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US Economy: Rudderless and reeling from direct hits

Paul Craig Roberts was Assistant Secretary of the Treasury during President Reagan's first term. He was Associate Editor of the Wall Street Journal. He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. The following article first appeared in Information Clearing House on 16 September 2008. Many thanks to Peter Hindrup for drawing it to Webdiary’s attention.

US Economy: Rudderless and Reeling From Direct Hits
A raid on private pensions?
by Paul Craig Roberts

We were promised a “New Economy” of high-tech tradable services to take the place of the offshore manufacturing economy. Wondering what had become of the “New Economy,” Duke University’s Offshoring Research Network searched for it and located it offshore. Yes, the activities of the “New Economy” are also outsourced offshore.

Call centers, IT operations, back-office operations, and manufacturing have long been moved offshore. Now high-value-added proprietary activities such as research and development, engineering, product development, and analytical services are being sent offshore. All that’s left is finance, and it is crumbling before our eyes.

Independent broker-dealers are disappearing: Merrill Lynch, Bear Stearns, Lehman Brothers. These venerable institutions were too thinly capitalized for the risks that they took. Merrill Lynch is now part of the Bank of America, and Lehman Brothers is history.

Ill-advised financial deregulation led to financial concentration and not to more efficient markets. Independent local banks, which focused on financing local businesses, and Saving and Loan Associations, which knew the local housing market, have been replaced with large institutions that package unanalyzed risks and sell them worldwide.

Regulation over-reached. The pendulum swung. Deregulation became an ideology and a facilitator of greed.

Deregulating electric power gave us Enron.

Deregulating the airlines destroyed famous American brand names such as Pan Am, shrank the number of companies, and caused a decline in service. When airlines were regulated, they could afford standby equipment, and cancelled flights were rare. Today, the bottom line prohibits standby equipment, and mechanical problems result in cancelled flights. When economists calculated the benefits of deregulation, they left out many of its costs.

There are no longer any blue chip companies, which means that investing for retirement has become a crapshoot. People realize this; thus, the privatization of Social Security has no support.

If we look realistically at the US economy, we see that what is not moved offshore is being bailed out. Last year, the US Department of Energy was authorized to make $25 billion in loans to auto manufacturing firms and suppliers of automotive parts. Last week the Secretary of the Treasury took $5 trillion dollars in Fannie Mae and Freddie Mac home mortgages under its wing.

The Congressional Budget Office says this action by the Treasury means “that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget.” http://cboblog.cbo.gov/ Their revenues would be treated as federal revenues, and their expenditures as federal expenditures. If the former were greater than the latter, there would be no reason for the takeover.

The open question is: what do these new liabilities do to the Treasury’s own credit standing?

For now, this question is submerged. The traditional practice of fleeing to the US dollar and US Treasury bonds during periods of financial stress and uncertainty has boosted the dollar and kept interest rates low. But sooner or later the large US budget deficit, worsened by recession and bailouts, and the large trade deficit, which requires constant recycling of dollars held by foreigners into US financial and real assets, will result in renewed effort on the part of foreigners to lighten their dollar holdings.

When this time arrives, US interest rates will have to rise in order for the government to be able to continue to rely on foreigners to recycle the dollars acquired in trade to finance the US government’s annual budget deficit.

The current financial problems have pushed into the background the larger problems of the US budget and trade deficits. Goods and services for American markets that US corporations outsource offshore return as imports, which widen the US trade deficit. Moving production offshore reduces US GDP and employment and increases foreign GDP and employment. Moving production offshore reduces the export capacity of the US economy while raising the import bill.

Therefore, how is the trade deficit to be closed? One way is through the dollar’s loss in exchange value, which would reduce American consumers’ real incomes and leave them too poor to purchase the offshore goods and services.

How is the budget deficit to be closed when jobs are disappearing and GDP (tax base) is being relocated offshore?

Not by higher taxes. Higher taxes are problematic for a recessionary economy in which unemployment, properly measured, is already in double digits ( http://www.shadowstats.com/ ).

Some people have speculated that the budget deficit will be closed by dismantling entitlement programs such as Medicare. However, considering the cost of medical insurance, this would be catastrophic for tens of millions of older Americans.

The more likely avenue will be a raid on private pensions. The Clinton administration’s appointee, Alicia Munnell, as Assistant Secretary of the Treasury for Economic Policy argued that private pensions should face a capital levy to make up for the fact that their accumulation was tax free. I expect that the federal government, faced with its own bankruptcy, will resurrect this argument, as it will be preferable to printing money like a banana republic or Weimar Germany.

In the 21st century, the US economy has been kept going by debt expansion, not by real income growth. Economists have hyped US productivity growth, but there is no sign that increased productivity has raised family incomes, an indication that there is a problem with the productivity statistics. With consumers overloaded with debt and the value of their most important asset--housing--falling, the American consumer will not be leading a recovery.

A country that had intelligent leaders would recognize its dire straits, stop its gratuitous wars, and slash its massive military budget, which exceeds that of the rest of the world combined. But a country whose foreign policy goal is world hegemony will continue on the path to destruction until the rest of the world ceases to finance its existence.

Most Americans, including the presidential candidates and the media, are unaware that the US government today, now at this minute, is unable to finance its day to operations and must rely on foreigners to purchase its bonds. The government pays the interest to foreigners by selling more bonds, and when the bonds come due, the government redeems the bonds by selling new bonds. The day the foreigners do not buy is the day the American people and their government are brought to reality.

