No More Bullets

Bernanke now has something in common with Elmer J Fudd. He is now out of bullets. No, more buwets! No more buwets! Now that the federal funds rate is resting on the bottom at .25% we are in the same boat as the Japanese were in the 90s when in the midst of their burst real estate bubble they cut their rates to 0. Their experience? Nothing, nada as their economy languished almost a decade.

Back then they valued the 200 acre Imperial Palace in Tokyo as much as the entire state of California. I have walked completely around the Imperial Palace with the moats, fortifications, gardens and picturesque buildings. I'll take California, thank you.

It is going to take a long time for our real estate picture to clear. Only when entry level buyers can afford to buy homes will the end be in sight. Right now there are no jobs for this upcoming generation just plenty of debts. Homes will remain out of reach of these buyers. Perhaps they can subdivide some of these McMansions and turn them into duplexes or triplexes.

Bernanke has one thing over Elmer J, he has the keys to printing press and as he has stated they know where the keys are. The problem is once started the press usually does not get turned off to quickly. And, once all this money is injected into the system what is going to soak it all up so that inflation does not return with a roar?

All those smug Europeans who felt this was a pure American problem. Guess what, their bubble may be larger than ours. Then we have the Russians, the Chinese, the Arab oil sheiks and don't forget Hugo Chavez who were all declaring us done for and good riddance. Now, they have all decisively tanked. That is what happens when your main customer goes belly up - you do too. I wonder how much Hugo can afford to send to Cuba with oil down to $40 a barrel. Not much. Perhaps we will all be wearing a barrel soon, but we won't be alone. Misery loves company.

Most people still seem to think this will work its way out in a few months. Unfortunately, it looks like another wave of mortgage foreclosures are coming up next year. By that time commercial real estate should go bust also. All these mammoth stores they have been building will not have enough customers to service their debts. I knew this was a bubble when I saw the giant bath store on Route 17 in Randolf, NJ that is the size of Trajan's forum in Rome.

One thing is certain. Once all this smoke clears it's going to be a very different world.

Piecing together a cabinet

Obama is certainly burning the midnight oil trying to get his cabinet together - sooner rather than later. Yet already we see the indication that his ride on the unicorn may be short lived. Already there are rumblings that he must appoint an equal number of black officeholders to match that of the ill-fated Bush administration. Since Bush appointed several major cabinet posts to black candidates, is this to be the new quota? What about Hispanics? Then there are political considerations.

In times like these the qualification of the candidates should matter more than anything. Sure, Lincoln appointed a cabinet of people that were his rivals. Each person in his cabinet though he was better qualified to be President of the United States. Yet, looking at his cabinet picks, even if these people were not his rivals, most were also very good picks. William Seward at State gave great advice to Lincoln and his successors. When Lincoln wanted to issue the Emancipation Proclamation it was Seward that advised him to wait for a victory, or else it would appear to be a last cry of desperation - especially after the Fredricksburg disaster. Instead after the union victory at Antietam Lincoln issued the emancipation order from a position of strength instead of weakness. Salmon Chase at treasury was also fairly competent - his face appearing on the first US paper money - the greenback. Over the duration of the war prices rose 100%, yet with unconstrained paper money in circulation for the first time since the disastrous Revolutionary War Continentals, this was a decent performance. Simon Cameron, at War Dept? Well that was not so good. As Lincoln said "the only thing he wouldn't steal is a red-hot stove." He did not last long as he was replaced by the more competent Stanton.

So what gives Hillary qualifications to be Secretary of State? Especially when in the bull pen sits Richard Holebrooke - the man that rammed home the Dayton accords facing off against the Serbian leader Slobodan Milosevic ending the Bosnian war. He served a long tenure in the foreign office and the UN and has many accomplishments in both Asia and Europe being undersecretary of both regions. Plus, as a bonus he also knows international finance having been an investment banker working for Credit Suisse and Wall Street firms including, well Lehman Brothers. Here is a man with the strength, intelligence and savy for the job. In a time of financial crisis and with huge problems in Asia and the need for a tough negotiator - here is is. Is he to be relegated to being an advisor?

Hillary would no doubt bring energy to job, but little else. Oh, I forgot Bill, she would bring Bill along for the ride. This may be beneficial for late night comedians and Saturday Night Live but it bodes ill for this administration. What type of negotiations has she handled? Another candidate with less than stellar appeal is good old John Kerry, who has been eyeing this post as his reward for supporting Obama during the campaign. Now, is not the time for second best or a political pay-back.

With our economy imploding we also want the Treasury to have the most solid of candidates. Paul Volker would be a good candidate, but he is a little old for the stress. Then there is Larry Summers, who is the most qualified person for the position. Of course there is the issue of his foot in mouth problem that happened during his tenure at Harvard. Here he looked at the statistics and did not take heed of the PC and would up getting hammered by women's groups for saying women may have less innate abilities relative to science and engineering. He got hammered and had to do penance for a few years, stepping down from his Harvard Presidency. He is the certainly the most up to the task for what is at hand.

When Lincoln took office he also said he was afraid there was not enough "teats for the pigs". This is certainly even more true today. Emulating Lincoln is a nice touch, but if Old Abe had his choice it would be Holebrooke and Summers and certainly not Hillary and Bill. Mary Todd certainly gave him trouble enough.

Fixing GM - Fools Errand or No Choice Proposition

General Motors is not the behemoth is once was but it certainly employs a lot of people directly as employees, indirectly through its thousands of suppliers or even more indirectly through the earning power of these people that are kept gainfully employed spending money and keeping our floundering economy afloat. After scorning its lackluster models for years, many of us feel we should just let it die. Then again, since we all seem to be trying to keep our necks above water, if this Titanic does indeed go down will all be sucked into the vortex behind it. Hank Paulson thought the Lehman debacle would be a manageable bankruptcy. After all, they had months to prepare for it. Instead it blew a hole right through our financial system seizing up our money markets and leaving us tottering. Right now, with our economy listing heavily to port, can we sustain another torpedo shot in the bow? I am not ready for that, but is there anything that all the kings horses and all the kings men can do to put this cracked up company back in shape?

GM is a screwed up company for many reasons - its unions, its management and the government of the United States.

Having worked in a union shop, with UAW no less, I have personally seen what transpires under the union label. The basic mode of operation that describes the union shop I worked in was to milk the company as much as possible while doing as little as possible in the hope that management would relent and give them paid, time and half and double time overtime. When a union employee, usually a younger employee, wanted to do more than what was expected of him - he was actually disciplined or ostracized by the other union members. Since seniority is king in a union shop, these workers were inevitably weeded out. Last hired - first fired! Senior union members were free to read newspapers, phone in stock orders or in one memorable episode work on machining custom knife blanks into machetes with rosewood handles. In order to get work moving management resorted to a TLO - temporary lay off. In a TLO the generally older union guy agrees to stay home, "Laid off" on 90% pay, receiving money from state unemployment insurance and the rest from the company, only to go back to work in a few months. Later, more and more work was just outsourced to avoid them. Younger workers found their career prospects were gone. This month the site of my former plant is being bulldozed, a national historic site that built much of the equipment that won WWII.

The unions have complicated the work rules, rewarded workers purely on seniority ruining any incentive to get the work done leaving them incapable of competing against foreign workers that are all too willing to do whatever it takes to get themselves ahead. The only way to get ahead in a union shop is to play the game and bank the years until you are untouchable - or so you thought until the whole industry dies. Pension, retiree medical and other benefits are similarly skewed so that GM and the other US auto makers are at a considerable cost disadvantage with any other producer. Note that Toyota and other foreign companies actually produce cars in the USA - in states like Alabama far from the UAW stronghold of Michigan - soon to be a howling wasteland.

Let us not forget management. GM management is like most management in the United States - they mostly care about short term numbers and not making good products or taking care of customers. Listening to the siren song of Wall Street when times are good leaves them in the dust when times turn bad. Fuel efficient cars - we can't do those, there is no market for them because gas is cheap. They seek to maximize profits and their own bonuses. Since we import something like 70% of our oil, their business model was totally dependant on cheap oil prices. Risk management - bah humbug, profit maximus rules the day. Is this the first time this has happened to the US auto industry? No, back in the 70s we saw the same sorry story. Detroit got waxed then just the same and when oil went back down they resumed business as usual. These auto makers are so adverse to change they lobbied for years against seat belts. Then they lobbied against higher fuel efficiency standards.

Lastly, United States government does not make it easier for any company to compete in a world marketplace. Most countries do not burden their job producers with high taxes and the need to provide health care for their workers. These two strikes put them at a distinct disadvantage. Business taxes are very high in the USA, and this is part of the shell game. Everyone thinks that someone else is paying this tax. Instead it is paid for by consumers in higher cost and employees in jobs lost to cheaper regions. As even McCain stammered out about Ireland - lower taxes is one of the tools that the emerald isle used to attract foreign companies to relocate there - which they did. We get the reverse of the coin - our companies flee. The other huge burden of health care, is paid by the people in the form of taxes in other countries, or in the case of China perhaps not at all. This anomaly owns its existence to WWII where wage and price controls forced companies to use their benefit package as the means of attracting scarce workers.

