What is most remarkable about the world a year after Lehman fell is that so little seems to have changed. Even the papers have noticed.

“A year after Lehman, little change on Wall Street,” says the headline on today’s International Herald Tribune. “Backed by huge U.S. government guarantees, the biggest banks have re-structured only around the edges. Employment [on Wall Street] has fallen just 8% since last September.”

“Obama to push banking overhaul,” says another headline at the Telegraph. Yes, the pols will try to convince the world that they have regulated risk out of the market. Perhaps they will limit salaries… or insist on more disclosure… or require that the capitalists hold onto more of their capital. Then, they will stand before voters and say they have made the world safe for democratic capitalism. Don’t believe it; their bailouts have made it more dangerous.

We don’t know whether this was what Nobel prize winning economist Joseph Stiglitz had in mind. But he has come to the same conclusion:

“Stiglitz says banking problems are now bigger than pre-Lehman,” says the Bloomberg report.

Yes, Wall Street has a good gig going. The whole industry now benefits from the hedge fund formula – ‘heads I win, tails somebody else loses.’ When the hedge funds play the game, it’s their clients who lose money. But the way Wall Street banks play it, the big loser is the US government, directly, and US taxpayers and bondholders indirectly.

When the going is good, the bankers make millions in profits – which they take home as salary and bonuses. An analyst at JPMorgan (NYSE:JPM) estimates that American and European banks will pay their 141,000 investment banking employees $77 billion in 2011… or about $543,000 per employee. Since they pay out so much of what they earn, they lack the capital to survive a crisis. But when they’re threatened with extinction, the feds step in to bail them out. No wonder they have no fear of a meltdown…

Wall Street was quiet on Friday. The Dow was down just 22 points.

The most exciting news was that gold closed at $1,006. But if gold buyers were afraid of inflation they neglected to mention it to the folks over in the bond market. The US 10-year Treasury note yielded all of 3.34% on Friday. Which is to say, fear of inflation is probably NOT what is driving up gold. But we’ll come back to that tomorrow… We’ve been doing a lot of thinking about gold… Stay tuned.

Meanwhile, the Financial Times says world equity markets have rallied 65% since their lows in March. There is no longer any sign of panic. Or fear. People seem to think the crisis of over. This has reinforced their illusions. They desperately want to believe that their financial authorities have the matter under control. So long as things seem to be stabilizing – or actually getting better – they figure they can relax.

‘Nothing has really changed,’ they tell themselves. ‘It was just a hiccup… nothing serious,’ they say. They look out their windows and see the same trees, same buildings, same automobiles; it certainly seems as if nothing had changed.

Of course, when you set out on a drive from Manhattan, it takes a long time to get out of the city. For a long time, the buildings… the landscape… and the people still look the same. But you haven’t even crossed the Hudson yet! It is only later, after a lot of driving, that you realize… you are a long way from home. We suspect that there’s a long trip ahead of us too. We have begun the process of reversing a half-century of credit expansion. Since 1945, debt per person has increased. Now it is decreasing –with vast consequences. If we’re right, the financial sector will shrink for many years. Profits will be hard to come by. A job will be difficult to get too. And the part of the world dominated by Anglo-Saxons will diminish.

Fear will make a comeback… when people realize where they’re headed…

And more thoughts…

*** As you’ll recall from Friday, between the fall of the Berlin Wall and the fall of Lehman was perhaps the happiest, most worry-free period in American imperial history. The country had no military challengers (it had to pretend that a handful of muslim fanatics armed with box cutters represented a serious threat). Finance was the world’s highest margin business… and New York’s hustlers were good at finance – rivaled only by those in London. And English was the world’s dominant language. With these advantages behind them, Americans (and Brits) saw nothing before them but growth and prosperity. They had gotten used to living off the kindness of strange lenders. They thought they could get away with it forever. But when Lehman went down, so did hopes for the eternal reign of the anglo-american financial empire.

Now, savings rates are going up in America. Spending is down. So are salaries and prices. It’s a deflationary world… Practically everything is deflating…

Consumer prices… inflation is negative in the US and Europe…

Wages… household income is down in the US. Unemployment is up and the length of the average workweek is down. Result: lower wages.

Housing…“house price decline [in England] will continue after false dawn fades,” says a headline at today’s Telegraph. A study by Ernst and Young predict a 1.6% drop in British house prices in the first half of next year, after an 11.4% fall this year.

Net household wealth… down too, caused by falling house prices and falling incomes.

Oh… but here’s one thing that is up: government deficits. The US posted a deficit of $111 billion in August. A few years ago, that would have been a frightening deficit for an entire year. Now, we have hundred-billion deficits every month… with no end in sight.

*** As forecast, protectionism is on the rise. The Obama administration put a tariff on tires imported from China. It was done do to protect American tire manufacturers from competition. Free trade? Sure, when it suits us.

But China is getting huffy about it. In an “unusually strong riposte,” Beijing, using diplomatic language of course, said to the US roughly what Serena Williams said to her net judge:

“I swear to God, I’m f**** going to take this f**** ball and shove it down your f**** throat…”

Why’s China so upset? In an expanding world, everyone greedily grabs market share. Even if they’re not as fast as the next guy, they still feel they’re making progress. In a deflating world, on the other hand, if you give ground… you’re not just losing market share…you’re losing money!

*** This weekend we traveled back to Paris to take part in a panel discussion on freedom. Liberty is not a hot topic in Paris. In a metropolitan area of some 4 million people only about 50 turned out to hear our talk – and half of them were American or English. Still, we were surprised there were so many. Liberty is a popular word. But freedom has never been much in demand. Millions of books are sold that promise to reduce your weight. How many are sold that promise to increase your freedom? We don’t know of any. Our guess is that the bookseller who makes freedom his market niche will soon have dust on his books and cobwebs in front of his door.

Still, the little group was enthusiastic. Assembled in a stuffy miniature theatre off the Rue Mouffetard, the freedom enthusiasts had a number of ideas for promoting their cause. One wanted to infiltrate the government with closet libertarians. Another suggested a takeover of academia. Still another suggested engaging taxi drivers in Socratic dialogues.

We looked for a fire alarm. Clearly, the heat was getting to them. They needed a good hosing down. We live in a world dominated by rules, laws, edicts, taxes and regulations. But it is not because the masses have never heard of liberty. They know what freedom is; they just don’t want it.

Instead, what they want is an edge, an angle… a law that protects them from honest commerce… a special tariff that gives them an advantage… a monopoly… a privilege…

They want food stamps and unemployment compensation. They want free medical care for their parents and free schools for their children.

They want what we all want… growth and prosperity, without corrections. And they want to go to heaven without dying.

