The game is on! In one corner we have Deflation, pounding his chest and bragging of his recent exploits knocking down home prices and flattening the CPI. In the other corner is Inflation, shrouded under a cape and being coaxed to come back out for the next round by trainer “Helicopter Ben” Bernanke.

A boxing ring is defined by ropes and posts. The ropes of this ring are big banks and investment banks and the shadow banking system of credit default swaps and other derivatives. The ropes are being held up by the posts of government intervention and there are gaps and openings that can easily allow a contestant to get out of the ring and injure the innocent spectators.

Deflation is a powerful force that is driving down values. There is a tendency for this force to be self-sustaining as lower values discourage investment which produces job losses and slows economic activity, causing more job losses and even lower values because people cannot meet their financial obligations and so either assets are sold or they are never purchased in the first place.

Inflation on the other hand has a hidden power of his own. Beneath the cape hides the government, powerful corporate interests aligned with government, and every social welfare special interest and lobbyist known to man along with thousands of others of whom you have never heard. When Inflation enters the ring and begins pounding back at Deflation, his real power will still be hidden back under the cape.

We have seen this fight before. Deflation will land some heavy blows and win a few rounds. But in the end, Inflation will come charging back and throw Deflation out of the ring. Many bystanders will be injured, some fatally, as the effects of the contest spill outside of big banks and breaks small banks and businesses as well as household budgets.

It will not be a pretty contest and how long it will take to play out is unknowable. My guess is that it will take longer than we expect and that there will be some back and forth which may seem to make the final outcome uncertain when in reality it is not.

Eventually, the ability to print money will re-inflate asset values, although it may not be the assets the government would choose. Inflation sometimes lands in the stock market, sometimes in real estate, sometimes in natural resources, and sometimes in commodities or precious metals or collectibles. When the great contest is over, some will be rich and some will be broke. I hope you will not be among the latter.


Tim Geithner – The Perfect Treasury Secretary

Last January I said Tim Geithner was the perfect nominee to run the Treasury Department because he would do anything the Obama Administration told him to do.  Now the New York Times says he “blasted top regulators in an expletive-laden tirade” to try to get his (Obama’s) way in writing new financial regulations.

The full story is here.

Cash for Clunkers or Jack for the UAW

Does this make sense?

America is experiencing a financial crises because we have borrowed too much money and we produce too few products within our borders. So, we have borrowed one billion dollars from the Chinese so that a few people can buy more fuel-efficient cars.  Dealers say some of these trade-ins are low-mileage cars in amazingly good condition and that most of them are paid for. Not only is the government going further into debt, but so are most of the buyers.  Now they want to add another two billion dollars to the program. And this is going to help us how?

The only way out of the situation we are in is to decrease our consumption, increase our production, increase our savings and decrease our debt, both private debt and public debt. If you can bear to see how fast it is piling up, take a look here.

This program is selling cars and making people feel better. Bread and circuses.

Bonuses, Banks, and the Quick Fix

Investment banks pay annual bonuses that seem ridiculous to average people. To the tune of $32.6 Billion in 2008.  Four thousand six hundred seventy five people received at least one million dollars each. Read the details here if you want to know more about it.

There is no need for Congress to step in and limit this pay nor to bail out the banks! All that has to happen is for the existing regulators (primarily the Fed) to tell the firms that they will be allowed to fail if they do not immediately raise more capital which can be raised from the bonus-rich employees buying stock in their companies.

Regulators have this power and always have had the power to do this; they just found it easier to go to Congress and scream “crises, the sky is falling and you have to do something.”

Rich bankers can either let the golden goose from which they get their annual eggs die, or they can pony up to keep the firms alive. It is called capitalism and it works. It makes bankers prudent because they realize they are playing with their own money.  As it is now, it is heads they win, tails the taxpayers loose. 

Taxing ordinary Americans to pay for these bailouts is obscene and immoral. When your congressional representative is home for “recess” in August, I suggest you tell them that if they ever vote for such a thing again you will come to Washington with your pitchfork to chase them out of town.

