Dark Skinny

Like many others, I’ve read much on the issue of the current US financial crisis, and what has come out of all this effort is that I am amazed at all the tilted versions of the economic truth as well as to its cause and remedy which arise from both the media as well as from the America’s well-practiced government spinmeisters. There is the conservative view, the liberal side, the libertarian voice and the much feared socialist view. All stupid labels because good, well-practiced economics is - if you think about it - never political in its purpose or execution. All these “labels” only serve to trigger and play on the fears of the ordinary US citizen, to habitually force US citizens into “believing” the government or media spin as honest and true, but whose only real and exacting purpose has been to perpetuate popular self-image and therefore to steer and fool public opinion onside, whose end-purpose serves only to prompt yet another slithering and detestable shadow agenda. Bush Jnr is an overt master of this type of plebescitary and so-called “patriotic” government service or behaviour. But I wont waste time anymore talking about about an economic lame duck in this piece.

In its own perpetuation and disregarding which political “side” you are on, perhaps economic theory is the criminal here. In a quote by Ludwig von Mises of the Austrian School of Economics, here is what he had to say about politics and all those -isms:

“We can quantify the deaths caused by both communism and fascism, but we will never know how many deaths have been the result of capitalism; of nothing more noble than a rich man wanting to be even richer, and sacrificing the health and lives of millions of workers to achieve this. Don’t even try to count how many people capitalism has killed, because not only will you not know where to begin, but also it will never end.”

Notice that this quote is completely apolitical and self-evident - since every political stance - left wing, right wing, democracy and even financial capitalism - is accommodated within its single, critical sweep.  You cannot brand this statement  as  socialist, conservative, liberal etc. because it is so annoyingly all inclusive. Instead, it highlights the pernicious fact that not only politics but economics can easily be governed and ruled by power and greed (in whatever political overcoat) which are not economic or political entities - but human traits. This is the his ultimate message.

I’ve just finished reading “Crashproof - How to Profit from the Coming Economic Collapse” by Peter Schiff, and I was fairly stunned with the accuracy of its predictive content (written in 2006) and particularly the simplicity with which he explains macroeconimics, world markets and the US economy. This book is well worth a read. Here is an extract and a parable which fairly accurately describes how both Consumerism and Debt are most definitely finite and, in the end, a bad economic habit:

A Tale of Two Farmers
Farmer Chang grows only oranges. Farmer Jones grows only apples. Each grows only the fruit he produces most efficiently, trading his surplus for the fruit grown by the other. Both farmers benefit from comparative advantage and free trade. The sole reason that Farmer Chang “exports” oranges is so that he can afford to “import” apples, and vice versa. Suppose that one year a flood wipes out Farmer Jones’ apple crop. Not having any fruit to trade, but hungry nevertheless, he proposes to trade apple IOUs for Farmer Chang’s oranges. Since Farmer Chang cannot eat all the oranges he grows anyway, and since Farmer Jones’ IOUs will pay 10 percent interest (in extra apples, of course), he accepts. Farmer Chang accepts Farmer Jones’ offer only because of the apples that Farmer Jones’ IOUs promise to pay. By themselves, the IOUs have no intrinsic value. Farmer Chang cannot eat them. It is the promise to pay additional apples that gives the IOUs their value. When Farmer Jones issues his apple IOUs in exchange for real oranges, he does not actually pay for the oranges. Payment will not really be made until the following year when Farmer Jones redeems his notes by giving Farmer Chang all the apples his IOUs obligate him to pay. Only then can the notes be retired and the transaction be completed. Now suppose that the following year Farmer Jones’ crop is again destroyed, this time by a hurricane. He and Farmer Chang once again make the same deal, with Farmer Jones getting more of Farmer Chang’s oranges, and Farmer Chang accepting more of Farmer Jones’ IOUs. Further suppose that similar natural disasters continue to besiege Farmer Jones for several more years, until it finally dawns on him that he is eating pretty well, without actually farming. He therefore decides to turn his apple orchard into a golf course and simply play golf all day while enjoying farmer Chang’s oranges. In other words, Farmer Jones now operates as a service economy. Farmer Chang, by contrast, is so busy growing all those oranges that he never gets a chance to play Farmer Jones’ course. In fact, he has been accepting Farmer Jones’ IOUs for so long that he no longer remembers his original reason for doing so. He now counts his wealth based solely on his accumulation of Farmer Jones’ IOUs. Farmer Jones actually enjoys such a good reputation within the farming community that Farmer Chang is able to trade some of Farmer Jones’ IOUs for goods and services provided by other farmers and merchants. However, as a result of Farmer Jones’ good reputation, no one notices that his apple orchard has been turned into a golf course. His IOUs are now worthless since Farmer Jones no longer possesses the ability to redeem them with actual apples. Some might argue that the entire community now depends on Farmer Jones and his worthless IOUs and that Farmer Chang and the others will simply accept them indefinitely to avoid acknowledging the reality of their folly. Of course, were these revelations to occur, any unfortunate holders of Farmer Jones’ IOUs would officially be forced to realize their losses. However, their true financial situations would improve, as any further accumulation of worthless IOUs would end. As for Farmer Chang, he would once again, literally, enjoy all the fruits of his labor. The real loser, of course, would be Farmer Jones, for without a viable apple orchard or the ability to buy oranges on credit, he would starve. It would take years to transform his golf course back into an orchard, regain his lost knowledge of farming, and replace his obsolete and dilapidated farming equipment (provided he hadn’t already traded it in for golf carts and titanium clubs). In the end, Farmer Jones’ only alternative might be to sell his golf course to Farmer Chang and take a job picking fruit in his orange grove.

