Category: Economy
The Economy
The standard presumption is that the state of the economy is a key determinant of the stock market’s trends. All day long on financial television and year after year in financial print media, investors debate the state of the economy for clues to the future course of the stock market. If this presumed causal relationship actually existed, then there would be some evidence that the economy leads the stock market. On the contrary, for decades, the Commerce Department of the federal government has identified the stock market as a leading indicator of the economy, which is indeed the case. Read more
Macroeconomic Formulae: Man as Machine
Economist's devise today's macroeconomic formulations under the presumption
that people react to outside stimuli like billiard balls following physical laws.
Unlike physics formulae, though, the concepts represented by the variables in these
equations are often imprecise. Many that are considered precise are not because
they ignore the varying mental states of people. Often, the equations do not relate
very well to the real world. The combinations of vague definitions, improper
assumptions and detached impracticality prompted Nobel prize winner Wassily
Leontief of the Institute for Economic Analysis at New York University to say this
in 1982:
Year after Year, economic theorists continue to produce scores of mathematical
models and to explore in great detail their formal properties; and the econometricians
fit algebraic functions of all possible shapes to essentially the same sets of data
without being able to advance, in any perceptible way, a systematic understanding
of the structure and the operation of a real economic system.
In 1986, William Niskanen jr. of the Cato Institute was more succinct:
"Macroeconomic theory is in absolute shambles.
The biggest flaw in macroeconomic formulations is their underlying assumption that
the "billiard ball" has a fixed mental state. However, the mental states of people vary,
so their "reactions" to a "cause" will be different at different times. For example, an
increase in the money supply might lead to lower interest rates in some cases and
higher interest rates in others, depending upon what people discern to be the meaning,
if any, of the event. Because mental states change, the attempt to define a constant
relationship is futile. This is certainly true in the stock market. In some stock market
environments, rising bond prices are considered bullish, in others, bearish. In each
case, there is always an apparently airtight logical argument in favor of the relationship.
For instance, the conflicting arguments regarding stock and bond trends, offered
depending upon the season, are: Bonds compete with stocks for the investor's dollar,
so when one market rises, the other falls. Higher bonds mean lower interest rates, which
helps the economiy and makes speculative borrowing easier, so when one market rises,
the other one rises. While each of these arguments appears true from time to time, that
means the other is false. There is no macroeconomic formula that can express a
consistent relationship.A single discussion should concretize this point. Governments long operated under
the assumption that the higher the tax rates they impose upon citizens, the higher their
revenues will be. (Revenue = fixed social product x tax rate.) This would indeed be a
consistent relationship if society were a physical system. However, people are not
machines.Sometimes people increase their productive efforts when tax rates are high;
indeed, that has been happening in recent decades in the U.S., as both parents of most
families now must work to make up for the real income shortall that high taxes have
produced. At other times, people slow their productive efforts when most of their product
is confiscated. This is one reason why communism fails. Thus,given a certain social
mindset, higher tax rates can lead to lower renenues. In this case, the end result is the
opposite of the intended result.Economist Arthur Laffer explained this phenomenon in 1980. He hereby proposed a
different macroeconomic formula that relates tax rates to government income. The Laffer
curve claims that one particular rate of taxation will return the greatest renenue to the
government. If the rate is lower or higher than that, revenue will be less.
(Revenue = predictably variable social product x tax rate.) This formula, too, relies on the
assumption that society is a physical system like a machine that can be overburdened to
such a degree that it slows down. Like its predecessor, it sounds sensible and could be
applied with consistent results if people were automatons. However, suppose that this
formula is accepted by a government that is taxing citizens above the supposed ideal level
for maximum revenues. To achieve a goal of greater renenues, it lowers tax rates. Revenues
rise. It works! Then after a few years, people begin to understand that lower taxes made them
more prosperous. They agitate for further reductions in tax rates and elect politicians who
will accomodate them. Taxes are lowered further. Government revenues fall. People begin to
resent even the lowered tax rates as an impediment to their prosperity. Taxes are slashed;
government revenue shrinks. The end result is the opposite of the intended result.
Whether this would actually happen in any particular circumstance is perhaps debatable,
but it could happen, and that is the difference between social and physical systems.
Coveney and Highfield are damning in their assessment of the formulae that have so
long been taught in the typical undergraduate course in economics:
It has taken economists a long time to recognize the inherent complexity of their subject.
For decades, the central dogma of economics revolved around stale equilibrium principles
in a manner entirely analogous to the application of equilibrium thermodynamics..
Many economists have sought to shoehorn all economics into theories whose merits are
their mathematical simplicity and elegance rather than their ability to say anything about the
way real-world economics work...Classical equilibrium-based concepts have been infecting the
minds of generations of science and economics students with the dogma that the behavior of
a complex system can be deduced by simply summing its component parts.
