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He was wearing my Harvard tie! Can you believe it? My Harvard tie! Like, oh sure, HE went to Harvard...

Washington is getting the drop on Hollywood when it comes to needlessly remaking a beloved cinema classic into something tragic. They've cast Barack Obama as Billy Ray Valentine to star along side Timothy Geithner as Louis Winthorp. Or maybe Clarence Beeks? The Secretary of Agriculture?

"The market's been built up for the last few weeks to this. When you anticipate something so much, it never lives up to expectations. That's where we are," said Joe Saluzzi, co-founder of Themis Trading. "Now [the selling] is going to feed on itself," and it could "get vicious."

Saluzzi compared the scene at 11 a.m. EST, as traders waited for the announcement with their trigger-fingers at the ready to the famous floor-trading sequence in the movie, "Trading Places." In that movie, as today, traders waited quietly for a crucial announcement, and then all hell broke loose. This time, however, the announcement concerned the future of the U.S. financial system, rather than frozen orange juice.

I guess nothing inspires confidence on Wall Street like $3 trillion in government spending explained in no detail with bland generalities. All we need now is Harry Reid hollering, "Turn those machines back on!"

Unfortunately it won't be Randolf and Mortimer Duke who lose everything in this Washington remake - it will be our children and grandchildren.


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Comments (18)

Al Franken would feel at ho... (Below threshold)
John:

Al Franken would feel at home reprising his role, although it would be hard to tell the difference between baggage handler and Senator with his tax cheating background.

Maybe this is why he wants to get to the Senate!

"Unfortunately it won't be ... (Below threshold)
GarandFan:

"Unfortunately it won't be Randolf and Mortimer Duke who lose everything in this Washington remake - it will be our children and grandchildren."

Obama's response: "Fuck the children, I won."

Next time I hear a progressive go on about "it's for the children", I'm gonna shove the Pelosi Pork Package right down their throat.

RE: "Unfortunately it won't... (Below threshold)
kevino:

RE: "Unfortunately it won't be Randolf and Mortimer Duke who lose everything in this Washington remake - it will be our children and grandchildren."

All of us are about to loose a big chunk of our life savings. If you have money in the bank, in a year or so it will be worth 15-20% less than its worth right now. The government cannot borrow the staggering sums to pay for this. Our creditors in Asia won't extend us the credit even if they had it - and they don't because their economies are hurt, too. The only way to pay for this is for the Treasury to print more money, thus devaluing the currency already in circulation. The result will be 70's-style stagflation: unemployment, recession, and inflation - all at the same time. The value of the money in your pocket will degrade while you watch. And you'll never get pay raises fast enough to keep up with the inflation or the higher taxes. The State has already hurt the economy. Now it wants to cripple it.

And we lose in other ways, too. As the State becomes a central player in the economy, the power of the State will grow. The State doesn't create wealth, it takes wealth from the People by force or by fraud (e.g. printing money to take wealth from those who saved by devaluing their currency). As the State grows in power, it will use more power to control the citizens, and our freedom will be diminished.

Trillions of dollars!? We are so screwed.

The stock market is an indi... (Below threshold)
Mac Lorry:

The stock market is an indicator of what? One day it's down and the next day it's up with nothing relevant happening between. The cause of this apparent randomness is that the financial market has turned into a gambling casino with rules and interactions so complex that it's makes Earth's weather systems seem simple by comparison.

In that sysem no investor can have confidence they'll at least get their money back let alone make a reasonable profit. It seems that only the heavy hand of government is going to be able to force the simplification and transparency needed to get the markets back to serving their fundamental purpose of facilitating capital in search of future gains find promising enterprises in need of capital.

Capitalism works because it harnesses the creativity, courage, and hard work of people more effectively than any other system yet devised by man. However, problems occurs when that creativity, courage, and hard work is directed at gaming the system of matching up capital with enterprises. The wealth such gaming creates on the macro scale is an illusion and that's why it can disappear without a trace as if in a puff of smoke. Keeping up with those who would game the system and devising taxing countermeasures would require large department of motivated workers (they get to keep some of the taxes) along with the authority of a supreme chief grand Ayatollah to keep court challenges at bay.