Currently, there is much worry over the US auto industry. There is, perhaps, a good pattern and a useful parallel here. The UK auto industry died over twenty years ago because of poor management strategy, unions that were too strong and expensive, which led to poor quality standards, lagging research and uncompetitiveness. Sound familiar ? So the British government let the industry change itself and allowed foreign takeovers and company deaths. After all, in an honest  free market - as supported by both the Keynesian and Austrian Schools - only the strong  and successful should be allowed to survive. The same should be allowed to happen to the failing US auto industry. If this industry is propped up - even with the Chinese and Indian  auto markets rising - the US taxpayer will pay through the nose for this mistake. It’s purely a case of do you save a non-competitive and incompetent industry that is trying its best to die - just for the sake of maintaining auto-workers jobs ? And if this industry is supported, what will be the long term effects on an already financially strained and cracked US economy ? Peter Schiff convincingly extends these reasons in his recent article The Truth About Bailouts.

In terms of the American economy or any other national world economy for that matter, I always try to take it down to the Home Economics level. Nice and simple. The US currently has a National Debt of over $10.5 trillion and its National Debt is about five times its reported GDP. So just compare this to  a parable. Say you have a spouse, a family of two kids and a house. Now suppose the parents of the family earn a certain salary we will call X dollars. But both parents have combined outstanding monthly debts worth 5 times their earnings. But they never payoff this debt until, eventually - because of the climbing interest - both parents aren’t even capable of paying the interest anymore and bankruptcy ensues. I also realize that perhaps this parallel is a little unfair. After all, the US government can always sell its debt. As well,  the Fed can just switch on its printing presses to create some more liquidity. Forgive my assumptions here, obviously Home Economics doesn’t include the ability to sell your debt on the never-never and certainly would never include creating your own counterfeit money at home either. In individual terms, this counterfeit practice would correctly be described as immoral and criminal, whereas in terms of the Fed - this same counterfeit  activity would quietly be described as a “good and useful  banking mechanism”.

There are also many whose stance is rigidly to maintain the economic status quo, trying desperately and hopefully to cling on to this current order, such that they are able to continue  their wonderful debt-based lifestyles. But a national economy doesn’t really care about lifestyles or wishes or even politics, this beast will simply ignore all of us and just react to the economy and markets, which will either move back towards equilibrium and stability or - much more likely - towards chaos. Wishing will not make it go away ….

…And many will have to stop hiding and become a little more honest and, perhaps, a little less greedy - forced, in the end, to come out from behind the hypocrisy of That Bush, and back into the harsh glaring reality of realized unsustainable economics.

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So, as we breath a small sigh of relief and trust,  the bail-out remedy has been dissolved into the financial institutions — still fizzing –  and we wait for its effect. My blind and shaky faith in both Paulson’s and Bernanke’s economic capabilities reminds me of the Marx Brother’s film Monkey Business, wherein  Groucho quips, “Sure I’m a doctor, where’s the horse ?”.

