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Post from 1994 - Courtesy of NYT "Confidence Dip Imperils Stocks And Clinton"

THE American economy is growing at a nice clip. But public confidence is not. And because many do not think the future will be better than the present, both investors and Democrats may be in for disappointments.

The lack of optimism may seem puzzling. Since President Clinton's election, the number of people with jobs has grown by 4.7 million, or 4.2 percent. Not since Jimmy Carter has a presidential term begun by producing so many jobs.

The problem is that Americans are not at all confident that the recent past is prologue. On the job front, they are far less optimistic than they were just after the election. In December 1992, the Conference Board's monthly survey of consumer confidence found that 21 percent thought there would be more jobs available in six months. Now the figure is 13 percent.

Why the change? "A lot of the gains in employment have been in jobs at the low end of the pay spectrum or that don't have as much security," says Jason Bram, an economist at the Conference Board.

At a similar point in the first Reagan Administration, the economy was in recession, and employment was down 1.4 million since the election. But the three forecast questions asked by the Conference Board -- whether there would be more jobs and better business conditions in the economy, and whether the respondent expected higher earnings in six months -- got more positive replies then than they do now. Even in recession, the middle class then felt confident. Now, with white collar layoffs continuing, the Government deadlocked on health care reform and GATT ratification in jeopardy, the future seems less certain.

It is not just consumers who are fretting. Many on Wall Street see signs the economy is slowing. Those concerns probably are misplaced -- David Shulman, the chief equity strategist at Salomon Brothers, notes that the seers wrongly feared weak fourth quarters in both 1992 and 1993 -- but for some purposes perception is reality.

The Conference Board has been surveying consumer sentiment since 1969, and has developed two indexes, one reflecting consumer views of the present situation, and one reflecting the future outlook. In forecasting, what matters is the relationship of the two indexes.

In August, for the first time since 1990, the future index slipped to a point where it is just under the current index. Historically, if it falls to at least a nine-point difference, the stock market suffers. That happened, for example, in September 1987.

In addition, the relationship of the two indexes at the time of mid-term elections has forecast the coming presidential race. If the future looked better than the present, the incumbent party kept the presidency. And vice versa.

If those historic relationships are believed, it poses an interesting dilemma for Wall Street Republicans, which is to say most of those on Wall Street. Should they hope that the mood will improve, providing a positive sign for stocks? Or that it won't, providing a negative sign for President Clinton?

Graphs showing the Dow industrial average for the past week, conference board consumer confidence survey index of present situation and expectations from 1992 to 1994.

US Chronic Problems

Optimists argue that the global economy has merely hit a “soft patch.” Firms and consumers reacted to this year’s shocks by “temporarily” slowing consumption, capital spending, and job creation. As long as the shocks don’t worsen (and as some become less acute), confidence and growth will recover in the second half of the year, and stock markets will rally again.

Factors slowing US growth are chronic. These include slow but persistent private and public-sector deleveraging; rising oil prices; weak job creation; another downturn in the housing market; severe fiscal problems at the state and local level; and an unsustainable deficit and debt burden at the federal level.*

The financial crisis was driven by the multi-TRILLION dollar housing bust - until that is resolved (i.e. prices start increasing); this process of de-leveraging cannot complete. Banks must keep taking write downs (I would avoid bank stocks completely); the Fannie Mae/Freddie Mac issue needs to be addressed (billions/qtr in loses, still); and US consumers need to pay off their debts (a problem exacerbated by short sales).

Looking at post-housing bust Japan; the US is looking at the same medium-term issues that caused the Lost Decades. While the US stock market has recovered much more quickly and US banks were forced to write-down loses much, much sooner the comparison is still fair. We cannot rebuild trillions of dollars in lost wealth overnight.

With a $14 trillion GDP and 3% growth, we are adding $420 billion in wealth a year. Estimates vary, but loses from the financial crisis near $4.5 trillion, so even at 3% growth (higher than 1.8% in Q1 2011), it will take 10 years to rebuild the lost wealth.

The US economy is now larger than pre-crisis, which is a positive sign, but factoring in growth in the labour supply and population we are still well away from producing enough wealth to reduce the unemployment rate. We also need to understand that the debt, even at 2.96% rate, is a skim off the economy. Those interest payments (on $14 trillion), essentially wipe out the wealth creation and transfer to the foreign lenders. This is the danger of large deficits - it can turn into a vicious cycle.

*Credit to Nouriel Roubini for the initial insight.

"Reckless Endangerment" - researched evidence that government-sponsored banking is a bad idea

Watch the video from Yahoo! Daily Ticker

Money is power, and the big banks know it

It was many years ago that modern Western civilization crossed the Rubicon and developed a system of banking that lent more power to bankers than to the people. This is how modern money mechanics work - and it's not all bad.

With trillions of dollars on balance sheets at banks - big and small - it is important to have banks that ensure the proper flow of capital to resources that are in demand. It is the backbone of the capitalist system - the "profit motive" that built the Modern Era.

Politicians are prone to "pet projects" and support for unproductive industries, because they have constituents who would suffer without political support. This is planned economics - and it's not all bad either (unless you start forcing your plan on people). This helps mitigate shocks - and allows steady growth to proceed without the short-term vacillations of market forces that can be devastating to individual lives and families.

Since the 2008 financial crisis and the subsequent Great Recession, the interdependency of bankers and politicians has created a new form of state-sponsored capitalism - a hybrid of both ideas. The secret to the Great Recession that no one likes to talk about is this transition was irrevocably accelerated and has led to a much greater than advertised bailout to the banks.