Source: No Fear

Then, he followed his own theory… coolly… confidently… cutting Fed rates down to nearly zero, pushing Congress to pass a huge ‘stimulus’ bill, and even forcing Bank of America (NYSE:BAC) to take over Merrill Lynch. In this last event, he is accused of deliberately hiding Merrill’s enormous losses and then threatening the BofA board with dismissal if they refused.

Because of Bernanke’s swift and assertive action, the nation’s banking system held together during those critical weeks of late-2008. And because of his monetary (and fiscal) policies, all the worlds’ economies are now in some stage of recovery. Stocks are rising. House sales are increasing. All the indicators point to a better world.

In recognition of the fact that he saved the world, Ben Bernanke was given the nation’s highest honour; Obama picked him to continue as head of America’s central bank, the Federal Reserve… even though he was appointed by his predecessor, a Republican.

Everyone needs a story. It’s the way we understand things. Data is just data. Numbers are just numbers. Facts are just facts. Without the framework of a good tale to hold them together, they are worthless.

That’s why, here at the Daily Reckoning, we are suspicious of facts, data and numbers. As for the numbers, they are wrong before they get to us… often intentionally. Then, when they are later straightened out, they sometimes tell a completely different story. Even the ‘facts’ often turn out to be not facts at all… but distorted data, information has been twisted to fit into a storyline.

The more precise the data, meanwhile, the more they lie. Give us a CPI rate of 6.24% and we will give you back two numbers that are total fictions… and another one that turns out to be wrong later. As for the GDP growth rate… don’t even bother to give us a number at all. Whatever the digits say, it’s a lie.

This week came news that the GDP is falling at a 1% rate. This number surprised economists. They thought it was falling at a 1.5% rate. This better-than-expected number encouraged investors to buy stocks; the Dow rose 37 points yesterday. Oil and gold remained more or less where they were.

Economists are frequently surprised. In a study of GDP forecasts, a researcher found that economists did nothing more than extrapolate current trends into the future. If the GDP was growing at 2%… they projected that it would grow at 2.3% the following year. Or maybe 1.9%. These projections were mostly correct. Generally, one year is a lot like the year before. But whenever the direction changed dramatically, economists missed it completely. In other words, they’re not really capable of telling us what the economy will do – unless it does nothing different.

We’ve discussed the emptiness of the GDP figures many times. Just because the GDP is growing doesn’t mean people are really any better off. In fact, GDP growth during the Bubble Epoque was really a measure of how fast people were ruining themselves. Seventy percent of the GDP was consumer spending; as consumer spending went up so did debt. The result was a paradox and a shame – at the end of one of the longest periods of uninterrupted GDP growth in history, the typical householder was poorer than he was than when it began.

That’s why we are skeptical of numbers… especially precise numbers. They lie through their decimals.

What matters is the story… and our story now centers on the role of one man: Ben Bernanke. But the story that most people hear… and believe… is false. It is like GDP growth in the Bubble years… it may sound right on the surface, but the real story is opposite to what is commonly believed.

Bernanke ‘wrote the book’ on avoiding deflation, ‘tis true. But he doesn’t really have a clue what he is doing. He didn’t really avoid a Second Great Depression. There isn’t really a genuine recovery underway. And the world is not becoming a better place as a result of Ben Bernanke’s exertions.

Au contraire… he’s making a natural mess into an unnatural one. He’s turning a depression into a Great Depression… He’s making a bad situation worse.

At least, that is OUR plotline. But we’ll let the story tell itself… day by day… and see where it leads us. If we are wrong about the plot… we’ll find out…

*** What a summer.

Last night we invited our neighbours over for a barbecue. Damien, our gardener, manned the fire. Jules took care of drinks.

Along with the farmers, their wives and their children, came the girls from across the road. You’ll recall THAT storyline, dear reader. This has been a summer of awakening for the teenagers. For the first time since we’ve been here – 14 years – our boys have noticed our neighbours’ girls. Every summer before, we would only see them in church, lined up in pretty dresses… quiet… polite… We exchanged kisses, in the French manner, after the mass, but that was it. Otherwise, we never saw them.

“This is a summer the boys aren’t likely to forget,” began their older brother at breakfast this morning. “They all went down to the pond after dinner last night. I went down to say hello, but after a few minutes, I felt out of place. It was pretty hot down there.”

Yes, the girls have grown up. And so have the boys. Back and forth, all the month of August. Playing tennis and swimming in the daytime. Having dinner and hanging out at the pond at night.

“It’s a lot of fun,” our youngest boy, 15, reported earlier in the week. “But it’s complicated. We all seem to like someone else… but not the one who likes us. Eloise likes Henry, but Henry likes Claire. Claire likes me, I think, but I like Sylvie. I don’t know who Jules likes, but I think all the girls like him.”

Last night, however, it looked as though the iron filings were finally lining up. Your editor went down to the pond at 2AM; it was time to take the girls home, he told them.

“I don’t care if the girls want to stay or not… Take them home,” he told them.

The boys obeyed. But it was obvious that none of them wanted to leave. Edward had one of the girls by the arm. Henry and another were deep in conversation on the other side of the fire. Jules was nowhere to be seen.

It was the last time they would see each other until next summer. The girls would go back to their lives in Paris or elsewhere. Our boys would go back to school or on to their careers. Tonight was their last night together. The goodbyes were long… and, probably, tender.

“C’mon… get going,” said Father, heartlessly. “Wrap it up…”

Source: Making a Bad Situation Worse

The stock market crashed in ’29. The market then bounced. After a few months almost everyone was persuaded that the “worst is over.” But the worst was just beginning. It wasn’t until 1932 that the stock market finally hit bottom. By then, it beginning to seem like a depression… and only years later did economic historians tag it as a ‘great’ depression.

This depression is still wet behind the ears… We’re still in the bounce phase. On Friday, the Dow went 113 points higher. And as the bounce continues, more and more investors will come to believe that stocks are in a new bull market and that the economy is back in growth mode.

Neither will be true.

The stock market is in a bear market rally, not a genuine bull market. The economy is entering a long depression… possibly a ‘great’ one.

How can we be so sure? Well, we’re not sure of anything. But all the signs point in that direction. Household debt as a percentage of disposable income hit a low of about 2% just at the end of WWII. It’s been going up ever since. By 2005 it nudged against 15% — 7 times higher than it had been 60 years earlier. Household debt represents spending that has been taken from the future.

But you can’t take an infinite amount from future earnings. You reach a point when the future can’t handle it. As more and more future earnings are absorbed by past consumption, pretty soon there’s not enough left to live on. At some point, so much of earnings are devoted to paying the interest and principle on past borrowings that the poor householder cannot to pay his expenses. And imagine what happens if his disposable income goes down.

