2009: When False Hope Is Gone

With most pundits assuring us that the stock market has hit its bottom and with a new president about to take office, many have a great hope that the worst of the economic crisis is behind us. That the worst is behind us is almost certainly false. As the famous line goes, “It’s hard to make predictions—especially about the future.” With that in mind, here is how I see 2009.

Of course, I must issue the traditional caveat—that the following is not intended to be investment advice. Market timing is an incredibly difficult art and very few have been successful at it over the long-term. The truism in that last statement has been used by many who advocate a buy and hold strategy. However, a buy and hold strategy in this current environment is very problematical.

Home Prices: After falling about 20% last year, home prices are back to their March 2004 levels. In history, there has never been a bubble that ended before prices had fallen to below pre-bubble levels. It is hard to date the beginning of the housing bubble; but if we say it began somewhere around 2000, clearly housing prices will be falling much farther from here. Survey after survey shows that the average homeowner believes that their home has not fallen in value; housing will not be at the bottom until this psychology turns.

Houses are something you consume; they are not something to invest in. Like a new car, a new house begins to fall apart from the moment you purchase it. When the average individual realizes that truth, we will be at the bottom.

Stocks: Despite the tremendous amount of liquidity that the Fed has been injecting into the system, deflationary forces are for the moment stronger. The stock market is almost certainly not at its bottom. Extreme excesses cannot be corrected in a single year, particularly when the government is doing everything it can do to prevent the liquidation of bad assets.

Nothing goes straight up or straight down; and it is very likely that in 2009, within the continued bear stock market, there will be at least one very powerful countertrend rally. As the 1930s demonstrated, great fortunes can be made in a short time by those individuals who are smart enough or lucky enough to trade those countertrend rallies. The obvious corollary is that you can lose a lot of money in a short time if you are wrong.

Commodities and Inflation: For now oil and other commodities have succumbed to deflationary pressures. However, the Fed has injected an unprecedented amount of money into the banking system. According to Robert Higgs “since August, the amount of excess reserves has risen from $2 billion to $559 billion.” Banks are not lending out this increased liquidity—partially because of decreased demand and partially because of increased lending standards. Eventually, when these reserves make their way through the banking system, the money supply will increase by a huge amount. Some are forecasting hyperinflation as a result. Clearly the Fed does not want that—in a hyperinflation the very fabric of civilization is destroyed.

The Fed is playing a dangerous game, and I find it impossible to forecast when and if the turn—from deflation to hyperinflation—will occur. In 2009, the forces of deflation will not be overcome easily—and we can only hope that they are not overcome easily, since hyperinflation will devastate the economy beyond what we can imagine. Here is one warning—if hyperinflation visits us, the current bull market in treasury bonds will turn out to be the mother of all bubbles. Be on the alert for the turning point in interest rates.

Healthcare: 2009 will represent a transition year; increasing numbers of individuals will begin to realize that the healthcare model that is in place—take no responsibility for your health, eat bad food, don’t exercise, and then expect to get patched up with a pill or surgery—is no longer sustainable. In a national conversation—forced on us by the economic depression—we will hear about reducing entitlement spending.

Although we will begin to realize that there is not an unlimited amount of funds to be spent, in 2009, reactionary forces—those are the forces that demand that government covers everything in healthcare for everyone—will still be on the ascendancy.

Economic Ignorance—Again 2009 will mark a transition year; there will be growing interest in conversations about the proper roles of the Fed, of government, and of free markets. As with healthcare issues, this conversation will expand; but the forces of ignorance will prevail. For now, Keynesian nonsense –namely, that you can spend yourself to wealth—is on the ascendancy. Individuals completely ignorant of economics and history tell us time and again that we should not repeat the errors of Herbert Hoover; then they go about replicating the policies of Herbert Hoover and Franklin Roosevelt.

