our aging population that must sell their homes to fund retirement. They will exit the market and won’t be back.

There are the mathematical issues that state that as interest rates rise home prices decrease proportionally.

So interest rates will be a severe headwind on home prices for many years in the future.

Owners will learn that the buying and closing costs for a home are at historic highs. They will come to realize that it could take 8 years of mortgage payments to repay enough principle to be able to pay the round trip purchase and selling costs in a stagnant market.

So many people in the future will be surprised when they are required to write a large check when they sell their home.

There are the funding issues that suggest that as home prices decline there will be no money for move up buyers to purchase higher end homes. For the next ten years people will have to save for home improvement costs instead of robbing from their home’s equity.

So the move up market is dead for ten years and the home ATM is gone forever.

Honestly there is nothing that could possibly drive the housing market significantly higher above its present overvaluation. But there are thousands of events that will force prices back to the fair value that was the normal trend before 1999.

The fact of the matter is that assets will ALWAYS come down to fair value after a bubble and many times they can trend below fair value for a while. To think that this time is different is utter delusion. To make a highly leveraged bet on a delusional assumption is madness.


The people will listen for about ten minutes with a glazed expression.

When I am done they become animated and tell me how excited they are at the prospect of buying a home. Sometimes it almost seems like desperation.

They say that they must buy now. Everyone says that it is the best time in history to buy a home.


I love to go on the Housing Tracker website. I can follow the listing prices of homes in most major metro areas. Listing prices everywhere are still falling lower. Every month like clockwork they go down.

Every week we get closer to fair value. Every week desperate people are less likely to buy an overpriced home.

Every week there is a new person that might look at the data instead of the salespeople. And honestly decide if owning a house makes sense compared to renting.

Honestly decide if they want to lock themselves into 30 years of debt payments with absolutely no chance of escape once interest rates start to rise.

And acknowledge the fact that home prices are still historically overvalued in many areas compared to rent and household income.

As a nation we need to question how long the government can continue to desperately rob money from our children to prop up overpriced housing.

There will be a point in the future where people start looking at what is best for their family, for our children and for the nation in the long run.

I am not anxious for a housing bottom. That will take many years. I am looking for the emotional bottom.

I am anxious for our nation to stop looking at the real estate market with desperation.

Like we did before 1999,

and the previous 200 years before that.

Keynesians need a Class in Common Sense

I read Paul Krugman’s blog once in a while just to find out what the other half is thinking. Presently he is harping on the need to save our country from another Great Depression with more government stimulus.

So far we have been saved three times from big Great Depressions in the last 8 years.

The first time was when Greenspan and Bush saved us in 2002. The second time was when Bernanke saved us two years ago with 0% interest rates. And the third time was the bailout bonus for bankers.

There have also been little mini rescues such as the housing credit and cash for clunkers to name a few.

Also the government is planning to fund deficits of $1 trillion a year for the next ten years to continuously prevent various other great depressions that might come along.

It seems like preventing great depressions is the major government activity of late.

But Paul Krugman is adamant that this one is for real and we must borrow more money to prevent economic collapse. I assume that along with incurring this monstrous debt, he wants the government to waste the money just like they have done in all the previous rescue attempts.

Paul Krugman sees this as the end of the world but I see it as an opportunity.

I would like to suggest that we end this once and for all.

Let’s decide how much stimulus will stop great depressions for the next 10 years. Let's suppose it is $5 trillion. Then we divide $5 trillion 300 million ways and give $16,000 to everyone.

But for that $5 trillion I would need Dr. Krugman to sign a contract saying that he can’t ask for any more stimulus money for 10 years.

So Dr.Krugman will fund the biggest stimulus of all time.

It will be the most expensive economics class anyone has ever attended.

But he will get a lesson in real world economics. He will learn that:

• Destroying a currency can't create long term prosperity.
• Debt can't be eliminated with more debt.
• Wasteful government spending doesn't create long term private sector job growth.
  

Some might say that spending $5 trillion to give Keynesian economists a class in common sense is ridiculous.

I say it is money well spent.

The Most Expensive War in History

Our nation is wasting an incredible amount of productive resources to fight a battle that has become distasteful to many in our population. At one time this war was cheered as patriotic, but with the massive increase in expenditures and mind boggling waste, many are becoming resentful of our American government’s presence in an area where it does not belong. Even if we stopped the war now it will have a lingering effect for generations.

Of course I am talking about our government’s War on Affordable Housing.

