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[ThatHawaiiGuy]

Ass-Backward Economics - I

Jim Willie CB

[Painfully long...worth it all the way down to the end.]

Never in my entire life have I seen so much misguided folly so widely embraced as competent, expert, and grounded in historical precedent. The political body has had 30 to 40 years of deep influence on the social science economics field, left vulnerable to the expedient conformity to the growing wave sweeping our nation since the VietNam era to install a socialist system in every way shape and form, except in name. In an earlier article (see [1]) indicting economists, I stated my position in a mere 20 pages of the progressive decay of the economist trade. Simply put, it has been turned on its head, where up is down, debts are assets, paper is gold, IOU coupons and token slugs are money, credit is purchasing power, and a printing press is a source of wealth production. History is revised to suit political demands, while few call patently false revisions into question. Careful analysis of policy is sorely lacking. Challenge of important Federal Reserve policy is almost nonexistent. The public, the Congress, business leaders, and banking leaders are working with no proven economic compass whatsoever. Little wonder that the world economy might be on the precipice of a recession, requiring a lifeline of Federal Reserve credit and low rates to keep from stalling. The US Economy has become a bloated pig, burdened by debt, heavily dependent upon a constant large supply of credit. A barbeque awaits.

The truth cannot be suppressed. If a nation seeks real wealth, then it must build products, mine minerals, grow food supplies, or service these activities in support. If a nation intends to destroy real wealth, then it will print money and deem it as good & proper, allowing it to purchase real assets intermingled within an economy. Is that not a counterfeit process? In short, if no work is performed, then no value is created. Such truths are not self-evident in our world!!! Everything nowadays is backwards.

I detect a deep embarrassment among economist professionals, inept in their defense of a system that is failing, and policies that have been soundly discredited. They urge a hastened pace down the path squarely into the Japanese Liquidity Trap. Simultaneously, Japan, now the USA as well as Western Europe, have entered the tight clutch of a trap. The plain symptoms are interest rates heading to zero, excess production capacity, weak final demand, widespread liquidation of businesses (inventory and work force), absent demand for credit (outside mortgages), and reduced pricing power. Duration inside the trap can last for years, as we have seen in Japan. Political forces as well as social forces can be strong for drawing an economy into the trap.

Are we to be fortunate enough to avert a parallel liquidity trap like in Japan because our skin is white, because our eyes are set behind more prominent cheekbones? Are we any less socialist than Europe because we have one common language, because we permit more rapid unemployment and smaller severance packages? As Stephen Roach expertly details, the three major world economies are in a liquidity trap for the first time since 1930, having entered from distinctly different avenues. The United States is currently repeating the desperate policy implemented by Japan over 10 years ago. We seem to feel no alternative is available. Roach provides timely, perceptive, up-to-date essays as a true gift to the financial community (see his essay archive [2]). His two most recent essays detail the great recessionary risk to the world economy, and how the Federal Reserve has lost control. Only Asia, exclusive of Japan, chugs along. He makes an excellent point that the first nations to be hit by price deflation and asset bubble busts are the first to enjoy re-emergence from the devastating condition, which means Asian nations. They underwent the proper adjustments first, and will emerge first. The US Economy only recently has been hit, so will be late to the revival after the requisite massive adjustments. Two common characteristics shared among Japan, the USA, and Europe are overextended credit and burst asset bubbles. How can any sane thinking man or woman stand and refute such claims? I contend that most economic thought is directed toward many such denials, and as a result sorely lacks sanity. Everything nowadays is backwards.

