Wednesday, July 21, 2010

Some thoughts before heading out into the wild

Early tomorrow we leave for a safari/excursion that will take us to Victoria Falls in 8 days, at which time I hope to be back in touch with the world. I haven't had much time in any event, as our itinerary has been pretty full.

From my limited perspective the world hasn't changed much in the past 10 days, and I doubt it will in the next week. If anything, corporate profits continue to impress on the upside, and the passage of time is undoubtedly healing a lot of wounds, as it tends to do. Key financial indicators like credit and swap spreads have settled back down, and Europe seems to have avoided a banking crisis. The U.S. economy is facing headwinds, to be sure: misguided fiscal policy is soaking up a lot of the economy's productive resources (i.e., transfer payments) and thus holding back productivity and job growth; and uncertainty regarding the future of monetary policy and the future of tax rates is keeping a lot of investors and projects sidelined.

These headwinds are serious, but they are not a reason for the economy to slide back into recession. Recessions don't happen easily, and the U.S. economy has proven to be very resilient and dynamic in the face of adversity (recall that the recession of 2001 was mild, and it ended soon after the time that 9/11 happened). The Fed has dumped a trillion dollars of reserves into the banking system, but that hasn't resulted yet in a meaningful increase in the money supply because a) lots of folks are deleveraging and have no interest in borrowing from banks, b) many banks are still reluctant to lend, and c) credit markets are still shell-shocked from the events of the past several years and are not yet back to normal (and regulators are impeding progress, thanks to the new financial regulations pouring out of Congress). But the important measures of money supply (currency, M1, and M2) are all growing and show no signs whatsoever of any contraction or slowdown that might prove deflationary or choke off growth. Residential construction has fallen so much that it can hardly pose a risk to the economy going forward. Confidence in general is still low and there are lots of bears out there, but that just means that good news (or simply the failure of bad news to turn up) becomes a more potent force to the upside.

The economy's problems are slowly fading, and the policy outlook is likely to improve significantly as November draws closer—this is the biggest thing on the horizon right now.

Meanwhile, jobs are now being created, albeit slowly, but they are no longer being destroyed. Those who are working are doing just fine, as productivity has been quite healthy. Much of the world is doing pretty well, and some places, like China and India, are growing like weeds. Commodity prices show no sign of flagging demand. The yield curve is very steep, and that makes it easy for bank profits to mushroom; plus, a steep yield curve has been a very reliable predictor of recoveries. Finally, I know that unemployment is quite high in S. Africa, but I've been very impressed with the general level of prosperity I've seen here.


Benjamin Cole said...

If deficit spending is a headwind, then let's be honest and mention two unfinished wars and a nearly a trillion dollars in Dep't of Defense and VA spending. This dwarfs the $33 billion for the unemployment insurance extension (and that I oppose).
If we wish to reduce federal borrowing, there will have to be a lot of deep and ugly cuts in federal programs that are primarily financed by income taxes. About 70 percent of federal income taxes are eaten up by DoD, USDA, VA, Commerce, and Interior and debt.
If one wishes to cut Social Security and Medicare, I am fine with that, and that will allow cuts in payroll taxes--those programs are financed by payroll taxes.
It is going to take hard-nosed thinking, bereft of the political nostrums from either the left or right, to balance the federal budget.
Sadly, I do not see the gimlet eye of the right-wing anymore, that was there in days of Everett Dirksen or a Taft or Eisenhower. And the left-wing doesn't even think deficit spending is a problem (now joined by some Reaganite elements of the right-wing).
Oh well.

Public Library said...


When was the last time there was a steep yield curve with the short-end anchored at .25% for eternity? Japan has enjoyed an upward sloping yield curve and yet their economy is mired in decades of sub-par growth + gains. The US yield curve is probably no longer a blanket barometer without making adjustments.

Some reports I've read show the US curve is currently flat to inverted when normalized.

Europe, and the US for that matter, have not cleared the risk. It has most likely increased. The banking systems are defunct with just a few banks making up 98% of the profits via central bank support in many ways.

You can easily judge this by the increasing list of failed banks. Had we allowed this to occur much more rapidly without the interventionistas, we would be much further along in the process.

Instead, and like in Japan, we will trudge through a decade or two of trying to enable banks to make enough money to cover their continued losses on real estate and other soured loans.

I firmly believe China is a house of cards waiting for the wind to blow just right.

We've spent two or three decades blowing hope smoke off the backs of our Depression era immigrant families.

The game is up. If we want to rebuild America, we need to drastically reduce the government, the debt, and the capabilities of the Fed, while lowering taxes and providing incentives to save + invest.

Benjamin Cole said...

Public Library-

Japan--there is a model for us to avoid.

The yen has been strong now for two decades, and their economy has been in the toilet, and property values depressed.

They obviously need a long, sustained round of inflation, to repair bank balance sheets and lower the value of the yen. Property values have been falling in Japan for a long time.

Rather than fiscal stimulus, they should have gone to sustained monetary stimulus.

The time for a do-nothing Fed has passed.

John said...


After reading Ben's testimony I really did not see anything new. There was the usual assurances of beginning the tightening cycle should things start to heat up but I think that was lip service to inflation hawks. If any action is taken it appears to me it will be reducing/eliminating the .25% paid on banks' excess reserves on deposit with the fed. They do seem to be in a hurry.

Eaton (ETN) is a diversified power mgmt and global mfg of highly engineered products for industrial, automotive, construction, and aerospace markets. They reported earnings today of $1.36 significantly above what was expected. The dividend was increased 16%. Total sales were also up significantly.

Abbott Labs (ABT) reported today. Sales were up 17% and earnings nearly 14%.

Contrary to what is widely believed, many companies are growing their earnings AND sales. It is pessimism and lack of confidence in the future by the vast majority of people that is providing more optimistic investors opportunities to own great companies at bargain prices.

Bill said...

Benji: Are you pretending that Medicare/Medicaid and Social Security and all of its various forms are funded entirely by tax withholdings? Nothing could be further from the truth.

The estimated outlays for 2009 were $1,062.656 billion for Social Security and Medicare alone.

Total receipts for social insurance and retirement taxes in 2009 were $949.3 billion.

So, just looking at Medicare and SS, we have a 2009 deficit of roughly $113 billion. In addition to this, there is some $401 billion in the budget for 2009 for "income security". Also, education, health and social services devoured an additional $328 billion in 2009.

The total budget in 2009 for the "Human Resources" category less the VA was $1.850 trillion. By comparison, the total spent for defense was just $675 billion and the total spent for agriculture was $19 billion.

So, your constant broken record complaints about "red state socialism" ring hollow when compared to the actual facts. The budget is awash in red ink the red ink largely is caused by transfer payments in some form or another to your fellow parasitic Obama voters.

