Relevant and even prescient commentary on news, politics and the economy.

Edward Charles Ponzi Jr. Looks Ahead

This one is by Edward Charles Ponzi Jr. Regular readers may recall he had a post last year at this time.



-It begins to dawn on people that the idea that the US economy is “fundamentally sound” may be incorrect — as the financial economy tries to deal with the fact that asset prices cannot rise forever — and that increases in monetary aggregates will play out as inflation elsewhere. “Securitization” will be increasingly seen as the equivalent of a bad sausage — grinding a little e-coli into everyone’s meat.

-The Ponzi Scheme of Credit Expansion will BEGIN to unwind — as people realize that inflating assets and then borrowing against them, is not “an economy” — nor is borrowing money from other societies and spending it in their shop. We can say what we want about the size of our “GDP” — but the REAL ECONOMY — the one where somebody actually MAKES SOMETHING is a healthy but too-small part of our whole economic picture.

-While in the 1930s we were not in dire need of imported energy, commodities and finished goods — we are now — and so our economic decline will not pull down prices to levels that everyone can afford. So, even if we do not have a contraction the size of the one in the 1930s — it will be just as tough — as so many essentials will be hard to afford.

– We are at the top of virtually every trend — peak debt, peak asset values, peak oil, peak demographics – peak climate, PEAK EVERYTHING you name it — the Best Case Scenario is still the Perfect Storm.

-The Great Unraveling could be slow or fast — with any recovery having to lift the weight of retiring boomers and old debts that we can’t inflate away. Don’t compare Total Credit Market Debt with GDP – compare it to the size of the Real Economy – and the amount available to service debt. Someone with a $50,000 income and $500,000 in debt does not have all his income to service or repay debt – only what is left after essentials. Likewise Government debt combined with total private debt equals something north of 50 TRILLION. (NOT counting unfounded liabilities of future fiscal “gaps” between projected inflow-outflow. What percentage of the real economy is needed to pay that?

Oh – and about those economic growth predictions used to predict the fiscal gap….

-The amount of growth needed to manage the above debt-loads are not possible – therefore we will need to vaporize that debt – or it will vaporize us – with mass insolvency.

-In time, our current society will be seen as one that ate all the food in fridge, all the food in the pantry, sent out for pizza, maxed out the credit cards and then burned the furniture while proclaiming that we are really very warm and well-fed. Financial historians in the future will say, “what were they thinking?” about our era.

-“Economist” will become the lowest status profession.

-For a time people will understand that you cannot become wealthier by printing more little pieces of colored paper – or the electronic credit version thereof.

-The economy will be the main issue of the 2008 election and the Republicans will do very poorly. Having said that — the Democrats will have no constructive answers or responses. Short-term thinking and a low-pain threshold will prevent any really constructive actions.

-Baby-boomer paper assets will be decimated – and while they may return to older values in nominal dollars – that won’t mean much in purchasing power – as we are not the only ones in the world who want wheat, soy, corn, copper, oil, fish, etc.

-As the economy declines throughout 2008 and 2009 people will try stick it out until things “turn the corner” — but in a sense that will never happen — as Aggregate Americans live beyond their means there will be a PERMANENT reduction of our standard of living. Things may only improve substantially after most of the boomers are dead and we can get out from under the demographic problem.

-I am going to coin two new words here — 2008 will be INVERSIONARY — about asset deflation and monetary debasement – and instead of “inflationary” or “deflationary” — we will have a DISTORTIONARY economy — as monetary expansion tries to battle sinking asset prices.

-*IF* the economy limps along up until the election without a widely recognized recession – the price we will pay will be an environment with inflationary forces prevailing in an overwhelming fashion. Most likely: Inflationary Recession or “Stagflation”.

-The near future will be an interesting time to live – as our society collapses in many ways – we will have to re-invent ourselves and our systems – however all these mistake will be repeated in another 80 years.


“You can’t time a market — but you CAN time an era.” -ECPJ

Happy New Year to all my Bear friends-

Edward Charles Ponzi Jr.
Hooverville Falls
The Republic of Vermont

This one was by Edward Charles Ponzi Jr.

