29 September 2009

Into the Fourth Turning

Into the Fourth Turning

A Casey Research interview with Neil Howe, co-author of The Fourth Turning

The Fourth Turning is an amazingly prescient book Neil Howe wrote with the late William Strauss in 1997. The work, which describes generational archetypes and the cyclical patterns created by these archetypes, has been an eye-opener to anyone able to entertain the notion that history may repeat itself. At the time the book was published, the Boston Globe stated, "If Howe and Strauss are right, they will take their place among the great American prophets." Read this visionary interview published in The Casey Report, and see for yourself.

DAVID GALLAND: Could you provide us a quick introduction to generational research?

NEIL HOWE: We think that generations move history along and prevent society from suffering too long under the excesses of any particular generation. People often assume that every new generation will be a linear extension of the last one. You know, that after Generation X comes Generation Y. They might further expect Generation Y to be like Gen X on steroids – even more willing to take risk and with even more edginess in the culture. Yet the Millennial Generation that followed Gen X is not like that at all. In fact, no generation is like the generation that immediately precedes it.

Instead, every generation turns the corner and to some extent compensates for the excesses and mistakes of the midlife generation that is in charge when they come of age. This is necessary, because if generations kept on going in the same direction as their predecessors, civilization would have gone off a cliff thousands of years ago.

So this is a necessary process, a process that is particularly important in modern nontraditional societies, where generations are free to transform institutions according to their own styles and proclivities.

In our research we have found that, in modern societies, four basic types of generations tend to recur in the same order.

DAVID: The four generational archetypes. Can you provide a sketch of each for those of our readers unfamiliar with your work?

HOWE: Absolutely.

The first is what we call the Hero archetype. Hero generations are usually protectively raised as kids. They come of age at a time of emergency or Crisis and become known as young adults for helping society resolve the Crisis, hopefully successfully. Once the Crisis is resolved, they become institutionally powerful in midlife and remain focused on outer-world challenges and solutions. In their old age, they are greeted by a spiritual Awakening, a cultural upheaval fired by the young. This is the typical life story of a Hero generation.

One example of the Hero archetype is the G.I. Generation, the soldiers of World War II, who became an institutional powerhouse after the war and then in old age confronted the young hippies and protesters of the 1960s. Going back in American history, we have seen many other Hero archetypes, for example the generation of Thomas Jefferson, and James Madison, and President Monroe. These were the heroes of the American Revolution, who in old age were greeted by the second Great Awakening and a new youth generation of fiery Prophets.

After the Hero archetype comes the Artist archetype. Artist generations have a very different location in history -- they are the children of the Crisis. For Hero generations, child protection rises from first cohort to last. By the time Artists come along, child protection reaches suffocating levels. Artists come of age as young adults during the post-Crisis era, when conformity seems like the best path to success, and they tend to be collectively risk averse. Artists see themselves as providing the expertise and refinement that can both improve and adorn the enormous new institutional innovations that have been forged during the Crisis. They typically experience a cultural Awakening in midlife, and their lives speed up as the culture transforms.

A great example of the Artist archetype is the so-called "Silent" Generation, the post World War II young adults who married early and moved into gleaming new suburbs in the 1950s, went through their midlife crises in the '70s and '80s, and are today the very affluent, active seniors retiring into gated lifestyle communities.

The third archetype is what we call a Prophet archetype. The most recent example of this archetype is the Baby Boom Generation. Prophet generations grow up as children during a period of post-Crisis affluence and come of age during a period of cultural upheaval. They become moralistic and values-obsessed midlife leaders and parents, and as they enter old age, they steer the country into the next great outer-world social or political Crisis. Boomers, for example, grew up during the Postwar American High, came of age during the Consciousness Revolution of the 1960s and '70s, and are now entering old age.

Finally there is what we call a Nomad archetype. Nomads are typically raised as children during Awakenings, the great cultural upheavals of our history. Whereas the Prophet archetype is indulgently raised as children, the Nomad archetype is underprotected and completely exposed as children. They learn early that they can't trust basic institutions to look out for their best interests and come of age as free agents whose watchword is individualism. They are the great realists and pragmatists in our nation's history.

The most recent example of the Nomad archetype is Generation X. This generation grew up during the social turmoil of the 1960s and '70s and are now beginning to enter midlife. They are the ones that know how to get things done on the ground. They are the stay-at-home dads and security moms trying to give their kids more of a childhood than they themselves had. Their burden is that they tend not to trust large institutions and do not have a strong connection to public life. They forge their identity and value system by "going it alone" and staying off the radar screen of government. It could be very interesting to see the rest of the life story of this generation, particularly as they take over leadership positions.

DAVID: Could you tell us the general age ranges of these archetypes now?

HOWE: One Hero generation that is alive today is the G.I. Generation, born between 1901 and 1924. They came of age with the New Deal, World War II, and the Great Depression. They are today in their mid-80s and beyond, and their influence is waning.

Today's other example of a Hero archetype is the Millennial Generation, born from 1982 to about 2003 or 2004. These are today's young people, who are just beginning to be well known to most Americans. They fill K-12 schools, colleges, graduate schools, and have recently begun entering the workplace. We associate them with dramatic improvements in youth behaviors, which are often underreported by the media. Since Millennials have come along, we've seen huge declines in violent crime, teen pregnancy, and the most damaging forms of drug abuse, as well as higher rates of community service and volunteering. This is a generation that reminds us in many respects of the young G.I.s nearly a century ago, back when they were the first boy scouts and girl scouts between 1910 and 1920.

DAVID: Then following the Hero, we have the Artist, right?

HOWE: Yes. As I mentioned earlier, one example of that archetype is the Silent Generation, born between 1925 and 1942. This generation was too young to remember anything about America before the Great Crash of 1929, and too young to be of fighting age during World War II.

That 1925 birth year is filled with people like William F. Buckley and Bobby Kennedy, first-wave Silent who just missed World War II. Many of them were actually in the camps in California waiting for the invasion of Japan when they heard that the war was over. Part of their generational experience is that sense of just barely missing something big. Surveys show that this generation does not like to call themselves "senior citizens." They did not fight in World War II. They did not build the A bomb. They are more like "senior partners." Unlike G.I.s, they are flexible elders, focused on the needs of others. Many of them are highly engaged in the family activities of their children and grandchildren. In politics, they are today's elder advisors, not powerhouse leaders.

There is a new generation of the Artist archetype just now beginning to arrive. They started being born, we think, around 2004 or 2005. We did a contest on our website to choose a name for this new generation, and the winner was Homeland Generation, reflecting the fact that they are being incredibly well protected. So we are tentatively calling them the Homelanders.

This generation will have no memory of anything before the financial meltdown of 2008 and the events that are about to unfold in America. If our research is correct, this generation's childhood will be a time of urgency and rapid historical change. Unlike the Millennials, who will remember childhood during the good times of 1980s and '90s, the Homelanders will recall their childhood as a time of national crisis.

So, those are the two examples today of the Hero archetype, and two examples of the Artist archetype.

DAVID: What about the Prophet and the Nomad generations?

HOWE: There is only one Prophet archetype generation alive today: the Boomer Generation. We define them as being born between 1943 and 1960. Those born in 1943 would have been part of the free-speech movement at Berkeley in 1964, the first fiery class whose peers include Bill Bradley, Newt Gingrich, and Oliver North. The last cohorts of this generation came of age with President Carter in the Iran Hostage Crisis.

For the Nomad archetype, we again have only one example alive today, and that is Generation X. We define Gen Xers as being born between 1961 and 1981. Actually, there may be a few members of the earlier Nomad generation still around – those of the Lost Generation born from 1883 to 1900, but today they would be around 110. This was the generation that grew up during the third Great Awakening, the doughboys who went through World War I. They were the generation that put the "roar" into the "Roaring '20s" – the rum runners, barnstormers, and entrepreneurs of that period. They were big risk-takers.

DAVID: Is the Millennial Generation the next group up in terms of controlling or being a powerful force in society?

HOWE: It depends what you mean by a powerful force in society.

DAVID: Who is going to be in the driver's seat?

HOWE: Let me put it this way. The generation that is about to be in the driver's seat in terms of leadership is Generation X, the group born 1961 to 1981. In fact, we now have our first Gen-X President, Barack Obama, who was born in 1961 and who is in every way a Gen Xer, despite being born at the very early edge of his generation. His fragmented family upbringing, with his father leaving while he was young and his mother moving all over the world, is typical of the Gen X life story. A telling anecdote from his biography is that, when he arrived at Columbia University, he spent his first night in New York sleeping in an alley because no one had arranged to have an apartment open for him.

His life story has a "dazed and confused" aspect. He made his own way against a background of adult neglect and lack of structure. It's interesting that he is the first leader in America to call himself "post-Boomer." As a matter of fact, he talks regularly about how he intends to put an end to everything dysfunctional about Boomer politics: the polarization, the culture wars, the scorched-earth rhetoric, the identity politics, all of that. I understand a lot of people do not believe he can actually do this, but it's interesting that this is the rhetoric he chooses. That rhetoric is one reason why the vast majority of Millennials voted for him.