The US also let Detroit whine and complain about fuel standards and other things that would inconvenience their bottom line. Instead the USA ignored the fact that we have slipped from being a self-sufficient nation to being a nation at the mercy of foreign powers. Our political leadership is clueless and only interested in short term electoral advantages.

It is interesting that the democratic party has endorsed the concept that strengthening unions will help us restore our economy in a global marketplace when these same unions have helped crippled our economy and made us noncompetitive. They intend to push legislation that will allow union organizers to force employees to vote in open ballot on whether their plant should be unionized. Vote no and have your tires slashed, your home vandalized and be ostracized in public while receiving anonymous phone calls. Its been a long time since the service department at Ford was a goon squad tasked with beating up union organizers. Now it seems coercion is to be a legitimate tool of union organizers. All in this land of freedom. Barak Obama has stated he will sign this type of legislation.

I don't know how much success the government will have in running the auto industry. Even this new administration seems about to make some very bad decisions.

We are all stuck between a rock and a hard place.

Al Gore's Inconvenient Blind Spot

Al Gore deserves much credit for making people aware of the dangers of climate change. Through his book, his documentary and many speeches and writings he is a man on a mission. Just this week he once again wrote another Op Ed piece in the NY Times, however with the bottom falling out of the US economic tub, where will the resources will come for this immediate action? More interesting is what solutions he has left out of his plan.

Gore suggests many actions that should be taken - mostly renewable energy and conservation. He even goes on to suggest small things like encouraging composting, which offer only a tiny benefit. The one really big feature lacking throughout his plans is any mention of nuclear energy. This technology has matured tremendously since Hollywood and its Luddites allies branded it as dangerous and a threat to humankind. After Three Mile Island, fear of the China Syndrome took hold, if there was an accident it would burn a hole right through to China! Jane Fonda had made her last big contribution to the environment - too bad it boomeranged around her neck.

Instead no further plants were built and the fully completed $6 Billion Shoreham plant was mothballed by none other than Mario Cuomo who refused to approve its emergency evacuation plan, preventing it from obtaining an operating license and killing the project. The citizens paid a heavy burden in increased utility bills to flush a brand new plant down the toilet, but perhaps the biggest loser has been the environment. Instead of the sinister forces of unseen radiation from nuclear power, localized around nuclear plants, we have let loose a force that is changing our world from pole to pole. Yet, today nobody knows exactly how dire the implications are for our civilization and our planet. The fact that all the feedback loops and other effects are not known is even more terrifying.

Instead of improving our nuclear infrastructure we have pumped hundreds of millions of tons CO2 into the air, emissions that never would have happened without the fear mongers and insipid politicians. Since coal fired plants in the west also result in mercury in the fish we eat, we can thank Mario for the increase in mercury in our fish as well. Instead of zero greenhouse gas emission nuclear plants instead we got more coal, oil and gas fired plants.

Today 2/3s of our power is from fossil fuels and over half of that is from coal. Looking back at the Shorham plant and the output of typical coal burning plants, the 2,045 MegaWatt Shoreham plant would have produced the equivalent of a couple of big coal plants pumping out an equivalent 14 Million tons of CO2 and 82,000 tones of Sulfur Dioxide a year. So over the time since its closing in 1989, Mario's executive action has personally injected 266 Million Tons of CO2 into the atmosphere to achieve the same electrical generating capacity. Since the Shoreham fiasco essentially stopped all nuclear projects in the country, Mario can claim credit for injecting multiple Billions of tons of CO2 into the atmosphere. In fact, compared to Mario, George Bush and his energy cronies are pikers in the global warming hall of shame.

Today France produces 77% of its power from nuclear plants. They want to get 100%. Many countries around the world are planning new plants. Here in the "Greatest Nation" we have deadlock. We want the power - just not the plants to produce it, nor the electrical grid to deliver it. We are still deadlocked by these "environmentalists" who oppose one of the biggest tools in our arsenal to stop global warming. By all means windmills and solar are great ideas, but we should use all the tools available to us.

So Al, you should learn from George Bush and not be so stubborn and pigheaded. Otherwise you might earn the distinction now owned by Mario CO2 Cuomo, the man responsible for the biggest increase in greenhouse gases in history.

Taking Away Our 401Ks

The dust has barely settled on the election of 2008 and we hear the first rumblings of what we most fear - the democratic overreach. With huge looming budget deficits and a long pent up demand for new social spending the democrats are looking to increase the limits on their charge cards. The tool that has caught their eye is our 401Ks, the same vehicle many of us have been planning to ride into the sunset of our lives.

Unless we are employed by the government with a gold plated pension with cost of living adjustments and free medical insurance, we have only our lowly 401K to provide for our golden years. In the private sector where most people struggle to find employment, pensions are now a thing of the past and even then without a cost of living adjustment they are a risky benefit to trust retiring on.

Reprentatives George Miller and Jim McDermott are looking to remove the tax deductibility of 401K plans for employers. Instead they would like you to pay into a "guaranteed retirement account administered by the Social Security Administration" - and they propose to give us a $600 a year annual subsidy in its place!

Once employers lose their tax breaks for our matching contributions, kiss these matching contribution goodbye. Don't expect company pensions to come back either. They also propose encouraging us to "invest" in "special" government bonds that are guaranteed to achieve a 3% rate of return. What is the asset they hope to tap into? It's our children of course who will be saddled with the bill, nothing is going to be put aside but a pile of IOUS for them to pay. Instead there will be more money to be spent.

Recently this same strategy has been exercised in Argentina where the government of Cristina Fernandez is attempting to seize all private pension plans in an effort to avert a government default on its debts. Under the banner of protecting the workers retirement money the government instead wants to take their money and give them newly printed government bonds in return allowing them to spend the cash, plug their budget shortfalls and spend more money on what they desire.

It's only fitting that a government such as ours would follow the lead of Argentina and seize people's retirement money. The Social Security system itself was set up on the ponzi principal that as long as population kept going up, up, up, current retirees would be paid for by a larger number of younger workers. This bubble of demographics ended some time ago with the end of the baby boom. No assets have ever been set aside except IOUS with our kids names on them. Where once six or seven workers paid for one retiree, we will have one or two workers responsible for each retiree. Instead of a 1% payroll tax like many retirees enjoyed they may see 15% or higher. These younger Americans will have little choice but to lead lesser lives and put off their own families as they labor under the burdens they are now being assigned.

With the reliability of Social Security becoming more dubious every day and with the 401K as our only real chance that we (us non-government workers), have to provide for ourselves in our golden years, these moves seem destined to leave us either working until we drop or to become wards of the state. We can visualize this the world of the future where only government workers will ever be able to retire and live off the fruits of their labor. Instead government will suck us all dry.

Will Obama follow in the path of these hungry democrats? We'll all see come January.

Republicans Enter The Wilderness

Barring the return of Jesus Christ raining thunderbolts upon the Democrats, the Republican era will draw to a close today. Ordinarily a long period in the wilderness would be a good thing for a party that has lost its roots and in dire need of a long rehabilitation. The Republican party, formerly regarded as the Grown Up Party once believed in a small well-run government that kept out of the daily lives of its citizens. They had strong libertarian roots exemplified by Barry Goldwater one of the father's of the conservative movement. They were the bulwark that prevented the well-intentioned but often disastrous instincts of the Democrats from being fulfilled.

In today's Republican party Barry Goldwater would be derided as a libertine and a godless man. Here is how Goldwater saw the religious right:

"However, on religious issues there can be little or no compromise. There is no position on which people are so immovable as their religious beliefs. There is no more powerful ally one can claim in a debate than Jesus Christ, or God, or Allah, or whatever one calls this supreme being. But like any powerful weapon, the use of God's name on one's behalf should be used sparingly. The religious factions that are growing throughout our land are not using their religious clout with wisdom. They are trying to force government leaders into following their position 100 percent. . .

"And from where do they presume to claim the right to dictate their moral beliefs to me? And I am even more angry as a legislator who must endure the threats of every religious group who thinks it has some God-granted right to control my vote on every roll call in the Senate. I am warning them today: I will fight them every step of the way if they try to dictate their moral convictions to all Americans in the name of 'conservatism.'"

Today, this man would have resigned from the Republican party in an instant. This is the bitter fruit that Jerry Falwell has bequeath upon the Republican party - no longer anchored in the fundamentals of business sense and good limited government it is now a caricature of its former self - a sectional, Christian religious party made up almost entirely of white men in a country that is growing more diverse every day. This is a party going nowhere fast.

As the party of Lincoln the sectional flavors recently added to the Republican party are especially troubling. Pandering to "the Base" (note that Al Qaeda also means "the Base"), they deride the Northeast and the West Coast and claim moral superiority for the "heartland". Their rhetoric borrows heavily from that of the old Confederacy which incessantly raised many of the same issues against the North and Yankees in particular.