Cactus here… I’ve stated before, I’ll state again… I think the economy will be slower next year than it was during the first three quarters of this year. I wouldn’t be surprised if we have a recession some time next year. The bill is coming due. Of course, its always possible that the Fed will really goose the economy by making money really, really cheap to avoid that fate… but if it does it, it won’t be avoiding that fate, merely postponing it.

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Via Betsy’s Page, an essay by VD Hanson. VD-H argues that its no biggie that mistakes have been made in Iraq… after all, mistakes were made during the US Civil War, WW1, WW2 (European and Pacific theater), Korea, and Vietnam. (He goes on to list a bunch of ’em.)

This strikes me as illogical as… the sort of nonsense that VD-H usually writes.

In the US Civil War, the disparity between the Union and the Confederacy wasn’t all that big. Either side, by itself, would probably have been considered one of the ten or so most powerful military entities in the world at the time. In WW1, we entered against the Germans and Austro-Hungarians… who had managed up until then to fight the other major European powers plus the Russians to a standstill. In WW2, the war was against the German and Japanese empires, which in a few short years had managed to take over much of the world. In Korea, it was against China, the most populous nation on earth – with by far the biggest military. In Vietnam, it was a proxy war against the USSR, the world’s other superpower at the time.

Clearly even VD-H should be able to see a difference in magnitude. The Iraqi military, after more than a decade of sanctions, was a shadow of its former self – the same former self that had surrendered en masse to CNN cameramen. Sure, the CNN cameramen had reams of spare of videotape, but still. And the insurgents are even more pitiful examples of military prowess – when insurgents tried to take on Saddam’s defeated (by CNN) military after Gulf War 1, they were crushed.

One can only conclude that the mistakes in the current war are orders of magnitude beyond those described in VD-H’s essay. Leaving every one of the enemy’s captured ammo dumps unguarded in our haste to protect the Oil Ministry in Iraq means a few thousand more American soldiers die over a period of five years. On the other hand, a tiny miscalculation against the Germans in World War 2 could mean tens of thousands of casualties immediately. Heck – ask the French what happened when they made of mistake of assuming that the Germans would respect the neutrality of the low countries. Failure to translate an intercepted Japanese message almost wiped out the entire US Pacific fleet. It was only blind luck that US flat-tops were in the open ocean during Pearl Harbor or there wouldn’t have been a Battle of Midway – instead, there would have been a Battle of San Francisco. Miscommunication with the USSR almost led to World War 3.

The kind of mistakes that are prolonging the mess in Iraq are very different from the the kind of mistakes you can recover from when dealing with the Confederacy, the Third Reich, the Empire of Japan, the PLA, or the Soviet Union. If VD-H can’t tell the difference, I guess he can always continue writing for the National Review and similar publications.

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Three Similar Topics, Plus One

So right after Benazir Bhutto is assassinated, her her husband and her 19 year old son become co-leaders of her party. Of course, Bhutto herself got the job upon the death of her father. I note… from what I can tell, this is pretty much the only Party that matters in Pakistan today, unless you count the crazy fanatics or the military.

At the same time, writing about another topic – the promotion of my semi-sorta-kinda cuz, the inimitable TBogg, no doubt taking a break from watching moss grow on his basset hounds, writes

Like Bill Kristol (and John Podhoretz, and Jonah Goldberg and Mark Halperin) Andrew Rosenthal is a legacy hire, so let’s not even pretend that we’re talking about a meritocracy here. Why work hard and be smart and when your last name is the Golden Ticket to Willy Wonka’s House of Media Aristocracy? So, of course Andy doesn’t understand why people might take offense at his hiring a man whose name might as well be Billkristolisfuckingwrongabouteverything. Sure it’s not like Kristol was being hired as a straight news reporter where facts are everything, unless you’re Judith Miller, but he might have considered hiring someone with a passing acquaintance with things like the real world where there are consequences for being wrong and being stupid and the idea that you can smirk your way through the bloody consequences is not acceptable. But, no. Kristol and Rosenthal are mirror images of each other; both born on third and still wondering why the other kids never pick them first when choosing up sides.