This is not the financial position of a superpower.

Will what happened to Lehman Brothers today be America’s fate tomorrow?

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The end of America. Well, 0.3 per cent of it, anyway...

Check this out:

The US economy shrank by 0.3 per cent from July to September as consumers cut spending and companies reduced investment.

Yup, there it is. The end of America.

That is, the GDP of the USA went down zero-point-three percent in the third quarter this year. In this, the "worst economic crisis of our time".

It actually rose 3 percent the quarter before that.

If it goes down again, America is officially in recession.

Not yet, true, but in three months maybe.

Of course, already there are signs the worst of the credit crisis which started all the hysteria is now over.

China and Japan are having a hard time, granted. Not good news for Australia, that.

But it's not quite the cataclysmic collapse of the world economic order, including the destruction of the USA, that everyone was confidently predicting only a couple of weeks ago, is it?

It's a bit like those "imminent attacks on Iran" we kept hearing about for years. And which nobody had even the slightest bit of evidence for.

Never let logic or evidence stand in the way of a good histrionic meltdown, I say. Then just quietly drop the subject when the facts are in.

The "worst economic crisis of our time".  Zero-point-three percent.

Slogans are not analysis

Ernest William: "No matter who their government is, the US has boxed itself into a situation where their economy cannot exist without war."

That's economic reductionism ad absurdum. More a slogan than an analysis. Policy decides where and how economic resources are applied, and these can be moved between applications according to what governments choose to do.

The same resources which go into making a jet bomber can go into making a state of the art airliner.

In fact, in the case of a company like Boeing, exactly that happens.

The new 787 Dreamliner project is not a military application, but carries with it the potential to generate enormous amounts of economic activity.

The commercial decision to invest in the Dreamliner project was informed by commercial, not military contractual, opportunities.

If government held out the prospect of a lucrative defence contract instead, Boeing could well have directed the economic resources away from the Dreamliner project into a defence project instead.

Indeed, it recently was awarded a $7 billion defence contract, but the Dreamliner project was not contingent on the former. It was quite separate.

The whole "economic determinist", "war makes economies work" argument is a futile form of fatalistic thinking that isn't even logical.

If that's how you think, why even bother discussing policy?

You sure?

I think there are many who would disagree including the British government that regularly sends a Royal family member off to visits the Saudis to encourage them to purchase more weapons.

Several European countries probably couldn't survive without their weapons manufacturing industries and sales. We don't even need to discuss the billions that have flowed to USA corporations.

Remember the old Indian adage about posessing a weapon - if you possess one it will be used at some stage. War is profit even if it was a war to defeat the Nazis.

Bite the bullet, I say

That's a fascinating line of argument, Michael de Angelos.

Do you have any facts to support your contention that "Several European countries probably couldn't survive without their weapons manufacturing industries and sales"?

Perhaps tell us which countries? And why they wouldn't survive?

Would Russia be such a country? Or France, possibly western Europe's largest weapons producer?

Or perhaps Sweden?

While you don't feel any "need to discuss" evidence, such propositions would doubtless be much more persuasive if you did discuss the reasons for making such claims.

It's simply not logical, and especially odd for a supposed pacifist, to argue that political leadership cannot prioritise arms expenditure nor that economic activity can be directed towards peaceful ends.

Yet in essence, that's what the "weapons industry economic determinists" are saying. That growth in weapons is intrinsically connected to growth per se.

What a bizarre and dismal outlook.

Thank heavens it's patently untrue.

Threatening hedge funds

Hedge Funds Threaten to Block Mortgage Modifications

The New York Times “Mortgage Threat From Hedge Funds Irks Democrats” reports that multiple hedge funds threatened legal action against banks that renegotiated mortgages in a manner not in their financial interest.

It is disturbing that most financial institutions are doing little to promote the national interest, and Paulson is doing nothing to require them to do so. Paulson’s theme song is Dire Straits’ “Money for nothing, your kicks for free. (I want my MTV).”

Not surprising at all

Banks to Use Bailout Bucks for Mergers

Banks that are too big to fail are using taxpayers' money to make themselves even bigger - which means when they fail the taxpayer will have to fork out even bigger sums.

The heart and soul of the banking system is an abomination. Only when the greedy bastards are dealt with in the courts and replaced with human beings who understand what banking is all about - commercially, productively and socially - will the punters have any chance at all.

Paulson announced earlier this month. “This increased lending will benefit the U.S. economy and the American people,” he said. The banks were supposed to “strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure.”

The weaker banks will use the money to plug their holes, while the stronger banks have the option of using the money to fund takeovers of weaker banks or simply holding on to the money as a cushion in tough times.

The movies have told us

The contributors to this forum have supplied 365 posts regarding the US Economy and next in line is the "Obama Angel of Terror" thread with 229.

Surely no one would deny that the US is the most single influence in the industrialised world. And, may I say, the most predatory.

Over the centuries, dictators have prevailed and failed. Empires have equally done so.

A dictatorship in my opinion is no different to the prevailing political attitude of the nation in question.

The thrust of US democratic terrorism is surely being identified.

Does any Webdiary contributor really believe that the US, over the last century, has tried to line the streets of their puppet governments with gold?