Obama is the opening wedge of Gen Xers who will assume very high leadership posts. They are not yet the senior generals in control of the military, but they are taking over the reins of government and, of course, the top spots in American businesses.

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Modeling the Economy as a Complex System

Modeling the Economy as a Complex System

Using models within economics or within any other social science, is especially treacherous. That's because social science involves a higher degree of complexity than the natural sciences. The reason why social science is so complex is that the basic unit in social science, which economists call agents, are strategic, whereas the basic unit of the natural sciences are not. Economics can be thought of the physics with strategic atoms, who keep trying to foil any efforts to understand them and bring them under control. Strategic agents complicate modeling enormously; they make it impossible to have a perfect model since they increase the number of calculations one would have to make in order to solve the model beyond the calculations the fastest computer one can hypothesize could process in a finite amount of time.

Put simply, the formal study of complex systems is really, really, hard. Inevitably, complex systems exhibit path dependence, nested systems, multiple speed variables, sensitive dependence on initial conditions, and other non-linear dynamical properties. This means that at any moment in time, right when you thought you had a result, all hell can break loose. Formally studying complex systems requires rigorous training in the cutting edge of mathematics and statistics. It's not for neophytes.

This recognition that the economy is complex is not a new discovery. Earlier economists, such as John Stuart Mill, recognized the economy's complexity and were very modest in their claims about the usefulness of their models. They carefully presented their models as aids to a broader informed common sense. They built this modesty into their policy advice and told policy makers that the most we can expect from models is half-truths. To make sure that they did not claim too much for their scientific models, they divided the field of economics into two branches-one a scientific branch, which worked on formal models, and the other political economy, which was the branch of economics that addressed policy. Political economy was seen as an art which did not have the backing of science, but instead relied on the insights from models developed in the scientific branch supplemented by educated common sense to guide policy prescriptions.

In the early 1900s that two-part division broke down, and economists became a bit less modest in their claims for models, and more aggressive in their application of models directly to policy questions. The two branches were merged, and the result was a tragedy for both the science of economics and for the applied policy branch of economics.

It was a tragedy for the science of economics because it led economists away from developing a wide variety of models that would creatively explore the extraordinarily difficult questions that the complexity of the economy raised, questions for which new analytic and computational technology opened up new avenues of investigation. Instead, the economics profession spent much of its time dotting i's and crossing t's on what was called a Walrasian general equilibrium model which was more analytically tractable. As opposed to viewing the supply/demand model and its macroeconomic counterpart, the Walrasian general equilibrium model, as interesting models relevant for a few limited phenomena, but at best a stepping stone for a formal understanding of the economy, it enshrined both models, and acted as if it explained everything. Complexities were just assumed away not because it made sense to assume them away, but for tractability reasons. The result was a set of models that would not even pass a perfunctory common sense smell test being studied ad nauseam.

Some approaches working outside this Walrasian general equilibrium framework that I see as promising includes approaches using adaptive network analysis, agent based modeling, random graph theory, ultrametrics, combinatorial stochastic processes, cointegrated vector autoregression, and the general study of non-linear dynamic models.

Initially macroeconomics stayed separate from this broader unitary approach, and relied on a set of rough and ready models that had little scientific foundation. But in the 1980s, macroeconomics and finance fell into this "single model" approach. As that happened it caused economists to lose sight of the larger lesson that complexity conveys -that models in a complex system can be expected to continually break down. This adoption by macroeconomists of a single-model approach is one of the reasons why the economics profession failed to warn society about the financial crisis, and some parts of the profession assured society that such a crisis could not happen. Because they focused on that single model, economists simply did not study and plan for the inevitable breakdown of systems that one would expect in a complex system, because they had become so enamored with their model that they forgot to use it with common sense judgment.

Models and Macroeconomics

Let me be a bit more specific. The dominant model in macroeconomics is the dynamic stochastic general equilibrium (DSGE) model. This is a model that assumes there is a single globally rational representative agent with complete knowledge who is maximizing over the infinite future. In this model, by definition, there can be no strategic coordination problem-the most likely cause of the recent crisis-such problems are simply assumed away. Yet, this model has been the central focus of macro economists' research for the last thirty years.

Had the DSGE model been seen as an aid to common sense, it could have been a useful model. When early versions of this model first developed back in the early 1980s, it served the useful purpose of getting some intertemporal issues straight that earlier macroeconomic models had screwed up. But then, for a variety of sociological reasons that I don't have time to go into here, a majority of macroeconomists started believing that the DSGE model was useful not just as an aid to our understanding, but as the model of the macroeconomy. That doesn't say much for the common sense of rocket economists. As the DSGE model became dominant, important research on broader non-linear dynamic models of the economy that would have been more helpful in understanding how an economy would be likely to crash, and what government might do when faced with a crash, was not done.

Among well known economists, Robert Solow stands out in having warned about the use of DSGE models for policy. (See Solow, in Colander, 2007, pg 235.) He called them "rhetorical swindles." Other economists, such as Post Keynesians, and economic methodologists also warned about the use of these models. For a discussion of alternative approaches, see Colander, ed. (2007). So alternative approaches were being considered, and concern about the model was aired, but those voices were lost in the enthusiasm most of the macroeconomics community showed for these models.

Similar developments occurred with efficient market finance models, which make similar assumptions to DSGE models. When efficient market models first developed, they were useful; they led to technological advances in risk management and financial markets. But, as happened with macro, the users of these financial models forgot that models provide at best half truths; they stopped using models with common sense and judgment. The modelers knew that there was uncertainty and risk in these markets that when far beyond the risk assumed in the models. Simplification is the nature of modeling. But simplification means the models cannot be used directly, but must be used judgment and common sense, with a knowledge of the limitations of use that the simplifications require. Unfortunately, the warning labels on the models that should have been there in bold print-these models are based on assumptions that do not fit the real world, and thus the models should not be relied on too heavily-were not there. They should have been, which is why in the Dahlem Report we suggested that economic researchers who develop these models be subject to a code of ethics that requires them to warn society when economic models are being used for purposes for which they were not designed.

How did something so stupid happen in economics? It did not happen because economists are stupid; they are very bright. It happened because of incentives in the academic profession to advance lead researchers to dot i's and cross t's of existing models, rather than to explore a wide range of alternative models, or to focus their research on interpreting and seeing that models are used in policy with common sense. Common sense does not advance one very far within the economics profession. The over-reliance on a single model used without judgment is a serious problem that is built into the institutional structure of academia that produces economic researchers. That system trains show dogs, when what we need are hunting dogs.

The incorrect training starts in graduate school, where in their core courses students are primarily trained in analytic techniques useful for developing models, but not in how to use models creatively, or in how to use models with judgment to arrive at policy conclusions. For the most part policy issues are not even discussed in the entire core macroeconomics course. As students at a top graduate school said, "Monetary and fiscal policy are not abstract enough to be a question that would be answered in a macro course" and "We never talked about monetary or fiscal policy, although it might have been slipped in as a variable in one particular model." (Colander, 2007, pg 169).


Let me conclude with a brief discussion of two suggestions, which relate to issues under the jurisdiction of this committee, that might decrease the probability of such events happening in the future.

Include a wider range of peers in peer review

The first is a proposal that might help add a common sense check on models. Such a check is needed because, currently, the nature of internal-to-the-subfield peer review allows for an almost incestuous mutual reinforcement of researcher's views with no common sense filter on those views. The proposal is to include a wider range of peers in the reviewing process of NSF grants in the social sciences. For example, physicists, mathematician, statisticians, and even business and governmental representatives, could serve, along with economists, on reviewing committees for economics proposals. Such a broader peer review process would likely both encourage research on much wider range of models and would also encourage more creative work.

Increase the number of researchers trained to interpret models

The second is a proposal to increase the number of researchers trained in interpreting models rather than developing models by providing research grants to do that. In a sense, what I am suggesting is an applied science division of the National Science Foundation's social science component. This division would fund work on the usefulness of models, and would be responsible for adding the warning labels that should have been attached to the models.

This applied research would not be highly technical and would involve a quite different set of skills than the standard scientific research would require. It would require researchers who had an intricate consumer's knowledge of theory but not a producer's knowledge. In addition it would require a knowledge of institutions, methodology, previous literature, and a sensibility about how the system works. These are all skills that are currently not taught in graduate economics programs, but they are the skills that underlie judgment and common sense. By providing NSF grants for this work, the NSF would encourage the development of a group of economists who specialized in interpreting models and applying models to the real world. The development of such a group would go a long way toward placing the necessary warning labels on models, and make it less likely that fiascos like a financial crisis would happen again.


28 September 2009

The Capitalistic system will collapse Marc Faber


Housing roundup from Housing bubble blog...

It’s Friday desk clearing time for this blogger. “Chicago’s bungalows and brick Georgians are selling, but woe to the owner of a city condo. Phil Sammarco didn’t think it’d be so hard to sell his two-bedroom, two-bathroom condo in the city’s DePaul neighborhood when he put it on the market in March for $449,000. Now priced at $435,000, he has fielded — and rejected — a few low-ball offers and showed the unit to a lot of first-time buyers who have indicated they have a wealth of properties to look at. Now he’s thinking of turning it into a rental instead of lowering the price again.”

