Is A Better Bubble Inflating the Stock Market?

Many trillions of dollars have been invested by the United States in the financial industry during the last 15 months.  And the pace of the bailout continues to increase.  A lot of real money has been put into the economy.  But it seems to have disappeared.

Except for maintaining the lifestyles of upper management, the financial industry has not done what it is supposed to do with their economic stimulus monies.  It has hoarded all of that money.  And why not?  When prices for everything is falling, stagnating cash is a good investment.  But moving money is what drives the financial industry.  Rest assured that those managers are brow-beating the few employees they have not yet laid off to find a place to invest the real money given to them by the treasury and Congress.

Now a trend spearheaded by US stock markets is forming in stock markets around the world.  The values of stock markets in the Untied States are experiencing the most spectacular rises in their history.  That would be an inviting investment, at least in the short term, for the big bailed out financial industry.

Imagine all of those trillions of dollars of bailout and stimulus money suddenly being invested in stock markets again.  The value of US markets alone would rise at least several trillion dollars.  Financial institutions are leading the charge.  There is no other place, except T-bills…, for them to invest their bailout money.  Could this rise in stock market values simply be another bubble?

Unlike the previous bubble, this rush for stocks is backed by the US Treasury’s bailout funds.  The previous economic bubble, spanning several industries, has been funded by what is known as ‘leveraged’ investments.  That basically means the borrowed money is invested in hopes of making that money back and then some more.  Often money has been borrowed from a source that borrowed money from a source that borrowed money from a source… you get the idea.  The financial industry is at the top of that pyramid.  They can invest at least 9 dollars for every dollar deposited, or invested…, in their institution.  Many, such as Lehman Bros., have leveraged their investment by more than 100 to 1!  Now these financial institutions have real government money to invest.  Now they won’t need to sell to satisfy a calling creditor.

The market’s current inflation is due to the mutual investment of the Treasury’s cash by financial institutions in each-other.  But that money will do the rest of the economy little good.  Manufacturers don’t have customers.  So  they won’t get loans.  Higher stock prices in times like these only help companies that are willing to sell their own stocks for capital.  And that does not help their stock’s price.  The only stable increase in stock prices will be with financial companies that are investing in each-other.

Those of us who cannot afford to take advantage of this new bubble must be content to cheer on the financial superstars that can until this bubble pops too.  The government is going to be compelled to do it to satisfy fearful politicians.  Growing resentment combined with unemployment and a poor shopping experience is stirring up the voters.  Eventually the government is going to take back the bailout and stimulus money.  If that happens before the rest of the economy grows enough to support big financial companies again, then the bubble pops.

(Imagine the insider trading knowledge that federal politicians can peddle in that situation.  They are going to make a killing!)

Democrats Eager To Rekindle Republican Revolution

A revolutionary change is needed to fix our broken democracy.  But don’t expect either of the two major political parties to provide that change.  The Republicans really protect the rich and powerful’s freedom to dominate everyone else.  (They are probably fans of the Marquis de Sade).  Their record while they had control of our government here in the United States has demonstrated that.  Yet the Democrats seem to have forgotten what inspired that so called Republican Revolution.

Can you remember why Newt Gingrich was able to rally the nation behind the Republican Party?  The answer is that people were tired of the secret deal making and favortism of the Democratic Party’s ‘good-ol-boy’ network.  Their way of spending federal money has been based on a racket administered by senior lawmakers.  Democrats have rewarded junior lawmakers for passing special interest legislation that benefits senior lawmaker’s campaign contributors.  In return for their cooperation, junior lawmakers would be given ‘pork’.  That ‘pork’ is essentially a bribe disguised as funding for local projects and public services.  The Republican Revolution’s ‘Contract With America’ has promised to stop that kind of corruption.

Unfortunately the Republicans are at least as intoxicated by power as the Democrats.  During the time they controlled our government, they have created a ‘Pay to Play’ system for lobbyists.  That system allowed powerful special interests a way to bypass the formal leadership structure of Congress and go directly to the Republican’s rank and file members of Congress.  (This system became known in the media as ‘K-Street’, for the name of the street where the most influential lobbyists kept their offices.)  Rather than reducing corrupting influences over Congress, the Republican Pary hid under the bedsheets with them.

Now, instead of a revolution, the wheel of progress has rolled backwards.  This is not referring to the election of Barack Obama.  This is about Congress.  The Democrats have taken back their control.  And they are on a mission to save America’s economy.  But like the Republican Party’s use of the ‘War On Terror’ as an excuse to help the clients of influencial lobbyists hoard wealth, the Democrats are using the resulting financial crisis as an excuse to create a pork barrel bonanza.