No matter who their government is, the US has boxed itself into a situation where their economy cannot exist without war.

Consider that this disgraceful financial plague we are now suffering has been intentionally created to give a "new life" to the Military/Corporate "American dream".

The extreme capitalists who subscribe to this forum should be reasonably judged by obvious patronising attitudes and false expressions of the oldest of all cons - statistics.

NE OUBLIE.

Movies

Ernest William: "Consider that this disgraceful financial plague we are now suffering has been intentionally created to give a "new life" to the Military/Corporate "American dream".

Are you seriously saying that the current world financial problems have intentionally created? I think we would all like some proof of this.

Swap Aussie home loans for Dutch tulips - they're a better bet

Here's some interesting facts...

  • Australia will now have to generate 4 per cent of GDP to meet payments to foreign holders of its assets. This is twice as high as the burden faced by the US.
  • Australian household debt has reached 177 per cent of gross domestic product, almost a world record:

And driving these two things?

Home mortgages.

The summer of love

Paul Morrella: "The facts are these: Obama has a massive youth following."

A bit like Bobby Kennedy back in 1968. Or, John McCain's generation as it is now known.

I've answered your questions

Scott Dunmore: "Now, back to population, climate change and conservation, or had you forgotten?

I think if Obama (as seems very likely) is elected all these things will be solved. Nothing will actually change - except Federal funding to certain groups, and the doom stories suddenly becoming brighter.

I believe in a society where we all live by the same rules. Basic really. If you have wealth, and pay your taxes, and abide by the law, I don't have a problem. Nobody should have a problem. 

The election of Obama is a good thing for a guy like me. I think it'll reopen a stale debate about what sort of society people really want. Obama will give a stark choice. He's a socialist no doubt about it (the ghost of Jimmy Carter). It'll force Americans to really evaluate if that's what they really want. In doing so the world will move in one direction or the other. We are now finally at the "beginning of a new century". The culture wars of the 60's will finally be behind us.

The facts are these: Obama has a massive youth following. It'll be these people over the next thirty years that decide the direction of the world.

The facts are also: Many of those young educated supporters will face a reality that they'll be working harder, have less opportunities, pay much more tax, and they'll earn less then we did. What will come of that will be in the lap of the future Gods.

I don't think European socialism will be good for America, and I don't think it'll be good for the world. Hopefully it causes a return to real capitalist spirit.

Falling out.

I trust not, Malcolm B Duncan.

I see that I have misrepresented myself.  My statements would have been better phrased as questions, because I did not make clear that I was passing on impressions and comments, with a complete lack of any real knowledge.

I understand that your attitude is that this will prevent families becoming homeless.  Yes?  Obviously a good thing.

Disparity

F Kendall "Can't we do better than such a disparity?

Countries can do anything they like. They merely have to change their own laws. The American Government could for example take the 180 million dollar house off a person (it happens in Russia all the time), and even declare themselves a socialist government. They may have a hard time finding buyers for the house (people are wary of investing in something that may not be theirs). Though, thats never stopped Russia.

Disparity is part of life. I wish I played golf like Tiger, and I guess if they cut his legs off I might. Outside of that it's not going happen.

If you live in a capitalist society expect disparity with wealth. That's the nature of capitalism, which is competition. Some will be bigger winners than others. I long ago accepted that rather basic fact, and now hope that people choose to use their wealth for good intentions. Most people generally are good at heart, and of course there is a minority that never will be.

There really are some basic truths. If you're a specialist doctor you will receive more (money or otherwise) than a trench digger in any society. What the specialist doctor has is rarity of skill. The law of supply and demand doesn't change in any situation.

The fact is that the top earning ten percent in America pay 80 percent of income tax. This figure will continue to rise. Add to this generational change and that's a disparity. The ticking time bomb that none dare speak its name. If America for whatever reason was to lose that top ten percent (going into the future especially), nobody has to be a genius to work out the ramifications. I know much of the same disparity is across the western world including Australia. That's OUR biggest problem!

A tax on consumption would mean that these top ten would still pay more tax. Your examples of Lear jets etc. No taxes on production would add incentive to all classes of people. For all intents and purposes you're making tax a personal choice.

Until distortions are taken out of economies the problems that we're seeing we will continue to see. It's obvious to anyone that looks (McCain, Obama, Rudd etc) that this present situation cannot continue. The nature of democracy dictates that truth isn't rewarded. People don't want the truth, they want the goodies. So this slide will continue until it can slide no more. We'll all know when that day arrives.

PS Wealth disparity and other moral arguments isn't really my scene. The economics of a situation are either right or they're wrong (economically). Morals are a separate issue.

PSS Florida and Texas are interesting because of their property rights. One cannot have one's primary property taken. One can effectively be bankrupt in America and still keep a primary residence (of any value) in Texas and Florida. That's why guys in, say, Enron switched major dollars into their residences in Florida and Texas toward the end. That does distort the property market to an extent.

Bullshit?

What a vehement response to a suggestion, Malcolm B Duncan.

I don't understand what the fact that your parents were raised in this area - at some  time or other - has to do with the issue of rent control.

Are you willing to expand on this a little? Did rent control affect them in any way?  Rent control is what we are discussing, is it not?

The suggestion of places built for  "workers or tenants" is intriguing. Which category were your parents in? These days, one hopes that they are synonymous. 

How times change.

What was the suggestion?

