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Financial Skeptic Bulletin, November 2013

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[Nov 29, 2013] 'The Long Slog: Economic Growth Following the Great Recession'

Mark A. Sadowski said in reply to Dan Riker...

The Great Depression versus the Great Recession.

Monthly (Industrial Production):

Quarterly (GNP and GDP):

Annually (GDP):

Roger Gathman said...

Actually, we finally have a recovery tailored to what economists love: a real "reform" of the labor sector and efficiencies out the wazoo! I caught this paragraph in the latest New Yorker, which reviews books about the new landscape of media blockbusters and includes this nuggett from Tylor Cowen:

"Cowen is less troubled by the further enrichment of the already rich. He takes it for granted that America will be increasingly influenced by "labor-market polarization": productivity will continue to increase, but an ever larger proportion of the gains will go to "a relatively small cognitive elite"-human blockbusters, economically speaking. Meanwhile, more and more workers will find themselves in various service industries, assuming they can find full-time work at all. According to Cowen, future citizens will agree that "America is one of the nicest places in the world." He predicts that even those with stagnant or falling wages will have "a lot more opportunities for cheap fun and also cheap education." The formulation "cheap fun" explains much of what makes people so excited, and so anxious, about the future of popular culture."

I think we can all be excited that there is, on the one hand, a boom rewarding the 'cognitive elite' - geniuses, every one of those hedge fund traders - and on the other hand allowing cheap fun for the non-cognitive sloberati. More video games at cheaper prices! Playing these things can help you forget, for instance, the diseases that you suffer from that you can't afford to cure! Its a win-win Great Moderation recovery, and the graphs go to show how, finally, we've stumbled on the right formula for a more exciting America.

Dryly 41 said...

There have been eleven recessions since WW II, and, the collapse of the financial system after Lehman Bros. filed for bankruptcy on September 15, 2008. This was the first time the financial system collapsed since October 1929. Nine of the eleven recessions and the collapse of the financial system occurred during Republican presidential administrations.

It is not correct to compare the economic downturn caused by the Federal Reserve raising interest rates to combat inflation with that caused by the collapse of a nations financial system. In the former case once the recession takes hold inflation ceases and interest rates are reduced and more normal GDP growth ensues for the most part.

In contrast, interest rates were reduced to 0-.25% in December of 2008 where they have remained to the present time with no appreciable impact on growth. In 1935 Marriner Eccles described this as "pushing on a string" which can't be done. Economists today call it a "liquidity trap". Eccles called for economic stimulus as the only means for dealing with "under consumption" which is now called "lack of aggregate demand".

It is very difficult to get out of a liquidity trap. FDR thought the economy had reached "escape velocity" in 1936 and he believed in balanced budgets. He was wrong and the country slipped back into recession.

It really behooves a nation to keep and maintain a safe and sound financial system which, by definition, cannot be done with a laissez faire approach to finance. The only extended period of financial stability we have had in our nations history occurred following the "strict supervision" of finance from 1933 to the deregulation of the Savings and Loan banks. Still we pressed ahead with deregulation of the rest of finance, and, have not returned to "strict supervision". We have also returned to "austerity by sequestration" and slow growth.

We are slow learners.

Matt Young said in reply to John Cummings...

The folks at thye Manhattan Institute agree with you:


We think the global growth outlook is deteriorating due to lack of structural reforms, under-investment and contractionary U.S. monetary policy.

Interest rates are set below-market, limiting credit growth and channeling it to the government and established corporations. This rationing process causes the same problems experienced with other types of price controls. In the case of credit rationing, it leaves labor growth and dynamism weak.
While many of the assets favored by the Fed's policy have been pushed up in price on the theory that the Fed is creating extra credit, we think non-favored activities (like new business formation, a critical factor in job growth) are harmed, leaving a sluggish and disinflationary environment despite inflation in government-favored assets.

Matt Young said...

Get ready for another year of slow economic growth, across the country and in California.

That's according to a forecast presented Monday in Costa Mesa by economists at Orange County's Chapman University. Their message: The economy is stuck in low gear.

"The current mild expansion pales in comparison to previous recoveries," says the forecast, from Chapman's A. Gary Anderson Center for Economic Research. "But despite its weak nature, and perhaps because of it, the recovery is still in gear. It is going on 53 months. By now, most other recoveries would be experiencing accelerating inflation and tightening labor markets. Yet, there is no sign of those pressures."

Obama and his advisers, very poor economists.

The Rage said...

Everybody is also forgetting about peak oil, which is definitely here.

If oil prices were still around 20 dollar a barrel as in the previous 20 years, consumption would be higher as would be growth. That was a big reason why the Bush era credit boom didn't drive higher economic growth and why the recovery "seems" weak. Going by jobless claims unemployment is fading rapidly and this will show up in the next 6-12 months as unemployment is the final lag in economic data. But we would have been there faster with cheaper oil.

We may be entering in a "goldilocks" period were oil prices stay generally flat why the economy outgrows it for awhile. But I suspect by the 2020's, another ugly price increase is coming.........

kievite said...

There are several factors that make the current situation unique:

1. Growth of energy prices make recovery of manufacturing sector impossible without new technological breakthrough. As a result money flows into financial sector creating speculative booms and busts: financial bubbles are generated because too much money (profits and surplus value) is chasing too few fruitful investment projects.

2. Financisation makes exit from each new recession more difficult. As Minsky's observed in Stabilizing an Unstable Economy excessive financisation makes economy unstable.

3. Military expenditures became at some point a drag on the economy.

4. Successful oligopolistic corporations try to maintain and increase profits by reducing share of them which is paid to labor. This way they further undermine consumption (outside of consumption of luxury good aka conspicuous consumption)

Looks like this is not a Great Recession. This is a new normal as Grossgnation as a norm.

I think The Endless Crisis How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China by John Bellamy Foster, Robert W. W. McChesney explains this quite well.

And S&P500 at 1800 is a pretty damning sign.

[Nov 26, 2013] Art Cashin: Here are the 3 biggest risks to stocks

Art Cashin expects stocks to keep rising, but still sees some serious risks for the market

Art Cashin says the market could continue to run higher into the end of the year, but warns that any of three events could put the kibosh on the rally: a European slowdown, a geopolitical flare-up and a continued rise in interest rates.

"The 'Santa rally' traditionally start the week after Thanksgiving, so we'll get a good look at it," Cashin said on Tuesday's episode of "Futures Now."

"The only thing that could throw it off is if the European economies start to stutter. Because the S&P has benefited from the fact that it's not just the U.S.-it's filled with multinationals that have made money in Europe-and I think we're doing a little pause for reflection here, trying to figure out how much the European component will kick in."

(Read more: Get ready for a fantastic December: Trader)

More broadly, Cashin said "there's always the risk" that the hazard of a market decline outweighs the reward of further gains. He adds that this could be particularly true if a geopolitical conflict rears its ugly head.

"What troubles me is that everything away from the United States is kind of marched off the stage," said Cashin, the director of floor operations for UBS. "We've had a lot of geopolitical worries over the past two years, and they seem to have disappeared. And if suddenly [a geopolitical conflict arises], whether it's in the Middle East or something pops up in the South China Sea, then I think we could see a little take-back."

However, the most pressing worry for this market veteran is a far more commonly discussed one.

(Read more: Markets will come 'unhinged' if this happens: BofA)

"The most immediate domestic concern is what will happen to interest rates," Cashin said. "They are temptingly looking at that area between 2.7 and 3 percent on the 10-year [Treasury yield], and that could send a lot of bidders off the field."

