The downturn took $12 trillion off Americans’ net worth. The feds have pledged about $12 trillion to fix the problem.

But wait, where does government get any money?

Hey, they borrow it, just like consumers did. And besides, it’s ultimately the same money – taxpayers’ money. So what’s the big diff?

The big diff is the subject of today’s Daily Reckoning.

The first big diff is that the feds don’t spend your money the way you would. Private citizens spend money they don’t have on things they want but don’t need. The feds spend money that doesn’t belong to them on things that the rightful owners don’t even want.

Wait a minute. US markets were closed yesterday for Labor Day. With no figures to report, we should talk about something important. What’s important about macro-economics? Nothing. It’s 95% claptrap. The other 5% is pure fraud.

At least as practiced by the leading macro-economists of our time – such as Ben Bernanke, Tim Geithner and Larry Summers. It’s just a show-off sport… the idea is to impress the world with some fancy data-heavy formula… win the Nobel Prize and save the world. That way, you get what all men crave… money and power. Why do men (and women) want money and power? Aw c’mon… we explained it already. Because it improves their chances of survival and procreation. In a DNA study, for example, they found that Genghis Khan, today, has something like 6 million male descendants. Is that success, or what?

The great Khans of today are no longer the steppe warriors on horseback. They’re basketball players, rock ‘n’ roll stars, actors, and hedge fund managers. And, oh yes, occasionally, economists.

The link between economic theory and procreation is probably very weak; but that doesn’t stop economists from wanting to strut around and show off. And the way for an economist to show off is to get himself appointed to the President’s Council of Economic Advisors… or to the central bank… or get a professorial post at Princeton… etc. etc. This you do by producing tomes, formulae and hypotheses. And, don’t forget to write a piece for the Wall Street Journal from time to time.

Another important hint: your work has to suggest that you can manipulate the business cycle, control the credit cycle, or generally make things turn out the way people want.

If you are a Daily Reckoning-type economist, you can forget fame and fortune completely. Who wants to hear from a macro-economist who tells people to leave well enough alone… and to let the forces of natural economics sort out their own problems? No one… at least no one who is running for public office. Instead, they want someone who will promise to “Save the World.”

Save the world from what? Why… from the damage done by other economists!

Two generations of American economists thought the way to bring prosperity was to encourage consumption. On the face of it, the idea is absurd. Classical economists… and Daily Reckoning commentators… laugh at the idea. You don’t really get rich by consuming; you get rich by saving and investing.

But they had their charts and graphs… their theories and their jobs teaching economics at prestigious universities. Naturally, they had the feds’ ears too – since every politician wants to promise more consumption. The feds favoured home ownership, for example… even by people who were bad credit risks. They set up Fannie (NYSE:FNM) and Freddie (NYSE:FRE) to make it easy for people to buy houses. They even passed a law requiring banks to lend to people who weren’t likely to pay them back; that was the origin of the sub-prime mortgage market! They kept interest rates low, too, so people could borrow at affordable rates. And they inflated the currency, so consumers would want to spend their money rather than save it. They also opened the world to free trade, so Americans could buy more, cheaper stuff made by foreigners. For 50 years, they cultivated consumption and let production go to seed.

And now… wouldn’t you know it… Americans have over-consumed. Personal expenditures per capital rose 25% between 2003-2005. Personal debt soared to over $13 trillion… about $124,000 per household. Total debt/GDP tripled since 1980.

And now it’s pay-back time. The private sector has cut back. Consumers need to under-consume to make up for the over-consumption of the bubble years. Savings rates are rising. Spending is falling (see below)…

And so what do the simpletons do? Private citizens are unwilling to consume… so they push the government to consume their money for them!

“Frugality is the new normal,” says an Associated Press report. One study suggests that consumer will spend 14% less – even AFTER the recession is over.

Boomers are out of time. Out of money. And they’ll be out of luck unless they trim expenses and begin saving.

They’ve figured it out. Personal spending has fallen in 4 of the last 6 quarters. It hasn’t done that since 1947 – when they first began tracking it.

Consumers’ net worth has taken a big hit – down $15 trillion, from $65 trillion to $50 trillion.

And so, the simpletons think the government has to rush in where fools foundered… that is, rush in with more money.

But where do the feds get any money? They have to borrow it… or print it. There’s a big difference between federal borrowing and private borrowing. When the private sector borrows the risk is that people won’t be able to pay back their loans. That is a risk that lenders live with. They know the risk; they factor it into their decision-making. Sometimes they’re right. Sometimes – such as when economists mislead them with a lot of gibberish numbers – they’re wrong. And when they’re wrong, borrowers default… and lenders lose money.