Benjamin Cole said...

Well, there is a hint in the statement that the Fed will go again to quantitative easing, if need be, and I totally agree with that idea. I encourage it, indeed.

I know everyone's personal observations are anecdotes--still, there is industrial property in Los Angeles that is empty, for sale or lease, and that has never been empty since at least 1980s, and maybe not then.

There are abandoned restaurants on Olympic Blvd. in Beverly Hills--broken windows, etc.

I have never seen commercial real estate so soft in Los Angeles--as a professional observer going back to the late 1970s. I won't even talk about the office market--suffice it to say you can rent class A space in downtown LA today for about the same rate as 1979, or about $3 a square foot a month. And maybe you get nice furnishings too.

I have been optimistic until the last few weeks. Maybe I am getting old, who knows. But I sense the market wheezing out, and deflation setting in. Maybe it is Obama, and people are quitting--man, I don't know.

I see these great industrial-warehouses, so rentable for decades, empty month after month.

We need a jolt, we need some inflation. I know it is heresy to say so, but not every time calls for the same policies.

The Cold War called for a strong military. The 1950-60s called for civil rights actions. But times change, and old policies become outdated.

So it is with the Fed. They are worried about monetary rectitude, when they should be worried about getting us back into boom-times. Inflation is DOA.

John said...


I know it is depressing to see great properties lying idle with no prospects. Recessions bring difficult times that can last much longer than we expect or prefer. Sometimes we are just worn down by the negativity. It seems to permeate all discussions and bombards us from all sides..especially from the media who are desperate for eyeballs. Good news does not get them. Bad news does. The focus is always on big picture negative macro events which are easy to articulate and sound intelligent when said with seeming authority. Very few of these gloom selling macro-merchants are held accountable by the media for being wrong but are celebrated as oracles on the rare occasions when they are correct.

The American economy is akin to a super does not move quickly but when it is moving it is very difficult to stop. As of now it is moving. It is slowing but the engine of industrious people striving for a better life for themselves and their families will keep it going. Sometimes people want our supertanker economy to be a cigar boat. They also want the stocks they buy to go up instantly. Life just isn't like that. Patience, occasionally in abundance, is necessary to be successful. We may well be in one of those times now. I do not believe the Fed can make the elephant that is the US economy dance at its whim. It will take time and good economic policies to bring us back to full employment prosperity. I believe we are on that road but it will take awhile to get there.

Stay optimistic, and stay invested. Better days are ahead.

Benjamin Cole said...


I enjoy your posts--I believe deeply in a positive future. I just wish the Fed would step on it. Pedal to the metal.

While the Fed is parsing the fine points of monetary policy, Americans are getting crushed under real estate debt, taking banks down too.

Mark Gerber said...

I hesitate to respond to your viewpoint, but will briefly do so out of a feeling of obligation and respect for you. You simply sound like a great guy, and I would hope that someone who read what I wrote and felt strongly that I wasn't thinking straight would respond to me.

Although a stock market bounce is certain possible, and could get downright frisky when the fed takes the rate on reserves down to zero, and finds other innovative ways to rain down money, I hope you will consider getting out, completely out.

America is no longer great and you must see that. Both Republican and Democrat leadership has been a disaster, are ducation system is falling apart, our states are broke, our overall debt is at all time record highs of over 300% of GDP, and that doesn't include the 300% of GDP of unfunded liabilities. When Scott recently made a comparison of the USA to Argentina, the parallels were striking -- but the world wasn't sitting on Trillions of Argentine dollars thinking they were holding a reserve currency. On top of that, the western world is about to experience the largest old-age population cohort the world has ever seen.

I'm out of time, and I don't really have the energy to debate, but I hope you will seriously consider the full picture here. Sure we still have a lot of birght, hard working people, but look at the burden they carry and what they are up against.

Be well my friend.

John said...


First, let me thank you most sincerely for your concern. Empathy is something we can all attempt to develop to a higher level. You clearly have. IMO it is to your credit.

Second, it is a little ironic that I am bullish for nearly the precise reason you are bearish, as best I can tell. You are justifiably concerned about the gross debt incurred by the USA. I assure you I share that concern. I am certain many many others much more powerful and influential than you or me share it as well. I was taught many years ago by a very astute market player. One of the lessons I found most practical and valuable over many years was that seen snakes rarely, if ever bite. It is the unseen ones that are dangerous. I believe our debt problem is most definately a snake and most certainly a dangerous one. But it is a seen snake. I also do not believe America is comparable to Argentina. When Scott made the analogy I do not believe he felt that way either.

One of the problems our equity markets have been struggling with is competition from the bond market. Fear of another '08 meltdown has been rampant and has sucked money out of equities and into bonds of all stripes, but particularly treasuries. I believe that as it becomes clear the bull market in treasuries has ended, and rates are rising, FOR WHATEVER REASON, money will return to the equity markets in huge amounts. Profits will be protected and the money will have to go somewhere. You can see a small version of this phenomenon if you overlay a chart of the S&P 500 and the 10yr US treasury bond. You should notice an inverse correlation. Bonds appreciated during the fall of '08 as the equity markets tumbled. When the rebound in stocks occured from May '09 through roughly April of this year, treasuries generally declined in price. During the 'eurocliff' scare of May, treasuries again appreciated.

It is my contention that treasuries PEAKED in the fall of '08, and are now in a long term bear market. There is virtually NO more room for short rates to fall and there is No value in longer dated treasuries, in my opinion, UNLESS, we experience a collapse of the global economy. Sorry, I am not in that camp. I see no evidence of such. Simply because there are large amounts of debt does not mean we are doomed.

I disagree strongly that America is no longer a great country. We have problems, and we fuss with each other (mostly over money) but our institutions are strong, our laws are obeyed, our strength militarily is unchallengable, and the government by virtue of its taxing authority is virtually a full partner in every business within its borders. We are NOT Greece, Argentina, Rhodesia, or even Japan. Such comparisons IMO are ludicrous.

I am bullish. I am bullish not just because I believe in America, but also because the vast, vast majority of investors are petrified. They are hiding in bonds with no future, near zero yielding CDs and MM accounts, and even cash and gold stuffed in safe deposit boxes. I have seen what I believed to be rational investors buy canned food and stick it in their basements along with ammunition for shotguns and rifles. In ALL MY EXPERIENCE such behavior is characteristic of BOTTOMS, not tops.

Stocks do not reward us instantly. The highest returns I have ever seen experienced occured over time, with entry points made during times of fear and uncertainty. Few can do it. But if you can, the rewards are very high.

Equity investing is not for everyone. I have frequently said in previous posts most people need the assistance of one or more qualified professionals. I still say so.