[Nov 26, 2013] The Fed has created a huge global bubble Stockman

Nov 26, 2013 | CNBC

David Stockman: There's a worldwide bubble in stocks

Former OMB Director David Stockman says the actions of the Fed and central banks around the world have led to a massive bubble, and the end result won't be pretty. With CNBC's Jackie DeAngelis and the Futures Now Traders.

The actions of the Federal Reserve have created a massive bubble not just in U.S. stock prices, but in a variety of assets all across the world, contends David Stockman, who served as the director of the Office of Management and Budget under Ronald Reagan.

"The Fed is exporting this lunatic policy worldwide," Stockman said, referring to the Federal Reserve's asset-purchasing program. "Central banks all over the world have been massively expanding their balance sheets, and as a result of that there are bubbles in everything in the world, asset values are exaggerated everywhere."

"It's only a question of time before the central banks lose control, and a panic sets in when people realize that these value said.

(Read more: Good news: Bubble concern is at a 5-year high)

The issue, says Stockman, is that central banks around the world have followed the Fed's dovish lead "for either good reasons of defending their own currency and their trade and their exchange rate, or because they're replicating the Fed's erroneous policies."

Either way, "Central banks have been massively expanding their balance sheets," which has reduced interest rates on government bonds, and increased the amount of money chasing a fixed set of assets.

Stockman, who is the recent author of "The Great Deformation: The Corruption of Capitalism in America," says that it takes little digging to discover that assets are overextended.

"This is a financial asset bubble, and you can see it in the valuations if you want to look at it," Stockman said on Tuesday's episode of "Futures Now." "The Russell 2000 is hitting another peak today-it's trading at 75 times reported trailing earnings. That makes no sense. It's up 43 percent in the last year, but earnings of the Russell 2000 companies have not increased at all. It's up 230 percent from the bottom. Mainstream America is not doing that well."

In fact, Art Cashin, director of floor operations for UBS, made a similar point on the same episode of "Futures Now."

"This market, this whole economy has kind of a split personality," Cashin said. "Wall Street is making a record, and yet your brother-in-law can't find a job."

Yet while Cashin doesn't call this a Fed-induced bubble, crediting the situation instead to "the miracle of managers in all the major corporation doing more with less," Stockman warns that the end of the bull run will be very painful.

"This is dangerous. We're in a dangerous financial system that has been more or less wrecked by central banks and their policies," Stockman said, adding that "I haven't seen too many bubbles in history" that haven't ended violently.

[Nov 26, 2013] Pope attacks 'tyranny' of markets, urges renewal in key document by Naomi O'Leary

Yahoo News

Pope Francis called for renewal of the Roman Catholic Church and attacked unfettered capitalism as "a new tyranny", urging global leaders to fight poverty and growing inequality in the first major work he has authored alone as pontiff.

The 84-page document, known as an apostolic exhortation, amounted to an official platform for his papacy, building on views he has aired in sermons and remarks since he became the first non-European pontiff in 1,300 years in March.

In it, Francis went further than previous comments criticizing the global economic system, attacking the "idolatry of money" and beseeching politicians to guarantee all citizens "dignified work, education and healthcare".

He also called on rich people to share their wealth. "Just as the commandment 'Thou shalt not kill' sets a clear limit in order to safeguard the value of human life, today we also have to say 'thou shalt not' to an economy of exclusion and inequality. Such an economy kills," Francis wrote in the document issued on Tuesday.

"How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses 2 points?"

The pope said renewal of the Church could not be put off and said the Vatican and its entrenched hierarchy "also need to hear the call to pastoral conversion".

"I prefer a Church which is bruised, hurting and dirty because it has been out on the streets, rather than a Church which is unhealthy from being confined and from clinging to its own security," he wrote.

In July, Francis finished an encyclical begun by Pope Benedict but he made clear that it was largely the work of his predecessor, who resigned in February.

Called "Evangelii Gaudium" (The Joy of the Gospel), the exhortation is presented in Francis' simple and warm preaching style, distinct from the more academic writings of former popes, and stresses the Church's central mission of preaching "the beauty of the saving love of God made manifest in Jesus Christ".

In it, he reiterated earlier statements that the Church cannot ordain women or accept abortion. The male-only priesthood, he said, "is not a question open to discussion" but women must have more influence in Church leadership.


A meditation on how to revitalize a Church suffering from encroaching secularization in Western countries, the exhortation echoed the missionary zeal more often heard from the evangelical Protestants who have won over many disaffected Catholics in the pope's native Latin America.

In it, economic inequality features as one of the issues Francis is most concerned about, and the 76-year-old pontiff calls for an overhaul of the financial system and warns that unequal distribution of wealth inevitably leads to violence.

"As long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world's problems or, for that matter, to any problems," he wrote.

Denying this was simple populism, he called for action "beyond a simple welfare mentality" and added: "I beg the Lord to grant us more politicians who are genuinely disturbed by the state of society, the people, the lives of the poor."

Since his election, Francis has set an example for austerity in the Church, living in a Vatican guest house rather than the ornate Apostolic Palace, travelling in a Ford Focus, and last month suspending a bishop who spent millions of euros on his luxurious residence.

He chose to be called "Francis" after the medieval Italian saint of the same name famed for choosing a life of poverty.

Stressing cooperation among religions, Francis quoted the late Pope John Paul II's idea that the papacy might be reshaped to promote closer ties with other Christian churches and noted lessons Rome could learn from the Orthodox such as "synodality" or decentralized leadership.

He praised cooperation with Jews and Muslims and urged Islamic countries to guarantee their Christian minorities the same religious freedom as Muslims enjoy in the West.

[Nov 23, 2013] Kevin Drum and the Retirement Crisis Eye on the Ball

Parasitic rent-seeking (aka legalized theft) of financial oligarchy is an important problem that squeeze Social Security. Just look how efficiently Merrill Lynch fleece Wal-Mart workers.
Beat the Press

Kevin Drum poses a reasonable question about the existence of a retirement crisis in a recent blogpost. He notes that retirement income projections from the Social Security Administration's MINT model show income for older households rising from 1971 to the present, while incomes for those in the age 35 to 44 were nearly stagnant. The model also shows income for older households continuing to rise over the next three decades. Kevin's conclusion is that we are wrong to spend a lot of time worrying about retirees, and would be wrong to consider increasing Social Security taxes on the working population to maintain scheduled benefits for Social Security recipients.

While the story of rising income for retirees is correct, there are several points to keep in mind. First, the main reason that income for the over 65 group has risen is that the real value of Social Security benefits has risen. Social Security benefits are tied to average wages, not median wages. This is important. Most of the upward redistribution of the last three decades has been to higher end wage earners like doctors, Wall Street types, and CEOs, not to profits. Since the average wage includes these high end earners, benefits will rise through time, pushing up retiree incomes. For the median household over age 65 Social Security benefits are more than 70 percent of their income, so the story of rising income is largely a story of rising Social Security benefits.

However even with this increase in Social Security benefits, replacement rates at age 67 are projected to fall relative to lifetime wages (on a wage-adjusted basis) from 98 percent for the World War II babies to 89 percent for early baby boomers, 86 percent for later baby boomers and 84 percent for GenXers. There are several reasons for this drop. The most important is the rise in the normal retirement age from 65 for people who turned 62 before 2002 to 67 for people who turn 62 after 2022. This amounts to roughly a 12 percent cut in scheduled benefits. The other reason for the drop is the decline in non-Social Security income. This is primarily due to the fact that defined benefit pensions are rapidly disappearing and defined contribution pensions are not coming close to filling the gap.

It is also important that the over age 65 population on average has a considerably longer life expectancy today and in the future than was the case in 1971. In 1971 someone turning age 65 could expect to live roughly 16 years, today their life expectancy would be over 20 years. This is a good thing of course, but it means that when we use the same age cutoff today as we did 40 plus years ago we are looking at a population that is much healthier, and therefore also more likely to be working, and further from death. If we adjusted our view to focus on the population that was within 16 years of hitting the end of their age 65 life expectancy, the story would not be as positive.