In a recent interview, Alice Rivlin, former director of the Congressional Budget Office, was urging consumers to spend. “It doesn’t matter what you spend it on,” she said. The newest Nobel laureate in economics, Paul Krugman, writing in the New York Times took the position that states should not have to keep a balanced budget. “The nation,” he said, “will be reeling from the actions of 50 (the governors of each state) Herbert Hoovers.” When my twins were nine years old, they read Richard Maybury’s Whatever Happened to Penny Candy and they already understood more about economics than Rivlin and Krugman. There will be no end to the economic crisis until this Keynesian nonsense is repudiated in the same way that medicine has repudiated bloodletting.

Jeff Macke takes on the “too big to fail” nonsense that we hear our “leaders” cite:

When we look back on 2008, statements such as “(company XYZ) is too big to fail” will be every bit as absurd as anything from the Great Depression. The very idea of the government being powerful enough to “save” corporations in a recognizable form to the benefit of shareholders is simply asinine. It’s roughly the same as declaring a person “too important to die.” Regardless of whether you are flesh and blood or an obsolete organization, there is no bargaining with death. It comes to us all; even if you have the ability to print your own money.

Winston Churchill said, “Some regard private enterprise as if it were a predatory tiger to be shot. Others look upon it as a cow that they can milk. Only a handful see it for what it really is—the strong horse that pulls the whole cart.” The good news is that Churchill’s “handful” of people has shrunk to such low levels, that the numbers can only grow from here.

Conclusion: Did you ever hear this story?

There’s a story about a man who falls over a cliff, and on the way down he grabs hold of a root. He’s hanging there by this root, and he’s hollering to high heaven, “Help me, God! Please, help me!”

And God says: “Sure, I’ll help. What do you want me to do?”

The guy says: “Save me. Get me down from here.”

God says: “OK, trust me, and let go of the root.”

After a pause the guy says: “Is there anybody else up there?”

Collectively, we are hanging on to a lot of false beliefs and hoping that we can be saved without letting them go. Fortunately, for the future of the planet, this is impossible. 2009 may be treacherous to our finances, but each of us can still be a “beneficial presence” in the world as we extend a spirit of kindness and generosity to others.

When false hope is gone, real change can begin.

Sweet Are the Uses of Adversity

In Shakespeare’s As You Like It, Duke Senior, his throne usurped, has been exiled into the Forest of Arden. Even so, life is not all bad he allows, for “sweet are the uses of adversity.” Duke Senior does not say he’s glad for adversity, but he would prefer to use his adverse circumstances wisely rather than to sit around complaining.

As a nation we can begin the process of using our adverse circumstances wisely. Government, at all levels, counts on the ignorance of the public in order to be able to continue their disastrous policies. Let us begin the process of remedying deficiencies in our own education. Monetary policy make headlines almost daily, and I urge everyone to read and study Murray Rothbard’s classic What Has Government Done to Our Money? This monograph is available online for a free download at the Ludwig von Mises Institute.

We are continually told the nonsense that the cure for the bursting of our credit bubble is an unprecedented flood of new money and credit. Can simply increasing the money supply cure our economic woes and restore prosperity? Common sense tells us that it cannot, and Murray Rothbard explains why:

When the supply of any other good increases, this increase confers a social benefit; it is a matter for general rejoicing. More consumer goods mean a higher standard of living for the public; more capital goods mean sustained and increased living standards in the future. The discovery of new, fertile land or natural resources also promises to add to living standards, present and future. But what about money? Does an addition to the money supply also benefit the public at large?…

Whereas new consumer or capital goods add to standards of living, new money only raises prices–i.e., dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange value. Other goods have various “real” utilities, so than an increase in their supply satisfies more consumer wants. Money has only utility for prospective exchange; its utility lies in its exchange value, or “purchasing power.” Our law—that an increase in money does not confer a social benefit—stems from its unique use as a medium of exchange.

