Archive for the 'Economics' Category

Please, keep your opinions to yourselves.

Published on July 10, 2009 in Economics. 0 Comments Tags: , , , , .

I dread people asking me what my degree or job title is.  When I tell people that I am a “Mathematics Specialist”, they usually crinkle their nose and comment on how much they hate my chosen field.  Not everyone, of course, but a vast majority.  Ask a bunch of adults to raise their hand if they can’t read, and you’ll get nobody’s hand up.  People feel embarrassed to admit they can’t read.  Ask the same group of adults if they can’t do math, and you will get many hands.  People are not embarrassed at all to admit they can’t do math.  I’ve always thought it was weird that a room full of adults has no problem admitting their incompetence in the field of mathematics, a field that permeates every aspect of human life.  The situation isn’t much different for the field I got my first degree in;  Physics is still viewed by many as an intractable and incomprehensible field for the nerds and geeks of the world.  I’ll give you an example:  I was getting my teeth cleaned, maybe a year ago or so, and the lady asked me what I went to school for.  I told her I had gotten a BS in physics and an MS in mathematics.  She responded with a loud, “Ewwwww!  I hated math and physics!”

I told her, “I hate dentistry!” (not really, but I was thinking it!  What are you supposed to say to someone who just told you they hate your passion and chosen profession?)

But I am not writing about the fact that nobody has a problem telling me how much they hate my occupation.  I can live with that.  What would really bother me is if one of those people started arguing with me about Quantum Mechanics or the Calculus of Variations.  In fact, this has happenned before.  A while ago someone who had read some popular book, like Hawking’s “A brief History of Time”, wanted to actually argue with me about how quantum mechanics really works!  He had so many misconceptions of the subject that I just gave up and said, “whatever dude”, and left it at that.  I mean, can you imagine me trying to tell my dentist how to do her job that day?

But recently I have realized that this is exactly what almost every person does with both politics and economics.  Everybody, no matter how well read they are, has an opinion on these fields.  That must be exhausting for actual economists!  Economics is a science, like math.  You set out basic assumptions (axioms) and you draw conclusions through logic that you can test against reality for usefullness.  I’m glad they have kept math out of politics, because it would drive me crazy, I think, to hear the Hill debate weather or not Pi is actually a rational number.  Most people know nothing about economics, having never read a single book, but they nonetheless have many ideas and misconceptions of the subject (and will have no problem imposing those views on others through the force of government).  Similarly, everyone has an opinion on politics without ever having read the basic texts.

Marx, Bastiat, Adam Smith, Mises, Friedman, Locke, Hobbes, Hayek.  Everyone who ever talks about politics or economics should be familiar with all these names, and more, or they are like the guy arguing with me about quantum mechanics, full of misconceptions.  The one big difference is that the guy arguing quantum mechanics can’t really affect how the world works, or the direction of research in that field.  His understanding does not affect my world in a real way.  However, the peope who constantly argue politics and economics without at least a solid understanding of the fundamentals do affect the economy though their votes and elected representatives.  The TARP, (or TALF, or whatever it is now called), stimulus, bailouts, these all have serious implications for my future.  When the Mayor of Detroit gets on TV arguing economics with an economist, it drives me crazy.  Almost as crazy as Stephen Baldwin arguing the politics of Marijuana legalization with Ron Paul.  It reminds me of the classic skit in Monty Python’s Flying Cicus where the bulky boxer is put in the ring with a little girl and he just keeps knocking her down over and over.  Except this is real life, and instead of being funny, it’s actually quite depressing.

Now, since I am not an economist, though I have read many many books on the subject, I still tend to listen to actual economists before forming my opinion of any policy.  And just like the layman trying to decide on what to wear for the day and deciding what channel’s weatherman to watch, i want to listen to those that repeatedly get it right.  Some “economists” have proved to be so only in name, missing just about every single warning sign on the way to the current situation.  I dont listen to them.  I cant imagine a physicist or mathematician lasting too long when every time he sits to do an experiment or solve some problem, he misses wildly.  However there are many economists who have gotten it right over and over.  I tend to listen to them.

