My printing presses are operating 24/7!

On the first day of Christmas, my country gave to me

A debt bigger than GDP

Yep, that’s right. US Public debt stands at more than 100% of GDP. The last time debt was this high, we were fighting a World War across two continents and building a peaceful prosperous world, whose basic shape would endure for generations. That was money worth spending. On this occasion, however, we’ve run up the debt, in order to protect Wall Street bankers – yet the sebanks are still crammed full of unsustainable assets. It won’t be long before the Fed further loads its balance sheet with worthless toxic assets … thereby transferring liabilities from the reckless bankers to US citizens. Maybe not quite such a good buy, huh?

On the second day of Christmas, my country gave to me

Debt for the poorest

According to Nobel Prize-winning economist, Joseph Stiglitz, the share of American GDP going to wages and salaries has falled to about 43% since 1970. At the same time, the slice going to companies in after-tax profits has doubled since just 2005. How have the US middle classes even vaguely been able to sustain their living standards? Answer: by taking on unpayable debt that chokes the financial system and throttles economic growth. It’s an appalling situation and it’s not set to change.

On the third day of Christmas, my country gave to me

Bernanke trashing dollars

Impact of money printing and currency debasement

Ben Bernanke, Chairman of the Federal Reserve, is not an elected official. Prior to taking his current job, he was a classic ivory tower economist: a guy who couldn’t do any harm because no one was dumb enough to give him any power. Then he took control of the Fed: an organisation whose structure and oversight has barely been altered since 1913 when it was created, under vastly different conditions. Back then, GDP was just $40 billion. By contrast, in 2011, the interest on US debt was $454 billion despite interest rates at 200-year lows. Since taking charge of the Fed, Bernanke has printed trillions of dollars – a plan that trashes the value of the dollar in your pocket, and a plan with no plausible exit strategy. The plain fact is that pumping money into the economy does nothing to boost real growth or real output – it just inflates bubbles in property and stock, as has been shown repeatedly for thirty years and more now. If you’re not convinced, just check the graph.

On the fourth day of Christmas, my country gave to me

Overpriced healthcare

Good quality healthcare is, in my view, a human right and Obamacare, for all its faults, brings that right a little closer to millions of Americans. But the United States, under every administration and every Congress, has completely lost control of health costs. We currently pay about $8,000 per head in health costs. (That figure includes household, corporate and government spending.) Our major competitors spend between $2,900 per head (Japan) and $4,500 (Canada). And they have better healthcare. To find OECD countries with worse performance on ‘years of life lost’, you have to travel south to Mexico or east to Hungary. All other countries in the OECD fare better.

On the fifth day of Christmas, my country gave to me

Quarreling leaders

Iceland is no banana republic

We pay politicians to solve problems, right? We just had an election at which alternative views were put to the people, for their decisions on the way forward. And this country of ours has some fair-sized problems. So what happens? We have the ultimate This-Needs-A-Decision-Now situation in the fiscal cliff, and both sides cleave to their existing rigid positions until (wait for it) they come up with some dumb and unsustainable last minute compromise. That’s not what they’re paid to do. These same politicians think that raising the debt limit will stimulate the economy. Wrong! At a global level, the growth in credit instruments has outpaced growth in the real economy by a factor of around four times. That’s not healthy for the world, and it’s not healthy for the debt-dependent United States. I predict that the US will enter a recession in 2013.

On the sixth day of Christmas, my country gave to me

Corruption on Wall Street

You could have a whole 12 days song just for Wall Street corruption and its toothless regulators, so endemic is the problem. But let’s narrow the microscope, so we’re only looking at SEC enforcement

Zero high profile bankers in jail = 0 regulation

actions since 2009. Firms affected include: Citigroup (multiple times), Commonwealth Advisors, Goldman Sachs, ICP, JP Morgan (multiple times), Mizuho, Stifel Nicolaus, Wachovia, Wells Fargo, American Home Mortgage, Bank Atlantic, Countrywide, Credit Suisse (multiple times), Franklin, Fannie Mae, Freddie Mac, Indymac, New Century, Option One Mortgage, Thornburg, TierOne, Bear Stearns, Charles Schwab , Evergreen, Morgan Keegan, Oppenheimer, Reserve Fund, State Street, TD Ameritrade, Bank of America, Brooke Corp, Brookstreet, Colonial Bank, Taylor Bean & Whitaker, KCAP Financial, and UCBH. The list includes firms where executives from that firm were charged. In total, 133 entities and individuals have been charged. Total penalties and similar charges amount to $2.6 billion. Aside from the SEC, other regulators have been equally active. And has anything fundamental changed? Nope. Nothing at all. Wall Street is still rotten to its core. And why would it change? When these fines represent perhaps 10%, if that, of the ill-gotten gains why on earth would bankers change their business models? They just need to keep paying the toll.

On the seventh day of Christmas, my country gave to me

Despairing workers

This time its worse..