TBogg follows it up:

It must be interesting to go through life knowing that the Wingnut Fairy will put money under your pillow every night no matter how many times the invisible hand of the free market gives you the finger. If it weren’t for wingnut welfare Lucianne, Irving, Gertrude, Norman, and Midge would have left their idiot children on a hill somewhere for the wolves to eat.

Meanwhile, an anecdote I’ve shared before… for a while I worked for a Fortune 500 company. The CEO was a young guy. From what I could tell, his primary qualifications for running the company were that he was the son of the previous CEO, and the grandson of the previous CEO. His second most important qualifications that I saw were the somewhat a incestuous relationship going between his family (one of two big shareholders of the company) and the folks who owned an investment bank (the other big shareholder of the company). I believe the third most important qualification he brought to the table was the fact that the company was competing against other companies whose leaders came from similarly narrow pools of people who had only a superficial understanding of the workings of the company in which they inherited a large share, or who had only a superficial understanding of the workings of the company they had bought a large share in using funds they had inherited. The fourth key thing that made him CEO-worthy was his father’s membership at Augusta. He also seemed to pretty used to the trappings of power, and I’m sure that counts for something.

OK. So I’ve described three situations – Bhutto’s son, TBogg’s story about Kristol and Company, and a company where I worked. In my opinion, three very similar stories. But here’s how I imagine these three situations would play in Peoria…

Situation 1. My guess is that even without being aware of her husband acquired his nickname “Mr. Ten Percent”, most Americans would probably not associate this chain of events as hewing all that closely to the Democratic ideals that Bhutto used to talk about and would disapprove of where this story is going. (Key words: talk about.)
Situation 2. I imagine about half of all Americans would tsk tsk over my semi-sorta-cousin’s recent appointment if the situation had been to explained to them with TBogg’s eloquence
Situation 3. I figure only a very small number of Americans would have a problem with the CEO story.

Am I right about this? And if so, what’s the difference between these three situations?


And a follow-up… reader dxc sends a link to an essay in the LA Times that touches on both Pakistan, and people inheriting their positions of power:

At the beginning of his second term, Bush spoke confidently of the United States sponsoring a global democratic revolution “with the ultimate goal of ending tyranny in our world.” Ever since that hopeful moment, developments across the greater Middle East — above all, in Iraq, Afghanistan, Lebanon and on the West Bank — have exposed the very real limits of U.S. wisdom and power.

Now the virtual impotence of the U.S. in the face of the crisis enveloping Pakistan — along with its complicity in creating that crisis — ought to discredit once and for all any notions of America fixing the world’s ills.

Bush dreamed of managing history. It turns out that he cannot even manage Pakistan. Thus does the Author of Liberty mock the pretensions of those who presume to understand his intentions and to interpret his will.

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Instant Experts

Mark Steyn at the NRO:

In the stampede of instant experts unveiling their Pakistani solutions-in-a-box, some contributions are worthy of special attention.

Instant experts on Pakistan. I wonder if who those might be.

In an unrelated story, here’s what I see under a heading entitled “AT WAR” and a subheading entitled “Pakistan” right at this moment:

JONATHAN FOREMAN: While Benazir took her courage too far in the pursuit of her political dream, the only parties we should blame for her death are the terrorists who actually killed. “Questions of Blame” 12/28 10:11 AM

VICTOR DAVIS HANSON: Lost in all the frenzied reaction to the Bhutto assassination is any consistency of critique. “Pakistani Punditry” 12/28 9:43 AM

STANLEY KURTZ: Polling data may show support for Bhutto, but it’s not because of her strong anti-terror position, but in spite of it. “Democracy in Pakistan” 12/28 11:30 AM

RICH LOWRY: Upon her return, she was a frank voice against Islamism. “When an Assassin Succeeds” 12/28 12:00 AM

MONA CHAREN: Now, at last, and perhaps just in time, the campaign season will get serious. “The Real World Intrudes” 12/28 12:00 AM