“‘You’ve got a lot of choices,’ Sammarco said. ‘Right now nobody is really comfortable that the worst is behind us. If you don’t think the market is stable and you don’t think it’s going to be as good or better, why wouldn’t you rent?’”

“A few years ago, few people in the housing market had ever heard of a short sale. Mention the term today and people, whether they are homeowners or real estate agents, just roll their eyes. The Obama administration is aware of the frustrations. In mid-May, Treasury Secretary Tim Geithner announced plans to streamline the process by offering financial incentives to mortgage servicers and investors that accept short sales.”

“Meanwhile, homeowners like Dallas O’Day are in limbo. O’Day, a Chicago attorney, and his family relocated from California in June 2004 and bought a Mediterranean-style home in Chicago’s Beverly neighborhood for $395,000. They rewired the house, stripped and refinished the wood floors and the woodwork, and did other work to restore its charm.”

“Last year, personal circumstances prompted them to list the home for sale just as the housing industry’s meltdown was picking up steam. With no takers and no longer even expecting to break even on his investment, O’Day relisted the 2,700-square-foot home in January as a short sale. Four months and three price reductions brought the house down to $384,900, at which point a potential buyer made an offer in late May. O’Day accepted it and submitted the paperwork to the lenders holding first and second mortgages on the home. He has yet to receive a response.”

“Meanwhile, the family has moved into an apartment, the refrigerator has broken in the home and there’s evidence of mold in the basement.”

“‘What has astonished me is that in the presence of one of the softest housing markets I can remember, we’re hitting up on four months and they’ve just had a person assigned to look at it, that they would move at such a glacial pace,’ O’Day said. ‘My expectation is I’ll be renting until whatever blemish is gone. I’ve just accepted the fact that at some point it’ll be foreclosed upon because I just don’t think the banks will pull it together. I feel like I’ve done everything I can do.’”

“A slowdown in the local housing market is reflected in assessed values for homes in Yakima County this year, the Yakima County Assessor’s Office said. .Certainly, King County has suffered from a bursting of the housing bubble. Stan Roe, assessment unit supervisor in the King County Assessor’s Office, said Monday market values in King County fell by an average of 15 percent this year.”

“‘I don’t think I’ve seen this big a drop before’ said Roe, who has worked for the King County Assessor’s Office for 19 years.”

“The spectacular fall of WaMu has left a hole in the heart of Seattle. To mark the anniversary of WaMu’s collapse, The Seattle Times caught up with former employees…who saw problems behind the scenes before the final days. James Meacham was at ground zero for some of Washington Mutual’s most questionable home loans. He wasn’t a typical banking executive — he had a master’s degree in theology and had spent time as a minister. He was hired in Seattle in 2000 and rose to become a vice president of business strategy at WaMu’s Long Beach Mortgage division. Based in California, the division specialized in subprime mortgages, made to those with flawed credit histories.”

“On a gut level, Meacham says, the packages of loans that Long Beach and WaMu began bundling and selling to investment banks didn’t make sense. But those loans held the lure of bigger profits for everyone, and the investment banks couldn’t seem to get enough of them. Meacham says he could see the housing crash coming, and sold his California home in 2006 at the peak of the market: ‘It didn’t take a financial genius to work out that blue-collar workers can’t be paying $3,000 a month for their houses,’ he says.”

“There was the pressure from his superiors at WaMu to grow the business rapidly, he says. There were the mathematical formulas and financial projections that showed bundling all those risky mortgages would turn out just fine. And there was a sense that the rules of the game had changed. He has wrestled with the question of who was primarily to blame for the mess. Was it lenders like WaMu? The investment banks? The global housing boom? He wonders if there is a point where credulity, and belief in a system, become culpability.”

“‘The basic problem was the assumption that housing prices would always go up,’ Meacham says. ‘It was an egregious error.’”

“No state has fallen as far as California has in the current global recession. James Doti, president of Chapman University in Orange County and a member of Mr. Schwarzenegger’s council of economic advisors, was in Toronto to discuss the many issues plaguing the state. Here is an edited conversation with the Financial Post’s Eric Lam.”

“Q. What was it about Southern California that made it such a target? A. Zoning, environmental regulations, real estate controls are all greater in California than other parts of the nation. This led to more rapid housing appreciation in Orange County than elsewhere because it was more difficult and costly to build there. Since the construction industry could not respond as rapidly as it could in other parts of the country, it led to a severe supply-demand imbalance.”

“Q. What kind of price appreciation are we talking about?”

“A. At one point average prices in Orange County hit US$750,000, roughly ten times the household income. This could not be supported and that’s when the drop occurred. But houses are affordable again: the average house price is about US$400,000. There were small 100-year-old units close to Chapman that were two room bungalows, maybe 900 square feet, going for US$900,000. Now they’re down to US$300,000, and still people look at them and say, ‘My goodness that should be no more than US $75,000.’ But in Orange County that’s affordable.”

“The real-estate bust that has pummeled San Diego’s downtown condo market and wreaked havoc in its outlying suburbs has hit its once-impregnable beach communities. Beachfront property has come down as much 30 percent in some areas from 2006 highs, with much greater savings possible on foreclosure properties or short sales.”

“Even the crown jewel, Coronado, hasn’t escaped the downturn. ‘Four years ago, you couldn’t find anything in Coronado for under $1 million,’ said Maureen Kerley, a real-estate agent who works in Coronado and Scottsdale. ‘Now, there are dozens.’”

“Please, keep those tax credits rolling. That, not surprisingly, is what the battered real estate industry is arguing as it lobbies for an extension of the $8,000 first-time homebuyer tax credit. Zillow is rolling out a new survey of homebuyers that finds that extending the tax credit would bring an additional 334,000 buyers into the market over the next year starting in December. Overall, that estimate is based on a nationwide survey of prospective homebuyers in which 18 percent cited an extension of $8,000 tax credit as the ‘primary’ influence on whether to jump into the market.”

“Still, extending the tax credit could prove costly to the rest of us who have either already bought homes are renting now. Obviously, at some point the market will have to stand or fall on its own without Uncle Sam’s help. But is it time to go cold turkey now?”

“The Florida housing market is struggling because of a declining population, tight credit, high unemployment rates and a lengthening of the home-buying process, economists said. ‘I think we have a tougher path to get (out of the housing slump) than the nation as a whole,’ said Dr. Sean Snaith of the University of Central Florida’s Institute for Economic Competitiveness.”

“Tax credits won’t solve the main problem of limited credit, Snaith said. ‘Most people cannot get financing right now — that to me is the bigger problem,’ Snaith said.”

“First-time house buyers in Australia this summer took out bigger loans than the same period a year ago, writes Nick Gibson. The Australian Bureau of Statistics says that the average loan size for first home owners increased from $246,500 in 2008 to $269,100 in July 2009. This compares with the average mortgage for a new house of $266,900.”

“The trend suggests that first-time home buyers have been contributing less of their own savings while taking advantage of the $21,000 in government housing grants introduced this year as as part of a national stimulus package.”

“‘The housing grants have helped to incentivise a property market that shows no sign of stalling and is forecast to grow consitently over the next decade,’ says Darrell Todd, ceo of thinkingaustralia.”

“The Reserve Bank warned yesterday that the super-sized loans were an ‘unusual outcome’ given that loans to first home buyers were normally smaller than loans to other home buyers. However, figures compiled by the Australian Bureau of Statistics show the average loan size for first home owners was up from $246,500 a year ago to $269,100 in July. This compares with the average loan size for all owner-occupied housing commitments of $266,900.”

“First home buyers have also helped to push up new home sales, according to the latest Housing Industry Association report. According to analysts, the growing loan size suggests first home buyers have been relying heavily on government grants of up to $21,000 rather than putting their own savings into it.”

“The International Monetary Fund has urged central banks to be prepared to lift interest rates to head off the sort of asset price bubbles that produced the global crisis. But don’t expect the Reserve Bank to start targeting Australian housing prices. Yet still be prepared for the central bank to lift interest rates more aggressively if house price rises start getting out of hand. And expect governor Glenn Stevens to complain more about other policy bottlenecks that appear to be pushing up house prices.”

“Stevens has long been uneasy with the orthodoxy — promoted by former US Federal Reserve Board chairman Alan Greenspan — that monetary policy should not aim to dampen asset prices, except to the extent needed to keep goods and services inflation low.”

“‘I personally would not want to commit to saying, ‘we’re definitely never going to pay attention to asset prices and totally ignore them,’ he said. ‘That has been shown to be a mistake, basically.’ But neither would the Reserve Bank ‘aggressively chase down’ asset prices that “pop up here and there”, even if they didn’t seem to make sense.”

“Today’s rising housing prices, however puzzling, are not a bubble now because credit growth remains subdued. But Stevens admitted to not understanding why Australia’s housing prices are so high given we have so much spare land.”