Guess how many jobs the US private sector has added over the last 10 years? Almost none. Private sector employment is back to levels of 1999. There are more jobs in restaurants and health care… but many fewer in manufacturing. Net gain: zero.

The only job gains have been in the parasite sector – government. On the evidence, this trend is going to continue. Now, the feds have a new post called “pay czar.” As near as we can tell this is a busybody who undertakes to control salaries in the industries that the feds have bailed out.

There will be a lot more jobs running the regulatory/bailout apparatus. Then, too, there are all the make-work jobs of the shovel ready boondoggles the feds began in an effort to replace private spending.

Back in the private sector, 72 banks have failed so far this year. And a record 34 million Americans are getting food stamps.

Naturally, incomes are falling. Now, imagine the consumer… he’s already paying 15% of his disposable income to debt service… and then his income is cut in half! This means that 30% of his remaining income must be used just to service the debt. Impossible to do without big cuts in spending…

The poor consumer hit the wall in 2007. He was spending all he earned… and paying more of his income in debt service than at any time in the last 60 years. He couldn’t continue to live on future earnings – there just weren’t enough of them. That is why the finance industry has topped out. It loaded Americans up with enough debt already.

And it’s why the credit cycle has turned. All of a sudden savings rates are back up to 7%. Consumers are cutting back… raising chickens in their back yards… driving less… planting gardens and squeezing their nickels. The private sector is de-leveraging. And there won’t be any durable economic boom or lasting bull market on Wall Street until this process is finished.

How long will that take? Read on…

*** Harvard professor Ken Rogoff says it will take 6-8 years for households to reduce their debts to a more sustainable level. Let’s see. We reported on Friday that the big upswing in credit over the last 60 years added about $35 trillion in excess debt to the system. But not all of that is private debt.

Taking the period of the bubble years, in 2000 total debt in the US came to $26 trillion. Now, it’s twice that amount — $52 trillion, of which $38 trillion is private… or more than 2 and a half times GDP. At this level, the private debt absorbs roughly one out of every 7 dollars in consumer earnings – in interest and principal payments.

If the private sector undertook to reduce debt back to 2000 levels, it would mean eliminating all the debt accumulated during the bubble years – or about $19 trillion. How long will it take to pay down, write off, inflate away and otherwise shuck $19 trillion?

Well, inflation is running below zero – so that is not now a source of debt reduction. Between write-offs and pay-downs, about $2 trillion has already been cut – over, very roughly, the last 2 years. At least the math is easy. At that rate, it will take 19 years.

Now, let’s go back and look at the Japanese. How long have they been deleveraging. Gosh all mighty… 19 years. From 1990 to 2009.

Are we looking at a 20-year period of on-again, off-again deflation… of bear market rallies followed by real bear markets… of weak employment and weak or no growth? That’s what we argued, along with Addison Wiggin, in our first book, Financial Reckoning Day. Then, the stock market took off… and the bubble years came. It looked like we were dead wrong. Maybe we were just early. Or maybe those bubble years were just a feint… a fake-out that convinced the entire world to invest in stocks and property, just before the biggest crash in history.

In that book, we guessed that the crash in the tech sector marked the beginning of the end. By 2005, it didn’t seem at all as though we were in a down-cycle. But adjusted for inflation, stocks never beat their January 2000 high. And outside of government, the economy has no more jobs than it did in 1999. We’ve had wars against terror, bubbles in practically every sector, trillion-dollar boondoggles, bailouts, bamboozles and Michael Jackson’s tragic cooling… but what is the only durable thing to come out of the last 10 years? Just Google and debt.

*** “When you have a big family there is always someone in the family who is in trouble,” said another friend.

“I thought that when the children left home to go to college, we’d be more or less free from problems. They’d be on their own. We could turn our attentions to other things.

“Well, it didn’t turn out that way. There’s always one of them that has a problem. And we spend a fair amount of time worrying about them… even if there’s nothing we can do to help. Or trying to help them if we can…

“And then the grandchildren come… and then we worry about them. It just goes on and on. It’s not disagreeable, of course. I’d rather have children and grandchildren to worry about than not have them. But there doesn’t seem to be any end to it… ”

Source: Still in the Bounce Phase

Well… we’re the Daily Reckoning, that’s who. And we’ll say it: they’re wrong.

This ‘recession’ is already the second longest since the first leg down of the Great Depression. That downturn of the early ‘30s went on for 43 months. This one is now at 19 months – officially – which makes it longer than any other since the Great Depression.

Is it over? Is it going away? Is that all there is?

Nope. Nope. Nope.

Instead, we are merely proceeding as we should… into a “deepening structural depression,” as John Williams puts it.

Yes, he uses the D word too. Because a D is what we have. Not an R.

It’s a depression because it requires major structural change. A recession only requires time. And not even much time… just a few months to work down inventories. But a depression takes a lot of time…to restructure industries and rebuild balance sheets. Debt needs to be paid down – or inflated away. And businesses need to redirect their efforts towards a more profitable line of activity.

Both the increase in unemployment and the slump in industrial production are worst than at any time since 1945. As for retail sales and housing starts, they’re the worst in the post-war record books.

The figures tell us that something important is going on. But what’s the key to understanding what it is? And how will it be cured?

This key is to understand that this is a major structural depression. It can’t be cured by more stimulus, because stimulus is what caused it.

This time, we need a real cure… bankruptcies, workouts, deflation, defaults… and maybe, eventually, hyperinflation.

None of those things happen easily or quickly. Businesses don’t want to go bust. Families don’t want to lose their houses. So if they get a lifeline from the feds, they grab it and hold on. And the longer they hold on, the longer it takes to make the structural changes that the economy needs.

The length of time spent in unemployment is now longest since 1948. And consumer debt, at only 12% in 1982, is now at 18% of GDP. “With that kind of debt, there is no question that the feds will implement a tight money policy,” said Marc Faber in his speech here in Vancouver yesterday. Instead, look for easier… and easier… money policies, he says.

We learned – was it yesterday? – that the feds have put up an amount equal to more than 150% to GDP to bailing out Wall Street — $23 trillion. No wonder Goldman is reporting record bonuses!

“We have to spend money to keep from going broke,” says Joe Biden, a man who is out of his depth in the bathtub.

But when you’ve got that kind of money covering your mistakes… how much restructuring are you going to do? Not much.

“Wall Street Learned Nothing,” is a headline at Forbes, making the obvious point.

The feds still believe in stimulus. And Wall Street still smiles and takes it. That’s why the recovery is still a long way off. Now, the feds are in charge of the money… and in charge of key industries, including automobiles, banking, insurance… and soon, healthcare. They’ll block innovation. They’ll prop up ailing institutions. They’ll provide more and more stimulus.