The economist community is ripe for criticism and even attack, yet hardly a harsh word is heard. I describe their members as having formed a political priesthood, with uncontrollable federal budgets justified by govt frontmen, with falsified deceptive national economic data reports offered up by internal govt swindlers, and with absurdly optimistic forecasts spewed by brokerage harlots. My greatest condemnation goes to the academic quacks, whose arrogant tribes never discuss the giant hidden pitfalls of the debt-based economic foundation, which perpetuates and urges on discredited economic theories, which provides a breeding ground for new deficient disciples. Academia has failed us in their endorsement of an economic system incapable of proper function since that critical 1971 year. In the movie series "Terminator" they cite a date when the machines first developed self-awareness. In 1971, the world monetary system first developed lack of awareness of its inherent self-destruction. Yet few talk about the enormity of removing gold from the monetary foundation, replacing it instead with US govt debt. Without gold to carry the weight and represent the prima facie of the world monetary standard in the USDollar, by default our nation's sovereign debt fills the void. Our precarious USDollar is nothing but a debt-denominated instrument passed off as legal tender in international commerce. Some day foreigners will not accept it so willingly for payment of gargantuan bills. The world's economic house is built on sand, yet economists find nothing wrong. Everything nowadays is backwards.

Would a person build a family home structure atop shifting sand? Hell no!! Yet we cavalierly build the world economy atop the debt-denominated USDollar, whose supply is recklessly accelerating and whose collateral is being reduced dangerously. A foundation of a savings-based population, erected upon a capstone of a gold-backed dollar worked all too well during the Eisenhower Administration. Such prudence failed to accommodate either domestic socialist spending or adventures in war abroad, and were therefore abandoned. Since that time, we have embarked on a lunatic mission to duplicate the Communist Politburo central planning committee. Our Federal Reserve has had a truly disastrous track record. It has behaved more like a drug dealer supplying the credit upon which we have become utterly dependent, than a banking supervisory board. Its latest agenda has been to expand credit, to monetize the long bonds (thus debasing the dollar), and to intervene ten times more often than ever before in the financial markets. Its wayward chairman now advises tapping home equity to sustain the consumption bubble, an utterly irresponsible and unprecedented statement by any central banker. It has attempted to achieve outcomes according to a planned agenda, blocking the natural course of corrections. It has morphed into an agency to spread its financial cancer, even as its victims look pleadingly to it for solutions. Our Federal Reserve will instead continue to cause even greater problems, hardship, and panics. Everything nowadays is backwards.

In order to sustain the sale of Treasury Bonds, which finance the climbing federal deficits, our burokratic creative accountants commit fraud on a massive scale to promote the story of economic recovery, rising income, strong productivity, subdued price inflation, manageable job losses, and ample savings. Not a single macro econ statistic is valid, not a one. Richard Benson carefully exposes the mass of deceptions (see [3]). We are witnessing a "hedonic economic recovery" which owes its basis to phony and objectionable distortions reported within government statistics. The official misrepresentation is astonishing, shameless, and criminal. Could the USGovt sell their federal debt if the truth were told? In his service to the public, Michael Hodges gives detailed descriptions (see [4]) of the unbridled fraud.

Gross Domestic Product is over-stated by approximately 10%, or $1500 billion per year, if you ignore absurd adjustments and defer to the cash economy. Income is augmented by similar fictitious ploys such as $800B in self-paid rent for homeowners and $300B in credits for bank checking accounts (nowadays paid by fees), among others.

Productivity is double-counted and triple-counted by means of adjustments for faster computer processors and faster disk storage access. A recent conjob was perpetrated to reclassify software expenditures as capital equipment investments, thereby allowing a multiplier to be unleashed as in the accounting of equipment sales.

Business investment over the 12 months ending 2003Q1 for computer systems grew by an hedonically elevated $56 billion, whereas in current unadjusted terms, it rose only $4.4B. Recently announced forward guidance by both Sun Microsystems and Siebel Systems serves to confirm the notion that information technology recovery is a myth.

Even the jobless report is conducted with fraudulent intent, as nutty estimates are introduced for small business job creation, thus wiping out over 300,000 layoffs in Q1 of this year in revision.

Savings are not a small and rising percentage of income, but rather are actually about minus $400 billion annually after one pushes off the ledger several fraudulent adjustments cited above.