One of the big talking points ahead of the election was whether the jobless rate would come to Obama’s rescue. And sure, the rate has nudged down to below 8.0%, from closer to 10.0% three years ago. But that’s not the most striking piece of economic data to come out of the Bureau of Labor Statistics. The most striking – and saddening – data is that we now have, by far, the lowest civilian labor force participation rate for thirty years. Workers are leaving the labor force because the jobs aren’t there. It’s a waste of a generation. Meantime, we should use a new unemployment metric that reflects the true US jobless rate rather than a politically sanitized version. A little honestry, transparency and accountability can go a long way.

On the eighth day of Christmas, my country gave to me

Corporate tax scams

GE's CEO advises the Obama administration on economics, go figure!

In 2010, General Electric paid no corporation tax. None. Not even one miserable dollar. In the five years to 2010, GE accumulated $26 billion in US profits and do you want to guess how much of that was passed to the IRS? You’re guessing zero, right? Unfortunately, you’re wrong. The answer’s worse than that: they accumulated a net benefit of $4.1 billion. Oh, and though the firm is America’s biggest corporate lobbyist, the truth is that countless big firms are playing the same game – and the data shows that the more you lobby, the better your shareholders fare. I’m guessing that’s not quite the way the Founding Fathers intended things to work.

On the ninth day of Christmas, my country gave to me

A huge Farcebook rip-off

Morgan Stanley banked profits on this IPO

Just in case anyone needed proof that Wall Street has absolutely no ethics at all, the Facebook IPO popped up to remind us. Extravagant valuations on launch led to an intra-day high of $45.00, before reality set in and the stock plunged to a way more realistic $17.55. The winners: company insiders and Wall Street. The losers: the retail investors who believed the hype. (Oh, and since we’re talking about hype, then Apple at its current $500 a share is way more reasonable than it was at closer to $700. It’s a wonderful firm, but it’s in a commodity business where the competition, finally, is catching up.) On Facebook, meantime Morgan Stanley has just been fined $1.5 million for an operation whose profits were well in excess of that sum. Again: why change a business model if the fines are mere pinpricks?

On the tenth day of Christmas, my country gave to me

The power to hope

Ho HO HOPE

This is America. However bad things get, we can still believe in the possibility of improvement. We can believe that our leaders will find the ability to be responsible, to think about the good of the country before the good of their parties. We can believe that the media and regulators can find their teeth. Can demand transparency and enforce accountability. Above all, we can believe in the power of the American people to demand change. To slash debt, return to honest money, to speak truth in politics. And perhaps, who knows, we can return to the old ways of making money: by making stuff and selling it instead of through ever more opaque financial dealings based upon fictional future value, a mountain of debt, and way over-leveraged derivative products.

A merry Christmas to you all.

Four More Years

Obama’s an accomplished individual. Smart, cool, in control. But his standout quality is probably his ability to create euphoria. Create it, sustain it, ride it. Watch the people celebrating with him at his victory rally in Chicago and you could easily believe that the USA had just won a war or beaten a recession.

Unfortunately for Obama, reality doesn’t have much time for speeches. The economy was dire going into the election. Coming out of it, you can almost hear the engine failing.

Let’s take the first indicator of failure – the stock market. The market mood darkened in September and October, then dropped abruptly as news of Obama’s victory sank in. I don’t actually think that’s because Wall Street hates Obama. I think it’s more that as the election hoopla dies away, investors realise how little they can expect from the government, how bad the economic situation really is. And, for that matter, how bad the political situation is. The House remains solidly Republican, the Senate comfortably Democrat – and the whole divisive status quo guaranteeing gridlock for another four years.

Over the next few weeks, you’re going to hear a lot about the fiscal cliff. In January 2013, a whole lot of things happen together. George W. Bush’s tax cuts expire. A payroll credit expires too. Some automatic spending cuts are imposed across the board. (These last cuts, of course, aren’t thanks to some outbreak of sanity in Washington, but a bad compromise cobbled together in the course of 2011’s debt ceiling crisis.)

The fiscal cliff is huge, and real. Its impact is potentially around 5% of American GDP. By contrast, George Osborne’s fiscal tightening amounts to little more than 1% a year. If you want to get your head round what a comparable tightening would imply in the British context, then just imagine that the basic rate of tax increases by 10 pence in the pound overnight. Or that spending in the NHS is halved, again overnight.

No economy is strong enough to take that kind of punishment. The British economy is struggling to come out of a double-dip recession even with its own weak-as-milk pace of tightening – and, indeed, I think a triple-dip recession is highly probable. The fundamentals of the US economy are in some ways better than ours (less reliance on the finance sector, less proximity to European travails) but a 5% cut in economic demand overnight? The result will be crippling.

Although the US jobless rate has improved slightly in recent months, that’s only because dispirited workers have left the jobs market altogether. The US employment rate is a horror story. Piling a massive fiscal shop on top of those weak fundamentals, and you’re going to see a massive rise in unemployment. (If you look at U6 unemployment data for the US it’s hovering close to 15%, a shocking stat.)

You might think that the solution is obvious. If the fiscal cliff is so bad, then simply decrease the slope. Go for a slow-but-sure Osborne-style tightening so the budget deficit floats gently lower. And sure enough, there are plenty of economists, living comfortably in their ivory towers, who suggest just such a solution.