A growing group of analysts and strategists now calls for another big stimulus package. You see, the current stimulus program hasn’t worked. Why not? Well, because it was not enough… or not properly focused, say economists. In either case, the solution is not hard to figure out. Even Nouriel Roubini says “more stimulus is needed.”

So more stimulus is what we will have… and a collapsing economy… and a falling dollar… and more!

Source: Proceeding Into a Major Structural Depression

I don’t have to tell you things are bad. Everybody knows things are bad. It’s a depression. Everybody’s out of work or scared of losing their job. The dollar buys a nickel’s worth; banks are going bust; shopkeepers keep a gun under the counter; punks are running wild in the street, and there’s nobody anywhere who seems to know what to do, and there’s no end to it.

We know the air is unfit to breathe and our food is unfit to eat. And we sit watching our TVs while some local newscaster tells us that today we had fifteen homicides and sixty-three violent crimes, as if that’s the way it’s supposed to be!

We all know things are bad – worse than bad – they’re crazy.

It’s like everything everywhere is going crazy, so we don’t go out any more. We sit in the house, and slowly the world we’re living in is getting smaller, and all we say is, “Please, at least leave us alone in our living rooms. Let me have my toaster and my TV and my steel-belted radials, and I won’t say anything. Just leave us alone.”

Well, I’m not going to leave you alone.

I want you to get mad!

I don’t want you to protest. I don’t want you to riot. I don’t want you to write to your Congressman, because I wouldn’t know what to tell you to write. I don’t know what to do about the depression and the inflation and the Russians and the crime in the street.

All I know is that first, you’ve got to get mad.

You’ve gotta say, “I’m a human being, goddammit! My life has value!”

So, I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window, open it, and stick your head out and yell,

“I’m as mad as hell, and I’m not going to take this anymore!!”

Network was released just two years after the 1973-74 stock market crash. And Beale’s mad rant to camera was very much a product of its time, capturing brilliantly the out-of-control inflation, the recession, the Cold War.

But we bring it to your attention today because Beale could just as well be talking about our “Great Recession,” the one brought on by easy credit, corrupt government, shoddy regulation, bungling corporate management and the credulity of the herd. And because Beale’s speech has one vital ingredient, something that’s sorely missing from our current predicament: anger.

So today, dear reader, we’re going to get mad, Howard Beale-style. We’re going to stick our head out the window and yell. And if you’re reading this, wherever you are, we ask you to do the same. Get mad… Remember who’s responsible… And most important, start putting in place your plan to survive this whole stinking mess.

As the author of Bailout Nation, Barry Ritholz, wrote last week at The Daily Reckoning, the recklessness and incompetence that led to the economic meltdown seemed to be a team effort, “but that does not mean we cannot attempt to highlight those whose contributions have disproportionately led to the final catastrophe.”

First on Ritholz’s list of culprits, and on ours, is the man they once called “the Maestro,” former Fed chairman Alan Greenspan. According to Ritholz,

Several of Greenspan’s policies proved to be wildly misguided: the regular interventions to protect asset prices and bail out investors, the irresponsibly low rates after the post-2000 crash, and his nonfeasance in supervising lending. Most of all, it was his deeply held philosophical conviction that all regulations are bad, and are to be avoided at all cost. We now know what that cost is, and it’s astronomical.

Here we part company with Ritholz. The lack of regulation did not cause the collapse. It was bad regulation combined with the implicit promise of government bailouts led to the extravagant and poorly calibrated lending and financial risk taking that finally blew up the financial markets last year.

But whatever your view on Greenspan’s regulatory errors, his decision to keep interest rates artificially following the 2000 stock market crash was incredibly dimwitted. First, it facilitated the re-election of one of the nation’s most blundering presidents George W Bush in 2004. Second, it fueled mass speculation. This led to an inflationary spiral that pushed commodities prices and real estate valuations into the stratosphere.

Of course, the Maestro was just doing his bidding. And who knows, maybe the old fool really did believe that all that funny money would one day find a good home.

Congress, on the other hand, was supposed to look out for the interests of the American people and uphold the Constitution. Yet over the years it has eroded so much of what once made America great.

Instead of a free market, it has given us central planning, fiat money, the biggest deficit of any serious country in the world. It has destroyed the value of the dollar. It has given us a national debt, the interest on which cost the American taxpayer $260 billion last year alone. It has given us Fannie Mae and Freddie Mac and laws criminalizing banks’ failure to lend to subprime borrowers. It has given us an unfunded liability for Social Security and Medicare that now measures just under $100 trillion or 700% of annual GDP.

On Congress’s watch, the America that routed Hitler’s armies, rebuilt Europe and defeated the Soviet Union has been brought to its knees.

Maybe we’re just tired and grumpy. We’re on our way to Berlin to see how the German economy is holding up, and we’ve been traveling all day. But we see this as reason to get mad.

As the ancient Greeks knew well every crisis is an opportunity. (It’s engrained into their language: the original Greek word “crisis” translates into opportunity.) The Great Depression led to the creation of the Securities Exchange Commission, deposit insurance and the Glass-Steagall Act, which separated investment and retail banking.

To what end will the current crop of American politicians use this “Great Recession” (as James Grant of Grant’s Interest Rate Observer calls it) or “Greater Depression” (as Casey Research’s Doug Casey terms it)?

To begin, we might reasonably expect our dear leaders to allow the crisis do its work. As Joseph Schumpeter taught us, and important function of economic crises such as the one we’re now experiencing is they help rebalance an economy and make it more efficient.

According to Schumpeter’s core idea of “creative destruction,” downturns, if left to their own devices, have the positive effect of weeding out inefficient and failed companies and allowing more capable businesses take their place. They also encourage investors to reallocate their capital sectors and businesses with more chance of success.

On a wider scale, our current crisis is perhaps a once off chance to rebalance global trade – something that has been dangerously out of whack for some time now. We know that leading up to the collapse Americans lived beyond their means: they spent too much money they didn’t have. Meanwhile, the Chinese saved too much and spent too little. As a result, America imported (and consumed) too much and exported (and produced) too little.

This is now naturally being rebalanced: personal savings rates in the US are now rising back toward their historical average. The Bureau of Economic Analysis revealed that Americans in May on average saved 6.9% of their after-tax income – the highest level in 15 years.

White House chief of staff Rahm Emanuel and those that surround him in the Obama administration appear to have a different view of the opportunity that’s been created by the current crisis. (Readers will recall that Emanuel famously urged his fellow Democrats to remember never to let “a serious crisis go to waste … it’s an opportunity to do things you couldn’t do before.”)

Unfortunately, Team Obama isn’t much interested in Schumpeter’s creative destruction or the allowing debt-crippled Americans save and pay down their debts. Instead, it’s bent on the twin political wonders of bailouts and ‘stimulus’ packages.