The economy caught up to me personally in the last few weeks in my own lost job, as my consulting firm has experienced lost bids for contracts, non-renewal of current contracts, while account receivables have zoomed upward. Our clients are under severe stress. I was given notice of layoff effective on August 1st, despite having ample statistical skills generally, and diverse experience in the marketing research field. Most of my direct clients are other analysts; much of my work is internal activity. I am a luxury for my firm, assisting analysts in difficult methods, training via seminars in newer applications. Later this summer, I am out of work, an ironic victim of my own forecasts. My warnings to certain VP's in my firm were heard, and a year later are a reality. Their agent of warning is being shown the door. Anger is centered upon being situated within my firm's organization as an overhead staff consultant with lesser external billing, against my longstanding objection. I am involved in a wide array of projects, but not much as a direct intermediary with the client. My firm has decided to cut overhead costs, at the risk of reducing critical skills which would enhance our position to compete for new contracts. A vacated analyst position suitable for me will likely not be replaced, due to insufficient work loads. Further frustration breeds from insight possessed without recognized economic academic credentials, thus limiting work opportunity in that wasteland sector, ripe for new blood. So I march in the same professional direction as my recent past, which aint so bad.

In the meantime, I remain irrepressible in speaking the truth about the vast net in which our nation is now perilously ensnared. I will lay out how the economic principles closely held as true, proclaimed as consensus wisdom by the self-adulating priesthood, errant principles which chip away at our chances to emerge from the current nationwide malaise. Jobs are being destroyed while the credit bubble is raising the bar of risk to unprecedented levels. Talk has begun to creep into the press & media in reference to Greenspasm's moral hazard, wherein he has steered interest rates below the prevailing realistic price inflation rate. Talk has also begun concerning his questionable interpretation of household balance sheets and urged reliance upon home equity in the management of routine spending. He seems unaware of the risk of his own inflationary policies. The monetary base is expanding at an annual rate greater than 20%. Before this storm ends, he will be demonized and blamed for a long nightmare. He remains a knighted hero, appealed to as the savior of final resort, trusted beyond all reason, even as the entire economic body is suffering from fallacious policy and counsel. The Fed is looked toward as a beacon of hope, when in reality its policies are the primary cause for crazed levels of debt, the collapsed stock market, and the stagnant economy. Everything nowadays is backwards.

The economy under Greenspasm's recent guidance thru the credit bubble is running on nothing but stimulus and liquidity fumes. The dislocations are becoming ever wider. No resemblance whatsoever is evident to previous exits from recessions, such as the one in 1993. The over-rated chairman has finally admitted to unreasonable post-Iraqi war expectations. Debt now is supporting critical household essentials, not frivolous consumption. Extension of credit bordering on extremely insane has born little fruit of economic activity. Growth in Federal Reserve monetary expansion has only succeeded in widening the trade gap and balance of trade account, and pumped up new financial sector bubbles. An argument can be made that the Fed counterfeiting operation revs up the printing press, and China's trade surplus escalates beyond control. The bond market's July reaction to the Fed's latest rate cut represents a deafening vote of "NO CONFIDENCE." Since the rate cut, the 10-yr Trez yields has risen almost a full 1%, mortgage rates have risen half of 1%, gold & silver have risen noticeably, and the USDollar has met downchannel resistance, certain to resume its longterm bearish trend. The markets have detected a Fed which has lost control. Our fate lies in Asia's hands, from their willingness to continue to purchase our extraordinary debts. The latest trade gap news makes it abundantly clear that our hyperbolic creation of money & extension of credit within our struggling economy has succeeded in swelling foreign-held debt, unmatched by any substantive benefits to our many industries that actually produce goods (excludes financial sector). A case in point reveals that the housing boom has not enabled any benefit to domestic furniture makers. Instead, it has spawned an explosion in foreign furniture imports, from China and other Asian locations.