I would disagree on only two points: First, economists for the most part have not
recognized the error in their premises; only a few have. Second, the old economic
theories are not elegant; they are ugly. In contrast, we have a truly elegant law in the
Wave Principle, which is the bedrock principle of sociology and finance, and therefore
ultimately of macroeconomics. The science of macroeconomics must drop the
mathematics of physics and adopt the mathematics of sociology. Minds are not
billiard balls or machines or computers, they are minds. (The Wave Principle of Human
Social Behavior, Robert R.Prechter, 1999)
EU
Kaczynski legt Lissabon-Vertrag auf Eis Einen Tag nachdem der deutsche Bundespräsident die Ratifizierung des Reformvertrags von Lissabon vorerst verweigert, hat auch Polens Präsident Lech Kaczynski eine Unterschrift als "sinnlos" abgelehnt. FTD, July 1,2008
By George Reisman
Posted on 1/14/2008
Capital in the form of credit is normally and, certainly, properly, extended out of previously accumulated savings. In sharpest contrast, credit expansion is the creation of new and additional money out of thin air, which money is then lent to business firms and individuals as though it were a supply of new and additional saved up capital funds.
Its existence serves to reduce interest rates and to enable loans to be made and debts to be incurred which otherwise would not have been made or incurred. Always and everywhere, to the extent that private banks participate in the process of credit expansion, they do so with the sanction and generally with the active encouragement of the government.
Economists, above all Ludwig von Mises, have shown how credit expansion is responsible for the boom-bust business cycle and how its existence depends on deliberate government policy. Nevertheless, public opinion believes that the business cycle is an inherent feature of capitalism and that the role of government is not that of causing the phenomenon but of combating it. Indeed, as Mises observed, "Nothing harmed the cause of liberalism [capitalism] more than the almost regular return of feverish booms and of the dramatic breakdown of bull markets followed by lingering slumps. Public opinion has become convinced that such happenings are inevitable in the unhampered market economy."
The truth is that credit expansion is responsible not only for the boom-bust cycle but also for another major negative phenomenon for which public opinion mistakenly blames capitalism: namely, sharply increased economic inequality, in which the wealthier strata of the population appear to increase their wealth dramatically relative to the rest of the population and for no good reason.
It is not accidental that the two leading periods of credit expansion in history — the 1920s and the period since the mid-1990s — have been characterized by a major increase in economic inequality. Both in the 1920s and in the more recent period, a major cause of the increased economic inequality is that the new and additional funds created in credit expansion show up very soon in the financial markets, where they drive up the prices of securities, above all, common stocks. The owners of common stock are preponderantly wealthy individuals, who now find themselves the beneficiaries of substantial capital gains. These gains are the greater the larger and more prolonged the credit expansion is and the higher it drives the prices of shares. In the process of new and additional money pouring into the financial markets, investment bankers and stock speculators are in a position to reap especially great gains.
Since it's so important, the main point just made needs to be repeated: credit expansion creates an artificial economic inequality by showing up in the stock market and driving up stock prices. Since the stocks are owned mainly by wealthy people, they are the main beneficiaries of the process. The more substantial and the more prolonged the credit expansion is, the larger are the gains enjoyed by wealthy people more than anyone else.
The new and additional funds injected into the economic system also soon show up in an additional demand for capital goods, such as business inventories and plant and equipment, and in an additional demand for consumers' durable goods, such as houses and automobiles. The purchase of these latter goods, like the capital goods purchased by business firms, depends largely on credit and is encouraged by lower interest rates. It is also fed by the capital gains being reaped by wealthy individuals, which results in an especially pronounced increase in the demand for luxury housing and for luxury goods in general.
The additional demand for capital goods and consumers' durable goods serves to increase business sales revenues and thus business profits across a wide spectrum of the economic system. Credit expansion increases profits in the economic system because the expenditure of the new and additional money in buying capital goods and labor increases the sales revenues of business firms immediately, while it increases the costs they must deduct from those sales revenues only with a time lag. This is also true to an extent of inflation that enters the economic system by means of its creators simply spending the new and additional money rather than lending it out — "simple inflation," as Mises calls it. What is present in both kinds of inflation — credit expansion and simple inflation — is the fact that sales revenues rise as soon as new and additional money is spent, but the costs deducted from the sales revenues of any given year largely reflect outlays of money made in previous years. In those previous years the quantity of money and volume of spending of virtually all types was smaller, including the spending that shows up in the present year as costs in business income statements.
Credit expansion boosts profits more than does simple inflation because the reduction in interest rates it brings about serves to increase the time lag between the making of expenditures for capital goods and labor and their subsequent appearance as costs in business income statements. The low interest rates encourage the purchase of such things as durable machinery and the undertaking of construction projects. The kind of increase that this must bring about in economy-wide profits can be seen in the following examples.
Thus in one case, imagine that a business firm uses newly created money that has come into its hands to increase its newspaper advertising, say. Its additional expenditure will be equivalent additional sales revenue to the newspaper. It will also most likely be an equivalent immediate additional cost to it — a cost that it must deduct from its sales revenues in its very next income statement. Thus, in the same accounting period that the newspaper records additional sales revenues equal to the firm's additional expenditure, the firm itself must record an equal additional cost of production to deduct from its own sales revenues. Obviously, in this case there is no increase in the economy-wide aggregate amount of profit. This is because economy-wide, aggregate sales revenues and economy-wide aggregate costs have both increased to the same extent.
Credit expansion is responsible for sharply increased economic inequality, in which the wealthier strata of the population appear to increase their wealth dramatically relative to the rest of the population and for no good reason.
