Paper Money's Heyday
Paris, France
Tuesday, December 23, 2008
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*** The whole auto industry has hit a telephone pole...want money? Just ask the hacks in D.C....
*** The situation we are facing now is why paper money was invented...Dubya says we must kill capitalism – in order to save it....
*** Laissez-faire, we hardly knew ye...end the financial crisis with a money crisis...vote for I.O.U.S.A. ...and more!
Nothing particularly remarkable in market news yesterday. The Dow fell 59 points. Oil slipped $2.50...to close below $40 again. The euro climbed back to the $1.39 level.
Caterpillar said it was cutting back executive pay. Corporations have been embarrassed by how much they paid their managers. They paid the top people millions of dollars; you’d think, if they were getting that kind of money, they’d at least look where they were going. Instead, they drove the businesses right into a ditch.
The whole auto industry seems to have hit a telephone pole. GM and Ford saw their debt downgraded again. And Toyota forecasts its first operating loss in 71 years.
We’re coming close to the end of a remarkable year. And the wonders keep coming...
Last Friday, the Fed said it would make low cost loans to anyone who would help get consumer credit pumped up again. “This includes hedge funds,” explained the report in the Financial Times , “which have never been able to borrow from the US central bank before.”
Isn’t that nice, dear reader? The helpful people at the Fed are going to provide money so that hedge funds can speculate on consumer debt. Then, the Fed will have a new kind of “asset” on its books – a loan to a hedge fund. From the date of its founding in 1913 until just six months ago the Fed kept little more than U.S. Treasury debt in its vault. Everything else was considered too risky for America’s central bank.
But everything has changed in the last half year. The banks...the capitalists...and Wall Street have all been humbled. Now, politicians are in the driver’s seat – in Detroit...in Lower Manhattan...and all through the economy. And now the Fed has $1.5 trillion worth of the kind of “assets” that got the financial industry into trouble in the first place.
Want money? Ask the hacks in Washington! Get in line!
Need to decide what kind of car to build? Ask a Senator or a Congressman?
Need to figure out if you should make a loan...or not make a loan...what business should be saved and which one should be left to die? There’s some bureaucrat at the U.S. Treasury who will help make the decision.
At long last, the dream of the bankers who set up the Fed has been realized. If you want to control a society, get control of its money. Everybody needs money. Everybody wants money. And they’ll have to come to you to get it.
In a gold-backed currency system, people have to respect the golden rule: he has the gold makes the rules. That’s why the Roosevelt Administration confiscated gold in the ’30s; it wanted to make a lot of new rules.
But gold is limited...and hard to control. In political matters, it is uncooperative. Say you want to prop up a failing industry...or buy off a pressure group...or pay off friends? Where do you get the money? You only have so much gold...and you don’t want to waste it. So you tend to be careful. That’s why the feds turned to the kind of money you get from trees. Paper money is much more, shall we say, pliable... It is a go-along, get-along kind of money. It’s ready to pick up the tab for any party, no matter how outrageous...and ready to go along with any scheme...no matter how absurd.
And today, we have just the sort of situation for which paper money was invented. Absurd and outrageous. The feds want to hand out money; they need some cheap money to hand out. And since everyone needs money – in fact, at this stage of the crisis they are desperate for it – they’re ready to go along with anything the feds want.
This line of thinking is continued...below...
*** George W. Bush said last week that he had to kill capitalism to save it:
“We abandoned free market principles to save the free market system,” he is quoted as saying.
Let’s see, how does that work...perhaps you could try a little hanky pank with your neighbor’s wife in order to save the sanctity of your marriage? Or rob a bank in order to prevent theft? Or eat a few extra desserts at Christmastide in order to keep slim?
We just don’t get it.
You might say you believe in Holy Salvation and still keep a rabbit’s foot in your pocket. But if you want to get into Heaven you don’t rape a nun.
At least, France’s president Sarkozy is more honest about it: “Laissez-faire, it is finished.”
Yes, dear reader. Laissez-faire , we hardly knew ye. But now, free market capitalism is less respectable than rap music. State-directed capitalism is the new thing. In the space of barely six months, the U.S. government has taken effective control over the banks, the automakers, and the mortgage industry.
From Bloomberg :
“The Bush administration’s $13.4 billion rescue of GM and Chrysler is a fitting finish to a year in which governments around the world expanded their role in the economy and markets after three decades of retreat.