The secretive, adhoc and shadow-agenda-tilted remedies of these two “government employees” does not stir any faith from my bowels whatsoever. Their continued verbal flatulence - telling us nothing really - makes me wonder whether the coming Depression is, indeed, stoppable - or is it like those multitude of assured and very expensive allopathic cancer “cures”, where it is so difficult to determine whether the poor and trusting cancer patient was - in the end - killed by the cancer or the vicious “cure”. Meanwhile, the advising doctors and drugs companies get fatter and richer. I’m sure even Hippocrates himself would shudder with disgust and horror at this sick ruse…

First Paulson. His background and pure essence is Wall Street. He was an Ivy Leaguer, East coast, and was a star wrestler and footballer at college.  He has a B. A. in English from Dartmouth College. Disappointingly, I can’t find any learned references to Economics within his education at all. Paulson began his work in government, moving up to work as assistant secretary to Jon Ehrlichman in the Nixon administration from 1972 - 73. From here he joined Goldman Sachs, eventually succeeding Jon Corzine to become CEO in 1998. In Wikipedia his achievements may be further summed up:

“His net worth has been estimated at over US$700 million.^[9] Paulson has personally built close relations with China during his career. In July 2008 it was reported by The Daily Telegraph that: “Treasury Secretary Hank Paulson has intimate relations with the Chinese elite, dating from his days at Goldman Sachs when he visited the country more than 70 times.”"

Just before the bailout vote in the senate, Goldman Sachs (together with other major financial institutions) contributed significant funds to both McCain and Obama as well as to other major players including Senator Dodd, Head of the Senate Banking Committee. Perhaps they did this to assure safe passage of the Bailout Bill through the Senate ? See it here :

Here is evidence of who Paulson really works for :

[youtube:http://www.youtube.com/v/BEumrdHOq0w]

Evidence of Political Manipulation by Goldman Sachs:

“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve System. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

Here is a fairly simple description of how - by the wondrous banking mechanism known as “Fractional Reserve Lending” - $700 Billion(The Paulson Plan) turns into $70 Trillion by a simple wave of the Fed’s magic wand.

Fractional Reserve Lending(FRL) is used by all banks these days - but usually with strict discretion. This is how banks make so much money. However, The US Treasury and particularly The Fed and its printing presses continually over-uses this banking mechanism to the extreme. The Fed can do this because they keep the interest rates low artificially. It’s quite simple and works like this - Say China wants to buy $1 million of US debt in the form of Bonds, T-Bills etc. So the Treasury issues the T-Bills via the Fed. The Fed gets the Chinese payment and is then allowed by US banking law - and the mechanism of fractional reserve lending -  to generate 9 X $1 million out of thin air via the use of their over-worked printing presses. The money generated from the T-Bills and T-Notes is supposed to be used to pay back the massive US Fiscal Debt. Nope, doesn’t happen. Instead the now $10 million is lent out at artificially low rates to all the US banks and financial institutions - and when these banks get their share, they can also multiply it a further ten times using the same FRL mechanism - for personal and business loans to the public at much higher lending rates.

So now let’s now talk about the $700 billion Bail-Out. The minute The Fed gets that $700 Billion, it then - with staunch help from their printing presses and their magic wand (FRL) - gets multiplied by 10 and becomes $7 Trillion. Ah, but then when the Fed gives out this money as a low interest “loan”, the receiving financial institutions can also multiply this by 10 again using FRL - so the final Bail-Out will suddenly become $70 Trillion dollars. Hey Presto !! Easy credit isn’t dead is it ?

To give you an idea of how big the $70 Trillion is - The current unmanageable US fiscal debt is only about $60 Trillion now.

Oh…and The Fed charges the government about 2.2 cents on the dollar to produce these greenbacks - so The Fed makes a clear profit (since The Fed itself pays not one cent in govt  tax) off the government and therefore the taxpayer of about $13.9 Billion dollars for creating all these federal notes off the taxpayers own money !! It’s almost laughable isn’t it ? Almost.

And so what will the effect be through the inevitable inflation on the ordinary Mainstreet citizen when the US markets and economy is suddenly flooded with $70 trillion ? Yet another huge “inflation tax” on its people ? And Wall Street is saved ?

It’s a Mainstreet massacre.

I quit.