Various stuff tied in to the current economic climate

I was watching one of those science/nature channels the other night and they were talking to archaeologists about this island in the Pacific that is about the size of Washington, D.C. From what they have found, the island was colonized by people who arrived by seagoing canoe. When they got there, it was completely forested with over twenty types of palm trees. Over the next four hundred years, they population of people grew and the trees got smaller in number, the fishing around the island got poorer, and eventually the people started eating each other and vanished from the island.

Another thing that happened that came with the people was the introduction of rats onto the island biological chain, and the rats, with no natural enemies, multiplied very quickly and ate most of the seeds in the fruit that the palm trees dropped, accelerating, perhaps even causing the deforestation. Currently, there are no trees on the island. I suppose, over time, some palm tree seeds will get started somewhere and THEY will find the island a fertile place to grow with no current competition.

The reason for mentioning all this is that there were not any particularly heroic rats or rats with leadership powers that caused what happened to happen. Nature is just a process, and part of the process is that without any natural enemies; whether it's humans, algae or rats; populations grow and eventually destroy themselves, form a bubble, you might say. The bubble results in a bust.

Back in the late 1990's, when the Glass Steagal Act was repealed and the Wall Street investment banks like Goldman Sachs were allowed to go from being partnerships, where the individual partnership members were liable for their losses, to corporations; I was furious, and I couldn't understand why everyone was jumping on the bandwagon and cheering this on, particularly since it was being pushed by the representatives of Goldman Sachs in the Clinton administration, Robert Rubin and Larry Summers. This meant that and investment bank could also act as commerical bank, without the separation that the Glass Steagal Act put into place during the 1930's depression. It also meant that investment bank partnerships could incorporate and have limited liability. Clinton is a student of history and no dummy, so I suspected that this was the price he had to pay to remain in office.

This, coupled with the de-regulation that was trumpeted by idiot Ronald Reagan, the man whose cut government to the bone and balance the budgets conservative philosophy changed completely after he got out of the hospital after he was shot. He was shot in the body, but the greatest change was to his brain, his views on cutting government. Something must have gotten his mind right. He was a believer in the Laffer Curve, a piece of baloney that you can still hear trumpeted on the Kudlow show by the originator, no doubt receiving a large stipend from some think tank for continuing to spread the falsehood in as many places as possible. George H. W. Bush, the last president of the United States named Bush who possessed any kind of brain or principles, referred to this as Voodoo economics and had the courage to raise taxes during his term, which resulted in his not being re-elected, despite his triumph in the Gulf War.

These things set in place a PROCESS, no different in operation than the process that resulted in the habitat destruction of that Pacific island. By the time this all plays out, we are likely to find out that the deregulation that LOOKED like a wonderful thing to investment banks, might have put them into an inexorable course that resulted in their destruction. The deregulation allowed them to do almost anything they wanted to do. The repeal of Glass Steagal enabled them to force the government to bail them out like a regular bank. Thereafter, we had a process in which any leader of an investment bank that decided to hold back and not get involved in these money making schemes of derivatives and collateralized debt obligations, would have been fired. The PROCESS put into place a system where those who were conservative and prudent were not going to be running things. Lehman and Bear Sterns would still be around, were it not for that process, and Merrill Lynch would have survived as an independent entity.

In short, they had to do what everyone else was doing to keep up and to keep the stock price up. They had to make money to keep the best people, to keep their jobs. They were all forced into highly leveraged, risky behaviour. Goldman Sachs, of course, had less risk, because of their influence with government policy.

You can't change just one thing. Everything you do has an effect on many other things.

And I have some questions to ask.

What is the difference between what the tax cuts based on Laffer Curve philosophy that were done under Reagon and Bush II (both times resulting in huge deficits, not a robust economy) and the economic stimulus packages that were put in place by both Bush II and Obama? In the end, the whole mix of tax cuts, deficits, money printing, zero interest rates by the Fed, etc. are all just different kinds of ways to stimulate the economy, trying to maintain prosperity by spending money we don't have (money that is just paper backed by nothing).

My second question is "What is the difference between a derivative or other piece of paper that has no basis in an ownership of an actual security or asset and the operation of a bucket shop?" Bucket shops were outlawed years ago. They were places where you could go, similar to a stock brokerage, and make bets on the direction of various stocks. You never owned any of the stocks. You just settled up, based on whether your bets were right or wrong. The place that managed the bucket shop took a cut in exchange for providing the service. Isn't there a basis for outlawing these things because they lack any economic reality, the same as a bucket shop? They are just a form of gambling, just like credit default swaps were a form of insurance that should have been regulated by the state insurance regulators who somehow couldn't see what other people could see long ago.

