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Nov 27

Written by: Diana West
Friday, November 27, 2009 5:32 AM 

In response to my marking the intersection of cutting-edge Glenn Beck and catching-up New York Times on financial dysfunction and inevitable-seeming collapse on Tuesday -- underscored by yesterday's "shock announcement" that Dubai was unable to meet its debt payments (couldn't have happened to nicer bunch of guys) -- financial hawkeye George Ford wrote in Wednesday with the following thoughts:

1. There's a lot of talk about debt this week because of Barry's meetings with the Chinese. It's logical to assume that the Chinese leaders read the US alternative media and the WSJ, and threw some pretty good arguments at Barry about what he is doing. Hence the NYT puts as breaking news on the front page an article discovering massive US debt, to show the Chinese we are concerned about it. Why else would this be the lead story? And quoting the high priest of fixed-income, Bill Gross, the author last year of the widely-used term "new normal"? He is to Obama-economics what Robert George is to contemporary sex education. So the Times is obviously trying to appear like a responsible in-house publication of the administration and on the side of fiscal prudence, to lay groundwork for when Barry pays some lip-service to the dangers of leverage. But of course it's all smoke.

(Reminds me of the recent WSJ article about the Yale economist who has discovered that leverage distorts market prices.)

2. Using perfect timing and coordination with the Times front page story, the White House is now "considering" a bipartisan fig-leaf commission to deal with this pesty debt issue, as it is obviously getting in the way of the larger agenda of government expansion. And what better way to put the Good Housekeeping Seal of Approval on tax hikes than a bipartisan panel decrying the evils of deficits?

3. You have noted that the article sidesteps bizarrely but typically the $787 billion porkulus, the omnibus bill, the healthcare bill, the cap and trade, and of course the talk of now doing a "real" stimulus bill with GOP-inspired tax cuts.

4. We may be moving into the second phase of the Crash, the first phase being Lehman. The new phase is the realization that the market is gone for good, or at least for now, and has been replaced with the political economy. See this article about the permanent TARP. Or the articles about the rampant and open corruption in hedge funds and their corrupt relationships with enormously powerful gatekeepers at the California and New York State pension funds. Or the 60% rise in the Dow. What is happening is assets prices crashed last year, and we the taxpayers bailed out the financial firms who bet wrong. They have taken that money to plug holes in their balance sheets, and then borrowed at 0.25% interest rates against that new capital we gave them. The strategy is to borrow as much as possible (Goldman possibly $1 trillion, or 10 times the money we made available to them) and buy anything with it, figuring that by the time you have to pay it back, the dollar will be debased by inflation, so you're getting a discount. I believe that people are starting to realize that the bail-outs are not temporary, and that the current stock market bubble can be manipulated for another couple of years, or even until 2012.

5. Any president who gives KSM a criminal trial is capable of doing ANYTHING with fiscal and monetary policy, even stuff we can't currently imagine.

6. Barry does not believe in the market. He doesn't believe that a man can improve his station in life by building strong balance sheets and good cash flow. I have worked with people like this in Indonesia. They only believe in making money with public money. Everything else is for suckers. The purpose of a state bank is to raid it. So when Barry saw the prognosis of the economy a year ago, he thought, forget the path of painfully squeezing debt out the economy, paying down our debts, slow growth for a couple of years, which is what the old remedy would have been: a period when everyone pays bills, consumes a little less, there are bankruptcies, and the debt is back to a manageable level in 2 years. Barry said, forget that, let's just print money, borrow against the future, and assume everyone's debt!

(Background: Total debt in the US grew to $52 trillion in 2008, when GDP was about $14 trillion. That means a debt level of 375% of GDP. In 1929, the ratio of debt-to-GDP was 190%. In Japan, the ratio was 270% at the peak of their asset bubble in 1989.)

(Background: The San Francisco Fed warned in May about the painful effects of the winding down of the high US consumer household debt, and many economists detailed the factors that could intensify the deleveraging on the economy, such as lack of credit, high unemployment, factory over-capacity, falling wages, and declining net worth -- all of which contribute to the future envisioned by Bill Gross: the "new normal" of slower growth, narrower profit margins and decreased asset returns.)

7. So, the prudent view calls for investors and consumers to prepare for a long period of deleveraging. But Obama is exploding government debt to counter this trend, and in essence destroy our relationship with the market, and turn us toward the government, with some similarities to the economies of Indonesia, Malaysia, Thailand and Singapore leading up to the 1997-98 crash in Southeast Asia, awash in US dollars propping up asset values.

8. The bad news is that China, far from being a reliable engine of growth, is showing all the signs of Southeast Asia circa 1997, with horrible implications for us.

9. Even worse is that Japan is about 10 or 20 years AHEAD of the US on this track of using leverage to cover up structural deficits. If Japan suffers a currency crisis, it would happen very quickly and the effects around the world would be devastating.

See why I waited till the day after Thanksgiving? Read and think.

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