But one of the most respected and listened to economists has been disastorously wrong on multiple occasions.  Paul Krugman, Nobel prize winner and Keynesian economist extrodinaire, has been wrong over and over.  He suggested, in the wake of the dotcom bubble that greenspan should blow up a housing bubble to replace lost business investment.  Here we see a perfect example that replacing bubbles with other, larger bubbles can only lead to a worse situation in the future.  Would you rather go back to 2000 and let that recession take place and never have experienced the housing bubble to begin with?  Of course you would.  Unless, that is, you like the fact that we will be running a 2 trillion dollar deficit this year (which means we nearly have to borrow every two months what we did for the entire year last year at a time when the dollar really cant take anymore beatings), multi-trillion dollar deficits over the next four years, and moral hazard created when government steals from its citizens (who are broke) to bailout their rich friends on wall street.

Instead of continuing to listen to those economists that have repeatedly gotten it wrong, why not listen to someone who has been right?  Examples are abound, just not in the mainstream media.  Here is one.  Tom Woods is my hero.  Here is another, Peter Schiff, Ron Paul’s economic advisor during his long shot presidential bid (and someone I wholehartedly support to this day as maybe the only honest, principled representative left who is truely conservative).  Check out the recently popular Schiff was right video on youtube.  Finally, Gary North and Lew Rockwell.  Gary can be found on Lew’s blog, which I read everyday.  Obviously, when Obama says the economists on all sides agree, he is admitting the personal flaw of selective hearing (as egomaniacal authoritarian warmongers tend: to select facts to support their agenda;  self-absorbed and obtuse to the extreme).

The Santa Claus Conspiracy, Part  Dew

Published on March 8, 2009 in Economics, Philosophy and Politics. 0 Comments Tags: , , , .

Let us return to the metaphor of  “Santa Claus: Benevolent Conspiracy” as it relates to money and banks and fear and faith.

In the case of Sanity Claus, the conspirators must maintain a sufficient degree of consistency and credibility in their deception in order to perpetuate the conspiracy, to alleviate the doubt and boost the faith of the true believer.  Don’t ever give them REASON to doubt, for they will surely grasp upon it if the least bit curious, and eventually unravel the whole freakin’ fairy tale.  Inconsistency was the hobgoblin that swallowed my parents’ version of the myth, and its role in my belief system.  You can’t, on one hand, reward and encourage a child to examine the universe from a scientific, rational, logical western perspective and then try to feed the same child fairy tales about a fat fucker with a flying sleigh.

Cognitive dissonance breeds the questioning of authority and reality.

Unlike myself, when my own children came to the realization that Santa was a crock of shit, they kept their mouths shut. For years. Their faith had been replaced with the fear that if they dared utter the truth, the presents would cease to appear.

They tolerated the deception as long as the gifts came in.  We played along as long as the requests were reasonable.

They knew, and we knew that they knew and we all played make-believe and nobody got hurt because everyone played nice.  If the players become either greedy or irresponsible, the game collapses.

For the kids, that meant reasonable requests.

For the adults: don’t promise what you can’t deliver.

The benevolent conspiracy, the Fractured Fairy Tale of Fractional Reserve Lending and debt-based currency is beginning to unravel.

The reason?

In a word, greed.

Unreasonable expectations.

Unrealistic promises.

Prosperity, abundance and the delusion that Santa can deliver whatever our heart desires has turned us into a society that engages in willful co-conspiring year round.

“Where’s dinner?”

“Under the tree!”

You can only keep the fairy tale alive as long as you don’t try to squeeze too much magic out of it.  Everyone’s gotta play nice, or else.

We have – both literally and figuratively – bought a little to deeply and selfishly into the myth that we can create something from nothing at all.

We’re afraid to call out the allegedly adult co-conspirators for their deception and irresponsible actions, because we’ve become reliant on their largesse for our very survival.

Our faith has been replaced with the fear that if we dare utter the truth, the gifts under the tree will vanish.

The fairy tale:

Too Big To Fail.

Realty is gravity:

i.e.,

What goes up

Must come down.

