What comes next shouldn't be a suprise to anyone.

Can you say FDR style infrastructure projects?

Here is link to a 2003 Federal Reserve Bank of Dallas paper about "Monetary Policy in a Zero-Interest-Rate Economy". (pdf format)

You can't say the fed didn't tell everyone what they were going to do. They published their play book in 2003, and are currently following it.

1)Cut rates to zero. (if fails see #2)
2)Buy “Other domestic securities” (if fails see #3)
3)“The goods & services solution”


a) This article from FT.com makes the argument that the rate cuts didn't work.
"Fed capitulates: the central bank is broken" .

b) Considering the unemployment numbers, I would argue that the alphabet soup of fed facilities and bailouts ( buying up “Other domestic securities”) also didn't work.

c) Next up will be “The goods & services solution”. From the Fed paper:

“The strategy can be implemented, however, by coordination with fiscal policy-makers. The Federal government, for example, could purchase goods and services and finance the purchases with new debt, which the Fed in turn would buy–in technical terminology, the Fed would ‘monetize’ the resulting debt.”

Looks like the fed is going to resurrect inflation, even if they have to buy the Brooklyn bridge (literally). I would guess that massive infrastructure projects are going to be started. Probably more food stamps. This seems like a perfect ideology match for the new democratic government.

Oh well, we need expanded electric grid and rail service anyway to deal with peakoil.

The End!

Well, this looks like “The End”.

The USA has accumulated so much debt that the system is about to collapse. Fannie Mae and Freddie Mac will be the straw that breaks the camels back. During the next couple of months foreign investors will lose faith in the dollar, treasuries and GSE (Freddie and Fannie) bonds. Add on top of that the inability of FDIC to cover all the failed banks and the American public are left in a truly deplorable situation.

The citizens, banks and government of the USA are insolvent. No one, will be able to save anyone, because they are all drowning.

If you want to buy anything, do it by the end of September, after that your money will be worthless.

It didn't have to be this way, regulations were in place, and powers granted to control the orgy of bad loans and worthless bonds. Alan Greenspan could have stopped this from occurring. Bush could have stopped this. Many a book will be written about why they didn't. I'm going to assume that the words “greed”, “power” and “arrogance” will be use to describe their actions.

What is really scary, is that I not convinced there is a "right thing" left to do. All options seem like different flavors of suicide.

It is pretty obvious that the foreign investor are going to simply leave in the next couple of months.

It is also obvious that the politicians are not going to go on an austerity program to pay the bills. Nor are they going to abandon their rich banker friends.

I would love to hear a WORKABLE solution that doesn't crash the economy.

Oh sure, there are “solutions”: devaluate the currency, make the bond holders take a haircut, put Freddie and Fannie in a conservatorship . But all those solutions mean the foreign investors who have artificially propped up the economy will leave.

Got Gold?

Hank Paulson and Ben Bernanke are a cornered animal?

http://www.minyanville.com/articles/dow-Bernanke-nasdaq-Paulson-crude-Fed/index/a/17152

“One of the best tidbits of advice I received as a young buck was to put yourself in the shoes of the person on the other side of your trade. See what they see. Think what they think. Keep your friends close and your counter-party closer! “

“Hank Paulson and Ben Bernanke have a clear mandate. They’re willing to mortgage our future with hopes that a legitimate economic recovery takes root. We’ve seen this movie before (on the back of the tech bubble) but memories are short given our immediate gratification societal mindset. They’ve got deep pockets. Interest rate cuts, Auction Facilities, discount windows, shifting collateral parameters, Working Groups on Financial Markets, interest on bank reserves, rebate checks, open-market operations and repurchase agreements are all at their disposal.

And if those don’t work, they seem intent on inventing intervention that does. We’ve written extensively about financial engineering and the inherent dangers thereof. The Federal Reserve balance sheet continues to drain as they attempt to fund the banking system. There are only so many bullets left in the gun and the last one will likely be pointed inward.

Still, we must respect the claws of a cornered animal. We’ve passed the point of no return and the government will do everything within (and potentially beyond) its powers to ensure the finance-based global balls remain in the air. You don’t have to agree with it, you simply have to respect it.”

I read this article Wednesday, and it has stuck with me like a pebble in my shoe.

