Today's Opinion Picks July 15, 2009

Comment:  

Today has a lot written about the baby boomer generation, and appropriately so. I am part of it. Some media attention has "blamed" us for the current problems, but I don't see it that way. I see our parents generation as having benefited most from this era, with their comfortable retirements and medical care. The boomer's are facing some real challenges. Also, don't miss what Justin Fox has to say about Goldman profits. 

One of my goals here is to sort out and find only the best to save my reader time, but today much of that went out of the window. Some days it depends upon my mood, and today I found too much to include. My apologies. Just skim, if you don't have time, or look for the subjects that interest you most. But if you are inclined, there is much in this thread to help educate and inform and provide some valuable perspectives from some intelligent writers and thinkers on these subjects. And, by now, my blogger window has gotten really small for some unknown reason and I am not informed yet how I can get it back to it's normal size, so .... like I said, I have some homework to do. Sigh. That won't keep me from hitting the bike trail soon, however! It's too nice out there.

-Kalpa

Headlines Don't Tell the Real Story

ByVincent Farrell Jr.

......... Take out car sales -- which I don't think can be either real or consistent-- and gas sales and you find retail sales actually fell 0.2%. Gas prices have fallen since the date of the report and are now down four weeks in a row. The average price last week for a gallon of gas was $2.53. That compares with $4.11 at the peak last year.

On the price of energy, apparently Morgan Stanley thinks crude oil will average $55 for the third quarter of 2009, $60 for the fourth quarter, and will rise to $85 in 2010. But take your pick of forecasts. BNP says oil will be at the $45 level through August. I think oil is still vulnerable and will trend towards $50. A price of $85 for next year would require a fairly healthy economic recovery and to my mind is a bit optimistic. Faced with massive deficits, Congress and the Obama administration have to figure out how to pay for any health care legislation. The wizards in the House have come up with a 5.4% surtax on the highest wage earners. Take a look at an editorial, "The Small Business Surtax," in the Wall Street Journal on Tuesday. While the congressional tax guys want to portray a surtax as a levy on the fat cat financiers, the Journal editorial points out that six of every 10 taxpayers that would be affected by the surtax proposal are small-business owners. This is where the rubber of job creation meets the road of unemployment, and these class warfare Washington guys have no clue.

They also tout the Bush tax cuts that expire next year as an addition to the dollars they can count on. But that expiration already has been counted in long-range budgets -- so no counting twice, guys. If the surtax were to be enacted and if the folks that labor with my pal Jason Trennert at Strategas add it up correctly California residents would have a top marginal tax rate of around 55%, New York state folks would get a 54% rate, which includes some propose Medicare increases, and we lucky New York City denizens get a 57% rate. The lowest would be Wyoming, and residents there would still be over 45%......... I still feel the market is in a corrective process that will take us a bit lower.

A Tale of Two Bailouts

Yesterday saw one TARP recipient, Goldman Sachs, report $3.44 billion in profits even as another, CIT, teeters on the edge of either bankruptcy or another taxpayer bailout. Which way CIT will tip remained unclear as we went to press, but its very plight shows how the government's approach to systemic risk has created groups of financial "haves" and "have nots." What the Goldmans of the world have in addition to profits is the widespread belief that they are too big to fail. Both Goldman and CIT converted into bank holding companies at the height of the financial panic last fall, which made them eligible for TARP injections. Goldman also benefited at a crucial moment from the Federal Reserve takeover of AIG, and it received the additional filip of FDIC-guaranteed debt issuance through the Temporary Liquidity Guarantee Program. CIT was excluded from the latter program on grounds that it didn't pose a systemic risk, even as larger competitors like General Electric were allowed in.

CIT's asset quality has since fallen further, and it now faces $2.7 billion in maturing debt this year that investors fear it will not be able to roll over. So it is seeking another taxpayer rescue, and officials at Treasury and Fed are sympathetic. But if CIT -- a company one-tenth the size of Lehman Brothers -- can be bailed out long after the panic has passed, the word "systemic" has lost all meaning. CIT has long been a lender to subprime corporate borrowers, and this decade it took on even greater risks at precisely the wrong time. It has lost money for eight straight quarters. Its lending supports less than 1% of the total U.S. retail and manufacturing, and plenty of competitors could pick up its market share. There's also a question of why the FDIC -- which is supposed to protect bank depositors -- should be the rescue agent........ 