Mark, thank you again for your concern. PLEASE feel free to challenge my views whenever the mood strikes you. I look forward to our pleasant discussions.

Benjamin Cole said...


I like your commentary--and it is true. Buy when everyone is wailing, and sell when the bands are playing in the street.

I see interest rates at zero for a generation. You will get minor negative returns on safe bonds. Too much capital out there.

This could set up a huge rally in property and equities.

The Fed just has to accommodate not strangle.

Bill said...

So am I crazy to put 50% of my retirement money in PIMCO total return and 50% in Vanguard Total Stock Index because interest rates will rise and PIMCO will crash?

John said...


I think you need to do what you feel is best for your particular situation. I do not think what you describe makes you 'crazy'.

I do believe equities will significantly outperform bonds over the next several years.

Just my cheap opinion.

Benjamin Cole said...

BTW--even Fed guys are saying we are hitting deflation


Former Federal Reserve board member Lawrence Lindsey said on Thursday it will be “obvious” by the end of this year that the U.S. economy has entered a “deflationary trap.”

“We know from (Fed) Chairman (Ben) Bernanke’s recent comments that it is now at least a concern … By the end of this year I think it will be quite clear,” Lindsey said in an economic forum in Tokyo.

“I would expect by December we will see further quantitative easing” by the Fed, he said.

Mark Gerber said...

I read your thoughtful response to my post. With little time to write and directly comment on your post, let me hit on a point where I think we have some agreement: bonds and cash will be terrible investments over the next 10 years. Long term bonds may go higher from here before their bubble bursts, but I would guess that bubble will burst within 3 years. My projection goes like this:

1) The dominant economic force in the USA and Europe is deflation.
2) The USA has a massive public and private debt burden, so deflation will trigger a depression and a second default by the USA (the first being in 1933 when the dollar was revalued against gold by government edict)
3) The Fed thinks they can prevent such deflationary collapses by pumping up the money supply, and Bernanke has written volumes on this conviction
4) We are rolling back towards deflation. The fed probably thinks moving sooner and bolder is better than later and timid. (However, I really don't know if that approach will prevail, but due to limited time, I won't cover the case of slow and timid now.)
5) Once their QE medicine is powerful enough (probably within 3 - 6 months for a bolder fed approach) the stock market will start heading back up towards its 2010 high, possibly going higher. Gold will probably go up roughly the same percent, maybe more, and longer dated bonds will hold steady at first, but then start droping slowly.
6) Next it will become increasingly clear that inflation is taking hold and thus it will start to accelerate, slowly at first. The bond market will continue to drop, and stocks continue to rise slowly, but gold will rise faster.
7) The fed will make some timid moves to reduce its balance sheet and slow inflation, but bonds will keep dropping along with stocks. Gold will continue to rise.
8) Within a year or two, inflation will rapidly accelerate, going from the area of 4 or 5 percent to double digit in a few months, bonds will start crashing, gold will start rocketing into the area of 4 - 5K.
8) Shortly thereafter a US treasury auction will fail or the US will fail to make an interest payment, stocks will crash to lows below 2009, gold will probably start to descend as deflation overwhwelms the system, and unemployment will be rapidly climb into the 40 to 50% range.
9) At this point we live in a very different country and start to figure out how to regroup and survive the greatest depression the world will ever see.
10) After 5 years, growth slowy returns to the USA, unemployment starts to drop, but we don't get back to where we are now for at least 5 more years.

To add a final comment to what probably seems as delusional to most people reading this, we might have one chance to avoid this scenario, but time is running out. We have to pass legislation that forces the USA onto a trajectory of a zero deficit within two years. That plan will have to include tax increases and massive spending cuts including medicare. Of course, we will go into a recession and unemployment will probably rise as a result of such moves, but at least we won't collapse. I doubt, however, our country has the political will to take such a path over the next year.

Mark Gerber said...

One last thought for tonight. You wrote:

In ALL MY EXPERIENCE such behavior is characteristic of BOTTOMS, not tops.

My concern is that nobody alive today has actual experience with the fundamental economic facts in place today. The western world has never had a ratio of retired/working as large as we soon will, and the USA has never had a ratio of debt/GDP as high as we now do, and if we use the true debt which adds in unfunded entitlements, that ratio is twice as large. So, I'm wondering if you can convince yourself that this is a bottom purely based on analysis without drawing on your experience?

Cabodog said...

Earnings reports say it all:

Microsoft made money and beat expectations.

Alaska Airlines made money and beat expectations.

When Microsoft, as has-been in my book, can make money and even AIRLINES are profitable, face it gang, the recession is over.

Repeat: the recession is over. We're on for a normal recovery from a recession.

John said...


I will keep your scenario in mind.


John said...


First, lets just say the amount of debt we have/will have is known by the market as are the demographics of the labor force. The media has been full of this and many speeches and power point presentations have been made on the subjects. It was the point of my 'seen snakes don't bite' metaphor.

The object of my 'experience' point was one of investor sentiment. When large percentages of investors flee an investment catagory, it is a bullish indicator for the intermediate/long term, depending on how the sentiment is measured. Same thing for investors loving an investment catagory. It is a bearish indicator. The most dramatic example of this to me was the final months of the technology bull market in the late 1990s. Soccer moms with no clue of what they were buying were daytrading stocks and making thousands per trade. Another example was the recent real estate bubble. You get the idea I'm sure.

Today investors are pouring into bond funds and other similar instruments, shunning equities and real estate. The sentiment indicators say this will change. We just do not know when.

I share your concern for the debt problems we face. Where we differ is in the consequences. I believe the issue will be faced and dealt with, although it will be over several years. In the meantime there could be some very good years for the equity markets.

Of course there are many, likely including yourself, who do not share this view. If you fear an implosion of the global economy for whatever reasons, then your investment choices should go in other directions. As I have said before, there are as many paths to investment success as there are unique imaginations.

Mark, thank you for sharing your thoughts with me and other readers of this blog.

John said...


There have been, as always, some disappointments. Amazon was one, as was Hershey. But I believe overall the reports have been quite good.

One that really inspired me was Ford. They earned $2.9 billion and $.68 per share, well above what was expected. Market share increased in N America for the third straight quarter. Sales were up vs last year all over the world. Their 34b in debt was paid down to 27b. In my opinion their debt will soon be investment grade and they could pay a dividend next year.

One other item, GE increased their dividend 20%. Boards of directors rarely increase dividends absent top line growth. GE is NOT an exception.

Benjamin Cole said...