Lest ye be spooked by my lunatic howlings, look at the Light Side of the Moon.

Defy gravity with levity.

Spin to the yin that completes the yang.

Decouple your perception of value from the dollar standard.

The Power to Love is an unlimited commodity; adopt it as your currency.

Measured in gigaHugz and delivered in person.

Door to door, face to face, cheek to cheek;

On demand or on the dance floor.

If we all play nice, any myth will suffice.

peas bewitchu

A Look Back at My Head a Year Ago

Published on February 21, 2009 in Economics. 0 Comments Tags: , , .

The following content was originally written on January 10, 2008 and posted in an online forum.   Please excuse my somewhat disjointed ramblings since this was originally intended for an internet message board.   I simply wanted to revisit my previous thoughts and assess the accuracy of my predictions.  So here we go:

Here’s some doom and gloom for ya.

Here’s what I see in the next four years that our next president must deal with.

Stagflation

Alan Greenspan reminds everyone that things aren’t great.  He gives us insight into the weird raising of interest rates that occurred toward the end of his career.  He tells us that we are already seeing the early signs of stagflation.

Economics.about.com says the following on stagflation:

“But the most important element in the war against inflation was the Federal Reserve Board, which clamped down hard on the money supply beginning in 1979.  By refusing to supply all the money an inflation-ravaged economy wanted, the Fed caused interest rates to rise.  As a result, consumer spending and business borrowing slowed abruptly.  The economy soon fell into a deep recession.”

The problem with today is that the Fed can’t stop printing money.  Our tax base is shrinking and we have two wars to pay for, not to mention Social Security and Medicare, so a cure by recession is out of the question.  Over the next four years, the status quo (Bernanke and his Keynesian dreamworld utopia) would be to keep rates artificially low to prop up the market.  Meanwhile, prices continue to rise for the same reasons they did in the 70′s, including energy and commodity costs.  This leads to unemployment.  Further, oil prices will continue to rise as long as we maintain a military presence in the Middle East, but more on that later.  I just hope that we won’t be drawn into a conflict with Pakistan or Iran.

Our viable candidates have offered us better schools, “energy independence”, and a slew of other non-issues that CANNOT be payed for.  None of it will matter when unemployment reaches a new high, the national debt swells faster than ever before, and prices rise as the dollar falls.  Our stagflation cannot be cured by recession.  Unfortunately, only a severe depression can result since the Fed’s hands are tied and the government needs the money.

The same Keynesian arguments won’t work anymore.  Hayek was right.  Get used to it.  I mean, how could we ever believe a guy that talks about “Keynesian multipliers?”  What a load of crap!

MILTON FRIEDMAN:
Stagflation was the end of naive Keynesianism.
You had two things at the same time, which under the Keynesian view would have been impossible.
You had stagnation in the economy, high level of unemployment.
You had inflation, with prices rising rapidly.

NARRATOR:  When Hayek moved back to his native Austria, he was depressed. The success of mixed economies made his free-market theories, and Hayek himself, seem more irrelevant than ever.

LAURENCE HAYEK, Hayek’s Son:  The world was very much a socialist world.  His ideas were not fashionable.  Nobody seemed to listen to him.  Nobody seemed to agree with him.  He was alone.

NARRATOR:  Hayek found his ideas shunned by the academic world.

FRIEDRICH VON HAYEK (interviewed in 1978):  Most of the departments came to dislike me, so much so that I can feel it to the present day, [and] economists very largely tend to treat me as an outsider.

NARRATOR:  He was living in a provincial town and stuck in a rut.  But the outside world was beginning to change.  Skimming the newspaper in his usual restaurant, Hayek read how inflation and unemployment were rising at the same time.  There was a new word to describe it: “stagflation.”

So have we taken any lessons from the 1970′s?   It appears that haven’t.  Tis a shame, but the party in Washington and on Wall Street was more important to the ruling elite than the parties on main street.

China, however, is learning from our mistakes. China has no social security, no guaranteed medical plan, and no pention benefits.  They seem more capitalistic than the U.S.!   It’s no wonder they are doing so well.