But now imagine that the firm spends the same amount of money in buying durable machinery that will be depreciated over a ten-year period. Once again, a seller — this time the seller of the machinery — will immediately have additional sales revenues equal to our firm's additional expenditure. But in this case, our firm will certainly not have an equally large additional cost of production to report in its next income statement. If its expenditure for the machinery was $1 million, say, then while the seller has $1 million of additional sales revenues in his next annual income statement, our firm will probably have merely $100,000 of additional costs to report in its next annual income statement. This is because the purchase price of the machine is not charged off all at once, but only gradually, over its depreciable life. The implication of this example is that in the current year there will be an addition of $900,000 to economy-wide, aggregate profits. If our firm's $1 million were part of an investment in the construction of a building with a forty-year depreciable life, the implied addition to economy-wide, aggregate profits would be even greater.
Such boosts to profits go hand in glove with the rise in common-stock prices and greatly reinforce them. Of course, once credit expansion comes to an end, the stimulus it gave to profits and to the stock market both disappear and at that point profits plunge and capital gains turn into capital losses. And at that point, the enemies of capitalism turn to attacking capitalism for causing depressions.
Now as the new and additional money created in credit expansion works its way through the economic system, one would expect the demand for labor and thus wage rates also to rise. This certainly does tend to happen, and in the 1920s wages increased substantially in terms both of money and real buying power. They simply did not increase to nearly the same extent as the incomes of the wealthier strata of the population, nor, of course, to the extent that business profits increased.
In addition to the special stimulus given to profits, a second reason for the failure of wages to keep pace with the rise in profits is that the encouragement given by credit expansion to the purchase of durable capital goods, particularly plant and equipment, tends to take place at the expense of funds that otherwise would be devoted to the purchase of labor services. As a result, the rise in wages is retarded at the same time that profits sharply advance. For this reason too it does not keep pace with the rise in profits.
Despite any appearances to the contrary, the rise in real wages in the 1920s was not the result of credit expansion but of rising production. Credit expansion actually operated to retard the rise in production insofar as it caused the wasteful investment of capital, i.e., what Mises calls malinvestment.
The rise in production is what prevented the prices of goods and services from rising as rapidly as credit expansion raised wage rates in terms of money. The rise in production, in turn, was based on a high degree of availability of capital funds provided by actual savings, as opposed to credit expansion, together with rapid scientific and technological progress. It was this that increased real wages, i.e., the goods and services that wage earners could actually buy with their wages.
In contrast to the experience of the 1920s, in the two great recent credit expansions, i.e., the dot-com bubble of 1995–2001 and its successor, the presently collapsing housing bubble that began not long thereafter, there has been very little, if any, rise in real wages. Most commentators appear to attribute this to nothing more than the unrestrained greed of businessmen and capitalists. They apparently go on the theory that if there is anything in the economic system that breathes or moves other than at the command of the government, or other than with the active supervision and control of the government, it is proof that we live in an era of "laissez-faire." For example, in The New York Times of December 30, 2007, in an article titled "The Free Market: A False Idol After All?" Times columnist Peter Goodman writes:
For more than a quarter-century, the dominant idea guiding economic policy in the United States and much of the globe has been that the market is unfailingly wise. So wise that the proper role for government is to steer clear and not mess with the gusher of wealth that will flow, trickling down to the [sic] every level of society, if only the market is left to do its magic.
That notion has carried the day as industries have been unshackled from regulation, and as taxes have been rolled back, along with the oversight powers of government.
This alleged laissez-faire environment, such writers pretend, has enabled businessmen and capitalists shamelessly to enrich themselves at the expense of increasingly impoverished wage earners, to whom nothing any longer even "trickles down." Increased free trade and "globalization," of course, are attacked as part of the process and as greatly contributing to the stagnation or outright decline in real wages.
In sharpest contrast to such blather, in the real world there are innumerable rules and regulations enacted by the federal government to control virtually every aspect of economic activity. They are contained in the more than 70,000 pages of The Federal Register. The overwhelming mass of government interference described therein, and in its counterparts at the state and local level, is a glaring refutation of claims about the existence of any kind of laissez-faire in the present-day world. The very description of such interference, in tens of thousands of pages of official text, is a refutation of such size and literal weight as to render any claims about laissez-faire or insufficient government controls or regulations utterly nonsensical.
This truly massive body of material also suggests that the actual explanation for the stagnation in real wages is precisely an ever-growing burden of government intervention in the economic system. The intervention is in the form of policies that undermine genuine saving and in numerous other ways undermine capital accumulation and the rise in the productivity of labor. Personal and corporate income taxes, the inheritance tax, the capital gains tax, and government budget deficits — all entail the taking away of funds that, if left in the hands of their owners, would have been heavily spent, indeed, overwhelmingly spent, in the purchase of capital goods and labor services. Instead, those funds are diverted into financing the consumption of the government and those to whom the government gives money.
Inflation and credit expansion greatly exacerbate this diversion of funds, because their effect is artificially to increase the incomes subject to these taxes and thus to deprive business firms of the funds required to replace assets at prices made higher by the same process that increases their taxable incomes. The progressive aspect of income and inheritance taxes also worsens their effects, because incomes tend to be saved and invested the more heavily the larger they are; at the same time, substantial inheritances are more likely to be retained in the form of accumulated savings and capital than are modest inheritances.