The government has so far spent $439 billion of the $700 billion TARP slush fund on bailing out failed banks, insurers and auto makers. (So much for creative destruction.)

The Congressional Budget Office now admits that most of the money it shelled out to GM, Chrysler and their financial arms and suppliers ($55 billion) and to AIG ($70 billion) will be lost. And losses for the bailouts of Citigroup and Bank of America are now expected to come in at $9 billion and $10 billion respectively. (Yes, dear reader, we’re angry…)

President Obama billed the first ‘stimulus’ package as “making dramatic investments that would revive our flagging economy.” But as we know now, the truth lies elsewhere. The Wall Street Journal estimates only “about 12 cents of every $1” of that particular spending bill is “for something that can plausibly be considered a growth stimulus.”

The 647-page bill rushed through Congress was impenetrable enough to keep all but the most determined snoops away. But we know now it contains $1 billion for Amtrak, a railroad that hasn’t turned a profit in 40 years; $2 billion for child-care subsidies; $50 billion for the National Endowment for the Arts; $400 million for global-warming research; $650 for to pay for digital TV conversion coupons; and $150 for the Smithsonian (among other boondoggles).

We also know that the unemployment rate today is 9.5% – nearly 20% higher than the Obama White House said it would be with its much-hyped $787 billion ‘stimulus’ package in place.  And that it in May it took $6.52 stimulus dollars to increase consumer spending by $1. As David Rosenberg of Gluskin Sheff puts it, the money from Uncle Sam is going into the coffee can instead of being used to buy more coffee: Americans are saving, rather than spending, their stimulus.

In addition to the Obama’s first failed ‘stimulus,’ a second spending bonanza is now being proposed. This is a grave mistake. Americans are finally saving more and consuming less. They are even taking tentative steps to paying down their all too onerous debt burdens.

What does the government do confronted with this prudent behavior? It panics. And it immediately tries to reverse the trend. It borrows money out of pocket from foreigners and prints dollars to try to jumpstart the very trend – debt-driven spending – that led us to the current collapse.

The truth is no amount of Keynesian stimulus will replace the roughly $12 trillion lost in household wealth. Former political lights tried this throughout the 1960s and 1970s. The result? Poor growth and high inflation.

We can’t escape the fact that overspending, overborrowing and undersaving caused this crisis. It’s wrong to believe that it’s also the cure.

Good day… And a Marvelous Monday to you! You know the Jobs Jamboree data that printed on Friday, and created some HUGE euphoria among the media types that love to just “read the news” and not actually do the research to report it? Yes… It was a very good number, on the outside… Not that losing 345,000 jobs in a month is a good thing, but it is far better than the near 700,000 jobs lost a couple of months ago.

So… I’ve got that to talk about today… And the rebound by the dollar that has taken the euro to the 1.38 handle and looking as if it is going to go lower… And, then finally, I have to get on my soapbox again, because I don’t think I want my President calling me names! So, all that and more as we begin this 2nd week of June…

OK… Well… Did you get all caught up in the euphoria of the Jobs Jamboree on Friday? I know the 2 different cable news stations we have on here in the office, sure took the number, hook, line and sinker. The markets all reacted violently to the number too… At first… You see, when the number was reported, which was -345,000 for May, the euro took off, and the dollar selling was incredible, but the flurry only lasted about 1/2 hour, then someone with an ounce of gray matter, looked closer at the number. It was like a game of Who’s foolin’ Who?

So… Here’s the skinny… If the jobs losses were really just -345,000 in May it would have signaled a bottoming of the job losses, and a bottoming of the recession / depression, which would feed right into the inflation story, albeit a lot sooner than anyone would have expected… And with that thought, the dollar got sold. But… A funny thing happened on the way to the forum, and the currencies were soon to reverse their recent trend, and it all came back to the Jobs Jamboree…

First of all… The Bureau of Lying Statistics, I mean Labor Statistics, reported on their website that 220,000 jobs were created in May through the Birth / Death Model… And 43,000 of the 220,000 “ghost jobs” were Construction jobs… Really? You’ve got to be kidding me! But if you think that’s all… That’s just the tip of the labor iceberg… The number of unemployed persons actually increased by 787,000 in May! The number of long-term unemployed (those jobless for 27 weeks or more increased by 268,000 over the month to 3.9 million and has tripled since the start of the recession.

Not that I’m trying bum you out on a Monday morning, I just think you “should know” the score… The total number of unemployed persons is 14.5 Million… In January of this year 5 months ago it was 11.6 million… And… Oh, by the way… The 9.4% Unemployment Rate? It’s probably nearing 20% in “real terms”…

The thing that gets me is that people, investors, traders, hedge funds, etc. all react to data and make investment decisions based on the data when it prints… I guess this will teach them to wait until all the dust settles and the numbers have had a chance to be exposed to the daylight! I just think it’s a shame that we have to deal with these liars, and cheats, just to make us all “feel good”…

So… Eventually the truth comes to the top, because the truth… Is out there! So… Why is this bad for the currencies? Well… In normal times this news would be manna from heaven for the currencies… But these aren’t normal times, as the President, U.S. Treasury Sec. and Fed Chairman all remind us at least once a week… And the trading pattern for this type of bad news, is that the inflation picture everyone was thinking of last week and the week before, just isn’t going to come that fast… So… The currencies gave back gains that they had made in the last two weeks…

Whew! I typed all that “non-stop” and have to give my fat fingers a chance to rest here for a minute!

The euro also has had to deal with the Irelands rating was lowered by S&P to AA… But, I do have to say that since I’ve come in this morning, the bias has been to sell dollars, and buy euros… But, the move has been very small…

There’s not much in the data cupboard this week, until Thursday when the May Retail Sales report prints… The Butler Household Index (BHI) tells me to expect stronger Retail Sales in May. Wednesday we’ll get the May Budget Statement, which will be around a deficit of -181 Billion… Did you all get that notes I wrote last week about the month of April and the Budget Deficit… Did it hit home with you? Maybe I should repeat it just for GP…

Here’s what I said on Thursday… The Budget Deficit this April was $20.9 Billion, the first deficit in this “tax-paying” month in 26 years! Can you imagine that? In April when taxes are paid, we recorded a deficit? That’s pretty amazing folks… April 2009 tax receipts dropped 44% compared with those in April 2008.

And Here’s what I said on Friday… And I also believe that we will return to the underlying Weak Dollar Trend for good in the 2nd half of this year… Because… By then… the U.S. Budget Deficit, which has already breached 5% of GDP (late last year), will be heading beyond 10% of GDP this year. So… Do you want to own a truck load of dollars when the markets are staring at a Budget Deficit of greater than 10% of GDP? I don’t think so!

