Martin Huchinson on the System

"The current political-economic system is simply unsustainable; no economy can afford to pay for four giant zombie financial institutions, two substantial military adventures, a zombie-driven housing market, an exploding health-care bill and Goldman Sachs partners' lifestyle aspirations. ... Iconodule vested interests will oppose such a program with all their strength. But in the end, the iconoclasts will win--the [US] cannot economically afford for them to lose", Martin Hutchinson at Prudent Bear, 23 November 2009, link: http://www.prudentbear.com/index.php/component/content/article/33-BearLair/10311.

I agree. Lloyd Antoinette Blankfein, repent. Before it's too late.

Sliding Back to Gold

"So the world has bench-tested the Keynesian theory that gold is a barabrous relic, and found it wanting. ... There are three ways in which the world could move towards a gold standard without actually getting there. ... Second, the world's monetary authorities could start targeting the gold price as part of their monetary management, aiming to keep it within a certain range, thereby preventing excessive monetary expansion and dampening excessive exchange rate fluctuations. A 'hard money [Fed] chairman, for example, worried about the value of the dollar, could seek to keep the gold price between $900 and $1,000", Martin Hutchison (MH) at Prudent Bear, 7 December 2009, link:

http://www.prudentbear.com/index.php/thebearslairview?art_id=10318.

I first used MH's phrase "sliding back towards a Gold Standard" almost 30 years ago, suggesting MH's second alternative. However, $1,000 an ounce isn't high enough. See Mike Rozefff's comments about the ZDV of gold.

Why Save?

"In the recent unpleasantness, the [US] made some progress towards solving its biggest economic problem of recent years: the lack of US savings. Regrettably, in the latest figures, the beginnings of economic recovery have brought backsliding with the savings rate dropping back from 6% to 4.3%. Without more savings, as global liquidity declines, the [US] will quickly become a capital-starved economy, losing investment to capital surplus countries where savings are plentiful. The difficult questions are: what caused the savings decline and what can be done about it? ... The US savings rate began to decline in the 1970s. ... There appear at first glance to be three factors that may have affected the trend in savings rates: The first and most important is the return available to savings. ... The second reason why the savings rate may have declined is the revolution in consumer finance since the 1960s. ... The third reason, impossible to quantify, is the attitude to saving of the US population itself", Martin Hutchinson at Prudent Bear, 26 October 2009, link: http://www.prudentbear.com/index.php/thebearslairview?art_id=10302.

The savings rate fell because interest rates are too low. As long as Zimbabwe Ben can steal your savings to give banks to prop them up, why save? Further, your savings are subject to taxes on non-existent interest and capital gains. Among other things the tax code should change to encourage savings. What's hard to understand? Under the current fiat-money, post-1971 regime, interest is what Uncle Sam promises to pay you to steal your principal.

The Liquidity Bomb

Martin Hutchinson has a 5 October 2009 post at Prudent Bear which I agree with. Here's a link: http://www.prudentbear.com/index.php/thebearslairview?art_id=10295.

Hutchinson on Hyperinflation

Martin Hutchinson's (MH) 12 October 2009 post at Prudent Bear, link: http://www.prudentbear.com/index.php/thebearslairview?art_id=10296 is a must read. MH notes, "We have never experienced a global hyperinflation, in which money is unable to purchase goods, so it becomes worthless. ... Once articles start appearing in the Financial Times about investors choosing to buy physical commodities rather than futures, many more such investors will be drawn into this activity. ... It does not matter one whit whether investors demand physical gold rather than futures, because gold has only insignificant industrial uses and the stocks of gold available in 'inventories' such as Fort Knox are far more than sufficient to supply those uses for a decades if necessary". Gold is money. Not the stuff our counterfeiter in chief Zimbabwe Ben creates.

Martin Hutchinson on Capitalism

Martin Hutchinson (MH) has a 28 September 2009 post attacking: financial alchemy, economists, bad accounting, the Fed, ratings agencies, banks, AIG, Goldman Sachs, phony statistics and the bond markets. He writes heresy, "It would have been much better to allow Goldman Sachs and the other major counterparties to AIG credit default swaps to suffer the full losses, and then send some random collection of CDS dealers and maangers to jail for a couple of decades or so, as was done after the Drexel Burnham and Enron collapses". Off with MH's head. Here's a link: http://www.prudentbear.com/index.php/thebearslairview?art_id=10282. MH says it all.