Yes, it is true that prices for most goods are not rising right now, but they are not falling as rapidly as they would otherwise be falling. Government who purports to be an advocate of affordable housing is desperately trying to stop housing prices from deflating and, in the process, is keeping housing out the hands of those who were prudent savers. Chrysler cars will sell at some price—that price may be 50% or more off—but why is Chrysler any different than your local clothing store where clothing is being marked-down 80%? Eventually, because of excess money creation, we may get the worst of all worlds—depression followed by hyperinflation.

So why is the Fed doing what it is doing? If new money is not a cure, why pump up the money supply at all? The key to understanding the Fed’s actions is the fact that the new money is not distributed equally to all of us; and those who do get it do not receive it at the same time. Despite Ben Bernanke’s nickname of “Helicopter Ben”—derived from a famous speech he gave that the Fed could spread money around through a helicopter drop—the Fed would never spread money around by a helicopter drop. New money always goes to benefit the Fed’s politically connected cronies, and it is not distributed equally.

Who are these cronies? Consider this report from Associated Press: “Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits last year.” These banks have so far received $188 billion in taxpayer’s money. Among the other findings:

Lloyd Blankfein, president and chief executive officer of Goldman Sachs, took home nearly $54 million in compensation last year. John A. Thain, chief executive officer of Merrill Lynch, topped all corporate bank bosses with $83 million in earnings last year. J P Morgan Chase chairman James Dimon ran up a $211,182 private jet travel last year when his family lived in Chicago and he was commuting to New York. The company got $25 billion in bailout funds.

I could go on and on, but who is not getting the money? Probably those of us reading this blog post are not being bailed-out, but at least we have shelter and food. The LA Times recently reported on the growing homeless crisis in Los Angeles with poignant examples: “The father who pretends to work through the night at a computer at a 24-hour office supply center so his child can sleep safe and warm in a stroller…the mother who takes a baby to the emergency room at 11 p.m., knowing the odds are they won’t be called until morning and can pass the night in the waiting room.”

There are many more stories that appear every day, and they are heartbreaking. How can this be America? Trillions transferred from the middle class and poor to the incompetent, stupid, and criminal among the wealthy. I don’t believe in an Old Testament God that punishes nations and individuals for their misdeeds, but I do believe that individuals and nations that fall out of step with the principles of liberty suffer the natural consequences.

We all need to contribute in our own way to those who are suffering—direct contributions of food and clothing are important—but long-term, the only way out is education that corrects our mis-education. Please read What Has Government Done to Our Money?

Who Are the Real Un-Americans?

Perhaps my experience is not so different from yours. I have owned four non-Japanese cars—my Chrysler caught on fire while I was driving it, my GM stranded me 300 miles from home on a bitterly cold day, the engine of my Ford had the dangerous habit of turning itself off while I was driving the car, and my Volkswagen blew its head gasket at 12,000 miles. In contrast, my Toyotas and Hondas have never needed more than routine maintenance. Am I biased when I shop for a car? Of course! Am I un-American when I buy a Japanese car? Of course not!

Consider the new automobile bailout. Although Senate Republicans have temporarily defeated this measure, President Bush has announced he will spend part of the $700 billion already allocated on such bailouts. We need not revisit again how blatantly unconstitutional such actions will be.

In one way it is easy not to get too incensed about the money—it is comparatively small, “only” $14 billion; and we are ready numb to this reckless assault on our economic future. Yet, we all know that this $14 billion is just a small down payment towards many more future payments. How could it be otherwise? If $14 billion was enough to save GM, Chrysler, and Ford, private investors would be rushing to get in on this marvelous bargain. GM and Ford stock have almost approached the penny per stock level; and if the forecasts are correct of those who advocate the bailouts, this would be a tremendous opportunity for investors to get rich. Of course, we know it is no opportunity. Those who promise us a return on our taxpayer investment are either ignorant of the basic laws of economics, or they are lying. They are promoting the interests of a few over the rest of America.