“Agents are expecting a flood of first-home buyers this weekend. Figures from Australian Property Monitors show there are 4054 metropolitan properties priced under $400,000 on the market - 58 per cent of the total 6997 listings. This compares to the 3921 properties under $400,000 that were on the market at the same time last year and 6412 for total listings.”

“‘It’s the last weekend before the grant changes,’ said Toop & Toop agent Kay Morris. I would imagine there would be more people this weekend looking.’”

“Century 21 Central agent Rosalyn Marker said there was a sense of urgency, which was evident at a Melrose Park sale this week. ‘To have an open with 88 people over the last Saturday and Sunday was a very rewarding result for us,’ she said. ‘We had 11 offers on that property, most of them were young couples … and I would be expecting them (those who missed out) to be looking again this weekend.’”

“Sang Ah Lee, 25, signed a contract for the Melrose Park home on Tuesday after searching the property market for about four months. ‘Because of the grant I tried harder to find a property I liked because that was a deadline for me,’ she said. ‘So I was very lucky.’”

“The Australian dream of home ownership is slipping away, leaving a threat of a US-style collapse in house prices, according to a team of university researchers. Analysis by researchers from South Australia’s Flinders University has revealed home ownership in the 10 years from 1996 rose only 0.8 per cent despite strong economic growth and low interest rates in that period.”

“Other findings included large gains in national income from the resources boom were ‘wasted’ by increasing house prices and accumulating debt to unreasonable levels.”

“Dr Joe Flood, the Institute’s adjunct professor, said the ‘the writing is on the wall for the ‘Australian dream.’ Dr Flood and his team assessed Census data to conclude that Australia’s housing market is in “a very dangerous and unstable situation which has received little adverse attention.’ The researchers found that after 1996, average house prices increased by three times on average - to around 6.8 times medium household income - and debt levels surged.”

“‘On the one hand Australia is vulnerable to a collapse like the United States, where prices fell by a half during the sub-prime collapse … or to a long slow decline as in Japan since 1988,’ Dr Flood said.”

”’The country that promised limitless land, cheap housing and near universal home ownership to all comers now has the most expensive housing in the world amid very tight housing and land markets and little prospect of restoring the balance,’ Dr Flood said. ‘As long as the Government, the public and the media remain in denial, and self-congratulatory rhetoric continues that Australia has cleverly avoided the housing market correction it needed to have, there is little chance that matters will improve.’”


27 September 2009

Interview with Harry Dent

Using exciting new research developed from years of hands-on business experience, Harry S. Dent, Jr. offers a refreshingly positive and understandable view of the economic future. As a best selling author on economics, Mr. Dent is the developer of The Dent Method - an economic forecasting approach based on changes in demographic trends.

In all of his past books since 1989, Dent saw an end to the Baby Boom spending cycle around the end of this decade.

In his new book, The Great Depression Ahead, (Free Press, 2009), Harry Dent outlines how this next great downturn is likely to unfold in three stages, with an interim boom stage between 2012 and 2017 before the long-term slowdown finally turns into the next global boom in the early 2020s. In his book The Great Boom Ahead, published in 1992, Mr. Dent stood virtually alone in accurately forecasting the unanticipated “Boom” of the 1990s. Today he continues to educate audiences about his predictions for the next and possibly last great bull market, from late 2005 into early to mid 2010. Since 1992 he has authored two consecutive best sellers The Roaring 2000s and The Roaring 2000s Investor (Simon and Schuster). In his latest book, The Next Great Bubble Boom, he offers a comprehensive forecast for the next two decades and explains how fundamental trends suggest strong growth ahead, followed by a longer-term economic contraction. Mr. Dent also publishes the HS Dent Forecast newsletter, which offers current analysis of economic, and financial market trends.

Mr. Dent received his MBA from Harvard Business School, where he was a Baker Scholar and was elected to the Century Club for leadership excellence. Since 1988 he has been speaking to executives, financial advisors and investors around the world. He has appeared on “Good Morning America”, PBS, CNBC, CNN/FN, and has been featured in Barron’s, Investor’s Business Daily, Entrepreneur, Fortune, Success, US News and World Report, Business Week, The Wall Street Journal, American Demographics and Omni.

While at Bain & Company he worked as a consultant with several Fortune 100 companies. He has also been CEO of several entrepreneurial growth companies and an investor in new ventures. A frequent speaker on economic trends, Mr. Dent educates clients and partners on The Dent Method and provides strategic vision for asset allocation and investment selection.


26 September 2009

iTulip.com Gold Myths Cheat Sheet


iTulip.com Gold Myths Cheat Sheet

An eight-year-old bull market in gold has spawned more erroneous theories and timing calls along the way than you can count. We break it down to the Top Eight Myths and recount the consensus opinion on gold since the bull began in 2001.

Here are eight popular myths about gold that we have collected since 2001 when we put 15% of our portfolio into the yellow metal (with the iTulip counter-argument in parentheses):

A. Earns no interest. (Gold has out-performed stocks and bonds every year since 2001 in real terms.)

B. Performs poorly on the long term. (True, unless the currency is in long term decline due to structural economic imbalances and negative interest rates are maintained for extended periods to stimulate economic growth of the imbalanced economy.)

C. Better inflation hedges exist, such as TIPS. (Inflation is a secondary effect of a weak currency. Gold hedges dollar currency risk directly, inflation risk indirectly; dollar denominated bonds cannot.)

D. Is money (In order to qualify as money gold must act as both a store of value and means of exchange. We use cigarettes in a prison as an example. You must convert gold to dollars before you can make purchases in the U.S. so gold only meets the first criteria. Gold is a currency. We call it the Fourth Currency because it competes with the dollar, euro, and yen in international currency markets.)

E. Price is primarily determined by physical demand for gold. (That's backwards. The gold price is primarily determined by global demand for the currency that is used as the unit to measure the gold price.)

F. The dollar will strengthen relative to other currencies and push down the dollar price of gold. (The dollar's long-term value is determined by international political relationships. Its short-term price is influenced by economic events. The long-term trend is negative because the dollar is a reserve currency nearing the end of its life span. Short-term value fluctuations are irrelevant to non-traders.)

G. Asset price deflation will result from a collapsing credit bubble. Central banks cannot contain the asset price deflation. It will spill over into wage and commodity prices and crash the price of gold. (Central banks can create infinite money through the process of double entry bookkeeping. Consider, for example, TARP.)

H. The smart moneys wait for F. and G. to happen before taking a position in gold.
Below we list the popular consensus about gold that we heard over the years since 2000, prefaced by the cumulative average gold price that year.

What they said, when they said it, and the gold price that year:
1. Gold $271: "Gold will continue to decline as it has for 20 years to $200 or lower."

2. Gold $275: "Gold is certain to continue its decline to $200 or lower due to deflation following the collapse of the stock market bubble." (That was the year we backed up the truck.)

3. Gold $310: "Despite a modest recent rise due to increased gold demand driven by investors’ fear associated with the 9/11 attacks, gold will soon resume its decline to $200 or lower once the fear subsides."

4. Gold $363: "The rise in the gold price since 2001 is due to a combination of temporary factors, such as investors’ fears about oil and inflation related to the War in Iraq and a weak dollar. Soon the positive outcome of the war will be clear, the dollar will strengthen, and gold demand will drop off, pushing prices back down toward $200."

5. Gold $410: "Economic recovery is pushing up gold demand and prices. The Treasury department has restated its strong dollar policy. Gold will soon lose its luster and fall back to $300."

6. Gold $445: "Gold prices increased only slightly this year over last year, indicating a topping in the gold price. Next year gold prices will fall to $300 or lower."

7. Gold $604: "The spike in the price of gold this year is due to short term dollar weakness. Look for the dollar to rally and gold to decline back to more normal levels below $400 starting next year."

8. Gold $695: "Gold traded mostly sideways over the last year, indicating a topping in the gold price. Look for gold to decline to well under $500 next year."

9. Gold $872: Early in the year, "Gold is participating in a bubble in commodities. When the commodity bubble pops, gold will fall more than 50% along with oil and other commodities." Later in the year: "Gold has crashed to $716 along with stocks and commodities and will continue to decline to $500 next year."

10. Gold $924: "The gold price reflects widespread concern about the financial system in the wake of the global financial crisis. As the system steadies, the gold price will drift down to under $700."

What does each popular consensus position about gold have in common? One, wrong every time. Two, every few years the prediction of the following year's price "bottom" was increased in ratchet-like fashion. Waiting to buy based on the consensus has been a mistake eight years running.

iTulip.com Position: The price of gold began to rise after the foreign debt dependent and asset price inflation-dependent U.S. FIRE Economy went into decline in 2001. The steady fall in exchange rate value of the dollar and rising dollar gold prices reflects the decline of the FIRE Economy.

We hold gold as long as the U.S. economy remains structured as a finance-based economy, particularly while government policy attempts to resurrect it. We sell gold only after the U.S. economy and dollar-centric global monetary system is restructured and the U.S. is able to grow through saving and investment with positive real interest rates.