I can see Harry pulling out... (Below threshold)
ODA315:

I can see Harry pulling out a crisp new dollar bill and hand it over to Nancy.

All of us are about to l... (Below threshold)
Brian:

All of us are about to loose a big chunk of our life savings. If you have money in the bank, in a year or so it will be worth 15-20% less than its worth right now.

"About to"???!!!

Lose 15-20% in a whole year?!

Have you been paying attention?!

Great references Baron.... (Below threshold)
SillyPuddy:

Great references Baron.

"I ain't gonna have no money to buy my son the G.I. Joe with the kung-fu grip! And my wife ain't gonna f... my wife ain't gonna make love to me if I got no money!" So they're panicking right now, they're screaming "SELL! SELL!" to get out before the price keeps dropping. They're panicking out there right now, I can feel it."

The result will be... (Below threshold)
Mac Lorry:
The result will be 70's-style stagflation: unemployment, recession, and inflation - all at the same time.

Part of the 70's stagflation included high interest rates. It was common for CD's of that time to pay 12% to 15%. People with money in the bank may lose 3% to 4% value per year, which is what they have been experiencing for nearly 20 years because of artificially low interest rates. It's not surprising than that the U.S. savings rate is so low.

The government cannot borrow the staggering sums to pay for this. Our creditors in Asia won't extend us the credit even if they had it - and they don't because their economies are hurt, too.

The government financed WW2 in part by selling bonds. It seems that if the government issued bonds that guaranteed a yield of just a few percent plus the rate of inflation they would get a trillion or two from the American people. These bonds would have to be like U.S. savings bonds in their availability and liquidity. The only money the government would need to print would be to pay the interest as the principle is coming out of the money supply. Even then, the government gets a share of the interest back in the form of taxes.

Such bonds pull money out of private banks, but if banks are not lending money it's not doing the economy any good anyway. Just the threat of issuing such bonds might convince banks to start lending again.

Mac,Bonds are boug... (Below threshold)
Baron Von Ottomatic:

Mac,

Bonds are bought and sold based on their yield. Considering the debt obligations the federal government has already incurred and the higher yields the government would have to offer as an inducement to vacate other investment vehicles they'd only be further adding to the interest we're already paying on the national debt. Borrowing is borrowing.

You're also forgetting that war bonds were popular because of patriotic sentiment after Pearl Harbor and the fact that millions of families had a loved one fighting overseas - i.e. directly helping to win a war in which they had a family member fighting.

Somehow, I don't think "Uncle Sam wants you - to build a dog park in San Diego" will have the same broad-based appeal...

Baron,Yes, "Borrow... (Below threshold)
Mac Lorry:

Baron,

Yes, "Borrowing is borrowing", but if the U.S. is not able to borrow the 1.5 trillion dollar cost of TARP and the Stimulus bill, the only alternative is to print the money. Printing that much money is going to cause inflation and if the Fed holds down interest rates in an attempt to stimulate the economy, capital will find safe havens outside the U.S. dollar. The result will be a frozen credit market, not because of fear, but because there's simply no money available. The only way to attract capital would be to allow interest rates to rise, which increases the cost we're already paying on the national debt.

My idea is for the government it issue a new type of bond that pays interest at the rate of inflation plus a few percent. That would make these bonds one of the safest safe havens available, which by itself would attract capital. Many people would jump at the chance to invest in bonds that are guaranteed to pay even 3% above inflation. By making them available only to domestic investors (including IRA and 401k plans) it doesn't increase the money supply when the government spends those dollars on stimulus projects or uses them to offset tax cuts. If inflation is kept low such bonds could actually reduces the cost we're already paying on the national debt.

As it is, capital is looking to safe havens and we saw what that did to the price of oil last summer. It turned into a short lived oil bubble where many investors lost money. Now the move is to gold, but it could be just another bubble with those getting in even now destine to lose their money.

If you think our economy is in trouble now it will only get much worse if we end up with high inflation while the Fed is trying to keep interest rates low. There will be no money for any type of loan and credit cards debt will see interest rates go over 30%. Every investment tied to mortgages or long term debt will lose value. Every fixed rate savings bond (I have some paying 6%) will be cashed in requiring the government to print more money.