Because of the reduced demand for labor that results from the taxation of funds that would otherwise have been used in employing labor and in buying capital goods, wages are substantially less than they otherwise would have been. At the same time, the buying power of those reduced wages is also sharply reduced in comparison with what it otherwise would have been.
It is worth pointing out that, totally apart from the effect of social security in undermining the incentive to save, the sheer rise in tax rates since 1965 to pay for the system has taken away fully eight additional percentage points of the income of every wage earner whose earnings are equal to or less than the amount subject to such taxation. In 1965 the combined social security tax on wage earners and their employers was 7.25 percent, which applied to a maximum annual income of $4,800. Today, the combined rate is 15.3 percent, which includes 2.9 percent for Medicare. The 15.3 percent rate currently, i.e., in 2008, applies to all wages and salaries up to a maximum of $102,000 per year. The effect of these major increases both in social security tax rates and in the amount of income subject to them has been to reduce the take-home wages of many workers by considerably more than 8 percent.
The social security contribution of employers is a loss to wage earners, because it is a cost of employment no different than the payment of take-home wages. Financially, it is a matter of indifference to employers whether they pay this sum to the government or to their employees. The cost to them is the same. It is money that the employees could and would have had, if the government had not taken it from the employers.
The same is true of all other costs borne by employers on behalf of their workers, whether it is health insurance, day care, family leave, or whatever. The costs in question are all costs of employment, which, in the absence of such government interference, the wage earners could and would have had in their own pockets. Compelling employers to pay the costs of such things is at the expense of the workers' take-home wages. The more such costs are imposed, the lower are take-home wages in comparison with what they otherwise would have been. The increase in such costs over time has correspondingly held down any rise in take-home wages.
Government intervention, as I've said, not only holds down the demand for labor and thus wages, particularly take-home wages, but it also reduces the buying power of wages. This is because the supply of capital goods is less, thanks to the diversion of funds from their purchase. The absence of these capital goods prevents the productivity of labor from being increased as much as it otherwise would have been. This in turn holds down the production both of consumers' goods and of further capital goods. The consequence of a lesser supply of consumers' goods is prices of consumers' goods that are higher than they otherwise would have been and thus a buying power of wages that is correspondingly lower than it otherwise would have been.
The consequent absence of further capital goods compounds the negative effect on production, in a process that can be repeated over and over again, with each passing year. What this means is that because fewer capital goods in the form of factories and machines are available this year, the ability to produce capital goods in the form of factories and machines for the following year is reduced, because capital goods in the form of factories and machines are the means of producing further capital goods in the form of factories and machines no less than they are of producing consumers' goods.
The buying power of wages is also reduced by all of the other laws and regulations that hold down the production and supply of goods in general and thus keep up prices. And again, there is a compounding effect. Environmental legislation deserves an especially prominent place in any list of such laws and regulations. Already, because of the restrictions it has imposed on the production of oil, coal, natural gas, and atomic power, it has served to raise the price of energy to unprecedented levels and to deprive many wage earners of the ability to buy gasoline for their cars or trucks and heating oil for their homes. To the extent that wage earners are able to pay energy prices reflecting a $100-per-barrel price of oil, their ability to buy other goods is correspondingly reduced. If the environmental movement's agenda of radical reductions (up to 90 percent) in carbon dioxide emissions is imposed, meeting it will require absolutely crippling cutbacks in the production and use of oil, coal, and natural gas, which must result in corresponding reductions in production, increases in prices, and absolute devastation for real wages.
The negative effect on production here is again a cumulative one, inasmuch as lack of energy supplies hampers the ability to find and exploit further supplies of energy. The more abundant and cheaper energy is, the greater is man's ability to move masses of earth and to process them, thereby developing further energy supplies. Thus, government intervention that reduces energy supplies reduces the ability to find and exploit further energy supplies.
$22
"This stagnation is the result of massive government intervention …"
Other examples of laws and regulations holding down production are minimum-wage, pro-union, and licensing legislation. These cause higher costs, higher prices, the diversion of labor from more productive pursuits to less productive pursuits, and, finally, unemployment. Subsidies of all kinds, tariffs, and consumer-product safety legislation also serve to hold down the production and supply of things and to keep up or add to their costs and prices. Again, to whatever extent production in general is curtailed, so too is the production of capital goods, with a consequent cumulative negative effect on subsequent production.
It should be clear that the resumption of an era of high and progressively rising real wages requires a radical reduction of government intervention into the economic system and the reestablishment of economic freedom.
What we have seen is that credit expansion is responsible not only for the boom-bust business cycle, as Mises showed, but also that it is a major source of artificial economic inequality and sharply increases profits relative to wages. These are processes that come to an end and are actually thrown into reverse as soon as credit expansion stops and the recession/depression that is its ultimate consequence begins. In wasting capital through malinvestment, it undermines the rise in production and accompanying rise in real wages. Despite credit expansion, real wages could still rise through most of American history, because of the substantial economic freedom enjoyed in the United States and did so even in the midst of credit expansion, as in the 1920s. In the last two episodes of major credit expansion, however, and over the last several decades as a whole, real wages have largely stagnated. This stagnation is the result of massive government intervention into the economic system that undermines capital accumulation and both the demand for labor and the productivity of labor. It is not the result of economic inequality, the profit motive, or any other aspect of the capitalist system.