The data from the MINT model may also be somewhat misleading because it includes owner equivalent rent (OER) as income. While not having to pay rent is clearly an important savings to an older couple or individual that has paid off their mortgage, it can give an inaccurate picture of their income. There are many older couples or single individuals that live in large houses in which they raised their families. The imputed rent on such a house can be quite large relative to their income as retirees. (Imputed rent is almost one quarter of total consumer expenditures even though only two-thirds of families are homeowners.) There are undoubtedly many retirees who live in homes that would rent for an amount that is larger than their cash income, which will be primarily their Social Security check.

In principle it might be desirable for such people to move to smaller less expensive homes or apartments, but this is often not easy to do. Government policy that hugely subsidizes homeownership and denigrates renting is also not helpful in this respect.

The other part of the income picture overlooked is that almost all middle income retirees will be paying for Medicare Part B, the premium for which is taking up a large and growing share of their cash income. That premium has risen from roughly $250 a year (in 2013 dollars) to more than $1,200 a year at present. This difference would be equal to almost 5 percent of the income (excluding OER) of the typical senior. That means that if we took a measure of income that subtracted Medicare premiums (not co-pays and deductibles) it would show a considerably smaller increase than the MINT data. The higher costs faced by seniors for health care and other expenditures is the reason that the Census Bureau's supplemental poverty measures shows a much higher poverty rate than the official measure.

Finally, there is the need to focus on the question of how well seniors are doing. Seniors income has been rising relative to the income of the typical working household because the typical working household is seeing their income redistributed to the Wall Street crew, CEOs, doctors and other members of the one percent. However, even with the relative gains for seniors their income is still well below that of the working age population. The median person income for people over age 65 was $20,380 in 2012 compared to a median person income of $36,800 for someone between the ages of 35 to 44. Now we can point to the fact that incomes have been rising considerably faster for the over 65 group, but this would be like saying that we should be annoyed because women's wages have been rising more rapidly than men's wages. Women still earn much less for their work and seniors still get by on much less money than the working age population.

The bottom line is that it takes some pretty strange glasses to see the senior population as doing well either now or in the near future based on current economic conditions. We can argue about whether young people or old people have a tougher time, but it's clear that the division between winners and losers is not aged based, but rather class based.

[Nov 20, 2013] Warren Buffett talks all-time record highs on Wall Street, stock prices in the future

The trend is your friend, until it ends.

The 83-year-old, appearing at his former grade school in Omaha, Neb., in honor of American Education Week, said on "CBS This Morning," "I don't know what stocks will do next week or next month or next year. Or five or ten years from now, I would say that they're very likely to be higher."

The Dow hit 16,000 for the first time on Monday, and the index has gained more than 3,000 points this year alone. Some analysts believe investors could be riding the bull market into a bubble.

Asked if he thinks stocks are overpriced (investor Carl Icahn has called them a "mirage"), Buffett said, "I would say that they're in a zone of reasonableness. Five years ago, I wrote an article for The New York Times that said they were very cheap. And every now and then, you can see that that they're very overpriced or very underpriced. Most of the time, they're in an area where maybe they're a little high, a little low, and nobody really knows exactly. They're definitely not way overpriced. They're definitely not underpriced."

[Nov 19, 2013] Yahoo! Personal Finance

"... limit it [your company stock --NNB] to ~10% of your portfolio."

Under a law passed last year, you can even sell shares that your employer contributed to your account, as long as you've been there for three years.

Being too conservative

Plowing too much money into low-risk choices like stable value, bond and money funds may seem safe since it protects your 401(k) from market setbacks.

But it's dangerous in the long run because your savings won't grow enough to provide you with an adequate income in retirement.

A better approach: Create a blend of stocks and bonds that provides a cushion against price drops but also gives you a shot at the gains you'll need to amass a sizable nest egg.

For help setting the appropriate mix for your age, check our Asset Allocator tool.

Doin' the smorgasbord thing

In an attempt to diversify, some people spread their money evenly across all the options on their 401(k) menu.

That doesn't produce a well-rounded portfolio any more than scarfing every item at a buffet assures a balanced meal. You might wind up with too big a helping of growth or bonds, depending on your plan's options.

What to do? First plug your choices into the Instant X-Ray tool at to see how your portfolio breaks down by the major asset classes - large and small stocks, bonds and foreign shares.

You can then compare your current mix to the blend our Asset Allocator recommends and, if necessary, rejigger your choices to get your 401(k) on track.

Avoiding these errors won't guarantee you a giant nest egg. But you will be making the most of every penny you set aside. And in the long run, that will pay off.

[Nov 18, 2013] Fed's message of no rate hike until 2015 is sinking in study

The situation is probably more complex then obvious lack of desire of Fed to raise rates. See The Great Stagnation

The paper, published in the latest Economic Letter from the Federal Reserve Bank of San Francisco, looks in detail at data through late May. At that time, the researchers said, investors and economists expected a first Fed rate hike around mid-2015, based on economist surveys and Treasury yields interpreted in light of near-zero rates.

Although the paper does not explicitly say so, the decline in market rates since May -- when Fed Chairman Bernanke offered a timeline for the end of the Fed's massive bond-buying program that now sees too aggressive -- suggests that traders may now see the Fed's first rate hike as coming even later.

Convincing the public that the U.S. central bank will keep rates low for a long time is a key pillar of the Fed's super-easy monetary policy, which seeks to stoke investment and hiring by keeping borrowing costs down.


The Fed is simply not going to taper. The Fed has become the glue which keeps the Government solvent and the stock market inflated. Artificial as it is, the Fed is trapped with no escape.


In my opinion, QE isn't going to end anytime soon because the financial and banking community won't allow it to end. They've become so accustomed to cheap government loans and the subsequent orgy of quick profits, they will politically destroy any politician that gets in their way.


The average joe just has no clue what is about to happen...we have a necessary but unsustainable heroin addiction to QE. We cannot stop until we overdose. And the overdose is coming soon.


all the bullsheet about the economy doing so good and the markets at all times high, but why keep printing then???? governmint is not your friend people...wake up, the time will come..we have to stop the corrupt politicians or else would be too late

[Nov 18, 2013] Icahn warns stock market could face 'big drop'

It can be a month, it can be year, but S&P500 at 1800 with economy and consumers suffering and cutting back is a real disconnect...

Activist investor Carl Icahn on Monday said there was a chance the stock market could suffer a big decline, saying valuations are rich and earnings at many companies are fuelled more by low borrowing costs than management's efforts to boost results.

Unnerved by Icahn's prognosis, investors pushed stocks lower. The S&P 500, which was trading near unchanged before Icahn spoke, closed down 0.4 percent.

"I am very cautious on equities today. This market could easily have a big drop," Icahn said.

He said share buybacks are driving results, not profitability.

"Very simplistically put, a lot of the earnings are a mirage," Icahn told the Reuters Global Investment Outlook Summit. "They are not coming because the companies are well run but because of low interest rates."

[Nov 17, 2013] BofAML Warns Don't Get Complacent

Zero Hedge

In the near term, BofAML's Macneil Curry warns "we are growing a bit cautious/nervous, as US equity volatility is flashing a warning sign of market complacency that has often preceded a correction or a pause in trend."

This 'red flag' is asterisk'd appropriately in the new normal with "to be clear, the balance of evidence is still very much US equity positive, but the near term downside risks have increased."

Via BofAML's MacNeil Curry,

We are bullish stocks, with the S&P500 targeting 1844 into year end [ZH: which sounds awfully close to an extraplotaed protjection of where the Fed's balance sheet implies year-end target].