The feds, on the other hand, can’t default. At least, not when their debts are calibrated in money they control. But there’s the risk right there. And it is a different kind of risk. It’s the risk that the feds may choose to pay back the loan in much cheaper currency. Or merely make a mistake that results in much cheaper currency.

Imagine a private borrower who could print up a few extra bills in his basement to pay his monthly mortgage. He may not do so… perhaps his sense of honour would prevent him. Or maybe he would fear that he wouldn’t be allowed to borrow again. But if his back were to the wall, there is little doubt that he’d soon be in the print shop.

The feds are in the print shop already. They’re printing up more dollars intentionally – to try to get inflation rates up… and to finance federal borrowing. It will be a miraculous thing if their new dollars don’t eventually cause inflation. But the macro-economists who run the print shop tell us not to worry. They’ve got it all under control. They’re already talking about when and how to withdraw the dollars they so helpfully provided during the crisis period.

The simpletons – who had no idea that the crisis would come… and then thought it could be easily contained… and then mistook it for a monetary, banking crisis… and then judged it over before it had really started…

…these same simpletons still do not understand that the problem is not a lack of money, it’s a surplus of debt…

…they now reassure us that they know just how much money to put into the system… and just when to take it out.

If you believe them… you might want to stay in stocks and US bonds. If not, you should head for cover.

The country is being run “by a gang of clueless bozos,” says Lee Iacocco, in his new book.

Source: Head for Cover

By “shows signs of improvement”, I suppose he means things like another extension in unemployment benefits, which he admits “is something that the administration and Congress are going to look very carefully at as we get closer to the end of this year.”

Naturally, I take points off his grade and I note that “look very carefully at” is a prepositional phrase, and he should have more correctly said that extending unemployment benefits “is something at which the administration and Congress are going to look very carefully” but either way it means that it is a “done deal” since there is going to be almost $3 trillion in deficit-spending money ($1.84 trillion in budgeted deficit and the usual $2 trillion in Supplemental Appropriations that will appear in the next year), all seemingly just sitting there! Hahaha!

The 5-Minute Forecast took a look at the specifics, and found that “Congress is under pressure to extend benefits again. Emergency legislation has already bumped unemployment programs to 79 weeks in half the states, about triple the norm and the longest since its 1930 inception (the rest of the states have programs ranging from 46-72 weeks).”

Yikes! We’re already at records of unemployment never even seen before! Nevertheless, they continue “Word on the street is that Congress will tack on another 13 weeks for states with unemployment rates over 9%… at a cost of $70 billion”, which seems like such chump change when next year’s federal budget deficit is, by itself, $2 trillion!

Blomberg says that Larry Summers, director of the White House National Economic Council, glossing over the fact that he has not been right about the economy or raised a peep about the rampant “creating excess money and credit” crap that Alan Greenspan and his loathsome Federal Reserve were doing for the last 15 years, says that he is now sure, sure, sure that the economy will resume growth in the second half of the year, although the job picture “will be serious for some time to come.”

Naturally, one wonders how economic growth can resume when more and more people are unemployed, with no viable options, and staggering under the biggest debt loads in the history of America, but even when you send him an email asking “What kind of stupid thing is that to say, you ignorant, loudmouth neo-Keynesian halfwit lowlife?” he never explains!

Just in time, The 5-Minute Forecast sort of obliquely answers my question when they reported that “both Larry Summers and Tim Geithner refused to rule out a middle-class tax hike.” Hahaha!

Oh! Growth in government taxation! Hahahaha!

Ignoring my rude laughter, Bloomberg continues with the insight that has Mr. Summers saying, “the Obama administration will work with Congress to ‘do what’s necessary to make sure appropriate unemployment benefits are available.’”

And working with Congress ought to be a snap, as Congressman Charles Rangel, chairman of the House Ways and Means Committee, said he “supports extending unemployment insurance benefits for another 13 weeks” because there is “no question” that the unemployed “deserve it”, because the are the “the true victims of this fiscal disaster.” Hahahaha!

The truth is that everyone is a victim of the abject stupidity of government morons like Congressman Rangel, who happily voted to deficit-spend monstrous amounts of money year after year after year, plus pledging a hundred trillion dollars in future benefits, and encouraged the Federal Reserve to create massive amounts of excess money and credit so that people could go into crushing debt by borrowing Too Much Money (TMM) to buy, among other things, the gobs of new government debt, all of which cemented into place a bloated, dysfunctional, corrupt, government-centric economy! Hahaha! We’re freaking doomed!