Liberals should be particularly concerned because runaway inflation would prove Obama's policies and the theories they are based on an utter failure. By 2012 republicans will be back in control of the government with a historical mandate to fix the economy whatever it takes. That means selling off much of the land the federal government owns out west including federal forests and even wilderness areas. Environmental laws that interfere with private enterprise will be modified so that they don't. The corporate tax rate will be zero as will the capital gains tax rate. If the economy then recovers you can expect those changes to be permanent. Without Republican support Obama has gone all in with his bet on the stimulus bill, and in doing so he has dragged liberal economic ideas into the bet as well.

Maybe it's time to try some new ideas, like inflation plus interest bonds.

Brian:If you're on... (Below threshold)
kevino:

Brian:

If you're one of the people who lost tons of savings due to the stock market downturn, you have my sympathies. A lot of people stayed in the market when they shouldn't have and lost a lot of money.

Was I paying attention? You bet: the warning signs were there. Various authors (e.g. Peter Schiff) predicted this years ago. When I got out of the Market more than a year ago, my friends thought I was nuts, but now that I'm making still making money, they are asking better questions.


Mac Lorry:

The idea of a domestic bond issue (e.g. new class of savings bonds) is an idea that I've pushed with politicians for years now. It's something that really should be done. You are correct that most politicians don't like the idea because they don't get it or because they don't want to divert money from banks or the market. Perhaps they'll listen now.

There is a basic problem, though. Most families in the US are drowning in debt. They simply don't have the money. Just for the stimulus package at $838B divided by 280 million households in the US is about $2667 per household. I wonder what percentage of households in the US have $2667 to invest in a long-term bond issue? I'll bet it's about one tenth of the number of households carrying $2667 in credit card debt.

[Sidebar: If you think that US banks are in trouble with home (secured) loans going bad? Wait to you see what happens when more people default on loads of credit card debt. That's probably the next big bubble to burst.]

In the past this country has looked to foreign creditors to pay our bills. Their economies are hurting too, and they have got to start worrying about our ability to pay. I suggest you look at the rate of increase in the bulk money supply: it's not a pretty picture.

The idea of a dome... (Below threshold)
Mac Lorry:
The idea of a domestic bond issue (e.g. new class of savings bonds) is an idea that I've pushed with politicians for years now.

With years of pushing it seems you should have some links you could provide where you explain that new class of savings bonds.

I wonder what percentage of households in the US have $2667 to invest in a long-term bond issue? I'll bet it's about one tenth of the number of households carrying $2667 in credit card debt.

The percentage is irrelevant. The current value of private retirement funds is still 8 trillion dollars even after the big hit they took in the last 15 months. The right inflation plus interest bond mix (higher yield the longer it's term ) could attract hundreds of billions, if not a trillion of those dollars, all money the government doesn't then need to print.

[Sidebar: If you think that US banks are in trouble with home (secured) loans going bad? Wait to you see what happens when more people default on loads of credit card debt. That's probably the next big bubble to burst.]

If the government just prints money the resulting inflation will virtually guarantee large increases in interest for credit card debt and that will push many people into bankruptcy as well as ripple through wall street because lots of that debt has been converted into securities.

High inflation will kill any hope of the economy recovering as well as democrats' control of the government.

Mac:RE: Savings bo... (Below threshold)
kevino:

Mac:

RE: Savings bonds
It seemed to me that savings bonds were the right idea because ordinary people trust them, they are easy to acquire, and they are available to citizens but not institutions. The idea never got off the ground.

RE: $8T
That's an interesting number. Treasury announces the new bank bailout program is now $2.5T. The Stimulus is $0.8T. Various other bailouts will add to the figure. We're still in February, and the price is close to $4T.

Now get real. Do you really think that financial advisers will sink half - yes half - of the total funds that they manage in US treasury notes? In particular, given that they are long-term securities and many will need the money soon or will need to have the ability to tap into those funds?

Other questions:
1. Given the way that Washington is throwing around trillions of dollars, do you think that this is the end? Now that the public is used to these staggering amounts, won't it be easier to "invest" more?
2. How will the country pay the interest on that huge debt if they could borrow it legitimately?
3. What will this do to the economy when you take that much capital out of the stock and bond markets?
4. Have you considered the total amount of money that is now at risk due to all of the new Federal guarantees? (Bloomberg reported that the total is about $8T already.)