Another bullshit post. As if there could be a pullback with Ben/Janet printing out their ass. Get with it Tyler.


The top chart shows multiple pullbacks, with Ben printing. Wait until it crashes with the FED printing.


At least it's not a complete echo chamber. It is good to hear what the other side of the human brain is saying, even if it is wrong.


If we're all waiting for a Black Swan, is it still a Black Swan?

Yen Cross

We've read this disclaimer 3-4 times over the last 2 weeks?

Be prepared MUPPETS. All your pensions are belong to us...

[Nov 17, 2013] The Surprising Death Of Surprise Zero Hedge

Remember the game is not "return on capital". It is "return of capital". "death of surpise" is more like "death of markets."

"The period of peak liquidity will remain in place for the foreseeable future," suggest Brown Brothers Harriman in a recent note, and as Reuters reports, for all the fevered speculation about when the Federal Reserve will begin scaling back its monetary stimulus, market volatility has been taking a leisurely nap, suggesting investors see no major shocks on the horizon to derail their bets. "We're not trying to follow the twists and turns of the very short-term investment cycle," confirms one wealth manager who will only change his strategy if the Fed "dramatically changed," its policies.

The market's apparent ignorance of the ebb and flow of data surprises - both positive and negative - is clear as it has virtually no bearing on short-term yields, which have remained at historic lows thanks to the trillions of dollars of liquidity and zero interest rates from the Fed. "Fear not the Fed," advises BofAML, as the Fed's $85 billion-a-month asset purchase program trumps everything.


Sweet- always nice to see the top- when everyone is absolutely, positively sure that nothing can go wrong.....

This liquidity will disappear as soon as the Chinese repatriot to cover their bullshit real estate bubble- Ben will be sitting on his hands, cursing why he didn't get out a month earlier......


I'm guessing you were around for the last two blow-off tops. Does feel a bit similar, doesn't it?


Everyone = < 1% of the population now? Yeah, that's a real signal there bro.

Groundhog Day

The party will go on until everyone, including the shoe shine boy is a trillionare


"...since mid-2011, the correlation between U.S. economic surprises and two-year Treasury yields has completely broken down"

This couldn't possibly have anything to do with the beginning of QEternity, right?

[Nov 16, 2013] Sundown in America By DAVID A. STOCKMAN

The modern Keynesian state is broke, paralyzed and mired in empty ritual incantations about stimulating "demand," even as it fosters a mutant crony capitalism that periodically lavishes the top 1 percent with speculative windfalls.
March 30, 2013 |

The Dow Jones and Standard & Poor's 500 indexes reached record highs on Thursday, having completely erased the losses since the stock market's last peak, in 2007. But instead of cheering, we should be very afraid.

Over the last 13 years, the stock market has twice crashed and touched off a recession: American households lost $5 trillion in the 2000 dot-com bust and more than $7 trillion in the 2007 housing crash. Sooner or later - within a few years, I predict - this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too.

Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the "bottom" 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.

So the Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation's bills. By default, the Fed has resorted to a radical, uncharted spree of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble.

When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today's feeble remnants of economic growth.

THIS dyspeptic prospect results from the fact that we are now state-wrecked. With only brief interruptions, we've had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy.

As the federal government and its central-bank sidekick, the Fed, have groped for one goal after another - smoothing out the business cycle, minimizing inflation and unemployment at the same time, rolling out a giant social insurance blanket, promoting homeownership, subsidizing medical care, propping up old industries (agriculture, automobiles) and fostering new ones ("clean" energy, biotechnology) and, above all, bailing out Wall Street - they have now succumbed to overload, overreach and outside capture by powerful interests. The modern Keynesian state is broke, paralyzed and mired in empty ritual incantations about stimulating "demand," even as it fosters a mutant crony capitalism that periodically lavishes the top 1 percent with speculative windfalls.

The culprits are bipartisan, though you'd never guess that from the blather that passes for political discourse these days. The state-wreck originated in 1933, when Franklin D. Roosevelt opted for fiat money (currency not fundamentally backed by gold), economic nationalism and capitalist cartels in agriculture and industry.

Under the exigencies of World War II (which did far more to end the Depression than the New Deal did), the state got hugely bloated, but remarkably, the bloat was put into brief remission during a midcentury golden era of sound money and fiscal rectitude with Dwight D. Eisenhower in the White House and William McChesney Martin Jr. at the Fed.

Then came Lyndon B. Johnson's "guns and butter" excesses, which were intensified over one perfidious weekend at Camp David, Md., in 1971, when Richard M. Nixon essentially defaulted on the nation's debt obligations by finally ending the convertibility of gold to the dollar. That one act - arguably a sin graver than Watergate - meant the end of national financial discipline and the start of a four-decade spree during which we have lived high on the hog, running a cumulative $8 trillion current-account deficit. In effect, America underwent an internal leveraged buyout, raising our ratio of total debt (public and private) to economic output to about 3.6 from its historic level of about 1.6. Hence the $30 trillion in excess debt (more than half the total debt, $56 trillion) that hangs over the American economy today.

This explosion of borrowing was the stepchild of the floating-money contraption deposited in the Nixon White House by Milton Friedman, the supposed hero of free-market economics who in fact sowed the seed for a never-ending expansion of the money supply. The Fed, which celebrates its centenary this year, fueled a roaring inflation in goods and commodities during the 1970s that was brought under control only by the iron resolve of Paul A. Volcker, its chairman from 1979 to 1987.

Under his successor, the lapsed hero Alan Greenspan, the Fed dropped Friedman's penurious rules for monetary expansion, keeping interest rates too low for too long and flooding Wall Street with freshly minted cash. What became known as the "Greenspan put" - the implicit assumption that the Fed would step in if asset prices dropped, as they did after the 1987 stock-market crash - was reinforced by the Fed's unforgivable 1998 bailout of the hedge fund Long-Term Capital Management.

That Mr. Greenspan's loose monetary policies didn't set off inflation was only because domestic prices for goods and labor were crushed by the huge flow of imports from the factories of Asia. By offshoring America's tradable-goods sector, the Fed kept the Consumer Price Index contained, but also permitted the excess liquidity to foster a roaring inflation in financial assets. Mr. Greenspan's pandering incited the greatest equity boom in history, with the stock market rising fivefold between the 1987 crash and the 2000 dot-com bust.

Soon Americans stopped saving and consumed everything they earned and all they could borrow. The Asians, burned by their own 1997 financial crisis, were happy to oblige us. They - China and Japan above all - accumulated huge dollar reserves, transforming their central banks into a string of monetary roach motels where sovereign debt goes in but never comes out. We've been living on borrowed time - and spending Asians' borrowed dimes.

This dynamic reinforced the Reaganite shibboleth that "deficits don't matter" and the fact that nearly $5 trillion of the nation's $12 trillion in "publicly held" debt is actually sequestered in the vaults of central banks. The destruction of fiscal rectitude under Ronald Reagan - one reason I resigned as his budget chief in 1985 - was the greatest of his many dramatic acts. It created a template for the Republicans' utter abandonment of the balanced-budget policies of Calvin Coolidge and allowed George W. Bush to dive into the deep end, bankrupting the nation through two misbegotten and unfinanced wars, a giant expansion of Medicare and a tax-cutting spree for the wealthy that turned K Street lobbyists into the de facto office of national tax policy. In effect, the G.O.P. embraced Keynesianism - for the wealthy.

The explosion of the housing market, abetted by phony credit ratings, securitization shenanigans and willful malpractice by mortgage lenders, originators and brokers, has been well documented. Less known is the balance-sheet explosion among the top 10 Wall Street banks during the eight years ending in 2008. Though their tiny sliver of equity capital hardly grew, their dependence on unstable "hot money" soared as the regulatory harness the Glass-Steagall Act had wisely imposed during the Depression was totally dismantled.

