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May 21, 2005

The Big Pen
by John Mackenzie

We are going dark economically, in good time, but not before the Credit Cycle has wound up.

Lights out, but not until the Federal Reserve has attempted to monetize the governments way out of their insipid hole, a stage managed, centrally planned school of Marxist Physiocracy at work, making certain we are ruined beyond ruin.

There is simply no other explanation in my opinion.

Have at it... even Das Capital held little mention of the socialist alternatives, but instead attacked the predatory nature of our system.

Apparently, the Federal Reserve does not give a damn what the market wants because they have figured out how to control the price. And now, price has nothing to do with the market.

This manic desperation is simply insane.

The Fed defends the derivatives markets because no one needs them more than the Fed and without them, they would have to monetize 10 to 12X more cash than they already are at present.

They are up to their necks in the Equities and Bond Markets.

Both markets are priced for perfection at a time when perfection is merely a sentimental objective.

Considering GNP and its net income from abroad are heavily weighted into our phantom GDP figures, the efforts being made to maintain the machinery, structures and 'productive' financial endeavors will continue without measure.

Factors that should produce 'stability' only produce waste.

The building has been burned to the ground and now we are simply detonating its foundation.

Waste is everywhere; especially within the FED's manic desperation... none of us will find this useful or even purposeful for our own well being.

When the day arrives Foreign Central Banks stop hurling good money after bad, a nuclear bomb is going to go off in the financial markets, we just don't know when that's going to happen, but can look for signs.

The majority of economists have atoned, inline with Alan Greenspan, that rising interest rates will improve the US savings outlook. Entertaining this notion is perverse yet, an excellent example of how dismal the black art of economics has become.

The structural absence in savings requires a US dependence on international investors for funding of the Current Account and Budget deficits. Higher rates are THE panacea to repairing Global imbalances. The Fed continues to pander this cure as if the very imbalances they have fostered have a cure to the equivalent of 'Financial Plague.'

Remarks by Chairman Alan Greenspan: Globalization and innovation
At the Conference on Bank Structure and Competition, sponsored by the Federal Reserve Bank of Chicago, Chicago, Illinois
May 6, 2004

"To be sure, even with the increased flexibility implied in a paradigm of expanding globalization and innovation, the combination of exceptionally low saving rates and historically high ratios of household debt to income can be a concern if incomes unexpectedly fall. Indeed, there is little doubt that virtually any debt burden becomes oppressive if incomes fall significantly."

Oddly enough, real incomes and real savings have been declining for decades. Clearly, an oppressive debt burden is significant. Our 'standard of living,' earnings have fallen 11% since 1968, 7% alone in the past six years.

The GDP calculation is fallacious at best; it increases regardless of whether a dollar is placed into government or private hands. Generating debt is the greatest component. The economy may appear to be expanding, but outside of government, private sector income has been on the decline for a very long time.

Wages, savings, investment and capital accumulation priced in debt.

So now we must prepare to save and not lament higher rates, for they are the very vehicle in which we will be driven to save by way of 'oppressive' burdens of debt. Fear not the waste employed by the public sector.

Brilliant, and by the way Chairman, were you not encouraging everyone assuming debt under your recent reign of compounding moral hazards to shift to adjustable rate mortgages with rates at 54 year lows.

'We may not be able to usefully determine at what point foreign accumulation of net claims on the United States will slow or even reverse, but it is evident that the greater the degree of international flexibility, the less the risk of a crisis.'

The Federal Reserve's Monetary Policy remains expanding bank credit, accelerating open market desk operations and a printing press 24/7 as the stick save for the US economy. Deflation fears have required conscious decision making on the part of the Federal Reserve to raid all Capital Stocks and inflate asset bubble after asset bubble to avoid what they perceive to be a catastrophe, referred to as 'recession.'

Their fears and manic operant avoidance suggest it will be far worse than a mere recession. Asset bubbles in stocks, bonds, real estate and credit (credit is an asset until the bill is due) and grossly distorted and artificially low interest rates have constantly sent the wrong signals to consumers. After two decades of usurping the globe's savings, the bill is coming due there as well for the US Treasury, Government and out Corporate Kleptocracy.

Diminished 'savings' was replaced with the 'wealth effect' through a 'productivity miracle' in credit and as returns of cash provided historically low rates of return; so why not borrow short and lend long.

The Federal Reserve has provided the greatest thrill ride in recorded financial history, a one-way bet with only one outcome; an unprecedented credit collapse whereby default is the most probable outcome. Just how rates remain negative in real terms is difficult to imagine.

A collapsing currency, our stock in trade, the dollar will begin to unwind with such voracity, it is nearly impossible to accept an interest rate environment whereby the cost of 'money' remains low. Unless, of course, there is an adjacent tool that can mitigate the shortfalls in the near term.