I don't want to fall out over this but I don't think you have the vaguest idea what you are talking about, F Kendall.

ALL of my grandparents were proctedted tenants under the 1948 Amendment Act.  Their rent was controlled.  That was how all their children got a good education (from State schools).

I used to be able to stand at the front fence at 34 Narelle Street, North Bondi as a child and see the Bridge - from the gate - as you said hello to the postie.   From the back of me Dad's place, one got a different view of the same Bridge.  Didn't know the Paddo postie - he deliverd to the front door.

When I was born, all we could do was rent: some slum called 20 McLeay Street.  Hilarious stories.  Real Lennie Lower yarns.

Dad worked hard and eventually bought a house.  Still works hard and he's only 79.  Want an invite to his 80th?  Keep January 3 free.

My parents had to pay key money to get a flat.  Get the picture about where I am coming from?  We rent.  I own nothing apart from my personal possessions and my library.  Now, that's a business decision some would say about where I have ploughed my earnings, such as they are, and that is a fair criticism because all of them have gone either into the practice or bank interest or on lifestyle but it all goes.

As to your specific question, my parents were children. 

My kinda man

"or on lifestyle but it all goes."  You reminded me of George Best Malcolm. When questioned about where all the money he had made from soccer had gone, his reply ran along the lines of "Well, I spent a lot of it on fast cars, booze, women and gambling. The rest I just squandered."

I should have been so lucky.

"It depends how one looks at a situation"

Paul Morrella, you must be getting tired of using that line of "personal perspective thing"...er, it's just a refusal to answer the question, is it not?  And, you have used it on all the threads, absurdly about bubbles, and elswhere?  It's an evasion of issues that you don't  want to address?

"Personal perspective".  Right.  If the house in Florida that echoes your (self perceived) status costs $83 million, and has to be stocked with staff, lear jet etc, then a $300 million bonus is barely adequate. And, there are business rivals out there whose houses cost $123 million.  Is that what you mean?

Or are you speaking of "poor" societies, like that of Western Samoa, where each unit of antibiotic medicine is sold separately, at a significant price?

Can't we do better than such a disparity?

"It depends how one looks at a situation," says Paul Morrella.  Yes, Paul.  Look at it from what is right, and look at it from what is wrong. 

Easy, isn't it?

MBD fyi

Malcolm, following your earlier, this may be of interest.

Deutsche Bank Foreclosures Tossed Out of Ohio Federal Court - “They Own Nothing!”

Disagree, Malcolm B Duncan

Because it led to the world that Ruth Park described in her famous series, where the rent was far less than necessary to maintain the joint.  Hence the Padddo slums; hence the gentrification when/as it lapsed.  Hence, as Ruth Park apologises, it leads to the multistorey housing com excrescences.

Not so long ago here where a landlord, anxious to build on the rent-controlled premises, either tried to burn or bulldoze it down ... can't rememeber which, but I know that that house is gone and his new house reigns.

I have the same philosophy as you re tenants. However, come rent control and I would not rent at all. An empty house is far easier to sell than a rent-controlled one.

Bullshit

Just complete bullshit, F Kendall.  My dad grew up in Paddo.  My Mother grew up in what was then the new suburb of North Bondi.

Those places were built either for workers or tenants.  Have a walk around: any terrace will have one big building which was for the builder.  The rest were for the tenants who provided the cash-flow.

Wealth means different things to different people

F Kendall "I noticed that you described yourself as "a reasonably wealthy person" in Climate Science for Dummies on 6th August, 2008, and was quite chuffed by your evident progress a few weeks later when, (I think), you described yourself as "wealthy" with no qualifier'.

As I wrote: it's a personal perspective thing.

It depends how one looks at a situation

Scott Dunmore: "Leave aside the fact that the RBA's policies are for the time independent of the government of the day, for you it seems money supply is an economic entity whereas for me it means the supply of money and for too long now, money that didn't exist. When my chef asked me where have all those trillions have gone, I had a hard time explaining to him it never existed in the first place. A mirage that disappears when you get close to it".

Money is a human concept used as a medium for the exchange of "things". You're getting the physical presence of money mixed up with valuation. All that's happened is that valuations have changed. Something is only worth what another is willing to pay. We've reached the upper limit in many things and are now in the process of regression.

"Well, you put policies in place."  Who's you; government? Hang on Paul, you can't have it both ways; it's either regulation or no regulation. Shut up shop, go back to tariffs and scrub free markets?

Individuals can take steps - isn't government really only a reflection of a majority of individuals? I don't remember advocating regulation. A good system is one that rewards effort and doesn't reward sloth. Something for nothing if you like. Not only is it a good system, it's the only workable system. We're now seeing what happens when this becomes distorted.

Your air of studied calm detachment is, I find, becoming slightly irksome.

I've seen it all before, and so have you. There isn't any need for panic or prophecies of doom. The easiest way to handle a problem is face it head on. Every problem has a solution - it's only a matter of finding it.

Now Paul, while I can agree with you to a certain extent, ("wealthy" people I know are ever crying poor mouth, the cost of everything and complaining about the tax they pay,) it is, as you say, relative but easily assessed. You own a harbourside mansion, an investment portfolio, a yacht and a Merc or whatever. You're wealthy. C? simple.