The leading living spokesman for the Austrian School of Economics, Kurt Richebacher cuts through the maze. He makes available a portion (see [5]) of his broad diverse editorials, sharing less than a promising outlook. For a more global review and analysis of the world economy, I urge interested readers to review any writings by this brilliant and clear economist. He makes a certain point regularly. At the present stage of our economic situation, an acceleration in money creation is mandatory in order to tread water. It takes $5 of newly created credit to generate $1 in new GDP activity. Last srummer, $4.50 was required.

Gresham's Law :

This time-tested adage is in need of a dusting, supplemented by two corollaries. The law addresses the basic medium of exchange in day-to-day commerce.

Gresham's Law: "bad money displaces good money"

So phony money, otherwise known as counterfeit currency, masquerades within the commercial circulation of money, and pushes out real money. In nature, in much the same manner a cuckoo bird steals and then occupies an existing nest, pushes out a few of the old mother's eggs, and deposits her own. Not possessing rocks in their heads, people hoard their old real money, and rely solely the phony money, since fools willingly accept the phony money as payment for groceries, gasoline, doctor bills, car repairs, restaurant bills, and shoes. The horded old money is kept in a secure place, where years later it will emerge worth many times more. The public inevitably awakens to the exposure of the sham. Here I take the liberty to extend this basic irrefutable law into two directions.

Money is not dormant, but rather moves, affecting sectors of the economy. There are far-reaching consequences for corrupted money within the development (or decay) of our economy.

Gresham's Sector Corollary: "industry sectors nourished by bad money and debt will displace the productive sectors anchored by real money"

So the destination of tainted money will be sectors that enjoy a new dominant role, temporarily. Supplied by bad money, the unproductive sectors such as mortgage finance and residential real estate will enjoy the fleeting beneficial rise in price out of proportion to a rise in true worth, all from unearned and manufactured new printed money. While the productive sectors struggle in these harder times, cash flow suffers, debt is difficult to maintain, and workers are shed. Ailing sectors can later be acquired by the nouveau riche beneficiaries of the freely flowing counterfeit sources. They are smart perceptive riders of the monetary inflation wave, owning and managing housing properties over the long term, or speculating with complex financial surfboards in the short term. They produce nothing, yet enjoy the benefits of real wealth. Displacing the old school enterprises, these new financial sectors are where the new jobs appear in the interim. We see them in mortgage finance, property appraisal, and brokerage sales. Again, they produce nothing, yet serve up the illusion of wealth production, and even earn the praise of financial leaders who operate levers on the money printing machines. The real sectors of the economy are pushed aside as obsolete, even as debts rise to signal a warning of the aberrant condition.

The wretched story continues further, as individual assets are detrimentally affected.

Gresham's Debt Corollary: "assets closely associated with heavily indebted businesses are vulnerable to liquidation or impairment in value"

General Motors and Xerox own many fine assets. But their enterprises are overloaded with debts to the point of totally crippling ongoing business functions. Compounding the burden are pension and related financial obligations. A great many large corporations are in a similar bind. GM has approximately three retirees per active worker, with health costs rising for the retired base faster than revenues. Their profits from carmaking operations are disappearing faster than a Ferrari on a Grand Prix roadway. Xerox's debt load is many times its market capitalization; GM's is even worse. As their indebted businesses are liquidated in slow motion, the owned and amortized assets gradually suffer writedowns in value. Asset proximity to heavy debt leads to forced liquidation and distressed sales, in order to keep the cash flow steady. Debt must be serviced, even at the expense of asset writedowns and distressed sales. Discounted car sales and product transactions qualify as writedowns, commonplace events nowadays. As long as severance costs exceed production costs per built car, the theme will continue to be "moving inventory." This summer should see some stormy labor clashes with the UAW. They may have already begun, with announced worker furloughs. Much of the debt expansion comes from the bottomless well of tarnished money.

