March 12, 2010
When a stranger in a tinfoil hat tells me that the sky is falling, I don’t pay attention to him. On the other hand, when credible sources warn of an upcoming economic collapse as a result of our government’s financial ignorance — I listen.
Simon Johnson is a professor of Entrepreneurship at MIT’s Sloan School of Management. From 2007-2008, he was chief economist at the International Monetary Fund. He recently co-authored an article for CenterPiece with Peter Boone entitled, “The Doomsday Cycle”. Their essay began with this observation:
Each time the system runs into problems, the Federal Reserve quickly lowers interest rates to revive it. These crises appear to be getting worse and worse — and their impact is increasingly global. Not only are interest rates near zero around the world, but many countries are on fiscal trajectories that require major changes to avoid eventual financial collapse.
What will happen when the next shock hits? We believe we may be nearing the stage where the answer will be — just as it was in the Great Depression — a calamitous global collapse. The root problem is that we have let a “doomsday cycle” infiltrate our economic system . . .
The essay contains a number of proposals for correcting this problem. One of them involves tripling the requirement for core capital at major banks to 15-20% of assets. They concluded with this warning:
Last year, we came remarkably close to collapse. Next time, it may be worse. The threat of the doomsday cycle remains strong and growing.
Of course, the fact that scares me is that our government doesn’t give a damn. We aren’t likely to see any changes in capital requirements or anything else that was suggested in that article.
Niall Ferguson is a professor of economic history at Harvard. He recently wrote an article entitled, “Complexity and Collapse — Empires on the Edge of Chaos”. It was published in the March/April 2010 issue of Foreign Affairs magazine. The piece began with this summary:
Imperial collapse may come much more suddenly than many historians imagine. A combination of fiscal deficits and military overstretch suggests that the United States may be the next empire on the precipice.
Niall Ferguson’s essay inspired Paul Farrell of MarketWatch to write a commentary on Ferguson’s piece, summarizing the highlights, while driving home this message:
Dismiss his warning at your peril. Everything you learned, everything you believe and everything driving our political leaders is based on a misleading, outdated theory of history. The American Empire is at the edge of a dangerous precipice, at risk of a sudden, rapid collapse.
* * *
His message negates all the happy talk you’re hearing in today’s news — about economic recovery and new bull markets, about “hope,” about a return to “American greatness” — from Washington politicians and Wall Street bankers.
* * *
“The Consummation of Empire” focuses us on Ferguson’s core message: At the very peak of their power, affluence and glory, leaders arise, run amok with imperial visions and sabotage themselves, their people and their nation. They have it all.
Fortunately, Mr. Farrell included some advice for those of us who are wondering about how to survive an economic collapse: Head for the hills. Here’s what he had to say:
At this point, investors are asking themselves: How can I prepare for the destruction and collapse of the American Empire? There is no solution in the Cole-Ferguson scenario, only an acceptance of fate, of destiny, of history’s inevitable cycles.
But there is one in “Wealth, War and Wisdom” by hedge fund manager Barton Biggs, Morgan Stanley’s former chief global strategist who warns us of the “possibility of a breakdown of the civilized infrastructure,” advising us to buy a farm in the mountains.
“Your safe haven must be self-sufficient and capable of growing some kind of food … well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc. Think Swiss Family Robinson.” And when they come looting, fire “a few rounds over the approaching brigands’ heads.”
A reading of Paul Farrell’s article about Barton Biggs from July of 2009, reveals a more comfortable assessment of a crisis which may be 40 or 50 years in the future. Professor Ferguson’s essay has apparently given Mr. Farrell a greater sense of urgency about the disaster ahead. Here’s the assessment Mr. Farrell gave last summer:
But how to invest for the “End of Civilization” coming around 2050? The next 40 years will be confusing: Accelerating struggles between aging populations and disenchanted youth, soaring commodity prices, global warming, peak oil, food shortages, famine, blackouts, rationing, civil disorder, increasing crime, worldwide jihads, riots, anarchy and other dark scenarios of a tomorrow with “warfare defining human life.”
Compare and contrast that view with the concluding remark from Mr. Farrell’s recent piece:
You are forewarned: If the peak of America’s glory was the leadership handoff from Clinton to Bush, then we have already triggered the countdown to collapse, the decade from 2010 until 2020 … tick … tick … tick …
You have just read the views of some intelligent men who are warning us that a huge disaster may lie just around the corner. Yikes!
More Damned Lies Than You Can Count
March 15, 2010
Thanks to the great work of Anton Valukas, as court-appointed bankruptcy examiner investigating the collapse of Lehman Brothers, people are finally beginning to realize how significant a role fraud plays on Wall Street. It turned out that the Enron scandal wasn’t the once-in-a-lifetime event people thought it was. Accounting fraud occurs on a regular basis, as does fraudulent stock price manipulation. The 2200-page report prepared by Valukas and his team at Jenner & Block has everyone talking. It’s about time.
Other lies are getting more exposure as well. President Obama justified the bank bailouts with the rationale that giving the money to the banks creates a “money multiplier” effect because banks can loan out 8-10 dollars for every bailout dollar they get, giving the economy more bang for the bailout buck. As I pointed out on September 21, Australian economist Steve Keen published a fantastic report from his website, explaining how the “money multiplier” myth, fed to Obama by the very people who helped cause the crisis, was the wrong paradigm to be starting from in attempting to save the economy. Here’s some of what Professor Keen had to say:
Now that Australia’s economy is beginning to recover, they have already found it necessary to begin raising interest rates. As I pointed out last September:
Michael Shedlock (“Mish”) recently referred to Professor Keen’s debunking of the money multiplier myth in a fantastic essay:
Blogger George Washington recently wrote an extensive, thought-provoking piece about public banking and other potential alternatives to resolve the economic crisis, which appeared at the Naked Capitalism website. The essay began with a discussion of Steve Keen’s work in exposing the “money multiplier” as a sham.
Speaking of shams, former Labor Secretary Robert Reich recently wrote a great essay entitled, “The Sham Recovery”. Reich has exposed the propagandists touting the imaginary economic recovery in his unique, clear style:
It’s always nice when a big lie gets exposed. It’s even better that we are now learning that the true cause of the financial crisis was plain, old sleaze.