Within weeks of the Lehman Brothers bankruptcy in September 2008, Washington, with Wall Street's gun to its head, propped up the remnants of this financial mess in a panic-stricken melee of bailouts and money-printing that is the single most shameful chapter in American financial history.

There was never a remote threat of a Great Depression 2.0 or of a financial nuclear winter, contrary to the dire warnings of Ben S. Bernanke, the Fed chairman since 2006. The Great Fear - manifested by the stock market plunge when the House voted down the TARP bailout before caving and passing it - was purely another Wall Street concoction. Had President Bush and his Goldman Sachs adviser (a k a Treasury Secretary) Henry M. Paulson Jr. stood firm, the crisis would have burned out on its own and meted out to speculators the losses they so richly deserved. The Main Street banking system was never in serious jeopardy, ATMs were not going dark and the money market industry was not imploding.

Instead, the White House, Congress and the Fed, under Mr. Bush and then President Obama, made a series of desperate, reckless maneuvers that were not only unnecessary but ruinous. The auto bailouts, for example, simply shifted jobs around - particularly to the aging, electorally vital Rust Belt - rather than saving them. The "green energy" component of Mr. Obama's stimulus was mainly a nearly $1 billion giveaway to crony capitalists, like the venture capitalist John Doerr and the self-proclaimed outer-space visionary Elon Musk, to make new toys for the affluent.

Less than 5 percent of the $800 billion Obama stimulus went to the truly needy for food stamps, earned-income tax credits and other forms of poverty relief. The preponderant share ended up in money dumps to state and local governments, pork-barrel infrastructure projects, business tax loopholes and indiscriminate middle-class tax cuts. The Democratic Keynesians, as intellectually bankrupt as their Republican counterparts (though less hypocritical), had no solution beyond handing out borrowed money to consumers, hoping they would buy a lawn mower, a flat-screen TV or, at least, dinner at Red Lobster.

But even Mr. Obama's hopelessly glib policies could not match the audacity of the Fed, which dropped interest rates to zero and then digitally printed new money at the astounding rate of $600 million per hour. Fast-money speculators have been "purchasing" giant piles of Treasury debt and mortgage-backed securities, almost entirely by using short-term overnight money borrowed at essentially zero cost, thanks to the Fed. Uncle Ben has lined their pockets.

If and when the Fed - which now promises to get unemployment below 6.5 percent as long as inflation doesn't exceed 2.5 percent - even hints at shrinking its balance sheet, it will elicit a tidal wave of sell orders, because even a modest drop in bond prices would destroy the arbitrageurs' profits. Notwithstanding Mr. Bernanke's assurances about eventually, gradually making a smooth exit, the Fed is domiciled in a monetary prison of its own making.

While the Fed fiddles, Congress burns. Self-titled fiscal hawks like Paul D. Ryan, the chairman of the House Budget Committee, are terrified of telling the truth: that the 10-year deficit is actually $15 trillion to $20 trillion, far larger than the Congressional Budget Office's estimate of $7 trillion. Its latest forecast, which imagines 16.4 million new jobs in the next decade, compared with only 2.5 million in the last 10 years, is only one of the more extreme examples of Washington's delusions.

Even a supposedly "bold" measure - linking the cost-of-living adjustment for Social Security payments to a different kind of inflation index - would save just $200 billion over a decade, amounting to hardly 1 percent of the problem. Mr. Ryan's latest budget shamelessly gives Social Security and Medicare a 10-year pass, notwithstanding that a fair portion of their nearly $19 trillion cost over that decade would go to the affluent elderly. At the same time, his proposal for draconian 30 percent cuts over a decade on the $7 trillion safety net - Medicaid, food stamps and the earned-income tax credit - is another front in the G.O.P.'s war against the 99 percent.

Without any changes, over the next decade or so, the gross federal debt, now nearly $17 trillion, will hurtle toward $30 trillion and soar to 150 percent of gross domestic product from around 105 percent today. Since our constitutional stasis rules out any prospect of a "grand bargain," the nation's fiscal collapse will play out incrementally, like a Greek/Cypriot tragedy, in carefully choreographed crises over debt ceilings, continuing resolutions and temporary budgetary patches.

The future is bleak. The greatest construction boom in recorded history - China's money dump on infrastructure over the last 15 years - is slowing. Brazil, India, Russia, Turkey, South Africa and all the other growing middle-income nations cannot make up for the shortfall in demand. The American machinery of monetary and fiscal stimulus has reached its limits. Japan is sinking into old-age bankruptcy and Europe into welfare-state senescence. The new rulers enthroned in Beijing last year know that after two decades of wild lending, speculation and building, even they will face a day of reckoning, too.

THE state-wreck ahead is a far cry from the "Great Moderation" proclaimed in 2004 by Mr. Bernanke, who predicted that prosperity would be everlasting because the Fed had tamed the business cycle and, as late as March 2007, testified that the impact of the subprime meltdown "seems likely to be contained." Instead of moderation, what's at hand is a Great Deformation, arising from a rogue central bank that has abetted the Wall Street casino, crucified savers on a cross of zero interest rates and fueled a global commodity bubble that erodes Main Street living standards through rising food and energy prices - a form of inflation that the Fed fecklessly disregards in calculating inflation.

These policies have brought America to an end-stage metastasis. The way out would be so radical it can't happen. It would necessitate a sweeping divorce of the state and the market economy. It would require a renunciation of crony capitalism and its first cousin: Keynesian economics in all its forms. The state would need to get out of the business of imperial hubris, economic uplift and social insurance and shift its focus to managing and financing an effective, affordable, means-tested safety net.

All this would require drastic deflation of the realm of politics and the abolition of incumbency itself, because the machinery of the state and the machinery of re-election have become conterminous. Prying them apart would entail sweeping constitutional surgery: amendments to give the president and members of Congress a single six-year term, with no re-election; providing 100 percent public financing for candidates; strictly limiting the duration of campaigns (say, to eight weeks); and prohibiting, for life, lobbying by anyone who has been on a legislative or executive payroll. It would also require overturning Citizens United and mandating that Congress pass a balanced budget, or face an automatic sequester of spending.

It would also require purging the corrosive financialization that has turned the economy into a giant casino since the 1970s. This would mean putting the great Wall Street banks out in the cold to compete as at-risk free enterprises, without access to cheap Fed loans or deposit insurance. Banks would be able to take deposits and make commercial loans, but be banned from trading, underwriting and money management in all its forms.

It would require, finally, benching the Fed's central planners, and restoring the central bank's original mission: to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy. Getting the Fed out of the financial markets is the only way to put free markets and genuine wealth creation back into capitalism.

That, of course, will never happen because there are trillions of dollars of assets, from Shanghai skyscrapers to Fortune 1000 stocks to the latest housing market "recovery," artificially propped up by the Fed's interest-rate repression. The United States is broke - fiscally, morally, intellectually - and the Fed has incited a global currency war (Japan just signed up, the Brazilians and Chinese are angry, and the German-dominated euro zone is crumbling) that will soon overwhelm it. When the latest bubble pops, there will be nothing to stop the collapse. If this sounds like advice to get out of the markets and hide out in cash, it is.

[Nov 15, 2013] Steps From a Correction Poly

Speculative markets are always a reflection of market participants' collective greed. To support speculative behavior, participants formulate justifications which are often delusional. The "madness of crowds" is a well-known phenomenon that is all-too-common in the investing world.

Speculative markets are always a reflection of market participants' collective greed. To support speculative behavior, participants formulate justifications which are often delusional. The "madness of crowds" is a well-known phenomenon that is all-too-common in the investing world. Each time - whether the late-90's internet bubble, the mid-00s real estate bubble, or the current equities bubble - participants find a way to convince themselves that this time is truly different.