Probably a lot of these people are facing their own sub-primes, I don't know. Credit is an illusion not only inflicted upon certain types of people. People weigh up what they believe is "fair". If they believe they're being treated unfairly, they move to greener pastures. They take their money and whatever else with them. There'll always be a place in the world, somewhere, for people who wish to be wealthy. There'll always be a place that encourages those feelings. If you don't want them somebody else always will.

Unanswered questions

If you're going to lecture me Paul would you please refrain from using my own words to do it? "Money is a human concept used as a medium for the exchange of "things".  is at least the third occasion you've done it.

It's not me that's confused re money and value. I know full well that valuations are meaningless until a sale is made.

No, you're wrong about the "personal perspective" thing. It's a matter of statistics although individuals might argue where to draw the percentile line and I'll make a bet that the richer one is, the higher the mark.

Now, back to population, climate change and conservation, or had you forgotten?

Malcolm B Duncan

Wasn't rent control a disaster last time around?  

F Kendall

Not if you were ALL of my grandparents.  Or most of the poor living in Sydney or other parts of NSW.  Might have been a problem for landlords but who gives a stuff about the rich?

I've been a landlord and I always kept the rent low to keep a good tenant.

You know, renting, the sort of thing TOM knows so well.

Rich

"I never know what people mean when they talk about wealth".  Paul Morrella, how can that be?

I noticed that you described yourself as "a reasonably wealthy person" in Climate Science for Dummies on 6th August, 2008, and was quite chuffed by your evident progress a few weeks later when, (I think), you described yourself as "wealthy" with no qualifier.

"Wealth" is the word that people use about their own finances:  they tend to call others "rich" or "filthy rich".

Things

That's correct Malcolm, the rebels can just leave the keys in the letterbox and walk, when their asset becomes a liability. If foreign investors weren't paying attention then they are now.

Another interesting thing is if one defaults on their mortgage, which has been consodlidated into a security, then sliced and diced into investment packages, then who holds the title?

It's a funny old world where the accumulation of wealth is encouraged, initially for reasons of welfare and security; I've always felt most secure (and free) when I have naught, well, enough to get by. As such, like Malcolm, I chose to live asset free; you are the target of none.

Personally I've never been attached to things for things become the baggage of your enslavement.  Maybe you never truly own anything, it owns you.

Does the US have a Torrens System?

Justin Obodie, you raise a very interesting question to which I do not immediately know the answer.  I shall research the problem and get back to you.

As far as I know, the rebel colonies do not have a Torrens System, so the transfer of land would still be controlled (subjecct to individual State Legislation) by common law transfer by deed.  Boring to the rest of you I suppose but fascinating to me (Real Property has always been one of my loves and deep fascinations as a lawyer - I think I may be the only person in NSW who has a book called Irish Land Law - couldn't resist - no wonder it was on remainder).   

I suppose it might come down to the bundling of the securities being secured by no more than a mortgage by deposit of the deeds evidenceing the chain of title in which case one would be in a Doe d Doe situation vis a vis the last transferee.  That might mean, in a lot of cases, that the correct title holder could not be identified.  Take the Freddies and Fannies: does the Bush Administration now become the holder in due course?  What happens if the holder of the mortgage files for part 11 Bankruptcy?  Dunno actually, English and Australian laws are complicated enough without bothering about what a bunch of puritan hicks have done to themselves.

Although I do have a paying brief at the moment which may mean I have to become very well acquainted with Chapter 11.

Why do people deal with anyone outside the country?  It was so nice at the beach yesterday. 

You tell me what you mean

Scott Dunmore "Paul, I kinda see where you're coming from but this "The "government" controls the money supply."  flies in the face of what has been happening. Patently governments have had no control of money supply".

Central Banks dictate the rate of interest (money supply). Perhaps you're saying Central Banks aren't a branch of Government? I will say that some Central Banks are more powerful than others. Make no mistake, Governments can change the current policies at any time.

"Produce more than one consumes"  What , world wide? what is the point of that and how could that be achieved now? No manufacturing capacity and no capital to put it in place. Not that capital is required as Hitler proved in the thirties.

Well, you put policies in place. Unfortunately these things take time and foresight. The current democratic system of government, doesn't reward such efforts. That's why we have people handing out the "Christmas money", well, because, because, you're there.

Care to address the other points I raised?

I don't see a return to the great Keynesian theories of the past, if that's what you mean. Sure, some may try and they'll fail. The system isn't in place for such a return (and it'll be much less so going into the future). I could give you a whole number of reasons why if you're interested.

The only fair and rational tax system, by the way, was the original one. Tax wealth, nothing else.

I never know what people mean when they talk about wealth. It's usually a personal perspective thing. Fair is nice, it doesn't automatically follow that fair makes a good system, even a workable system.

Que?

Paul, I think we have a communication problem. It probably stems from the fact that I don't do econospeak.

Leave aside the fact that the RBA's policies are for the time independent of the government of the day, for you it seems money supply is an economic entity whereas for me it means the supply of money and for too long now, money that didn't exist. When my chef asked me where have all those trillions have gone, I had a hard time explaining to him it never existed in the first place. A mirage that disappears when you get close to it.

"Well, you put policies in place."  Who's you; government? Hang on Paul, you can't have it both ways; it's either regulation or no regulation. Shut up shop, go back to tariffs and scrub free markets? I would, Keating's level playing field was ever an illusion. I'll totally agree with you re the handouts; as dumb an idea as I've heard. King Knut or what? This tide is coming in fast.