But that solution is not available. The IMF – hardly a sensationalist organisation – says that the elimination of America’s long run fiscal gap requires both a 35% increase in all taxes and a 35% cut in all entitlements. The fiscal gap is heinous, but it’s only the first step. It doesn’t even take America where it needs to go.

It gets worse. If fiscal policy can’t save America, how about monetary policy? Alas, and just like in Britain, monetary policy is all out of gas. Interest rates can’t go any lower. quantitative easing (QE) has reached its limits. (And, in any case, QE is little more than a way to rescue Wall Street at the cost of inflation for the rest of us.) The worst thing that could happen to America is that Ben Bernanke, the unelected Chairman of the Federal Reserve, tries to rescue things. The best thing that could happen is that he goes on holiday for four years, having left his Blackberry in the office.

The Princeton Professors Economic Experiment

In short, America’s problems are profound and there is no way to deal with them except one that imposes huge short-term costs on the economy and the people. I don’t think it’ll get quite as bad as it has done in Greece – the US economy has a lot, lot more about it than that – but most of the pain still lies ahead.

And in matters of finance, everything is circular. So the government needs to raise taxes and slash spending to sort out its debt problems. The result: a huge reduction in demand and heavy job losses. The result: countless homeowners being unable to service their mortgages and a huge rise in ‘jingle mail’, as homeowners send their house keys to the foreclosing banks. The result: an already weakened banking system sinking further under a tide of ill-advised boom era lending. And of course, as all this happens, the economy will shrink, which means that the US government has to slash spending yet further in a desperate effort to keep its deficit reduction efforts on track.

These words might seem apocalyptic, but I’ve been saying these things for a while. (My book, Planet Ponzi, has the whole story, and it’s out in paperback now.) What’s more, we’ve already seen disaster scenarios such as these come true in well-managed countries of the developed West. Spain had a much lower debt to GDP ratio than the US. It had better supervised banks and less casino-banking. But we all know the state that Spain is in: a death-spiral that even Germany may not be able to help with.

And the signs are everywhere in America. Go-go stocks have lost their lustre. Facebook trades at little more than half its IPO price. Apple, for so long a do-no-wrong stock market darling, is down more than 20% from its recent highs. Businesses are hoarding cash, because they don’t dare invest it, don’t dare return it to shareholders.

I don’t suppose Mitt Romney thinks of it like this, but you could argue that the 2012 election was a heck of a good one to lose. America has outrun financial reality for decades now. Debt-fuelled, government-funded. The future bought on the never-never.

But the debts are falling due. Reality is knocking at the door. And the fiscal cliff is only the start.

How low can a political system sink? Pretty low it would seem. A recent Rasmussen poll suggests that around two-thirds of us would happily fire every single member of Congress, a spectacular lack of confidence in our lawmakers. These are unprecedented levels of disdain and the sad thing is that they’re largely justified.

Frozen solid!

The conventional analysis of this malaise has to do with partisanship in Washington. Too much money, too many special interests, too many lobbyists, too many non-competitive electoral districts leading to a new breed of politicians who pander only to the increasingly extreme demands of their base. The Constitution was never intended to foster such gridlock. Remember that the authors of that Constitution lived in a nation without political parties — in a world where parties of the modern sort were unknown. It was 1796 before the party system had really taken hold and even then, that politics was more fissile, more fluid, than anything we have now. Indeed, you could argue with conviction that the country has never had a more gridlocked, mutually hostile and partisan Congress. At a time of great economic peril, that’s a terrible position to be in.

There are wider consequences too, best expressed in the Russian proverb that the fish rots from the head. If our national leadership is incapable of showing transparent, accountable leadership, what hope is there for the other institutions and organizations that together create the nation?

One recent example would be shocking if repeated injury hadn’t more or less robbed us of the ability to be shocked. The Fast and Furious scandal matters. For a number of years, the Bureau of Alcohol, Tobacco and Firearms allowed guns to ‘walk.’ The idea was to allow suspect purchasers to acquire guns in the belief that these weapons could be tracked back to high-level figures in the Mexican drug cartels.

I don’t know if that was a completely dumb idea or not. I’m not qualified to comment. What I do know is that many dozens of Mexican citizens are alleged to have been killed by these weapons and at least one U.S. Federal agent, Border Patrol Agent Brian Terry, was shot dead. One ATF official told a congressional oversight committee, “The ATF armed the [Sinaloa] cartel. It’s disgusting.”

But these things happen. In a big country, with a complex government, sometimes people do stupid things. That’s not, in itself, the issue.

How's about a little love and a lot of Executive Privilege?

The issue is what happens next. Is there a transparent investigative process, whereby the facts are investigated and the appropriate people dismissed or (if found to be in breach of the law) punished? Of course not. The House voted to cite Eric Holder for contempt of Congress in a battle over which documents should be released to the inquiry. Holder claims he’s just a proxy for Obama and the entire attack is partisan. Nancy Pelosi argues that it’s all part of a giant conspiracy to undermine democracy. Just in case things hadn’t sunk low enough, Rep. Trey Gowdy tells Pelosi that she’s “mind-numbingly stupid” and suggests she “schedule an appointment with a doctor.”

