Monty Pelerin's World

Economics, Finance and Politics Through The Prism of Classical Liberalism

November 2009 - Posts

The Shrinking Presidency

The Shrinking Presidency

TObamaBowED-AK559_noonan_DV_20091124185419hings are not going well when material like the following from Peggy Noonan appears:  ” ”a critical mass of influential people who once held big hopes for his presidency began to wonder whether they had misjudged the man.’ They once held ‘an unromantically high opinion of Obama,’ and were key to his rise, but now they are concluding that the president isn’t ‘the person of integrity and even classiness they had thought.’ ” The sentiment becomes especially significant when the quotes inside the quote are from “… journalist Elizabeth Drew, a veteran and often sympathetic chronicler of Democratic figures …”

Noonan concludes: “The Obama bowing pictures are becoming iconic not for those reasons, however, but because they express a growing political perception, and that is that there is something amateurish about this presidency, something too ad hoc and highly personalized about it, something . . . incompetent, at least in its first year.”

When SNL turns rather viciously against someone, it is not good press.

Wisdom: Eisenhower and Michael Crichton on Science


Michael Crichton


President Eisenhower

Anyone can rent a scientist. But when Federal funding is at stake, it appears you can also rent a conclusion.

In his farewell address to the nation back in 1960, Dwight D. Eisenhower warned of the danger from the military industrial complex. Less well-noted was his admonition of how scholars (scientists) could be corrupted by Federal employment and funding:

“The prospect of domination of the nation’s scholars by Federal employment, project allocations, and the power of money is ever present – and is gravely to be regarded.”

This advice seems especially prescient with respect to the Global Warming “science” that has come under attack. Findings appear to be a by-product of funding. When only politically acceptable outcomes receive funding, prostitution arises.

The late Michael Crichton, himself a medical doctor trained in the scientific method, was critical of what was happening. He warned about it in his 2004 novel, State of Fear.  Appendix I, entitled “Why Politicized Science is Dangerous,” was quite explicit as to how science was being done, or rather not being done. He likened what was happening to the politically-motivated and hideous “science” of eugenics. The following is quoted from that appendix:  [IF YOU ARE HAVING TROUBLE READING, CLICK IN BODY OF QUOTE]


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Stansberry: Bankruptcy of the US is Now Certain

Stansberry: Bankruptcy of the US is Now Certain

uncle-sam-brokeThis article concludes, as did my recent post Spiraling to Bankruptcy. that the bankruptcy of the United States is now inevitable. Porter Stansberry approaches the topic from a different angle, using cash flows and borrowing capacity, to support his conclusion.

Stansberry  has a great sense of urgency believing “the odds are very high you’ll be wiped out over the next 12 months.” Whether he is correct in this prediction, only time will tell. Timing is impossible to predict with any degree of reasonableness. Bankruptcy could happen this week or not for many years.

The bankruptcy of the United States is now certain

Tuesday, November 24, 2009
From Porter Stansberry in the S&A Digest:

It’s one of those numbers that’s so unbelievable you have to actually think about it for a while… Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that’s not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That’s an amount equal to nearly 30% of our entire GDP. And we’re the world’s biggest economy. Where will the money come from?

How did we end up with so much short-term debt? Like most entities that have far too much debt – whether subprime borrowers, GM, Fannie, or GE – the U.S. Treasury has tried to minimize its interest burden by borrowing for short durations and then “rolling over” the loans when they come due. As they say on Wall Street, “a rolling debt collects no moss.” What they mean is, as long as you can extend the debt, you have no problem. Unfortunately, that leads folks to take on ever greater amounts of debt… at ever shorter durations… at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that’s when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.

Continue reading Stansberry: Bankruptcy of the US is Now Certain

Pinflation, Reflecting Inflation

Inflation changes our perspective of many things, especially numbers. Richard Feynman stated:

“There superman_pinball_2are 10^11 stars in the galaxy. That used to be a huge number. But it’s only a hundred billion. It’s less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers.”pinflation300

The path of inflation reflects itself in more than prices. Here is an interesting take on Inflation through the history of PinballPinflation

To listen to other good short stories, go to the Seanachai

Retirement, For Whom?