RE: Credit cards
Yes, more people will go bankrupt due to credit card debt if interest rates rise. But I'd also look for more meddling by the Federal government, such as a cap on credit card interest rates or a freeze on interest payments on old debts. The banks will complain, by the State has already bailed them out so they really can't complain, and the State could threaten to call in their loans.

RE: Printing money
We're already seeing some pretty bad movement in the money supply (M1 and M2).

In simple terms:
1. The country buys too much on credit and saves too little.
2. The country doesn't manufacture enough. (2/3 of what we call GDP is consumer spending, often for things that weren't actually produced here.)
3. For years we've relied upon foreign money to finance our public debt. There are limits to the ability and confidence to loan us the amounts we need, and we may have already exceeded those limits.
4. After years of spending with borrowed money, the cure for our ills is not for the State to borrow huge amounts more and spend it. This insane idea almost sounds like Washington having one last spending binge before the house of cards collapses.
5. No one has published a plan to finance this mess.

We are so screwed.

Now get real. Do y... (Below threshold)
Mac Lorry:
Now get real. Do you really think that financial advisers will sink half - yes half - of the total funds that they manage in US treasury notes? In particular, given that they are long-term securities and many will need the money soon or will need to have the ability to tap into those funds?

You are not paying attention to what I proposed or you wouldn't be asking such questions. In uncertain times people seek finacial safe havens so that their capital (savings) don't lose value because of inflation. That's why the idea of an inflation plus interest bond is different than anything currently available. For example, if such a bond yields 3% APR over inflation and inflation is 12% over the year the yield is 15%. If inflation was just 2% the yield is 5%. As an investor I don't need to worry about the inflation rate with such a bond. I can count on getting a real 3% return. These would be a new type of bond so forget all the rules for T bills and savings bonds. These inflation plus interest bonds would be like CD's in that you could buy them for a specific term. The longer the term the higher the yield.

Given the way that Washington is throwing around trillions of dollars, do you think that this is the end? Now that the public is used to these staggering amounts, won't it be easier to "invest" more?

As soon as the government has to start printing money to fund the projects it will start causing inflation. The polticial atmosphere will change quickly once inflation starts to take off.

How will the country pay the interest on that huge debt if they could borrow it legitimately?

The choice is taxes or assets. How much is half of the land in the western U.S. worth? That's about how much the federal government owns. In Alaska they own about 90% of the land.

What will this do to the economy when you take that much capital out of the stock and bond markets?

People putting trillions of dollars into the stock and bond markets through their retirement plans has caused an artificial inflation of stocks and bonds. So much money has been available that even the most foolish business model can get funded along with junk bonds that have no real value. If anything, diverting retirement funds into infrastructure projects will stabilize the stock and bond markets because they will, by necessity, be based on sound business models and real value. Anyway, whatever the negative effect it will be less than that of runaway inflation.

Have you considered the total amount of money that is now at risk due to all of the new Federal guarantees? (Bloomberg reported that the total is about $8T already.)

Don't get me wrong, I'm not saying the government should spend all the money they propose, but if they do, one non-inflationary way to finance at least part of it is with the bonds I described.

Yes, more people will go bankrupt due to credit card debt if interest rates rise. But I'd also look for more meddling by the Federal government, such as a cap on credit card interest rates or a freeze on interest payments on old debts. The banks will complain, by the State has already bailed them out so they really can't complain, and the State could threaten to call in their loans.

They will have every right to complain if inflation gets back into double digits. If the government then imposes caps on interest rates credit simply won't be available accept to those who don't need it.

We're already seeing some pretty bad movement in the money supply (M1 and M2).

If that's true then there is no slack in the system and as soon as the money is needed the government will have to print it and ruinous inflation will soon follow.

For years we've relied upon foreign money to finance our public debt. There are limits to the ability and confidence to loan us the amounts we need, and we may have already exceeded those limits.

Noting will ruin confidence in the dollar quicker than inflation. The Obama administration is determined to spend and spend big, but if they can't control inflation the economy will be in much worse shape than it is now.

No one has published a plan to finance this mess.