And… Then this week we get the actual data to tie it all together in a nice bow!

I just saw a news story flash across the screen quoting the President… Hmmm, seems President Obama believes that his “stimulus package” will create 600,000 jobs… Well, that should be in the bag, right? I mean if it’s not people being hired to take the census, then the BLS will just create them out of thin air, and the President will be able to say… “See! I told you I would create 600,000 jobs!”

I shake my head in disgust… I really do folks… And speaking of the President… I don’t know about you… But I’m tired of him apologizing to other countries… And I really don’t like him calling me names… OH! He’s calling you names too!

OK, back to regular stuff… The Reserve Bank of New Zealand will meet this week, and I’m on the fence regarding what they will do… I’m leaning toward leaving rates unchanged, but jawboning for further rate cuts… Which is about the same as actually cutting them! So… Just cut the darn things! Quit beating around the bush!

And… U.S. Treasury yields continue to climb higher, and that means further losses to holders… The 10-year U.S. Treasury yield hit a seven-month high this morning… Treasuries have to deal with more supply this week. Hmmm… I have to blow my own horn here and tell you that I told you a couple of months ago that this would happen… That the deficit spending would create a monster, and that monster would be the need to issue more Treasuries than ever before, and the more you issue, the less the value of those outstanding become… So, to sell them, you have to allow the markets to let the yields rise to attract investment, and… As the yields rise, those previous issues lose value, in the secondary markets… Sure, if you hold them to maturity, there’s no principal loss… But how many of those Treasuries were bought last year in the flight to safety, to hold until maturity? I don’t have an answer, but my guess is… Not many!

See? Deficits Do Matter! And these days it’s the Budget Deficit that’s taking the hits… The Trade Deficit, which used to be the Big Kahuna, is no longer adding $700 Million to the Current Account each year. In fact, the Trade Deficit will print this week for April, and is expected to remain below $30 million… Not a Surplus, but still, much better than the $65 million figures we used to see every month! As I’ve explained before though this is simply, not the preferred way to reduce one’s Trade Deficit… To have a recession! No, it would have been far better to have our exports be competitive…

And in the “here we go again” category… Saudi Arabia, Bahrain, Kuwait and Qatar signed an agreement to create a Persian Gulf monetary union, committing themselves to working toward a common currency despite the withdrawal of the United Arab Emirates and Oman.

These “oil states” threaten to do this about once a year… Kuwait finally go tired of waiting and dropped their peg to the dollar over a year ago! But, an oil monetary unit? Now that would really put a dent in the dollar’s armor, eh? Just don’t go hanging your hat on that happening any time soon!

I think that we’ve seen some real profit taking in the past few days… A reversal of the risk taking that was going on… And… The feeling that we went too far too fast… This move back in the euro and other currencies does give all those that were sitting on the sidelines and just couldn’t pull the trigger on the rally that began in March, an opportunity to get in at cheaper levels than the past two weeks…

And with that… I’ll head to the Big Finish!

Currencies today 6/8/09: A$ .7870, kiwi .62, C$ .89, euro 1.3850, sterling 1.59, Swiss .9130, rand 8.1850, krone 6.4470, SEK 7.8645, forint 207.35, zloty 3.2810, koruna 19.50, yen 98.55, sing 1.4585, HKD 7.7520, INR 47.57, China 6.8372, pesos 13.40, BRL 1.9615, dollar index 81.30, Oil $67.45, Silver $14.96, and Gold… $951.02

Source: Who’s Foolin’ Who?

Meanwhile, the currency markets are as are the most liquid, recession-proof market out there. And we’ve heard that one group of FX investors, led my master FX trader Bill Jenkins, has been making big wins lately. We’re talking gains of 42% in five days, 70% in four days, and 100% in one day.

Bill has been making these gains using currency options. They ensure strict minimum risk and require very little starting capital.

Right now, Bill is sending his FX profit-plays to a select group of test readers. He’ll tell you what the best play is and you decide whether to execute that play for maximum profits. Bill has agreed to allow Notes readers can join them risk-free. Follow  this link to  learn more.

And there are the regulators too! Under their very noses the biggest scams in history went unnoticed. America’s SEC alone – to say nothing of the countless other cops on the financial beat – had 3,371 employees playing the piano in 2006. If you can believe it, not a single one of them noticed what was going on in the back room. Even after rummaging through Bernard Madoff’s back office twice in the last three years, they still didn’t know. They must have been like pets watching an orgy…with no idea what to make of it, but wagging their tails and vaguely wanting to get in on the action.

Between Tuesday and Wednesday of last week, Madoff’s managed accounts were thrown into a “spiral of horror” said one fund manager. Tipped off by his own sons, the feds went to Madoff’s apartment. They gracefully asked if there was perhaps a misunderstanding. No, replied Madoff, “there was no innocent explanation.” And so, they put the cuffs on him and acted as though they had Lucifer himself in custody.

Bernie Madoff is a giant in his field. He out-Ponzied Charles Ponzi. He out-Princed Chuck Prince. He could have taught the Egyptians how to build pyramids. In the history of high-stakes grifting, he out did them all. A Robin Hood with Alzheimer’s; he stole from the rich. If he’d only remembered to give to the poor he’d be a hero!

Madoff’s charm was that he out-foxed the foxes and out-scammed the scammers. How hard was it to give away new houses to people who didn’t have any money…or get people who didn’t speak English to sign toxic mortgage documents? Child’s play, really. And the executives with their millions in bonuses… and humbuggers like Richard Fuld – their marks were mostly ordinary stock market investors; low hanging fruit compared to the coconuts Madoff plucked. Rather than go after the widows and orphans, he swindled the smartest money in the world…money managed by family offices…the old Jewish money from New York and south Florida…London’s Man Group…Switzerland’s Union Bancaire Privee. He even flim-flammed the hedge funds – including Fairfield Greenwich for $7.5 billion. And Tremont, a fund of hedge funds, put in more than $3 billion. How cool is that?

And he was remarkably democratic about it; he took money from his own tribe, his own clan, and his own golf club buddies. Billions of it. Even more impressive, he did it not with hyperbole, but with relative modesty. He produced only about 10% per year – which didn’t seem like much during the Bubble Epoque.

How could he guarantee steady 10% per year returns from stocks? Like so many of the conceits and delusions of La Bubble Epoque, it was absurd on its face. How come the SEC, with its legions of accountants, didn’t notice that the numbers were fraudulent? And how could the entire financial industry – with its Nobel winners and it business school graduates – not have noticed what was even obvious to us feral economists here at The Daily Reckoning? For years, we warned that the whole thing was a scam, a fraud and a delusion. And The Daily Reckoning is free!