Another question is that when a country like China which has a fiat paper currency, just like all the other currencies in the world, and it has over seventy percent of what is called its "reserves" in U.S. dollars; just what constitutes a "reserve?" What are you reserving if your reserve for your paper currency is just an accumulation of another paper currency?

Since my last post I have watched a couple more interviews on the Internet at the Charlie Rose site. One of the things that I hate about the network shows like Kudlow's is that nobody who expresses anything but positive viewpoints is allowed to finish a sentence. They are always shouted down by one of the Wall Street propaganda hacks who are on the show, usually permabulls of some sort. Charlie Rose keeps things going, but the people are allowed to talk.

You can get a very good picture of where were are headed and some very good thinking from his interview with Nouriel Roubini at http://www.charlierose.com//view/interview/11003

There is also a very good interview with Joseph Stiglitz at http://www.charlierose.com//view/interview/10885

And there is a very good discussion of the SEC case against Goldman Sachs at
http://www.charlierose.com//view/interview/10973

When I try to read between the lines of David Boies discussion of the weakness of the SEC case, it makes me wonder if a deliberately weak case is being brought. Goldman Sachs has a lot of influence in the administration.

These people at these invesment banks are smarter than all of us. They've got us over a barrel where they are constantly harping that any attempt to curb their abuses or let them fail is going to result in economic disaster. So, my prediction is that bailouts, stimulus, deficits, whatever method can be used to keep the party going will continue, serving no purpose, in the end. We're going to have a lot more inflation while the economy continues to wind down until supply meets demand again. It's going to take years, longer, since they are trying to put it off. Eventually, when the market and world economy have tanked, the oversupply burns off and inflation becomes so obvious that they can no longer lie to us about it, they will be raising interest rates; but we are a long way from that. Doing Volkerish things isn't allowed unless all hope has been lost, so the artificial stimulation of various sorts will continue for awhile.

We're in a bind. We DO need regulation. Regulation does not mean the end of capitalism. We have meat regulations so you don't go to the store and buy spoiled meat, and we still have a competitive, capitalist grocery industry. Unfortunately, across the board, we have a system in which industry places its members in what is laughably called "government service" where they take a pay cut and go to work for the government, supposedly regulating their industry, but actually acting at the behest of those who put them there. The regulatory process is subverted into ineffective regulation, no regulation, or regulation designed to favor certain players in the industry.

If we were to go over to Africa and interview the gazelles, the more thoughtful ones would admit that they are the genetic beneficiaries of the lions and leopards who have been hunting them forever. If the poorer examples of the gene pool weren't weeded out by being eaten early over the thousands of years, they wouldn't be able to jump so high or run so fast. But none of them would want to be the one eaten.

Similarly, everyone just LOVES the idea of the creative destruction of capitalism, where the businesses that take on too much risk or do the wrong things at the wrong times, don't develop good products, etc. go out of business. But nobody wants to get destroyed. The Oligopoly talks a lot about capitalism, expecially if anyone is trying to regulate them, but they don't really want creative destruction. They want a sure thing. We all want a sure thing. And, yet the sure thing, like the sure thing that those people who colonized that Pacific island or the rats who colonized it with them, results in your eventual destruction. You wind up going too far.

The Buddhists say to take the middle path. The Romans counseled moderation in all things. Perhaps this new religion of deregulation could have used a little moderation and common sense, and all of us would have been better off.

Bobzillah Killah

Economic thoughts: Kudlow, BP, etc.

For those of you who may have missed it on my profile, I was a CPA, in the business for about 35 years and a partner for about 26 of those years. I dealt with lots of people who owned businesses.

Almost every Kudlow show features at least one, and more often than not, quite a few nitwits who apparently have never been in business or known anyone who was. They say things like "The reason nobody is hiring is because of this Obama medical insurance plan and they don't know what's going on with the income tax." This is complete crap. I never knew a businessman who was overjoyed when corporate or personal income tax rates went up; but I have NEVER heard one put off hiring or just throw up his hands and give up and close his business because of something like the new medical insurance legislation or increases in taxes.

THINK ABOUT IT.