And now – unbelievably! – Congressman Rangel thinks that increasing federal government deficit-spending, via expansions of the money supply by the Federal Reserve to promise another 13 weeks of unemployment benefits to the victims, is going to fix things? Hahahahahahackahackahaha!

The extended “Hahahahahahackahackahaha!” is to cleverly denote that I am laughing and laughing until my sides are starting to hurt, and I am coughing and hacking up what appears to be pieces of lung at such preposterously and overwhelmingly funny Theater of the Absurd stupidity! Hahahaha!

In such a giddy state, I obviously cannot continue to the inevitable climax where I demand that you buy gold, silver and oil immediately as protection against the best intentions of government or suffer my contempt and scorn, which admittedly seems so far away from my current fit of laughing and coughing! Hahahahahackahackahaha!

Anyway, I could never say, “Buy gold, silver and oil because your own government is destroying your money and you!” better than when Mr. Rangel says it for me with “Victims deserve more of what they got!”

Whee! This investing stuff is easy!

Source: The True Victims of Government Stupidity

When we left three weeks ago, it was cold and rainy in Europe…and the world was in the midst of a terrible financial crisis.

But now we’re back…and everything has changed. The trees along the Boulevard de la Villette have leafed out. Flowers are in bloom. People are sitting at sidewalk cafes. Life seems to be returning to normal.

As expected, the financial world seems to be walking with a lighter step. It feels the sun on its face…and guesses that the long winter is behind it.

“Encouraging signs” are everywhere, says Le Monde. In fact, all the news reports say they see them. Consumer sentiment isn’t as bad as it used to be. Stocks are rising. The banks are back in business.

“How to profit from the recovery,” says one headline.

“Stocks point to end of downturn,” says another.

The Dow rose 119 points on Friday.

Newsweek probably speaks for millions. It looks at the recession so far and thinks: is that all you got? US GDP is contracting at a 6% annual rate. Prices are falling. Unemployment is 8.5% in the whole of the United States…as high as 13% in some areas.

But “if we’re in the middle of a new Great Depression,” asks the magazine, “why are we still ordering $17 cocktails?”

It may be a depression, in other words, but it doesn’t seem like one.

Why?

We can think of two reasons. First, the world is a lot fatter than it was in the ’30s. More people have more money – even in a recession. Some of them will want to buy $17 cocktails no matter how bad things get. Today, the Okies have air-conditioning, unemployment comp and Social Security. They won’t sweat quite as much as they did 70 years ago. At least, not until the government goes broke.

The basic problem is that too many people lived beyond their means for too long. Now, their means are shrinking and they’ll have to live within them. Still, they should be able to earn enough to be comfortable…unless all Hell breaks loose.

The other reason it doesn’t seem like a Great Depression is that we are still only in 1930. The stock market crashed in ‘29. Then, there was a rebound, in which people came to believe they saw “encouraging signs”…and began to look for ways to profit. They bought stocks, hoping to recover what they had lost – only to get hit again – harder. The bottom didn’t come until July 8th, 1932, when the Dow hit 41. And the misery didn’t reach the news photos until the mid-’30s…after Hoover and Roosevelt had successfully prevented a quick recovery.

If the pattern of the ’30s holds, we won’t see the stock market bottom until 2011. Then, it will begin to feel like a real depression. And interestingly, The Richebacher Letter’s Rob Parenteau notes that 2011 is when the second wave of toxic property loans (Alt-A and Option ARMs, to be exact) is set to reset.

And you will recall what happened when the first peak in subprime loan “resets” arrived smack dab in the middle of 2008: billions in bank write-downs… along with trillions of dollars in market losses immediately followed.

That gives us a good idea of what will happen in 2011… Millions more consumers will freeze up as their finances go over the cliff… more bank losses will drag down even more so-called ‘blue chip’ retirement portfolios… and the impact of the consumer bust we’ve been following in these pages will get “multiplied” yet again. Millions more Americans could lose everything.

So, don’t be impatient, dear reader. Everything will happen…when it’s ready.

Now, we turn to Addison reporting on the outlook for the U.S. economy:

“The Chicago Fed’s latest National Activity Index,” writes Addison in today’s issue of The 5 Min. Forecast, “which crunches dozens of numbers to come up with a near-term economic forecast with a not-bad track record, shows the economy still hovering near the lows of the 1973-75 recession.”