But will they go on the gold standard, untying their currency from our fiat paper?

Some excerpts from Moneyweek:

Dollar collapse: the rise of Asia

On our way to a post-collapse, post-dollar world, Asia will likely transition from a de jure dollar standard to a de facto gold standard.  This will happen in stages as the dollar crumbles; Asian countries and consumers will accumulate gold reserves surreptitiously at first, and may eventually formalize the transition through some sort of pension IMF-type arrangement.

Asia has the “second mover advantage” of being privy to all the Western World’s mistakes.  They are able to see where profligacy and runaway entitlement programs have led.  Their top-down orientation will enable them to rein in expensive entitlement programs or, better yet, curtail young ones before they grow bigger.  Not being as mentally and emotionally tied to the workings of empire and the capitalist welfare mentality, Asia will successfully cut the cord faster.  In doing so, Asia will also rely on its citizens’ natural propensity to trust precious metals and hoard them as a store of value in the first place….

While Keynesians see the rise of gold as temporary – and will continue to assert their naysayer views as gold rises further – it will soon come to light that the ‘world reserve currency’ idea was the temporary thing, an anachronism of the industrial age…

The world reserve currency concept is tied to the notion of a single all-powerful superpower.  That is a 20th-century idea that is going away.  It is also tied to the idea of a single economic powerhouse striding atop the rest of the world. That idea is going away too…

Even if China becomes the new manufacturing Boss Hoss of the 21st century, it will not wield the same economic heft as America did in the 20th or Britain did in the 19th.  There are too many competitors for that now.  To the degree that China’s power comes as a cheap manufacturing destination, it will always be one price cut away from noncompetitiveness with India or the rest of the Asian nations, and eventually the Middle East, South America, Africa, etc… economy of scale is simply no longer the powerhouse edge that it used to be.  The agglomeration of industrial and political power seen in the 20th century will likely vanish into the pages of history.  The concept of ‘world reserve currency’ may well vanish with it…

Asia could well be the vanguard for a new gold standard because of internal dynamics.  China is exemplary in this regard in that Chinese citizens regularly save as much as 40% of their personal income. This is in large part due to the lack of a safety net in China.  There is no Social Security, no guaranteed medical care, no pension benefits and so on.  Many of China’s less-connected citizens seem as likely to bury their wealth in a shoebox as put it in a bank. This mindset strongly favors a physical, storable asset, like gold.

So maybe we could hear from our candidates about these things?  There are serious problems out there, and forgive me for supporting the only wack job [read: Ron Paul] that specifically addresses these concerns and offers a new solution.

As I predicted over a year ago, rates have been kept low and tensions continue in the Middle East and between us and Pakistan.  Obama continues to assert, despite the National Intelligence Estimate’s conclusions to the contrary, that Iran is seeking nuclear capabilities.  Unemployment continues to rise and Congress, together with the Fed, is pouring money into the financial system with absolutley no regard to inflation.  We have seen a slight correction in commodities, but as gold has clearly reversed its downward trend, so will other commodities.  Oil has certainly come down in a major way, but this is simply a temporary correction, which always happens when oil prices spike like they did.  Commodities are the only asset class whose fundamentals have remained strong throughout this downturn and they will continue to be the best asset class throughout the coming depression.  Our leaders, however, must have not seen what I observed because they have ramped up their spending and economically destructive behavior since I wrote this.

Sometimes I feel like I’m eating crazy pills!

China: Evil Geniuses or Complete Fools?

Published on February 13, 2009 in Economics. 0 Comments Tags: , , .

For over a decade, we have seen China lauded as the next world power. At first glance, it’s easy to see why so many renowned investors threw money at the evil geniuses of the East. They’re the world’s leading exporter, the largest owner of U.S. Treasuries, and have seemingly unstoppable economic growth. Add the world’s largest military and a population four times our own to the list and you get the myth of eminent Chinese dominance.