Now I don't remember mentioning Keynesian economics but I do remember bringing up the subjects of over population, climate change and conservation.

Your air of studied calm detachment is, I find, becoming slightly irksome. None of this stuff matters to you? Is it all about the "bottom line'? It is for me but I've got a different bottom line; far deeper.

"I never know what people mean when they talk about wealth"

Now Paul, while I can agree with you to a certain extent, ("wealthy" people I know are ever crying poor mouth, the cost of everything and complaining about the tax they pay,) it is, as you say, relative but easily assessed. You own a harbourside mansion, an investment portfolio, a yacht and a Merc or whatever. You're wealthy. C? simple.

At this point I'm going to acuse you of being disingenuous.

Sorry, you've named the wrong culprit

Scott Dunmore: "'Laissez faire' is the culprit Paul."

The problem is that there isn't an economy that's truly "laissez faire". It's a myth.

Most people never learn from situations such as the one we are presently witnessing. I mean, common sense would dictate we ask those people that are presently "making money" what's going on. No, that'd be too easy. So we ask business journalists (a contradiction in terms), academic flakes, politicians etc, etc etc. Basically everyone who didn't pick anything correctly.

The "government" controls the money supply. A bank merely facilitates what the government is looking for. That's why the idiocy of government owned banks and "extra regulation" doesn't hold any water. An example: everybody agrees that asset prices are over valued. Everyone agrees that loose credit is the culprit. So we have the American and Australian Governments threatening banks about now withdrawing that credit! You have in fact governments doing exactly the opposite to that which they condemn. It's absurd.

So why would a government-owned bank not make easy credit available? We know in the case of Freddie and Fannie (semi-government) that's exactly what they did. And why would regulation work when governments are asking for the opposite of what the regulations are meant to put a stop to? It just doesn't stand up under the most basic scrutiny.

The way out of this problem is simple. Produce more than one consumes. So why would the Australian government come out with the latest package? It's called churn. That's why the Australian surplus is a mirage. They put the money out there, and then they accept it back through taxation, churn it, and put it out there again - value isn't added, money is. It makes the books look good, it certainly doesn't address fundamental problem. It's a lie. And like all lies it comes into problems when found out. Exactly what's happening at the moment.

Ask yourself one simple question. If we were to currently live in a world barter system, would we be seeing the current daily price fluctuations?

If one makes doing nothing more profitable than doing something, what's the logical conclusion? Now be truly honest with yourself. And that my friend is the heart of the problem.

A true tax system would'nt tax production and would tax only consumption. Of course the nature of democracy (majority wins) will always mean this is a pipe dream. And whilst these distortions exist there will always be a small amount of people, who see through them, and who profit from them. And I don't care what form of government we have: it has always been this way, and it'll always be this way.

Farbeit from me to deconstruct

The current exchange between Paul Morrella and Scott Dunmore raises some interesting questions. I'm not sure if anyone has commented on it here but, as I was discussing these mortgage problems with one of the learned friends the other day he made the point, remarked on in the newspapers, that in the US, lenders have no recourse to the borrower.

That might come as a surprise but it is so.

Most people, and certainly sophisticated people like most Webdiarists, understand the concept of borrowing: you borrow the money, you have to pay it back. I suspect most of the next decade of my life will be spent doing what I have become expert at: ensuring people do not pay it back. Be that as it may, the way mortgage law has developed in the world apart from the rebel colonists, All the Russias and China, one gives a personal pledge to repay. That means the debt is not just secured against the land itself but is personally guaranteed. That is, all one's assets are available to repay; it not just the land. (The principal reason I have no assets.) What has lunged the world into the current crisis methinks is (a) that foreign lenders did not realise that was how domestic debt operated in the rebel colonies, and (b) they were so stupid they thought the bubble would never burst.

Well, get ready for reality kiddies: we are going to see either bankrupt families homeless, or moratorium legislation and rent-control. I'm in favour of the latter and the last. A civilised society does not see people homeless or starving or in preventable ill-health. Are we a civilised society here in Australia? Ask an aboriginal over 90 from the remote Northern Territory, then ask yourself.

In agreement, sort of

Paul, I kinda see where you're coming from but this "The "government" controls the money supply."  flies in the face of what has been happening. Patently governments have had no control of money supply.

"Produce more than one consumes"  What , world wide? what is the point of that and how could that be achieved now? No manufacturing capacity and no capital to put it in place. Not that capital is required as Hitler proved in the thirties.

Care to address the other points I raised? Never mind about what they taught you at the Ayn Rand School of Economic Philosophy, what's your take on the situation? Your selectivity is disconcerting at times.

The only fair and rational tax system, by the way, was the original one. Tax wealth, nothing else.

Wall Street Monsters

This is worth a read: Wall Street Monsters

The primary practical objective of this corrupt trio (JPM, GSax, FDIC) is to avoid Credit Default Swap fires, which would bring an end to their reign of terror. This USEconomic failure is in progress and is unstoppable. The 1930 Depression resulted after monumental credit abuse from the bottom up, as hundreds of thousands of people leveraged investments 10:1 with stocks primarily. The 2000 Depression will come after monumental credit abuse from the top down, as hundreds of big financial firms leveraged investments by 7:1 and 20:1 with bonds primarily. The most absurd of all is the CDO-squared, leveraging upon leverage. Total seizures have crippled the banking system. Short-term credit has largely vanished, as letters of credit are routinely not honored at ports in the United States. The panic will continue, especially when supplies dry up.