There is, it is the printing press and I fully expect the insane mindset currently inhabiting 33 Liberty Street in New York City to employ it. It is their nature, the history of their actions and entirely congruent with 'policy.'

Risk and uncertainty never entered the equation until now.

Now, it is simply too late.

'The resolution of our current account deficit and household debt burdens does not strike me as overly worrisome, but that is certainly not the case for our yawning fiscal deficit. Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances.'

I often wonder what does strike our good Chairman as 'worrisome' as he seems to believe everything outside of the very government he is financing is likely to stabilize. Are derivatives 'stable' and one must wonder what they truly create out side of the transfer of risk. They certainly do not create 'Value.'

'The last three decades have witnessed a significant coalescing of economic policy philosophies. Central planning has been judged as ineffective and is now generally avoided. Market flexibility has become the focus, albeit often hesitant focus, of reform in most countries. All policymakers are struggling to understand global and technological changes that appear to have profoundly altered world economic developments. For most economic participants, these changes appear to have had positive effects on their economic well-being. But significant minorities, trapped on the adverse side of creative destruction, are suffering. This is an issue that needs to be addressed if globalization is to sustain the necessary public support.'

Had I just fallen off the turnip truck or been slumbering in front of a new plasma TV, I suppose it would be palatable to accept the excuse mongering above.

At no time in history has 'Central Planning' been embraced with such necessity.

The process of Creative Destruction is certainly present. Unfortunately it is merely a subjective point of view. Empirically, the much vaunted concept the new economy replacing the old is riddled with holes.

I still need to eat, drink and use the loo. I must work to earn income in order to consume. In order to consume, I must save. If 'technology' allows me to be more efficient within this fundamental process, efficiencies are gained.

At present the new economy is maturing and providing diminished returns at the margin. On balance, for every new paradigm, there has been a countervailing correction of excess.

The new economy was simply a catch phrase of Wall Street's propaganda machine, yet another poorly defined concept used to justify another of Alan Greenspan's Bubbles as the Industrial Economy was arbitraged. Remember this when it comes time to defend America and the need to productive endeavors is hampered by a lack of capital resources and stock.

I suppose in the New & improved Globally Interdependent Economy we can toss paper airplanes at one another in times of war, disease and famine

Basic economic models assume:

Output: y = f(N,K,L)

This is not the real issue, the real issue is incomes to service the mountainous DEBT:

Y = Consumption (C) + Government Spending (G) + Investment (I)

Given consumption is credit based asset inflation through Alan's Greenspan's surreptitious 'Wealth Effect'... far less consumption is forthcoming.

Investment?

Who in their right mind 'invests' in distorted price signals with little if any intrinsic value?

That leaves... 'G' and I see no signs of that letting up.

Hyper Inflation of asset base stocks is going to spillover into price in exchange. We produce very little, yet consume a disproportionate amount. I sincerely doubt out paper airplanes will replace hard work when it comes time to rebuild capital stocks.

If you somehow are managing to hold onto conventional monetary analysis implying 'deflation' is a pure monetary phenomena, you have a lot of explaining to do... as we are deflating with rapid expansion of both monetary facilities and credit.

The issues remain capital & cash flows. Free flowing property... we do not have this, what we have is a constricted system designed to channel flows.

When an economic system can no longer perform due to dislocations, it matters little how much money you print or credit you facilitate. It remains tightly within the domain of 'First Abusers,' namely the Fed's shareholders. This privilege only serves to exacerbate the dislocation in terms of price, function, flow and form.

Foundational economists having embraced all sorts of seemingly benign 'truths' and have much to learn as well, we all do. Conventional analysis is dead on arrival. The data points project benign neglect unprecedented in both scope and scale.

Adam Smith's 'Wealth of Nations' could not have imagined the wrath of globalization, yet the Statist remains firmly entrenched in failure.

Ricardo... ditto. Competitive advantage for whom... the lowest cost producer? Someone wins, yet another loss. How is this mutually advantageous? It is not, the simple fact is the IMF/World Banks loans made to nations thought to be prime candidates for this advantage, found a concentration of industry into a few hands.

Marx.... divides property into property owners, the rest are a proletariat herd at their beck and call... people embrace economic slavery for the greater good.

Von Mises believed in the competitive efficiencies of markets, aligning the value of money and independence of capital and property, by far the best school of economic thought in my opinion, one step short of brilliant.

Keynes did not believe in truly free markets, but intervention.

Freidman... adjusting the monetary base for stability is utterly devoid of logic and clearly requires 'Central Planning.'

At present we are faced with a new age of purism for the greater good.

This environment is run by computers programmed by fallible humans with one eye on the prize... Utopia.

What a mess, protect yourself and the ones you love; there are distinct relationships between tyranny and poverty. History is replete with examples.

John Mackenzie

John Mackenzie manages private capital - Email: m2jrmfl@bellsouth.net

Copyright © 2004-2005 John Mackenzie

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