“‘The message, as we have seen in other key cyclic indicators,” says Rob Parenteau, “is that free-fall phase of the recession appears to be done in the United States. But that should not to be confused with ‘the recovery has begun’.’”

“‘Could this be a head fake?’ Rob asks. ‘We know that the auto production recovery under way in Q1 will peter out this summer as GM has announced a nine-week furlough to reduce inventory, and set off another round of equity investor fear and uncertainty. We also know Treasury issuance will be ramping up through the rest of the year as fiscal deficit spending increases.

“‘Who, besides the Fed, will be willing to take up all these Treasury bonds?’

“Heh. Who indeed. The Chinese? We believe they’re now buying gold.

“The president’s chief economic advisor, Larry Summers, chimed in with his own near-term outlook yesterday.

“Sleepy figures the U.S. economy will contract ‘for some time to come.’ The head of the president’s National Economic Council also expects ’sharp declines in employment for quite some time this year.’ But apparently, that prospect bores him.

“Of course, he is the only member of the Committee to Save the World still collecting a government paycheck.”

Each weekday, Addison brings readers the The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.

And back to Bill, with more thoughts:

How about those Chinese? Inscrutable, huh? Well, the world’s financial media seems to have ’scruted’ them last week, when news came out that our friends in the Far East had quietly increased their gold holdings by 75%.

“China admits to building up a stockpile of gold,” says a Reuters report. And the price of gold jumped over $900 – closing at $914 on Friday – on the news.

Remember the Golden Rule? He whole holds the gold rules. The Chinese are gaining wealth and power; soon, they will claim their right to make the rules.

The big banks aren’t so dumb.

Sure, they built time bombs in their basements, lit the fuses…and then forgot about them…

Sure, the resulting explosion obliterated $50 trillion in wealth…

Sure, the world economy, according to the IMF, is in its worst recession since the Great Depression…

Sure, the banks’ shareholders have been killed as their profits and share prices collapsed…

But the bankers themselves? Don’t worry about them. The New York Times reports that pay levels in the banking industry are about as high as ever. As a percentage of revenue, pay at Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS), for example, are higher than ever. Average pay at Goldman has gone up from $377,000 in 2005 to $569,000 in 2009. At JP Morgan Chase (NYSE:JPM), the average person got $108,000 in 2005. He’s up to $138,000 this year. Same thing at Bank of America.

How is this possible?

You can thank their trade association – the Federal Reserve. The big banks can borrow from the government for practically nothing and then lend the money to house buyers for 600 basis points of income. Or, they can lend it back to the government for about 200 basis points.

And now Newsweek reports that the big banks are gaming the bailout programs by buying toxic debt at 20 cents on the dollar and selling it to the government at 60 cents a dollar.

As we said last week: What do you expect? Put food out in the alley and you’re bound to attract rats.

“Toro…toro!”

Two Dear Readers came to our aid last week. The word we were looking for was not ’sepa,’ but cepo. It means “stocks” – like the kind of stocks they put the pilgrims in when they were bad. And it’s used down on the farm in Argentina for the heavy wood pincers that grab cows by the neck so the cowboys can work on them.

As you will recall from last week, your editor spent his vacation running 1,300 head of cattle through the cepo. It was round-up time down at the ranch. Each animal had to be examined, tagged, vaccinated…and, if they were a young male, usually castrated. Your editor was given the job of closing the back door on the contraption, so the animals couldn’t back up after they’d gotten into the box. Seemed simple enough. Indeed, he got the job because Jorge judged it so easy that even a complete greenhorn couldn’t mess up. But there were times when brains were called for…and other times when brute force was needed. In both instances, your editor sometimes came up short.

The cows were not always well behaved. Sometimes, they’d refuse to enter the wooden box. Other times, they’d try to jump out…or jump onto the cow in front of them – often getting so tangled up it took four or five men to pry them apart.

And then, there were the bulls.

Bulls are huge, dangerous animals. We gave them special attention. Especially one of them.

“Toro,” we yelled when a bull came through the maze and arrived at the sluice gates. The big Braford bulls were gray with stripes on their backs, a little like the pictures of a Tasmanian wolf. Hundreds of small flies lived on the bulls’ backs too. The bulls were so big they could barely get through the narrow corridors of the stone maze. Then, when they arrived at the sluice box, where the cepo waited for them, they could barely enter; once inside, they were so long that the rear door couldn’t be closed.