For over a decade, China’s export-driven economy has paved the way for enormous economic growth. By pegging their currency lower than the dollar and taking full advantage of 130 million migrant workers slaving away in sweat shop conditions, their competitive edge in manufacturing has been untouchable. They even went a step further to stimulate demand for their exports by becoming the largest holder of U.S. treasuries as well as Fannie Mae and Freddie Mac debt. The criminal masterminds were set to become the next superpower. I mean, what could possibly go wrong with funding one of the largest credit booms in history through slave labor and currency manipulation?

Meanwhile, U.S. politicians ignored the currency manipulation, human rights violations, and pollution and enjoyed the supposed “prosperity” it all provided. The Federal Reserve continued to inflate the economy while China kept goods cheap and credit even cheaper. Just when it all seemed to be unsustainable and started to burst, financial innovation came through to turn our hot potato economy the dawning of a new era. Housing prices rose and the resulting debt was just packaged up and sold off to anyone naïve enough to buy into it. The game of hide the sausage was on. From the (formerly) oil rich Middle Eastern countries to China to government pension funds, the willful ignorance continued.

Now the game is up. What’s left is unsustainable debt and interest rates at an all time low. As it turns out, being the largest holder of U.S. Treasuries at that moment wasn’t such a good idea after all. Bond prices only have one way to go. Then you consider that China’s exports declined 17% in the past year. Apparently, relying on other countries to drive nearly half of economic growth wasn’t that bright either. Top it all off with 20 million of those sweat shop citizens now being unemployed, and you have one dangerous situation that is just starting to develop.

At this point, everyone is a loser and an idiot. So it’s time for a new fool’s game: beggar thy neighbor. The goal this time is not unlike the last. The country that devalues its currency the fastest wins the race of inevitability. Argentina and Iceland are all-stars at this one. Japan? Not so much. The U.S. and China started off in a dead heat with equally destructive spending efforts. Then President Obama kicked it into overdrive in his very first week on the team by accusing China of currency manipulation. If he chooses to make that accusation formally, it would force China to let the Remnibi rise against the dollar and erode their export base. It would also drastically reduce, if not prevent them, from purchasing U.S. treasuries. What better way to destroy your currency the fastest than to tell your largest creditor to fuck off. Let’s take a look at the response from Chinese officials:

Yu said China has no plans to channel its reserves toward stimulating its own economy because its trade surplus is sufficient to fund any import needs. China’s trade surplus was $39 billion in January.

China “should diversify its reserves away from U.S. Treasuries if the value of China’s foreign-exchange reserves is in danger of being inflated away by the U.S. government’s pump-priming,” he said.

He goes on to say:

China can also use this opportunity to get a promise from the U.S. not to make inappropriate requests on bilateral trade and the Chinese yuan,” Lu said. “We can’t afford more yuan appreciation as the economy is facing a serious slowdown.

So let me get this straight. China doesn’t want their currency to appreciate or it will collapse their economy. So in retaliation, they threaten to stop purchasing treasuries, which will crash the dollar and cause their currency to appreciate. Someone seems to be forgetting the rules of beggar thy neighbor. At this point, it’s safe to rule out evil genius status and call them what they still are: Our bitch. Some might say “but what happens when they become a consumer based economy!” Sorry, but slaves don’t make good consumers and consumers don’t always make good slaves. “Here’s 2 acres and a mule. Buy a pair of jeans” will not work. The old adage says that when the U.S. sneezes, the rest of the world catches a cold.  Soon we we will find out that when the U.S. catches a cold, China riots.

The U.S. on the other hand, needs increased savings to pay off debt, yet we continue to encourage more debt and prop up inflated assets. The Consumer of Last Resort, aka congress, is trying to pick up the slack. If they succeed, inflation will be a big problem. If they fail, we experience a prolonged deflationary depression. Welcome to Economic Zugzwang.

The famous Austrian economist, Ludwig von Mises, once said, “There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.” Regardless of which path we choose, a collapse is coming. And when it does, our debt will no longer be backed by the full faith and credit of the United States government. It will be backed by 10,000 nuclear missiles.

Magic, Monetary Policy and the Santa Claus Conspiracy

Published on February 12, 2009 in Economics. 0 Comments Tags: , , .

