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    Daily Digest – September 26

    by Davos

    Saturday, September 26, 2009, 1:38 PM

Hello all,

After 10 months of doing this daily, without a break or a day off, I’m experiencing economic burn out; my symptoms are exhaustion, terseness, and grumpiness.  I need to prioritize my world a bit.  Mostly I want to begin the Zero-Carbon Car conversion of our 10-year old Subaru (she has 150k miles on her and one very tired engine). Marsh has some painting for us to do in the house we built together.

It has truly been a pleasure to contribute to this fine community that Chris has created. I often wish there were a Martenson Island as opposed to a Martenson Cyberblog.

I landed on Chris’s site over a year ago from a link to the environmental chapters of the “Crash Course,” which I received in an email from Buffett’s original investor.  It was followed by an email from an ex-governor who also spoke highly of CM’s work on the environment.

The Crash Course was, for me, like a key to the stereogram: putting the picture of the economy hidden below the picture painted by the media into crisp focus. Most of all it explained and then underscored the 3 E’s.

Wednesday, September 30th will be my last day manning the Daily Digest.  I offer today’s DD as a “Best Of” from my spreadsheet of almost 5,000 posts.  At the bottom are my sources for all the blogs I follow.  The mainstream sites on my RSS reader are so I can see what the herd is being fed.

Take care,
Davos

  • Grayson: Has the Fed Ever Tried to Manipulate the Stock Market? (AMAZING Video, H/T JAG)
  • Gold and Economic Freedom
  • 60 Minutes (CBS) Wave 2 AltA’s and Option Arms (Video)
  • 19 Million Vacant Homes
  • Real Estate 1890-2009 (Chart)
  • The Shallowest Generation
  • Naked Short Selling (Video)
  • Soros: Period of wealth destruction
  • 7 Stages of a Bubble
  • Minsky Ponzi Credit
  • Central Bank of Zimbabwe, Quantitative Easing of Zimbabwe, the United Sates and the UK
  • US Debt Clock
  • iGoogle RSS Reader of sites I visit daily

Economy

Grayson: Has the Fed Ever Tried to Manipulate the Stock Market? (AMAZING Video, H/T JAG)

[video:http://www.youtube.com/watch?v=mXmNpdYpfnk]

Gold and Economic Freedom

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (“paper reserves”) could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain’s abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed “a mixed gold standard”; yet it is gold that took the blame.) But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Page 153 of the book “I.O.U.S.A.” Greenspan autographed that original article for Congressman Ron Paul, Md and told Dr. Paul that he still believes in it. Irrational Hypocrisy.

60 Minutes (CBS) Wave 2 AltA’s and Option Arms (Video)

19 Million Vacant Homes

Feb. 3 (Bloomberg) — A record 19 million U.S. homes stood empty at the end of 2008 and homeownership fell to an eight-year low as banks seized homes faster than they could sell them.

The number of vacant homes climbed 6.7 percent in the fourth quarter from the same period a year ago, the U.S. Census Bureau said in a report today. The share of empty homes that are for sale rose to 2.9 percent, the most in data that goes back to 1956. The homeownership rate fell to 67.5 percent, matching the rate in the first quarter of 2001.

The worst U.S. housing slump since the Great Depression is deepening as foreclosures drain value from neighboring homes and make it more likely owners will walk away from properties worth less than their mortgages. About a third of owners whose home values drop 20 percent or more below their loan principal will “hand the keys back to the bank,” said Norm Miller, director of real estate programs for the School of Business Administration at the University of San Diego.

The Shallowest Generation

What “essentials” do the Boomers invest all this borrowed money in every year? The U.S. Census bureau provides the answers:

  • $200 billion on furniture, appliances ($1,900 per household annually)
  • $400 billion on vehicle purchases ($3,800 per household annually)
  • $425 billion at restaurants ($4,000 per household annually)
  • $9 billion at Starbucks (SBUX) ($85 per household annually)
  • $250 billion on clothing ($2,400 per household annually)
  • $100 billion on electronics ($950 per household annually)
  • $60 billion on lottery tickets ($600 per household annually)
  • $100 billion at gambling casinos ($950 per household annually)
  • $60 billion on alcohol ($600 per household annually)
  • $40 billion on smoking ($400 per household annually)
  • $32 billion on spectator sports ($300 per household annually)
  • $150 billion on entertainment ($1,400 per household annually)
  • $100 billion on education ($950 per household annually)
  • $300 billion to charity ($2,900 per household annually)