We continue to view all short-term pricing factors, such as those we have heard from time to time since 2001, as noise until the global economy and monetary system restructures.

Declassified State Dept Data Highlights Global High-Level Arrangement To "Remain Masters Of Gold" ~ Zero Hedge

In the days before the development of the IMF's S.D.R., or Special Drawing Rights, which was a preliminary attempt at a international currency and a way for governments to push gold away as a primary form of wealth/asset equivalency, there were discussions on what the role of the international community would be i) with regard to promoting the SDR as a globally accepted "currency" and ii) and more relevantly, how to retain dominance over the critical gold market by not just the US (represented in this case by the Federal Reserve) but by its core international counterparties.

A recently declassified telegram to the Secretary of State sent in 1968, has some very distrubring revelations to gold "conspiracy theorists" who believe there could be an international arrangement to maintain a control over gold prices in the international arena. This is especially true as the G-20 meets currently in Pittsburgh behind closed doors. Could gold be one of the issues discussed?

We particularly bring readers' attention to paragraph 13 in the telegram below, which present some troubling revelations (emphasis ours):

If we want to have a chance to remain the masters of gold an international agreement on the rules of the game as outlined above seems to be a matter of urgency. We would fool ourselves in thinking that we have time enough to wait and see how the S.D.R.'s will develop. In fact, the challenge really seems to be to achieve by international agreement within a very short period of time what otherwise could only have been the outcome of a gradual development of many years.

Furthermore, apparently 41 years ago the Plunge Protection Team had a more affectionate name (paragraph 11)

Special attention has to be given to the extent of the membership of the reshuffle club. A simple and effective rule probably would be that countries with asset holdings that are higher in relation to their gold holdings than the relation that is obtained amongst reshuffling countries are free not to participate in the reshuffles. On the other hand, countries whose asset holdings are relatively low (and whose gold holdings, therefore, are relatively high) should be obliged to submit themselves to the reshuffles. Indeed, this obligation seems so essential that it would have to become part and parcel of the new reserve asset scheme.

Also notable is the following disclosure (paragraph 3):

It is unlikely that the international monetary system could stand one or two more speculative crises like we have had last November and December during which gold losses were more than $1600 million. This is so because the point may be reached at which the speculation would reinforce itself in a cumulative way. Apart from this it is uncertain that members of the pool would be willing to go on supporting the market for such big amounts.

Oh really? "Go on supporting" presumably means they currently are supporting it? With the push for Fed transparency, could this one point get some additional insight, since if over 40 years ago the Fed, and the members of the gold "Pool" were openly intervening in the gold market, one can only imagine what the situation is now, especially with hundreds of trillions of new assets having been built on top of the Gold core of the inverted liquidity triangle?

In a nutshell - gold as an asset class is critical as it lies at the foundation of the entire credit/liquidity inverse expansion pyramid as presented by John Exter:

Gold Telegram


25 September 2009

Deadly Dollar Carry Trade ~ Jim Willie

Welcome a new carry trade to town! Before introducing it, let it be known that the carry trade concept was not a foreign tool to Robert Rubin, former Goldman Sachs currency superstar and former Treasury Secy in the Clinton Admin. He was the initial Wall Street fox invited to serve in the Dept Treasury henhouse, the beginning of the financial structure ruin for the nation. He served as Treasury Secretary in the same sense that a armored truck heist serves a bank. Rubin designed the Gold Carry Trade in the 1990 decade that took down the Gold price. He arranged for the USTreasury gold lease rate to be in the neighborhood of 1%, made available to Wall Street firms, but NOT YOU! They leased the gold bullion from Fort Knox, the national treasury, and sold it into the market. With proceeds they bought USTreasury Bonds, and ushered in a decade of prosperity, as they like to call it, more like a Stolen Decade of Prosperity in Jackass parlance. They set up this Decade of Despair. The end result was the depletion of the USGovt gold treasure by Wall Street for their private gain, but NOT YOURS! To think Wall Street exists in order to facilitate capital formation for the USEconomy is a gross error of judgment, that misses the entire criminal syndicate function they serve, best described as a vast parasite. The public has finally seen it with the climax death of Lehman Brothers, the nationalizations of the Black Holes in AIG and Fannie Mae, the extortion for the TARP funds, the secrecy upheld for its slush fund distribution, and the defiant posture from the USFed when confronted with audits. The syndicate is showing itself more clearly.

The Gold Carry Trade served its purpose, enriching Goldman Sachs beyond its wildest dreams. They even orchestrated an IPO stock event in order to cash in but retain control from their own deep bounty. Gold descended from $400-450 per ounce down below $300, hitting the depth a year after Rubin’s yeoman service. The USDollar peaked at the same time that gold bottomed. Now with insolvency of the US banks and US households, comes insolvency of the USGovt and the absence of its gold collateral for the USDollar itself, the consequence of Wall Street plunder and pillage.

Be sure to know that the natural order has unfolded the beginning of a quiet murder skein behind the scenes. It has been launched by the death of an ABN Amro banker in the Netherlands and the death of the Freddie Mac Chief Financial Officer, both last spring. Other deaths occurred just last week, four convenient ends for men who might have struck a plea bargain agreements with damning evidence, who might have been targeted by angry elite investment victims, and who might just have known too much about fraudulent money trails. Anyone who buys the suicide stories is dopey at best, a moron at worst. Recall that the businessman Al Capone attended church and gave money to ophanages.


Welcome a new carry trade to town! Here in the present, the new carry trade has begun to take root with the USDollar as its basis. Its requirements are simply stated. It needs a crippled bank system that offers a reliable 0% interest rate, a crippled currency that offers little risk of a rise in exchange rate, and plenty of targeted opportunities to invest in rising asset groups in competition. The gold asset is one such object asset. One is hard pressed to identify a sovereign bond security pitched by a government with any credibility. Their deficits, boatloads of bond issuance, and public statements in desire of weaker currencies tend to rule them out. So Govt Bonds are not a viable object. They are too busy ruining their currencies in the midst of the Competing Currency War. Why just two weeks ago, the Swiss Govt announced their frustration at a rising currency, despite all efforts to undermine their Franc currency. They will be forced to redouble their destructive efforts. The Europeans did NOT want to reduce interest rates a year ago, but they did, a correct Jackass forecast that went directly against some banker contacts. That shows the power of the Competing Currency War, since the Euro currency had risen to 160, sufficient to render considerable harm to the European Union Economy in its export trade. With numerous currencies ‘frozen’ from programmed destruction, the time is ripe for the USDollar Carry Trade to be launched. It has been launched. THIS CARRY TRADE WILL PUNISH THE USDOLLAR BADLY AS IT WEARS A BADGE OF SHAME!

The ruinous bursted bubble from Japan around 1990 and the seemingly endless years of 0% Japanese money enabled the Yen Carry Trade against a backdrop of a chronically insolvent Japanese bank system. A critical characteristic of that carry trade was that heavy leverage applied enormous pressure in a way so as to maintain the low Yen currency and the high US$ currency. In the summer 2008 when the USFed took the official interest down to 0.25% and stuck it there, the USDollar Carry Trade was assured of a vigorous run through the financial factories. Here is what is so important about its upcoming entrenchment. The US$ exchange rates will be heavily subdued, with any rebounds totally smothered, resulting in a relentless Gold rise with gusto. The shorting of the US$ is key for the supply of funds. It comes as borrowed US$ funds used outside the US Sphere, thus net bearish. It comes as leveraged instruments designed to capitalize on a continued US$ decline integrated into securities like with short DX contracts.

The coordinated and systematic ruin of major currencies, through monetizations, through vast federal deficits, through sustained near 0% official rates, and through chronically insolvent national bank systems, will assure that the Gold asset will be a favorite for the USDollar Carry Trade for at least a couple years, maybe more. Furthermore, installation of the USDollar Carry Trade will assure that No Exit Strategy will be available to the USFed also. Wall Street firms will participate in this free lunch carry trade, just like all others. Wall Street will not permit a USFed rate hike to firm the US$ exchange rate. Talk about a strong perverse factor behind the USDollar. This is every bit as powerful as the ‘Beijing Gold Put’ analyzed in the Hat Trick Letter issued in September.

Continued forces will be at work in a variety of ways to continue the thrust and duration of this new USDollar Carry Trade, sure to keep it badly subdued. The risk is so great that a USTreasury Bond default could even become the last stop on its pathogenesis pathway. Just today, the compromised erudite spokesman Lawrence Meyers actually said the USFed will probably remain on hold for its near 0% interest rate until the end of 2011. That is NOT a misprint!!! The USFed will justify its decision not to hike rates, not to halt money creation, all the while discussing theoretically an Exit Strategy. Try not to laugh too hard! Also, the US$ Swap Facilities are scheduled to end in October 2009. Their extension should be very harmful for the USDollar, from the bad publicity and the understood urgent implicit desperate need. The next wave of US bank losses will arrive to coincide with the falling of the leaves in autumn, an apt parallel. The inability of the USFed to conduct and execute any Exit Strategy at all is powerful impetus behind the development of the USDollar Carry Trade, and the powerful lift it gives the Gold price. They cannot raise interest rates. The Stimulus Bill has run its measly course. The monetary stimulus must remain in place. The Uncle Sam patient is imprisoned in the Intensive Care Ward.