In this new Republican party, people are broken down into the good Americans and the godless ones. They would like to decide many things on your behalf including your reproductive choices, end of life decisions, how you raise your children, what books they read in school while introducing religion to your kid's science classes. This was formerly the party of limited government!

It makes sense that with their primary focus shifting towards religion the former virtue of prudence in finance and restraint in goverance finance leaving Americans to live free and independent lives would lose favor. Religion demands conformity and obedience.

In an ideal world, the Republicans would lose big time today, go into the wilderness to regroup and retool. They would atone for their sins and come back after the Democrats inexorably run the country further into the ground. This time it appears to be different. The Republicans dying by the sword today are the more rational and palatable ones in the party. New England appears about to be completely sterilized of Republicans. The safe Republican seats remain in the "heartland". Thus, after this fiasco the Republican party is more likely to be even more puritanical and less likely to be a successful counterweight to the Democrats.

For years our elected representatives have been sacrificing the future for the benefit of their re-election. We have dug our country into a deep hole. Check out this link. With looming liabilities of over $52 Trillion dollars we face a steep decline in our standard of living over the next few decades. Are the Democrats the ones to solve these problems? History says no they are not.

Without a decent alternative to the Democratic Party we are all screwed. Perhaps we have to start a new party. How about the name Federalists?

McCain a Greek Tragedy

McCain's campaign has been floundering for a lot of reasons, but the final nail in the coffin may be his continued adherence to the failed concept of campaign finance "reform". Conceptually, this argument flows from the dubious principal that money is bad and it's bad to have money in politics. Money may allow "special interests" to influence an election. These arguments are very old indeed. They were also made at the constitutional convention were talk of foreign gold and other abstractions were similarly lamented.

So the solution is to have the government regulate through very well intentioned and politically connected bureaucracy, the amount of free speech permissible on the air waves, especially during the interval immediately before an election. In practice this works similar to the way gerrymandering has worked to create election districts that achieve near perfect re-election victories for the politicians in charge. This is one of the major reasons our nation has become so politically polarized as these candidates only need to pander to their distinct base of constituents and make no attempt to provide for the common good. Remember E Pluribus Unum, our former motto? It no longer applies.

McCain the author of McCain/Feingold followed this bad idea to his doom, by agreeing to take government fiance and all its spending restrictions even though Obama, who originally stated his intention to do the same, reneged and raised enough cash to impress Croesus. There is an order of magnitude difference in the amount of money these candidates have to spend and this will become clear when Obama airs his 30 minute television commercial on network prime time. Fortunately, as Michelle Obama says they are not putting ads on Nick and Disney channel to bore the children. General McCain went into battle as under prepared and under stocked as George W went into Iraq.

Campaign fiance is another well intentioned measure that achieves exactly the opposite result as its stated purpose. By limiting donations to small amounts and putting stiff restrictions and reporting requirements on them, it forces candidates to continuously forage for funds and pushing them into the arms of organized groups that have a large number of boots on the ground. These groups often represent unions, government workers, religious groups - otherwise known as special interests. Meanwhile, the barrier to entry into politics is raised for newbies a/k/a challengers. The established candidates control all the levers, plus they have the free franking privilege allowing them to send free mail as well as ready access to the news media. There are valid reasons an overwhelming majority will be re-elected even this year.

The Obama fund raising effort shows great sophistication in that a huge number of small donations has been funneled into his campaign. This diversity of funding sources also implies more independence from - special interests. The fact the most politicians do not have the fund raising resources as Obama does not detract from the lesson learned. It is the diversity of funding sources that would allow a politicians to break free of the interest groups that control them.

In fact as long as major campaign contributors are specifically identified, what concern is it to limit their political donations? A candidate will have more funding choices to choose from and is even less beholden to single set of constituents or special interests. If Malcom Forbes, Bill Gates and Warren Buffet decide that candidate X is the man or woman that must be elected to save the nation, why can't they bankroll him as long as they identify themselves? In 1968 Eugene McCarthy entered the race Democratic primary against Lyndon Johnson to oppose the Vietnam War. Sounds like that might have been a good idea to air in public. Today, campaign finance "reform" would prevent that, Johnson would get a pass.

This attempt to regulate free speech in the context of political campaigns is also a symptom of the larger decline in support for free speech in general. The Supreme Court ruled that money does not equate with free speech and upheld much of this campaign finance reform package. In other words you are free to speak, just that you may not use money to purchase space on the airwaves or print media to have anyone actually hear you speak. Effort are underway in the Democratic party to crack down on talk radio by reintroducing the "fairness doctrine" so that they can clobber Rush Limbaugh and Shawn Hannity - all in the interests of fairness.

One must always question the motives of these politicians making these decisions especially when they start using slogans like reform or fairness. One of the more obscure reasons that Republicans were all for alcohol prohibition in the 1920s was the fact that in states like New York, the democratic power base was run out of the taverns and barrooms. Shutting them down was a good idea - for Republicans.

Politicians will always seek ways to suppress their opponents and boost their own fortunes. That is reason enough to keep them away from managing elections, setting up election districts or deciding who is eligable for run for office and how much money can be spent. These schemes always have a way of working to the advantage of those already in power.

Strike While the Iron is Hot

Congressmen that voted down the bailout measure on Monday must be pretty pleased with themselves. After blowing $1.2 Trillion dollars of stock market value the next day - heavily damaging pension funds and 401K plans across the country, they finally passed a heavily loaded up bill that swelled from 3 pages to over 400. Now we have more sheep studies, new Nascar track facilities, subsidies for Rum producers and even some money to help bail out Hollywood. Considering the country is just about tapped out and bankrupt, what did these Congressmen vote for - saving the country's economy or their own smelly job? Of course the voted for their jobs not for the good of the country.

Where will this extra $120B come from? Will we one day raise taxes to pay it off. No, it will be monitized in the form of future inflation and further erosion of our pensions, savings and our standard of living.

The time wasted before the measure was finally approved saw further weakening of economy increasing the odds against this $700B bail out bill actually working. Credit continued to implode and asset values fell quite a lot last week. At least we did not see banks shutting down in waves like 1932.

The wisdom of the Paulson approach to get the measure voted quickly was a good one, even if the salesmanship was lacking. This episode further confirmed what has been learned over the past few centuries in dealing with these finanancial crisis by Bagehot, Hamilton, Milton Friedman and many other great economists - that time is of the essence in dealing with a crisis like this.

We can now add a striking new dimension to our understanding - the startling revelation that our elected officials will still take the time to loot the treasury even while being warned the country is on the verge of a collapse. Sherman's bummers would never have gone that far.

Republicans: "Let them eat cake"

Apparently, the Republicans have seized an opening in an otherwise dismal election season. Dissatisfaction with the bailout plan and its $700 billion price tag has filled up their e-mail bins and they would like nothing more than to direct these angry people to the polls, to vote for them. Populist commentators inveigh against "bailing out the big corporate interests" and screwing the taxpayer. Many political points can be scored on the basis of these populist stances with an ignorant public.

We have politicians and pundits helping to reinforce the public's belief that some rascal on Wall Street is solely responsible and certainly not their own virtuous behavior. Trading up their home, taking out home equity loans and going on vacations or investing in vacation property does not seem to be demonized as much as the "money lenders" who facilitated these things. In truth there is plenty of blame to go around everywhere. Once the dynamic of "Home Prices Always Go Up" and the fact that the government's tax policies favor real estate over mundane investments like savings accounts, dividends and similar stogy investments it was natural for the money to flow into housing.

As the credit markets dry up, large and small companies can not find credit to fund their operations. How will they buy material to build things, or to buy inventory to stock shelves, or to move inventory to stores? The American public does not care about these matters. They are used to the stores always being chock full in the land of plenty. With companies like Mc Donalds coming under pressure I wonder what the effect is right now on small businesses. If this continues much longer and the furloughs start and large number of their friends and family are sitting idle they may begin to think otherwise. How many bankruptcies will we see? If the public thinks this bailout is expensive they will be astounded when it costs ten times as much down the road if something is not done that is both effective and immediate. But, then we can invest our time watching show trials of some of these Wall Street villains from our new HD TVs while we sit on the couch and await our own foreclosure.

Instead we have the same pleading for drift and inertia that was heard in 1930-33. We hear: "It's not the government's job to interfere in financial markets", "These bad institutions should fail and quicker the better", "Why should the government purchase these securities?".

The Republicans alternate plan, capital gains tax cuts for corporations that are all red with capital losses! The second plan, an insurance system where I guess these distressed companies will pony up insurance money based on . . . what is it based on? How long will this take to sort through their risk and exposure. I guess we had better start pouring over all their assets. Here is a good explanation of the weaknesses in the Republican's plan. Meanwhile the clock is ticking and companies are under enormous pressure.

The Paulison plan is to remove these "toxic" assets from the books by the Federal Government taking them over. They are toxic because it will take a lot of time for the true values of these assets to become known and for them to sold at a proper price. Since nobody knows the value of these assets the market price is now $0. At the end of a trail of packaged, bundled securities are houses and real assets that are not really worth $0, they are worth less than they originally were. How much is that, who knows 60-80% perhaps. So the $700 billion will be used to purge these assets from the system buying and selling them at a loss if need be to get them off the books. The alternative is to have the US fanatical system freeze to a halt. They did not mind that situation in 1933 either when all the banks shut their doors and millions were left unemployed.