Today many young families must purchase homes for 6 times their household income. This is compared to their parents that bought homes at 3 times their household income 15 years ago and their grandparents that purchased at 2 times their household income.

The government has spent trillions of dollars through subsidies, tax breaks and direct market manipulation of interest rates in an attempt to make housing prices unaffordable for young families that want to enter the real estate market.

Our War on Affordable Housing dwarfs the resources that are presently being spent on the War on Drugs or The War on Terror.

Many are starting to question whether this is the proper battlefield to expend the limited resources of our nation.

An assault that might be more justified would be a War on Unemployment, like Roosevelt funded during the Great Depression He employed millions of workers to build things. This program constructed Hoover dam and much of the infrastructure in our National Parks.

How about a War on Outsourcing? This engagement would fight all of the crazy tax breaks that allow companies to send jobs overseas and would replace them with subsidies to hire workers at home.

The only thing that we must consider is that if we stopped the War on Affordable Housing and used those resources to fight a War on Unemployment and a War on Outsourcing at the same time, it could cause massive problems in our economy. Our unemployed labor pool would shrink to zero as the sale of fairly priced homes would quadruple. This would cause the biggest economic boom in our nation's history. We would then be forced to start a War on Employment to counteract the unbridled prosperity.

The biggest problem with the War on Affordable Housing is that prices are always being pulled toward affordability. The market trends in line with historical fair value in the long run no matter how much money is expended to manipulate the free market in the short run.

On top of the trillions that we have already spent, our government will have to spend many hundreds of billions of dollars a year, forever, to continually battle the forces of the free market to keep homes unaffordable for new families entering the real estate market.

So the War on Affordable Housing appears to be an extremely expensive fight that we can never win.

Also, understandably, it is fast becoming an unpopular government policy for our younger citizens who can't afford to buy a home because of the high taxes they have to pay to continue fighting the War on Affordable Housing.

But the War on Unemployment or the War on Outsourcing would be supported by everybody. Either battle would only be temporary. And both are 100% winnable.

The best part is that our nation will be able to win a war for the first time in a very long while.

Economic Elitism is not the Solution

Last Tuesday we had what was called “The Summit on Housing Finance”. This was a get together of a group of individuals that were instrumental in the policy choices that caused The Housing Bubble, The Credit Crisis and The Great Recession. This is our “Economic Elite”. The government invited them to get together to figure out how to repair the system that they and others like them have destroyed.

Unsurprisingly the main suggestions from the event were that we need more unsustainable debt to taxpayers, more government control piled on top of our already dysfunctional markets and of course much more subsidies for the financial sector.

I looked back at all of the quotes from the economic philosophers of the past 2,500 years. And I couldn’t find any references that espoused unsustainable debt to manipulate asset prices, rewarding speculators at the expense of prudent savers or tightly controlling markets to reward government favorites.

No, actually there are a few economists that favored controlling free markets. Karl Marx is the most notable.

And I must admit there was a period where people felt that it was wise to give all of the resources of a country to a few very rich elite with the hope that this nobility would trickle some of the spoils back down to the rest of the populace. This “trickle down” economic period was called feudalism or more appropriately, “The Dark Ages”.

The tightly controlled markets of Karl Marx run by an Economic Elite of feudal lords sounds rather archaic. But that is how our economy runs today.

The Economic Elite have usurped our economy. Many of our markets are broken. The participants of “The Summit on Housing Finance” suggest that we break them even more.

The Economic Elite are saying that taxpayers must borrow ever more money and give it to the Government and The Financial Sector to waste, just like Japan.

But why do we want to emulate Japan? Japan’s economy is terrible.
Why can’t we emulate Germany? Or Canada? Or Australia?

Or better yet, why can’t we emulate the US economy at the point before our Economic Elite diverged from the philosophy of our forefathers?

Our country was based on free markets and rewarding good ideas. It was called capitalism. The market rewarded good ideas with wealth and power. The same free market severely penalized bad ideas with loss of wealth and power.

This freedom of markets has been removed and is now controlled by the Economic Elite through the government. Most of the people that ran our economy into the ground should be penniless and powerless. Instead they are put in charge.

This is not absolute tyranny but it is autocracy through subterfuge.

Economic doctrine has replaced free markets. This doctrine has become so complex, convoluted and conflicted that our economy doesn’t work properly anymore. Most of the policy we are using to solve our problems can’t be justified with logic, reason or common sense.