Like I said, I'm not arguing for the stimulus bill. We can only hope that Obama and the democrats will come to their senses if the stimulus bill doesn't work. Otherwise, the American people are going to have to sweep democrats out of office in 2010 to prevent them from throwing more money away.

Mac:We agree on ma... (Below threshold)
kevino:

Mac:

We agree on many points, and, yes, I understand full well that printing money will create inflation, but you're assuming that the politicians will make the tough choices to avoid inflation. I see no evidence of that. In fact, if memory serves, that exactly what happened in the 1970s to trigger inflation, so history is on my side. You also seem to forget that inflation is the State's friend. Not only does it allow them to tap into other people's capital, but it starts a cycle that puts people into higher tax brackets automatically.

RE: Bond issues with build-in inflation protection
You seem to make two invalid assumptions. In uncertain times, people look for solid investments. Inflation protection would be nice, but it isn't required. In any case, you seem to be getting the idea that there isn't enough. Even if you build in inflation protection, as you propose (and I don't think that will happen), you also seem to forget that the State already rigs the CPI in their favor by underestimating the rate of inflation because it's in their best interest to do so.

RE: Nothing will ruin the dollar quicker than inflation
Paper currency is based on confidence. Lots of things will ruin it. If foreign governments or investors figure out that we will have problems paying the bills, the loss of confidence will do it very quickly.

There is also the possibility of undermining the currency. China is using our money to build a manufacturing base that is exporting goods. When the time comes that they have amassed sufficient wealth and manufacturing capacity, then they will stop extending credit and move their economy to an internal consumer-oriented economy - much as the US did immediately after WW II where the US was the only real economy standing. The Chinese will happily bankrupt the US. Business is war.

RE: Trillions invested in stocks and bond artificially inflated prices
That's totally wrong. Those funds are critical for raising capital, and that is the seed corn for the whole economy. Pulling that money out will be far worse than the current credit crisis: it will increase the costs of capital formation and investments by industry.

RE: Sweeping the democrats out of office in 2010
Perhaps we'll get a repeat of 1994, but I don't think so. I think that President Bush, and Senator Lott, and Senator Cunningham, et. al. have killed the GOP. If the Dems fail, the public will likely come to the conclusion that we have a two party system where neither party is competent to run the country.

We're screwed.

Mac Lorry's analogy employs... (Below threshold)

Mac Lorry's analogy employs a comparison with the earth's weather systems and reminds us that if Barry Hussein Soetoro and Geithner and the other two-bit crooks and tax-dodgers used the same computer modeling the Gore-Bull Warmingistas use, the detritus left in the wake of Roosevelt's and the rest of the lying, looting, thieving, mass-murdering "Democrats" decades of monetary ballsups would be all cleared away by April!

Brian Richard Allen
Los Angeles - CalifGREENSPANicated 90028 -- and the Far Abroad

We're not screwed yet, kevi... (Below threshold)

We're not screwed yet, kevino. The glass is still half full!

Read this and cheer up:

THE WORLD-WIDE GOVERNMENT BUBBLE

Dagny D'Anconia - (Apologies to - B A)

Wednesday February 11 2009

http://www.dagnyd.net

From http://www.tothepointnews.com

Dot.com stocks and tulips are not the only things that can lead to financial bubbles. Governments can also be the focus of financial mania. Our global credit crisis is in reality a government bubble in the process of popping.

There are signs when a bubble exists:

1) On the face of it, a bubble looks illogical. You wonder are people crazy or are you just too old fashioned to understand. After all "It is hard to argue with success." People who buy into it are afraid of missing out when their friends and relatives are all benefiting. There is a herd instinct.

2) Money keeps flowing in to the system to keep it afloat. In this sense any bubble is a form of a Ponzi or pyramid scheme. The early adopters are kept profitable at the expense of the ones that later follow the fad. Even though there may be no con-man mastermind behind it, the dynamic of the invisible hand works as surely as if the con-man runs it.

3) A bubble may have made some sense at the start, with some new product or technology at the root of it. However from that small and rational start the phenomenon takes on a life of its own. At that point the ramp up becomes near exponential.

The way markets classically work is through a negative feedback on prices. If a good or service "overpriced" fewer people are willing to pay and the price comes down. Sometimes this negative feedback doesn't work and the higher the price goes, the more people become willing to pay it and a positive feedback loop is created.

