Thursday, August 20, 2009

China's Boom or Bust: the Paradox of Easy Money

The Chinese perpetual growth machine chugs along, leaving many commentators shaking their heads (The Coming Chinese Meltdown at PrudentBear), and some nodding in approval (such as The Secret of China's Economic Miracle by Ellen Brown.

According to my analysis, typical economists do not understand the benefits of the state controlled banking system (that China has and Ellen Brown recommends), but free money advocates like Ellen Brown do not understand the dangers of government control.

The benefit of state banking are clear and persuasive: control over credit, done for the public benefit, allows a remarkable immunity to the laws of finance that govern private banking systems. Bad loans piling up seems to be a huge problem, right? Not so much to the Chinese. When the bank is the government, just write them off, and start lending again.

The Chinese system is remarkably like the core action of my Jubilee People's Bailout, and is living proof that it works. Instead of letting bad debts and tight money constrict the real economy, just write the debts off and supply more money. Viola, economic growth continues! It really is that easy. The Chinese are proving it right now in the sheer incredible volume of loans that the government is forcing, literally requiring by law, banks to issue into the productive economy. Hence, Chinese growth continues even as the rest of the world contracts, despite supposed Chinese reliance on exports.

The problem with this permanently state-run system is the issue of malinvestments and waste. The free market is necessary because it gives real signals about available resources. If the government continually pumps the system full of money, those profit and loss signals are lost. In a free economy, the business cycle is a natural response to too much malinvestment, as prices collapse, companies fold, and everyone tightens their belt and retools into profitable areas. If government floods the economy with cash at every sight of problems, malinvestments are never cleared out, meaning true and sustainable profitability is never reached.

With its tight controls on capital flow and currency trading, along with state planning and bailouts, the Chinese economy today is much like the old Soviet economy. The big difference is that the Soviet block was firewalled off from the economy of the free world. China today is like a parasite on the free world's economy, sucking in the world's resources in the effort to delay the day of reckoning that eventually befell the Soviet system. The problem for us is, this time, we are not firewalled off, so our markets and way of life have become hostage to Chinese malinvestment and economic reality-denial.

Monday, August 10, 2009

GDP as Mass Mind Control

The role of GDP as mind control was recently highlighted by the market’s reaction to the release of the second quarter numbers. Traders cheered and markets bumped up, as the fall was revealed to be only 1.0%, contrasted with the fall of 6.4% for the first quarter. Commentators are already calling the end of the recession, predicting a positive GDP for quarter three.

As the People’s Economist, it is my job to examine and explain the reality behind the mass of abstract economic shibboleths, and today I will explain the common sense reality behind GPD numbers.

The definition of our GDP is actually really simple: the sum total, measured in dollars at market prices, of all good and services produced on US soil.

[note: Some of you old-timers may remember hearing announcements about GNP, but that was discarded in favor of GDP at the start of the era of globalization in the 1980s. Why GDP is the preferred measuring tool for the pro-globalists include such gems as the fact that GDP includes illegal immigrants and foreign factories in America, whereas GNP would exclude them.]

The weird fact is, GDP can be constantly rising while we all get poorer and more miserable. For example, the expansion of police forces is paid in dollars, as are the salaries of correctional officers. So, is the arrest and imprisonment of masses of people a good thing? It contributes to GDP!

Obviously, since GDP is the sum of all cash transactions, GDP is highly dependent on inflationary money creation. So, it is basically axiomatic that if the government stimulates the economy with lots of printed-money bailouts, GDP will go up.

The central role of government expenditures on GDP showed up in a big way in the 2nd quarter numbers just released. To wit: “Real federal government consumption expenditures and gross investment increased 10.9% in the second quarter, in contrast to a decrease of 4.3% in the first. National defense increased 13.3%, in contrast to a decrease of 5.1%. Nondefense increased 6.0%, in contrast to a decrease of 2.5%. Real state and local government consumption expenditures and gross investment increased 2.4%, in contrast to a decrease of 1.5%.” So, all this government spending was skyrocketing while personal consumption and investment was still plummeting: “negative contributions from nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment, private inventory investment, and exports.” So, government spending helps GDP, but does it really help our economy?
Now, Chris over at Casey Research [here], expressed the traditional libertarian understanding of the matter, which is that all government spending is inferior: “You see, GDP records the dollar amount of goods and services produced in the economy during a given period. But it equates government spending with private spending. And it ignores the wealth and potential growth destroyed by taxation.”