I work for the federal government. As a physicist, I try not to get involved in politics, but on occasion, I do end up substituting for my boss in some very interesting meeting. The dynamics of how the federal bureaucrats think is reflected in the article.

Anyone who thinks that the federal government is intent on doing the right thing, needs a reality enema. Generally the front line people try to do the right thing, but once you pass the first line supervisors, it is just about power and ego. It is all about getting power, defending your power and the public be damned.

Hank and Ben have been given their orders, and if anyone things they are going to have a twinge of regret, or a last minute epiphany, you have not talked to very many bureaucrats.

The score card up till now, and tomorrows forecast.

Ben Bernanke has stuck religiously to his play book during the current crisis. He has inflated the currency, and stopped bank failures at any cost. If you read his writings, from before his ascension to the throne, nothing so far will have surprised you.

The situation:
The housing bubble popped, the banks were shown to have no clothes, all branches of government were asleep at the wheel, and the only active players on the field are the banks and the Federal reserve.

Will government react to this crisis? No, or at the very least, not before a crash. You will hear plans and platitudes, investigations and calls for reform, but the two major parties need big buck for the election fight this year. There will be no perp walk for the people who bundle campaign contributions. (Or at least not till there are riots in the streets.)

At a chaotic inflection point in history, it is almost impossible to see which forces will triumph, but we can at the very least look at the major players.

Banks, Investment houses and the fed:
The banks aren't illiquid, they are insolvent, bankrupt, broke, a collapsed Ponzi scheme. They bet their investors money on the fantasy that growth will continue indefinitely, and lost. They are just a meaningless facade left in place to fool/fleece the public while gulping from the Federal Reserves tit. Their last big play will be by the individuals who looted them, as they try to bribe the politicians and the Federal reserve into a bailout/pardon.

A really important sub-thread of this, is that having an “account” with one of these institutions is just a promise, to give you money or shares. Until you close out your account, it is all just a promise, backed up by an insolvent institution.

Stocks:
The stock market crash of 29 did not cause the depression, it was caused by the depression. You really have to laugh at people who think stocks will hold value during a crisis. If your broker goes belly up, you are just another creditor. Even assuming you took physical ownership of your stock certificates, 1929 showed what happens to stocks. Add in the growing hatred of “speculators” and you will be lucky if you not arrested for shorting a stock.

Commodities:
It is my opinion that there is a general commodities bubble, and it is bursting. However, some commodities may continue to go up in price. Namely grains and energy. After looking at the data, it appears there are genuine shortages in these areas, and those shortages may even survive a major economic down turn. Although they will take an initial beating with all the other commodities, a real shortages trumps a bubble.

Unfortunately, the process used to invest in commodities isn't as straight forward as opening up a bank account “in oil”. As calls to reign in “speculators” rise the government may finally act (or conspire) to close the market to us humble mortals. (Poof! Goes your money!)

Gold, dollars, euros and yens:
Only a fool would keep his money in the constantly debased dollar at this point. The only problem is where to put savings, if not in dollars? Should we keep them in a bank/investment account? (Hell no!) How about a foreign bank? (You know, the ones that bough all the sub-prime mortgages.) Should you believe in the decoupling fairy? How about federal reserve notes stuffed under your mattress? (Not if a new currency is issued.)

The answer (unfortunately) is to invest in actual stuff. Even more unfortunate is that you can't keep you life saving in spam and bottled water. It won't fit in your house, besides, who the hell wants a house full of spam, and the utility company refuses to take payment in spam (or euros, or gold, or 9mm ammo........).

Foreign Investors:
These are the real wild cards in the equation. At what point do the foreign investors just leave? And if they leave, what happens?

A market crash will be the least of our problems if the foreign money takes a hike.

The federal government runs at a deficit. It spends more than it takes in, then borrows the rest. Much of that is borrowed from other countries. Will higher treasure rates lure them back? They might, if everyone and their brother weren't fleeing to treasures already, driving down the returns. If they loose faith they will ever be paid back, who would invest in a failing government?


My personal strategy is as follows:
Treasuries = 99% of my savings is in treasuries (I don't real have a choice all my saving is in a 401K.)

Home = Up till now, I have been paying off my home at a greatly accelerated rate. But I am pretty sure the loan is held by a “publicly-owned corporation chartered by Congress”. Can my loan get called in if the holder goes belly up? If the payment system locks up because of bank failures, will I be on hook for penalties?