Albatross habits

Now I've known for a long time Justin that albatrosses don't snort and they mate for life so what's this about an ex? Mark you, I wouldn't blame an albatross for searching further afield; after all only getting it once a year is more than a bit dismal and then only after much bill crossing and smoodging. Me, I'm a two bottles of leg opener man.

All levity aside thanks for the link; as scarier a picture as one would not wish for.

I wish I could remember with whom I was debating this months ago.  Geoff was in there somewhere but I remember that was about banks lending money that didn't exist. My chef asked me yesterday, "trillions lost; where has the money gone?" Once again, the medium is the message, or was.

Could have been Eliot when I described the US as a dead man standing.

China will suffer as much as any other country if not more. It has changed it's economy from a rural based one to an industrial one; kept it's currency artificially low and invested all it's profits in another country that is about to go belly up. Shades of the late twenties only this time the position is reversed. The US will be the defaulter nation and a bloody big one at that.

Soar easy, may you float over the southern oceans forever.

Paul Morella, if you are still thinking this is a cyclical correction, may I suggest you take a hard look? For a start, boom/bust events are not cyclical; a better model is wave formation and in this case the wave is a tsunami. The sea goes out and people rush to the beach to take advantage of the phenomenom.

"Laissez Faire" is the culprit Paul. A seismic shift to the left is aready under way and no ,I don't think that is a good thing. It will take the form of National Socialism, the acronym for which is "Nazi". I wont go into it further as I do not want to pre-empt a thread Fiona  is about to put up. I might get around to writing my own thread starter in the form of "Open Letter to the Prime Minister". I will but I've got to recover lost data first.

As catastrophic as this might seem, it's not the biggest challenge facing humanity; in fact it's a distraction.

You can guarantee that climate change and conservation are going to be put on the back burner and the biggest elephant in the room, the biomass of humanity, will continue to be ignored.

Afbatross

Eliot: "Do you think any Afro-Australians will become Prime Minister?"

Probably around the same time we elect an albatross for PM.

Indigenous Americans in Congress

Justin Obodie: "Eliot, I wonder if the US will ever have a native American Indian as the President?"

Maybe if Republican Congressman Tom Cole, a member of the Chickasaw Nation, or Senator Daniel Akaka, a Polynesian American, decide to run.

You never know?

Do you think any Afro-Australians will become Prime Minister?

Let the good times roll

Andrew OConnell: "For anyone who's interested in finding a bit more about the man (and his wife) and is unblinkered by ideology, I recommend a look."

I will admit that Obama supporters go beyond ideology, they've moved to fantasy. He's the only guy I know that says something, and people tell you what he really meant to say.

Between the current crop of money printing fools - which Obama wishes to take to a whole new level, the idiots at the NY Times, and a misfit collection of performing seals (Madonna, Bon Jovi etc) the next four years should be fun.

Thanks to burning records most of these celebrity dupes are forced onto the live circuit to pay for their own sub-primes. I hope many of these cretins are willing to accept payment in shells, and/or start doing some wealthy Arab birthday parties.

Obama's a hologram?

"The great thing about hip hop (real hip hop) is the lyrics are raw and unlike Obama real". 

Paul, I watched a lovely video on the interweb and unless they've done the full Rimmer on him, I'm convinced that he actually exists.

 For anyone who's interested in finding a bit more about the man (and his wife) and is unblinkered by ideology, I recommend a look.  He strikes me as a very good (and real) man indeed.  Whether or not that is enough for him to overrule the MIC and all the other bastards who seem to be actually running the show and actually make a difference remains (hopefully) to be seen.

Tony Mundine for PM

Eliot, I wonder if the US will ever have a native American Indian as the President?

Indeed you never are too old, Ernest

"Actually the first troops withdrawn from Vietnam and not replaced were the 8 RAR Battalion and they marched in Brisbane on 13 November 1970.

Never too old to learn are we Eliot?"

Ernest, I know you ex Navy types have a few troubles with the army structure so I thought I would point out that 8 RAR is in fact a Batallion. The correct terminology if you use Batallion and Regiment is 8th Batallion, Royal Australian Regiment..

See, you never are too old to learn are you, Ernest?

Come off it

G'day Craig Warton,

I agree that one is never too old to learn of course, but Battalion was thus spelt when my brothers served in the 6th and 9th Division Battalions. When I served in Canberra W/T station as a PT instructor, I had a fair amount of contact with the Duntroon cadets and the RAR Battalion, and my dictionary still spells it as Battilion so I am trying to learn where you are coming from.

Really, it seems a petty issue to me but I would like to know how you arrived at that spelling - or was that just a diversion?

Cheers Ern G.

Spelling mistakes

Ernest, your brother may have served in a Battalion in the 6th or 9th division, but he did not serve in the 9th Division battalion.

Relax Ernest, I made a spelling mistake when correcting your error in terminolgy. You can rest easily knowing that Jews, Americans, Neo cons or Howards new order were not involved in the mistake.

What was the RAR battalion at Duntroon? I could understand a detachment from one of the Battalions being there but I have never heard of a complete Battalion being there.

I look forward to your proof

Oh yes, what did you think of the swings in the by-elections in NSW on the weekend?  22% swing to win a seat is certainly impressive as I am sure you would agree.