And now, historians look back and wonder: how could people have been so stupid? The answer is simple: in a bubble, it pays to be stupid. You buy something at a lamebrained price…and it goes up. Not only did stupidity pay, it paid well. Running a bank paid better than robbing one. Hedge fund managers got paid more than contract killers or stick-up men.

“When the tide goes out, you see who’s been swimming naked,” says Warren Buffett. We haven’t seen the tide so low in many years; the view is nauseating…hideous…but never before have we seen so many skinny dippers nor had such a laugh. More than $15 trillion has been lost…so much that it threatens to turn the lights out on the entire world economy. The investment banking industry has disappeared. Regular banks have been nationalized. The auto industry is broke. Investors stagger. And mobs break shop windows protest.

Historians will try to make sense of it. But all historians lie. Not intentionally. It’s a professional requirement. They look back and think they see a plot. From then on, every circumstance is bent, greased and wedged into the story line. The basic facts are the same any way you look at it; the dramatis personae don’t change. But the historian can make readers laugh or cry. He can turn it into morality play or an amoral farce. He can focus on the struggle of the masses or the failures of leaders, the triumph of a caste…the defeat of a class…or the perfidy of an entire profession. Already, they’re telling their tale: the system failed…now, we need to fix it. We need more regulation; another Nobel Prize winner, Joseph Stiglitz, says so in the current issue of Newsweek Magazine.

Too bad they can relax and enjoy the elegant mischief of capitalism. In the space of 6 months, it has scratched 10,000 Porsches…destroyed more monuments than Cromwell…and squeezed the rich harder than Mitterand. It would have taken an army of dreary Bolsheviks decades to redistribute so much wealth; and it wouldn’t be half as much fun.

Source: The Bright Side of Catastrophe

This from The Daily Reckoning:

Global financial markets are acting as though the world is about to implode. Over the past four months, the investment community has dumped all assets; regardless of their underlying economic fundamentals. We have seen unbelievable wealth destruction on a global scale and trillions of dollars have evaporated and returned to monetary heaven.

The rate of decline has been astonishing and in the past twelve months, the Dow Jones Industrial Average (Dow) has seen its worst one-year performance – ever! It is interesting to observe that the Dow’s recent plunge has been even worse than the 1929 decline which preceded the Great Depression of the 1930’s (Figure 1). So, are we really witnessing the end of the world as we know it?

Regardless of the Armageddon fears prevalent today, I would argue that this slump may turn out to be a fantastic buying opportunity for the patient, long-term investor.

Now, the mainstream media seems to be convinced that our planet is headed into a permanent global depression and investor-sentiment certainly reflects this thought process. The same cheerleaders who, only a few months ago, were gleefully shouting about the emergence of a new global economy are now forecasting eternal disaster. Furthermore, investors are liquidating all assets as images of their children living in shanty towns fill their fearful minds. ‘Demand destruction’ and ‘de-leveraging’ have replaced ‘liquidity’ and ‘global growth’ as the new buzz-words. Stocks are down significantly from the highs, corporate bonds have taken a beating and even commodities (including precious metals) have joined the bear parade. And those who naively bought structured products from private banks have seen total losses. So, where do we go from here?

The best way to begin is by reiterating that global markets are now extremely oversold and undervalued, hence attractive. This may sound counter-intuitive but it is vital to understand that a decline of 40% in US stocks (and even more in some countries) has set the stage for fantastic long-term gains. If my assessment proves to be correct, investors who buy the unimpaired sectors today should make a fortune over the coming decade.

Remember, the best time to buy is when everyone is despondently selling. As John Templeton (founder of Templeton Funds) often said, “bull-markets are born on pessimism, grow on scepticism, mature on optimism and due on euphoria”. And you can be sure that the investment community is feeling extremely pessimistic and fearful today.

At present, a lot of ‘gloom and doom’ and ‘deflation’ chatter is doing the rounds in the mainstream media. The recent selling panic is frequently being described at the worst crisis since the Great Depression. However, this hype does not imply that the economic outlook is similar to the 1930’s. One of the biggest reasons why the Great Depression occurred was due to the failure or inability of the money-supply to expand in line with the need for this money.

Furthermore, the failure of roughly 5,000 banks did not help the situation either as millions of Americans lost their savings! In the current situation, however, various central banks and governments are throwing trillions of dollars into the monetary system and all bank deposits have been guaranteed. And if need be, the authorities will print money until the world runs out of trees. So, in my view, a prolonged deflationary phase or a global depression is not likely to happen.

The recent sharp declines in the markets can be attributed to the fact that two separate negative events caught the public’s attention at roughly the same time – depth of the financial crisis and fears of a US recession. Now, as far as the first issue is concerned, it is my belief that the worst is behind us. For sure, we may hear of sporadic bank busts in the months ahead, but the recent government guarantees prevented a total collapse of the banking system. For the record, I do not agree with the recent bail-outs because they are immoral and are going to cause huge inflation in the future. However, we all have to deal with reality and for now, it seems that the credit markets are starting to function again.

Our research reveals that currently US$3.5 trillion is sitting on the sidelines, waiting to be invested. And when investors deploy this cash into the markets, it will flow towards sectors which have been unharmed in this financial crisis. Now, I do not know about you, but apart from natural resources (where supply and demand imbalances persist) and industrials (which may benefit from massive government-sponsored infrastructure projects), I cannot find any other sector which has strong fundamentals. Housing faces severe over-supply, autos are struggling, banks will suffer due to over-regulation and consumer discretionary stocks will also fare poorly as the over-stretched public in the West tightens its belts.

The one sector of the economy which remains in excellent condition is commodities. Demand is holding firm, supplies of key resources are still tight and the ongoing credit crisis will only delay many projects which were previously meant to come online. This will create additional supply shortages in the future, thereby leading to much higher prices.

As far as precious metals are concerned, it is worth remembering that our world’s financial system has been hijacked by money-printers. Whether it is the Federal Reserve, Bank of England or the European Central Bank – they are all creating money ‘out of thin air’ and inflating the supply of paper currencies.

As this rampant inflation continues, what is astonishing though is that so many investors are being hoodwinked into believing that our world faces a genuine deflationary bust. These days, opinion is divided as to whether we will witness continuing inflation or gut-wrenching deflation. In my view, this discussion is absurd and deflation (or a contraction in the supply of money) is out of the question.

Banks are in the business of lending money and debt creation is essential for their very survival and prosperity. So, you can be sure that the modern-day money lenders will find a new way to further expand the supply of money and debt.

Whilst paper currencies (cash) regained some purchasing power in the past few months due to forced liquidation in the asset markets, there is no chance that they will maintain their value over the medium to long-term. History is littered with numerous paper currencies which became totally worthless and I suspect many of the current ones will also disappear. In fact, a remarkable study confirms that only 23% of paper currencies ever issued have survived the test of time! The vast majority were destroyed due to hyperinflation and are no longer in circulation.