I have not looked at Ford closely, but they seem to be doing something great. Their new F-150 is getting rave reviews, and the new Mustang too. They have introduced a luxury car hybrid-the Lincoln MKZ-that gets 41 mpg. A luxury car!
They are bring a very high mpg plug-in hybrid to market in 2012, the Ford Fusion. Right now, I think they are the best-hitting auto company, globally.
I don't know how this translates into sales or profits. But sooner or late product quality and innovation pays off, or at least I hope so.
I say watch Ford. Or buy one!

Mark Gerber said...


I too appreciate your effort here. It may be too much to ask, this next question, but I'll give it a shot:

You wrote:
I share your concern for the debt problems we face. Where we differ is in the consequences. I believe the issue will be faced and dealt with, although it will be over several years. In the meantime there could be some very good years for the equity markets.

First, don't get me wrong in that I believe the stock market can go up over the next few months or possibly even the next year or two -- that is, before it drops below the 2009 low in real terms.

But my question to you involves your confidence that the debt will be "faced and delt with over several years." How can that possibly be given the demographics? Given we're starting from a place this year where our $2.2T in total federal revenuses will not even cover medicare 0.5T, medicaid 0.3T, social security 0.7T, interest 0.2T, and defense 0.7T, for a total of 2.4T, how will we deal with this debt?

Even more important, how long until more people react to these seen snakes? Besides, living in an area full of seen snakes, I can tell you two stories: 1) the seen snakes do not get me because I take proventative action once they get TOO close, and 2) according to local snake experts, many (if not most) snake bites acutally do come from seen snakes, because people think they can get close or even prove they are faster! I wonder if your analogy has similar qualities?

Mark Gerber said...

In regards to my challenge to you to explain how "the issue will be faced and delt with" in your comment:

I share your concern for the debt problems we face. Where we differ is in the consequences. I believe the issue will be faced and dealt with, although it will be over several years.

I have been asking Scott that question for almost ten years. I have been projecting the decline underways since 2008 for over ten years! During that entire time, Scott gave me alsmost exactly the same answer you did! For ten years I could never get him to explain to me how the actuarial/mathematical facts of our debt, population demograhics, and entitlements would be "delt with" to avoid an ultimate collapse! Can you do it? Can you explain how we will deal with it before this coiled snake that we're all getting closer to strikes?

P.S. Over the last 10 years, I wrote that stock market would begin a secular decline starting as early as 2007-2008, and no later than 2010-2012. I don't say this to brag by any means, just to provide background. Perhaps you have even read some comments by others on this blog who were members of that old forum and remember my projections! One person wrote here that they adjusted the investment stratgey as a result. (I can also tell you that a number of people around town who heard my views over the past 15 years have done the same - I was initially wildly bullish starting in late 1994, and projected a roughly flat stock market for 2000 to 2007/8. When people used to ask me what they should do in 2007/8, in the 90s I would tell them I can't answer that qeustion because it is more of a sociological or political question than an economic question. I told them if the nation turned towards socialism, they needed to put all their money in gold. I told them if our national debt was in control and we held onto free market, small government principles, they should buy treasury bonds. Given the debt has only skyrocketed since then, and we are clearly turning towards socialism, it looks like gold will continue to be the answer.

Cabodog said...

Having driven Toyotas since 1987, I was very impressed a year ago when I rented a Ford Fusion. Fit and finish was excellent; very impressed.

However, can't say that about a Mustang I rented. Thought it was a bit plastic.

Chevy: the worst. Very poor fit and finish. Very sad that Detroit could produce something that bad.

I still own Toyotas, so far.

John said...


I can see from your posts that we are quite far apart on our visions of the world and America's future. You make good points concerning the problems we face and I have no specific answers...other than to make some multi year projections as you have done.

I appreciate your point of view and I will certainly keep them in mind. I am happy to know you think the stock market can appreciate over the next couple of years. It appears what you envision will evolve over several years.

I assume you are invested in gold. It has done well over the last several years. Also, congratulations on your previous forcasts.

Mark Gerber said...


For what it is worth, I would still truly appreciate your sharing your multi-year forecast for how the USA will "face and deal with" our exploding national debt. I painted my vision with some detail for you, and you say your vision is different, but don't share it other than to say you think the stock market will rise in the near term (because of relative value compared with bonds) and the debt will be delt with over time. But how will that debt be delt with? Narrowing that broad question down, how would you deal with the debt if you were appointed our benevolent king?

In the past couple of weeks I have chosen several random (non-financial) professionals to have this discussion, and in every case I got the same answer. Using your analogy, all the answers, state "Yah, I see that snake up ahead on our path, and even though we're getting close, I plan to proceed knowing it will somehow go away." Not one person can tell me how they know that snake will go away, including you. One middle aged man did finally acknowledge the snake may not go away, but then he said it's so depressing to think about he would rather just continue to believe it will move.


randy said...


The only way to get out of our debt problem is if growth in GDP exceeds growth in debt. Any country can run perpetual deficits as long as GDP grows at a faster rate. GDP can grow in only two ways - population growth and increases in productivity. As you note, demographics don't look good for population growth, which is ironic in the backdrop of worries about over-populating the world. One potential bright spot is immigration. Fortunately, the US is still one of the most attractive places to immigrate. Unfortunately the growing nativism looks to strangle immigration. However, there is always hope that will change. We can certainly be optimistic about increases in productivity. The solution to Medicare / SS are clear: start increasing retirement age, decreasing benefits, and modest increases to the payroll tax (most likely by raising the limit). Get out of the wars, find an alternative to foreign oil to improve our trade deficit.... The US has a huge advantage with our ability to innovate and the fact that the dollar is the the global reserve - for now.

In short - the situation is not entirely hopeless.

Clearly though, reduced government spending is where it starts, followed by changing medicare / ss policies and getting a better energy policy, and getting out of the wars. What may be hopeless is getting politicians that will do the right things, and very soon.

Mark Gerber said...

Hi Randy! Wow, that was a well written, cogent answer to my qeustion! I'm short on time at the moment, and hope to comment further, but in general I agree with you on all counts!

What may be hopeless is getting politicians that will do the right things, and very soon.

I suppose this is the real question. Although I doubt it will happen in time, I wonder if Obama is really willing to be a one term president by placing a tourniquette on our bleeding (gushing) medicare/medicaid artery after the November election. Perhaps I'm grapsing at straws, but I do wonder if his recent appointment of a medicare head who is a solid proponent of rationing wasn't some sort of signal to those of us who know that time is running out.

How much time do you think we have to at least commit to a concrete, realistic plan to bring the deficit down? How much time do you think we have to get the deficit down?

John said...