Since the Republican Party is more concerned with social issues than business ones there is an opening for the democrats to seize the affections of the business interests in this country as long as they could somehow reconcile it with their union supporters. Right now the "Grown Up Party" is acting more like administration of King Louis XVI and hoping they avoid blame for the economic catastrophe right now, despite holding the White House for 8 years and Congress for much of the last decade.

This is not the Republican Party I once knew.

Financial Collapse Act 2

Congress has finally come up with a bill to stabilize the countries finances and the stock market is up at the moment. Don't count on this to last very long. The Chinese have directed their banks to shun American ones and a lot other countries are looking very warily at this country.

In the good old days we were able to laugh at Argentina or some other smaller country at their economic foibles. This time we are the ones caught with our pants down. Huge debts and liabilities loom before us and the country has underinvested in all manner of infrastructure for years. Who will furnish the funds to rebuild this country? We have been relying on foreigners to the tune of $2 billion per day.

These foreigners have already seen the value of their US assets fall like a rock. These foreign countries look to the US as a safe haven in times of trouble. They have lost big time on the USA. The Saudis $800 B sovereign wealth fund - ouch. We rely on Chinese investments in US Treasury bills so we can spend what we can not afford and to make promises to our citizens to that we have no way to keep.

These countries are not going to keep showing up the Treasury auctions to support our government and its banana republic may of controlling its finances. Right now everyone is fleeing into Treasuries from stocks, bonds and other assets in search of a safe haven. When this tide ebbs who will be buying this debt? Who will furnish funds so that productive businesses can borrow? The only way to attract these funds will be higher interest rates, much higher.

People have been warning for years that this implosion was coming. Our former Controller General has been warning of a catastrophe for years.

Video Link

Instead politicians keep putting Christmas presents under the tree, leaving the bills for our kids.

It may be too late to land this plane as said on this recent Glenn Beck blog.

Link to DEFECON2

Act 2 is going to suck worse than Act 1.

Time Running Out: Skirting the Edge of The Great Depression of 2008

The excesses of the last decade seem to have finally caught up to the United States. This fact is still dawning on millions of Americans who know something is up but have not idea how serious it really is. Most expect it to blow over in a a few weeks just in time as we get ready for Christmas season. Make no mistake the past few weeks we have certainly been walking down along many of the same paths trodden in 1929, 30 and 31. For now we are very lucky to have avoided falling off the precipice. This luck is not guaranteed to last, especially with the US of A in much worse financial shape than in 1929 after living on trillions of dollars of borrowed money.

Our political leaders were briefed last week by Hank Paulson and Ben Bernanke on the severity of what happened on Wednesday when money markets locked up and were on the verge of seizing up. A threatened electronic run on all these financial instruments was in store for the next day, followed by wholesale business shutdowns, bankruptcies and massive layoffs. Once started this implosion would be impossible to halt. The vortexes put in place by the earlier collapses have spread fear and uncertainty far and wide, it's every man, woman, corporation and institution for themselves.

As Congressional leaders that were in the big meeting left shell shocked and a bit more circumspect than usual, they then arrived back in their offices to hear the fallout. Populist rhetoric about how the big institutions get bailed out while the man on main street gets the bill began immediately. Pelosi started to recover her senses as fellow democrats started to stiffen her spine and show her the political advantages of holding out for their interests. Perhaps they could get a "main street bailout" for their constituents. Ron Paul continued his brand of rhetoric that the good old gold standard and leaving these Wall Street interests to the fate they so richly deserve. Newt Gingrich chimed in to announce that this solution was just plain wrong and would lead to bigger problems down the road. As he said:"Congress was designed by the Founding Fathers to move slowly, precisely to avoid the sudden panic of a one-week solution that becomes a 20-year mess."

This is not a situation that was through out by the founding fathers where hours matter and careful deliberation is not an option. When in time of war the President does not wait on advice and consent of the Congress since to do so would invite defeat. In this case Congress is needed to approve legislation in the middle of a crisis that does not allow time for careful deliberation followed by liberal amounts of pork barrel spending. Of course it is the Congress itself that has run up our national debts while incurred financial commitments to the tune of $54 Trillion. In the end these commitments are certain to doom us.

Helicopter Ben as a student of the Great Depression knows when send out the helicopters. Unlike these people advocating inaction and deliberation in the midst of an epic battle, he and Paulson are trying to put a tourniquet on the wound. The question now is this: Will we be forced to follow the path encouraged by the Roy Young (Fed Bank Boston) in 1930 towards inaction while our financial system shuts down and our whole capitalist system implodes? Even if we learn from this past debacle, and take proper action it still may be too late to prevent it. Meanwhile, we must endure the political posturing interleaved with more panic and deterioration.

Unfortunately, the real causes of the Great Depression are not taught in schools and instead populist explanations are presented as fact. These facts blame greed, capitalism and especially the diabolical money interests located back east on Wall Street. We hear this same refrain today. People knowledgeable in the facts know that in 1929 a normal business cycle recession was turned into a Great Depression by the inaction of relatively new government agency - the Federal Reserve System.

This agency was termed the "lender of last resort" to prevent panics like the big one in 1907 from occurring again. Instead it made it much, much worse. In this epic drama the limits of a bureaucratic entity and the personalities of the different players involved would combine to create inertia while the financial lifelines of a great country congealed, businesses stopped, food rotted on the vine and millions of people were laid off to face an uncertain and bleak future.

After the stock market crash the Federal Reserve Bank of NY responded properly to the crisis by injecting money into the market to stabilize it. Harrison its governor did this from "their own account" and without approval of the board. Since the NY Bank was the de-facto leader of the Federal Reserve System dealing with its counterparts in Europe and around the world they had the experience to deal with the crisis, however the untimely death of the Benjamin Strong a powerful and respected leader has left Harrison, a lawyer running the NY Bank. The more regionally minded reserve banks were jealous of NY and took issue with Harrison's decision to inject funds. Many of them did not agree with the idea that the Federal Reserve, a government agency would and sell buy Federal securities to inject in liquidity to the market. So much for the lender of last resort. When asked why the Federal Reserve Act had specifically given them these powers, Ben Strong replied "they are there to use!" Too bad this Ben was already in his grave.

Harrison's initial effort to pump money into the system was correct and the things stabilized. Banks received more funds for a year after the crash as depositors felt lucky to not be putting their money in banks and not in stocks and bonds. A full year later the first run on the banks started with a few small banks in the west until it led to bank named the Bank of the United States. The name itself caused a panic as it was thought by some that "the" Bank of the United States had failed. The failure to salvage this bank resulted in cascading runs on other banks. The Federal Reserve remained inactive through this and the following second crisis. Keeping it's portfolio of securities dry in case an emergency would require them!

Throughout 1932, 33 the Federal Reserve tried to stay inactive, while pleading impotence and to push the blame on things like "bad" banks. Many thought it was therapeutic to let these "bad" banks fail. When Congress forced it to intervene by injecting funds it was too small a scale, especially while France was busy pulling all the gold out of the country.

Attention Ron Paul: when you are on the gold standard your internal monetary system is controlled from outside forces, a dependant variable - think China.

These banks when they suffered a run had to liquidate assets, bonds especially at a time when everyone was selling them. Since funds deposited are also lent out in a fractional reserve system they had to destroy $29 of assets to give each depositor $1 of net currency by the time the final collapse happened!

With these distressed assets on the books many of our financial institutions remain at risk to go under, taking with them more and more. This includes major US corporations. Think about companies not being able to stock store shelves. Time is critical to prevent a possible catastrophe. As demonstrated by Milton Friedman in his Monetary History, a injection of $2 billion would have fixed things easily at the early stage of the collapse. As time went on the amount of money escalated quickly. It is better to nip it in the bud that watch it expand geometrically. These lessons were learned long ago by Walter Bagehot and even Alexander Hamilton who faced the rupture of our first stock bubble in 1790s.

The potential for collapse in this instance resembles the failure of the World Trade Center - once the floors start to pancake they will continue to do so all the way down. We can argue about the building's architecture later right now the goal is to prevent the rupture.

The Decline and Fall of the United States - Part III

Government policies and actions often have inadvertent side effects and these are made even more worse in an interconnected world where actions taken in Beijing can have an immediate effect on Americans at home. The USA has enjoyed a place second to none since WWII and the advantages this brings to Americans are universally taken for granted. One prime example, is the dollar's place as the world's reserve currency. This makes dollars attractive to foreigners especially for a country that continually must borrow from foreigners to pay for government deficits and the US foreign trade deficit. However, the dollar itself has no intrinsic value other than the strength of the country it represents and its status as the world's reserve currency is a result of its relative stability.

Changes in tax policy towards interest and dividend distributions and capital gains forced changes in the way Americans thought of investments in general, investments that were needed to be properly placed to put the United States on a path of sustainable growth and not boom and bust cycles.

