On The Audio

No, not on the radio, but on the audio. The final entry in my pre-review of David Stockman's new book the Great Deformation is an audio interview with Chris Martenson. Since Martenson mostly agrees with Stockman, this allows a full discussion of the issues addressed in the book. I hope to have the book and my review finished by next Wednesday, wish me luck as I still have many pages left!

Where Is My Charmin?

There is an inevitable cost to government control of industry. From Associated Press: 

CARACAS, Venezuela (AP) — First milk, butter, coffee and cornmeal ran short. Now Venezuela is running out of the most basic of necessities — toilet paper.

Blaming political opponents for the shortfall, as it does for other shortages, the embattled socialist government says it will import 50 million rolls to boost supplies.

Blaming others for your own mistakes sounds vaguely familiar somehow. Why are there shortages? The AP article explains. 

Economists say Venezuela’s shortages stem from price controls meant to make basic goods available to the poorest parts of society and the government’s controls on foreign currency.

“State-controlled prices — prices that are set below market-clearing price — always result in shortages. The shortage problem will only get worse, as it did over the years in the Soviet Union,” said Steve Hanke, professor of economics at Johns Hopkins University.

President Nicolas Maduro, who was selected by the dying Hugo Chavez to carry on his “Bolivarian revolution,” claims that anti-government forces, including the private sector, are causing the shortages in an effort to destabilize the country.

This, of course, could not happen here! I have two blasts from my blogging past on this. Click here for “The Great Toilet Paper Shortage,” and click here for “The Great Toilet Shortage.” Both took place around the time of US price controls.  As the economist mentioned in the AP article, if a product's price is kept artificially low by government, a producer has to stop making it. They have no choice. The "president" of Venezuela's inability to understand this does not bode well for that country. 

In fact the crisis in health care in the US will probably lead to price controls, which always leads to shortages. This is one reason why I have been blogging about health recently. Get in the best health you can, while you can, as the crisis I am expecting may lead in unexpected directions and that might include rationing of health care. It is good to have a spare tire when you drive, it is not good to have a "spare tire" all the time. 

Cutting the Military

The US cannot afford the military it now has. If the US military is exempt from any cuts, then the rest of the budget must be cut so substantially that it would be catastrophic. Back in the time when the US actually had an enemy, the man who was president, Dwight Eisenhower, actually knew more about the military than any president we ever had. What did he do? David Stockman in his new book The Great Deformation tells us:

The nearly one-third reduction in real defense spending during the Eisenhower period was thus achieved by sharp changes in priorities and force structure. These included shrinking the army by nearly 40 percent, large cuts in naval forces, and an overall reduction in military personnel from about 3.5 million in early 1953 to 2.5 million by December 1960.

As a conservative I am supposed to worship at the altar of Ronald Reagan. But Stockman actually worked for him. Here is his description of military spending under Reagan:

As indicated, constant-dollar spending in Reagan’s fiscal 1989 budget was 30 percent, more than Eisenhower’s last budget, but even the subsequent official end of the Cold War resulted in only a modest rollback. Clinton’s final budget was a tad smaller in inflation-adjusted dollars than Eisenhower’s, even though by the year 2000 the United States had no industrial state enemy left on the planet.

Well, at last we can be happy that Obama is president and the insanity will stop. No, not so much. Stockman explains:

In fact, inflation-adjusted defense spending in fiscal 2011 of $670 billion was a new record, eclipsing even George W. Bush’s final war budget. It was thus abundantly evident that even an out-and-out “peace” president is no match for the modern warfare state and the crony capitalist lobbies which safeguard its budgetary requisites. Indeed, Barack Obama pushed the frontiers of the warfare state further than ever before. Beating his mandate for plowshares into an even mightier sword, the peace president pushed defense spending to a level 80 percent greater in real terms than General Eisenhower.

All these quotes are from pages 215 to 218 of The Great Deformation.

I suppose that neither liberals nor conservatives should read The Great Deformation, at least not unless they are taking their blood pressure meds.

While I am only guardedly pessimistic, and Stockman is totally pessimistic, the crisis that is coming will not be a happy time. I hope I am wrong.

Here is a part of the most ignored speech ever made.

Cause and Effect

I Pity the Fool that Expects QE to Work! Studies show that if you exercise you are healthier. Or do they? While there is a relationship, what is that relationship? If you feel better, you are more active. So is the true relationship between exercise and health that healthy people exercise? These types of studies are not as helpful as one would like.

Stockman, in his book the Great Deformation, points out just such an issue with regard to the Great Depression. Nobel Prize winner Milton Friedman made his reputation on his theory of the Great Depression. The current Fed chairman, Ben Bernanke, was Friedman's acolyte. The theory is that the Great Depression was caused by the Fed letting the money supply drop. But was the Great Depression caused by a dropping money supply, or was the drop in the money supply caused by the Great Depression?

Bernanke, or his probable successor Janet Yeltin, will not allow the money supply to drop. In fact Yeltin, or so the rumors say, is even more of an easy money type than Bernanke. What will she do in 5 years when it becomes clear that Quantitative Easing isn't going to work? This answer to this question is why those that believe in inflation believe in inflation. The cure may be worse than the disease.

As I am guardedly pessimist, I still hope for a trifecta—spending reductions, tax increases, and lots of easy money. I hope I am wrong and this is just a normal recession. We will know in 3 to 7 years.

Get Out the Tin Foil Hats

Matt Taibbi has written some interesting articles about finance in recent years. Here is the beginning of one such article. 

Conspiracy theorists of the world, believers in the hidden hands of the Rothschilds and the Masons and the Illuminati, we skeptics owe you an apology. You were right. The players may be a little different, but your basic premise is correct: The world is a rigged game. We found this out in recent months, when a series of related corruption stories spilled out of the financial sector, suggesting the world's largest banks may be fixing the prices of, well, just about everything. 

This is pretty much what I have been saying—the whole market is rigged. In an earlier article I suggested various pre-investments one could make. If the whole market is rigged, how is any investment possible? You can speculate, but you cannot invest

What in particular does Taibbi suggest has been rigged? Libor (the interest rates paid in London), and interest-rate swaps (a form of derivatives) are easily-proved examples. 

Another example was the recent drop in gold prices. While gold was due for a correction, someone suddenly dropping 400 tons of gold on the market was bound to affect the price. Using money borrowed at near zero interest rate, 95% of the sale was borrowed. This amount is about 1/6 of all yearly production around the world. 

This sale forced others who had borrowed money to buy gold to sell their gold to meet a margin call. If one borrows 95% of a purchase, and the price drops 5%, the investor either has to come up with more money or sell. More gold on the market meant prices had to drop. The fact this gold did not exist did not matter. This cascade continued for some time. 

Minion of the Grand PoobahThere was an unexpected side effect. Gold and silver were in effect on sale. Retail investors all over the world rushed to buy real gold in coins or bullion form. There is now a shortage of physical gold and silver. As I write this blog post, gold is now headed back up. 

Was this a conspiracy? In one sense yes, in another no—but it is definitely market manipulation. 

Adam Smith suggested in 1776 that if businessmen get together, prices will be fixed. So in that sense these market manipulations are a conspiracy. But no, the businessmen do not get at lodge meetings and take orders from the Grand Poobah.

So get out the tin foil hats, the markets are manipulated.