You're running a business and wondering whether to expand or not. The medical insurance thing passes, and you don't like it; but, guess what. It's going to have the same effect on every one of your competitors as it does on you, so you will all raise prices to cover the costs. Irritating? Yes. Stop hiring because I'm angry about this medical insurance scheme? No. In the end, it's not going to change a thing for me. This is nothing compared to the unions I had to deal with years ago.

Oh, my! But, that nasty ole Obama is doin' it to me agin', Ma! He's a-gonna raise 'em them income taxes, and I'm just a gonna shut the damn doors! No way am I hiring anybody nohow! First of all, none of my clients talked like that; and they didn't think like that either. Of course, they would have loved to keep sixty cents out of every extra dollar earned, but why would they not want to expand and make more money if they could only keep fifty-seven cents or fifty-six cents of every extra dollar earned? We don't need a course in logic to figure that one out, but apparently, the propaganda shills on the Kudlow show who probably get paid off by the talking point aired (maybe a little bonus from the thinktank they receive a fellowship from) find it beyond their mental capabilities.

Dispense with the product of the baloneymongers. The reason why private business isn't hiring is because it's laying off. The reason why it is laying off is that there is over-capacity everywhere, built up during the euphoria of the debt fueled boom that the Kudlowites cheered on (along with "Drill, drill, drill!"). The laying off causes even more decreases in consumption, which require more laying off; because it takes awhile for the oversupply to burn off and come down to the level of receding demand. This is called a recession, or a depression, if it's bad enough. THAT'S why people aren't hiring, not because dat big ole meeaaaan wolf Obama is a gonna pass commoniss medical insurance and tax all may monneh away.

I was watching the Kudlow show on Thursday night, and every time one of the heads on the multi-head screen picture started to say bad things about where we were headed, they were interupted and shouted down by this screaming bow-tied anus up in the right hand corner in the most abrupt and rude manner, or the shrill shriek ("They let me fill in for Larry, and dammit, I'm going to keep this show positive about America!") of the female anchor would cut through like a knife to cut down any dissenters before they could get through their second sentence.

Oh, well. What's new about that. King of the Talking Anus Clan, Art Laffer, has made primitive intellectual bullcrap economics into an art form, an invisible art form, you might say, except for his appearances on the Kudlow Hour of Crap, because that stuff that he and his fellow Neocon nitwits SAY happened when his Laffer principles of economic stimulus through budget deficit induced tax cuts never DID happen. The opposite happened. We had huge deficits.

Even though he is a complete shill, you have to enjoy a guy as likeable as Larry Kudlow, though. He's like a carnival barker who's got a little smirk on his face, and he's so much fun that you just feel so HONORED that he's picking you to put the con on. He may have to move out of the country after the recession/depression really gets going; but I'm sure he won't have to worry about where his next meal is coming from.

The BP oil spill thing is an environmental disaster. Okay. Let's just try to get past the human and biological tragedy for a second (think like Anus Clan Minister of Infomation, Rush Limbaugh, if you can) and figure that the result will be laws that curb drilling on U.S. soil or areas around our coast we have sovereignty over. This is going to preserve what is left of our domestic oil supply, while we, courtesy of G.W. Bush and Dick (if ever there was a Dick) Cheney, now have the mid-east secured. We're going to do a little immitation Israeli ball squeezing (while they scream quite theatrically and their somber Senator intones sonorously about where we're headed); but our arab buddies trust us more than they trust the Chinese and Russians, and they have to make a deal with somebody.

Ever heard of an arab thinktank? Me neither. It's like the Swedish Comedians Hall of Fame, a non-existant destination. (Yeah, yeah, I know about the number system, but it's been awhile, hasn't it?) They need a friend who can make things go boom, and we've proven ourselves capable of suppressing their population so they can stay in power and we can get the oil we need so eco-hippies can throw their mountain bikes in the back of the truck and drive up into the mountains on a trip that generates pollution from the burning of unnecessary fossil fuels (truck: mountain: gas: git it?).

THAT'S the reason why the Chinese are threatening to keep those rare earth metals away from us we need to make the siliconi pepperoni chips that power the world generator or whatever. We're tying a big stone around their neck by making it hard for them to get oil, expensive for them to get it, having to buy and transport if over long distances.

That's all for now. I always like to leave people a little hungry; but I'll give you a chance to watch something that will make your mind go "Schwaannnggg!" There is an incredible interview on the Charlie Rose Show of Jim Chanos, famed short-seller who got the ball rolling from the analyst side on Enron and has some AMAZING things to say about today's situation and China's future, etc. It's at http://www.charlierose.com/view/interview/10960

Bobzillah Killah