… your $200,000 ten years ago has been halved in terms of purchasing power. However, in terms of planning purposes, your anticipated retirement amount has been reduced by 75%. Given these outcomes, who will be able to retire? And for those already retired, how many will “unretire?”

For Buy and Hold investors, better have a look at the following post. There are lessons to be learned, even if your broker would prefer you not know them. When viewing the charts below, remember that Japan has completed two lost decades with no end yet in sight. We are just finishing our first decade, but the results have been devastating for investors, retirees and those planning for retirement.

To put things into perspective, suppose you were nearing retirement in 2000 and had $200,000 invested in the stock market. Your anticipated retirement date was 2010 and you expected your investment to compound forward at 8% per year. Doing the math, you expected to have $426,000 at retirement. Instead you would have ended up with $138,000. To make matters worse, inflation over this period meant that your purchasing power in 2000 dollars was even less.

The government-issued CPI index shows purchasing power decreased by about 22% over this period. Thus, your starting $200,000 in purchasing now compares with about $108,00. (The CPI index is felt by many to understate actual inflation. John Williams at argues your purchasing power decreased quite a bit more.)

Using the government’s CPI numbers, your $200,000 ten years ago has been halved in terms of purchasing power. However, in terms of planning purposes, your anticipated retirement amount has been reduced by 75%. Given these outcomes, who will be able to retire? And for those already retired, how many will “unretire?”

If inflation heats up, as many expect, the impact on retirement will be even more severe.

The United States Lost Decade & Gold
November 25, 2009

As we enter a new decade we are compelled to point out what, in our opinion, is the “Lost Decade” of the United States. The financial media, brokerage houses and advisors have done a good job promoting the opportunity of owning US Equities, and as a result the average investor continues to wait and hope that their cookie cutter, simplistic investment strategies will provide for their future.

The reality is that investors have been severely punished for “buying” and “holding” US equities over the past decade.  The following chart illustrates the “nominal” performance of the Dow Jones from January 2000 to October 2009.

The next chart illustrates the Dow Jones performance when it is adjusted for the government’s measure of inflation, the questionable Consumer Price Index (CPI).

Continue reading Retirement, For Whom?

Obama and His Cardiff Giant

This post originally appeared on American Thinker today.

The Cardiff Giant, known as “America’s Greatest Hoax,” has new competition for the title — Global Warming. Recent revelations of what  appear to be doctored data, corrupted scientists and pressured peer reviews have produced terms such as climategate, climaqquidick and similar pejoratives. Describing the events of the past week, Senator Jim Inhofe, a consistent critic of the science said: “Ninety-five percent of the nails were in the coffin prior to this week. Now they are all in.”

Despite what appears evidence of outright fraud, President Obama refuses to acknowledge, no less investigate, what is increasingly becoming known as “The World’s Greatest Hoax.” Obama’s intentions to go off to Copenhagen, pretending that “the science is settled,” is a political gaffe of enormous proportion. It puts whatever is left of his rapidly diminishing credibility at risk, as well as his agenda.

Most political disagreements are ideological and too complex to easily prove anything. Health care is a good example. It is ideological and many-faceted. There is no definitive way to “prove” that one side is right and the other wrong. In health care that was particularly evident as the objectives (”marketing’ to the public?) shifted as required. In situations like this, credibility is all important. “Can I trust what this man says?” becomes the measure that the public uses to support or reject these complex issues.

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Spiraling To Bankruptcy

If the Government confiscated everything, the social programs would still be $50 trillion short and the Government would still be bankrupt. Furthermore, no company or individual would be left with anything.

The economy is in bad shape. Some say it is worse than any time since the Great Depression. I believe it is actually worse than the Great Depression because of the level of debt. At the time of the Depression, neither governments nor individuals were deeply in debt. We were a nation of savers. Now we are a nation of spenders, living beyond our means. Individuals and governments at all levels are over their heads in debt, some literally drowning.