And an American officer has been shot dead by guns that walked out of the country under the direction of our ATF officials. And Mexican drug cartels have bolstered their armories. And our southern neighbor has descended that little bit further into violence and anarchy. Yet all our politicians can do is call each other names and bicker at each other.

So much for the head of the fish. The rest of that fishy body isn’t smelling too good either. Barclays, a British bank that scooped up Lehman’s U.S. operations and has a huge presence on these shores, has admitted manipulating the LIBOR “Fixings.” Those markets are multi-multi-trillion dollar markets and if the banks are rigging them for their benefit, you can bet your house that you’re one of those to have lost money as a consequence.

So what happens? Answer: not much. It’s been fined a little fraction over 1% of its market cap. The Chief Executive — who’s already pocketed over £100 million in pay over the past few years — resigns (but will probably get a huge payoff). No one goes to jail. No one ever does, more deflection and more diversion.

Or ING, a foreign bank trading out of New York, is fined for fraud, breaking sanctions aimed at Cuba and Iran. The fine was big, but who goes to jail? Nobody. Instead the bank says in a statement that it, “it took a provision of €370 million ($462 million) in the first quarter of the year to cover the penalties, set up a team to prevent and detect money laundering, closed its representative office in Cuba in 2007, and ended relationships with sanctioned entities.” Gee, shucks.

Where did I put that 1.6 Billion..? Look under my keyboard.

Or MF Global, run by Jon Corzine, formerly of Goldman Sachs and close to the Obama White House. The firm went bust and around $1.6 billion in client money has gone walkabout. If someone takes money that isn’t theirs, that is theft. I’m not talking about the law, necessarily, I’m not a lawyer — but I am talking about ethics. If someone or some group of people conspires to deprive clients of $1.6 billion, that person or group of people should be wearing orange and looking out of windows with bars on them. But what actually happens? Nothing.

The solutions are so simple. We need transparency and accountability at the top. We need accountability and transparency all the way down. Forget about creating new laws when we never enforce existing ones. If you mess up, you bear the consequences of your actions. If a federal operation goes wrong, it is investigated swiftly and rigorously, with appropriate outcomes for those involved. If your firm goes bust, nobody bails it out. If you breach the law, you go to jail. If you steal a thousand bucks, you receive a light sentence. If you steal a thousand million bucks, you should get the cell next to Bernie Madoff and the same release date: 14 November 2139.

Is that going to happen any time soon?

Nope. It won’t. But meantime, two-thirds of us are right. We need to fire this Congress and start again. The pledge of allegiance talks about justice for all. We need to honor that pledge at the moment we are doing the opposite.

 

This was published  in the Huffington Post 

It’s a strange world we’re living in. This newspaper reported yesterday that, ‘Britain and the US joined forces to urge Germany to create a central Brussels body that could assume sovereignty over individual countries’ budgets and fiscal policies.’

David Cameron and George Osborne are said to believe that ‘a single currency can only work if the Eurozone creates an effective fiscal union.’ Barack Obama is in on the act too. Everyone, it seems, wants a Euro superstate … except for Angela Merkel, the woman who’d be in charge of running it.

Now this seems like a simple story, only the more you look at it, the more it’s like one of those pictures where you have to count up the number of impossible things: fish flying through the air, roofs with no walls, water flowing uphill. And right now, we’ve got a lot of flying fish.

Point number one, a simple one. Germany can’t bail out Spanish banks. It’s illegal and unconstitutional. I know that democracy has taken a pasting recently – just witness an unelected Italian government or the almost total absence of democratic consultation over the fiscal stability treaty. (Take a bow, Ireland, for remembering that voters matter.) But even in these undemocratic times, the rule of law still matters. Germany is coming under acute pressure to break or bend laws passed in good faith. It is right to resist.

Secondly, another simple point. As a hedge fund manager, I’m charged with looking after money on behalf of my investors. It’s my job to make money when the markets are good, to avoid losing it when they’re not. And one of my rules is the oldest one in the market: you never double up on a losing trade. You don’t throw good money after bad.

That plain good sense has been altogether lost in recent times. Europe has too much debt, right? So what’s the solution everyone’s been talking about? Answer: more debt. Yes, sure, we’ve been hurling money – whether borrowed or printed – at these problems for the past four years. That solution has clearly failed … yet the answer, apparently, is to do the same again, only on a larger scale. That’s craziness, the very definition of insanity.

What makes it worse is that we see the same recycled advisers coming up with the same failed solutions. I estimate that, if you include guarantees, the co-ordinated money printing since 2008 has currently added at least $14trillion to the global money supply. That’s almost one quarter of world GDP. Does anyone really think that if $14 trillion hasn’t solved the problem, more money is going to do the trick? The problems and challenges have been getting worse, not better.