That is how you make a “representative” actually represent you instead of K Street lobbyists. Believe me when I tell you there will be more attempted bailouts and more bonuses in the future.  It may be three months, six months, or a year, but America’s financial problems are far from fixed.

Life and Death Under Capitalism

One of the most important court cases in U.S. history will be heard  tomorrow, June 5th. It pits Indiana State Treasurer Richard Mourdock against the United States government. While the case is nominally brought against Chrysler in the Chrysler bankruptcy, the reorganization plan was put together by the Obama Administration’s Auto Task Force.

You can read the Bloomberg story here. The crux of the case is this: Can the U.S. government take assets that are pledged as security for debts due to existing creditors and give those assets to someone else?  The Auto Task Force plans to give creditors twenty-nine cents on the dollar from the TARP funds and to give the pledged assets to Italian auto maker Fiat.

If this is permitted, then over 150 years of well established law will have been tossed into the dustbin of history. Not to mention that this is clearly an extra-legal use of TARP funds. You can listen to a good interview of Richard Mourdock that took place on WOWO radio by clicking here. (Note, the interview is in two parts and the link has Mourdock’s name misspelled as Maurdoch.)

This is why this case is so important. Secured creditors accept a pledge of specific assets in return for loaning money to a borrower. The creditor has the ultimate right to take possession of those assets and sell them to satisfy the debt. That is how it is with the mortgage on your house, for example.

In the words of Mourdock, “this is far bigger than Chrysler or the State of Indiana,” it is “important to our capital market system.” If secured creditors are not truly secured, then lenders and investors will demand higher rates of interest and may not lend at all to some industries. The government’s position in this case is penny wise and pound foolish.

Who is benefiting? Primarily the UAW and the U.S. Government. Part of the irony of this case is that the Indiana Treasurer is suing on behalf of two union pension funds (Indiana Police and Indiana Teachers) and one other state fund. He is totally alone in this fight. Every other creditor caved in under threats, and pressure from the White House. The California state retirement fund walked away,for example, because the state is asking for a federal bailout.

This case represents a blatant misuse of federal power to abrogate private property rights. It is totalitarian in its nature and represents a major threat to capitalism itself. If we the people lose this one, then who will lend to auto companies, to other unionized industries, or to the government itself? Those who do so run the risk of being labeled as greedy, unpatriotic, speculators who will be publicly excoriated by the White House press office and may look forward to threats of physical violence and death, all of which occurred in the case of Chrysler’s creditors.

The case, In re Chrysler LLC, will be heard in the Second Circuit Court of Appeals and could move quickly to the U.S. Supreme Court regardless of the outcome because Bankruptcy Judge Arthur Gonzalez as scheduled the transfer of Chryslers assets to Fiat for June 15th.

Fiction, Freedom, and the Forth Estate

We have all watched a magician perform illusions that leave us spellbound. “How did he do that?” we ask ourselves. We understand there is always something going on that we do not see and that a big part of the illusion is accomplished because our attention is drawn to what the magician wants us to see. The “show” is a fiction that hides what is real.

America is witnessing a kind of magic show right now. Great attention is focused on what President Obama says while what he does is accepted with little scrutiny and no serious questioning because of his personal charisma and popularity.

Elected Republicans and the RNC are almost entirely silent. It is only Newt Gingrich, Dick Cheney, and a few others who seriously question what is happening. In response we see stories from the old media about “moderate” Republicans fearing the party has left them. These stories are designed to silence elected Republicans so they will not say what they are thinking.

The President says he is concerned about the budget deficit. Yet he helped pass the $700 Billion TARP bill. He asked for the $787 Billion stimulus bill to be passed in January so he could sign it quickly once inaugurated. It shot through Congress so fast that no one actually read it before voting on it. The President has said “no more earmarks” and yet the bill he signed contained thousands of earmarks.