We are told that GM, Ford, and Chrysler are victims of a crumbling economy. This is either a confusion of cause and effect or another calculated lie. Their failing businesses are not the effect of a crumbling economy, they are one of the causes. Lew Rockwell has calculated that GM loses about $4000 for every car they sell. Thus, they are a cause of wealth destruction in America. This destruction of wealth was hidden for many years by the cheap credit bubble of the Fed. Left to its own devices, the marketplace will begin a healthy transfer of capital and labor away from failed firms to those firms that can best serve the most urgent needs of the consuming public. This will promote—rather than hinder—an economic recovery.

In the 1980s, Japanese cars were imported rather than built in the United States. Perhaps you can remember when Lee Iacocca successfully fought for import restrictions on Japanese cars. He helped to fan racism against Asians, and the quotas helped to push up the price of the average car by $2500. In 1982, in a hate-filled rage, two laid-off autoworkers killed Vincent Chin, a Chinese-American who the men mistook as Japanese. This past Friday, in a Detroit suburb, the tires of five “foreign” cars—a Honda, a Hyundai, a Mazda, a Toyota, and a Volkswagen—were lashed, and “Buy USA” was scrawled on the sides of the vehicles.

I put “foreign” in quotation marks because chances are that most of those cars were American-made. Buying a Japanese car built in Tennessee or Kentucky instead of a GM car built in Michigan is no more un-American than buying oranges grown in a grove in California instead of a grove in Florida. The United Auto Workers (UAW) as well as Ford, GM, and Chrysler, would like to confuse us on this point; but we don’t have to believe their self-serving nonsense.

Let’s make no mistake about it; automobile bailouts are about supporting firms and unions who are more interested in serving themselves then in serving Americans. It is their selfishness—of course, selfishness is not limited to the automobile industry—that is at the heart of our problems. By selfishness I mean they want to get without giving. The foundation of capitalism is to get by giving. In other words, you earn a profit by satisfying the most urgent needs of the public better than someone else does.

Even before there were Japanese auto plants in America, those who bought Japanese cars manufactured in Japan were improving the health of the economy of America. If you doubt that, consider how impoverished America would become if it stopped trading with the world. The results would dwarf the catastrophic effects of all the bailouts to date.

Leo Gerard, president of the United Steelworkers, advocated lawlessness last week: “If we have Republicans who oppose us, we are going to take to the streets, we are going to occupy places.” Gerard was referring to a proposed $900 billion “Main Street bailout.” Not content with having helped to destroy the steel industry in America, the unions are now threatening overt criminal behavior. No doubt these threats and actions will become increasingly commonplace as the economic depression, created in part by their previous actions, gains momentum.

Kathy Ward works in a Nissan plant in Tennessee. Her pay has been cut this year by about $5000, and she rightfully resents the fact that she will be forced to support UAW members who have refused to take a pay cut. She’s glad she still has a job and wants to see the Nissan plant continue to be prosperous. Unlike her UAW counterparts who have the power to steal from their fellow Americans, she has no such power.

Is stealing a strong word? Would you voluntarily send a check to the UAW or Chrysler or Ford or GM? No, I didn’t think so. Steal means “to take [the property of another or others] without permission” and this is exactly what is being done.

You would think the choice would be clear—voluntary transactions that raise the well-being of both parties in a trade, such as Honda selling you a new Accord, or involuntary transactions that steal from one group to give to another. America continues to make the wrong choice, and we will all suffer in the process. Those who advocate such theft are the real Un-Americans.

The Bravehearts of Mumbai

It is hard not to notice the contrast between the heroism of ordinary Indian citizens and the seemingly inept official governmental response to the terrorists in Mumbai. In the Mumbai train station for instance, over 60 policemen (admittedly, underarmed) were on duty; the gunmen were out in the open; yet, not one of the policemen attempted to shoot the terrorists. In the hotels, about 10 gunmen, up against a force of over 1000 commandos and other law enforcement officials, were able to stay alive for over two days and wreak havoc.