And third, don’t we live in a capitalist world? Where smart ideas are meant to make money, where dumb ideas lose it. Capitalism without bankruptcy is comparable to Catholicism without hell – yet G7 leaders seem ready to gang up on Germany for holding fast to this basic truth. If a Spanish or Greek bank has got itself into trouble by making bad bets with its shareholders’ capital, it deserves to lose everything. If the Spanish government wants to fix its financial system, it should do so with money belonging to its own taxpayers.

And finally, the Elefant in the Zimmer. Germany doesn’t have the money to bail out Europe. In the first place, its debt to GDP ratio is actually worse than Spain’s. It’s about the same as Britain’s, and we’re hardly in fine financial fettle at the moment. Furthermore, those ratios are based on the official debt numbers … which exclude, for example, any notion of pension liabilities, an area where Germany has massively under-provided over the years. The German economy itself is robust, but that country’s pensioners are going to need every ounce of that muscle for themselves.

Merkel is unwilling to bail out Spanish banks – which would be unconstitutional – despite the encouragement of the G7

Personally, I think Angela Merkel is resisting the G7 pressure for some honourable reasons. I think she doesn’t want to break the law. I think she believes completely in the law of capitalist consequences: that the people who make the mistakes need to be the ones to pay for them.

But she’s also a numerate, intelligent woman. She knows that Germany’s financial strength is far from impregnable. The country’s financial capacity is strong, precisely because she and her predecessors have taken care not to overload it – not to do to Germany what Blair and Brown did to Britain. I don’t want a superstate any more than you do. I certainly don’t want a British Prime Minister to be advocating the development of such a state. But fortunately, I think Merkel doesn’t want one either. Can’t finance it, doesn’t want it. Let’s hope she holds firm

I published this in todays Daily Mail

Paul Krugman, a Nobel Prize-winning economist and writer for the New York Times, is in London at the moment telling us that we’ve got things wrong.

On Tuesday, he gave a lecture at the London School of Economics entitled, ‘Austerity Thy Name is Vanity’. Today, he was on Radio 4’s Today programme telling us that the coalition’s economic policy was ‘failing dismally’, arguing that ‘it is deeply destructive to pursue austerity in a depression.’

I half agree with him. The bit I agree with is that I think it’s fair to call what we now have ‘a depression’. We’re just coming out (we hope) of the second dip of a two-dip recession and I personally wouldn’t bet either that there won’t be a third one or that this dip we were in over winter is necessarily at an end now. Krugman is right: times are grim.

But that doesn’t mean he’s right about the remedies. He wants us to spend more money. Specifically, he wants the government to increase spending by 2% of GDP. Which is pretty modest, right? 2% doesn’t sound like a whole lot.

But let’s remember a couple of things. First, Britain produces quite a lot of goods and services. Even in these recessionary times, we produce £1,500 billion worth of stuff in a single year. If you take just 2% of that very large pile, you are talking about £30 billion. That’s a lot of money. You couldn’t quite pay for the entire British armed forces with that kind of cash, but you’d get a lot more than half.

Secondly, has Paul Krugman not noticed, this coalition government pursuing its ‘austerity’ budget is still spending far, far more than it raises in taxation. In fact, we’re spending about £120 billion that we don’t have. In effect, we’ve chosen to fund the entire health budget from borrowed money. Or, if that thought scares you, then forget the health budget. That borrowed £120 billion would buy the whole defense budget, plus the whole transport budget, and still leave enough left over to put around a thousand quid into the pocket of every man, woman and child in the UK. And at the moment, we borrow that much each year.

For Krugman, this recklessness is not yet reckless enough. He wants us to borrow more, expand the debt faster, add to the burden that will need to be paid off. I don’t have a Nobel Prize on my mantelpiece, but I can see craziness when I see it.

There’s something else he hasn’t noticed. Krugman is an American and I don’t know how often he comes to Europe. But on this continent of ours, there’s a country called Spain. That country has lower debt than the United Kingdom. It has a smaller government deficit. And – Krugman may not have noticed this, but I bet you have – that country is walking a financial tightrope. International investors are shunning that country’s bonds. Put bluntly, Spain is at acute risk of going bust.

Going bust: Spain has a lower deficit and smaller national debt, but is struggling to borrow on the international money markets

Britain is not in that position for two reasons. Number one, we have our own currency, our own central bank and an ability to determine our destiny that not even Germany possesses. That’s probably the biggest part of the story. But we also have a coalition government that has explained clearly and credibly how it is going to restore Britain to the path of fiscal rectitude.

If Osborne listened to Krugman (and don’t worry, he won’t), the cost of borrowing for the British government would accelerate instantly. We’d have to slash budgets and raise taxes simply in order to pay our new, higher borrowing costs. It would be a move of the utmost lunacy.

Three short points to finish with.

One, in the midst of financial crisis, it’s easy to lose a sense of proportion. When an economist on the radio talks about two percent of GDP, we need to remember that that translates into huge sums of money. We need to be responsible about those sums, not get dizzy with the magnitudes.