The President said no lobbyists would be appointed under his administration. The exceptions came almost immediately and then last Friday the policy was scrapped with little fanfare. Watch what he does, not what he says.

The President says he wants to nationalize healthcare to save money. Really? Do you believe more people can get more care, and better care, for less money? No one past the second grade should buy that illusion.

The President wants to limit carbon emissions to save the planet. Or is it to create an enormous new tax system that will undermine our ability to be globally competitive and justify regulating virtually every human activity?

The President promised “change.” No one seemed to question whether this “change” would add to our freedom or take away our freedom. We should keep in mind the wise words of Gerald Ford who observed, “A government big enough to give you everything you want is a government big enough to take from you everything you have.”

The U.S. Constitution was set up to preserve our freedoms by establishing a limited government that would only have a few definite, enumerated powers. The Forth Estate (the free press) was to be the watchman on the wall that assured our freedoms would never be swept away.

The Forth Estate, in the form of newspapers, NBC, ABC, and CBS, has fallen under the spell of the magician. Thank God for the Internet media, talk radio, and FOX News or there would be no Forth Estate as conceived by the Founders.

Most of what the federal government does today is far beyond the enumerated powers. Because no one seems to question anything government does, even the legislation that passed last week is ignored. Consider the TARP bill that had the express purpose of protecting financial companies from collapse. President Bush used some of that money for the first round of bailouts of the auto companies. Where was the Forth Estate?

Now there are credible allegations that auto dealerships designated for closing by the Administration were selected based on political contributions. This is a serious issue. Where is the Forth Estate?

Never forget that government is a monster that always seeks to feed itself and to grow and to devour anything that stands between it and the satisfaction of its appetites. Freedom is a precious thing, and once taken away is not easily regained.

Freedom depends on discovering truth and opening it to the light of day. Fiction, illusions, and flowery speech will not preserve freedom. Will the Forth Estate fight to preserve freedom, even its own freedom?

Madoff Gets a Bum Rap!

Bernard Madoff has been widely excoriated for running the largest Ponzi scheme of all time. If only it were true.

Bernie took money from investors while promising solid, but not spectacular returns. He used money from later investors to pay off earlier investors and skimmed off a bit for yachts, jets, villas, and other goodies too numerous to mention as his take for keeping it all afloat for years.

Now, I understand that fifty or sixty-five Billion dollars seems like a lot of money to most folks but it is chump change compared to what is actually the world’s largest Ponzi scheme. Congratulations, because you are part of it!

It is called Social Security. The government took money from early workers (beginning in the 1930’s) and gave them great returns. Among the first was a woman who paid in less than fifty dollars and then collected benefits until she died at the age of 100.

Bernie Madoff skimmed off money for his personal expenses; your government has effectively done the same thing. Your dollars have paid for national defense, welfare, food stamps, roads and bridges, waste, fraud, and abuse, and a host of other things. Bernie didn’t put IOU’s in the till for the things he bought. Your government did put in IOU’s, but the money is gone, accounted for, and spent.

Bernie made a lot of people happy with the fine returns he provided for many years. FDR and successive congresses have made voters very happy by providing lots of goodies from the federal treasury for many years.

Bernie has gone to jail because he could not find enough new investors to keep it all going. The same thing will happen eventually to Social Security. Younger workers will revolt.

The Trustees just told us the money will be gone sooner than they thought it would last year. They are talking about when the IOU’s run out. But there are only tax payers to pay the IOU’s and those same taxpayers will have to pay for current government expenses at the same time they begin paying off the IOU’s in just a few years.

This is what is known as a train-wreck and it will happen sooner than you expect. The only difference is that no one will go to jail. The guilty parties are voters who have kept on, and keep on, electing politicians who rob them of their freedom while promising “security” in return.

Those who make this bargain end up with neither. Bernie Madoff is probably collecting his Social Security payments while in jail. If only we could lock up Congress with him!