I have explained all of the essential matters discussed in this article in full detail, with all of their presuppositions and implications, in my book Capitalism: A Treatise on Economics.
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George Reisman, Ph.D. is the author of Capitalism: A Treatise on Economics and is Pepperdine University Professor Emeritus of Economics. His web site is www.capitalism.net, and his blog is www.georgereisman.com/blog.
History of Financial Disasters
by Bill Bonner - The Daily Reckoning
WILL YOU BE WIPED OUT IN THE COMING FINANCIAL DISASTER?
History of Financial Disasters: Here's How to Make Sure the Answer Is No
I have seen financial disaster up close. And it ain't pretty.
If you ever wonder how bad things can actually get, look no further than the story of my
grandfather - a good man beaten by forces he couldn't control.
My grandfather was a bank director in the 1920s. He was active in the community, and
commanded a lot of respect in a time when people had to work hard to earn respect. With
a prosperous business and a growing family, all was well.
Then, when he was 57 years old, the financial roof caved in on him.
It wasn't his fault… not entirely. He just went wrong trying to do the right thing.
What Daily Reckoning readers are saying:
"[Bill Bonner and Addison Wiggin] are
living proof that concerned thinkers still
exist in our society. The daily dose of
sanity is a lifeline in a [society] where
debt is wealth,lies are truth, and
integrity is the lapdog of politics.
Keep up the good work!"
One reader says, "You make more sense in one e-mailthen a month of CNBC."
It all started, of course, with the market crash of Oct. 29, 1929. The single largest financial disaster in the history of the New York Stock Exchange wiped out all the gains of the previous year. Between Oct. 29 and Nov. 13 of that year, when stock prices hit their lowest point, over $30 billion disappeared from the balance sheet of the American economy.
(By comparison, that was more than the total sum that the U.S. federal government had spent to fight the First World War, and exceeds over $800 billion of today's dollars.)
It should have been a wake-up call - the first sign that something in the American economy was
terribly amiss. And in fact, millions of people - including my grandfather - were genuinely worried.But officials and commentators who should have known better stepped in to reassure Americans that there was nothing to fear.
History of Financial Disasters: When Doing the "Right" Thing Is the Wrong Idea
The campaign of misinformation started with President Herbert Hoover, who chose his words
carefully when he discussed the state of the economy in 1929. In the lexicon of American
economists and politicians, previous downturns were referred to as "Panics," such as the
"Panic of 1873" and the "Panic of 1893." Hoover tried to put a less harsh face on the calamity
by calling the 1929 downturn a "Depression," instead of a "Panic." (Of course, that name stuck,
with a vengeance.)
But that was nothing compared with the sunnier picture other people tried to paint on things.
"Don't worry," said Richard Whitney, the then-41-year-old whiz-kid vice-president of the New York Stock Exchange. "This is just a temporary setback." Legend has it that Whitney thereupon marched onto the floor of the New York Stock Exchange and casually placed an order for 10,000 shares of U.S. Steel at $205, or 40 points above the market price. (Later, U.S. Steel would lose over 90% of that value.)
"The economy is still strong and should come back soon," added Yale's Irving Fisher, who
had been so wrong in his assessment of the economy only days before Black Tuesday.
Still, this wave of optimism was fairly convincing - and quite contagious. In fact, it trickled
down to my grandfather.
His best friend and business partner told him, "Your money is safe in this bank. Besides,
how would it look if you -- a director -- took your money out of the bank? People would think
the bank was ready to fail."
So my grandfather did what he thought was the responsible thing to do. He kept his money
in the bank to serve as an example for others.
With the hindsight of history, we know what a huge mistake that was. And if anyone at the time
had stopped to consider the implications of the stock market crash, they would have, too.
History of Financial Disasters: Watching the Dream Become a Nightmare
Without consumer confidence, liquidity simply dried up. One bank would call in its loans from
another. That other bank would call in its loans to businesses and private individuals. Most of
the businesses and individuals did not have sufficient cash to repay the called loans. So one
entity went bust, which caused other entities to go bust, and so the cycle continued and
cascaded. Factories closed, offices were vacated and farms were sold out literally from under
the feet of the former owners. The national unemployment rate eventually exceeded 25%.
My grandfather found himself in the middle of this spiral. And when his bank failed, he lost
everything.
He and his partners had to sell the business for a song. He and my grandmother sold their
house for a huge loss. And at one point, my grandfather had to borrow $25 from his brother
just to feed his family.
This isn't the way it was supposed to be. Throughout his life, he'd been told how good things
were.
In 1929, John Raskob, chief executive of General Motors and head of the Democratic National
Committee, published an article entitled, "Everybody Ought to Be Rich" in no less a trusted and
credible source than the Ladies' Home Journal.
That same year, President Hoover commented that "We in America today are nearer to the final
triumph over poverty than ever before in the history of any land. The poorhouse is vanishing from
among us."
As the great American humorist Will Rogers later remarked, "We are the first nation in the history
of the world to go to the poorhouse in an automobile."
Those words haunt me as I see history repeating itself today…
History of Financial Disasters: Could Something Like What I Have Described Happen to You or Me?
All my business career, the idea of my grandfather having to borrow $25 from his brother --
at 57 years of age -- has stuck in the back of my mind, buzzing like a fire alarm that won't turn off.