The speculative frenzy always reaches the point where those prudent investors who have remained on the sideline can no longer tolerate feeling foolish while everyone else is making so much money. So they dive in too, and each passing week brings more conversions to the bullish case. Eventually, everyone is a bull...and there are very investors left with the courage to stay out of the market. At present, this phenomenon likely explains why Investors Intelligence sentiment data is hitting extremely low numbers of bears. The spread between Bulls & Bears is now at its highest since April 2011, which was precisely where the market last topped. A 20% correction followed shortly after.

[Nov 15, 2013] Comex Registered Gold Falls To 587,235 Ounces - Claims at 63 to 1 - The Karma of Buddha's Palm

From a gold bug...
Jesse's Café Américain

Earlier today in a piece about price premiums in India I included a link to the online section of Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds.

You might want to have a quick glance over the chapter regarding John Law's highly innovative dalliance into the théorie monétaire moderne that was adopted by the nation of France, almost to the point of its demise. It is a useful reminder that truly, there is nothing new under the sun.

As theoretical as all these pricing antics and market manipulations might seem, exercises in price setting for personal greed or policy considerations have real world consequences, especially when they are applied over long periods of time, and with some resort to coercion.

The longer that valuations are maintained against the market, the stronger the coercion to sustain them must become, to the demise of freedom, and the point of exhaustion and collapse. The Soviet ruble is a possible case study for what happens when the unsustainable meets the inevitable, even with a hairy knuckled police state backing it up.

We might start thinking about 2014 as the year of financial consequences.

[Nov 14, 2013] Citi Warns Fed Is Kicking The Can Over The Edge Of A Cliff

The goal of this page is not to time the market. It is to prevent 401K investors from stupid, self-defeating move, which are typical when greed overwhelm those who missed S&P500 rally and now can try to catch the train. In this particular role ZeroHedge is OK.
Zero Hedge

It is becoming increasingly obvious that we are seeing the disconnect between financial markets and the real economy grow. It is also increasingly obvious (to Citi's FX Technicals team) that not only is QE not helping this dynamic, it is making things worse. It encourages misallocation of capital out of the real economy, it encourages poor risk management, it increases the danger of financial asset inflation/bubbles, and it emboldens fiscal irresponsibility etc.etc. If the Fed was prepared to draw a line under this experiment now rather than continuing to "kick the can down the road" it would not be painless but it would likely be less painful than what we might see later. Failure to do so will likely see us at the "end of the road" at some time in the future and the 'can' being "kicked over the edge of a cliff." Enough is enough. It is time to recognize reality. It is time to take monetary and fiscal responsibility - "America is exhausted… is time."

Via Citi FX Technicals,

Small business (the "backbone of the US economy") is struggling again

These numbers were released this week and give rise for concern. The outlook here does not look very promising as we see all of the charts above starting to look shaky.

We are particularly focused on the overall small business optimism index and what it suggests.

... ... ....

As can be seen from the chart above the Small business optimism index and the S&P were very correlated from 2007-2012. If anything, the Small business optimism index has tended to slightly lead i.e. the business backdrop seemed to reflect the economic backdrop which was then reflected in the equity market.

However, since Sept. 2012 when the Fed went "all in" with QE "infinity" there has been a huge divergence between these two. After an initial "hiccup" of about 9% in the Equity market it has since rallied 32% in 11 months, with no corresponding support from the business index.

There is now a "huge divergence" between the "backbone of the US economy" (Small business) and the Equity market. This clearly shows that while sharp balance sheet expansion at the Fed continues to "elevate" the equity market, it is far from clear that it is providing incremental benefit to the real economy. If these small business indicators continue to deteriorate as we expect then there is likely an inevitable negative feedback loop to the real economy and ultimately employment creation (Which at this point remains "qualitatively poor")

If the Fed is not concerned about the dangers of creating a potential "bubble" in financial assets that does not see fundamental support, then they should be. They might want to explain what their next policy measure would be IF they allow a financial bubble to emerge while they sit at "Zero bound" short-term rates and a balance sheet likely sitting above $4 trillion.

The Equity market move is fundamental: Yeah right!

S&P and the Fed balance sheet since early 2009. Not at all correlated... well maybe a little

S&P, Fed Balance sheet and US GDP: QE infinity is working really well…..DUH..

Year on year real GDP growth peaked in 2010 at 2.8%.(YOY growth in nominal GDP peaked at 5.2% in 2012 and is now back at 3.1%). These levels remain extremely low by "normal" recovery standards and have failed to re-accelerate despite the fact that the Fed has nearly doubled the size of its balance sheet since 2010.

The Fed balance sheet is now $3.85 trillion and still rising.

[Nov 14, 2013] SP 500 and NDX Futures Daily Charts - Another Day, Another New High For Equities

the Fed and the government of the US (and UK for that matter) are pursuing policy designed to enhance the well-being of the wealthiest few, and doing very little for the public at large, except perhaps just enough to keep them confusedly apathetic.
Jesse's Café Américain

The unstoppable Wall Street money machine keeps rolling on the QE express.

What could possibly go wrong?

Have a pleasant evening.

... ... ...

There was a slight downward pressure today as it was a bit of risk off, with some commodities, bonds, and stocks trading weakly because of 'taper talk.'

As if.

There should be no doubt in anyone's mind that the Fed and the government of the US (and UK for that matter) are pursuing policy designed to enhance the well-being of the wealthiest few, and doing very little for the public at large, except perhaps just enough to keep them confusedly apathetic.

"We run carelessly to the precipice, after we have put up a façade to prevent ourselves from seeing it."

Blaise Pascal

Gold Daily and Silver Weekly Charts - Are We There Yet Daddy

Jesse's Café Américain

"We run carelessly to the precipice, after we have put up a façade to prevent ourselves from seeing it."

Blaise Pascal

Gold and silver largely chopped sideways today with a slight downward bias, but nothing of real consequence.

There was a small amount of movement of gold out of the Scotia Mocatta warehouse on Friday. The report is shown below.

The way to play the precious metals market is to not take leveraged or timed (option) positions. Why is this?

Because the markets are being price manipulated, like the currency markets, LIBOR, base metals, and quite a few others it seems.

So what do we not do? We do not try to time the market, since the guys who are pushing prices around have the advantage of 'seeing our hands' given their market positioning and access to non-public information.

This means we are trading for the intermediate to long term. Daily price antics cannot affect us because we are not leveraged, and we are not holding things like options which have expirations.

I wanted to clarify this, because lately I have been getting some questions that make me think that some are trying to time this market, and pile into leveraged positions to maximize their outsized gains. That is not likely to work. The worst thing that can happen to a new trader is to hit a jackpot like that, because they will break themselves trying to regain the feeling of being fortune's child by playing long shots.

Convergence is a more likely way to play markets. That means that even though some things can get out of bounds and stay there for longer than we might think, eventually the fundamentals will come to bear and the markets will converge back to probability again.

In the case of gold, claims per ounce at these prices are at historic highs. The last two times this happened, we saw a major intermediate trend change within six months. Can it be nine months? Sure, why not? With regulators turning a blind eye and the Fed essentially handing the banks and trading desks $80 billion per month by buying their assets at non-market prices, things can go on for quite some time.

But eventually the fundamentals of supply, demand, and value will apply, and sometimes with a vengeance. We saw this in the financial crisis of 2008, wherein the mispricing of risk in Collateralized Debt Obligations blew up, and the housing bubble collapsed.

Sometimes that is what happens when trend becomes overextended. You can break yourself trying for the maximum profit and bragging rights, and miss the big move when it comes from sheer exhaustion.