Federal reserve notes and gold/silver = I have a little in a safety deposit box, but it is damn small amount. I may accumulate more, but I really don't know right now.

As the crisis deepens Part 1: Freezers/Refrigeration.

One of the things to consider as the crisis deepens, is that rolling blackouts and power outages will add to the burden of an already stressed population and economy. In a world of shortages, one thing you don't want, is to have your limited supply or food of perishable medicine to be destroyed by unreliable power.

I've been looking for a high efficiency 12 volt dc/110 ac freezer for a while now. Although I've know about Sundazer and Sun Frost for years, neither really suited my needs.

I wanted a chest style freezer that worked on 12v and 110ac, yet had a low enough power consumption that it could run off solar panels. Most 12v coolers are of the thermo electric variety. They are very inexpensive and pretty much useless (I have one). They provide little cooling for the power consumed.

Then I ran across the Coleman Stirling Power Electric Cooler. Which led me to the Engel freezers. The Danfoss compressor, in the Engel, is the same high efficiency one used in the Sundazer.

The Engel's is sold by Big Frog Mountain and Cabelas. I consider that a pretty good endorsement, since Big Frog has been doing the alternate energy thing since 1989 and I've always been pleased with the stuff I bought from Cabelas.

Engel is an Australian company, here is their link. They also sell kits for converting an existing cooler or building a freezer from scratch.

Of Trolls and Screamer.

The thing that always fascinates me is motive.

Whether we are talking about climate change, peak oil, air pollution, or whether the moon landings were real, you always have people willing to froth with religious fervor that, “it is not true”. I work with some of them and it is interesting to probe their thought processes.

Generally I find four root causes:

1) Selfishness: Some are quite open about this. The high performance/luxury vehicle makes them feel important and special. They will not give it up, no matter what the cost to others.

2) Hatred of the group promoting the issue: If party “X” is promoting it, then it must be bad.

3) Fun: They enjoy being a troll. It give them a sense of power. Here in the south I see a lot of this. People hang a rebel flag or act like a redneck, just to piss the rest of the country off. They love to watch the liberals dance in anger. It almost has reach the status of a sport.

4) Delusion: Never underestimate the need for people to delude themselves. Life can be really hard. Sometimes insisting that a perpetual motion machine works is part of their coping strategy for dealing with the loss of their job, loved one or social status. I see this with some of my evangelical friends. They were on a path to self destruction till they found “X”. Now that they have “X”, “It is in god's hands”.

Which isn't to say that dissent is not a valid and useful thing. It keeps science honest. In fact, at work I have pretty must taken on the role of dissenter. They call me “Mr. Sunshine”, because I always tell them the flaw in their big idea. The difference is, that I have had decades of experience in my field and actually know my subject. Sometimes they overcome the flawed logic, sometimes they don't. But to be a valid dissenter you need to know your subject and have real world experience in science and technology (as apposed to deluding yourself that you know a subject).

As a citizen in a democracy, we have several choices when science, politics and beliefs collide.
1) Read up on what real scientists are saying (not the TV talking heads) and accept their judgment.
2) Get a college degree for the field in question, then spend decades working in that field.
3) Read legitimate science literature and try and apply your life experience.

All three choices have problems:

Blind acceptance of authority is never a good thing.

College degrees are expensive and time consuming. If you tried for a degree in every field you had a question, you would spend your whole life in college. An this assumes you don't get the all important real life experience in that field, or that you are any good in your field of study.

Reading legitimate scientific literature is a good start but unless you have had years of science and technology experience in the real world, your going to make invalid assumptions.

Yes, I know this sounds elitist, but others have made some good comparisons on this subject. One of my favorites was second guessing the airline pilot every time you fly on a commercial airliner. Owning a flight simulator program is not a valid reason to break into the cockpit, and wrestle the controls from the pilot. Not if you want to keep living.

In the case of peak oil and climate change, I have used a three pronged approach.

1)I looked at what the experts had to say.
2)I then went looking for the data behind their conclusions.
3)Then I went looking for the dissenters to see what they had to say.