Fine. Economists have few answers. Money is tainted. Productive sectors are in liquidation, adversely affected by a great "sucking sound" emanating from within the burgeoning bogus bowels of the financial sector. Assets are suffering impairment. A new credit bubble at least five times larger than the busted stock bubble has inflated and is desperately being kept inflated by easy money and interest rates well below the running rate of price inflation. What is the difference between a bull market in stocks or bonds or real estate, and a busted bubble? Easy. While inflating, the perpetrators, the beneficiaries, and the clueless all label it a "bull market." After the process turns into reverse, causes horrific damage, destroys some lives, ruins many pensions, the phenomenon is more easily detected and labeled correctly for what it was all along, a "bubble." With assets, we pound chests and use the label "bull market". With products, we alert the town criers and use the label "inflation." It is all inflation, all from the same source.

In many respects, the entire US Economy is a speculative bubble, with liberal monetary policy pumping up one bubble after another, supported by mindboggling credit supply. The latest speculation underwritten by our Fed is the real estate sector, whose rise it prays will miraculously rescue the economy, will soak up the excesses in productive capacity and debt burdens, and will bushwhack a path toward even a semblance of an economic recovery. Easier said than done. A bad plan with poor chances of success. History says "no way." Even the venerable John Templeton believes the housing sector is next up to the gallows of valuation reduction (see [6]). He expects a sizeable decline. Instead of falling its typical 20% after the stock bear market struck, the housing sector rose by over 20%. He advises buyers to wait for a truly significant decline from the top!!! Such are the wages of the Greenspan's Fed policies.

ASS-BACKWARD ECONOMIC BELIEFS & POLICIES :

Just what are the prominent accepted economic beliefs and policies which are ass-backwards? They seem to be insidiously all-encompassing, hence require a diagnostic list. Diagnosis is one thing, but the cure is far more elusive and politically impossible without the public mandate behind a national crisis. That upcoming crisis is written in stone. I will attempt to document the most flagrant and destructive among the constructs held as true. Each falsehood would take several pages to adequately discuss and disprove, so pardon the brevity and outline form. I must devote some time aside from my shrinking office workdays to locate and secure a new job. Part I of this article will address three premises, which are each patently false. Part II will address six other incorrect premises, to be shot down within a week.

a) The US Economy is in danger of falling into deflation, so the Fed must accelerate the monetary pumping operations. Wrong diagnosis, wrong cure, feeble attempt to cover its tracks. A quote is in order, considered humorous by many, but tragic to be sure, coming from my most recent article (see [7]) on credit markets and their own vicious circles.

"Our economic advisors and observers are befuddled by inflation, embarrassed by their inability to distinguish among inflation, deflation, disinflation, reflation, stagflation, declining asset values, liquidity, credit, monetization, and money supply."

The entire concept of inflation is horribly misunderstood by almost every corner of this nation.

After 30-40 years of mismanaged banking and political leadership, unchecked monetary inflation and credit abuse have resulted in massive overproduction, colossal debts, and extreme international imbalances, which naturally lead to falling asset and product prices during liquidation in a grand corrective phase.

The structure of the US Economy is now deeply dislocated, out of balance, and flawed. The current price deflation is a structural phenomenon. Greenspasm has diagnosed it as a monetary problem, unleashing vast money supplies in its treatment. Japan made the same mistake, earning them more problems, from which we have learned nothing.

Monetary inflation causes price deflation after overproduction, default on debt after its unbridled buildup, and the inevitable collapse of asset speculation (called bubbles). One can aptly conclude that our monetary inflation (i.e. credit expansion) paid our bills abroad, financing our trade gap imbalance. More monetary inflation (i.e. Trez Bond issuance) paid for our federal deficits.

The end result will be arterial aneurisms from the excessive blood supply that the economic body cannot properly handle. In our economy, we are seeing aneurisms in the form of new bubbles in real estate, mortgage bonds, and treasury bonds. Prescribing evermore monetary inflation for the treatment of the deflationary aftermath is like prescribing Jack Daniels on the morning after, to a chronic alcoholic suffering from delirious tremens (DT's). It calms the "shakes," temporarily silencing the visible symptoms. The disease continues to be nurtured.