....The phenomenon will be much like a flesh eating bacteria. What is eaten during unbridled USFed money creation and USGovt debt issuance is the USEconomic capital, both industial capital and household capital. The most misunderstood aspect of the profound accommodation with near 0% rate of interest (ZIRP) and enormous mountains of printed money (QE) is the destruction of USEconomic capital. Not only is new capital formation NOT possible, but capital is liquidated and banks are hesitant to lend even to good customers. Zero Interest Rate Policy and Quantitative Easing serve as the most severe and formidable Weapons of Mass Destruction to capital that the modern world has ever seen. See small business sector, see the car industry & supply lines, see construction sector, and much more. Both the ZIRP and QE are fuel and lubricant both to power gold to the $2000 level, serving as vivid battle cries!

The tragedy of modern day central banking, a franchise in total failure, has been the hidden destruction of capital with their full blessing. The central bankers cheered the dispatch of US factories to China so as to exploit cheaper labor, labeling ‘Low Cost Solutions’ as the myth chapter. Debt replaced income. They cheered the raid of equity from US homes after urging a housing bubble creation. Foreclosures resulted. They justified the absurd legitimacy of a USEconomy structured atop a housing bubble, calling home equity wealth, labeling ‘Asset Economy’ as the myth chapter. Bank system insolvency resulted. They justified the horrendous US trade gaps and current account deficits, recycled back to the US from Asian and OPEC finance of the USTreasurys, labeling ‘Macro Economy’ as the myth chapter. Credit dependence and now monetization dependence resulted. They cheered the ultra-low rates to stimulate an economic rebound that has not occurred, to their frustration. They endorsed the US bank stock rally, aided and abetted by fraudulent bank balance sheet accounting. Lofty stock valuations (amidst a 97% profit decline) and heavy executive insider selling resulted. They cheered the stupid Clunker Car program that used $9 of USGovt funds for every $1 in fuel costs. A Detroit basket case resulted.

The latest shameful disgraces for the USFed are three. 1) The USFed monetizes USTreasurys during auctions by using the primary dealers as temporary holders before permanent open market operations, and by using foreign central bank sales of USAgency Mortgage Bonds in addition to the USDollar Swap Facility. 2) The USFed just admitted publicly that it had consistently been hiding its Gold Swap Agreements, thus rendering Greenspan a perjury perpetrator and the institution in violation of its contract. 3) New York Fed president Jan Hatzius (another GSax plant) expects the USFed balance sheet to expand by over $1 trillion more. The transgressions of the USFed ensure gold will hit $2000.


Wrecking the world’s greatest economy

ND: Do you miss the old Hunter Thompson as much as I do?
EJ: Last week I listened to a recording of a lecture he gave at Boulder University in 1977 after he published Fear and Loathing in Las Vegas. At one point a student in the audience asks if there is anything that he as a young person heading out into the world can do to help get the U.S. off the self-destructive course that Thompson describes in his book. Thompson is fatalistic. He says, no, there is not, that the crazed system is destined to go on and on until it blows itself up and burns itself out. Looks like he was right.

ND: We blew it. The media, I mean.
EJ: We use this catch phrase at iTulip: “Who could have known?” to refer to any obvious outcome of excess and fraud over the past 11 years that we've been in operation. Anyone reading our site—and plenty of others—since 1998 could see the current crisis coming down hard on us, but not if they only read mainstream papers or watched cable or network TV. After a string of failures to protect the public from cheats, crooks, and liars—the primary role of the media—a cloud of suspicion hangs over the whole industry. On top of the business model challenges created by the Internet, there’s a real crisis of credibility. Today they’re backpedaling as hard and fast as they can, and maybe readers will forget that the media hung them upside down to have their pockets picked by mortgage brokers and stock jobbers selling the American dream as a debt they can’t repay and a stock portfolio that vaporizes as soon as they reach retirement age. It's a safe bet they will forget.

ND: Who’s doing a good job today?
EJ: The Wall Street Journal is doing a good job of covering the crisis now that it’s here. Plenty of thoughtful skepticism about the recovery. But the fact remains that the savings of a generation of our middle class was wiped out by the stock and housing bubbles. Failure by the media to expose the frauds while they were being perpetrated has caused millions to lose faith in the mainstream media.

ND: Who will take its place? Glenn Beck and Alex Jones?
EJ: The average American doesn’t know how to be intelligently skeptical. They lack the tools. Their schooling taught them to believe what they read in the paper and watch on TV and are told by anyone in a uniform or anyone who makes more money than they do. For example, the mortgage broker in a suit who told them not to worry about exaggerating income in order to qualify for a ridiculously huge mortgage. You can say these people were stupid for trusting the brokers and the appraisers and the lawyers and all of the other conspirators to the gigantic fraud that came to be known as the housing bubble, including the media that used to quote the National Association of Realtors as a source of information about the safety of housing as an investment. That’s journalism? But who is the public supposed to trust? No one? So now the public doesn’t trust anyone. Why should they? But in the wake of these frauds they lack the tools necessary for critical evaluation of even the most basic data about their economy, never mind complicated issues like monetary policy, inflation, and employment. In this environment guys like Glenn Beck and Alex Jones thrive.

ND: Where is this headed?
EJ: When the people lose faith, they do not then believe in nothing. They believe in anything. Between an oligarchic government controlled media and a public unable to distinguish between an argument made on evidence and one based on speculation, I believe we are heading into an era of rising nationalism and unreason unlike anything we have seen since the 1930s. The antecedents are exceedingly dangerous. Our polity can be whipped up into a frenzy to do just about anything.

ND: Where is the leading edge of rising nationalism?
EJ: Japan just elected the first government since the end of WWII that represents a break from alignment with the U.S. The election was a big deal in Asia. The winning platform was distance from Washington and separation from Wall Street.

ND: Japan was hit especially hard by the global recession that we caused.
EJ: True, but it’s important to remember that our economic relationship with Japan has been difficult since at least the Kennedy administration.

For U.S trade partners like Japan, the U.S. has been like a very large and important customer that delivers most of the revenue to a goods manufacturer. Endlessly demanding, at times irrational and occasionally dangerous, our behavior was tolerated for one and only one reason: we, the customer, always placed our order by the end of the quarter. All was forgiven.

Then the 2008 crisis came. We, as a major customer to our global trade partners, have always been difficult to do business with, but at least we were worth it for the orders, even if they had to provide much of the financing. But since U.S. consumer demand for imports fell off a cliff last year, we’re not worth the trouble.

Yet our demanding and irrational behavior continues as if we were still the world’s most important customer or we will regain that status shortly, if only we print and borrow enough money to get households borrowing and buying again. The perpetuation of this delusion will end in tears.

ND: What did we do to Japan under the Kennedy administration? I don't remember that.
EJ: In my research I came across a reference on Sony Corporation’s web site that stated that Japan's 1965 economic depression was rooted in the interest equalization tax instituted two years earlier by President John F. Kennedy. The U.S. economy was in recession and domestic capital was pouring out of the country. Kennedy imposed a 16.5% interest equalization tax on all capital leaving the U.S. to slow the outflow--basically, a capital control. The law succeeded in decreasing the outflow of U.S. capital but it also caused a panic in world stock markets. In 1965, Japan’s securities market crashed and Japan had its worst depression since The Great Depression.

While it’s tempting to see events like the election of an anti-U.S. government in Japan as a recent development, the issues between the two countries that led to that outcome have been brewing for decades. The 1980s bubble and crash was also a product of U.S. policy. Political change, such as shown in the election of a new government in Japan, appears sudden if you haven’t followed the history and antecedents.

After this latest U.S. financial and economic debacle that cratered Japan’s economy, the Japanese people decided they’ve had enough.

A must read continues

Mortgage rentiers find they are not in Kansas anymore....

Back in April, we mentioned the The Mortgage Netherworld of MERS — the Mortgage Electronic Registration Systems.

MERS is the firm that (technically) holds 60 million US (securitized) mortgages on behalf of the actual buyers. They were created by a consortium of lenders in part to save money (on paperwork and recording fees) every time a loan changes owners. In the era of securitization, these savings amounted to billions of dollars.

But MERS also acts as a shield, making it all but impossible for many borrowers to deal directly with whoever happens to be holding their mortgage at the moment. As the NYT noted, it has “made life maddeningly difficult for some troubled homeowners.”

Now, the Kansas Court of Appeals has called foul. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. (Other than GlobalResearch.ca, I have yet to see any MSM coverage of the issue). The Court stated that MERS’ relationship is not that of a true party possessing all the rights given a buyer. Hence, the court ruled:

“By statute, assignment of the mortgage carries with it the assignment of the debt. . . . Indeed, in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.” (emphasis added).

What does this mean for the 60 million people — over half of all US mortgages — whose loans have been securitized, sliced and diced, and are now held by MERS?