So I think that is where we are with the precious metals, and with gold in particular. There are no sure things, but this one seems to be unfolding in a fairly classic manner. Try not to pig out and get sidelined before the time comes. As Bernard Baruch once said, better to lose the first ten percent of a major bull move than to try and get in early.

Now, you may not think we are going to see another leg up in precious metals. And you could be right. So what do you do? You sit out and wait for a clear breakout and confirmation. For those more aggressively inclined you take light positions with cool money and no leverage. And then sit and wait to be right.

I do not know how this will unfold exactly. But I do know one thing. All the pundits and master traders don't know any more than that either. But they will be glad to sell you their opinions, and hope that you do the natural human thing and remember the three times they were right, and forget about the six times that they were wrong. Most people certainly tend to keep score that way.

There are ways to get nearly perfect records in trading. But most of them are not available to the average, honest person.

Have a pleasant evening.

[Nov 11, 2013] Debt and deficit as shock therapy by Ismael Hossein-zadeh

Nov 6, 2013 | Asia Times

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing.

When Naomi Klein published her ground-breaking book The Shock Doctrine (2007), which compellingly demonstrated how neoliberal policy makers take advantage of overwhelming crisis times to privatize public property and carry out austerity programs, most economists and media pundits scoffed at her arguments as overstating her case. Real world economic developments have since strongly reinforced her views.

Using the unnerving 2008 financial crash, the ensuing long recession and the recurring specter of debt default, the financial oligarchy and their proxies in the governments of core capitalist countries have embarked on an unprecedented economic coup d'état against the people, the ravages of which include extensive privatization of the public sector, systematic application of neoliberal austerity economics and radical redistribution of resources from the bottom to the top. Despite the truly historical and paradigm-shifting importance of these ominous developments, their discussion remains altogether outside the discourse of mainstream economics.

The fact that neoliberal economists and politicians have been cheering these brutal assaults on social safety-net programs should not be surprising. What is regrettable, however, is the liberal/Keynesian economists' and politicians' glaring misdiagnosis of the plague of austerity economics: it is all the "right-wing" Republicans' or Tea Partiers' fault, we are told; the Obama administration and the Democratic Party establishment, including the labor bureaucracy, have no part or responsibility in the relentless drive to austerity economics and privatization of public property.

Keynesian and other liberal economists and politicians routinely blame the abandonment of the New Deal and/or Social-Democratic economics exclusively on Ronald Reagan's supply-side economics, on neoliberal ideology or on economists at the University of Chicago. Indeed, they characterize the 2008 financial collapse, the ensuing long recession and the recurring debt/budgetary turmoil on "bad" policies of "neoliberal capitalism," not on class policies of capitalism per se. [1]

Evidence shows, however, that the transition from Keynesian to neoliberal economics stems from much deeper roots or dynamics than pure ideology [2]; that neoliberal austerity policies are class, not "bad," policies [3]; that the transition started long before Reagan arrived in the White House; and that neoliberal austerity policies have been pursued as vigorously (though less openly and more stealthily) by the Democratic administrations of Bill Clinton and Barack Obama as their Republican counterparts. [4]

Indeed, it could be argued that, due to his uniquely misleading status or station in the socio-political structure of the United States, and equally unique Orwellian characteristics or personality, Obama has served the interests of the powerful financial oligarchy much better or more effectively than any Republican president could do, or has done - including Ronald Reagan. By the same token, he has more skillfully hoodwinked the public and harmed their interests, both in terms of economics and individual/constitutional rights, than any of his predecessors.

Ronald Reagan did not make any bones about the fact that he championed the cause of neoliberal supply-side economics. This meant that opponents of his economic agenda knew where he stood, and could craft their own strategies accordingly.

By contrast, Obama publicly portrays himself as a liberal opponent of neoliberal austerity policies (as he frequently bemoans the escalating economic inequality and occasionally sheds crocodile tears over the plight of the unemployed and economically hard-pressed), while in practice he is a major team player in the debt "crisis" game of charade, designed as a shock therapy scheme in the escalation of austerity economics. [5]

No president or major policy maker before Obama ever dared to touch the hitherto untouchable (and still self-financing) Social Security and Medicare trust funds. He was the first to dare to make these bedrock social programs subject to austerity cuts, as reflected, for example, in his proposed federal budget plan for fiscal year 2014, initially released in April 2013. Commenting on this unprecedented inclusion of entitlements in the social programs to be cut, Christian Science Monitor wrote (on April 9, 2013): "President Obama's new budget proposal ... is a sign that Washington's attitude toward entitlement reform is slowly shifting, with prospects for changes to Social Security and Medicare becoming increasingly likely."

Obama has since turned that "likelihood" of undermining Social Security and Medicare into reality. He did so by taking the first steps in turning the budget crisis that led to government shutdown in the first half of October into negotiations over entitlement cuts. In an interview on the second day of the shutdown (October 3rd), he called for eliminating "unnecessary" social programs and discussing cuts in "long-term entitlement spending". [6]

Five days later on October 5th, Obama repeated his support for cutting Social Security and Medicare in a press conference, reassuring congressional Republicans of his willingness to agree to these cuts (as well as to cuts in corporate tax rates from 35% to 28%) if the Republicans voted to increase the government's debt limit: "If anybody doubts my sincerity about that, I've put forward proposals in my budget to reform entitlement programs for the long haul and reform our tax code in a way that would ... lower rates for corporations". [7]

Only then, that is, only after Obama agreed to collaborate with the Republicans on ways to cut both the entitlements and corporate tax rates, the Republican budget negotiators agreed to the higher budget ceiling and the reopening of the government. The consensus bill that ended the government shutdown extends the automatic across-the-board "sequester" cuts that began last March into the current year. This means that "the budget negotiations in the coming weeks will take as their starting point the $1 trillion in cuts over the next eight years mandated by the sequestration process". [8]

And so, once again, the great compromiser gave in, and gave away - all at the expense of his (unquestioning) supporters.

To prepare the public for the long-awaited attack on Social Security, Medicare and other socially vital programs, the bipartisan ruling establishment has in recent years invented a very useful hobgoblin to scare the people into submission: occasional budget/debt crises and the specter or the actual pain of government shutdown. As Sheldon Richman recently pointed out:

"Wherever we look, there are hobgoblins. The latest is … DEFAULT. Oooooo.

Apparently the threats of international terror and China rising aren't enough to keep us alarmed and eager for the tether. These things do tend to wear thin with time. But good old default can be taken off the shelf every now and then. It works like a charm every time.

No, no, not default! Anything but default!". [9]

Economic policy makers in the White House and the Congress have invoked the debt/deficit hobgoblin at least three times in less than two years: the 2011 debt-ceiling panic, the 2012 "fiscal cliff" and, more recently, the 2013 debt-ceiling/government shutdown crisis - all designed to frighten the people into accepting the slashing of vital social programs. Interestingly, when Wall Street speculators needed trillions of dollars to be bailed out, or as the Fed routinely showers these gamblers with nearly interest-free money through the so-called quantitative easing, debt hobgoblins were/are nowhere to be seen!

The outcome of the latest (2013) "debt crisis management," which led to the 16-day government shutdown (October 1-16), confirmed the view that the "crisis" was essentially bogus. Following the pattern of the 2010, 2011 and 2012 budget/debt negotiations, the bipartisan policy makers kept the phony crisis alive by simply pushing its "resolution" several months back to early 2014. In other words, they did not bury the hobgoblin; they simply shelved it for a while to be taken off when it is needed to, once again, frighten the people into accepting additional austerity cuts - including Social Security and Medicare.