We will continue to see both price deflation in the production side of the economy, and price inflation in the resource and commodity side of the economy. Modern economists still force perceptions in aggregate form as one or the other, with considerable shortsightedness and ineptitude. Liquidation of inventory and workers continues, while Chinese low-priced competition remains fierce. As corporate revenues decline, earnings are generated via liquidation and cost cutting, thus the reduced prices. Meanwhile, speculation induced by the Federal Reserve has led to price inflation emerging from all financial sectors. They are curiously labeled "bull markets," which demonstrated true dysfunction in recognition. The energy sector and some other commodity areas are seeing price rises from shortages. The main risk to accelerated money creation by the Fed is to cause the opposite ends of the economy to move to greater extremes. We are soon to see even lower product prices and even higher commodity prices, just when the housing sector falters. Extreme outcomes are the order of the day when money is created irresponsibly.

b) Lower interest rates are stimulating the economy and will eventually kickstart growth. Nonsense, the exact opposite is true in an environment burdened by overcapacity, although completely unnoticed. Low shorterm rates enable the survival of precisely the weak companies deserving of liquidation, which otherwise could not succeed in carrying on their debt loads. The overburdened by debt, the inefficiently run, those with uncompetitive product sets, they all are given an assist in survival (see Ford and General Motors). Low rates create a collectivist climate whereby the weak, the inept, the clumsy are given reprieve, all in the name of preserving jobs. As a result, low rates forestall an economic recovery. The liquidation has simply been coerced into a lower gear.

We have a class struggle in progress. On one side we have the younger credit-hungry, active politically, more critical to the demand equation. On the other side we have the older, more prudent savers, less extended or over-extended into debt, often retired, and politically more passive, more critical to the supply equation. Why would the unelected banking officials sacrifice savers so readily, currying favor to the debtors? Because debtors rule this nation and control political power, because our entire system is debt-based, because extension of debt ensures sustained economic activity. Those living off credit sources surely benefit, but at the expense of more numerous savers such as retirees. In a low demand environment for money to expand the capital base, the income and service side consequently dominates the story. Smells like a Liquidity Trap to me, as money velocity is slowing. Zero Bound is in close reach, with numerous forces pulling powerfully toward the permanent trap.

Pent-up demand is sorely absent, a requisite ingredient in order to reap the advantage of attractive rates. Across the entire economy, demand is approaching a limit in the three critically important areas: capital equipment, cars, housing. The demand side of low rates does not add up to a kickstart.

Manufacturing is at a historical overcapacity now, with only 75% capacity utilization. Low rates do little to encourage corporate executives to approve large outlays when supply is in excess, final consumer demand is weak, and cash flow is reduced.

Zero rates with nothing down have done little to sustain car sales, which recently showed a sizeable 30% decline year over year. Car demand has been almost totally exhausted.

Residential housing demand has yet to register sufficient pause for any beneficial pent-up demand to develop either. Now job losses are inhibiting the sector. Interest rates are the lowest in 40 years. Delinquencies and defaults are also at 40-year highs. Go figure!

Data supports the argument that low rates are slowing down the economy, the exact opposite of what fumbling economists claim, and what self-serving brokerage analysts exhort the public to believe. We have a net reduction in economic cashflow from the interest rate equation with each successive rate cut. The supply side of low rates does not add up to a kickstart either.

In the year 2001, roughly $1100 billion was earned in interest income from govt treasuries, corporate bonds, certificates of deposit, and passbook savings.

Only half that figure, roughly $600 billion was paid out as costs to service mortgages, equity lines of credit, installment loans, and revolving credit lines.