First, let me say I don't believe the solutions to all the world's problems are knowable by mortals. The further into the future one attempts to peer the murkier the view becomes (at least to me). So I do not have a 'multi year' view of specifics on how all of the issues we face will play out. It is an interesting exercise to attempt and some freighteng scenarios can be spun by vivid imaginations but I also think there are reasonable chances for more beneign outcomes. Automaticly assuming dire consequences because specific answers to specific problems that will be with us for many years is a prescription for bunker investing - which is fine but is not for me. Risk is always with us. If it were removed, opportunity would cease to exist. I choose to look upon the unknowables as a normal state and to see the fear it creates as opportunity. I am aware that my view is usually in the minority, which to me is good. I begin to get nervous if I start finding my opinions popular.

Throughout our history our nation has faced problems. The specific resolutions IMO were rarely known early in the process. However we have always faced our problems and found acceptable answers to most people. Since we live in a democracy, by definition everyone cannot have their way. But we find answers. Many are pessimistic about our abilities to continue to do so and for them lies a different investment track than for those who are more optimistic.

You may see this as a cop out to your question, and if so I offer my apology. My style is my own. I do not ask to be emulated. I like to believe my mind is open to many ideas, thus my appreciation for you sharing yours.

randy said...
This comment has been removed by the author.
randy said...

Hi Mark!,

I always appreciate your comments. Well, it's reassuring to know that you find some agreement with my comments. Some of your earlier posts are kind of scary! I recognize that your position in those posts is unchanged - that our nation is headed on a disastrous path.

I'm naturally a little pessimistic, so this is out of character for me, but I guess like John, I have some indefinable faith in the US. Maybe because it's too painful to consider an alternative future for my children.

< How much time do we have...>

I don't think there is a point of no return, rather a continuum where future pain increases the longer we wait. Decreased spending will be forced upon us at some point. There may be an important "point" when investors insist on much higher rates for US debt. That will increase the problems dramatically.

I can imagine though - What if we pursued the Pickens energy plan ( or nuclear or whatever ), and retooled the US for this with the funds we no longer spend in wars - wars that are less necessary because our national energy security no longer depends on the middle east, and we realize that ethanol is comparatively stupid so we quit spending money on that. Even one major policy change like that could be a game changer.

More likely though, we will see improvement on the margin, just enough to ease immediate anxiety, enabling politicians to do nothing for now, making the future painful.

I think another thread on how to invest for the long tail risks would be interesting.


Bill said...

I have to agree with John. My mother just celebrated her 80th birthday last week and she's seen a lot of headlines over the years that declared the end of the world (and at times it looked as though we were really close!), yet she reminded me that we always seem to recover. Remember those good old '70s and how it seemed as though the US was in a downward spiral with no hope for recovery? With the 24/7 news cycle I suppose we expect everything to turn on a dime, but it just doesn't work that way. Maybe this time is different, but I've got to believe we still have the ability to work through it and come out better than before. If not, I guess I'll have to move to Idaho and grow a garden and live off the land.

Mark Gerber said...

John (and Bill),

I appreciate and enjoyed your answer. Although you did not exactly give your prescription nor a forecast of how the USA will dig out the largest debt burden in our history, you expressed your beliefs and methodology clearly, and I respect and appreciate that. My original assessment that you seem like a great guy has only been reinforced from our conversation.

I would sum up your approach (and Bill's and the majority of investors) as one of faith in the people of the USA. In the end, we probably agree on that because even though I think the odds are now solidly over 50% that my USA debt default prediction will come true, it's not the end of the world nor the end of the USA. We will just have to regroup and rebuild.

My guess is that it will take us about 5 years to figure out a plan for USA 2.0 and begin rebuilding. Then, after a decade of struggle, USA 2.0 will emerge out of the economic rubble and our aggregate standard of living will begin to rise again. After another decade, I expect that standard of living will surpass where we were at our peak in 2007.

This final paragraph is my version of faith. My pessimistic side says it's possible that we won't emerge to that higher standard of living for a generation or two rather than a decade, but I reject that vision because I do have faith in the USA.

I too leave it to everyone to consider their own strategies. I don't feel the need to convince anyone. My family is preparing -- my wife and brother believe my concerns, as extreme as they may be sound, are valid, and they are the only people I feel a responsibility for in this regard. I try to paint enough of my background to let people know I am not a perennial doomsdayer, and let eveyone decide for themselves. Frankly, I hope I am wrong! One of the reasons I have been talking to so many new, bright people about this over the past month is that I'm hoping to be conviced that I am wrong! Sadly, this effort has only caused me to accelerate my preparations.

Even worse, I know see potential evidence that our government is preparing. For example, I believe
the health care reform law is a vessel for "equitable" rationing to either slow the fiscal bleeding as we decline and/or distribute salvaged pieces after a collapse. The recent revelation that the law contains a requirement for reporting of GOLD transactions over $600 only solidifies my view. Gold obviously has nothing to do with healthcare, but everything to do with a vessel for managing a decline or collapse! After all, you can't enforce equity (spread the wealth) when some people are hording wealth in the form of gold!

(When I used to present my demographic driven roadmap to our future, I always kept a copy of Roosevelt's 1933 decree against holding too much gold handy to explain this could happen again. It looks like it's on the way! )

Mark Gerber said...
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Mark Gerber said...
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Mark Gerber said...


Yes, a thread on how to invest for the long tail risk would be interesting.

But as you wrote (and I agree):

More likely though, we will see improvement on the margin, just enough to ease immediate anxiety, enabling politicians to do nothing for now, making the future painful.

This gets back to my question on how much time we have to do something. That is, how much time before the markets downgrade the credit risk of the USA. If we are rolling over towards deflation now, and to me the last two months of economic data show that may be happening, then the fed will probably send out the QE helicopter again soon, and we will probably have even less time.

It looks like it's up to the dems to either extend the Bush tax cuts or provide some similar tax relief to give a boost to business confidence and buoy stocks. Given Geitner's appearances on Sunday shows this morning, it looks like they are trying to sell a package to extend the tax cuts for those making under $200K only. I don't know if that's enough to support the stock market here, but my guess is it probably is. I think it is critical that they improve market psychology now, and given the upcoming elections, they are highly motivated to do so.

So we may be able to buy some more time, but the reason I am betting that a USA default is more than 50% probablility is it's getting to be too late to do the sort of serious things necessary. For example, nuclear reactors take about 10 years to bring on line, and I would guess switching a significant number of verhicles to natural gas will take at least 5 years. We still have dumb immegration policies (and I don't even hear any smart proposals, only proposals to buy hispanic votes). Social security is drawing on the so-called Trust Fund sooner than expected, and Medicare is bleeding more $$ than expected, moving the date of default forward.

I just don't see strong GDP growth for the next decade at least. The housing crisis has made our economy less flexible (since increasing numbers of americans have negative equity), capacity utilization is still at the prior recessions lows, etc.

Of course, we do have very low interest rates, but Japan has had very low interest rates for almost 20 years now.