To start, it potentially gives a powerful weapon to homeowners who are being foreclosed upon. If their mortgage is held by MERS, they certainly have a strong basis for challenging the action on the grounds of standing. (Note that this was a Kansas COURT OF APPEALS decision, and while it is not binding on other states the way a US Supreme court ruling would be, it is likely to be influential). I also think the Kansas Court of Appeals could also review this case

I don’t quite agree with Ellen Brown, who in an extensive legal analysis of the decision, writes: “The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose.” It may be possible for trustees for the securitized loans to somehow perfect standing, i.e., develop the ability to claim loan ownership (perhaps via a purchase) and then move to foreclose. (Brown also calls it a Kansas Supreme Court decision, but it appears to be the intermediate 3 judge panel of the Court of Appeals that heard the case, not the full Kansas Supreme Court).

But Brown is correct when she states this is a very significant legal development, one that might dramatically impact foreclosure litigation.

This ruling could send the lenders who work with MERS scurrying to resolve this in their favor. Look for a lobbying effort to get some favored congresscritter to pass legislation granting them standing to sue on behalf of loan holders (Congress may be able legislate that legal right, although there are state laws to be contended with).

As foreclosures continue to ramp up, I expect a lot of rhetoric about why we need to stop them (I disagree) and modify mortgages (which have been mostly unsuccessful).

Last, you never know what someother state supreme court might rule. (Any lawyers out there know what is on upcoming dockets involving MERS ?)

Bottom line: It just got a lot harder to foreclose on homes with securitized mortgages in Kansas, and quite probably, the rest of the nation.


The Mortgage Netherworld (April 2009)

Landmark National Bank v. Kesler
No. 98,489
September 12, 2008

Landmark Decision: Massive Relief for Homeowners and Trouble for the Banks
Ellen Brown
GlobalResearch.ca, September 23, 2009

See also:
Six Degrees of Separation
Andrew Davidson
August 2007

24 September 2009

Buy Stocks Because U.S. Dollars Will Be "Worthless," Says Faber


Marc Faber, editor of The Gloom, Boom & Doom Report is, by his own account, "ultra-bearish" on the long-term fundamentals of the U.S. market. (Discussed in detail in this clip.)

However, in the near term, Faber sees plenty of money-making opportunities in stocks. Sure, prices aren't as cheap as they were in March, yet he's confident, "in this environment cash will become worthless." As a result, he says investors are, "better off being in equities," for the next two to three years.

Faber is most bullish on mining and energy companies. He recommends:
Newmont Mining and FreeportMcMoran as relative inexpensive. He also mentions Nova Gold, as another, more speculative buy.
In a contrarian call, on natural gas, he says Chesapeake Energy will be a winner when prices eventually rebound.
Oil giant ExxonMobil is another stock he thinks offer good value.

Outside of that, Faber says buying large-cap pharmaceuticals like Pfizer and Johnson & Johnson offer good defensive options.

Finally, he suggests U.S. airlines are poised for a rebound. If that happens, international airlines will follow and Thai Airways stock could double.

Debt deflation debacle ~ Dr Lacy Hunt, of Hoisington Investment Management

Steve Keen has support here...

Isabelle Oderberg: How did we get ourselves into debt deflation?

LH: Well it's been a long time in the making. The debt to GDP ratio took out the highs of the 1930s and 2003. At that point in time total debt was just a little bit more than $3 of debt for every dollar of GDP. Today it is just under $3.60 of debt for every dollar of GDP and we are going to see that ratio move higher, in part because normal GDP in the United States is now falling and the difficulty of repaying this debt is going to be very difficult, because the loans are denominated in dollars and the assets that were borrowed against are dropping in value. The income generating capacity of these assets are also dropping and the US economy is in something called a debt deflation. A very rare situation. It only occurs every 3 to 8 or 9 decades. The last time that we experienced it was the 1930s in the United States. We experienced it in the 1870s and 1880s and Japan experienced a debt deflation post 1988 but it has happened historically. It is very rare and the two main things that identify it are setting a new peak in the debt to GDP ratio and also a lot of borrowing that is improperly financed and where there is little likelihood that the borrower can repay the principal and the interest of the loan.

IO: What scenario are we going to see now?

LH: These debt deflationary periods tend to last. They're very pernicious, they're very persistent and they tend to last a long time. Really, the only thing that brought the United States out of the post 1929 debt deflation was our participation in World War II. The debt deflation that ensued after the panic of 1873 lasted another 20 to 23 years and the Japanese, they had debt deflation which started 1989 and is still running for all practical purposes today. They last for a very long time.

IO: According to your quarterly review and outlook, we're now essentially in a 15-year process. Does that mean that it's going to take 15 to 20 years for this situation to actually stabilise or normalise?

LH: Well, there are other intervening events that could occur. If we would have very significant technological breakthroughs that might shorten the process, but one of the things that suggest it's long running is you can look at what happened to interest rates and stock prices after these prior debt manias. Post-1928 you had a negative risk premium for 20 years. Negative risk premium meaning the total return on treasury bonds exceeded the total return on the S&P 500. Post-1872 you had another 20 year period of a negative risk premium and we've seen a negative risk premium post-1988 in Japan. The low in interest rates after those previous debt bubbles occurred about 14 or 15 years later, for example the low post 1928 occurred in 1941 on the yearly average basis at 1.95 per cent. Once we went into World War II, then there were some very minuscule increases 20 years after 1928 interest rates were up slightly, but not very much from the lows that were reached in 1941 and that was also a characteristic of the Japanese situation and our situation in the US post 1872.

IO: So if we're in any way mirroring the '31 to '33 situation, is the S&P at risk currently of a bear market rally?

LH: Well, one of the things that has happened in these debt deflations is you get a number of false dawns. People believe that the normal business cycle is going to take control and you're going to get a cyclical recovery and the model that soon prevails is that you get three to 10 years of expansion. You have one year, maybe a year and a half of a recession or nasty economic conditions, but after a year and a half at most, the economy then has another expansion for 3 to 10 years.

When we have these very rare debt bubbles occurring at these long irregular intervals, the normal business cycle model doesn't really apply. We do get some false dawns. Some intermittent cyclical recoveries but the unwinding of the debt process proves to be very very long and difficult. One of the reasons for that is that borrowers don't know anything about paying back loans in harder times, which is what's now beginning to occur and as a consequence there is a major behavioural shift or there has been historically in which consumers decide to live inside of their means as opposed to living outside of their means and normally the saving rate goes up for a long time.

After the experience of the 1930s the savings rate in the United States rose irregularly into the early 1980s and it's been in a decline since then irregularly to extremely low levels, virtually the same low levels that we reached in the 1930s and if history is a guide and there are not many data points we're now beginning to see an upturn in the saving rates that will last for a very long time.

IO: You said that this could be a 15 to 20 year process unless there are technological breakthroughs. I was just wondering if you could give me some examples of breakthroughs that might occur and whether you're referring to any form of government intervention that might help ease the situation.

LH: Well, I don't believe that government intervention, particularly of the type that we're taking. is going to be helpful. In fact the government intervention may be hurting the situation.

IO: Are you referring to stimulus packages in their current form...

LH: A stimulus package in its current form? I don't even think the word 'stimulus' should be used. It's a grab bag of various political promises. The most recent academic research that I have seen, published in 2008, indicates that the multiplier on government expenditure is just close to zero. If the government spends an additional dollar it has to fund that dollar either by raising taxes on the private sector or borrowing funds in the capital markets that would have gone to the private sector. Government spending, the government sector in the US, the productivity is at best zero and perhaps slightly negative, so when we enlarge the government sector and shrink the private sector we reduce the growth, potentiality, of the US economy. We shrink the pie and we make things worse off.

The very extensive efforts that government spending by the Roosevelt administration in the 1930s really produced no meaningfully positive results. In April of 1939 as the rest of the world was going to war our unemployment rate was still above 20 per cent. The Japanese ran deficits of 10, 12, 14 per cent of GDP. They've had nothing more than a few interim cyclical recoveries in the past 20 years. We had a very long difficult process after we unwound the extreme amount of debt that was taken, that was built up during the railroad bubble of the 1860s and 1870s. Government spending in this matter in fact may make the situation worse.

Let me just give you another point here. Last year the treasury borrowed about $170 odd billion to mail out rebate cheques and a few other short-term stimulus packages. Conclusive economic research indicates that people did not really spend transitory income to any significant degree. And they did not in this case. In fact, they even spent less of these rebates than they did the Bush rebates of 2001. So we borrowed the money and deprived the private sector of the capital. The recessionary momentum rolled along and now we have another $170 odd billion of debt on our books which we're paying interest for. There is one thing that would help on the government side, but I doubt that politically it can be done. Christine Rohmer, who is the incoming chair of the Council of Economic Advisors, in her academic work has found that every one dollar reduction in the marginal tax rates will raise GDP by $3 after three years. The problem is that that takes time, because in the interim you have to still borrow the money. The treasury does not have the funds in its checking account, but we're not going the route of either reductions in the personal or the corporate tax rate and so we're actually engaging in spending activities that have a zero multiplier and are very unlikely to change the economic dynamic going forward.