It is often lamented in the media that Americans save almost nothing and merely spend, spend , it is not often pointed out that it is difficult to achieve REAL savings in bank deposits, money market accounts and especially any taxable investment. Real in this case means after tax and after inflation are taken into account in the current tax environment. In the late 90s and the 00s the Federal reserve forced interest rates very low, in some cases negative in real inflation adjusted terms. The government turned a blind eye to the fact that much of these "returns" were illusory and taxed them again. First inflation, the governments stealth tax would get savers and then the IRS. It's a wonder that anyone would save in a mere savings account. Even with high rate of return in a money market of say 5% would be whacked at the marginal tax rate of say 30% and then rendered less than the rate of inflation. So the real effect is a negative rate of return on many of these "investments". Much as people do in a hyperinflation condition, sometimes its best to spend the money before it can be shrunk or taken by the IRS.

Dividends are also singled out in the tax code for double taxation as businesses which really are owned by the shareholders are taxed with business taxes and then the owners of the business are taxed again when they receive their dividends. As a result many companies ceased to offer significant dividends and focused instead on growth; companies including Microsoft and many other TECH companies followed these practices. Dividends were in fact looked upon with disparagement.

US government policies would in fact discourage savings and investment, yet people found ways to better their conditions with any tool at their disposal. Some would call this greed, but deferring immediate spending by saving for the future should be looked as a virtue instead of the vice that the tax code treats it. Instead the advantages of the home mortgage deduction caused many people to look at their homes as investment vehicles and not as a mere place of residence. After the real estate slow down in the late 80s during the 90s they started to steadily improve. More and more money started to flow to up scaling and building homes. Favorable tax treatment made this look better and better as it became the conventional wisdom that "home prices always go up". Meanwhile, companies pursued a growth mantra where actual profits did not matter as everything would be achieved by growth. Capital gains were taxed at the point of sale and hence the jack boot of government could not suppress growth of assets until the profits were actually received. To further these capital gains taxes were lowered to speed this development along.

During the Clinton years this growth oriented stock market resulted in another boom time as technology and outcome stocks took off. Large sums of money poured into the stock market by people seeking real return on investment. Internet ventures selling pet food, Crispy Cream Donuts, Telecom Stocks all had a tremendous run ups resulting in huge taxable gains for the federal government. Most of these companies had little real revenue but showed much anticipated growth and growth versus solid business fundamentals as was formerly exhibited by good earnings and dividends. As employees pocketed big bonuses and stockholders cashed out the government found a windfall fall into their hands, a revenue completely unexpected by the revenue authorities at CBO and Treasury. While Clinton was hamstrung from funding new programs by the Republicans, the money was flowing in from the stock market. The federal budget actually came into a balance. This balance was itself less than it appeared as this balance took into account Social Security inflows which were already pledged to retirees. Instead this money was spent.


What matters most to a country is its relative economic prosperity. It is this relative prosperity that determines its share of the world output of and from there its military and industrial potential are achieved. The rest of the world was not sitting idle while the United States squandered its advantages.

Economically the United States faced new challenges as Asian countries started to make striking advances. First Japan in the 1980s went on to take over much of the electronics industry and semiconductor fabrication in particular. The Chinese and Indians were also rising up from Communism and socialism and each had particular advantages. The Indians had many people that could speak fluent English, quickly call center jobs moved to India, followed by programming jobs and higher and higher technical services. Legal research, readings of X-rays and MRIs by skilled radiologists in the US could also be done conveniently using the Internet. Anything that could be done remotely with someone with good English skills could be done in India.

China a country with a workforce larger than the US, Europe and Japan put together was determined to regain its rightful place in the world, and especially to become the dominant power in Asia. They also rightfully wanted to provide a better life for their people many of who were in a state of poverty far below the normal experience of a western country. Starting slowly and moving steadily up the value chain they succeeded in putting large number of rural peasants into manufacturing jobs. Many Chinese would attend US universities, work in the USA and later return to China as conditions improved.

The Chinese presented the west with a large untapped, virgin marketplace. However, in order to gain access to this market foreign companies were made to jump many hoops, including creating research centers and building manufacturing plants in China. Western countries made large transfers of intellectual capital to China in the hope of sharing this bounty. The Chinese want to learn the technology, build products for themselves and not merely buy foreign goods. As noted by Pliny the Younger in ancient Rome, the Chinese do not want any of our products, they take only our gold and are only willing to buy some stained glass! Not much has changed over the centuries.

While the US would be dogmatic in pursing its free trade agenda, China would pursue an old mercantilist one at our expense, protecting even insignificant segments of their workforce from competition (like Chinese cartoonists!). The government has put in place mechanisms to limit foreign penetration and impede Chinese from purchasing foreign products. To achieve this they have created elaborate mechanisms to maintain the growth of their economy and to prevent it from overheating despite the dollar inflow.

When an American company purchases Chinese products the dollars that are received by a Chinese company they must by law be given to the Bank of China and exchanged for Renminbi the Chinese currency at an offically set exchange rate. The Chinese government takes these dollars and invests them through a single government agency frequently in US Treasury securities and other foreign investments. These Renminbi injected into the Chinese economy would tend to increase the money supply and lead to inflation, raising prices and making Chinese goods less attractive. Instead the Chinese government sops up this money by selling sterilization bonds much of this money so as to keep Chinese price levels low. (Note the same term "sterilization" which was pursued by the US Federal Reserve in the 1920s). Furthermore they maintain a strict exchange ratio with the dollar so that this unstable situation can continue. Chinese are not tempted to buy US products with their dollars as they are immediately sequestered.

The result of this merry go round is the Chinese import dollars, and sell products to us, they then take these dollars and inject them back into the US to finance both its federal budget deficit and the current account deficit. Goods flow pretty much one way, we only export dollars. Relatively poor Chinese are in effect forced to pay for Americans living beyond their means. They at least hope these foreign "investments" will pay off and at least not decline in value. Recent events have shown this to be a rather dubious position.

China's sudden arrival on the economic map of the world has caused a great deal of turmoil. It is as if a country that never existed before just popped into existence. Such cases are rare in the world for example Germany after its unification under Bismark. In this case the relatively poor Chinese pricing structure made their labor so much less expensive that those in the developed world and without environmental laws or the need to provide their workers benefits such as health care they had an even greater advantage. As a result in this new "flat world" the manufacturing jobs moved to China. The Chinese people learned from their western teachers and were not content to merely be the workers at foreign owned firms. New companies such as Huawei,Lenovo pointed the direction - direct competition on America's home turf. Western countries labor force was priced out of the market and with time these levels would have to adjust. As jobs hemorrhage in the US and flow to China wages in China will go up while American wages stagnate or in real terms decline until balance is achieved. This phenomenon is not a new one as its been observed even the ancient world. Skilled artisans in ancient Greece could no more compete with the slave labor of Ptolemaic Egypt any more than we can against labor rates in China that seem almost as cheap. Unfortunately, Migrating to the Danube basin is a less an option for us.

The US military has had fits as its suppliers move all their production offshore, as fewer and fewer people take up engineering in the US while the Chinese seem intend on producing millions of them. In the 80s and 90s the Department of Defense approached this problem by requiring domestic content of much of what they ordered. Integrated circuits, flat panel displays were required to come from a US supplier or a supplier that could contract with a foreign one to build the product in the United States. This lead to all sorts of problems as the very high manufacturing volume is what in fact drove productivity and quality up while driving costs down. The relatively low volume military purchases were barely enough to prime a production line. Whereas in earlier years the electronics industry was heavily influenced greatly by the buying requirement of DoD it was not firmly attached to commercial developments, and these were not in the USA but in Asia.

Intellectual capital was also flowing overseas as even many defense contractors moved programming jobs to India. Claiming the design conception and specification would remain in the USA and only the "mere" coding steps would be outsource much of this work went to India. American know how was being replaced by American know nothingness. Americans flowed into other fields as engineering and programming became a ticket to the next reduction in force. Instead they pursued other fields such as finance became an even bigger part of the US economy. When technology workers were needed is was both cheaper and in some cases easier to import them from overseas, especially from India on an H1B visa. Americans lower education standards made US graduates look less appealing. Even our most elite students from Stanford or MTI are regularly waxed in foreign technology competition.

From the perspective of a military strategist these are frightening developments. While most high technology manufacturing is now done in Asia and the US is dependant on foreign supplies of energy the US is very unprepared if something should happen to disrupt the world order. Most of the motherboard and many semiconductor plant are located coincidentally in Taiwan, the supposedly renegade provence of China which Chinese leaders want very much to bring to heel. The hallmark of the American military has been based on good engineering, technical advantage and raw power. These are clearly slipping away.

Now as economic conditions improve in China they are finally free to pursue their Fourth Modernization, that of their military. With a large Diaspora of US educated students returning to enjoy the Chinese resurgence, access to western technology and skilled work force the Chinese are ramping up a new navy not just outfitted to defense but to project power in their immediate neighborhood. Another potential flash point exist with the Japanese for access to disputed territory with oil and natural gas resources. A stronger Chinese navy gives politicians in Tokyo and navy men in Annapolis nightmares.