Chris is definitely correct that government spending out of taxation is almost always an economic loser. At best, the government adds a middle-man layer of expense, at worst, government is sponsoring complete malinvestment. As a general rule, there is no doubt, Chris’ instincts are correct: government spending is worse than private spending for creating wealth. Government spending primarily creates paychecks for government workers and other economic parasites.

However, Chris’ analysis is inappropriate in this case, because government is not spending out of taxation. In fact, the government is spending out of debt, which complicates the analysis. Spending out of debt means that government is simply creating money and spending it into the economy. Thus, it avoids the inefficiency problem that accompanies the diversion of tax money (although it does perpetuate malinvestment).

Regarding stimulus money created by government, the main question is, what is it used for? Money used as capital investment could prepare the economy for future growth. But money used for current welfare simply delays the day of reckoning. Money used for make-work employment also simply delays the day of reckoning.

Money used to fund welfare and make-work has additional problems because it is climbing up an economic hill, fighting economic gravity, so to speak.
For one, it encourages and perpetuates malinvestment. Wealth-destroying activities can be sustained indefinitely as long as money continues to flow into them. That is what malinvestment is by definition: a money losing activity. In the normal course of events, malinvestments get shut down, but government money can keep them going indefinitely, transferring the negative cost to society as a whole.

The second reason stimulus is fighting economic gravity is because it is financed by debt. Future debt repayment will suck economic juice out of future recovery. Thus, welfare and make-work stimulus makes the eventual day of reckoning worse, by adding the weight of debt to future economic activity, which will have to snuff out malinvestment regardless, but may snuff out marginally profitable activities if the debt load is too heavy.

A third reason stimulus is fighting an uphill battle is its inflationary effects. Newly created dollars decrease the value of existing dollars. This temporarily privileges government economic actions, but undermines everything else.
Thus, in order to be economically justified, today’s stimulus can’t be used just to cover current costs. Stimulus has to create sustainable economic growth, strong enough to overcome the debt payment drag and its own inflationary effects.

We can all see that today’s government stimulus is NOT meeting the criteria of targeting economic growth. In fact, stimulus money is mainly being used to plug budget gaps in the government and banking sectors. It is exactly analogous to using a credit card to pay your monthly bills. Eventually, unless structural changes are made, the bill will come due, and you have not increased your income, but only added to your debt.

Any dollar spending is good for GDP. In the real world, pumping money into unsustainable money-losing malinvestments is a bad thing, but it makes GDP bigger! GDP hides these fantasy gains, making them look like a positive thing. GPD numbers also directly reward inflationary debt spending.

Its all a form of mass mind control, so that our government/economic leaders can proclaim the economy has turned around. In reality, we are all poorer as malinvestments continue and our purchasing power is undermined, but GDP hides the spreading poverty.

Many alternative-oriented thinkers have attempted to calculate alternatives to GDP which take account of hidden costs, but there are only two real, non-falsifiable, and non-manipulatable statistics that speak to our rising or falling standard of living: average time off and retirement age. Less time off and later retirement ages mean we are getting poorer, no matter what other statistical garbage is invented.

A truly advancing economy means that we have to work less, and can quit working sooner. Anything else is strictly a statistical mind control technique like GDP.

The collapse of the one-earner family, and the evaporation of pension/retirement benefits, are testimony to our increasing poverty as a people. It is a preventable tragedy that money-based illusions like GDP keep people from recognizing the negative consequences of our economic policies.

Friday, August 7, 2009

Storm Clouds Gather as Fed Secretly Monetizes Debt

Scary stuff follows. Keep in mind, the only thing propping up national GDP, and the financial system as we know it, is the Fed monetizing the debt.