My advantage in looking into these subjects, is that I spent several decades in a large scientific bureaucracy working as a physicist. I was use to analyzing raw data and avoiding the inherent pitfalls. I am also use to dealing with how personnel self interest, or politics could distort findings. An organization does not willing publish information that cuts review streams.

In the final analysis, it all comes down to whether the predictions are true. Is the arctic melting? Is climate changing? Is oil getting more expensive? Are we drilling for oil in more remote and hostile environments?

If reality matches the predictions (or is worse than predicted), yet you keep coming up with excuses not to accept the data. Then it is time to take a real hard look in the mirror.

Ben Bernanke and the great depression:

With a lame duck president, the future of the country seems to be in the hands of Mr. Bernanke. So I went looking for some insight in to how the man thinks.

The first thing I ran across is a review of his book, "Essays on the Great Depression” Reviewed for the Cato Journal by Anna J. Schwartz (April 6, 2002). I would have thought that anything from the libertarian CATO institute, would be a blistering attack on government intervention and on the fed in particular, but it was a very nice summary of the book. Which was exactly what I had wanted, since I didn't feel like wading through a book fully of economic jargon.


A very telling paraphragh from the review:

"Bernanke distinguishes at least two channels by which deflation induced depression. A nonmonetary channel that, in his view, linked falling prices and falling output was banking panics and financial crises in choking off normal flows of credit. The decline in financial intermediation that followed from the reduction in banks' ability to lend engendered a fall in the net worth of households and firms holding nominally fixed debt. The ensuing debt crisis increased the number of bankruptcies and became an important propagator of economic contraction."

Sound a lot like todays sub-prime mess doesn't it. If I had read this before the last fed open market meeting I would have bet on the .5 rate cut.


The second item I ran across was: Remarks by Governor Ben S. Bernanke, At the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois, November 8, 2002, On Milton Friedman's Ninetieth Birthday.



A quote from that speech :

"It was in large part to improve the management of banking panics that the Federal Reserve was created in 1913. However, as Friedman and Schwartz discuss in some detail, in the early 1930s the Federal Reserve did not serve that function."

Again if I had read this before the fed meeting I would have bet on the .5 cut. The news was full of “bank failures” and Bernanke is convinced that it is the feds job to stop these by any means necessary.

He even quotes Friedman about the great depression:

“Germany had been insulated by her hyperinflation and associated floating exchange rate."

This is a man obsessed with bank failures and runs, but what does he think about the death of the dollar, due to high inflation and the dumping of the dollar as a reserve currency, that have resulted from his policies?

Evidently he thinks it is a good thing!

I'm not at all sure I agree. On the positive side, it is wiping out the federal debt (and everyone else's debt), at a remarkable rate. It also is causing oil to rise, which should cause more conservation. It should also slow or stop the export of jobs and manufacturing.

On the other hand it is going to become increasingly more difficult for retirees to live since their savings are not accruing faster than inflation, while the bogus “cost of living” adjustments of Social security will never keep up with inflation.

A very mixed bag. My brothers enormous mortgage and credit card debt is shrinking, but my fathers life savings are also shrinking. At the same time I have invested heavily in overseas stock markets. The death of the dollar is causing my investments to soar (at least on paper).

So I went looking for some more indications on how Ben viewed the inflation of the Weimar Republic, and found a lengthly endnote in one of his Fed speeches. From that endnote:

“More recent research has shown that attempted bubble popping by monetary policymakers played an even greater role in the onset of the Great Depression than we had thought. An insightful article by Hans-Joachim Voth (forthcoming) has shown how the German central bank, under the famous central banker Hjalmar Schacht, contributed mightily to the demise of the Weimar Republic by aggressively attempting to bring down stock prices in 1927. Schacht's policy was successful, in the sense that the stock market crashed. But investment plummeted as well, and the German economic boom of 1924-1928 degenerated into depression and played a role in the global slowdown. Ironically enough, Voth argues persuasively that in fact there was no bubble in German stock prices, so that Schacht's actions were purely destructive. “

Read the rest of Endnote #16, it basically says that bubble popping if a really bad idea.


So Ben seems to think that inflation (even hyperinflation) is better than depression. At the same time the people happy about a strong dollar (like the Chinese) are going to get really shrill in their dislike of his policies. After all, pegging your currency against the dollar, is now the same thing as tying an anchor around your neck and jumping overboard.

Dollar verses Euro and Yuan.