In the same train station, hotels and in restaurants, ordinary Indian citizens behaved heroically risking and in some cases giving their lives to help their countrymen and foreign nationals. In contrast, those in the military and police forces were bound by their “rule books” and bound by a rigid command-and-control hierarchy that was issuing the plan. Their response was slower and less fluid than the situation demanded. How could it have been otherwise? The terrorists were not operating under a central command.

This is not a post written to criticize the Indian military. In the United States at the Columbine High School massacre, innocents were slaughtered or died of their injuries while the SWAT team “staged” outside the high school for an inexcusable amount of time before responding. Unresponsive bureaucracies know no national boundaries.

But this is a post about the heroism of ordinary Indians and the great cosmopolitan city of Mumbai—a city of Hindus, Moslems, Christians, Buddhists, Sikhs, Jains, and Jews—where tolerance is the norm.

One of the targets of the murderers was the Chabad House—an orthodox Jewish outreach center located in a poor, Muslim neighborhood—run by Rabbi Gavriel Holtzberg and his wife Rivka. Immediately, Mumbai taught the world of the character of its citizens—residents in the area, presumably Muslims and Hindus, pelted the terrorists with stones in an attempt to stop them from entering the Chabad House. Some of these residents may have paid with their lives. I wish I could tell you more of their heroic actions, but no account I could find—Indian or American—had more details.

The terrorists entered the Chabad House. Two Indian nationals, employees of the House, Sandra Samuels, a Christian nanny to toddler Moishe Holtzberg (the son of the Rabbi and his wife), and Zaki Hussein, a Muslim, were able to escape the initial carnage and hide themselves away.

The next morning, Sandra heard little Mosihe crying out for her, “Sandra! Sandra! Sandra!” Leaving her safe nest, Sandra made her way up to the second floor where she found two-year old Moishe crying over his parents’ wounded or dead bodies. She scooped up Moishe; and then with Zaki standing watch at the door, Sandra fled the building.

“This baby is something very precious to me; what else could I have done?” Sandra said rhetorically as she tried to explain why she was not a hero. Indeed, Sandra, Zaki, and the neighbors of the Chabad House had functioned as human beings were meant to. There was no time to consult a rule book, there was no one to issue commands, they had no thoughts of “what is in for me.”

Bryon Katie in her book A Thousand Names for Joy has written: “To think that we need sadness or outrage to motivate us to do what’s right is insane… Love is action. It’s clear, it’s kind, it’s effortless, and it’s irresistible.”

In our own lives today, we can honor the bravehearts of Mumbai by doing what we truly value. Doing what is precious to us and not what is expedient or easier, because Love is indeed effortless.

In a Mumbai synagogue, Zaki comforts an inconsolable Moishe at the memorial service for his parents.

Sandra is now in Israel living with Moishe. Since Mosihe only responds to her, she has vowed to remain with him for as long as he needs her.

In 1970, Neil Diamond wrote a song “Done Too Soon”—a simple song that may well have been about the common humanity that the victims of the Mumbai murderers share. The last verse is:

And each one there
Has one thing shared:
They have sweated beneath the same sun,
Looked up in wonder at the same moon,
And wept when it was all done
For bein’ done too soon.

Things Are Not So Lovely Here

In 1908, when she was a young teenager, Anna Freud and her father Sigmund went for a walk in an upper class neighborhood in Vienna. Sigmund Freud said to his daughter, “You see those lovely houses with their lovely façades. Things are not necessarily so lovely behind the façades. And so it is with human beings too.”

Consider these two events this past week: The trampling of a Wal-Mart employee on Long Island and Robert Rubin’s defense of his record at Citicorp. On the surface, these events would seem to have nothing to do with each other. The shoppers at Wal-Mart were rightfully labeled as “savages” as they viciously trampled a 34 year-old employee while rushing the entrance on the Friday after Thanksgiving. So frenzied were the shoppers that they tore the doors off their hinges as they entered the store at 5 a.m. When I first heard the story, I hoped I was reading something from a satirical website; tragically, this wasn’t the case.