With AIG and the Big Banks having paid off (mostly) the $700 billion that the government granted them in 2008. We need to look at the continuing bailout that is creating new global imbalances and will likely be described as the cause of the next big crisis. With 0.5% interest to banks, that are lending to consumers at 4.5% - they are minting a profit. This is doing two things:

1) Giving banks a government subsidy by inflating the money supply. This is great for them because: it makes their debts smallers; and improves their capital. But, 2% inflation to everyone but central bankers means making 98% of last year's earning. This makes paying bills more difficult and has a negative affect on consumer spending and investment (the real economy). This process is likely to accelerate into 2013-2015 as the deflationary spiral that was averted by Ben Bernanke (by printing money), turns hyper-inflationary as real growth begins. Consumers will start hurting more and more as inflation ticks up to 4-6%.

2) Increased leverage rates at banks

Investment banking is the "shadow economy" - it creates massive wealth by making nothing. It is the process of taking A, giving it to B and making money on the transaction. Modern banking was founded on this, it was the toll that the real economy paid to ensure that capital was able to move freely and seek out profit.

This traditional view has changed as speculative bubbles are running amok (at the behest of the Fed). Banks are no longer looking for "investments" - a small company with a great idea that will grow; or the real estate company that needs money to build homes, but will sell at the end for a profit - those do not make return in a quarter, they are long-term. So banks have turned to financial instruments - derivatives, CDOs - because they can make quick profit.

This is the real danger of the state-sponsored capitalist model (currently being experimented with in China as well). The government is subsidizing massive gambles on pieces of paper. A derivative is a bet - a bet that something will happen (you don't buy a stock in a company, thinking it will go up, you buy a piece of paper that pays out if the company stock goes up - the investor owns nothing). It is not investing - it is gambling.

The central banks of the world are controlled by the Big Banks - and have complete control of the money supply. They have now - following a financial collapse that the majority of law makers still don't understand - convinced the political system to provide unneeded support. Support that hurts consumers.

The imbalance has not been corrected: Strategic issue #1 remains

Petrodollar Recycling explained

"Starting around 1996, a large current account deficit in the United States has been matched by surpluses primarily in other advanced economies and in emerging Asia, and has been accompanied by corresponding shifts in net foreign asset positions".

We all know now that 'fiscal imbalance' is a major issue affecting the economy. Recently President Obama announced with the G20 a mission to adjust this fiscal imbalance primarily by encouraging the Chinese to spend more, and by adjusting incentives to encourage Americans to save more. One issue that the G20 failed to address on this issue is resource dependence and the global cost (affecting China/Asia as well). With strong allies in Saudi Arabia and Canada, the U.S. has no incentive to transfer from it's carbon-based energy system. Although Obama has been the most progressive president on this issue, it is not fast enough or powerful enough to create dynamic change in the economy (there needs to be a stronger 'nudge'). The Chinese are moving more quickly because, like much of Asia, oil supply cannot keep up with the pace of growth in their economies - How come we haven't done a cost-benefit analysis?

Copenhagen 2009

Americans have trouble contemplating 'climate change' science. 49% don't believe it is real, let alone a problem. This is why the debate about oil production needs to be transitioned from an environmental issue to a financial issue. It's a $300 billion/yr. issue since 1996. There needs to be a shift in policy to get people behind the move from carbon-based power to renewable that is based on this imbalance. Obama talking points on this should say: "Don't like the $700 billion stimulus package because it's wasteful? Well we stimulate Saudi Arabia's economy that much every 2 years - that's wasteful."

The Western world can easily bankrupt ourselves. As the richest countries we are now the most indebted. This is how empires collapse and new world orders are created. It is issue #1 to eliminate dependence on foreign oil.

Aristocrats tax peasants: Top 1% at it again

Goldman Sachs: Your tax dollars, their big profits

The structure of our modern democracy is currently at risk and this economic panic has succeeded in assisting the largest transfer of wealth from the middle class to the ruling elite in the history of human civilization. The $70 trillion dollars the U.S. Federal Reserve/Treasury (debt machine) have produced to bailout the financial services industry has been used by the elites to buy up all the depreciated assets that the middle class can no longer afford.

History could read that banks (aided by consumers and the federal government) made billions of dollars worth of loans to over-inflate the housing market. They made billions off of the interest and transaction fees and then sold the mortgages at a profit. The banks traded these on a "secret market" of OTC transactions in a game of musical chairs - betting on who'd get caught using derivatives. When they all got caught (Mar.-Sept. 2008), the American taxpayer was left with the gambling debts.

Now that we have bailed them out, they are using the liquidity and investment, that the taxpayers provided them, to make money by taking advantage of the distressed finances of the middle income households that makeup the primary spending power of the U.S. consumer economy. The U.S. taxpayer may end up making back $0.60-.80 on the dollar for our investment, while Goldman Sachs pulled in $3 billion in profit in 3 mos. and saw its stock value increase 150% since March 2009. Secondly, the inflationary pressure that will have to be worked through the system to absorb the trillions of dollars of liquidity poured in through new U.S. debt will be a drain on purchasing power for decades.

Goldman Sachs

The current and previous U.S. treasury secretaries are Goldman Sachs alumni, and Goldman Sachs is one of the largest political contributors to both parties ($994,795 to Obama, his #2 contributor). The lines between the government and the banks have blurred, and this poses and issue for the U.S. taxpayer because the government needs the banks to be profitable to earn the billions invested back over the coming decades, however the banks become profitable through interest and fees that are essentially a tax on citizens. Also, the most profitable parts of banks are the ones that citizens want to regulate most. Right now it seems that the Goldman Sachs lobby is winning over the finances and futures of the American taxpayers. Our democracy is in jeopardy if the interest of business takes precedence over the interests of constituents. ~GK