Hutchinson on the Dollar and SDRs

Martin Hutchinson (MH) attacks China's notion SDRs should replace the dollar, 30 March 2009 at Prudent Bear, link: http://www.prudentbear.com/index.php/commentary/bearslair?art_id=10210. MH notes, "There is thus no good reason to believe that the dollar represents a sound store of value, the principal function of a reserve currency. ... Other major world currencies don't look any more solid than the dollar. ... In an ideal world, we would satisfy Zhou's requirements by a simple return to the Gold Standard, at a parity of perhaps $1,000 per ounce that was high enough not to be excessively deflationary. ... 2008's gold mine production of 2,407 tons, higher than in recent years because of high gold prices, was only 1.4% of the gold stock of 170,000 tons. If velocity were constant, that would not be sufficent to accommodate 1% population growth and desired global economic growth of 3% without an unpleasant annual deflation of 2.6%".

Why would "deflation" be unpleasant? It's gold holders being paid 2.6% annual 'interest" in terms of other goods. While agreeing with most of MH wrote, and seeing he referrred to the "stock-flow ratio", I conclude MH does not understand the gold standard. $1,000 an ounce is far too low for a stable parity price. See my 24 December 2007 post: http://skepticaltexascpa.blogspot.com/2007/12/fed-and-four-letter-word-gold.html.

Hutchinson on Failure

Martin Hutchinson (MH) has a 9 March 2009 post, which among other things, attacks TALF Here's a link: http://www.prudentbear.com/index.php/commentary/bearslair?art_id=10200. I agree with MH. Among other things, MH called the CDS business "wholly unsound". Amen. The Obama administration's program will only "divert $1 trillion into the most unproductive assets on the planet, the lowest quality mortgage, credit card and commerical real estate loans made during the crazed easy-money bubble of 2004-07". Precisely.

The Coming Depression

"In spite of Friday's alarming rise of 533,000 in unemployment, when you look at the near-term future, there still seems little chance that the current unpleasantness will turn into a rerun of the Great Depression [GD], or anything like it. ... However, in the long term, things are not so rosy; over the next 15 years, Americans and Europeans may suffer a worse fall in their living standards than during the [GD], albeit played out agonizingly slowly. ... In terms of living standards, real per capita personal consumption expenditures did not recover to their 1929 level until 1941, giving American consumers 12 years of living standards lower than they had become used to. ... In the long run, a major economic effect of economic globalization is to reduce the income gap between rich and poor countries, by bringing the latter fully into the nexus of the global economy. ... There is one snag, at least for rich countries such as the [US], Western Europe and Japan. If the world becomes more equal more quickly than it become richer, then living standards in rich countries must decline. If the world were suddenly to achieve equal income levels between countries, without a significant increase in output, U.S. living standards would fall by over three quarters. ... A second factor intensifying the decline in U.S. living standards is the appallingly low U.S. savings rate and the reduction in the U.S. capital pool that has resulted from over a decade of excessively low interest rates. ... The final factor depressing long-term living standards is the unwise policy response in the last few months to the credit crunch and the beginnings of global downturn. ... Contrary to popular and journalists' beliefs, these expenditures are not free; they must be borrowed. ... There are few policy responses that will do any good. Probably the most important is to raise the real return on risk-free savings as quickly as possible to around 5% to 6%, higher than the equilibrium rate, while eliminating the federal budget deficit. ... Before you dismiss this speculation as far-fetched, remember: everyone used to think house prices could not fall nationwide", Martin Hutchinson (MH), 9 December 2008 at http://www.prudentbear.com/index.php/commentary/bearslair?art_id=10160.

I don't dismiss MH's comments, I think his scenario is likely. See my related 4 July 2008 post on sovereign debt, http://skepticaltexascpa.blogspot.com/2008/07/sovereign-debt-risk.html.

Emerging Market Country Advice

"However, most emerging markets are not all that badly run. Indeed, given the abysmal performance of a number of Western governments in recent weeks, the case can be made that many emerging markets are well run by Western standards, avoiding obvious mistakes that are common in the West. Brazil for example is fighting inflation the right way, with a benchmark Selic short-term interest rate of 13.75%, double its rate of inflation. ... Traditionally, emerging markets have suffered from a higher cost of capital than the rich West. ... The [US] in particular and the West in general have gone on a spending binge that has left the majority of the world's foreign exchange reserves in the hands of Middle Eastern and Asian governments. ... That suggests that competently run emerging markets should regard this crisis as a temporary hiccup, not a reason to despair, and certainly not a reason to jettison wholesale an economic model that has worked generally well for them and to retreat into Third World autarky and socialism. ... In the long run, emerging markets' advantages of labor costs will still be there, and if they preserve the essentials of a free-market system they will have in their domestic economies much of the savings base they need to succeed. ... Conversely, the prospects of Western economies would appear dismal. With inadequate savings bases, they are going to be permanently capital-short in a world where capital is both scarce and more expensive. ... As for emerging markets themselves, it is now clear that the advice they have received from Western institutions such as the World Bank has been largely misguided, and ill-suited to a world in which the global stability that had been promised proved so ephemeral. ... For domestic and international reasons, emerging markets need to establish solid property rights. ... Interest rates need to be kept significantly above the rate of inflation to encourage saving and discourage borrowing-fueled consumption, banking systems must be protected from collapse, taxation of capital must be kept at a low level. ... Government spending must be tightly controlled at all times. ... If population growth is too rapid (above 1% per annum approximately) steps should be taken to reduce it. ... Rapid population growth is incompatible with increasing living standards, and hence should be sharply discouraged", Martin Hutchinson (MH) at http://www.atimes.com/, 28 October 2008.