I was five years old when I unearthed the first of many conspiracies being perpetrated upon me. One could also say that it was my first conscious awareness of cognitive dissonance within the belief system that was being fed to my young and gullible mind.

Science Bless my ‘rents, for they had nurtured and encouraged my natural curiosity about the way the world operated, and had begun to provide me with the rudimentary tools of western rational thought. Ironically it was these very tools that led me to the inescapable conclusion that Santa Claus was bullshit.

Maybe I should have been angered or hurt by the revelation that I’d been willfully deceived by those in whom I’d placed unconditional faith and trust, but I wasn’t, or if I was I was too wrapped up in the sweet triumphant taste of having single-handedly, rationally and logically deduced the fraudulent nature of this mythical Claus d00d who had previously seemed to defy natural law by figuratively and literally flying in the face of all things rational and reasonable.

There was a catch, of course. Taking Kris Kringle out of the equation collapsed the cloud of magical possibility into a finite set defined by the ways, means and will of the parental units.

Ah, but there was another catch, and this one was the best of all:  If I kept my mouth shut and played along, I would continue to receive: not from a magical bounty, but with the most abundant generosity that my parents budget would allow. Since “Santa” had delivered pretty well in the past, I wouldn’t suffer any future losses so long as I didn’t “spoil the magic” for my siblings.

This was my initiation into the Great and Benevolent Santa Claus Conspiracy, and, until today, I have never revealed these secrets to any True Believers.

It sucks to find out that magicians are just con artists until you become a magician, promise to keep your mouth shut, and become skillful and consistent at performing professionally for fame, fortune, awe, and respect.

Modern illusionists don’t need the absolute faith of the innocent child to perpetuate the power of their “magic.” They just need to be crafty, adept, and deceptive enough to impress and confound the observer with a WTF moment.

How does he DO that?

Leave ‘em guessin’ and they’ll keep coming back for more.

There are only three requirements for the perpetuation of magic’s myth and  marketability.

  1. Integrity/accountability. A sleight of hand artist that can leave Joe the Plumber slack-jawed as he “magically” pulls Joe’s wristwatch out of his own breast pocket HAS TO GIVE THE WATCH BACK before the performance is over. If the entire audience realized that they too had been “magically” relieved of their watches rings, blackberries, and the “magician” shrugged his shoulders and merely said, “Don’t look at me,” I doubt he’d sell too many tickets once the word got around.
  2. Novelty. The act must be presented as something new and different. Rad the label: Magic fades with repeated watchings.
  3. “Honor amongst thieves.” Don’t let Penn and Teller fool you. They’re expository performances are no more of a threat to the Blaines and Copperfields  (and thereby the industry as a whole) than the “revelation” that “some porn stars have fake tits” is to the porn industry at large.

As long as the above requirements are met, the masses will entertain the myth of magic to a level that perpetuates the game. We know it ain’t real, but like Santa Claus, it’s benign enough, and nobody’s being fleeced beyond the price they agreed to pay. We willfully submit ourselves to the deception so long as it doesn’t hurt us.

If, on the other hand, bands of sleight of hand artists, illusionists and smooth talking magic men swept into our cities and towns and performed their act, and we fed them well and put them up and turned our heads when they kissed our daughters at the door, and we awoke to find that everything we had was gone…

Ladies and gentleman, seekers of divine Alumination, phants, phreaks and pharts alike, the time has come to open your hearts and your minds, your eyes and, of course, your wallets.

What do yo see before you?

A Federal Reserve Note, backed solely by the “good faith and credit of the United States of America.”

This final benevolent conspiracy is just a little different from the last two, because there’s no real choice regarding participation.

We’re all in, all of us, for the duration.

Let us Play:

Dear conspiratorial Universe, grant me the ability to make/believe, to conjure the Power to Love, to metamorph the metaphor and mutate the vision to the Outer Limits of Reality Television, and to inspire my fellow sisbrahtheren to invoke the inner imagination that reveals the substance behind the Question we Dare Not Ask:

If the Money Magicians fail to deliver, if they fail to act in good faith, if they are three card monte swindlers and pick-pocketing scammers rather than generous loving benevolent parents or an upstanding legitimate performers, when we close your eyes and open them again, what will remain, and what will have disappeared?