ANDREW C. MCCARTHY: If you really want democracy and the rule of law in places like Pakistan, you need to kill the jihadists first. “Benazir Bhutto” 12/27 1:20 PM

AN NRO SYMPOSIUM: Jonathan Foreman, Daveed Gartenstein-Ross, Victor Davis Hanson, Stanley Kurtz, Bill Roggio, and Henry Sokolski react to Bhutto’s murder. “After Bhutto” 12/27 11:40 AM

MARK STEYN: Benazir Bhutto’s return to Pakistan had a mad recklessness about it which gives today’s events a horrible inevitability. “Benazir Bhutto” 12/27 10:10 AM

Irony died long before Benazir Bhutto did.

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CoRev on a Pocket Veto, Cactus on a Pocket Veto

This one is by CoRev.

In a surprise move late this week President Bush vetoed the Defense authorizations bill. First a little civics lesson. The way funding is performed in today’s federal government it takes two bills. First is an authorization to spend which usually sets goals and limits on an agency’s spending (i.e. raises for employees, amounts for construction, research, operations, etc.) and some instructions on priorities how that authorization is to be spent. Second, a bill is passed, the budget, which funds those authorizations. Essentially congress has two swipes at effecting how and how much money is spent.

The current authorizations bill included a poison pill effecting and even eliminating some spending BY THE IRAQI GOVERNMENT. Huh, you might say? US authorizations stop Iraqi from spending? What was included was a hidden little set of clauses authorizing plaintiff’s trial lawyers to impound Iraqi bank accounts.

File a law suit against the Iraqi government or official and the first motion could be to impound ALL/ANY bank accounts. Thusly, all Iraqi accounts could be locked up tight by a US Court just by request of a plaintiff’s lawyer(s).

Here’s just one potential impact.

By the way, the real question is what account is those billions of Iraqi dollars in? That provision would terminate the arms purchases thru FMS with the
first lawsuit. That would stop further arming of the ISF with Iraqi money. The end of the Iraqi military surge.

And this comment explains some of the motivation.

Theres (sic) a lot more sneaky stuff here than meets the eye. What this little jem (sic) did was to allow Iraqi assets to be frozen by trial lawyers sueing (sic) Iraq for the actions of Saddam Hussein. The back door effect would be that Iraq
would be strapped for cash, pull all of their money out of American banks, and it would probably put a financial stop to the rebuilding progress, in effect taking money away from the war effort. This is in effect, a back door effort to cut off funds for the war because if you take away all of Iraqs (sic) money, there would be no money available for our forces rebuilding that country. The dhims knew exactly what they were doing here and this amendment was never made know to anyone befor (sic) the bill was submitted.

By the way, this bill was submitted late on a friday (sic)night and voted for on saturday (sic) afternoon. I seriously doubt anybody really knows everything in it.

More information is available at Captain’s Quarters. Read the comments for a lively discussion countering the good Captains opinion.

This one was by CoRev.

Cactus here. A few comments – based mostly out of ignorance:

1. I figured foreign countries are generally exempt from lawsuits in US courts… except when by some action they are not. An example would be how Libya was slapped with a huge judgment in a US court over the plane that went down in Lockerbie, for example. And Steve Benen links to an AP report:

Sovereign nations normally are immune from lawsuits in U.S. courts. An exception is made for state sponsors of terrorism, and Iraq was designated such a nation in 1990. After the 2003 invasion of Iraq, however, Congress passed a law and Bush issued a decree stating that Iraq was exempt from such lawsuits.

The subject of intent that often comes up in situations like this… If the Republican Congress and the Republican President had intended for a post-Saddam Iraq not to be liable for such suits, they either would have written that into the law in the first place, or they would have changed the law in the years following his fall before the Dems took over.

Update… On a re-reading of this point, it is clear I misunderstood the quote I provided. My bad. My point number 1 is moot.

2. The AP also reports:

Bush’s decision to use a pocket veto, announced while vacationing at his Texas ranch, means the legislation will die at midnight Dec. 31. This tactic for killing a bill can be used only when Congress is not in session.