Well now we know what happened: The Fed pretty clearly pre-arranged, either explicitly or by "suggestion", that the Primary Dealers take up the auction with the promise that The Fed would immediately monetize half what the Primary Dealer's took!
Folks, this is beyond bad - it is pernicious and outrageous conduct by The Federal Reserve in conspiracy with the Primary Dealers, both of which are now desperately trying to prop up the US Government Bond Market through subterfuge rather than just buying up the bond issue from Treasury when originally put to the market!
If you think the economy and credit markets are "on the mend" why would The Fed do something like this? It would not be necessary unless The Fed was told (by those very same Primary Dealers) that they were going to be unable or unwilling to take down any more Treasury Debt.
Folks, let me be clear: The United States HAS OFFICIALLY HIT THE TREASURY DEBT WALL and The Fed and Treasury are engaged in subterfuge and conspiracy in an attempt to hide this from the market.
There is no other explanation for what just happened.
When it sinks in to the market's consciousness - we had two failed Treasury Auctions last week, both 5 and 7 year, yet we intend to try to borrow ANOTHER $400 billion next quarter and nearly $100 billion this coming week - the consequences could be extremely severe."

Tuesday, August 4, 2009

Excess Reserves, the Federal Deficit and Fed Manipulation

Amazing statistic: excess reserves in our banking system are up to $744 billion. This is from an average of $1.7 billion from 2002-2007. That is an increase of 43,645 percent! Excess reserves are defined as cash kept by banks on deposit with the Fed, above the minimum reserve requirements.

So, there is a ton of money sloshing around in our banking system. Where did the excess reserves come from? An increase in the personal savings rate, combined with all the federal stimulus money given to banks.

But the banks aren't putting it out in loans! What are they doing with it? Investing in paper securities, esp. government bonds. “Government financing needs are extraordinary right now,” said Tony Crescenzi of Pacific Investment Management Co., which oversees the world’s biggest bond fund. “At some point banks will shift from investing in securities toward making loans, but we haven’t seen that yet.” [quote from Bloomberg here]

Do you see the circularity in this? Banks are bailed out by the Fed. The banks then use that money to purchase government debt. You increase your savings rate, which the banks then use to fund the expansion of the federal deficit. Federal spending is sucking in capital.

Meanwhile, our economy is continuing to grind down from deflation. Commercial and industrial loan growth is decreasing at an anual rate of 4.5%, mirroring the collapse in economic output. Consumer prices fell 1.4% in June from a year earlier, the biggest drop since 1950.

And here is the Fed's role in this scam: the steepness of the yield curve, or the difference between short- and long-term rates, is giving banks incentive to borrow for almost nothing in the overnight lending markets and invest the proceeds in Treasuries.

Keep in mind, while the long-term rate is somewhat market driven, the Fed directly controls the short term rate. In other words, the Fed is intentionally manufacturing the financial flow into government debt.

Listen to this quote from William Dudley, the president of the New York Federal Reserve Bank: a recovery “will be considerably slower than usual,” and “credit availability will be constrained for some time to come.”

Ok, explain me this: with a massive amount of excess cash sitting in bank vaults, why is credit availability constrained???

Do you see what is going on here? Banks are simply hoarding the cash, watching the real economy collapse in a deflation, as they stay liquid and highly profitable by recycling government debt.

Banks love the guaranteed results of government debt during an economic collapse when real investments are liquidating. Cash is king during a deflation, so banks want to be as liquid as possible, to be able to scoop up cheap assets when the markets bottom out. So they are hoarding cash! It is that simple.

The Fed, the federal government, and the banks in general, are sucking the lifeblood out of the real economy, engineering an economic collapse, while guaranteeing banking profits through government debt which is paid by the citizens. The citizens' real economy is royally screwed, and the citizens get to pay for the destruction.

At this point, I am forced to agree with Obama's racist pastor Jeremiah Wright: "God damn America!" This is the devil's work, nothing less.