If a price surge is in progress and that has the psychological effect of validating itself, then a bubble is poised to form. There have been positive feedback bubbles for prices in real estate, tulips, beanie babies, dot.com stocks, and a myriad of other irrational exhuberances.

4) There is available time or income to keep the scheme going. Thus prosperity, large amounts of credit, and people with too much time on their hands can get their resources sucked up into a bubble mentality.

In our bubble, politicians used the power of government to compel banks to offer bad loans to key constituencies. The banks, in the absurd belief that the Federal government could and/or would "guarantee" their millions of bad loans, then made absurd amounts of credit available.

Our government has also made grandiose promises to provide Social Security, Medicare etceteras. Other states, China, Japan, Singapore, etceteras, kept reinvesting in federal government debt and in Dollars and thus sustained the bubble. All possible because people believed in the greatness of the American government.

5) All bubbles come to an end when the liquidity is no longer available. After a certain point the bubble cannot be stopped by outside forces, but it does stop when the available resources are no longer available. It is like a fire that rages until the fuel is spent.

By all these measures, we have a Government Bubble that is popping. The spending ("stimulus") package being approved now will raise the government's immediate commitment to 9.7 trillion dollars - enough to pay off 90% of the home mortgages in America.

The rate at which the government is sucking up money has gone exponential. Under the name of "stimulus" and "bailout" politicians give money they don't have to their political cronies with barely even a fig leaf of a cover story. The conservatives -- whose Grace Commission clearly but to no avail sounded the alarm decades ago -- are impotent to stop the phenomenon.

If you look at the rise in spending it is clear that it has gone on unabated, crossing Republican and Democrat congresses and "administrations," with, except, perhaps for the 25% leap it took during the Clinton years, barely any distinction. The phenomenon is beyond the political realm. The government bubble is an economic phenomenon that transcends politics.

Government revenue has become a positive feedback loop. Big government has become so financially successful that it is irresistible. Government money is indirectly and directly controlling the outcomes of elections through funding of pro-big-government schemes, corruption and political subsidiaries such as ACORN. The outcome of the election was economically preordained by the dynamics of the bubble. It had to be won by a big spending liberal.

It would be rational for the American government to see the financial abyss and cut taxes and spending, but this is something it cannot do. It cannot because this phenomenon is beyond politics and beyond reason. Politicians and their bureaucratic activists cannot stop what they are doing. Their power base demands it. The Democrats and RINO's were elected/selected because they were determined to do it. The voters demanded it and as the direct consequence are doomed to go over the cliff.

As you and I watch the unfolding of the Obama phenomenon, where pseudo-benevolent Leftists and Big Government are touted as the answer to all ills, we feel, while experiencing all of the classic feelings one has watching a bubble inflate, as if we are watching a mass lunacy. We are.

It has been frightening to see the madness of the crowd, the religious fervor of the faithful, the persecution of the heretics, the obscene absorption of power and money. It is a strange comfort that their insane vision for the future cannot be realized. With infinite money every one of us would have become the slave of the ever-growing state. Instead we will experience the government's bubble pop.

Based on the Grace Commission findings, the bubble was predicted to pop back in 1995, when the impending financial disaster was clearly laid out in the book Bankruptcy 1995. ( http://www.amazon.com/exec/obidos/ASIN/0316282065/thereikipage )

It was only the infusion of liquidity from foreign nations such as China and Japan that held off the day of reckoning. The authors could not believe that foreign nations would continue to buy T-bills - but they did.

Economically it was an absurd thing, but politically it made sense: Countries like Japan and China thought they could gain control and dominance of America by financial means instead of military ones. Thus the authors of Bankruptcy 1995 were correct about the phenomenon, but off on the date.

Many have been wondering what can stop the insane juggernaut that is the Obama gravy train. The truth is after a certain point nothing can stop a bubble but itself. Just like bubbles that formed before, this government bubble could not be stopped by even the most determined and courageous patriots among us.

When the liquidity runs out, the bubble pops and thus ends on its own. The liquidity is now near running out. The Democrat-controlled Federal government is inevitably heading into more extravagance and unsustainability.