The House last week adjourned until Jan. 15; the Senate returns a week later but has been holding brief, often seconds-long pro forma sessions every two or three days to prevent Bush from making appointments that otherwise would need Senate approval.

Brendan Daly, spokesman for House Speaker Nancy Pelosi, D-Calif., said, “The House rejects any assertion that the White House has the authority to do a pocket veto.”

Put another way… if you can only use a pocket veto when Congress is not in session, and Congress has remained in session, the pocket veto does not apply. GW was very good about sticking to the letter, if not the intent of the law, when it came to recess appointments. Dems began to play the same game. And now GW wants to play the intent rather than the letter of the law?

3. Leaving aside any issues of illegality or whatnot – this is an administration that cared so little about US taxpayer money that it lost track of billions of dollars of reconstruction money in Iraq. It cared so little about US lives that it lost track of tons of explosives and who knows how many weapons that could be used against US troops. But it seems plenty concerned about money being made available for the members of the Iraqi government (those paragons of honesty and virtue) to loot.

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Apparently a kind of relative of mine is getting a new job.

I’ve never actually met him (though I did have dinner with his parents once), and our one common relation (an uncle by marriage on my part, a cousin on his father’s side (if I recall correctly) on his) is now dead. So is he still my relative?

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Yves Smith on the Future of the Euro

I once had a post comparing the the Euro (one currency, multiple countries with different economies) to the dollar (one currency, multiple states with different economies) and concluded that for such a situation to be stable, you need to see transfers to the lousy performing states from the well performing states. And we do see such transfers. (Interestingly, for decades, on average, it seems the lousiest performing states are among the reddest of the red states, inhabited by people who rail against welfare.)

I was thinking of that yesterday when I read this interesting Yves Smith’s post on the future of the Euro. And I’ve been trying to think what to add to it – some pithy comment or whatnot instead of just a link – but after 24 hours I’m giving up. Click the link.

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Sammy Looks at the Role of Expected Price Appreciation in Housing Prices

Sammy sends this one…

Role of Expected Price Appreciation in Housing Prices

U.S. home prices are declining, putting considerable strain on the economy. Much of the blame is focused on “reckless” financial institutions. But what has been the role of the public (or free market) in driving housing assets up to, in retrospect, unsustainable levels?

Up to now the price of a house has been made up of two components:

1) Shelter Value (tax adjusted mortgage (ownership) payment vs. comparable rental payment)

2) Investment Value (price appreciation)

Here is a model that illustrates the effect of these two components on House price.

Note: There are many Rent vs. Buy models out there. I chose this one because 1) It’s from the New York Times and 2) It’s so easy, visual, and fun.

O.K. Real World inputs. I currently rent a condo with a market value of $400,000 for $1250 per month (Portland OR). I used 0% rent increase as my assumption. Feel free to use your own.

Plugging these figures (shelter value) along the top, and adjusting expected appreciation (investment value) with toggle on the left yields the following results:

1) At 10% expected price appreciation buying is better than renting after 1 year

2) At 5% expected price appreciation buying is never better than renting

3) You don’t even want to know what happens below 5%, (but toggle the arrow anyway)

4) Reverse mojo, assuming 0% price appreciation (pure shelter value) a fair price for the condo is $165K (“Buying better than renting after 10 years”)

Buyers, sellers, investors use some form of this calculation in their decision making process. It was “Appreciation Crowd Mania” that drove home prices up. The screwy lending, relying on historical loss data, just followed. Now the crowd mania, as is want to do, is reversing.

This one was by Sammy.

Cactus here… I agree with Sammy. I have no doubt that home buyers and lenders both drove up prices together. I will say this….

1. Presumably, the lenders – financial institutions – were more financially savvy than most buyers
2. When the bail-out comes, I expect the lenders to do better than the buyers from it

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Noni Mausa: What’s With All the Shock and Surprise?

This one is by Noni Mausa…

What’s With All the Shock and Surprise?

Is it just me, or was the assassination of Benazir Bhutto if not a foregone conclusion, at least an extreme likelihood?