The priorities of our Boomer led society are clearly born out in the above figures. We spend more eating out than we give to charity. We spend as much on big screen TVs and stereos as we do on education. This may explain why 37 million (12.5%) of all Americans live in poverty and our high school students trail the students of 25 other countries (including Latvia) in science and math knowledge. Our school system processes many more clueless morons who don’t know the candidates for President, versus intelligent, thoughtful, hard working, driven young people. The $160 billion spent on gambling is indicative of the get rich quick without hard work attitude of the Boomer generation. Even worse, households with income under $13,000 spend, on average, $645 a year on lottery tickets, about 9 percent of all their income. Our government feeds this addiction by siphoning off billions in taxes from these gambling revenues to redistribute as they see fit.

Central Bank of Zimbabwe, Quantitative Easing of Zimbabwe, the United Sates and the UK

1.15

As Monetary Authorities, we have been humbled and have
taken heart in the realization that some leading Central
9 Banks, including those in the USA and the UK, are now not
just talking of, but also actually implementing flexible and
pragmatic central bank support programmes where these are
deemed necessary in their National interests.

1.16

That is precisely the path that we began over 4 years ago
in pursuit of our own national interest and we have not
wavered on that critical path despite the untold
misunderstanding, vilification and demonization we have
endured from across the political divide.

1.17

Yet there are telling examples of the path we have taken from
key economies around the world. For instance, when the
USA economy was recently confronted by the devastating
effects of Hurricanes Katrina and Rita, as well as the Iraq
war, their Central Bank stepped in and injected life-boat
schemes in the form of billions of dollars that were printed
and pumped into the American economy.

Naked Short Selling (Video)

Soros: Period of wealth destruction

GEORGE Soros, billionaire, philanthropist and hedge fund legend, has characterised today’s situation in global markets as the most severe since the Great Depression.

Mr Soros said global financial markets were in a period of rapid, massive de-leveraging that would fuel volatility.

“We are in a period of financial wealth destruction … and now we have de-leveraging,” he said.

7 Stages of a Bubble

Stage One – Displacement

Every financial crisis starts with a disturbance. It might be the invention of a new technology, such as the internet. It could be a shift in economic policy. For example, interest rates might be reduced unexpectedly. Whatever it is, the world changes for one sector of the economy. People see the sector differently.

Stage Two – Prices start to increase

 Following the displacement, prices in the displaced sector start to rise. Initially, the price increase is barely noticed. Usually, these higher prices reflect some underlying improvement in fundamentals. As the price increases gain momentum, people start to notice.

Stage three – Easy Credit

Increasing prices are not enough for a bubble. Every financial crisis needs rocket fuel and there is only one thing that this rocket burns – cheap credit. Without it, there can be no speculation. Without it, the consequences of the displacement peter out and the sector returns to normal.When a bubble starts, the market is invaded by outsiders. Without cheap credit, the outsiders can’t join in.

Cheap credit is the entrance ticket for outsiders. For example, gas prices have risen sharply in recent years. However, banks aren’t giving out loans so that people can store gas in their garages in the hope that the price will double in three months. The banks, however, are prepared to give loans to people with poor credit to hold condos in the hope that they can be quickly flipped.

The rise in easy credit is also often associated with financial innovation. Often, a new type of financial instrument is developed that miss-prices risk. Indeed, easy credit and financial innovation is a dangerous cocktail. The South-Sea Bubble started life as new-fangled legal innovation called the limited liability joint stock company. In 1929, stock prices were propelled into the stratosphere with the help of margin calls. Housing prices today accelerated as interest-only mortgages emerged as a viable means for financing overpriced real estate purchases.

Stage Four – Over-trading

As the effects of easy credit kicks in, the market starts to overtrade. Overtrading stimulates volumes and shortages emerge. Prices start to accelerate, and easy profits are made. More outsiders are attracted, and prices run out of control. Accelerating prices attract the foolish, greedy and the desperate to enter the market. As a fire needs more fuel, a bubble needs more outsiders.