The debt problem is intractable. This conclusion is not economic but mathematical. It literally is mathematically impossible to get out from under the level of existing debt. To demonstrate, only the Federal Government will be dealt with. Such a focus greatly understates the actual problem, because it ignores personal debt and lower-level government debt. States and municipalities have grown well beyond sustainable levels and are running large deficits. Some defaults have already occurred. Individual bankruptcy filings are soaring as are foreclosures.
Government Violence Tolstoy 001

Promises Beyond Reality: The Federal Government admits to over $12 Trillion dollars in debt. In reality, its obligations are multiples of that figure. The unfunded promises from Social Security and Medicare total around $100 trillion. That is, to properly fund the forecasted future deficits in Social Security and Medicare, $100 trillion would have to be put in the fund today. This liability is growing at the rate of about $5 trillion per year! The Government has promised benefits that they cannot honor. These programs are Ponzi schemes that make Bernie Madoff look like Mother Teresa. As evidence, the total net worth of the country (the country’s total assets less liabilities) is slightly above $50 trillion. If the Government confiscated everything, the programs would still be $50 trillion short and the Government would still be bankrupt. Furthermore, no company or individual would be left with anything.

Send in an Additional $1,525,000 With Your Tax Return : To further put the problem into perspective, the Federal


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Disgraced Spitzer Attacks Disgraced Geithner

Although this story doesn’t quite qualify for “No honor amongst thieves,” it does say something about Geithner. I suspect he will be thrown under the bus shortly, perhaps also with Bernanke. Bernanke is more difficult because of the political assault on the independence/privacy of the Fed.

As the economy continues to deteriorate, look for more of this “cannibalism.”

Geithner’s DisgraceThe new AIG report reveals how the Treasury secretary—and U.S. taxpayers—were fleeced by Wall Street banks.

By Eliot SpitzerPosted Monday, Nov. 23, 2009, at 2:57 PM ET

U.S. Treasury Secretary Timothy Geithner. Click image to expand.Timothy Geithner The issue has been festering for months: Why were AIG’s counterparties—including Goldman Sachs, JPMorgan Chase, and UBS—paid 100 cents on the dollar when the feds rescued the insurance giant, helping raise the cost of the bailout to nearly $200 billion? A new report issued by Special Inspector General Neil Barofsky now reveals that government officials, notably then-New York Fed President and current Treasury Secretary Timothy Geithner, grievously damaged the nation and capitulated to the very banks they should have been supervising.

Barofsky’s report reads like a case study in failed negotiation. The New York Fed didn’t have the backbone to stand up to Wall Street, didn’t understand its capacity to protect taxpayers, and didn’t appreciate that its responsibility was to taxpayers.

Geithner and the Fed have proffered a series of spurious reasons for their willingness to pay AIG’s counterparties—the leading Wall Street banks—in full while demanding concessions from every other entity with whom the Treasury or the Fed dealt. Geithner suggested he could not use the threat of AIG’s default in the absence of a federal bailout to get concessions from AIG’s creditors. Why not?

Continue reading Disgraced Spitzer Attacks Disgraced Geithner

Poor Getting Richer?

“… as long as the Schumpeterian horse of innovation and the Smithian horse of the gains from trade outrun the Government horse of stupidity, the winners will continue to be you, me and our children and grandchildren, even if the stupid horse is running a bit faster than it used to.” Steve Horowitz

It is difficult to determine which horse is running faster at this time. I would guess that it is the government horse. Steve Horowitz describes which horses ran faster in the past and the beneficial effects of that on the poor:

The Economic Condition of Poor Americans (and the rest of us) Continues to Improve

Steven HorwitzAs many of you know, this is a set of data I’ve followed closely over the years (as has Don Boudreaux among others).  The Census Bureau just released the 2005 data on what households have (HT: Ariel Goldring) and it has allowed me to update my data.  In addition, I’ve also rendered the data more consistent.  Each column on the poor below reflects households below the poverty line.  In previous iterations I had said it was the “lowest quintile.”  I’ve discovered that some of my data was that, but the older stuff was “below the poverty line.”  I’ve now made it all poverty line as the cutoff.  Here’s the historical data:
What Inflation? This Inflation

Those arguing that inflation is not a problem are either disingenuous, blind or cheerleading for Washington. Inflation  is not happening in wages, nor is it happening in many products where the misallocation of capital has caused oversupply (real estate being just one example).  It is happening in financial assets and it is happening in commodities. All of the worldwide stimulus and money expansion has to go somewhere besides excess bank reserves and it is, slowly. At some point, the excess bank reserves will be used and inflation will roar.