Please ponder the unponderable as the plate is passed, keeping in mind that here in my house your money’s no good, and I only accept voluntary donations of Aluminated Love.

Any denomination is fine.  Even if you only have a few sense left to your name, now is the time to give.

Peas bewitch you.

Macroeconomic Market Watch

Published on February 11, 2009 in Economics. 0 Comments Tags: .

“We’re Just Sitting Around Blowing Bubbles…”

A few bubbles have popped. A housing bubble and various commodity bubbles have come and gone. Asset-class bubbles have burst as well with others soon to come; mutual funds lost 30-40% on the year while the hedge fund industry took its biggest losses in history during 2008 – in many cases, years worth of profits and retirement savings were wiped out. Pension funds (much larger asset class than hedge funds) and private equity funds have yet to deleverage and take realized losses as was so publicized in hedge funds in late ’08.

Yet there are other – potentially more damaging – bubbles on the horizon. While the US Congress sits running around in circles trying to find out where the problems started (which really is a circle since they will only end up finding out it was themselves not to mention a whole host of other problems like the Ratings Agencies, but I digress), we are looking at bubbles in government debt not only in the United States, but in Europe and Japan as well. Interest rates have gone down as low as they can possibly go. Add to that an ever-expanding debt burden with each coming week’s worth of bailouts, stimulus plans, and backstops, and we have a scenario where inflation is inevitable when the global economy does start to recover. As with every past bubble, a collapse of the T-Bond bubble could mean a severe correction. This would lean more towards hyperinflation than inflation as demand for US debt dries up and the Fed is forced to print money to pay off even the interest rates on the *official* $10.7 trillion National Debt (see: fiscal gap which was calculated at $65.9 trillion even as far back in 2006 – I wonder what this would be now).

The “strong” US dollar as typically bubbles up in recessions is not very strong by historical standards, which signals that the lows for the dollar index in mid 2008 will soon be revisited and then some when the global economy corrects.

Gold is bubbling up as we speak, and this will likely continue to grow as uncertainty reigns king.

The most dangerous bubble has clearly shown itself this week (week of February 9), which you wont hear the pundits talking about. The government bubble is a new phenomenon, and it could probably just as well be named the Obama bubble (Obamubble?). There is an underlying theme lately that seems to be expecting the government to solve our problems. I myself fell victim to it at the peak of the panic. In retrospect, the government will not and cannot fundamentally solve our problems. They have done nothing but exacerbate many of the problems by throwing money at them. The leverage put on in recent years by pension funds, insurance companies, sovereign wealth funds, hedge funds, firms, and individuals was excessive and is now being removed. The government trying to salvage those that need to be removed does two things, neither of them good. First, it is a losing proposition, and the losses are placed on the future taxpayers. Second, it causes the good sectors where that money would have been used to become less safe, and potentially even pushes them into unprofitability as well. Since it is political season, it is clear why we as a populace have become so short-sighted.  Yet even if one concedes that public demand taking the place of private demand now nonexistent is not the worst idea in the world, in the long-term, there is no way out of this problem that doesn’t involve the US Government and populace saving more and spending less.  As it stands now, the Government is trying to plug the dam with (pun intended) bubble gum. Be careful out there!

US equities are likely to continue retesting the lows of late November in coming weeks as the global economy continues to deteriorate and hope in government plans falters. If the Dow breaks below 7450 and S&P 740, we could be setting up for another economic downwave and more bad news from stocks. There had been alot of bottom fishing at the year end as volume deteriorated and then became enthusiasm about the Obama stimulus plan. If the bottom fails, the money could just as quickly run for the exits. At 7000 on the Dow and 700 on the S&P, ride the wave back up before selling into the rally back near 8000.  These are large moves, and currency markets lately have been on edge as all the Yen crosses have made new lows in 2009 as have many major global stock indices. The US should be soon to follow as the government hope bubble is burst.