“The increase in the government’s role in the economy has been breathtaking. The U.S. looks set to rack up a budget deficit of at least $1 trillion this fiscal year, while the Federal Reserve has already increased its balance sheet by $1.4 trillion since last December. By way of comparison, U.S. gross domestic product last year was $13.8 trillion.
“Winding back the intervention may not be easy, says [Paola] Sapienza, (associate professor of finance at Northwestern University’s Kellogg School of Management).
“When Italy nationalized banks in 1933, ‘the architects who designed the system envisaged it as temporary,’ she says. ‘It was in place until the end of the 1990s.’ More recently, the Japanese government injected capital into banks to get them to lend to big corporations, keeping alive ‘the zombie companies that economists talk about,’ she says.”
*** How will it all end?
Bloomberg has found an answer:
“‘We’ll end a financial crisis with a fiscal crisis,’ says Vito Tanzi, former director of fiscal affairs at the IMF. ‘We’ll get out with very large public debt and very large public spending. That, for sure, will slow down the rate of growth for the next 10 years or so.’”
Not just a fiscal crisis. A money crisis.
Public spending will be financed first by borrowing...and then by printing. You’ll see Treasury bond yields – now at historic lows – shoot up. The dollar will collapse under the pressure. Gold will soar.
When will this happen? How will it happen?
No one knows. But the Economist says it could happen before the end of 2009. It is coming...but of that day knoweth no man.
*** Family update:
Henry came back from Charlottesville on Saturday. Jules arrived from Boston yesterday. Maria comes from Los Angeles tomorrow...along with Sophia, coming from London. From all over the English-speaking world, the family assembles for its Christmas holiday.
Jules gave this account of his trip over the Atlantic:
“It was horrible. I’m never flying American Airlines again. All of a sudden, we hit an airpocket...or something... It happened when the stewardesses were serving drinks. The drinks went all over the place. The stewardesses fell over. Everybody was screaming. A woman crawled along the corridor to get back to her seat. The captain got on the speaker and yelled at the stewardesses to take any available seat. One of the stewardesses at least kept calm and tried to help passengers. The others were in more of a panic than we were.
“I tried to say the Hail Mary...but I couldn’t remember the last lines...then, I thought my goose was cooked. I promised I would learn it if I were spared. And then, when the airplane settled down...it is amazing how silly I felt. Because I had been depressed. And now I was saved. I really felt good. And then, within 10 or 15 minutes, I forgot the whole thing. And I was depressed again.”
Maria, trying to make it big in Hollywood, sends this report:
“I got a part in an ad... It’s not Shakespeare. But it’s paid work. It’s a commercial for Audi and they say they are going to run during the SuperBowl!”
Henry helpfully posted this note before his arrival: “Here’s a quick Christmas list. A lot of you are on a tight budget, what with this worldwide financial meltdown, so I’ve included items that can easily be shop-lifted...”
Until tomorrow,
Bill Bonner
The Daily Reckoning
P.S. We just received this note from Addison and Short Fuse:
“I.O.U.S.A. needs your help! You can vote on the Critic’s Choice Award site for the documentary that you think should win...
“Here is the link:
VOTE IN THE BOTTOM LEFT CORNER
“All film reviews represent the unique and honest opinion of the authoring member. Any attempt to influence a review beyond providing information is a violation of BFCA standards.”
The Daily Reckoning PRESENTS: What seems to spook Americans about the financial crisis is the possibility that everybody in charge of everything is a fraud or a crook. Legitimacy has left the system. Not even the legions of Obama are immune as his reliance on Wall Street capos Robert Rubin, Tim Geithner, and Larry Summers seem tainted by the same reckless thinking that brought on the fiasco. James Howard Kunstler explores...
LEGITIMACY DWINDLES
by James Howard Kunstler
Zounds! Public sentiment toward the accelerating economic fiasco has shifted, seemingly overnight, from a mood of nauseated amazement to one of panicked grievance as the United States moves closer to an apparent comprehensive collapse – and so ill-timed, wouldn’t you know it, to coincide with the annual rigors of Santa Claus. The tipping point seems to be the Bernie Madoff $50 billion Ponzi scandal, which represents the grossest failure of authority and hence legitimacy in finance to date in as much as Mr. Madoff was a former chairman of the NASDAQ, for godsake. It’s like discovering that Ben Bernanke is running a meth lab inside the Federal Reserve. And out in the heartland, of course, there is the spectacle of Illinois governor Rod Blagojevich trying to desperately dodge a racketeering rap behind an implausible hairdo.