California is within weeks, perhaps days, of a financial disaster and it is not alone. Britain, Iceland, South Korea, and Spain are also in dire trouble. China and Russia are both in financially difficult and thus politically unstable situations. Headlines now state "Downturn accelerates as it circles the globe. Economies worse off than analysts predicted just weeks ago."

A bubble is a form of a Ponzi scheme and all the Ponzi schemes are now collapsing. These range from the massive "Social Security" pyramid to smaller Madoff type scams:

"These Ponzi schemes rely on new people being found -- but new people aren't investing. People are hurting and because people are hurting, they are seeking redemptions from what they think are these legitimate schemes," a Ponzi investigator said. "Between not having new investors and having old investors redeem, the world's Ponzi schemes are all simultaneously collapsing."

This means people relying on the government for their retirement funds will be as well served as are the Madoff investors.

Bankruptcy 1995 cites many examples of similar government bubbles: "The charts [of Bolivia, Argentina and Brazil] show that in all three countries hyperinflation was preceded by a period of deflation. What the charts don't disclose is that the deflation in each of these countries began with plunging real estate values and then spread, a scenario similar to the one that we are experiencing today [written in 1992]."

In the past such bubbles popping were heralded by a drop in real estate values, followed by brief deflation, followed by inflation. Judging by their examples we would appear to be near the end of deflation and on our way to inflation.

California offers us a spyglass into the future. "As goes California so goes the nation" and this is even more true in this case because what is politically doable in California is likely to be doable in Washington DC.

To to delay the inevitable, California is "banking" on a 21.8 billion bailout from the Federal Government. But meanwhile the California Government has given notice that tax refund checks will be "delayed". The effect this will have on the filing of tax returns is that everyone will wait until April 15th to file -- and the real drop in tax revenues will suddenly become apparent.

Here is the latest on what will be cut first:

"Controller John Chiang, who acts as the state's accountant, said he will have no choice but to delay $3.7 billion in [tax refund] payments next month because the state is running out of cash. Doing so, he said, would buy the state a few more weeks before its accounts run dry. The state is on the brink of issuing IOUs as it faces a $41.6 billion shortfall over the next year-and-a-half. ...

A severe drop in revenue from sales, property and capital gains taxes has left the state's main bank account depleted. The state has not had a positive cash balance since July 12, 2007, Chiang said. The state had been relying on borrowing from special funds and Wall Street investors, but those options are no longer available.

Chiang said his office must continue $6.6 billion in education and debt payments next month but will defer money for tax refunds, student aid, social services and mental health programs... Paul McIntosh, executive director of the California State Association of Counties, said many counties already are low on reserves and may have to shut down welfare offices or end drug and mental health treatment programs at a time when applications are up 22 percent statewide."

We already know how crazy California is. But how will Obama's adoring masses react when their mental health programs, special services, and student aid are cut? Folks with tax refunds seized will quietly fume and worry, but others will take to the streets. What happens when there are additional expenses from these street protests and quasi riots? Will there be cutbacks in schools, police, and medical payments?

Where is this headed? As in any bubble, the disillusioned people are left with broken promises and worthless empty symbols of what might have been. When the police are stretched too thin, bad things happen. We will have to fend for ourselves and not look to the government for our rescue. While we can handle that, imagine how people will react who cannot even imagine a world without government keeping order.

When a government bubble pops, the value of government suddenly drops. With a few rebounds and jerks in opinion along the way, people gradually find contempt for the whole idea of investing in government either emotionally or financially. Government will become, to the masses, the bad joke it was to us all along. Few will trust it and most who do will be thought of as a deluded. This will probably happen world wide.

What can we do to prepare?

The first thing we can do is be aware of the bubble.

Accept the inevitable and profit if we can.

Once we are at the top we can try to arrange our affairs so that government has as little impact directly and indirectly on us as possible. We should strive to look like an already squeezed turnip to the government and live as frugally and productively as possible.

Predicting how severe it will be is hard. We can see the inevitable direction, but not the depth of the pop or the recovery. Germany in 1923, Austria in 1922, Britain in 1979, and Argentina in 1989 provide examples of government euphoria, followed by deflation, followed by inflation. There was rampant corruption, lowered productivity and a lower standard of living. Recovery only followed cuts in government spending.