Accordingly, I would urge investors to sit tight with their positions in hard assets (precious metals, energy and agriculture) and add more capital at such depressed levels. Under the best-case scenario, global markets bottomed out over the past two months and even if they did not, at the very least, we should get a multi-month rally in commodities and related stocks.

Source: The End of the World…Or the Right Time to Buy?

This from The Daily Reckoning:

“Until today or tomorrow, the typical turkey enjoyed a fairly decent life…” commented our friend Nassim Taleb, in Zurich yesterday.

Yesterday [Wednesday], the stock market was quiet. The Dow ended up 36 points. Oil held at $50. Gold too…it stayed right where it was, at $820 an ounce.

But the slaughterhouses and gold mints worked overtime.

“You can understand how fraudulent most economic analysis is,” Nassim explained, “just by looking the life of the turkey. The animal is fed for 1000 days…and then it is killed. So, if you plotted out the turkey’s life on a chart, it would look great for 1,000 days…each day, the food arrived reliably, and each day, the turkey gained weight. The turkeys would look around and say they were enjoying growth and a bull market. Momentum investors would see it as an opportunity. The quants would run linear regressions on the data and prove that the risk was minimal. ”

Ben Bernanke would describe the turkey’s life – with no setbacks – as the product of a “great moderation.” Turkey stockbrokers would assure their clients that nothing had ever gone wrong in the turkey’s life. Turkey econometricians and theorists would come up with explanations for why the turkeys’ growth would continue forever and they’d pat each other on the back for having finally mastered the “turkey cycle.” Turkey politicians would run for re-election on the grounds that they had helped create a better world. And turkey economists would project further weight gains…until the turkey was the size of a hippopotamus

Then, come Thanksgiving, and all of a sudden, something goes wrong. Alas, all the turkeys’ theories, models, and conceits were for the birds.

“Rare events can’t be modeled,” Nassim continued. “Because they are too rare. You can’t get a statistically reliable sample. Alan Greenspan recently explained that he ‘had never seen anything like this before.’ Well, of course he had never seen it before. It never happened before.

“Because these events are so rare, they are also completely unpredictable…and usually much worse than you can expect. Like Thanksgiving Day for the turkey.”

The turkeys are getting the axe…but they’re having some revenge: Americans are getting the axe too.

Unemployment is rising sharply…and tomorrow, when Americans sit down to their turkey dinners, they will be dining in houses worth about 18% less than they were worth a year ago. Not only are their houses worth less…their values are falling faster and faster.

There’s no sign of a bottom to the housing market. In some areas – Los Angeles, Miami, San Diego, and San Francisco – the loss in housing wealth already exceeds 26% from a year earlier.

But don’t worry, dear reader. Houses are not dot.coms. And they’re not turkeys. They won’t go to zero. And they won’t disappear.

Besides, they were never financial assets in the first place. They’re just places to live. If you’re happy with your house…you don’t care what its price is.

On the other hand, if you’re not happy with your house, this is the time to start looking around. Our guess is that house prices will go down another 20-30%. Then, you will be able to get houses at very reasonable prices… Unless you want to live in Detroit – where you’ll be able to get a house at a remarkable price.

Meanwhile, the economy itself is sinking too. GDP faded in the 3rd quarter – down 0.5%. Most likely, the US economy will begin walking backwards faster too. Which means…more businesses will fail…more people will be out of work…and those people with any money in their pockets will be very careful about how they spend it…

…which will, of course, make things worse.

All this is a natural, normal response to a credit bubble. It gets bigger and bigger – and then it blows up. Loans are made…and then they are collected. Mistakes are made…and then they are corrected. People do stupid things…and then they pay for them. People go mad on the way up…then, they go mad again on the way down. What could be simpler?

But if you think the feds are going to stand still and let something natural happen, you have not been reading the papers. They’re “pulling out all the stops” to try to prevent the correction…

So far, the feds’ efforts have been futile. But we have little doubt that they will get the hang of it eventually. If there is one thing the feds can do it is inflate the money supply. Ben Bernanke stakes his reputation on it.

And here is Thomas L. Friedman explaining what is needed:

“…a massive stimulus program to improve infrastructure and create jobs, a broad-based homeowner initiative to limit foreclosures and stabilize housing prices, and therefore mortgage assets, more capital for bank balance sheets, and most importantly, a huge injection of optimism and confidence…”

Friedman is the voice of the masses. But the intellectuals agree. Bloomberg reports:

“’You want to do everything you can when you’re facing the threat of a deflationary breakdown of the economy,’ says Michael Feroli, a former Fed official who is now an economist at JPMorgan Chase (NYSE:JPM) & Co. in New York. He sees the central bank cutting the overnight lending rate to zero in January and holding it there throughout the year.”

“Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson are being forced to pull out the stops because the extraordinary actions they’ve taken so far have failed to gain much traction. Credit markets are collapsing, stock prices are plunging and the world economy is sinking into a recession.”

“The biggest mistake Obama could make,” says Yale economist Jeffrey Garten, “is thinking this problem is smaller than it is. On the other hand, there is far less danger in over-estimating what will be necessary to solve it.”

Yeah…go ahead and err on this side now…. Why not? You erred on the other side. That is about the depth and breadth of thinking on the issue – at least from the people who never understood what the problem was…and now offer to solve it.

And it was to one of these same hacks whom Obama has turned for his secretary of the Treasury – Timothy Geithner. Here is another Hank Paulson. Unlike Hank, he did not work on Wall Street. Instead, he was supposed to be keeping an eye on Wall Street – as head of the New York Fed. “He was in the room,” when all the bailouts and busts happened, said one Wall Street pro. AIG (NYSE:AIG), Bear, Lehman, Citigroup (NYSE:C)– he was in on them all. And he was at least peeping through a keyhole when Wall Street was enjoying its wild party. He saw the deals go down…the leveraged debt…the private equity buyouts…the subprime razzle-dazzle…the quants…the bonuses.

We don’t recall a single word of warning. But then, he’s a young guy…maybe he’s learned something.

But we have a pretty strong hunch he’ll be at the Treasury Department not to further his education…but to play his role in the developing tragedy. He’s meant to try to stop the correction. Rather than examine his lines carefully to see if they really make sense…he’ll speak the speech given him. “Stimulus,” he will say. “Protect jobs…save homes…avoid financial meltdown…,” he has heard them before. He will say them again. And why not? Almost everyone wants to hear them. They all want bailout. Almost everyone wants to be saved. Almost everyone wants to duck the bill collector…and stop the hangman.

We all have to play our roles, dear reader. We are all turkeys…waiting for the axe.

Source: We Are All Turkeys