Anyway, that's enough rambling for now.

randy said...


I really appreciate your commentary. This is a great blog but there is not a lot of substantive posts contrary to the host. Please comment more often!

It’s interesting to consider dooms day investing – in part because it highlights ( to me anyway ) how “invested” the world is in the US at least stumbling through.

On the gold issue - I think it’s fair to clarify, the health legislation did not specifically target gold. The ( alleged ) purpose of the relevant code section is to report any asset sales, supposedly so that the IRS can monitor for unreported capital gains on currently unreported assets. Whether or not it’s really targeted at gold, it’s a complete disaster.

Mark Gerber said...

Randy, thanks for that clarification and link on the reporting requirements in the new healthcare law! It does look like my source distorted the picture by focusing in on this requirement being specific to gold.

Benjamin Cole said...

Gold is falling. If we go to deflation, and I think we will, gold may crumple like Humpty-Dumpty.
Only seven percent of the demand for gold is industrial.
The rest? Well, gold is worth what the next guy will pay for it.
Which very soon could be les and less.

Public Library said...

I'm sure most of you won't be surprised that I am in agreement with Mark on the future of the US.

We are in a similar situation as the post 1929 crash except instead of a liquidity crisis, we are in a solvency crisis. The fed and government have been unwilling to admit this fact because the consequences are far more painful to realize.

Hope will not change the short term mathematics of insolvency despite the feds best effort to pump trillions of dollars into the system and congress dumping good money after bad. We only end up with more crummy cars and homes we do not need instead of retooling America.

The global system is imbalanced and every country is hoping things will go back to how they were long enough to hit the exits first.

The US and EU stress test were great examples of fooling the general public into believing things are safe and sound in the banking systems.

Despite $T's in sour real estate, structured product, and sovereign loans, the banks for the most part are doing just fine? It shocks me to think of the people who really believe this stuff.

We truly live in a "New Normal". Growth will not exceed the growth in debt and when rates eventually rise on the grand ponzi scheme, it's lights out for everyone.

Is it the end of the world? Not by a long shot but I can see quite a few people standing around with worthless paper wondering what just happened.

The sovereign defaults will somehow sneak up on people like synthetic CDO's, made out of worthless CDO's, backed by worthless BBB mortgages, did in 2007/08.

People do not want to imagine the US defaulting. It is incomprehensible and therefore will not get priced into the market until it is too late. The fact we now see CDS on treasuries the world over gives you an idea people are eager to play in this space. And not because they believe vol is going down if you catch my drift.

John said...

Every once in a while Jim Cramer says something I find myself in total agreement with (ONLY every once in a while). I respect Jim's intelligence and his market savvy I believe is good. Most of the time I find him a little over the top...but hey. He's a salesman for his site and a guy's gotta do what a guy's gotta do so I don't hold it against him. Like everybody, he has his defenders and his detractors and this is not to defend him but to give him some credit for saying something I find myself in agreement with.

In a comment today he says journalistic integrity, R.I.P. In other words, there virtually is none. He points to two instances where totally erroneous articles were written and even though both were later debunked for the BS it was, there was NO retraction or acknowledgement of the errors.

The first occured back in May when we were going through the fears of the Euro crashing to nothing and sovereign bonds becoming worthless, etc. etc. During the height of the panic the Financial Times had an article reporting that the Chinese were going to sell their European bonds. Markets around the world tanked. Of course, the 'journalist' writing the story could not have had a clue what the facts were because we have since learned that China was not only NOT selling their bonds, they were BUYING MORE of them. There has been not a peep about the story being erroneous.

The second item involved the Justice Department investigation of Goldman Sachs. With Goldman stock selling in the $160s, several papers reported that Justice was examining Goldman to bring CRIMINAL charges against them on the Abacus deal. The stories mentioned a 'referral' to the Justice Dept from the SEC which IMPLIES a recommendation to file criminal charges. The stock sank to the $130s. Rumors then swirled about the SEC 'wiping out' Goldman with such charges. As it turns out there was NO REFERRAL from the SEC. GS, like so many other securities was caught up in the panic of the moment. Was there ANYONE from the journalistic community that said, 'we got this one wrong'? NOPE. NOT A PEEP.

Bottom line: Just because something is in print does not mean it is true. That applies to both bullish and bearish articles. It just so happens bearish ones sell better. They can say ANYTHING and if they are WRONG? Hey, no problem. Nobody will remember. If they are right? WELL. Makes 'em virtually clairvoyant to a LOT of people and they get read a lot more the next time they write an article on the rumor-of-the-day.

HE-- of a racket.

Benjamin Cole said...

To All "End of the World" Doomsters, I have a question.

Okay, we have the farms, the infrastructure, the factories, the trained workforce, plenty pof housing, world's best distrobution and retailing system.

Okay, for the invisible phantasm of debt, we are going let this all collapse?

Not plague, not war, but just because we owe money?

This strikes me as bowing down before a taboo or totem. It is nuts.

Shame on us, if this happens. Cowering before our imaginations!

How about some suggestions how we can overcome this oddity--a nation capabe on incredible production, but which stalls for imaginary reasons?

Bill said...

And forgive us our debts, as we forgive our debtors?

Benjamin Cole said...

There is a moral hazard in forgiving debts, or business contracts.

When an AIG just walks away from its promise to insure bonds, and no one goes to prison, it makes you wonder. The corporate shield is mighty--do anything you want, just do it as a corporation.

That said, if the nation is overleveraged, we gotta do something besides collapsing. I do not regard collapse as sound public policy.

For the moment, a huge increase in what the Fed calls quantitative easing is appropriate. Running four to five percent inflation for a few years, while ratcheting down the federal deficit strikes me as not only do-able, but our only real option.

Or we can waa-waa and collapse.

What's your choice?

John said...


In a post above you said I had an 'indefinable' faith in the USA. I have a few minutes this evening so I would like to 'define' a few items of 'faith' I have in America. Many will scoff at what I say but sadly it is a fact that many Americans hold a deep seated belief that America is approaching its destruction. There is no more 'American Dream' and that we are 'past our prime'. Much of this pessimism is also held by Europeans who will assure eveyone who will listen that our best days are behind us. The sense that our power and prestiege are illusory is proclaimed by environmentalists(over global warming and other things) and Christian conservatives (over gay marriage and other things) and unless we repent of our ways we will suffer egregiously and it is probably too late anyway.