Second, Krugman is an economist. He lives in an ivory tower (never mind that he is probably angling for a high post in the next Obama administration). And ivory towers remove you from the things that matter. The British government needs to borrow a huge amount of money, simply to sustain itself. No one is forced to lend us money. We have to make ourselves creditworthy. Financial realists know that and adapt accordingly. Osborne and Clegg are both, thank heavens, realists.

And last, sometimes bad stuff happens and you can’t wish it away. If we could vote for sunshine, we’d vote for it. That, plus free food, plus good looks – and hey, why don’t we reduce the force of gravity to give us a little extra oomph in the mornings? ‘Voting for growth’ or for any version of Krugman’s policies are no more reasonable than these things. We created a huge pile of debt and now we have to work it off. That isn’t fun, but it is – alas – reality.

I published this in the Daily Mail

Shhhhhhhh!

But wait up. A hundred billion Euros? Lent secretly? On unknown terms and conditions? And the entire operation conducted by a bunch of unelected officials and scarcely reported in the media.

Please don’t think that these things happen in Europe but could never happen in the United States. They happen here all the time and on a colossal scale. Remember that Bloomberg fought the Federal Reserve all the way to the Supreme Court in order to establish that the Fed lent over $1.2 trillion to the US banking system and that those loans went ahead unbeknownst to and unauthorised by Congress. Oh, and although I say ‘the US banking system’ what I really mean is ‘any bank that puts its hand out for some cash.’ So the Federal Reserve considered it appropriate to hand over some of your dollars to such not-very-American institutions as the Royal Bank of Scotland, the Belgian bank Dexia, Credit Suisse, Deutsche Bank, the Italian Unicredit, and too many others to name.

Yet nothing happens. When Bloomberg broke its story about the Fed’s secret lending programme, a few other news outlets picked it up, but nothing changed. The same people are in charge of the Federal Reserve. They don’t think they did anything wrong. No central banker thinks that the ECB did anything wrong by handing a hundred billion euros to the collapsing banks of a failing country. It’s just the way these guys do business.

Just to be clear, though, there are alternative ways to do business. You might, for example, think that we should follow the following elementary rules: the central bank should avoid printing money and generating inflationary pressures which affect us all; bankers should lend money prudently and with proper due diligence; if those loans go bad, the banks should lose their money; and, over time, those banks are either left to go out of business (if they’re dumb) or encouraged to shape up and improve (if they’re not.) That system even has a name. It’s called capitalism. We had it in America once.

But not any more. We live in a world where moral hazard reigns supreme, where acts of gross stupidity seem to lack consequence. Where central bankers print money and no one cares. Where banks make dumb loans and get bailed out. Where politicians just want to get re-elected and know that the media is going to analyse the spin down to the very last molecule and leave the substance well alone.

Take some other recent news items. Facebook’s IPO saw its shares trade up to $45 before falling back to as little as $31, a fall of some 31%. It is alleged that Morgan Stanley, one of the banks running the stock offering, revealed data to its institutional clients that it did not share with its retail clients – data that, in effect, called into question whether Facebook’s high valuation could be justified. Morgan Stanley insists it followed every dot and comma of the relevant regulations, and perhaps it did. But retail investors have still lost a shedload of money. And Morgan Stanley and its peers have still made a huge amount in fees. If Morgan Stanley truly did follow procedures, those procedures are plainly inadequate.

Or take JP Morgan’s recent $2 billion trading loss. That arose in a bank which prides itself on its careful risk management. Which has lobbied vociferously against regulations which would prohibit the kind of activities which led to that loss. A bank which is surely ‘too big too fail’ – and in my eyes, therefore, also too big to exist.

Yet nothing changes. Just ask yourself these questions. Will the Fed never again extend secret loans to dodgy banks? Will Wall Street firms never again run an IPO that destroys billions of dollars in value for retail investors? Will Wall Street so clean up its act that it never again reports billion dollar losses because of dumb-but-greedy trades?

You know the answers. Nothing changes. In Europe at the moment, a calamity is unfolding. The Spanish bank, Bankia, has had its shares suspended as it seeks to apply for yet more state aid. The Spanish government, terrified by the way the ground is moving under its feet, is beseeching the Germans to help them borrow more money, so they can pass that money on to the same unreconstructed banks that lost it all in the first place. And meantime government deficits go on adding to the ever-less-supportable mountain of debt.

The United States is not yet in that position, but the preconditions are all here. An uncontrolled deficit. An out-of-control banking system. And politicians who would rather defer any problem than tell the truth about the mess we’re in.

This article was published in todays Huffington Post

It wasn’t hard to understand that decline. Wall Street was bust. General Motors was bust. AIG was bust. All but a handful of Main Street banks would have been bust too, had it not been for an extraordinarily vigorous response by both federal government and the Federal Reserve.

“We have repaid all of our loans in full, with interest and ahead of time”, really Ed?

The panic of that winter of 2008-09 may now be a distant memory, but the problems facing the country have hardly gone away. Europe continues to tremble on the edge of crisis. In the housing market, there are still huge levels of foreclosures, distressed selling and a scarily large stock of shadow inventory, waiting to be sold. Yes, joblessness is beginning to edge down, but it’s still at very high levels — and, worse still, the percentage rate of unemployment needs to be looked at skeptically in view of the more than one million dispirited workers who have exited the jobs market altogether.