Britain was suffering from its own popped bubble when Margaret Thatcher rose to power. Her tough approach to cut spending earned her the name "Iron Lady" and she was the first woman to lead a major party in Britain.

The Financial Times of London in 1992 credits Thatcher for saving England from remaining "the laughing stock of the Western World." Bankruptcy 1995 presciently notes in 1992 "If the United States has its own Margaret Thatcher, we haven't elected him or her to national office yet." But perhaps Alaska Governor Sarah Palin, who has already cleaned up similar messes at the level of state government, will become America's Iron Lady.

Today's situation is somewhat different from Britain in the 1980's. Not only is the United States government bubble popping; Many other countries who subsidized the delay from 1995 to the present are seeing their own collapse and deflation. To some extent America has been too big to be allowed to fail until now. International financial policies complicate the timing and results as many currencies, markets and housing markets fall and inflate at different speeds.

This bubble of government makes all other economic bubbles that have come before seem puny by comparison. Furthermore, this bubble is uniquely world wide. As liquidity is running out and credit is drying up, many nations are in a chain reaction realizing the hot air on which their politically-owned, operated, controlled and directed financial systems stand.

In any case the dreams of Obama's supporters and of the RINOs and the Democrats, will be agonizingly deflated as the era of big government ends. We will witness a breathtaking global spectacle of fear, loss, shock, and anger as the United States' government's bubble pops.

It may seem odd in this political climate to say big government will become a thing of the past.

But it already has.

It's just, that, like a decapitated chicken, still mindlessly running around in circles, its not quite done moving.

Brian Richard Allen:<... (Below threshold)
kevino:

Brian Richard Allen:

I don't have a lot of time to respond here. Simply put, if you're saying that "investment" in government (particularly borrowing against future generations) is a ponzi scheme, I basically agree. But the alternative or escaping from the scheme is where this piece fails.

For example:

When a government bubble pops, the value of government suddenly drops. With a few rebounds and jerks in opinion along the way, people gradually find contempt for the whole idea of investing in government either emotionally or financially. Government will become, to the masses, the bad joke it was to us all along. Few will trust it and most who do will be thought of as a deluded. This will probably happen world wide.

First of all, if government is discredited, there is always an alternative or changes to be proposed that will make it work again. But even if government - or just big government - becomes a laughing stock, there isn't a choice. People don't "invest" in government. Government is an exercise in force. People make believe that their government is a farce, but they won't have a choice. And fans of big government are also (almost without exception) fans of government that is able to defend itself against you malcontents that want to stand in the way of big government's service to the people. They know just how to take care of people like you.

The counter argument is that they do have a choice: they will vote big government out of office. History is not kind to this idea. As a libertarian, I support politicians who believe is small government that emphasizes the rights and responsibilities of individuals. Such people are few and far between. I also support fiscal conservatives. OK, which party does that represent? The GOP ran things for 12 years, and they spent money like drunken sailors. When they talk about stealing from future generations they have no credibility at all. We have, right now, a two party system where neither party values individual rights of fiscal responsibility.

I would also remind you that getting any political leverage is going to be difficult because the majority of Americans receive direct support from the State, and there are more Americans working in government than work in manufacturing. A wise man once said, "Democracy fails when people learn that they can vote themselves rich." And democrats who are already getting good at stealing elections and suppressing alternative ideas are hard at work changing the rules so that they get even more unfair advantages in future elections.

I would point out the simple fact that big government has been discredited for years. Democratic socialism is a dead idea in most places in Europe, and they are trying to figure a way out. And yet, look at the situation that we are in. The capacity for people to delude themselves into thinking that they can vote themselves rich is huge.

In thinking about other countries trying to dig their way out, I'm reminded of another fact: once big government has destroyed the economy - particularly the manufacturing base and the segments of the society that really produce, it is very hard to reverse the damage and put things right again. This is true in other countries, but it will be much, much harder when an economy the size of the US fails.

RE: "Perhaps Alaska Governor Sarah Palin, who has already cleaned up similar messes at the level of state government, will become America's Iron Lady."

LOL. She has little experience. She made a terrible first impression. And she doesn't have the brains.




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