I believe American culture has been and is a combination of greedy hubris and fearful gloom coexisting in a melting pot of multiracial people striving for a better life for themselves and their children. We constantly are hopeful but fearful that good times will be replaced by disasters of melting ice caps or a vengeful God for gay marriage (or out of control debts) and its all our fault. It is almost a national schizophrenia. In any case, its always something we're afraid of. Yet, through all the years, despite all the fears, America has found answers. To now assume we will not is in my cheap opinion, presumptuous. America is not without options. I do not pretend to know specificly how our problems will be resolved. As I said in a post above it is rare when the specific solutions to huge problems are known early in the process. Presidents Roosevelt and Lincoln likely had no idea how America would survive the desperate times we faced early in those dire crises. Because no path to certainty was clear did not mean it did not exist. Only that it was not clear. I believe such is the case today...and this crisis IMO is far less dire than America faced then. We can argue over that but historians will tell us that the early days of those wars were fraught with fear and uncertainty...with years of death and destruction before resolution was apparant. Yet we survived and prospered. Again, IMO our problems today pale in comparison.

Our debts are indeed fearful. We have not managed our affairs well. Yet we are the dominant economy in the world and we have much to offer in trade to a burgeoning global economy. Our role in it is evolving and the future may hold a different one than it has been in recent years. As our President has said, exports may offer some answers to some of our problems. And innovation has always been something Americans have excelled at. We have many assets imbedded in the imaginations of our industrious, multi-racial, multi-cultural population, the diversity of which is unmatched on the planet. It only needs the proper incentives to be unleashed.

Due to length, the remainder of this post follows below.

John said...

Continued from above...

Many deride our military. It is indeed costly to maintain. Yet we recieve many benefits. Our Navy controls the world's oceans. No matter whether it is a tanker leaving the Persian Gulf, a container ship enroute to Hong Kong, or a bulk carrier in the Mediterranian, its movement is guaranteed...or the US Navy. We may invade any nation (and unfortunately have been required to) but need not fear invasion ourselves. It is an interesting fact that this has never before happened in recorded history. It is also an extraordinary fact that America is in a position to guarantee the political survival of virtually any nation on the planet...or deny it. No other nation is remotely in a position to change that. As long as the world's most dominant economic, political, and military power acknowledges and pays its debts (in dollars), its future IMO is not in doubt.

The doom and gloom crowd will undoubtedly put forth their reasons why the world will sometime very soon tell us 'we don't need your dollars any more, or we don't need your markets any more, or we no longer need the US Navy to protect our interests'. In my opinion, that day is not in any of our lifetimes...even the younger readers of this fine blog.

We will, as a nation, address our budget imbalances and find bipartisan solutions. It will not be pretty or easy, but it will happen. It will happen because a plurality of our people will support it, and Congress will bow to their will.

The world is growing and we have much to offer it. America is, and will continue to be for a very long time a most valuable friend to have in an uncertin world.

I do not attempt to change the minds of those who maintain the belief that America is doomed. Those people will always be with us and they are entitled to their opinions and to invest their property in that light. Though I respect and honor their opinions I do not wish them luck for such would mean much suffering for the world's economies and populations. I'm sure they understand it is not personal.

randy said...

John - I'm glad for my casual choice of adjective! Thank you for elaborating so thoughtfully.

Benjamin Cole said...

I like your optimism. I can remember the 1970s, with rising urban crime, inflation, recession, Cold War, Vietnam, oil shocks--it just got worse and worse.
What happened? The 1980s and 1990s were a kind of Golden Age for investors and business owners.

Now? I think we slog through, just as we always do.

In contrast to you, I think we need to explore a radical reduction in military outlays to pump far more funds into our private sector, and a total rethinking of a very vulnerable surface ship navy.

It is more than telling when a third-rate power (N. Korea) can sink a ship from the first world nation (S. Korea) and they can't even figure out how it happened.

Torpedoes, possibly a "bubble-jet" torpedo, also known as a "rocket torpedo" or "supercavitation" torpedo look like the answer.

These torpedoe, along with Exocet-type missiles, render surface ships obsolete in a real battle.

The US and S. Korea are planning major naval maneuvers near N Korea. I hope nothing happens. But given the lunatics that run N Korea, they may decide to sink another ship--and they will be nothing our side can do about it before the fact.

Naval warfare is a fascinating topic--for anyone inclined, I suggest reading on Japan's deployment of huge, very fast and superior battleships in WWII--awesome mighty vessels sunk easily by changing technology. The huge battleships could be spotted by airplanes, and sunk by bombs or torpedos. They were worthless.

The Yamato and her sister ship, Musashi, were the largest, heaviest and most powerfully armed battleships ever constructed, displacing 72,800 tonnes at full load and armed with nine 46 cm (18.1 inch) main guns. Neither survived the war.

No military wants to admit it is obsolete, ever in history.

Public Library said...


Read this article:

You are dead wrong about what the Fed needs to do. The Fed needs to stop doing more of the damage is already engaged in.

"It is therefore futile to urge banks (as various commentators including Bernanke and Krugman are doing) to lend more if real savings are not there.

If the banks are forced to expand lending while the pool of real savings is declining, this would mean that they have to expand credit "out of thin air." Needless to say, inflationary credit can only make things much worse."

Benjamin Cole said...

Public Library-

You may wish to start reading a blog, Money Illusion, written by Scott Sumner, a Uni.Chicago Phd, and econ prof at Bentley University.

Sumner has all the conservative cred in the world--and he thinks the Fed needs to step up to the plate, announce a nominal GDP growth target of five percent, and move to a quantitative easing.

Normally, I concur with the sentiment that the money supply should expand at a fixed rate of say 4 percent a year, although I do not make a fetish out of money or gold.

I worship at the altar of real economic growth, not currency or gold.

randy said...


I'm curious. Is there a way other than ships to move the huge amounts of troops, equipment, and supplies to foreign shores?

Benjamin Cole said...

If the enemy has submarines, you can't use ships. If the enemy can place a missile anywhere near your fleet, you can't use ships.

Speaking to Afghanie, obviously everything has been airlifted in. It is landlocked, although, a bit oddly, we have US Marines (part of the Navy) serving there. BTW, the Marines are mothballing amphibious assaults--too dangerous. A missile could take out a ship easily.

I don't know if any US troops got to Iraq by boat, although I suspect it was all by plane. But then, Iraq had no submarines at all, so surface ships could bring in materiel.

As long as ago as the 1970, US Navy Admiral Paul Cohen was cal;ling for an all-submarine navy.

But, as you know, federal agencies evolve glacially, and militaries only after devastating defeat.

It may be that N Korea decides to sink a few of our ships on this next large joint maneuver between S Korea and the USA. I sure hope not. China recently surfaced an undetected sub in the middle of our Seventh Fleet.

Subs can hide themselves with stealth coverings, rendering sonar useless. Small attack subs can rest on ocean floors. They cannot be found.

Interestingly enough, it was recently discovered that a Japanese sub took part in Japan's heinous but highly successful attack on Pearl Harbor, and the sub may be credited with a couple sunk battleships there.