"What went wrong?" I have asked myself. How could it be prevented? And most troubling of all,
could it happen again?
But it really boils down to a single question: Are today's crops of bank presidents, or eminent
economists, or stock market experts really that much better today than they were way back then?
I still do not claim to know all the answers. But I am taking precautions. And here is your opportunity to take a precaution as well.
Through a special arrangement with the London-based publishing house Pickering & Chatto, I am pleased to be able to offer for sale in the United States a three-volume history, entitled History of Financial Disasters 1763-1995. As the title implies, these three volumes review the origins and consequences of the Western world's most important financial crises in the past quarter millennium.
The editors of these three fine volumes have chosen to highlight and delve into 19 seminal economic crises between 1763-1995. Rare public and private papers, offering insightful firsthand accounts from some of the principal insiders, offer rich source material and penetrating background on the events that occurred. In addition, the editors have culled the stacks of academic literature to assist the reader in interpreting these events, and in drawing conclusions and lessons for our own time. In short, History of Financial Disasters is a road map to understanding "what went wrong" in the U.S., British and other Western economies throughout modern history.
During a financial disaster, a lot of money changes hands. In my grandfather's case, as was the case for so many millions of others, the money left his hands and never returned. But the difference between losing a lot of money and making a lot of money in a time of financial disaster is often just being in possession of a little bit of critical insight. And that's what these fine books offer, insight - the kind that could be worth a fortune to the perceptive reader who can make the correct relationships between past and current events. That critical element of insight might make all the difference in the world.
Because even now, the clouds are gathering. And it's not hard to see what could easily happen over the next five years:
The prices of gasoline, heating oil, natural gas, basic foodstuffs and many other daily essentials of American life skyrocketing astronomically as the value of the U.S. dollar plummets and foreign suppliers stop selling increasingly scarce commodities into U.S. markets
State and local court dockets clogged with lawsuits as lenders sue their former customers for repayment of borrowed funds
Tow trucks prowling the streets of your neighborhood, the drivers holding "notices of repossession" in their hands
Family members and old friends approaching you with sheepish and embarrassed looks on their faces. They will ask if you can loan them "just a little bit of money until times get better"
Corporate America downsizing even more than in the past decade of so-called "boom times" with cheap oil and a growing economy. But this time, companies won't be downsizing to goose their stock prices - but to avoid having to file for bankruptcy
If the newspapers are still allowed to report such things, you may read about food riots by hungry people who have no real option other than to smash and grab (remember New Orleans in the aftermath of Hurricane Katrina?). You may also read about health care riots, as people literally storm hospitals, confront the medical staff and demand treatment for sick children and other relatives. And because the jails will already be so full of some truly bad hombres, the police may refuse to arrest the food and health care rioters for any but the most extreme acts of violence
Even death might not be a respite or reprieve from the financial disaster. Hundreds, and maybe thousands, of insurance companies across the country will see their portfolios plummet and their cash reserves and other assets simply evaporate. They will be unable to pay out on claims. These undercapitalized insurance companies, who were always there when you paid your premiums, will simply close their doors. Their annuities and policies of insurance will become worthless.
Will all of these terrible things come to pass? Probably not all of them. But certainly a few. Maybe even most of them.
What makes me so sure? History - the dramatic details you'll discover in your very own set of History of Financial Disasters books.
History of Financial Disasters: From the World's Pre-eminent Publishing House
You will not find this fascinating trilogy on the shelves of your local shopping mall bookstore. Nor will you see it on the best-seller list of The New York Times. This is because Pickering & Chatto is not your ordinary publishing company. This 180-year-old institution does not publish books to sell into the mass market. Rather, it has established its name as a purveyor of fine volumes to the most important libraries and the most discriminating collectors in the world.
Pickering & Chatto publishes important and lasting works such as the complete writings of famed biologist Charles Darwin, all 29 volumes of the man's opus. Several years ago, Pickering & Chatto also issued the first in a series of collectible editions containing the writings of key Austrian economists. This set sold out almost immediately, and is now available only in the secondary market at a rather substantial premium. The same can be said for the three-volume set entitled The Case for Gold, published by Pickering & Chatto in 2002.
In short, these types of books are geared toward the interested collector, and are sold into the highest levels of the limited, but worldwide market.
So History of Financial Disasters is more than just a mother lode of economic knowledge and critical insight into key economic events throughout history. It is also a prized product in its own right.
This set of books is an elegantly bound limited edition. Each of the three volumes in this trilogy is lovingly hand bound in rich navy blue, library-grade buckram with classic gold-detailed spines. The process uses book crafters' techniques that date back many centuries. These volumes are not some "production run" from a machine that would not otherwise look out of place in an automobile assembly plant. Instead, these fine volumes are the end product of the efforts of master bookbinders, which only Pickering & Chatto and a handful of European publishers can afford to commission and employ. It is not too strong a statement to say that each volume is a work of art in its own right.
Even before you begin reading this remarkable collection of historical knowledge and wisdom, when you touch the luxurious bindings and feel the silk-smooth pages, you will understand and appreciate that you have purchased something that is truly exceptional.
The materials that go into these volumes exceed the level of standards set by the American National Standards Institute. Only the finest 100% wood-free pulp available is used as raw material, and then it is laced with microfibers to prevent tearing. The paper is better than simply the so-called "acid-free." It is "neutral pH" paper, with an alkaline reserve, or buffer, in the finish of every page.