The US aircraft carrier battle groups are the main means of projecting US power around the world. The Chinese are working on submarine technology to neutralize them and to throw us back across the Pacific if the need arose. They now routinely shadow these battle groups and gain more familiarity with them, much as the Russians have done over the years. The US is also heavily reliant on satellites for communication and to guide munitions to target. The Chinese demonstrated quite ably their technical prowess in shooting down these satellites.

If any great power conflict came into being, the US would more closely resemble Great Britain facing the Nazi submarine wolf packs. Britain almost starved. Dependent for everything but food, this would not resemble our WWII experience. The Chinese also hold a set of cards more significant that any in the Furher's hand - a huge amount of US assets that can be dumped in the market in a "nuclear option". The Chinese have already threatened to use the nuclear option if they are not happy with US policies. Nor are they happy with the poor state of their investments which they entrusted to us and we have blown. With the US is dependent for operating cash from the Chinese over a billion dollars a day, we must gradually take Chinese concerns into consideration in whatever we do. Our freedom of action is limited by our reliance as a nation on the Chinese dole. The day is coming when permission from China may be required before embarking on any new programs, must like it did in the days of the Sun Emperor.

While many American politicians talk with boldness and a can do attitude, repeating platitudes about the our greatness and how we won the Second World War this country is in a different position now than in 1941. We are no longer either self sufficient, we are no longer technically superior and we are in a weak financial condition in hock to potential adversaries and facing exploding costs from government programs that are on a course to explode. And, the current crop of candidates are all offering us more goodies!


Next and Last: Terminal Stages the Bush Years

The Decline and Fall of the United States - Part II

Rome was not burnt in a day, and neither will the United States be turned into a howling wasteland in a day. The fall of Rome can not be explained by any single factor: not their lead plumbing, not a corrupt government squandering the empire's wealth, not intellectual stagnation, moral decay nor external pressures. All are cumulative and we exhibit all of them except the lead piping. The follies of many Roman emperors are certainly one of big reasons for the fall, as the scope of the emperor knew no bounds and his decisions or lack of decision would affect the whole empire. The founding father's sought to limit government and saw it as a potential threat to the lives and liberty of its citizens. This could not continue in the modern world but what would be the scope of government and could it be counted on to lead and make good decisions.

The Great Depression marks the point where the government started to expand its influence far beyond its modest means to deliver. Prior to that the economy had little management from Washington. The government had little power nor ambition to run things it had no particular claim of experience to run. The Depression is presented and accepted by most people as a failure of the capitalist system that required the government to step in and take control. Unbeknownst to most people, after years of analysis most of the blame is now laid on the Federal Reserve System, a government agency. Certainly amelioration of hardship was necessary at a time when some rural Americans were desperate enough to resort to feeding their kids boiled thistle! The New Deal opened the floodgates.

The New Deal lead to a huge expansion of government. This continues today as programs once created seldom die. Government support for agriculture especially the farm subsidies continue to this day despite sky high prices for farm commodities. A new government agency named Fannie Mae was established to help people own a home. This agency which along with its cousin Freddie Mac just recently had to be seized by the Federal Government to prevent possibly another Great Depression. The most enduring New Deal measure was the Social Security Act, originally envisioned as a way to get old people out of the work force to make way for the unemployed. Here the New Dealers came up with a pension system that would become a millstone for future generations. The money collected to fund future retirees would come into the governments's hands and be spent, not put away in some tangible asset like a private pension plan. Meanwhile fresh IOUs were issued in the name of the Social Security Trust fund so that in reality future generations were themselves the trust fund. This had the beauty of being predictable, unlike Wall Street Stocks or Bonds. The money was guaranteed - to be lost. Normal accounting rules for pensions were never required, because it is deemed to this day that this program could be discontinued at any time. Fat chance! This is the rationalization that it not be treated as a normal pension fund.

SS provided a bonanza of cash for the expansion of social programs as the inflows to the system far outweighed the outflows. As they crunched the actuary tables the New Dealers noticed that the liabilities accrued and bankrupted the system over time. As FDR said, "It is almost dishonest to build up an accumulated deficit for the Congress of the United States to meet in 1980. We can't do that. We can't sell the United Short in 1980 any more than in 1935". Since the government took the money and spent it, while claiming it was a "trust fund" without any real tangible assets, the New Dealers must have been counting on an ever increasing population. They could not see the demographic bulge of the Baby Boom, nor reduced fertility and population grown in later years.

WWII furthered the growth of government as it controlled all aspects of production, rationed resources and imposed wage and price controls set priorities as bureaucrats saw fit. One way companies found to attract workers, since they could not offer higher wages was to offer a new benefit, health insurance. Originally offered for this purpose this had the ill effect of uncoupling the costs of medicine from the beneficiaries that received them. This would become more and more significant as time went by.

The return of prosperity after WWII saw the United States fit right into the mold of the English Empire or the Roman one. Instead of a return to the depression, which many feared it was a boom time. The US Navy ruled the seas while the US economy was second to none: materially, financially and endowed with tremendous human resources. The GI bill turned thousands of soldiers into scientists and engineers. The equation of prosperity is very similar to that in the early 1800s: the country was vast, self-sufficient with huge natural resources, the people were on average more intelligent and educated and free to pursue their interests. Shiny cities on a hill, nor the intervention of the supreme being are not needed to explain this good luck.

The overwhelmingly dominant position the US had after the war would start to slip during the 50s and 60s. Our allies and former enemies were getting off their feet and the US encouraged them with free access to its markets and free trade. While the US could boast 50% of world manufacturing after the war, this was an anomaly that would fall as other countries recovered and started to compete with the United States. The voracious appetite for energy soon set the Texas oil fields into decline. The United States became a little less self sufficient by the day.

With time this bountiful prosperity and seemingly limitless power led to delusions of grandeur and lessened the fiscal restraint practiced in early times. The lessons of the New Deal were applied in the Great Society as Medicaid and Medicare came into existence with more government spending and little or no control of costs. Private medical plans had helped to seed this phenomenon which led to an ever increasing portion of the nation's wealth flowing into health care. Increasing numbers of government employees became more and more significant in the polling booth, voting themselves higher wages, better pensions and benefits.

The lack of fiscal and monetary restraint reached a crisis on President Johnson's watch as he pursued a guns and butter policy, not willing to curtail government spending while hemorrhaging money in Vietnam, he found the levers of the printing presses and used them. In fact he actually used physical intimidation on his Treasury secretary to force him to print more money "for the boys" fighting in Vietnam. This did little to help Johnson who left office a shattered man. It did lead to the ruinous period of inflation of the late 70s. The government made several attempts to stop inflation from Nixon's infamous wage and price controls and five point plan to Gerald Ford's humorous Whip Inflation Now button. Things would not go well for the US, until some discipline could be restored in Washington. The Arab oil embargo did not help as the US would have it demonstrated that it was no longer self sufficient in energy. A general malaise and a sense that the United States was adrift permeated society through the end of the Carter years.

Despite these reverses the United States still had many advantages as it lumbered towards 1980. It still had vast resources even if energy was not one of them, a skilled mobile work force, it was still a net creditor country, it had a significant manufacturing base and it was a leading exporter. The ruinous Keynesian approach of attempting to micro manage the economy from Washington was abandoned, the printing presses went idle. The new Fed Chief Paul Volker ran up interest rates, tanking the economy long enough and raising unemployment to wring out inflationary pressures. A brutal but necessary action at the time, this set the stage for the Reagan presidency. Reagan cut taxes from ruinously high 80% levels to more manageable ones. He failed however to reduce government spending. As he was interested in a major defense build up the democrats were all too willing to give it to him as long as he maintained social programs. These budget deficits were made good by borrowing as opposed to printing money.

As the federal budget deficit increased there were calls for restraint. Even when Reagan left office there was talk of the invisible hand his deficits had caused that would prevent new government spending. The Gramm Rudman act tried to instill some fiscal discipline on the Congress to match the new monetary discipline. The economy expanded during the 80s and the US regained its self confidence. An era of divided government with the presidency in the hands of the Republican party while Congress was in the hands of the Democrats worked for time to limit big increases in government spending. The Democratic party ever ready to lavish gifts on its constituents and supporters was moderated by a more fiscally responsible Republicans.

The Republican party was in many ways a moderating influence not a great mover or shaker since had not controlled the Congress since the Eisenhower administration. The Republican party needed rejuvenation and found it in the rise of the evangelical movement and especially Jerry Falwell's Moral Majority. As social conservatism waxed its fiscal responsibly waned. The leading issues were all about abortion or gun holders's rights. These things fired up "the base" of the party but were in fact a diversion from real challenges that were starting to heat up.

The Decline and Fall of the United States - Part I

For decades many people have compared the current Pax Americana to the last days of Rome. The wealth, the unrivaled power, the size and scope of the US just seemed so, so Roman. Every time they pronounced the end was neigh something came around and radically changed the equation leaving them to appear fools and knaves. Every time the United States was thought to be on its last legs, yet it got up and excelled.