Benjamin Cole said...

China Sub Secretly Stalked U.S. Fleet
(by Bill Gertz, - A Chinese submarine stalked a U.S. aircraft carrier battle group in the Pacific last month and surfaced within firing range of its torpedoes and missiles before being detected, The Washington Times has learned.
The surprise encounter highlights China's continuing efforts to prepare for a future conflict with the U.S., despite Pentagon efforts to try to boost relations with Beijing's communist-ruled military.
The submarine encounter with the USS Kitty Hawk and its accompanying warships also is an embarrassment to the commander of U.S. forces in the Pacific, Adm. William J. Fallon, who is engaged in an ambitious military exchange program with China aimed at improving relations between the two nations' militaries.
Disclosure of the incident comes as Adm. Gary Roughead, commander of the U.S. Navy's Pacific Fleet, is making his first visit to China. The four-star admiral was scheduled to meet senior Chinese military leaders during the weeklong visit, which began over the weekend.
According to the defense officials, the Chinese Song-class diesel-powered attack submarine shadowed the Kitty Hawk undetected and surfaced within five miles of the carrier Oct. 26. (2006)

John said...


Anyone can be sucker punched once, as we were at Pearl Harbor. Any navy on the planet that chooses to get into a REAL shooting fight with the US Navy will be destroyed...and they ALL know it.

The point I was trying to make re the Navy was that global commerce is protected by America's control of the world's sea lanes. Every nation that utilizes the world's oceans for trade requires the political blessing of the USA. Obviously it is not difficult to get...but the fact remains.

Benjamin Cole said...


Enjoy your comments as always.

On navies, I think times change, and they have now. Not neede for now, and maybe ever again.

The major powers of the world--China, USA, Russia--all want open sea lanes. China is an exporter, and Russia exports oil. So who is going to shut down sea lanes?

Having US Navy fleets roam the seas is like having fleets of fire engines constantly cruising around town, in case teams of never-before-seen arsonists set fire on a very windy night.

There has to be a balance between perceived risk and costs.

Jeez, in WWII Germany invaded Poland, Denmark, Norway, Romania North Africa and France, and still Midwestern Republican Senators refused to declare war on Germany, and stood athwart FDR efforts to enter the war.

Then Japan bombed Pearl Harbor. We still did not declare war on Germany, only Japan. Then Germany declared war on us three days later, and we started to mobilize in earnest.

Were the Republicans too conservative? I think so--but now we are far too active, I'd say.

Now, we are permanently mobilized without any nation-state enemies, or any power occupying nations etc.

Can we wait until there is at least the hint of a risk of sea lanes being shut down, before we spend $300 billion a year on warships? Very vulnerable warhips?

John said...


Your points are well taken. If you and/or I were deciding what was necessary the money spent on military preparedness would likely be different than it is. Our military has always evolved to successfully deal with the possible/probable threats we are likely to be required to face. I there is little doubt it will continue to do so. I believe there are big changes coming in all areas of government spending and EVERYTHING is likely to be on the table, including our defense spending.

Benjamin Cole said...


There is an interesting website, with articles by military guys.

They say there are two kinds of navy vessels: Submarines, and targets.

Another joke is that in the next war, all navy ships will be submarines, either intentionally or otherwise (as in getting sunk).

Happy reading, and watch over your tax dollars!

Public Library said...

Back to deficits. Military is a drop in the bucket compared to the grander ponzi scheme.

Taleb has a great analogy about the non-linearity of government debt. It always errors on the side of larger and larger deficits until it finally leads to a death spiral.

"As an analogy: You often have planes landing two hours late. In some cases, when you have volcanos, you can land two or three weeks late. How often have you landed two hours early? Never. It's the same with deficits. The errors tend to go one way rather than the other. When I wrote The Black Swan, I realized there was a huge bias in the way people estimate deficits and make forecasts. Typically things costs more, which is chronic. Governments that try to shoot for a surplus hardly ever reach it.

The problem is getting runaway. It's becoming a pure Ponzi scheme. It's very nonlinear: You need more and more debt just to stay where you are. And what broke Madoff is going to break governments. They need to find new suckers all the time. And unfortunately the world has run out of suckers."

John said...


St Louis Fed presidend is out with a research paper that seems to be right up your alley.

I suspect you will find it interesting.

Benjamin Cole said...

Public Library-

I agree with your larger sentiment, but your expression "military spending is a drop in the bucket: exemplifies what is wrong with America.

Every interest group think the spending they like, or the tax cuts they like, or the regulations they like, are not the problem. It is all those other regs and taxes that are the real problem.

Military spending, the home mortgage interest tax deduction, the USDA, the VA --they rival HUD, disability payments, green regulations etc in decreasing our wealth, and indebting our nation.

Public Library said...


Agreed. However, Those are all symptoms of the larger fallacy of deficits and debt do not matter.

Problem for most people is, their life blood and models rely on the inevitable not happening.

The repercussions of all of it will come home to roost one day.

Public Library said...


I have said form the beginning we should look no further than Japan for a glimpse of what our future will partially look like.

However, I 100% disagree with the Feds conclusion QE is the necessary step. It only perpetuates the mal-investment and prolongs the inevitable.

Sadly, they will look to do more rather than less when it is less that will heal us more quickly.

Benjamin Cole said...

Public Library-

Japan? I wish we could live so well. 3 percent unemployment, very low crime, very advanced civilization. They make us look like a Third World Banana Republic.

Grannis always hints we are Argentina-bound. Maybe.

Public Library said...

The Fed should already be normalizing rates and getting out of the way. Not embarking on a QE2 disaster.

John said...


My approach to the issue of the Fed is entirely what they are LIKELY to do and its effects on markets in the near term. I have been of the opinion that the Fed would remain on 'hold' with little to no further action prior to the elections. I still see this as the most likely scenario. The St. Louis Fed's QE paper seems to me to be a 'trial balloon' intended to spark debate on the subject. It will be interesting to watch.

Benjamin Cole said...


Thanks for pointing out that St. Louis Fed piece---very important.

Public Library: Yes, I have "gone over to the other side" in terms of QE. I say go for it.

We obviously cannot engage in much more deficit spending. We are in a liquidity trap. Yes, Obama should be more pro-business, and for that matter he should have exited Iraqistan pronto.

But here we are now.

I would rather live through a long inflationary boom than a long deflationary recession.

Is inflation theft from bondholders? Well--does not every investment entail risk? Where is it written bondholders are a sacred class? You can lose you rear end in equities and property. Or gold (sinking now, btw).

Deflation would rob property owners and crush banks.

We need to deleverage. Inflation would handle some of that.

Rishav said...
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