'We need shock and awe policies to halt depression'

by Peter de Waal The key thing I got from Ambrose Evans-Pritchard's article We need shock and awe policies to halt depression is that industrial production has collapsed at a rate 2-10 times faster than in 1929-1932! The credit bubble was largely based on worldwide property prices being pushed up with financial tricks over a 30-year period. In my opinion Capital has two ways out of this: 1) Allow house prices to collapse to the value at which ordinary working people can afford to buy them again i.e. 1-4 times the average yearly wage. This would of course bankrupt many insurance companies, pension funds and banks, ruining the rich. This would happen if the governments of the world stopped promising to bail out failed banks. The banks would then have to "mark-to-market" their loan portfolios, rather than hanging on to the notion that the book value of 18 months ago can be realised. Because of the bail-outs US Banks have been refusing reasonable offers for properties and their loan books, and have actually increased their exposure to toxic credit derivative products safe in the knowledge that they are "too big to be allowed to fail." 2) Print money like crazy and hope inflation catches up with those still wildly-inflated house prices. Option (2) is very dangerous, as it would capsize US efforts to get the world to buy it's debt in order to finance the bail-out of it's destitute banking system. Why would you buy a T-Bond when the value of the US$ is plummeting? Printing money or allowing inflation to rip would deal quite effectively to the US debt problem. There is always option (3) War. World War II began as a trade war, became a shooting war and ended as a nuclear war. We need option (4) make the bosses pay and end capitalism.

History will judge the left on how we rose to the crisis

by Grant Morgan 27 November 2008 We are one year into the global economic crisis. It is two months since the narrowly averted international financial meltdown sparked by the collapse of Lehman Brothers. And guess what? At long last, leaks from within the corporate hierarchy are giving notice that, no matter what actions are taken by governments, the world will face continuing economic chaos of one sort or another. That is made clear in the article below by The Telegraph's Ambrose Evans-Pritchard, one of Britain's most sober mainstream economic analysts. Evans-Pritchard quotes Tom Fitzpatrick, Citibank's chief technical strategist, who in a leaked memo has this to say about the frenzied moves by governments to pump liquidity into financial corporations: "The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock. Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop." The only two choices on offer, says Fitzpatrick, is either inflation shock (which will swallow the pay of workers) or an even worse economic deflation (which will swallow the jobs of workers). As Fitzpatrick notes, "this will lead to political instability". In other words, the centre will not hold. There will be movements to the left and to the right away from the centre which, typically in most advanced economies today, is crowded out by the main parties of the market. How should the left in New Zealand relate to this historic global shift? First, the left must understand that market politics in this time of crisis will deliver only inflation shock or economic deflation. Second, the left must get this understanding out to the grassroots by every means possible. Third, the left must work with the grassroots on a plan to protect the people from economic crisis by rolling back the market. Fourth, the left must make sure this people's plan also tackles global warming since economic sanity hinges on ecological salvation. Fifth, the left must start now, since momentum is all-important in political warfare. In a few days time, newly elected prime minister John Key will unveil his cabinet's economic stimulus plan. Under cover of tax cuts and a "relief package" for redundant workers, Key will take his first steps towards protecting the corporate market at the expense of the grassroots majority. The left must start preparing a response. We must be ready to "go to the masses" with an alternative strategy. The crisis, not the election, is the real test for the left in New Zealand. History will judge us on how we rose to the crisis.

Citigroup says gold could rise above $2,000 next year as world unravels by Ambrose Evans-Pritchard from Telegraph.co.uk 26 November 2008 Citibank said the damage caused by the financial excesses of the last quarter century was forcing the world's authorities to take steps that had never been tried before. This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

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Economic crisis is beyond the reach of traditional solutions

by Paul Craig Roberts from Vdare.com 14 November 2008 By most accounts the US economy is in serious trouble. Robert Reich, an adviser to President-elect Obama, calls it a "mini-depression," and that designation might be optimistic. The Russian economist, Mikhail Khazin says that the "U.S. will soon face a second “Great Depression” It is possible that even Khazin is optimistic.