In the early 80s we looked up at the "Japan that could say no" and listened to songs such as the one that went, "I'm Uncle Sam I bailed you out when you were down so help me now I'm fall'n, fall'n". Paul Kennedy wrote a brilliant book whose thesis was that Japan was about to supplant the United States as the dominant power. This time these Cassandra's may be about to proven right or even worse. They may be too optimistic.

The United States achieved preeminent status only after WWII, while the rest of the world was shattered and only America was on its feet. Western Europe was on life support, the communists were busy ruining their countries and the Asian giants of China and India were in nowhere land. The United States still largely self sufficient, exporting American know how and products to a needy world. It's capitalistic economy with a firm financial and business footing, enormous industrial facilities and a well trained and educated work force not burdened down by oppressive social programs and government dictates would go on to dominate the world. Meanwhile, the US Navy protected access to foreign markets and resources.

In this environment a sense of entitlement and superiority were allowed to breed as the United States was able to exploit it's position and grow in a period of unprecedented peace and prosperity. Vietnam and Korea were mere pin pricks, economically speaking to this giant that could do no wrong. To some it was a shiny city on a hill, a gift of god and a birthright to Americans with their superior values and upright religious upbringing. Economic factors are enough to explain this phenomenal rise, without invoking the almighty.

The equation for the success of any country at any time has been simple - it must be competitive with the rest of the world to maintain or grow it's relative position. This is mostly an economic measurement as opposed to a measurement of military power as all power ultimately flows from a country's economy and the vitality of it's people. In the few decades after WWII, United States was still largely self sufficient for energy, food, textiles, automobiles and all forms of modern electronics and technology. It's work force was on average better educated, mobile and motivated than anywhere else on earth. It's businesses could thrive while the US Navy protected access to foreign markets and resources. Everything was perfect. Sure, the Soviets could huff and puff, but they was never any serious competition.

The US encouraged it's allies with free trade and open markets for the good of all, except of course in agricultural products. In many ways the US of the period resembles the British empire and especially it's trade policies in the late 19th and early 20th century. Britain maintained freedom of the seas with its Navy and a free trade policy even as countries like the United States would out compete them in their own markets and in foreign markets leading their own producers into decline. What goes around, comes around.

The power and wealth of the United States led many of its leaders to always envision the power and might of the United States as it was in the glory days of WWII; as the country that could do anything it wanted. The great deeds of the US in the World Wars, the Civil War and the Revolution were taught over and over in public schools. World history was glossed over as only preparatory to the great American pinnacle of achievement. Gone were the fitful days of the Great Depression, the long painful 1870s deflation, the dark days of the Civil War when everyone thought the country was about to shatter, the Jacksonian depression of 1840s, the burning of Washington in 1814, etc, etc. Replacing it was a country schooled with the idea that it was endlessly bountiful and prosperous and that it would always be.

The US has always had its myth of American exceptionalism, it started at the countries founding. In many ways the United States has been the big exception. Even during major wars including the Civil War and the World Wars the United State's economy actually expanded! Most countries suffer reverses during these ill times. There was also a great deal of luck in not being attached to the European or Asian land masses and suffering the depredations of foreign armies. The US was also lucky in never being burdened by an entrenched aristocracy with a cultured elite controlling the levers of the economy. In American anyone could get ahead if they had drive, ambition and know how. In America education was more highly looked upon that in Europe where the elite controlled access. The combination of a better educated, more motivated workforce on a huge continent with huge untapped resources is a recipe for unparalleled success.

Next - What went wrong.

The Surge - a lousy term for a successful strategy.

One thing I have never liked about all this talk of the "Surge" being successful is it actually trivializes the real accomplishments of the US military. Public perception is that merely introducing 28,000 troops into the Iraq is the sole reason for the improved situation. We Americans we like things that are quantifiable and can be put in Power-point form.

In actuality improvement in Iraq started once the ideologues back at the Pentagon were removed from the picture and the military could use all avenues at its disposal to reduce hostility to US forces. This started even before the troop levels were increased. One big avenue was the ability to dispense sacks of money instead of bullets and bombs. When we originally invaded Iraq the Saudis offered us the best advice they could: "Pay the Iraqi army". To the Rumsfled's of the world this struck them as ludicrous that we should reward our enemies and use taxpayer dollars to do it. After disbanding the military and civil administration these disenfranchised people were impoverished and all too ready to do the dirty work of planting road side bombs and other attacks, all on the pay of the militants who provided bonuses if a good video could be obtained of the attack. In the new US strategy local sheiks were sought out and liberal use of sacks of money and development projects were allowed to align these people more in line with us than with the militants. Was some of this money wasted, squandered and not accounted for? Who cares, small potatoes! Our former Pro Consul Paul Bremmer would have had none of that. Keeping your hands lily white is fine for a bureaucrat but matters little on the field of battle.

While the Sunnis were afraid of the Shiite militias, the new Iraqi army and the Iraqi government itself, the US military started to provide support for local groups that would protect their neighborhoods and not attack US soldiers. The US military tolerated many of its former enemies to come together into local militia organizations to protect their neighborhoods. US soldiers had to grit their teeth as they worked with people that had ambushed and killed their comrades. Gradually the US military was seen more as an intermediary between with Shia dominated Iraqi government and the Sunni populace. Al Qaeda only offered more death and destruction and lost support. The main difference is that General Petraeus would rather not worry that things that were not perfectly to our liking but that we actually succeed in what is required to obtain our objectives, and get outta there. Military men do not see the world through the ideological prisms that politicians do.

Several actions of the Iraqi government that were miraculously not quashed by the Bush administration helped the situation to improve further. The move of the Al Maliki against the Sadr's Shiite militia in Basra showed the Shiite government could actually move against Shiite militia units, gaining some credibility with the Sunnis. Al Maliki's diplomacy to Iran, while odious to the Bush administration, represents the fact that Iran is the big power in the region that can not be ignored. If Iran would help cooperate with the Iranian government things will improve on the ground. They did.

The US military has often gotten a bum rap for being unsophisticated and more of a brute force operation. Going back to the Civil War many of its actions have been derided with the derogatory term "war of attrition" similar smears. Of course Grant's Vicksburg campaign is anything but an unimaginative affair, but that fact seems lost on most of these foreign historians. After a lot of trial and error the US military has adapted well to its new challenges and should be recognized for it.

Lets hope it continues.

Obama: Stubborn to the end finally comes around

Much is made about how stubborn George Bush has been as president- determined to march off a cliff despite all evidence right before his eyes. Sold a war that would be over quick, cost little or nothing he bought into it and spend much of his presidency defending it and shoveling our money at it. Ignoring all evidence to the contrary it took him years to recognize the facts on the ground in Iraq and not the visions in his head or babbled about by the Rummy - Feith - Wolfowitz crowd. This administration has been guilty of what Napoleon called "Forming a Picture" of the battlefield before he gets there. This cardinal sin of a commander is a product of intellectual sloth, blind faith in ideology and pure denial.

Recently Obama has been the one in denial, denial that anything has improved in Iraq. Finally, after months of evidence to the contrary he has turned around and admitted that things have actually improved. Improved to the point where we have handed of good ol' Al Anbar providence and soon perhaps Baghdad metro. Goodbye and good riddance. This does mean it was a great idea to get into Iraq? No, the costs both in wealth and treasure and to our standing in the world were not worth the cost, especially now that we have loosened Iran to dominate the region.

Obama's great claim to superior judgement rests on his position against the war, against his democratic colleges and the republicans. Like a Wall Street guru that makes a great stock pick, he has ridden this factoid pretty far. Like the hot hand of a Wall Street stock picker don't count on this judgement to last. Inertia and standing still are sometimes the right thing to do, what will Obama do when the right decision is NOT to stand still? That is the question.

Palin Who? Palin Why? Palin What the Heck.

McCain's surprise choice of Palin continues to reverberate. Was it a mere cynical ploy for Hillary voters? Was it her combative nature taking on some of her erstwhile supports like the former Alaskan governor whom she dethroned? Perhaps a little of both.

At least Palin has actually faced down people and taken risks - risks that could have nipped her nascent career in the bud. For most politicians, their career is their first, second and third priority. That is one thing that is very refreshing about her.

Less refreshing for me is her stand on stem cell research (No), abortion (No, Not even for rape and incest), global warming (Not a problem). These things will endear her to the base but not the public at large. But, we are electing either McCain or Obama and VP choices have ever made much of a difference.

Anyone remember Dan Quale?

Shows on: Is it Obama and Biden or That 70's Show

Obama has made one of the better picks in Joe Biden the thoughtful if not very succinct orator, also known as foot in the mouth Biden. Biden actually brings many credentials to Obama which he lacks, most notably on foreign policy. If one can survive the length of his speeches he actually has good stuff to say.

After the Biden pick it all seemed downhill as the opening day of the Democratic convention was a borefest of people making promises to give everyone health care without any thought for who would pay for it. I guess that is the nature of conventions and politics in general. Promise the moon, deliver the dust.