You wouldn’t be able to guess any of that from the stock market, however. The S&P celebrated the third birthday of this current bull market by racing up towards 1,400, more than double where it was three years back. Facebook is hoping to launch an IPO that will value it at some $100 billion. Apple is now worth more than $500 billion. General Motors has staggered from bankruptcy to a healthy market value of $40 billion. However, GM shares still are trading well below the price the government (taxpayer) paid for them and well below the IPO price.

Which all raises a question. Did investors panic unduly in 2008-09? Or are financial markets overheating today?

The question matters if you’re an investor, but it matters almost as acutely if you’re not. The economic and financial news you listen to is strongly skewed by the state of the stock market. If stock markets are hitting new highs, if IPOs are being boldly launched, it’s hard to argue that the economy is fundamentally weak — yet the real economy and its financial shadow are two very different things. And it doesn’t help that so many financial commentators either work for the sell-side firms (Goldman Sachs, Morgan Stanley and the rest) or on firms that depend on those companies for their business. To a striking degree, the financial coverage we get from the media reflects the views of Wall Street, not the health of the nation.

The bulls have a fairly simple argument. Yes, they can point to some real strengthening in the economy and the sheer panic which was present three years ago is gone today. But mostly, the bulls rely on an even more basic argument. The prices of all dollar-based financial assets key off the price for U.S. Treasuries. Since the yields on U.S. Treasuries have recently plunged to lows not seen for decades, that means that the prices of U.S. Treasuries are close to their all-time highs. (Remember that bond prices are inversely related to interest rates. So low interest rates are always correlated with high prices.) And since U.S. Treasuries are trotting along at exceptionally high levels, the equity markets are dragged upwards too. It’s not that investors are unaware of the various weaknesses in the economy, just that they can’t help but respond to the massive gravitational force exerted by the bond market.

I’ve been in the financial markets for around 30 years, and for around 27 of those years, I’d have bought that argument too. If the price of one commodity rises then the price of a closely related commodity needs to rise as well, and vice versa.

Only these aren’t normal times. The government bond market has been prey to manipulation on a wholly unprecedented scale. I’m not talking about anything you’re not already aware of. I’m talking about Ben Bernanke’s Quantitative Easing, a process which involves the massive purchase of government bonds by the Federal Reserve. Since the Fed can simply print limitless quantities of money to acquire those bonds, the price for them can’t help but shift. So to justify the current euphoria in the stock market by pointing to the jubilant bond market is simply perverse. It’s using the price of one blatantly mispriced asset to justify the price of another.

Even that might not matter if the rise in the bond market was permanent. But it isn’t and it can’t be. It can’t be because, over the long term, there is an almost one to one relationship between the supply of money and the level of prices. Since the Fed has been printing money like crazy (to buy all those bonds), inflationary pressure on the economy has increased. That pressure may not yet have fully manifested — because firms and consumers are still stressed — but it’s there, biding its time. The 40 percent rise in crude oil may largely be attributed to QE or money printing.

In the longer term, therefore, financial gravity will operate as it always does. U.S. Treasuries will find their own proper level. A level which will reflect a dysfunctional political system, frightening deficits and ever-increasing levels of debt. That repricing will have a calamitous impact on the stock market. It simply can’t play out any other way.

And countless investors know this. Most financial firms have money in the affected securities — stocks and bonds — because they need to park their case someplace, but that doesn’t mean they think those things represent good value. If you want a real indicator of the health of our economy, you need to forget about bonds, and forget about stocks.

And the global Ponzi Scheme which almost buckled in 2008 is once again alive and well. Global growth since 2002 has been 4 percent. According to my own calculations, the global growth in debt has been 12 percent. One would hope that some lessons were learned from the excesses of credit and leverage when the crisis started in 2007. Yet it appears that leverage and credit are being increased by shifting the Ponzi assets to the central banks balance sheets (taxpayer). This leads us to fairly conclude the price of gold gives you a fairer measure. The higher it is, the more scared investors are. The return on your money if you bought gold a decade ago: more than 500 percent. It’s a statistic which says you shouldn’t feel bullish. You should feel terrified.

And over $5.15 out West

Last month, gasoline prices hit their highest ever level for February — an eye-watering $4.69 per gallon in Manhattan. Predictably, since this is an election year, politicians vie to cast the blame onto others.

Barack Obama is most obviously in the firing line: he’s been president for three years. Why the heck hasn’t he fixed global energy markets yet? What’s he been doing all this time? More specifically, Republicans have slammed the president’s nixing of Canada’s Keystone XL pipeline, no matter than any impact on prices is years away.

Obama’s fightback has proceeded on several fronts. He’s sought to deflect blame for high prices onto the tax loopholes and subsidies granted to Big Oil. He’s called attention to his payroll tax extension which doesn’t solve the price issue but at least helps people to pay for it. And he’s used his Press Secretary Jay Carney to remind voters of his ‘all of the above’ approach to energy — an approach which has so far lifted domestic oil and gas production in every year of his term of office.