Compare MH's program for emerging market countries to current US government policy.

A Graveyard for Capital

"The [Fed's] unexpected inter-meeting cut of 0.75% in the Federal Funds rate to 3.5% was accompanied by a sharp rally in the dollar bond market, as the 10-year Treasury bond yield dropped to 3.4%. With inflation well above 4% and rising, one can only ask why? ... A 3.6% return is wholly unacceptable in a currency suffering from 10% inflation; returns of 2% in yen, 4% in euros, 4.5% in sterling or even 13% in Brazilian real will appear more attractive to the savvy international trader. ... Since the problem will initially be one in inflation, it may be thought that [TIPS], indexed to inflation are an adequate solution. Unfortunately, they are not. For one thing their inflation index is subject to the 'hedonic pricing' distortion, whereby reported inflation is adjusted for imaginary 'hedonic' benfits and hence lags true inflation by close to 1% per annum. ... The arrival of the new Volker ... would cause a further bloodbath in the bond market. ... There are three underlying trends that suggest long term US Treasury bonds may be an even worse investment in the long term than in the short term ... First there is the social security system. ... Contrary to Washington belief, this problem will be exacerbated by a continued high immigration of younger, less skilled people. Since poorer people require more services and pay relatively less into the social security system than rich people, the actuarial deficit will worsen, and it will become clear that the young and foreign-born are paying relatively heavy taxes in order to support a large retired native-born cohort with most of whom they have no genetic, ethnic or cultural links. ... The second actuarial problem is Medicare. ... Finally, there is the problem ... of the migration of an increasing proportion of US jobs to the Third World and the consequent decline in US relative living standards and very likely in absolute living standards. ... The US is currently in the position of General Motors in about 1970. ... In summary, like General Motors in 1970, the [US] does not deserve its AAA rating and its obligations, particularly those denominated in the local 'Bernanke pesos' should be avoided", Martin Hutchinson (MH) at http://www.prudentbear.com/, 28 January 2008.

I agree with MH. Continued levels of immigration will lead the US to a sociological catastrophe. I borrowed Franz Pick's phrase for this piece's title.

The snare of stimulus

"Excessive savings was Keynes' bugbear; he believed that excessive saving had been Britain and the United States' principal problem in the late 1920s, so that only a demand-side kick could re-stimulate the economy. ... We now know that Keynes' remedy was basically wrong. ... However, even those who believe in Keynes can hardly suppose a Keynesian stimulus to be relevant now. Lack of consumer demand has not been the problem in the US economy since 1995, quite the opposite. ... At this point, the long term need is for a radical upward re-orientation of interest rates, to a level that provides savers with at least a 3% real return over and above the current inflation rate of nominally 4%. ... It would also reduce the excessive US investment in housing and financial services, both of which sectors are in the early stages of a very unpleaseant downsizing of their current bloated and carbuncular state. ... A major rise in interest rates would also have the useful side-effect of preventing a resurgence of inflation. ... Even by the heavily massaged numbers of the Bureau of Labor Statistics, US inflation is above 4% and likely to remain there. ...However, a major rise in interest rates we are not going to get, quite the opposite. Instead the Fed, seeking as ususal since 1995 to provide short-term palliatives to Wall Street at the expense of the long term health of the economy, clearly intends to cut the Federal Funds rate further at its meeting January 30th, probably by 0.50% to 3.75%. ... That will have one effect which may appear unattractive, but which to the short-term thinkers of the Fed is beginning to have a strange allure; it will cause much higher inflation. Not the wimpy 4-5% inflation from which we are currently suffering, but a genuine take-no-prisoners 10-15% inflation. ... House prices got too far ahead of incomes. ... It is a clever solution, first practised (largely accidentally) in Britain in the 1970s. ... However, in 1975 inflation ran at 25% and it remained well into double digits for the next five years. ... It would enrich homeowners and heavy borrowers, and impoverish pensioners, savers and renters, thus intensifying the Latin Americanization of the US economy", Martin Hutchinson (MH) at http://www.prudentbear.com/, 21 January 2008.

Stephen Cecchetti, please read this. I read John Maynard Keynes' (JMK) General Theory, 1936, and didn't realize what JMK was talking about until page 336 of his 365-page magnum opus when I realized JMK had taken old mercantilist fallacies and dressed them up with new terms. I don't believe JMK believed a word he wrote, but decided to give the US and UK governments a rationale to reduce real wages through inflation and money illusion.