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Economic crisis is beyond the reach of traditional solutions

by Paul Craig Roberts from Vdare.com 14 November 2008 By most accounts the US economy is in serious trouble. Robert Reich, an adviser to President-elect Obama, calls it a "mini-depression," and that designation might be optimistic. The Russian economist, Mikhail Khazin says that the "U.S. will soon face a second “Great Depression” It is possible that even Khazin is optimistic. I cannot predict the future. However, I can explain what the problems are, how they differ from past times of troubles, and why traditional remedies, such as the public works programs that Reich proposes, are unlikely to succeed in reviving the U.S. economy. Khazin points out, as have others, such as University of Maryland economist Herman Daly and myself, that consumer debt expansion is the fuel that kept the U.S. economy alive. The growth of debt has outstripped the growth of income to such an extent that an increase in consumer credit and bank lending is not possible. Consumers are overburdened with debt. This fact takes monetary policy out of the picture. Americans can no longer afford to borrow more in order to consume more. This leaves economists with fiscal policy, which, as Reich realizes, also has problems. Reich is correct that neither a reduction in marginal tax rates nor a tax rebate is likely to be very effective. Reich, a Keynesian, has an uncertain grasp of supply-side economics, but as one who has a firm grasp, I can attest that marginal tax rates today are not the stifling influence they were prior to John F. Kennedy and Ronald Reagan. As Art Laffer said, there are two tax rates, high and low, that will produce the same tax revenues by expanding or contracting economic activity. Marginal tax rates are no longer in the higher ranges. As for a tax rebate, Reich is correct that in the present situation a tax rebate would be dissipated in paying off creditors. Reich sees the problem as a lack of aggregate demand sufficient to maintain full employment. His solution is for the government to spend "a lot" more on infrastructure projects on top of a trillion dollar budget deficit – "repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy." This spending would boost employment, wages, and aggregate demand. I have no opposition to infrastructure projects, but who will finance the baseline trillion dollar US budget deficit plus the additional red ink spending on infrastructure? Not Americans. The US savings rate is zero or negative. Home mortgage foreclosures are in the millions. Officially, US unemployment is 10 million, but if measured by pre-Clinton era standards unemployment is much higher. Statistician John Williams, who measures the unemployment rate by the pre-Clinton standards concludes that the rate of US unemployment is about 15 percent. President Clinton "reformed" the unemployment statistics by ceasing to count discouraged workers as unemployed. For years, the US government’s budget has been dependent on foreigners financing the red ink. Countries such as Japan and China and OPEC suppliers of oil to the US have huge export surpluses with the US. They recycle the dollars by buying US Treasury bonds, thus financing the US government's red ink budgets. The open question is: how much longer will they do so? Foreign portfolios are overweighed in dollar assets. Currently the dollar’s value is benefitting from the financial crisis, as investors flee to the reserve currency. However, sooner or later the huge outpourings of dollar debts will cause foreign creditors to draw back. Already China, America's largest creditor, has sent a signal that that time might be drawing near. Recently the Chinese government asked, as they do indirectly through third parties, "Why should China help the US to issue debt without end in the belief that the national credit of the US can expand without limit?" Is the rest of the world, which has demanded a financial summit to work toward a new financial order, going to permanently allocate the world's supply of capital to covering American mistakes? If not, the bailout and the stimulus package will have to be financed by printing money. And the bailout needs are growing. Car loans and credit card debt were also securitized and sold. As the economy worsens, credit card and car loan defaults are rising. Moreover, AIG needs more money from the government. Fannie Mae's loss has widened to $29 billion despite the $200 billion bailout. General Motors and Ford need taxpayer money to survive. General Motors says that its GMAÇ mortgage unit "may not survive." Deutsche Bank sees General Motors shares "as likely worthless." Shades of the Weimar Republic What Reich and the American economic establishment do not understand is that the recession paradigm does not apply. There are no jobs waiting at US manufacturers for a demand stimulus to pull Americans back into work. The problem is not a liquidity problem. To the contrary, there have been many years of too much liquidity. Credit has grown far more than production. Indeed, US production has been moved offshore. Jobs that used to support the growth of American incomes and the tax bases of cities and states have moved, along with US GDP, to China and elsewhere. The work is gone. All that are left are credit card and mortgage debts. Anyone who thinks that America still has a vibrant economy needs to log onto http://www.economyincrisis.org/ and face the facts. Economists associate economic depression with price deflation. However, traditionally, debts that are beyond an economy's ability to service are inflated away. This suggests that the coming depression will be an inflationary depression. Instead of falling prices mitigating the effects of falling employment, higher prices will go hand in hand with rising unemployment – a situation worse than the Great Depression. The incompetent Clinton and Dubya administrations, unregulated banksters and Wall St criminals, greedy CEOs, and a no-think economics profession have destroyed