The very smug faces on leading Senate Democrats during passage of the most recent bailout package are suspicious.  Those are the looks of people enjoying a feast; they are not sacrificing.  And they know that despite America’s overwhelming disgust with Congress, voters usually support their local representatives.  So, they will probably not be held accountable for their contribution to this financial fiasco.  President Barack Obama will probably take the blame for Congressional dysfunction.  And then Congress is going to welcome back a member of their inner circle.

If history is an indicator of what the future will bring, then we cannot depend on either of the two dominant political parties to correct the way our nation’s government is changing.  The Great Depression and more recent economic downturns demonstrat that both Democrats and Republicans allow greedy market manipulators to undermine our economy.  And we know that both Republicans and Democrats eagerly use government to create for themselves influence pedeling rackets.  The Democratic and Republican Parties have a proven recornd of corruption.

We, that is us individual voters, don’t need to wonder about who the Republican Party or the Democratic Party really represent.  It is obvious that both Political Parties represent very elite groups of very wealthy people.  And those groups have more wealth invested in this rut we are in to leave it behind.  Only a fool believes that wealthy people represent the best interests of regular Americans.  They care about their wealth.  For a full revolution of the wheel of progress, the dominant political parties need to be replaced.

Replace them by voting only for candidates from established political parties that are not one of the two dominant parties.  Do this for each election.  After only six years, there won’t be a Republican or Democrat left in office.  And after only four years, a new decentralized political establishent will begin to run our country as our founders intended.

Oh… Please bless America again.

Short-term Stimulus with Long-term Benefits

Please pardon my absence.  (I didn’t know that I had a few regular readers.)  I have been waiting to see the new administration’s true colors.  Although it is still too early to know them, I am beginning to once again feel compelled to sow my little seeds of thought.  So here is one:

What should the government do to help the economy?

First of all, do not save the companies that crashed full speed into this mess.  They did that despite glaringly obvious signs that trouble lay ahead.  Instead of being careful, short sighted business leaders and investors obsesivly followed unsustainable economic incentives.  If we keep them around to lead after the economy recovers, then they will do the same thing out of habit.

While we are getting rid of those bums, re-invigorate the economy in the short-term by investing in projects that have long-term benefits.  Besides investing in sustainable home-made energy sources and transpertaion networks to do that, also fund education.  Give students or their parents vouchers that will fund the hiring of more teachers.  Give shcools vouchers for hiring construction workers to improve their buildings.  Save the commercial publishing industry, (and access to their low-cost content), by sponsoring a nation-wide marketing campaign that targets the audience of every publication.  Have it encourage American’s to value education, hygiene, and courteousness.  Employ graduates by sponsoring research and developement of technologies that are more efficient.  Then give the results to domestic employers.  Investment in these kinds of economic fields will yield short-term stimulus while providing long-term benefits.

The culture of American business and the irresponsible consumerism it fostered are what caused most of our economic and environmental problems.  The business environment encourages corporate gluttony.  And its leaders are familiar with only that system.  A fresh start is needed.  It is time to dismiss the old corporate guards to find new employment.  They should consider learning a new skill; a sustainable business skill.

In the meantime, our government must take charge.  Only the government has the resources and authority to correct the economy.  It can begin doing that by using short-term economic stimulous money to invest in labor-intensive endevours that provide long-term benefits.  While that is putting money back into the hands of wage earners, the government can reform market regulations.  A network that employs the most talented professionals can be created to develop a system of sustainable economic incentives.  Irresponsible business leaders, by their own hands, have given us this opportunity to replace them and their unsustainable ways.

Bryant Arms

Ticking Inflation Bomb

The front page of the New York Times on 1/6/09 passed on to the public a warning from President Elect Barak Obama. He warned that trillion-dollar deficit spending by the government will likely happen for “years to come”. This spending is supposed to fund the great economic rescue. Barack Obama also acknowledged the burden that this will have on future tax payers.

Most of the money in the world’s failing economy has been invested in US government bonds. These bonds are one of the best ways to keep money safe in times like these. Average Americans don’t have the money to invest in government bonds. If they did, then the economy wouldn’t be in this mess. Wealthy investors now own most of the government’s debt. They fund the government’s deficits. And they will try to sell it when better investments become available.