I feel that our economic policy needs to be simplified so it is in line with a time before our free markets were totally usurped by this failed experiment at government directed economic control.

The goal should be toward sustaining an economy with:

· A very large middle class.
· Free Markets for everyone where the government protects against collusion, monopoly and entities that become too large to compete fairly with the rest of the players.
· A government that runs like a business with a balanced budget.

I am suggesting that we replace the last 20 years of crony capitalism orchestrated by our nation’s economic elite with 200 years of successful economic governance by free markets.

I am also suggesting that no nation has ever prospered by:

· Tightly controlling investment markets to reward political favorites.
· Creating temporary bubbles to force an economy to grow.
· Robbing from savers to reward speculators.
· Robbing from future generations to live at a higher than sustainable standard of living today.
· Starving the productive private sector to create a bloated and inefficient non productive public sector.


Each of these policies would have been abhorrent to our founding fathers. They understood the nature of tyranny and economic elitism.

In the last 20 years we have thrown away a system that was put in place by our forefathers. It had worked perfectly for the previous 200 years.

We are refusing to emulate the United States of our grandparents. Instead the goal of our nation’s economic elite is to become an impoverished and feudalistic crony capitalistic version of Japan.

Inevitable Impossibilities

Many economists are suggesting that our government continue pushing our economy in the same direction that caused The Tech Bubble, The Housing Bubble, The Credit Bubble, The Subprime Crisis, The Banking Crisis and The Great Recession.

As each of these economic events occurred these same economists were surprised by them. Each bubble or crisis was an outlier that was one of the last possibilities that they had expected.

Economists have stated that these outliers are “Impossible” to predict. This is ironic because, in my opinion, each of these economic events seems like the “Inevitable” outcome of bad government policy.

So in essence they are “Inevitable Impossibilities”.

As the government continues to push our economy in the same direction that caused all of our previous crises we are very likely to incur more “Inevitable Impossibilities”.

· The “Inevitable Impossibility” of increasing interest rates: Our nation’s interest rates have spent the last 30 years on a continuous trend almost straight down. A significant percentage of our nation’s economic growth is predicated on the continued contraction of interest rates forcing ever more gains from our extremely overvalued bond and real estate markets. Although it is an impossible event to economists, there is a distinct possibility that interest rates will increase in the future. Economists don't understand that as interest rates increase, bonds and real estate prices decline proportionally. So as our Federal Reserve is forcing rates artificially lower it is proportionally increasing the size of the inevitable crisis in the future.

· The “Inevitable Impossibility” of Living With-in Our Means: As a country we have been able to live beyond our means by borrowing resources from the future. We started by tripling our debt load to GDP over the last 30 years. When our individual credit ran dry we learned to use the government in our stead to borrow money from hostile foreign nations in the name of our grandchildren. Although economists feel that it is very unlikely, it is possible that during our lifetime we will be forced to stop robbing resources from our kids. As we continue to steal from our children it is just creating a bigger problem in the future.

· The “Inevitable Impossibility” of Free Investment Markets and Fair Wages: The government has usurped many of our formerly free markets. Interest rates are controlled by our political officials. The mortgage market is run by our government. Political policy sets most wages in the country with massive subsidies to the non productive sectors and huge tax burdens to the productive ones. Presently our elected officials have created a perfectly imbalanced economy where the financial sector earns twice and much as the government sector. And the government sector earns twice as much as the private sector. If the invisible hand of government stopped subsidizing the non productive sectors of the economy, then money would come flooding into the productive private sector. This would cause equally proportionate private sector employment growth with subsequent unbridled prosperity and possibly inflation. We are forcing more and more money out of the private sector. This is creating a bigger inflation problem once the flow of money starts to enter the private sector again.

All the examples above seem to be the most likely culmination of bad government policy because:·

1. Interest rates can’t be artificially manipulated any lower than they are now.
   
2. Asset prices can’t be artificially held above historical fair value forever.
   
3. We can’t live beyond our means forever.
   
4. In a democracy the government can’t control markets to reward political favorites forever.
   
   

But all of these logically “Inevitable” outcomes are not even among the “Possibilities” of our economic community. Economists say interest rates must be lower, asset prices must be forced higher, we must continue to borrow and spend. And absolutely the government is our savior.

For some reason, the most likely outcome of each of these “Inevitable Impossibilities” seems to lie far beyond the scope of our current crop of economic theorists to predict.