After the tragic death in Wal-Mart, police and Wal-Mart employees tried to clear the store. Shoppers initially refused to leave. As they did leave, they were screaming, “I’ve been on line since yesterday morning.” It is easy enough to be appalled at such behavior, but we should be equally appalled at Robert Rubin’s behavior.

Robert Rubin, who has been called by former President Clinton the “greatest secretary of the Treasury since Alexander Hamilton,” has received bi-partisan acclaim as one of America’s best “public servants.” (If you read Thomas DiLorenzo’s new book Hamilton’s Curse you will see that Clinton’s comment is not exactly high praise.) Currently, Rubin is a director and senior advisor at Citicorp. Rubin probably never shops at Wal-Mart; and no doubt, he would never engage in a shopping stampede. He doesn’t have to. Citicorp has paid him $115 million in pay since 1999 for sitting on the board of Citicorp and being an “advisor.”

Yes, Robert Rubin has a lovelier façade than the Wal-Mart shoppers, but let’s open the door and look in on Rubin’s “house.” The sad truth is that stripped of his lovely façade—his station in life, if you may—Robert Rubin has not behaved differently than the shoppers at Wal-Mart. Both deny responsibility and treat other people as objects that are in the way of getting what they so rightly deserve.

Robert Rubin justified his huge salary by bragging, “I bet there’s not a single year where I couldn’t have gone somewhere else and made more.” Made more for doing what? Rubin was not responsible for operating any of Citicorp’s businesses; “he told colleagues he wanted more time for activities such as fly fishing.”

Then why would Citicorp want to pay him such sums for doing very little? Was he paid because of his expertise or his brilliant forecasting ability? Again no. About the sub-prime mortgage meltdown, Rubin claims, “There was virtually nobody who saw that low-probability event as a possibility.” Rubin is either ignorant or a liar. Many, including myself, forecasted this meltdown which, rather than being unlikely, was almost a certain event.

Even today, Rubin is unrepentant about his role in Citicorp’s decisions to allocate more of its resources to risky assets saying that they could have been successful if they had had “the right people, the right oversight, the right technology.”

This is complete nonsense. Every year, unprepared hikers in the White Mountains of New Hampshire, ill-equipped to hike given the weather conditions, put the lives of rescuers in danger. For such hikers to argue that their hike would have gone alright if it hadn’t snowed is about is disingenuous as Rubin claiming that Citicorp would have been successful, despite their irresponsible decisions, if they had the “right people.” Hiking up Mt. Washington (only Mt. Everest has claimed more lives) in a blizzard and expecting rescuers to come and save you is as irresponsible and cruel as Rubin’s Citicorp investing in toxic junk and then expecting the taxpayer to pick up the tab. Incidentally, while Citicorp gets bailed out by the taxpayer, New Hampshire sends the rescue bills to the irresponsible hikers.

So why did Citicorp pay Rubin $115 billion dollars? In the words of The Wall Street Journal Rubin is an “uberfixer”—a powerful Washington insider. The Journal reminds us that “Rubin tried to use political muscle to prop up Enron, a valued Citi client. Mr. Rubin asked a Treasury official to lean on credit-rating agencies to maintain a more positive rating than Enron deserved.”

In a free-market, there would be no jobs for deal-makers with Washington connections; Washington connections would be worthless. Rubin was overpaid by $115 million dollars; his real value was zero. As for the stampeding shoppers at Wal-Mart, they killed someone trying to score a big screen television at a bargain price. Before our unfolding economic calamity is over, the actions of the Rubins of the world will cost far more lives than the stampede at Wal-Mart. How? A depression means more malnourished children, more crime, and untold human suffering. Because of his “lovely” façade, none of these victims will ever be traced directly to Robert Rubin.

Am I being too harsh on Robert Rubin? Robert Rubin has become very rich profiting off his political connections. His actions are generated from the same egoic mindset that puts a big screen television above a human life. Let’s make no mistake, Robert Rubin should be held in the same contempt as the stampeding shoppers at Wal-Mart.