In listening to the news over the past couple of days, the elements of shock and surprise had seemed to dominate the coverage. I have no idea why anybody would be surprised at this outcome, at least not anyone who has even casually followed the news in Pakistan and similar countries.

So my question is, the moment that Ms. Bhutto started up the steps into the airplane taking her back to Pakistan, was anyone planning what they would do in the event of her death? If not, why not?

This was by Noni Mausa.

And now, a word from our sponsors… or rather, from me, cactus. From what I could tell about Pakistan and the folks running the show over there, the administration bet all its money on two kleptocratic ponies in the Pakistani Stakes. One is now dead. My experience growing up in South America tells me that its not a bad thing if the death of a kleptocrat robs an uninformed American president of the opportunity to further alienate the locals – the fact that he (or she, as the case may be) is “our son of a bitch” is something remembered by the locals long after that son of a bitch kicks the bucket and is no advancing what an uninformed President perceives US interests to be in the very short term.

Having observed ham-handed American foreign policy through something resembling local eyes, I will only add this: I won’t be at all surprised if it turns out that money we gave by the sackful to one of our pet kleptos was used for the funding, training and planning of the operation that killed another. The process is helped along by the complete obliviousness of our folks who physically hand over the cash.

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Krugman and Trade–An end to finger wagging?

At last Krugman acknowledges that there has been a massive shift of jobs to low-income third world countries.

Since then, however, the sources of our imports have shifted to Mexico, where wages are only 11 percent of the U.S. level, and China, where they’re only about 3 percent or 4 percent.

As usual, Krugman fails to mention to that many of these countries have no labor protection, no right to bargain collectively…that they have become de facto awash in sweat shops, many of which our own companies happily use.

Nary a peep is heard from Krugman on this score. Instead, he seems to think that the poor in China and Mexico now have hopes of climbing the ladder. I guess that explains all the illegal Mexican immigrant labor. NAFTA must be a success sorry, Paul? Sorry, but there is no hope until labor is protected.

Krugman thinks that highly skilled jobs are staying in the states. Oh? He cites North Carolina and Lenovo. Is that it? Research centers are cheaper in China and India. Even the prestigeous scientific journal Science has acknowledge that fact.

Beijing–With China emerging as a world research power, top AAAS officials and their Chinese counterparts signed a series of cooperative agreements that could serve as the foundation for future collaborations on a range of scientific issues.
–October, 2007

The only highly skilled jobs staying in the states are those of bankers and investors, for now. With the rise of Sovereign Wealth Funds and state sponsored capitalism, the bankers and investors are surrendering, inch by inch, their corner of the world. But that is another story.

Look, when trade agreements are made with countries that have no labor rights, whose entire history has been the systematic repression of those right, what do you expect? You think that the repressive Chinese regime is about to surrender power? That they will not use its vast labor force to enrich itself and its collection of cronies?

The “contract agreement” China enacted last May is already in shambles. State owned, state directed banks, investment firms and corporations? You think that these entities will be responsible to the vast Chinese underclass? How convenient it is to have a repressive government run the only union in the country. Where are the checks and balances? Walmart is having a field day in China. [Maybe we should call it quits; announce the end to democracy; install a one-party dictatorship in the U.S.]

Sweat shops have proliferated because China looks upon its populace as mere cannon fodder in its effort to become a “frontier country.” According to He Chuanqi, who headed the research team of the CAS [the guys responsible for mapping China’s future], by 2050 there is a six percent chance of China’s minimum wage being $1,300/month, $15,600/year, $7.50/hour–in 2002 dollars! For a full discussion with links, see here.

Come on, Paul. Think. Actually look at the facts. Stop creating straw men to attack. The problem is not protectionism but the lack of rules underpinning globalization: The failure to ensure labor’s right to bargain collectively, to name just one.

If you continue to ignore some very unpleasant realities, if you refuse to understand the repressive regimes you now celebrate, if you refuse to address issues involving labor, then protectionism is what you will get.

Finger wagging? Yeah, right at you, Paul.

–thanks, Coberly. Edits made in italics.

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