Stage five – Euphoria

The bubble now enters its most tragic stage. Some wise voices will stand up and say that the bubble can no longer continue. They put together convincing arguments based upon long run fundamentals and sound economic logic. However, these arguments evaporate in the heat of the one over-riding fact – the price is still rising. The wise are shouted down by charlatans, who justify insane prices by the euphoric claim that the world is different and this new world means higher prices.

Of course, the “new world” claim is true; the world is different every day, but that doesn’t mean that prices run out of control. The charlatan wins the day and unjustified optimism takes over. At this point, the charlatans bolster their optimism with the cruelest of all lies; when prices finally reach their new long run level, there will be a “soft landing”. The idea of a gentle deceleration of prices calms the nerves.The outsiders are trapped in knowing denial. They know that prices can’t keep rising forever, but they rarely act on that knowledge. Everything is safe so long as they quit one day before the bubble bursts.Those that did not enter the market are stuck in a terrible dilemma. They can not enter but neither can they stay out. They know that they have missed the beginning of the bubble. They are bombarded daily with stories of easy riches and friends making massive profits. The strong stay out and reconcile themselves to the missed opportunity. The weak enter the fire and are damned.

Stage Six – Insider profit taking

Everyone wants to believe in a new brighter future but a bubble takes that desire and turns it upside down. A bubble demands that everyone believes in a brighter future, and so long as this euphoria continues, the bubble is sustained.However, as madness takes hold of the outsiders, the insiders remember the old world. They lose their faith and start to panic. They understand their market, and they know that it has all gone too far. Insiders start to cash out. Typically, the insiders try to sneak away unnoticed, and sometimes they get away with it. Other times, the outsiders see them as they leave. Whether the outsiders see them leave or not, insider profit taking signals the beginning of the end.

Stage seven – Revulsion

Minsky Ponzi Credit

The Financial Instability Hypothesis

Minsky took Keynes to the next level, and his huge contribution to macroeconomics comes under the label of the “Financial Instability Hypothesis.” Minsky openly declared that his Hypothesis was “an interpretation of the substance of Keynes’s General Theory.” Minsky’s key addendum to Keynes’ work was really quite simple: providing a framework for distinguishing between stabilizing and destabilizing capitalist debt structures. Minsky summarized the Hypothesis1 beautifully in his own hand in 1992:

“Three distinct income-debt relations for economic units, which are labeled as hedge, speculative, and Ponzi finance, can be identified.

Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows: the greater the weight of equity financing in the liability structure, the greater the likelihood that the unit is a hedge financing unit. Speculative finance units are units that can meet their payment commitments on ‘income account’ on their liabilities, even as they cannot repay the principal out of income cash flows. Such units need to ‘roll over’ their liabilities (e.g., issue new debt to meet commitments on maturing debt).…

For Ponzi units, the cash flows from operations are not sufficient to fulfill either the repayment of principal or the interest due on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stock lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes.…

It can be shown that if hedge financing dominates, then the economy may well be an equilibrium-seeking and -containing system. In contrast, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation-amplifying system. The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.

In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values.”

Those three categories of debt units – hedge (note: no relation to hedge funds), speculative, and Ponzi – are the straws that stir the drink in Minsky’s Financial Instability Hypothesis. The essence of the Hypothesis is that stability is destabilizing because capitalists have a herding tendency to extrapolate stability into infinity, putting in place ever-more risky debt structures, up to and including Ponzi units, that undermine stability.

US Debt Clock

Central Bank of Zimbabwe, Quantitative Easing of Zimbabwe, the United Sates and the UK

Dr. Rand Paul Part 1(Video, H/T iDoctor)

[video:http://www.youtube.com/watch?v=C9CHhJ68cAQ&feature=player_embedded]

Dr. Rand Paul Part 2 (Video, H/T iDoctor)

[video:http://www.youtube.com/watch?v=rY1AS7Ii_bs&feature=player_embedded]

Dr. Rand Paul Part 3 (Video, H/T iDoctor)

[video:http://www.youtube.com/watch?v=vrAyeTcD_9A&feature=player_embedded]

iGoogle RSS Reader of sites I visit daily

For us Baby Boomers: Gen-Xers seem to use RSS readers for their “Home Pages” I’m pretty content with Google’s iGoogle reader.

 

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