When the economy finally recovers, these creditors will take back their loans to the government and invest in companies that are poised to supply consumer demand. Investors simply will stop buying new government bonds. At that time there will be only four options for the government: default, raise taxes to pay off maturing bonds, reduce government spending, encourage inflation to make debts worthless.

The United States government defaulting on it’s debt would severely inhibit its ability to run future budget deficits for bailouts. Too many investors won’t buy government bonds if they are not guaranteed. Without funds from government bonds to pay for deficit spending, the United States would be forced to create extra money.

Raising taxes to keep up with the demands from government creditors will be, well, taxing. The effect will stunt economic growth. That defeats the whole point of using government debt to get the economy growing again.

Reducing government spending during an economic recovery is politically problematic. It would stunt economic growth when it is still needed. Government deficit spending is supposed to be what rescues this economy.

Creating extra money, even to pay for bonds, causes inflation. Normally, that discourages both saving and long term investing. Money needs to be spent before it looses much value. So consumers cannot save for major purchases. Commodities get hoarded. In the extreme, a primitive trade and barter economy emerges as the currency becomes worthless.

The good thing about inflation is that the value of debts also decrease with time. As the value of the currency drops, so does the value of the debt based on that currency. Wages go up during inflation. So a borrower will have more money to pay for a debt that is worth less.

For many reasons the result of trillion-dollar deficit spending will inevitably be high inflation. Taxes will not be enough to pay back the bonds used to rescue the economy. The sale of new bonds will not be enough to roll over that debt. Without income from either new taxes or enough new bond sales, the government cannot run a budget deficit. Severely reducing government spending to balance the budget is politically problematic. Eventually, the government will be forced to create extra money to pay its bills.

When the economy finally begins to recover, hoarded cash approximately equal to what investor’s withdraw from the government bond market plus the bailout monies that have been squirreled away will suddenly be dumped into other markets in a spending spree. The supply of goods will not be able to meet demand. Various market bubbles will inflate and pop as investors desperately try to beat inflation. And as the inflation spiral tightens, the spending frenzy will increase.

The government will have several tools available for slowing down the demand driving the inflation when it comes. It could reform the banking system and raise interest rates. But that won’t remove the excess money that would already be in circulation. Taxes can also be used to take excess money out of the economy. But taxes have notoriously uneven effects. And they are not nimble enough to cope with economic changes. There will be few practical options for the government to stop that runaway inflation.

Severely reducing government spending at that time may be a practical option.  Not many Americans or businesses would need to continue receiving government assistance. The economy would no longer be dependent on government spending. And the extra goods, labor, and services available to the rest of the economy after government spending cuts would help increas the supply needed to keep demand under control. It would also reduce the flow of money into the economy. It would be a perfect time to reform government.

Bailout Companies That Keep Workers

I was listening to Alan Chartock on WAMC interviewing Bernie Sanders on Tuesday. And I was thrilled to hear Bernie Sanders say that a business should not exist if it is too large to fail. That is so true!

It should be obvious to all of our leaders that big businesses subvert free market economies like ours; especially when those businesses are too big to fail.

Let me add that even though we are now being forced to bail out those big businesses, we should at least demand that these businesses help the economy… now. They should not be allowed to lay off any of their employees until they return the bailout money. And those big financial companies should not be given another cent until they hire back all of the employees they recently laid off.

That bailout money should have first gone to maintaining the payroll for regular employees. Instead they used the bailout money to maintain the payrolls of highly paid executives who laid off regular workers.

These bailouts are supposed to help regular people. We should not be bailing out companies that are laying off their workers. And if a company comes forward for a bailout saying that it is too large to fail, then we should break that company up.

International Bailout Competition Begins

The US has provided its American automobile industry access to money that it otherwise would not be able to get.  Car companies in other countries around the world say that this bailout is a subsidy that gives American manufacturers an unfair advantage over their foreign competitors.  Consequently, foreign car companies are asking their governments for bailouts too.  Due to the nature of international competition, we can safely expect other industries around the world to behave the same way.

Are Industry Bailouts Legal?

Aren’t the bailouts of industries by the US government a form of subsidies?  I thought those were supposed to be phased out according to international trade agreements.  Doesn’t the World Trade Organization, the North American Free Trade Agreement, and similar trade agreements with the United States threaten sanctions against member countries that introduce new subsidies to protect domestic industries?

The bailouts of the American auto industry and the American financial industry obviously help American businesses compete agianst foriegn businesses.  What will prevent those treaty members from suing for damages or sanctions as a result of the market warping subsidies given by the US government to American businesses?