IO: So essentially there's nothing that the government can do in this situation to assist?

LH: Well, I think that one of the things that might have helped would have been an alternative approach to the so called TARP [Troubled Asset Relief Program] bail out bill. There are two ways that we could have gone here, but there was no hearings held. It was just decided that that was the only way that we could go and so the treasury borrowed funds, used its borrowing capacity to try to prop up the entities.

The alternative, which the Japanese would have done and the better way to go, is to use the treasury borrowing capacity to protect the depositors and the customers of the banks and the insurance companies and perhaps extend unemployment benefits for their employees that are laid off. Zombie-like institutions intact with wholesale federal dollars, borrowed federal dollars – those institutions are really not able to grow or contribute to the economy. If instead we had protected the savers and the depositors, then institutions would have failed, but the healthy banks and insurance companies would have taken over the business of the institutions that made the mistakes and then we would have a growth trajectory going forward. So it's quite possible that the actions that we've taken and cost hundred of billions dollars, hundreds of billions of dollars have actually not helped the situation and may have had severe unintended negative consequences.

IO: You mentioned that there were no hearings for the TARP and I'm sure if we had a government spokesman on the call he or she would say 'well, we had to act quickly, we couldn't afford to hold a series of hearings and whatever', but I don't quite understand how they managed to get it quite so wrong if they had so many people telling them not to do this – very few people I've spoken to support the TARP.

LH: Well the public is hurting. The politicians feel the pain of the public sector. They want to be seen as responding to the pain and there is an overwhelming feel that they have to do something to help the public so we rushed through the rebate bill last year, the recessionary momentum moved on. It had no effect but that begs the whole issue of whether you should do something and if so if you do something is it the right measure or is it the wrong measure or does it have unintended negative consequences and I believe that we're taking the wrong steps.

Take for example one of the big things in the so called 'stimulus bill' is to increase spending for roads, highways and bridges. Last year we sent about $75 billion on such matters out of an economy of $14.5 trillion. An infinitesimally small component. If we were to double the component, the $75 billion spending it would still be an infinitesimally small component, but we couldn't double it overnight because you need architectural studies, engineering studies, you have to get environmental approval, you have to buy right of way, you have to satisfy community groups and in final analysis, road building is not a labour intensive function, it’s a capital intensive process. The folks that have been laid off in management and insurance and real estate and our young college graduates, they don't want to go and work alongside the road and there's not many of those jobs anywhere.

This is not the 1920s or 30s or even the 50s where there were thousands an thousands of people working alongside the road building the interstate highway system. This is a capital intensive process. It's not going to provide the jobs that are basically needed for the economy so here in this particular case we do get better roads and bridges which we need and which is a good thing in its own right, but it is not a stimulus package. In the case of construction of the green power plants, last year we spent less than $10 billion. If you double that which you couldn't do quickly it's still an infinitesimal part of the economy and it's also a capital intensive type activity and it would not provide jobs that people need.

IO: What specific things do you think the US government should be doing to try to create jobs?

LH: Well, you have to do things that change behaviour and the only thing that I know that changes behaviour is to reduce the marginal tax rates for individuals and also for corporations. Even this would not work quickly because of the deficit financing problem over the near term, but if you have a permanent reduction in the tax rates you raise the after tax rates of return and over time you will get definite multiplier benefits. As I mentioned earlier, the incoming chair of the Council of Economic Advisors has found that ever $1 reduction in the marginal tax rates will increase the GDP of total spending by $3. That's a multiplier of 3 to 1. In the case of government spending, the multiplier is zero. There's no net benefit for going along the expenditure route. So in the haste to do something and to show the public that they care about their plight, the politicians are doing something but in fact they're doing the wrong thing.

IO: Do you think with the shift in the way that unemployment figures are measured in the US, do you think that the situation is worse than it appears with unemployment?

LH: I think that there is a lot of unemployment. There's not just the standard headline unemployment rate, but we have the unemployment rate that takes into consideration people that are looking and can only find part time work, far less than the want, including people that have quit looking over the last year . But going back a number of years back to the Clinton Administration we used to have a U7 unemployment rate that took into account people that had quit looking because they couldn't find work in the last five years. I think if you were to use that old, expanded, non-official definition of unemployment you might find that it's probably as high as 17 or 18 per cent. The U6 rate which is published by the Bureau of Labor Statistics is currently showing about an unemployment rate of about 13.6 per cent, double the official or headline number.

IO: Specifically on lending and borrowing, you said there is a pattern of consumers are starting to move towards saving more and living perhaps within their means. In your note you say lending and borrowing is pretty much suspended. No one's lending, no one's borrowing. Is there anything the government, Geithner or anyone else can do to try and invigorate that situation? Interest rates are about as low as they can go.

LH: The great American economist Irving Fisher who did the pioneering work in debt deflation. Milton Friedman the Nobel Laureate called Irving Fisher the greatest' economist that America ever produced'. One of the Fisher's great competitors during his lifetime was Joseph Schumpeter [an Austrian economist] who taught at Harvard. Fisher was at Yale. Schumpeter said Fisher was the brightest man that he ever met.

Fisher, who did the seminal work in debt deflation, lays out the case that once you have in a period of extreme over indebtedness and a price disturbance began, the price level or the value of the assets falls and the income generating capacity of the assets falls, that it controls all or nearly all other economic variables. That's a contrary view to what Milton Friedman said. Friedman contended that if the Fed had prevented the decline in the money supply during the Great Depression the velocity of money which is outside the Feds control would have stabilised. So would have nominal GDP and the Depression would have [been avoided]. Fisher takes a different view.

Once we've got the extreme over indebtedness, really there's nothing that we can do and one of the problems is that the velocity of money is likely to fall very sharply and although the Fed has managed to increase the money supply, velocity has dropped even more sharply and that's why nominal GDP is falling so at least in the early stages of this difference of opinion between Friedman and Fisher, Fisher appears to be correct.

IO: There's no intervention that the Fed or anyone else could do to stop that process from evolving?

LH: Well I think the Fed is doing all that it can. If you read Ben Bernanke's essays on the Great Depression it's clear that he believes that the Friedman view is correct and he is pulling out all the stops to try to contain these deflationary forces but there is a credible expert in the field that made the point that it was quite possibly at the situation that nothing meaningfully can be done other than time to correct the problem. I know no one wants to hear that but that in fact may be the situation.

IO: In terms of S&P going forward, there could be a series of false starts or bear rallies, but is that how you see the market unfolding? Can you give a little insight into your outlook for the market going forward?

LH: I don't have a short-term view but I think if you look at the 20 years, post-1929 in the US, 1928 in the US, 1988 in Japan and post-1872 in the US, for those 20-year periods, you had a situation where the total return on treasury bonds, which was in the single digits leading into low single digits, exceeded the total return on equities and the total return, not only the income or the dividend, plus or minus whatever the change was in the capital value. And I think that we may be facing a situation similar to that as this process unfolds and although it cannot be said definitively, I think that there is a risk that the diversified portfolio model may not work in debt deflations.

Debt deflations, although they're very rare, if you study them you will see that they turned the world upside down as we know it. And another difficulty with these debt deflations is that no one that's alive today has in their own personal data bank, their personal history of experiences the prior experiences because they didn't live through them. It occurred before they were born. If they were alive during those time periods they were very small children. They may have learnt something either from parents or grandparents or so forth but it is very difficult for people of experience and practicality to understand what is gripping the situation when they have not ever lived it and that's one of the great difficulties for the US today and I suspect for the world as well.

IO: There have been some downgrades to the sovereign debt of some nations and some are predicting there will be more, especially the European countries that have very large current account deficits. Do you think that there will be likely further downgrades to sovereign debt and whether we will start to see defaults?

IO: Well I think that one of the difficulties for the entire world is that it's been very dependent upon sales of goods and sending their production to the US consumer. The main determinants of consumer spending in the US are income and wealth. We have experienced a wealth loss of approximately $11 trillion in the household sector through the end of last year. We don't know the final numbers but it's in that vicinity. The Federal Reserve's econometric model indicates that every $1 wealth loss will lower consumer spending 7.5 cents over three years.

Using that formula, the drain on consumer spending from the wealth loss alone is about 3.4 per cent per annum this year and 3.4 per cent per annum in 2010 and 3.4 per cent in 2011. And that's a larger drag than the average rise in consumer spending of about 2.9 per cent over the past two decades. The wealth loss will have a very material impact. The wealth loss is now being reinforced by an income loss. The income loss is stemming from massive lay offs and increases in unemployment and reductions in employment and those two forces are causing imports into the United States to fall.

As we buy less from the rest of the world it means there's less income and production overseas. One of the benefits is that the US trade deficit, which was 6 per cent of GDP has declined or improved to 3 per cent of GDP and as the further wealth and income effects depress discretionary spending it's quite possible that the US trade deficit may be eliminated in the next three or four years, which means that we'll continue spreading weakness to the rest of the world and it raises the risk of financial difficulties around the globe.