Perhaps just one more effort

Actually the AIF was entitled the Australian Military Forces in WW 2 because it was more than just infantry - but it was seldom used.

John Hirst Edmondson, the first Australian to be awarded a Victoria Cross during World War II, was born in Wagga Wagga in New South Wales in 1914. His parents' only son, Edmondson was 26 when he enlisted and was posted to the 2/17th Battalion AIF.

By April, German forces had begun to cut off and surround Tobruk. For eight months, from April to December 1941,Tobruk was besieged and Australian forces, notably the men of the 9th Division, the 18th Brigade of the 7th Division and RAN ships of the famous 'scrap iron flotilla' played a prominent role in the town's defence.

And - the make up of the military from the War Memorial:

  • 10 to 12 make a squad
  • platoon is 2 or 4 squads 40 to 100 men
  • company is 3 to 5 platoons 70 to 250 men
  • battalion is 2 to 6 companies about a 1,000 men
  • regiment is several battalions about 5,000 men
  • brigade is couple or 3 regiments 10,000 to 20,000 men
  • division is 2 or more brigades

NE OUBLIE.

Well done Ernest!

Ernest, congratulations! You have finally noticed that a Battalion is indeed part of a Division.

We dont normally call it a Squad now. The usual term used in the Army (now at least ) is Section.

I thought AIF stands for Australian Imperial Forces.

Now that you understand the structure of the Australian Army, how about them by elections eh?

No he didn't. That was Billy McMahon.

Ernest William: "When Labor was elected, Gough Whitlam brought them home."

No he didn't. That was Billy McMahon.

"In August 1972, shortly before being defeated in a federal election, McMahon announced that Australia would begin withdrawing troops from Vietnam."

Honestly, you guys have got to stop making up this stuff.

Withdrawals faux pas

Eliot Ramsey:  "In August 1972, shortly before being defeated in a federal election, McMahon announced that Australia would begin withdrawing troops from Vietnam." 

Must mean final withdrawal because upon research I found a piece entitled "Did the election of Prime Minister Whitlam in December 1972 lead to Australian troops being returned from Vietnam?"  No it didn't.

"By the time the Labor Government was elected in December 1972 there were only about 120 Australian troops in Vietnam - as training officers with the Australian Army Training Team Vietnam (AATTV)."

"The decision to scale back Australia's combat contribution was made in 1970, and all Australian combat troops had been returned to Australia well before December 1972."

Actually the first troops withdrawn from Vietnam and not replaced were the 8 RAR Battalion and they marched in Brisbane on 13 November 1970.

Never too old to learn are we Eliot?

Cheers Ern G.

Governor of California

Justin Obodie: "I wonder if we will ever have an aboriginal PM?"

Come off it. This isn't America.

Maybe a token Koori for Governor General? Or "President of Australia" if Kim Beazley turns down the job? Perhaps Kathy Freeman?

In fact, come to think of it, even America has a better chance of getting an Aboriginal president, or at least Governor of California.

Just imagine

Whatever your political beliefs may be, our people must be feeling more secure because we have a Labor Government.

At least during my lifetime, the perception of Labor was "steady as she goes" and there was a feeling that the government of the country was aware, and feeling, that the safety of our nation was in peril. 

If you check our history you will find that in dire security or financial problems, our democractic voters have opted for Labor.

Fiona: I can think of several million people who would not have agreed with you during the Whitlam era, Ernest, and almost as many (if not more) during the Hawke/Keating governments. Do please try for a little perspective.

Indisputable?

We have had 31 Prime Ministers up the present time, of which 13 were Labor; 7 Liberal and 11 others of various names.

Concerning the Great Depression I found the following information but with my comments:

Plummeting export income and consequent worsening of the trade imbalance had been dealt with by the Bruce-Page government by exporting gold reserves. Even before James Scullin (Labor) was sworn in, the Commonwealth Bank chairman had sought a meeting to advise the incoming Prime Minister of the effect of this trend given the high level of Australia’s overseas debt. It was not the collapse of the New York stock market in October 1929, but the burden of loan repayments due to London bankers that revealed the stark situation for Australia when parliament resumed in March 1930. (Sounds like history repeating itself?)

As far as I can gather, R.G. Menzies (United Australia Party) was the first Australian PM to declare our country at war. (Previously Britain did it for the entire Empire.) He sent our troops to fight overseas and when the people voted in Labor, Prime Minister Curtin brought them back to defend Australia.

Menzies then sent our troops to fight in Korea and followed that with the infamous ballot of death to send our conscripts to fight in Vietnam - and then retired. When Labor was elected, Gough Whitlam brought them home.

John Howard joined the United Nation's troops in Afghanistan and then joined the US’s pre-emptive invasion of a sovereign country Iraq. He did not declare war. He sent our military to Iraq and with Labor elected again, Prime Minister Rudd will bring them back.

The Howard/Costello Liberal government acted almost identically as the Bruce-Page (Nationalist Party) government in increasing Australia's foreign debt to alarming proportions before also being ousted by Labor.

People will reach their own conclusions, but to me, given the current world financial crisis and our foreign debt, the political will of the Australian people have reached out once again to the steady hand of Labor in desperate times.

PS. Gough won against a very unstable post-Menzies Liberal Party.

Cheers Ern G.

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