Most of the entire financial sector is under duress from low interest rates. The lending business faces a dire situation wherein commercial cash flows are inhibited from the economic stagnation, thus increasing risk to the borrower to repay. In contrast, rates held low provide wider profit margins for lenders, but at the cost of higher defaults. The insurance business is held to honor fixed obligations on annuity payments, defined accident costs, variable damage awards. Yet their income sources tend often to originate from the credit markets, where rates are low, from utility stocks bearing yields but losing principal. They also own stock portfolios, damaged from the stock bust, and commercial properties stressed by low occupancy rates.

c) Real Estate is in the midst of a great bull market, has held up economic growth, and is providing valuable equity for continued household consumption. Bull cookies, a new bigger bubble will cause bigger future problems when it runs its course. This bubble has been blessed by the press & media, by the Secy of Inflation Chairman Greenspasm, as a rescuing chariot on our commercial roadway in the post-bust era in the new millennium. A growing gap can be identified between what the market will fetch for a typical metropolitan home and what it is actually worth. Official interest rates have been forcibly brought down under the reckless aegis of the Federal Reserve. In fact, by late 2001, after several rate cuts and a stubborn long bond refusal to march lower in lockstep with the controlled short end rate, the Fed upped the ante on the moral hazard. They changed their modus operandi. They ceased all new 30-yr TBond issuances, and they began to intervene and purchase the 10-yr TNote within the counterfeit operations at the Dept of Treasury. The tactic succeeded in bringing down the long rate to nearly 3.0%, which is probably below any true measure of price inflation. Worse still, the Fed has been bantering endlessly about the threat of deflation, while the economy suffers debilitation from years of full-bore monetary inflation. Smells like a Liquidity Trap to me, as money velocity is slowing. Zero Bound is in close reach, with diverse forces pulling powerfully toward the permanent trap.

Sadly, residential real estate is the next bubble under construction, designed off a 5-times larger blueprint than the stock bubble, under full warranty to inevitably break. It will not collapse so suddenly as the tech-telecom-media-internet frenzied mania did.

We can all watch the sad pathogenesis to the automobile sector, which cannot seem to maintain growth or stability even with 0% loans and cash giveaways at signed closings. The first failure of zero-deals is with cars, a depreciating asset.

Next is the stall and gradual decline of residential housing, underpinned by declining rates and ready refinance cashouts. As housing valuations flatten, problems will develop. As jobs continue to be shed in unrelenting numbers, problems will amplify.

Why is it that rates are at 40-year lows, but both mortgage delinquencies and defaults are also at 40-year highs?
I believe the initial cracks in the residential real estate sector have already shown themselves, along its foundation of mortgage finance. Not one, but three top executives at Freddy Mac were urged to resign, a euphemism for release and firing. They admitted to managing future profits in the government sponsored enterprise (GSE). They apparently sidelined excessive profits in recent quarters, which could only mean they booked hefty speculative profits. Let me guess. They were tipped off by the Federal Reserve, placed bonded cash into futures contracts (i.e. gambled), and gained far more than could be easily hidden. They got caught before carrying out their intention to unleash these ill-gotten gains when default and delinquent losses would require an offset. The FRE chart has suffered damage. David Chapman recognizes a looming mortgage crisis, on the scale of the 1989-90 Savings & Loan washout, or the 1998 Long Term Capital Management wipeout. He points out that sales are topping out even as consumer confidence is on the wane (see [8]). But no fear, the USGovt and Asian central banks will ensure no collapse, at least until late or defaulted payments make for a mountain of losses. The risk of residential housing has become concentrated to the extreme into Fanny Mae and Freddy Mac, as leveraged focal points. The very collectivism we decried in the Soviet Union is alive and growing like a cancer in the mortgage finance industry, as mortgage portfolios are routinely packaged (despite any test of quality) for purchase by the US Govt agencies. The public has been bestowed a glimpse into GSE opaque derivative books. For now their gambles have paid off, but when conditions reverse with higher rates or worsening labor markets, those gambles will bite hard.