These dogfights don’t feel very new. The world faces a fundamental problem with rising energy costs. The political opposition blames the incumbent. The incumbent does his best to remind voters of a few basic facts of life — mostly that oil is a global market that lies beyond the control of the U.S. president — but ends up resorting to those fail-safe political tactics: flinging money at the problem (payroll taxes), blaming someone else (naughty Big Oil) and lastly those “evil empire” speculators (Wall Street).

And yet the background here is importantly different in a couple of respects.

First, Iran is now within touching distance of exiting its zone of vulnerability. By the end of the year, it’ll be effectively immune from outside attack and well on the way to finally possessing nuclear capability. According to the Economist, Benjamin Netanyahu ‘says privately that on his watch Iran will not be allowed to take an irreversible step towards the possession of nuclear weapons.’ That irreversible step is about to happen — unless Israel launches an attack in the next few months. Iran has promised to respond by blocking the Strait of Hormuz, the narrows through which 20% of all the world’s oil is obliged to pass.

There are, as it happens, serious reasons to doubt that an Israeli attack can be effective. It’s also questionable whether Iran’s feeble armed forces can effectively block the outward flow of oil from the Gulf. But those military reservations are hardly likely to assuage the price of crude oil, which has risen nearly 40% since last October. It should hardly need saying that a savage oil price spike is likely to thrust a frail world economy back into intensive care. I would judge that if we see any type of supply shock the oil price is likely to touch $200 or even $250 a barrel before the year is out. The consequences for economic growth are likely to be violent.

Disturbing as these thoughts may be, they’re disturbing in a way that don’t necessarily call for policy change in Washington. The Middle East has long been an unstable and dangerous place. The U.S. manages its interests as best it can. There’s a limit to what it can do. And, in the eyes of the mainstream media, that’s usually where the story ends.

But really, that’s where the story starts. If the country is faced with an impending spike in the price of its most important resource, the government’s monetary authorities should be seeking to ameliorate or counteract its effect — yet they’re doing the exact opposite.

At the most basic level, no one disputes that, in the long run, there is a very close relationship between the money supply and prices. (The Bundesbank says so and it ought to know.) Since the Federal Reserve — and its fellow central banks — have been expanding their balance sheets like crazy, that alone ought to make us worry about a tide of impending inflation.

But these worries don’t depend on some long-term link that’s invisible in the here and now. These stunning charts from Bloomberg demonstrate that the periods of quantitative easing (English translation: printing money) have coincided with upward spikes in the price of gasoline and the consumer price index.

Which is precisely what you’d expect. Ramp up the supply of money while depressing the U.S. dollar and watch the price of commodities and other assets skyrocket.

Indeed, that inflation is happening well beyond the energy markets alone. There’s gross inflation in the market for financial assets. U.S. Treasuries have never been as underwhelming a buy as they are now — yet their prices are at record highs. Same thing in the equity market. The world is trembling on the brink of hot war in the Middle East, collapse in the Eurozone, and the world financial system remains acutely fragile. At times like this, you’d expect equity prices to be trembling in a corner someplace, and instead they’re striding confidently to pre-crisis highs.

In short, the Federal Reserve is creating asset bubbles. Just as it enabled the tech bubble, the housing bubble, and the subprime bubble. Our current bubble is evident primarily in many asset markets and the market for oil and — so far — any damage has been limited. But that’s always true of bubbles. No one gets hurt in the upswing; that’s why they persist. Yet the bigger the bubble grows, the worse the final outcome. For 20 years now, the Fed has sought to escape the consequences of one bubble by inflating another bubble someplace else. That game has got to come to an end sometime and that time is now.

The primary causes of high oil prices don’t lie in Washington. They have to do with a limited resource that’s mostly located in unstable and troubled places. But our monetary response has been as wrong as it’s possible to be. Catastrophically wrong. And we’re about to reap the consequences.

So here’s our formula for success – one pioneered by Nancy Pelosi, though in truth just a variation on how almost every politician of almost every political persuasion behaves while in office.

Step One
Get elected to something. Nancy Pelosi got elected to Speaker of the House of Representatives. Nice move.

Step Two
Invest a chunk of money in something. Nancy Pelosi and her husband invested in VISA, first upon its IPO and more subsequently. At its peak, their investment totalled some $5 million. Now Nancy Pelosi and her husband are high net worth types – they’re politicians, so naturally they deserve to live a lot more comfortably than you do – but all the same $5 million was quite a chunk of change even for the Pelosi’s.

Insider trading laws do not apply to me, your point is?

Step Three
Make some laws. Or prevent some laws. Either way: have fun and make money. Nancy Pelosi, for example – previously an opponent of the runaway financial industry -used her office to slow down the passage of legislation which VISA lobbied hard against (using 14 lobbyists to do so, including one person recruited from Pelosi’s own staff). Here is the Daily Beast’s version of what happened next: [emphasis added]