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Random Thoughts
Bernanke
Shoots And Leaves; World Economy Dead
by
Gaurang Bhatt, MD
The double entendre title
is a good pr�cis of the future. The rubbish you hear from business
channels, sundry academic economists and hacks of the Bush and Obama
administration, who are the culprit partners in crime of the debacle, is
based on a skewed interpretation of Keynesian economic prescriptions
after the great depression. Explained simply, he said that the
government should be generally fiscally prudent with balanced budgets
and invest in infrastructure and education. During adverse circumstances
like recessions, the government should spend and run budget deficits to
prevent the recession from spiraling into a deflationary depression. The
decreased spending by consumers and business must be countered to
forestall a vicious cycle where decreased consumption and business
investment feed on each other. Keynes not emphasized first part of the
prescription is a necessary precondition for his drastic deficit
prescription. Mises Austrian School of Economics disagrees with Keynes
and compares the increased debt remedy equivalent to treating an
alcoholic�s withdrawal symptoms with more liquor.
The current problem with the Western world is that the US has a huge
debt and unfunded liabilities of 60+ trillion dollars. It has an
overvalued currency and has lost its manufacturing base. It cannot even
meet its own needs for toys, textiles, household appliances, automobiles
or most of life�s basic necessities. Thus we have a basically broke
government printing or borrowing money to keep further deterioration in
the job market. Any increased spending by the consumer would worsen the
trade deficit. Unfortunately China, Japan and the oil exporting
countries are unwilling to finance the trade deficit and desperately
trying to get rid of their dollars and treasury securities. That is why
the dollar and treasuries nosedived on Friday and gold, oil and
commodities rose.
The additional problems are that consumers comprise 70% of the US
economy. They are heavily indebted with credit card, auto loan and
student loan debts. This is why Obama tried to reduce the burden of
servicing that debt by preventing card companies from raising interest
rates retroactively and without reason. Since he won elections with
their donations, he paid the piper by making the bill effective only
after a period of nine months to allow the companies to lock in higher
rates for new and old credit cards. Consumers are worried about their
debt and their jobs. They have lost nearly 40% of their 401Ks and will
lose their pension benefits in bankruptcies like Chrysler and GM. Adding
fuel to the fire is that until recently most people have been using
their home equity lines of credit like an ATM card and now owe more on
their mortgage than their homes are worth. So any tax rebates that
people receive from the Bush and Obama stimulus are being used in
repaying debt rather than spending.
The lost jobs and corporate income tax revenue is leading to insolvency
of the states, starting with California. According to the IMF, there are
4+ trillion dollar losses in toxic mortgage securities and banks in the
US have written off 500+billion and EU and Japan about the same amount.
The shoe of another 2 to3+trillion dollar loss is yet to fall.
Commercial property values dropped a whopping amount last month and CMBS
losses are another shoe waiting to hit the US administration. The US
like �Typhoid Mary� has infected the world�s economies. Nearly 20
trillion dollars will be needed to recapitalize the G-7 banks and all
the governments put together don�t have that much money to spend to
reflate. Germany and the ECB are balking at any further stimulus. Spain,
Ireland, Greece and Italy are in dire straits. In the first unemployment
is hitting nearly 20%. Austrian and other EU banks have bad home
mortgage loans in Baltic States, Hungary, Poland, Romania etc. Most are
heading to the fate of Iceland. The Euro is rising now but may unravel
as a common currency.
Japan and Germany reported a massive shrinking of GDP and exports in the
Q1, 2009. The future of economies massively dependent on exports like
those of Taiwan, South Korea and Singapore looks cloudy. India looks
better because of internal consumption, but has huge budget and trade
deficits, high debt, dwindling reserves and is maxed out and incapable
of a further big stimulus package. Only China has high reserves, little
debt and the best chance of being unscathed. Germany like the Phoenix
has risen from the ashes many times, but like much of Europe faces a
demographic meltdown with falling population. The US economy is so
dependent on debt and borrowing, that it has become like a vampire
needing to suck the capital (blood) of other nations. The housing
numbers, revised GDP, personal income and spending, coming out next week
and the non-farm payrolls the following week may decide whether there is
any life left in the US economy or a final stake has killed the recovery
of the undead. The recession, if not depression, will be �L� shaped like
that of Japan, whose Nikkei hit 40,000 in 1989 and twenty years later it
is below 10,000.
Things have gotten so bad that Harvard economics Professors Rogoff
(former chief economist at the IMF) and Mankiew (former economic chief
to the US president) have suggested that a few years of 6% inflation may
be necessary to lead the nation and consumer out of debt. Other more
circumspect mavens equate this to dousing a fire by using a judicious
mixture of gasoline and water because there is a shortage of water
(money and savings). Administrations from Reagan, Bushes, Clinton and
Obama have taken the teeth out of regulations to benefit their
financiers to the detriment of the citizens and the republic. In
schizoid desperation Bernanke is spending printed and borrowed money to
buy treasuries to keep interest rates low to make mortgages affordable,
create a floor for falling house prices and to avoid national
bankruptcy, because rising interest rates would make servicing the US
national debt impossible. Their newfound love and interpretation of
Keynes ignores much of his sane words and advice, which follow.
�Capitalism is the astounding belief that the most wickedest of men will
do the most wickedest of things for the greatest good of everyone.�
�By a continuing process of inflation, government can confiscate,
secretly and unobserved, an important part of the wealth of their
citizens.�
�The ideas of economists and political philosophers, both when they are
right and when they are wrong, are more powerful than is commonly
understood. Indeed the world is ruled by little else. Practical men, who
believe themselves to be quite exempt from any intellectual influence,
are usually the slaves of some defunct economist.�
�The market can stay irrational longer than you can stay solvent.�
So Bush and Obama and their teams are reliving the novels of Dostoevsky,
�The Idiot� and �The Gambler� as they play double or quits
with our children�s money and their lives, while being cheered on by
sycophants, ideologues, con men, Ponzi schemers and misguided mavens, in
the casinos of markets and the Middle East.
May 24,
2009
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