A credible, cogent, and powerful argument has been made by the Rodney Cook, aka The Big Fisherman. He interprets Greenspasm's premeditated housing inflation project as instituting a "Housing Cover Clause" which girds the US Economy, and thus the USDollar (see [9]). A remarkable perception, since the stagnant economy, ballooning federal deficits, shocking debt burdens, and hemorrhaging trade imbalance collectively put the USDollar in great danger. The only visible pulse within the US Economy can be found in the residential real estate sector and its lifeline of mortgage finance. This sector can boast of no substantive production to justify its resurgent evidence of wealth. For the time being though, its ostensible evidence of wealth supports consumption. The development would be more laughable if it were not so tragic.

The "jobless recovery" continues, showing multiple distress signals. Investors continue to be fooled. The US Economy proceeds with its ultra-slow-motion liquidation of debt, labor force, and inventory. Daimler/Chrysler just announced a 90% decline in earnings of their most recent quarter, year on year, but exceeded analyst estimates. Sony just announced a 98% decline in earnings, as consumers pull back the reins of spending. Outside the financial sector, countless other examples of profit depression can be cited. The world economy is in deep trouble. The umbilical cord to the Federal Reserve credit line must remain for years, evident in an intravenous lifeline to the non-productive financial sectors. There is no guarantee that the liquidity lifeline will succeed in preventing a deep recession. Not at all. This nation does not admit its errors, does not correct its errors, and refuses to allow the natural corrections to occur, because the pain would be far too great, even to the point of causing social upheaval. Instead, it compounds errors with greater errors.

Part II of this article will address six additional incorrect premises. Look for the sequel to this article soon:

The USDollar decline has adequately addressed world trade imbalances

Consumption must be encouraged in order to keep the economy healthy and strong

Fed monetization produces new USTBond security assets to strengthen banks

Rising commodity & import prices are evidence that the Fed has succeeded in reflation

The US Economy will gain strength to offset rising interest rates along a normal cycle

The US Economy is growing again, led by profits, productivity, improved balance sheets

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PERSONAL ASIDE: It is my sincere curiosity how many readers are willing to make the commitment to pay a nominal $8 per month charge for regularly timed clarification on economic matters, to debunk conventional claims, and to provide guidance through the minefields in today's confusing financial world. In my mind, the value would far exceed daytime efforts within even the most productive marketing research. By night I work to uncover the financial chicanery and travesty in progress, a larger endeavor to be sure, with far greater implications to the world. Something very ugly this way comes, on the tail end of the dissipating bond market bubble and real estate decline that has begun. The long treacherous ride ahead requires a guide. Hmmm.

Professional crossroads lie ahead in my life. For months now, my efforts along the economy, gold, and currency front have been given away. I am excited by the prospect of performing a labor of love, as well as receiving compensation. New opportunities must be explored as life's challenges dictate change and open new doorways. An informal survey would be helpful in gauging interest in an investment letter. If interested in a monthly paid subscription to a newsletter with primary focus on the economy, with direct implications on currencies, gold, and international finance, let me know. If you wish, please shoot a quick email to me at: [e-mail]

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REFERENCES (including those from part II) :
[1] "A Statistician's Indictment of Economists" by Jim Willie CB (Dec 2002)
[2] essay archives by Stephen Roach (July 2003)
[3] "Govt Statistics: Lessons in Cooking and Spinning" by Richard Benson (June 2003)
[4] "Statistical Revisionism and Wizardry" by Michael Hodges (June 2002)
[5] partial editorial list by Kurt Richebacher (2000 to 2003)
[6] "Wall Street Great Says the Market is Broken" by Bill Fleckenstein (July 2003)
[7] "Vicious Circles and US Credit" by Jim Willie CB (May 2003)
[8] "Looming Mortgage Crisis" by David Chapman (June 2003)
[9] "Housing Cover Clause" by Rodney Cook (June 2003)
[10] "The Crumbling Strong Dollar Policy" by Ashraf Laidi (May 2003)
[11] weekly Japanese yen chart by Stockcharts.com
[12] "Japan, Argentina, Weimar, or Muddle?" by Jim Willie CB (April 2003)

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Jim Willie CB
July 30, 2003


http://www.gold-eagle.com/editorials_03/willie073003.html