What seems to spook people now is the possibility that everybody in charge of everything is a fraud or a crook. Legitimacy has left the system. Not even the legions of Obama are immune as his reliance on Wall Street capos Robert Rubin, Tim Geithner, and Larry Summers seem tainted by the same reckless thinking that brought on the fiasco. His pick last week for chief of the SEC, Mary Shapiro, is already being dissed as a shill for the Big Bank status quo. In a few days we’ll discover what kind of bonuses are being ladled out by the remaining Wall Street banks with TARP money and a new chorus of howls will ring out.
This is very dangerous territory. In dollar terms, the numbers being applied to the various problems are so colossal – trillions! – that the death of our currency seems assured. And in defiance of congress’s express intentions, none of the TARP “money” has been applied to its targeted purpose of buying up “toxic” (i.e. fraudulent) securities hidden in the vaults of banks, pension funds, and municipal portfolios.
George W, Bush’s personal bailout of General Motors and Chrysler is designed solely to postpone their bankruptcy and mass job layoffs until after the holidays. Otherwise, the $17.4 billion will probably be used by the companies to underwrite the extensive legal work required for the moment they must declare bankruptcy – when Mr. Obama is in the White House. Meanwhile, the President-elect has ramped up his job-creation target overnight from two to three million, and some observers are catching a whiff of Soviet-style economic engineering (“...we pretend to work and they pretend to pay us....”).
The years since Jimmy Carter have produced an astoundingly flaccid public, sunk in various addictions and distractions, but this is about to change. The darkling mood of political protest and violent activism that saturated my own young adult years is scudding up again on the horizon. Mr. Obama’s pick for attorney general, the mild-looking Eric Holder, may be the key figure in the early months of the new government. If he doesn’t commence some aggressive investigations and prosecutions – beginning with Henry Paulson for insider trading when he was in charge of Goldman Sachs and shorting his own company’s mortgage-backed securities – then the whole Obama enterprise could fall under suspicion of illegitimacy. The bums who ran the US banking sector into a ditch have to account for their turpitudes. They can’t be allowed to hide under a TARP.
Unfortunately, the legal system, and probably the legislative system, will be so buried in procedural bullshit from the unwind of countless enterprises and institutions, and the sorting out of the remnants, that it remains to be seen whether this generation of people-in-charge can even embark on a fresh start of anything connected to real everyday life in America. All this is starting to alarm the tattered residue of the middle classes, and from here it’s a very short path to them being really pissed off.
When legitimacy erodes, anything goes. Nothing is respected including rules and personalities. The center doesn’t hold and the new vacuum there is a tumultuous place. The same crisis of authority and legitimacy is spreading from nation to nation now. Soon, China will contend with a discontented army of the unemployed. Greece has been in an uproar for two weeks. Belgium’s government just collapsed. Trade barriers are going up. Exports are falling away. The world’s energy markets are not immune to these disorders. I would expect problems with the currently seamless supply lines that bring America two-thirds of the oil we use. Even a mild disruption of oil supplies could attach an anvil to the ankle of an economy already falling off a cliff.
Right now, the overwhelming sentiment is to get this country back to where we were, say, ten years ago, when everything was humming nicely: Clinton nostalgia. We’re definitely not gong back there, though. It’s an idle wish. And any set of policies designed to lead in that direction will prove very disappointing. Our destination is a land of much smaller-scaled local economies. We could retain our federal ties if the federal government can scale back appropriately from the bloated, feckless enterprise it has become. Otherwise, it might only get in the way and make matters worse, and the public in one region or another of North America might reach a decision that they are better off without it. That would be what’s called a revolution.
Regards,
James Howard Kunstler
for The Daily Reckoning
Editor’s Note: James Kunstler has worked as a reporter and feature writer for a number of newspapers, and finally as a staff writer for Rolling Stone Magazine . In 1975, he dropped out to write books on a full-time basis.
His latest nonfiction book, The Long Emergency describes the changes that American society faces in the 21st century. Discerning an imminent future of protracted socioeconomic crisis, Kunstler foresees the progressive dilapidation of subdivisions and strip malls, the depopulation of the American Southwest, and, amid a world at war over oil, military invasions of the West Coast; when the convulsion subsides, Americans will live in smaller places and eat locally grown food.
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