I agree with MH and have long thought the Fed's "plan", which even Helicopter Ben does not understand, and will slide into, is to drive US inflation rates to 6-15% for a decade averaging 12%, with measured inflation at 4-6%, averaging 5%. After a decade of this, US prices will be 211% higher, with nominal inflation of 63%, greatly reducing Uncle Sam's real debt burden.

Let Them Eat Cake

"At first sight, the resemblances across 130 years may not seem obvious. ... This is the story of how an over-extended empire sought to cope with an external debt crisis by selling off revenue streams to foreign investors. The empire that suffered these setbacks in the 1870s was the Ottoman empire. Today it is the US. Yet we need to recognize that these 'capital injections' represent a transfer of the revenues from the US financial services industry into the hands of foreign governments. This is happening at a time when the gap between eastern and western incomes is narrowing at an unprecedented pace. ... It remains to be seen how quickly today's financial shift will be followed by a comparable geopolitical shift in favor of the new export and energy empires of the east. ... Although many people will be surprised by the figures, Americans have long complained that average incomes have been stagnant in their country", Niall Ferguson at http://www.ft.com/, 1 January 2008.

"Tata Motors' emergence as front-runner to buy Jaguar and land Rover from the ailing Fod brings one question uppermost to a commentator sitting at a wealthy Western desk: Precisely which economic sectors can be relied upon in the future to provide jobs for Westerners at wages higher than are obtainable in the Third World" ... Since the majority of location-dependent jobs in Western countries are low-skill it therefore follows that if governments wish to protect local living standards, they need to discourage low-skill immigration. Except in Japan, they have not been doing so; both in the EU and the United States low-skill immigration, frequently illegal immigration, has gotten completely out of control and is immiserating the working class. ... From the summary above, it is pretty clear that income levels in the West are converging with those in the more competently run emerging markets. The bad news is that in the years ahead this is likely to happen through an absolute decline in Western living standards. ... By 2030, it is possible that the median real income in the United States and Western Europe may be no more than 50-60% of its level today", Martin Hutchinson (MH) at http://www.prudentbear.com/, 7 January 2008.

I think the average American male's earnings have fallen 35% since 1973, putting me at odds with official US statistics.

I have been saying things like MH for about 25 years. MH's position has significant implications for our educational establishment, i.e., we don't need most of it. Bertolt Brecht wrote "The Solution". It says in part, "Would it not be easier In that case for the government To dissolve the people And elect another?" It seems that's what Uncle Sam is doing.

Helicopter Ben is Lost

"If Fed Chairman Ben Bernanke's original estimate of subprime loan losses of $50-100 billion had been anywhere close to accurate, there would have been no problem. ... The Fed's chosen solution, dropping interest rates and pumping more money into the system, did not address the real problem and was thus useless, as it has since proved. It has only postponed the denouement for a few months and stored up further trouble with inflation. ... If Level 3 assets can be valued only by reference to an internal valuation model, ... how do we know they are really worth anything close to what the model says. ... Since every incentive led bank mathematicans to devise models that maximized the reported value of the bank's holdings, and since little or no market existed by which those values could be checked, it is likely that today those assets' book values are highly overstated", Martin Hutchinson, at http://www.prudentbear.com/, 26 November.

"And now Ben Bernanke, as is promised by 'targeting inflation' and heralded by the spooky sound of ravenous wolves howling in the distance and getting closer and closer, is going to bury us in price inflation and destroy us all, but that is the only thing he can do, as there is literally nothing he can do, for if there was, someone else in all of history would have thought of it, and tried it, when their stupid experiments with fiat currencies destroyed them, and believe me when I tell you that they tried everything, and they all failed. ... 'Stephen Cecchetti, professor of international economics at Brandeis University, and a former research director at the New York Fed', ... said, 'Nothing leads me to suggest that there's an inflationary pass-through from dollar depreciation.' Hahahahha!," The Mogambo Guru at http://www.gold-eagle.com/, 27 November.

I agree. Helicopter Ben's raining money down on the banks did not address the problem: what are the bank's assets worth? The models will be revealed to be optimistic to say the least.

I read Cecchetti's piece at http://www.voxeu.org/, 26 November, and thought it preposterous. It was so preposterous, I didn't think it worthy of comment.

Why Financial Engineering Doesn't Work

Martin Hutchinson wrote a post with this title at http://www.prudentbear.com/, 5 November. He concludes, "Financial engineering's benefit to the global economy is questionable at best and the increases it has produced in the financial services sector's share of global output may have been mere sucessful rent seeking". I agree. Financial engineering only made money for the financial engineers and left behind problems for the rest of us to pay for. Unlike say, mechancial engineering, there are no fixed numbers in finance. There is no Planck's constant.