Inflation starts slowly and doesn’t affect all assets equally. No bell goes off to signal its arrival. It is stealthy in the beginning, usually showing up in a few sectors of the economy. Finally it bursts out and everyone recognizes it. Is it for sure that we will have inflation? Nothing is certain. We could have a complete collapse of our

Continue reading What Inflation? This Inflation!

Must Watch Video on Dollar Bubble

A must-watch video that describes the case for dollar collapse and hyperinflation. See The Dollar Bubble

Does Experience Matter

Does Obama Administration Have Less Business Experience?
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Yesterday 1:55 PM|pk|Paul Kedrosky’s Infectious Greed

Does the Obama Administration have less business experience? According to some semi-whimsical (I think) research in a new J.P. Morgan report that would seem to be the case. The author looked at private sector experience of 432 Cabinet secretaries whose activities touch most on the private sector across all presidential administrations since 1900. Here is the result:

There are obviously many, many issues here, not least of which is that the author isn’t entirely clear on what the

Continue reading Does Experience Matter?

Healthcare Is This Country's Munich

“A Total Unmitigated Disaster for the Economy and for Freedom”

In a damning piece in The Freeman William L. Anderson explains why the healthcare plan will be our country’s Munich.

“There is nothing good to say about a new law that is going to raise taxes to confiscatory levels and will place a huge financial burden on people at a time when the government is actively going to war against American businesses. We are looking at totally politicized medical care in which every decision made by doctors and patients potentially can be nationalized and thrown into the maw of “public debate.”

“For all of the talk of cutting costs and saving money, this bill will do the opposite. It flies in the face of everything we know to be true in economic analysis, and it flies in the face of natural law itself.”

The implications of the proposed legislation go well beyond a deterioration in health care. We will be lucky to avoid a Great Depression if the government ceases all of its nonsense. Passage of the proposed healthcare plan guarantees it and condemns Americans to a standard of living much lower than most can imagine. Indeed, it will alter dramatically the concept of “the American way of life.”

An Optimist’s Version of Apocalypse Now

An Optimist’s Version of Apocalypse Now
Tuesday, November 24, 2009

John Rubino sees a financial apocalypse in our near future. For him, the catalyst that triggers the process is rising interest rates accompanied by a falling dollar. In his post entitled Long-Term Bonds and the End of Our World he describes it as follows:

"At some point in the next year or two, long-term Treasuries thus become the short of the decade. Falling bond prices will push up interest rates on all loans tied to Treasuries. Home mortgages, business loans, even credit cards will go up, while consumer borrowing and spending will shrink.

And then it gets interesting. With bond yields spiking and currency values plunging, the Fed and other central banks will, for the first time since their creation, be impotent. Lowering short term rates (already near zero) will be ineffective, while buying more bonds with newly-created dollars will force the dollar lower, making bonds even less attractive to ..."

Continue reading An Optimist’s Version of Apocalypse Now

Enron was an Ethical Angel compared to our Government

Fannie Mae reports third quarter loss of $18.9 billion and requests another $15 billion in taxpayer funds.

Another government enterprise comes back to the well for more, with no end in sight. Bloomberg has a summary of the results here. FNM was the organization that couldn’t do accounting properly several years back. Based on inaccurate numbers, they paid government-hired cronies huge bonuses. There is little doubt in my mind that this accounting is also wrong, but for different purposes. The government cannot release the real numbers. I believe they would be terrifying.  As Joe Weisenthal states: “Just to be clear, Fannie Mae (FNM) is still a total sinkhole.” Unfortunately this coverup, along with other policies, will result in much larger taxpayer losses.

One of the other policies was announced yesterday. Fannie intends

Continue reading Enron was an Ethical Angel compared to our Government

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