Russian Styled Centralization Replacing ‘Big Three’ Cartel’s Control Over American Auto Industry

This article by David Herszenhorn and Jackie Calmes titled “‘Car
Czar’ prescribed for automakers” describes a fundamentally flawed proposal to rescue collapsing industries. It would have an
elite group of industry-wide managers led by an appropriately named ‘Czar’ guide the failing American auto industry.

The name Czar reminds us of Russia and its instinct to centralize control
over industries and the economy in general.  That kind of economic
management is what caused the collapse of the former Soviet Union.
Competition is suppressed along with innovation for various self-serving
reasons in economies that are managed this way.

Lack of competition and innovation is also why the American auto industry is failing in the face of foreign competition. The ‘Big Three’ are essentially a cartel that has ruined the American auto industry’s free market. This scheme to appoint a  body of central managers over the industry is only going to enshrine the industry’s fundamental dysfunction.

There is a better way to use the money that would be used
to fund the auto industry’s bailout; and the money used to fund the new bureaucracy meant to manage the industry. Give it to average taxpayers in the form of a voucher. These vouchers
would subsidize the purchase of energy efficient, environmentally
friendly, American made cars. This would let consumers decide what
American auto companies, either old ones or new start-ups, deserve
help from the government.

We can avoid the pitfalls of both Russian styled socialism and US styled free capitalism.  The corrupting and smothering affects of centralized market controls by governments and big businesses are kept in check.  We must restore the rightful status of consumers as the leaders of our economy, for freedom’s sake.

Inflation Is Coming!

Banks can loan out 90% of all of their deposits.  Investments banks and many other financial institutions can invest 100% of their deposits.  What has happened recently is that the banks and other financial institutions have been investing in each other and artificially inflating the value of their capital.

Just imaging the effect of a well regulated bank taking 90% of its deposits and redepositing that money in a neighboring bank.  And that bank, in turn, does the same thing back to the first bank.  The apparent capital of a commercial bank, then, can be extremely inflated.  This effect has been even more extreme in other financial institutions.  More ‘fake’ capital, (money), has also been generated in a similar way by financial markets and by the new fangled products that traded there.  The result is a lot of ‘paper’ wealth has been generated and used as collateral for investing in ‘real’ wealth; such as real estate.

Now, that fake money has evaporated leaving everyone with more debt than real money.  The result is deflation; the value of money increases compared to the value of other property.  In other words, a dollar can buy more tomorrow than it can buy today.  That is why the trillions of dollars injected into the economy by the government are not yet causing inflation.  Those cash injections are only filling in the void left by the evaporation of the fake money.

But governments are clumsy managers.  Chances are they will inject cash until the economy has recovered enough to inspire businesses to spend again.  And for reasons stated in other parts of this blog, that will is going to take an exteded period of time.  By then businesses would have hoarded so much cash that they will go on a spending spree.  This, combined with all of the other cash injected by the government, will inevitably inject too much cash into the economy.

We will experience a lot of inflation when that time comes.

Congress Abandons Consumers

The reason why the economy is collapsing is because too many average consumers have lost their purchasing power. From the beginning of the crisis this has been obvious. So why are policymakers concentrating on implementing a trickle-down approach to rescuing the economy?

They have put their faith in the directors of big businesses to save our economy. Almost all of the cash meant to rescue the economy, (last count = more than 2.7 trillion), has been given to them. This is despite the widespread belief that free markets most efficiently direct investments to where they would be most useful. Our leaders need to remember why free markets work well.

Free markets democratize the economy. They give consumers the power to direct the economy. Consumers do this with their purchasing power. They give money to sellers and investors who offer the best deals for the things consumers want. In a free market anyone can hope to become a self-made business magnate. And the customers get to choose them. Free market economies serve the will of the people.

Our free market economy is quickly disappearing. The people have lost their purchasing power and Congress has abandoned them. Money for saving the economy has been given to the leaders of big businesses. They are not investing that money in people who would compete against them. The directors of big businesses are using their purchasing power to help themselves.  Regular consumers are left to fend for themselves.

Congress’s mistake must be corrected soon. The bailout money is being hoarded by big businesses that are laying off employees. More consumers are losing their purchasing power. If centralized control over the economy remains for the long term, then innovation would probably be stifled by timid bureaucrats and big business leaders eager to protect their profit margins. The situation is getting worse.

Policymakers and Congress can easily correct this situation. Simply direct the bailout money to average consumers. Let them choose which businesses deserve a bailout. Chances are almost everyone will get what they want.