Barring some unforeseen accident, or your own unfortunate "disaster," these exceptional volumes are heirlooms that should last for centuries. The publisher is confident that in 100 years and more, people will still treasure these books for their outward beauty, as well as for the wisdom contained inside. Meanwhile, this set of outstanding books will enhance your personal library and be a lasting symbol of who you are and, more importantly, of what you know and in what you believe.
This information is priceless. If I set a price of thousands of dollars, it would be worth every cent. After all, that is what it took to put these books together… and years of critical research. Yet I believe these books offer you so much remarkable wisdom that Pickering & Chatto sold this book to some of the most prestigious libraries in the world for $495. But because I bought all the remaining stock, I can offer you a substantial discount. You'll pay just $395 - a special discount of $100. And if the books are shipped to you within the United States, I will pay the shipping and handling on top of that.
In my view, there are dark clouds on the horizon and they are moving toward us rapidly. There is probably less time than you think to prepare.
And whatever you wind up doing, please accept my best wishes and hope for good luck to you and your family…
Sincerely,
William Bonner,
President, Agora, Inc.
Marks & Spencer Plunges Most in 19 Years on Unexpected Holiday Sales Drop Marks & Spencer Group Plc, the U.K.'s biggest clothing retailer, fell the most in at least 19 years in London trading after an unexpected decline in holiday sales. Bloomberg.com, Jan 9,2008
Einzelhandel unerwartet tief im Minus
( AP) Mi 09 Jan,
Umsatz real um mindestens 1,5 Prozent gesunken -
Ausgleich durch letzte Weihnachtseinkäufe unwahrscheinlich
EUROPEAN SHOPS SEE SALES CRASH
European shops saw trading crash in November, the EU statistics
agency said Tuesday. But the president of the European Union
insists the bloc still has the momentum to keep expanding.
Yahoo.com, Jan 9,2008
http://edition.cnn.com/2008/BUSINESS/01/08/euro.sales.ap/index.html
Doom and gloom plays out on Broadway
AP , November 24,2007
NEW YORK - It's a worst-case scenario that became a reality. As the Broadway stagehands strike enters its third week Saturday, there doesn't seem to be any way out of the thorny, seemingly intractable dispute
that has shut down more than two dozen plays and musicals since Nov. 10. Losses because of canceled performances are in the millions and climbing each day — a disaster not only for producers and theater owners, but for everyone employed in the theater and for those whose businesses depend on curtains going up.
Stores usher in holiday shopping season
By ANNE D'INNOCENZIO, AP
NEW YORK - Shoppers — shrugging off a spate of lead-tainted toy recalls and higher prices for food and gas — jammed stores before dawn Friday to grab discounted TVs, toys and the hard-to-find Nintendo Wii, for the official start of the holiday season, expected to be the weakest retail showing in five years. Stores, including Toys "R" Us and Macy's Inc. said more people were showing up this year for pre-dawn specials but merchants need them to keep coming throughout the holiday season to make their sales goals.
U.S. Industrial Output Unexpectedly Falls on Slowing Auto, Appliance Sales Industrial production in the U.S. unexpectedly dropped in October as slowing
sales prompted factories to make fewer automobiles and appliances,
Bloomberg, Nov 16,2007
Mortgage mess hitting WaMu hard
By Jonathan Weil
Bloomberg News
If you think the worst is over for mortgage lenders, a close look at Washington Mutual's balance sheet should dispel that notion pretty quickly.
The largest U.S. savings and loan stunned investors Oct. 17 when it said it would set aside as much as $1.3 billion this quarter to cover anticipated loan losses. The news came the same day Seattle-based WaMu announced a 72 percent drop in third-quarter profit to $210 million.
Since then, its stock has fallen 28 percent.
But the real wonder is that WaMu's forecast for fourth-quarter loan-loss provisions wasn't substantially higher.Bloomberg.com
News - Worldwide
Nov 5,2007
Weill's Earnings Machine Stalls as Citigroup Writedowns Deepen
By Bradley Keoun and Edgar Ortega
Nov. 5 (Bloomberg) -- Citigroup Inc., the profit engine built by Sanford ``Sandy'' Weill, has seized up.
The biggest U.S. bank by assets said yesterday that subprime mortgages and related securities lost as much as $11 billion of their value in the past month, a decline that may wipe out half of the company's profit so far this year. The New York-based company also said in a statement that Charles Prince, Weill's hand-picked successor, stepped down. Former Treasury Secretary Robert Rubin will become chairman, and Citigroup's most senior executive in Europe, Win Bischoff, will be interim CEO.Bloomberg, Nov 5,2007
Asian Stocks Slide on Subprime Concerns; Mitsubishi UFJ Falls
By Chen Shiyin and Hanny Wan
Nov. 5 (Bloomberg) -- Asian stocks fell, led by banks, after Citigroup Inc. said it will increase writedowns on subprime-linked investments by as much as $11 billion.
Mitsubishi UFJ Financial Group Inc. fell for a third day, while National Australia Bank Ltd. dropped the most in seven weeks. China Mobile Ltd. led losses in Hong Kong, the region's worst-performing market today, after comments by China's Premier Wen Jiabao signaled a plan to allow mainland investors to buy the city's shares directly will be held up.