If they put their weight into it, they probably could have broken through the cepo. Earlier in the day, a pair of fighting bulls had knocked the front gate off its hinges – a gate of heavy wood reinforced with iron bars.

One of the bulls was especially troublesome. None of the cowboys dared go into the corral with him – he would charge them quickly. And despite their yelling…lashes…and stones (Omar through rocks at him from on top of the wall…) he refused to enter into the maze that led to the cepo.

“He must know we’re going to get rid of him,” said Jorge.

“Why? He looks like a magnificent animal…”

“He is. But his testicles are too small. He mounts the cows…but they don’t get pregnant.”

Finally, Jorge got on his horse and entered the corral. The bull watched but did not charge. Jorge is 56 years old. But he must have been born on a horse. He and the horse moved swiftly, together, with no visible sign of communication between them. They pushed the bull from the right…the bull moved to the left. Then, they quickly turned to cut off his retreat…moving back and forth…forcing him toward the gate of the maze.

“Hyyaah….Hyyaah….” Jorge yelled at the bull, waving at him…pushing him back…

The bull seemed to realize his situation was hopeless. He couldn’t escape Jorge on his horse…and dared not attack him. He entered the maze.

Once inside, the gate closed behind him and the cowboys on the stonewall urged him forward with sticks, stones and loud whoops…

This time, there was no need to yell ‘toro’ – everyone knew he was coming – the last of the cattle…and the toughest of them all.

By then, Jorge was back at the side of the sluice box…waiting to get to work on the bull once he was locked in place by the cepo.

“Watch out…” he said.

The big bull hesitated. Then, all of a sudden, he charged into the sluice.

“Grab him! Stop him!” the cries went up all around. Pedro put all his weight on the cepo lever; his feet were in the air, trying to hold onto the bull. Jorge joined him…so that both of them had all their weight on the bar. “Close the gates!” they yelled when they realized they couldn’t hold him.

At the other end of the maze was Edward, 15, whose job it was to open and close the gates, depending on which paddock we wanted the cow to go into. He rushed to close all the gates…trying to keep the bull from getting away. He had no time to put the chain on the downhill gate; however, so he and Cosimir stood behind it…putting their weight behind it and hoping the bull wouldn’t test it. But a second later, the huge animal pushed against the wooden gate…Cosimir beat a fast retreat… Then, Edward, realizing he was alone against an unstoppable force…stepped aside too. The bull butted open the gate and ran down through the paddock and out into the field. He was free.

“What are we going to do?” we asked Jorge.

“Let him go…he earned it.”

Source: Not Depressed Yet

MSNBC reported last night that Obama is already getting advice from Ben Bernanke.  That ought to make you feel warm and fuzzy right there.

But wait, there’s more!  As of this writing it appears Lawrence Summers is the leading candidate for Treasury Secretary.  As in, the guy who was Clinton’s last Treasury Secretary.  So much for the promise of “no retreads” in an Obama administration.

I mean, Larry Summers?!  That’s really in-your-face, on any number of levels.  PC-liberal types are still up in arms over his remarks about the size of women’s brains when he was running Harvard, and the general consensus in Cambridge was that he ran Harvard with all the people skills of Attila the Hun.

More to the point is this: Summers was among those present at the creation of the biggest credit bubble of all time — when the Glass-Stegall Act was repealed in 1999.  As I’ve written before, tearing down the wall of separation between commercial banking and investment banking is a good idea in principle.  But written between the lines of the replacement legislation was a guarantee of government bailout if big leveraged bets went awry — one reason that the ultimate deregulator, Ron Paul, voted against it.

But hey, it’ll make for a nigh-seamless transition at Treasury — Paulson to Summers to national bankruptcy.*

And if it’s not Summers, the other candidates whose names have been floated will substitute just fine.  Tim Geithner?  The New York Fed chief was the architect of the (NYSE:JPM) JPMorgan-Bear Stearns deal, and has quietly kept his hand in every bailout and associated scheme since then.  New Jersey Sen. Jon Corzine?  Ex-Goldman Sachs.  Nuff said.

Presidents might change.  Taxes go down, taxes go up.  But the criminal finance class always makes sure to provide for itself first.

*Speaking of national bankruptcy, what sort of omen is it that the book version of I.O.U.S.A. was Amazon’s top seller Tuesday night as Obama snagged his victory?

Source: The Fix Is in