America's economy. What is the remedy for simultaneous inflation and unemployment? Three decades ago the solution was supply-side economics. Easy monetary policy had pushed up consumer demand, but high tax rates had curtailed output. It was more profitable for firms to allow prices to rise than for them to invest and increase output. Supply-side economics changed the policy mix. Monetary policy was tightened and marginal tax rates were reduced, thus stimulating output instead of inflation. Today the problem is different. The US has abused the reserve currency role, thus endangering its credit worthiness and the exchange value of the dollar. Jobs have moved offshore. The budget deficit is huge and growing. If foreigners will not finance the widening gap, the printing presses will be employed or the government will not be able to pay its bills. The bailout funds have been wasted. The expensive bailout does not address the problem of falling employment and rising mortgage defaults. Treasury Secretary Hank Paulson could not see beyond saving Goldman Sachs and his bankster friends. The Paulson bailout does nothing except take troubled assets off banks’ books and put them on the overburdened taxpayers’ books, thus endangering the US Treasury’s credit rating. What the Bush Regime has done is to stick the taxpayers with the banks’ mistakes. An intelligent government would have used the money to refinance the troubled mortgages and stop the defaults. By saving the mortgages from default, the banks’ balance sheets would have been made secure. By failing to deal with the subprime crisis, Bush and Congress have added a financial crisis to the exhaustion of consumer demand and the problems of financing huge trade and budget deficits. Belatedly, Paulson has realized his mistake. On November 12, Paulson announced, "We have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use [bailout] funds." The financial crisis has cost taxpayers far more than the amount of the bailout. Americans' savings and pension funds have been devastated. Americans in investment partnerships, who have been required by IRS rules to pay income taxes on gains in the partnerships' portfolios, have had the accumulated multi-year gains wiped out. They have paid taxes on years of "capital gains" that have disappeared, thus doubling their losses. America’s economic troubles will rapidly accumulate if the dollar loses its reserve currency role. To protect the dollar and the Treasury’s credit standing, the US needs to curtail its foreign borrowing by reducing its budget deficit. It can do this by halting its gratuitous wars and slashing its unnecessary military spending which exceeds that of the rest of the world combined. The empire has run out of resources, and the 700 overseas bases must be closed. Can Americans afford massive infrastructure spending when they cannot afford health care? In Florida a Blue Cross Blue Shield group policy for a 60-year old woman costs $14,100 annually, and this is a policy with deductibles and co-payments. Supplementary policies from AARP to fill some of the gaps in Medicare can cost retirees $3,300 annually. When one looks at the economic situation of the vast majority of Americans, it is astonishing that the Bush regime regards wars in the Middle East and taxpayer bailouts of Wall Street criminals as a good use of scarce resources. US corporations, which have moved their production for US markets offshore in order to drive up their share prices and provide their CEOs with multi-million dollar bonuses, can be provided with a different set of incentives that encourage the corporations to bring employment back to the US. For example, the corporate income tax can be restructured to tax corporations according to the value-added in the US. The higher the value-added in the US, the lower the tax rate; the lower the value-added, the higher the tax rate. Cutting the budget deficit by halting pointless wars and unnecessary military spending and reducing the trade deficit by bringing jobs back to America are simple tasks compared to confronting inflationary depression. The world has had enough of American irresponsibility and is taking away the reins. At the November 15 economic summit, the world will begin the process of imposing a new financial order on the US in exchange for continued lending to the bankrupt "superpower." With bailouts eating up the world’s supply of capital, continued foreign financing for Washington’s wars of aggression is out of the picture. Paul Craig Roberts was Assistant Secretary of the Treasury during President Reagan's first term. He was Associate Editor of the Wall Street Journal.

Citigroup says gold could rise above $2,000 next year as world unravels

by Ambrose Evans-Pritchard from Telegraph.co.uk 26 November 2008 Citibank said the damage caused by the financial excesses of the last quarter century was forcing the world's authorities to take steps that had never been tried before. This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold. "They are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank's chief technical strategist. "The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock. "Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don't think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes," he said. "This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised." "What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We're already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore," he said. Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. "If true, this is a very material change," he said. Mr Fitzpatrick said Britain had made a mistake selling off half its gold at the bottom of the market between 1999 to 2002. "People have started to question the value of government debt," he said. Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months – reverting to is historical role as a safe-haven store of value and a de facto currency. Gold has tripled in value over the last seven years, vastly outperforming Wall Street and European bourses.