This convention is all about hope and change, for all those [unfortunately] old enough to remember, this is looking more and more like a throwback to the 70s. We have all the hope and feel of Jimmy Carter, cleaning up the mess in Washington, while we will have more and more government to help us out. Just exchange Jimmy's cardigan sweater for Obama's Unicorn and its a wrap. Incidentally, I always felt Jimmy C meant well, it just did not turn out that way.

At least Obama is much more uplifting in his rhetoric, unfortunately there is nothing to be upbeat about right now. Each day more banks continue to flounder and fail, while Fannie and Freedie the biggest of all will have to turn over $223 billion in debt by the end of September with no buyers in sight. It will most likely be us - the US taxpayers that are going to pony up and nationalize them. The Chinese are queasy enough about their US exposure and are trying to go cold turkey so don't look to them. Will Citi go bust also? Slightly more positive the US balance of trade has improved a bit as consumers scaled back purchases while the worthless dollar has improved our exports. Too bad now the European market and our other export markets are starting to tank also. Meanwhile we are being tested by Iran and a resurgent Russia. The financial numbers showing the US going into receivership as the Social Security and Medicaid have been shown with mathematical precision to be on the verge of overwhelming and bankrupting us. Money for global warming remediation?

So Obama plans to raise taxes, lift the cap on Social Security contributions, increase corporate taxes and soak certain industries with targeted punative taxes. With this money he will do what, address the list of issues above? No he will throw more money at health care and new government programs.

Social security has always been a shell game, where half of your tax burden is hidden in the "employer contribution". Since the employer sheds this burden when they lay you off the reality is that this is your money that is deducted before it ever reaches your paycheck. For the poor self employed suckers paying 15.3% they at least looked forward to FICA top-out where they went back to 2.9%. For many people just above the $102K threshold, people the democrats assume to be rich Americans, this is referred to as their Christmas bonus, real bonus checks and wages have been non existent for years. This is where they get an extra $500 - $1000 to spend on the holidays. Wages have stagnated in these better paying professional jobs engineers, mid-level managers as they are outsourced or HIB visa'd to oblivion. Note that Obama does not consider this a tax increase, they just removed a cap costing people in the middle hundreds and thousands of dollars more. This money will not be saved in a rainy day fund to save Social Security, it will be spent. The real Social Security trust fund is our children who will be so indebted by the time the orgy of spending is done as to be unable to afford to raise a family of their own.

Obama also wants to raise corporate taxes. Democrats love employees who can vote them in, however they don't like employers that would give them a job. Eastern Europe and many places have been cutting corporate taxes and finding increased business activity. Here we have the highest corporate tax rates in the world. Who pays these taxes, the fat cigar chomping tycoon? Actually, we all do in higher costs for goods and services, less return on our 401K plans and other investments. Most Americans do not have the luxury of government pensions (double or triple dipped) with COLAS with full medical coverage. They have a 401K that is tanking. It is interesting to note that Obama's personal investments appear to avoid the equity markets where most of Americans pray they can make enough money to retire.

Taking up another populist hobbie horse, Obama also plans to impose special taxes on oil companies, a windfall profits tax. This was also tried in the 70s and proved a disaster. The end result then was decreased production and more money flowing to OPEC coffers. Notice now who are the really big oil companies on this planet. The holders of the oil are all state owned oil monopolies leaving our companies more as middle men who take a percentage of the oil profits that pass through their hands. We would like to encourage them to invest these profits into renewables and yes more oil exploration. Instead Obama will follow the lead of Venezuela's Hugo Chavez who uses the Venezuela oil company as his piggy bank. By siphoning off profits he has succeeded in curtailing investment in infrastructure and finding new fields. Despite high prices Venezuela's production has been falling. I could also mention that was Saddam Hussein's methodology as well.

Change, change, change. Baloney, this has been in reruns for years.

Nice going Chuck

Chuck Schumer has always been known as a grand stander and a big mouth, ready to pimp to the populist fashion in the eternal quest for votes. Always wanting to be seen fighting for the people against corporate and banking interests, Chuck can be a loose cannon. This time he has cost the treasury a few billion dollars and several hundred employees their jobs. I refer to Chuck's recent blabber mouthed letter that the set the stage for the fall of IndyMac bank on July 11th. Once depositors learned of this open letter questioning the banks solvency, depositors lined up and withdrew $1.3 billion in a spectacular run on a bank not seen since the 1930s.

We have recently been treated to a great many blasts from the past. We were treated to the first big run on a bank across the pond when the UK bank Northern Rock suffered a similar line up outside the teller windows as everyone queued up down the block for their funds. Of course this couldn't happen over here in America! Since then we have witnessed a major investment firm, Bear Sterns suffer a corporate run on the bank and now a good old fashioned depositor induced panic. All this despite deposit insurance!

The Bear Sterns announcement at prime time on a Sunday night demonstrates how these things are properly done - behind the scenes in quiet and announced when its a done deal. That way the institution does not implode and investor wealth and taxpayer dollars do not evaporate. In this case we had a grandstanding senator posturing as a protector of the people blowing the whistle before a salvage deal could be worked on. As the former, now unemployed employees of IndyMac wrote to the attorney general: "From the day (Schumer's) letter was made public on June 26 until the closure of the bank, a run on the bank took place and the failure became inevitable." Nice work Chuck!

Chuck presents himself as a person knowledgeable in financial affairs, this event should set them straight. Anyone familiar with these matters knows that investor confidences is paramount to success when an institutions suffers a liquidity crisis. The political machinations of a senator are at variance with what is needed in a time of financial crisis, when discretion is the better part of valor. That is why the Fed was created to get monetary policy away from the political process.

This isn't the first time our elected representatives lust for public appeal has boomeranged on them. During the depression while the banks were on the ropes and in need of the "lender of last resort", namely the Federal Reserve another bunch of well meaning senators and congressmen voted to require a list of the banks receiving loans from the Fed to be published in the best interests of the public. Of course being on that list was a death sentence with depositors queuing up to withdraw what they could as soon as the windows opened.

You would think someone like Chuck who prides himself on being an expert in these matters would know better. You would be wrong.

A Blast from the Past, the Russian Bear Awakens

We are certainly going back to the 70's with the economy in the dumpster, the specter of inflation, a war without end in progress and now the rumblings of the Russian Bear. We actually have US aircraft intercepting Russian bombers approaching US airspace a' la cold war! The attack on Georgia was certainly a long planned exercise that the Georgian president walked into. After handing out Russian passports by the truckload, conducting military exercises on the boarder and building up large military stores this campaign was very well planned. Unlike the Bush administration they seem to have put this one together pretty well. As the Georgians got spanked, everyone on the Russian periphery was warned - the Bear is back, the USA is powerless to help you. The more important question is what is the Russian objective? Is this limited to curtailing the Republic of Georgia which happens to have a nice oil pipeline running through it's territory, bypassing Russia, or does it portend larger objectives.

The Poles have already seen enough - they know the Russian routine and quickly inked a deal to deploy missile interceptors on their territory. Here, the Russian Bear again roars indignant and threatening - over a system that can only defend against perhaps ten missiles. Technically, this is a mere speed bump compared to what Russia could deliver to overwhelm this paltry defense. So, what gives with all the threats and hysteria from the Russians?

Essentially, the only logical conclusion is that it is the symbolic nature of the deal that offends the Russians. It certainly can't be the military capabilities of this system. Symbolically is shows the US in solidarity with Poland and possibly with other countries that have escaped the Russian orbit. Unlike many middle eastern countries (or the Bush administration for that matter) the use of logic will usually root out true Russian objectives. The overriding objective seems to be to regain Russian influence and prestige in the former Soviet Republics, while limiting the influence of western powers especially the USA. This may not be a return to the Moscovy empire of before, but the reduction of its neighbors to a vassal state seems to fit the plan.

Now that Russia is rested and ready, flush with oil cash and with a resurgent spirit and bold leadership they feel they should regain their rightful place as one of the preeminent powers in the world. Meanwhile, the USA has been fixated on Iraq where the action is certainly - Not! The USA is practically bankrupt anyway in need of Chinese support to pay its debts. The time is ripe for a Russian resurgence.

What's next? Ukraine is certainly on the target list, the Baltic states probably and of course Georgia. The expansion of Nato has put the US in a perilous position since it is now guarantor of several states that boarder on the Russian periphery but which would be difficult to support against a Russian onslaught. This onslaught would take the form of an application of soft power, economics and finally military power.

In supporting these states the US and NATO is in a similar position as the British and French who extended "protection" to the Poles in WWII even though they lacked a clear means of supporting them. Remember in 1939 Poland was far removed and shared no boarders with the Allied Powers and would not admit Russian troops on their soil. How could you give assurances to them? Based on what? What support is the US and NATO willing to spend to support some of these republics? Poland is one thing, but the Baltic States, Georgia and Ukraine are in a perilous position. Will they tack to Moscow or look for more empty assurances from the Americans?

The ball is back in Russia's court, try to guess where they go next.