``The subprime issue hasn't been solved yet,'' said Samantha Ho, a Hong Kong-based fund manager who oversees more than $5 billion of Hong Kong and China equities at Invesco Asia Ltd. Delays to China's proposed relaxation of curbs on Hong Kong share investments is hurting sentiment in the city, she added.Bloomberg.com, Nov 5,2007
Euro Zone Factory Growth Slows Down Sharply
The RBS/NTC Eurozone Manufacturing Purchasing Managers Index (PMI) was confirmed at 51.5, unmoved from the flash estimate and the consensus forecast and at its lowest since August 2005. Germany saw its sharpest monthly slowdown since its survey started in early 1996, with its factory PMI falling more than three points to 51.7, still above the 50.0 mark that divides growth from contraction. CNBC, Nov 2,2007
MSN Market Dispatches 8/23/2006
Existing home sales sink, drag stocks lower
Sales of existing homes fell more than 4% in July to the lowest level since January 2004. Inventories jump sharply. Stocks fall back broadly. Oil prices sink as gasoline inventories rise.
Real Estate Comes In for a "Not Soft" Landing
The potential for still greater damage [to the housing market] is evident by the fact that the chief economist for the California Association of Realtors has only recently stopped using the term “soft landing” to describe the California real estate market. “Maybe we need something new,” she says. But the “illusion of what was” is obviously in place because the economist adds, “That’s all I’m prepared to say. When I get a new term, I’ll let you know.” Based on the industry’s two key measures of future business, “crash” is not too strong a word.
(Elliott Wave Financial Forecast, August 2006)
Real Estate Comes In for a "Not Soft" Landing
By: Pete Kendall, August 16, 2006
The potential for still greater damage [to the housing market] is evident by the fact that the chief economist for the California Association of Realtors has only recently stopped using the term “soft landing” to describe the California real estate market. “Maybe we need something new,” she says. But the “illusion of what was” is obviously in place because the economist adds, “That’s all I’m prepared to say. When I get a new term, I’ll let you know.” Based on the industry’s two key measures of future business, “crash” is not too strong a word. (The Elliott Wave Financial Forecast, August 2006)
The following paragraph seems to be right out of Conquer the Crash. “These factors are largely the result of an increasing number of potential buyers adopting a 'wait and see' attitude because of uncertainty about where the housing market is headed."--Ryan Gordon
Good Morning America did a spot on pending job cuts in America. They were making recommendations about what people can do to prepare for this. One was to have 2-3 mos living expenses in savings. And the final one...I couldn't believe my ears...”Go out and get a home equity line of credit now because they won't give you one when you are unemployed.” Obviously assuming that the value of your home will never go down! Ouch! We are really in for it.--Eugene Fina
This chart shows the latest, even deeper plunge of the Housing Market Index and Traffic of Prospective Buyers. The latests data on housing starts confirms that a massive reversal is in place. Starts fell 13% from a year earlier while permits were down an even more dramatic 21%. Permits hit a record high in September 2005, while starts reached a seasonally-adjusted record in January of this year. A Reuters article from August 13 reveals that while the C-word is not yet in vogue, observers are starting to find some words to coinvey what's happening: "Steeply deteriorating." "Hard landing." "Kaput." These are some of the terms used by analysts to describe the slowing of the U.S. housing market.
The article, “U.S. Homeowners Say ‘Downsize Me!’” also provides ample evidence of the emerging conservatism called for in recent issues of EWFF and the Sociotimes entry of July 28. According to Reuters it’s suddenly dawning on Americans that they “are carrying a lot of excess weight and desperately want to slim down -- in the size of their homes.” “Our property taxes went down by 1,000%, the ConEd (bill) was cut by two-thirds and the cost of home maintenance was reduced by at least 50%,” says a semi-retired man who just moved from a 2,200 square-foot home to a 1,200 square-foot apartment. “No gardener, no roofer cleaning gutters, no tree spraying, no snow removal, no exterior painting every six or seven years."
In Florida, “homebuyers are losing interest in size altogether.” From 1970 to 2005, the average number of occupants per household decline from 3.11 people to 2.59, but over the same span, the size of the average home rose from 1,500 square feet to more than 2,400. “Homes are larger than need to be and more than [many homeowners] can handle.” This realization could have come at any point in the last 20 years; but it didn’t because people’s home buying decisions were not guided by the logic of necessity. They were driven by the expansive psychology of the old bull market, which is now succumbing to its alter ego. As we have noted many times, third waves are recognition waves in which the fundamentals respond in very robust ways. By noting that some are “sensing now may be the right time to get the best price before the market cools further,” the article points out, however, that recognition doesn’t happen all at once. Some see the reality sooner and reap the benefits.
The Wave Principle
of Human Social Behavior
And The New Science of Socionomics
by Robert R.Prechter, 1999
The Science of History and Social Prediction Best-selling author Robert Prechter’s revolutionary two-book set, Socionomics: The Science of History and Social Prediction spells out a historical correlation between patterned shifts in social mood and their most sensitive register, the stock market.It also presents engaging essays -- representing over 20 years worth of research -- correlating social mood trends to music, sports, corporate culture, peace, war and macroeconomic trends.
More about Socionomics