The outcome of the budget "crisis" also highlighted the fact that, behind the apparent bipartisan gridlock and mutual denunciations, there is a "fundamental consensus between these parties for destroying all of the social gains won by the working class over the course of the twentieth century". [10] To the extent there were disagreements, they were mainly over the tone, the temp, the magnitude, the tactics, and the means, not the end. At the heart of all the (largely contrived) bipartisan bickering was how best to escalate, justify or camouflage the brutal cuts in the vitally necessary social spending.

The left/liberal supporters of Obama, who bemoan his being "pressured" or "coerced" by the Tea Party Republicans into right-wing compromises, should look past his liberal/populist posturing. Evidence shows that, contrary to Barack Obama's claims, his presidential campaigns were heavily financed by the Wall Street financial titans and their influential lobbyists. Large Wall Street contributions began pouring into his campaign only after he was thoroughly vetted by powerful Wall Street interests, through rigorous Q & A sessions by the financial oligarchy, and was deemed to be their "ideal" candidate for presidency. [11]

Obama's unquestioning followers should also note that, to the extent that he is being "pressured" by his political opponents into compromises/concessions, he has no one to blame but himself: while the Republican Party systematically mobilizes its social base through offshoots like Tea Partiers, Obama tends to deceive, demobilize and disarm his base of supporters. Instead of mobilizing and encouraging his much wider base of supporters (whose more numerous voices could easily drown the shrill voices of Tea Partiers) to political action, he frequently pleads with them to "be patient," and "keep hope alive."

As Andre Damon and Barry Grey have keenly observed, "There was not a single mass organization that denounced the [government] shutdown or opposed it. The trade unions are completely allied with the Obama administration and support its policies of austerity and war". [12]

Obama's supporters also need to open their eyes to the fact that, as I have shown in an earlier essay, [13] Obama harbors ideological affinities that are more in tune with Ronald Reagan than with FDR. This is clearly revealed in his book, The Audacity of Hope, where he shows his disdain for

"...those who still champion the old time religion, defending every New Deal and Great Society program from Republican encroachment, achieving ratings of 100% from the liberal interest groups. But these efforts seem exhausted…bereft of energy and new ideas needed to address the changing circumstances of globalization". [14]

(Her own shortcomings aside, Hillary Clinton was right when, in her bid for the White House against Obama, she pointed out that Obama's economic philosophy was inspired largely by Reagan' supply-side economics. However, because the Wall Street and/or the ruling establishment had already decided that Obama was the preferred choice for the White House, the corporate media let Clinton's comment pass without dwelling much on the reasons behind it; which could readily be examined by simply browsing through his own book.)

The repeated claim that the entitlements are the main drag on the federal budget is false - for at least three reasons. To begin with, the assertion that the large number of retiring baby-boomers is a major culprit in budgetary shortfalls is bogus because while it is true that baby-boomers are retiring in larger than usual numbers they do not come from another planet; before retiring, they also worked and contributed to the entitlement trust fund in larger than usual numbers. This means that, over time, the outflow and inflow of baby-boomers' funds into the entitlement trust fund must necessarily even each other out.

Second, even assuming that this claim is valid, the "problem" can easily be fixed (for many years to come) by simply raising the ceiling of taxable income for Social Security from the current level of $113,700 to a slightly higher level, let's say, $140,000.

Third, the bipartisan policy makers' hue and cry about the alleged budget/debt crisis is also false because if it were true, they would not shy away from facing the real culprits for the crisis: the uncontrollable and escalating health care cost, the equally uncontrollable and escalating military/war/security cost, the massive transfer of private/Wall Street debt to public debt in response to the 2008 financial crash, and the considerable drop since the early 1980s in the revenue side of the government budget, which is the result of the drastic overhaul of the taxation system in favor of the wealthy.

A major scheme of the financial oligarchy and their bagmen in the government to substitute the New Deal with neoliberal economics has (since the early 1980s) been to deliberately create budget deficits in order to justify cuts in social spending. This sinister feat has often been accomplished through a combination of tax cuts for the wealthy and spending hikes for military/wars/security programs.

David Stockman, President Reagan's budget director and one of the main architects of his supply-side tax cuts, confirmed the Reagan administration's policy of simultaneously raising military spending and cutting taxes on the wealthy in order to force cuts in non-military public spending: "My aim had always been to force down the size of the domestic welfare state to the point where it could be adequately funded with the revenues after the tax cut". [15] That insidious policy of intentionally creating budget deficits in order to force neoliberal austerity cuts on vital social needs has continued to this day - under both Republican and Democratic administrations.

Although the bipartisan tactics of austerity cuts are subtle and obfuscating, they can be illustrated with the help of a few simple (hypothetical) numbers: first (and behind the scenes), the two sides agree on cutting non-military public spending by, let's say, $100 billion. To reach this goal, Republicans would ask for a $200 billion cut, for example.

The Obama administration/Democratic Party, pretending to represent the poor and working families, would vehemently object that this is too much ... and that all they can offer is $50 billion, again for example. Next, the Republican negotiators would come up with their own counter-offer of, let's say, $150 billion. Then come months of fake haggling and passionate speeches in defense of their positions ... until they meet eventually half way between $50 billion and $150 billion, which has been their hidden goal ($100 billion) from the beginning.

This is, of course, an overly simplified hypothetical example. But it captures, in broad outlines, the essence of the political game that the Republican and Democratic parties - increasingly both representing big finance/big business - play on the American people. All the while the duplicitous corporate media plays along with this political charade in order to confuse the public by creating the impression that there are no alternatives to austerity cuts, and that all the bipartisan public bickering over debt/budgetary issues vividly represents "democracy in action."

The atmosphere of panic and anxiety surrounding the debt/deficit negotiations is fabricated because the central claim behind the feigned crisis that "there is no money" for jobs, education, health care, Social Security, Medicare, housing, pensions and the like is a lie. Generous subsidies to major Wall Street players since the 2008 market crash has lifted financial markets to new highs, as evinced by the Dow Jones Industrial Average's new bubble above the 15000 mark.

The massive cuts in employment, wages and benefits, as well as in social spending, have resulted in an enormous transfer of economic resources from the bottom up. The wealthiest 1% of Americans now own more than 40% of the entire country's wealth; while the bottom 80% own only 7%. Likewise, the richest 1% now takes home 24% of the country's total income, compared to only 9% four decades ago. [16]

This means that there really is no need for the brutal austerity cuts as there really is no shortage of financial resources. The purported lack of resources is due to the fact that they are concentrated largely in the deep coffers of the financial oligarchy.

Ismael Hossein-zadeh is Professor Emeritus of Economics, Drake University, Des Moines, Iowa. He is the author of The Political Economy of U.S. Militarism (Palgrave-Macmillan 2007) and Soviet Non-capitalist Development: The Case of Nasser's Egypt (Praeger Publishers 1989). His latest book, Beyond Mainstream Explanations of the Financial Crisis: Parasitic Finance Capital, will be forthcoming from Routledge Books.

Jesse's Café Américain SP 500 and NDX Futures Daily Charts

Bernanke in Twitterland

he Twitter IPO looms over the market action as well as the real economy, and I have a sneaking hunch that the Street will support stocks until Twitter gets shoved out the door tomorrow, and perhaps for a few days after. As you have probably heard it is coming out on the higher side of $26 per share. Let's see how it does in the market.

I am not in stocks here, but am fighting an urge to get something going on the short side until we get a better idea if they can keep this pig in makeup for the year end ramp at least. Twitter may give us some insight.

This market is built on a foundation of meringue, supplied by those little elves at the Fed, who are pumping huge sums to Wall Street while Main Street languishes with little excess buying power and a floundering median wage.

While the Fed does not control fiscal policy, they have a huge amount of leverage as a primary bank regulator that they are not using well.

Have a pleasant evening.



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