 Banks that want to be successful will also want to be more like Goldman Sachs, creating an incentive for both larger size and more risk-taking on the taxpayer's dime. One policy response to the incentives created by last fall's bailout is simply to restrict the proprietary trading done by the subsidiaries of bank holding companies that enjoy both FDIC deposit insurance and an implicit government subsidy on their cost of capital. This is what Paul Volcker proposed, only to be overruled by Tim Geithner and Larry Summers. Another answer would be an FDIC-style bailout tax, perhaps tied to leverage ratios, for those in the too-big-to-fail camp. Developing a template to facilitate the seizure and orderly winding down of failing financial giants is also an essential element of whatever reform Congress cooks up.

* * *
No one welcomes the pain and dislocation if CIT files for bankruptcy. But U.S. policy toward financial companies cannot avoid all hardship, or the result will be a de facto cartelization of finance, with a resulting loss of competition and dynamism that have long been an American strength. The divergent fortunes of CIT and Goldman Sachs show how much we changed when we stepped in to save certain banks in the name of saving the system.

Winter's Coming for the Boomers: Part 1
by James Quinn

..........Lastly, there is the Fourth Turning, called a Crisis. We are currently on the verge of a Fourth Turning. This is a time of great turmoil, when society's basic institutions are torn down and rebuilt, and seemingly intractable problems are addressed. The apparently unsolvable financial dilemma of the country along with comprehension that Peak Oil has occurred will trigger the Crisis. The ultimate resolution could be rational and well thought out or it could end in a fiery fight to the death between countries or generations. During Fourth Turnings, America engages in a struggle for its very survival and redefines its identity as a nation. Large wars are often a part of this process. The American Revolution, Civil War, Great Depression, and World War II were all facets of past Fourth Turnings. During this period Old Artists disappear, Prophets enter elderhood, Nomads enter midlife, Heroes enter young adulthood—and a new generation of child Artists is born.

According to Strauss & Howe past Fourth Turnings in U.S. history we have overcome intractable problems and forged a new beginning:  “In the 1790’s, they triumphantly created the modern world’s first democratic republic. In the late 1860’s, wounded but reunited, they forged a genuine nation extending new guarantees of liberty and equality. In the late 1940’s, they constructed the most Promethean superpower ever seen.” Sometime between today and 2025, this nation will undergo a test of its very survival. 

The ultimate outcome will be in doubt. Strauss and Howe paint a dire picture of the coming decades:  “The risk of catastrophe will be very high. The nation could erupt into insurrection or civil violence, crack up geographically, or succumb to authoritarian rule. If there is a war, it is likely to be one of maximum risk and effort – in other words, a total war. Every Fourth Turning has registered an upward ratchet in the technology of destruction, and in mankind’s willingness to use it.”

America feels like it is unraveling. Though we live in an era of relative peace and comfort, we have settled into a mood of pessimism about the long-term future, fearful that our superpower nation is somehow rotting from within. Most of my adult life has been spent during the current Unraveling. In 1984 I was twenty-one years old and about to enter the workforce. The country was recovering from the worst recession in decades and the turmoil of the 1970’s was subsiding. Ronald Reagan (GI Generation) won re-election with a 49 state to 1 landslide victory over Walter Mondale using his Morning in America campaign slogan. 

Reagan’s tax cuts, interest rates starting a two decade decline and increased military spending combined to juice the economy. Reagan’s policies were the final dagger in the side of communism. The Soviet Union collapsed and the Berlin Wall fell. What many thought was the end of history, with democracy and capitalism victors, turned out to be a fleeting high. The initial signs of Unraveling were seen during Reagan administration. The Space Shuttle Challenger exploded, leading to questions of competence at NASA. The Iran-Contra scandal derailed the Reagan agenda as he showed signs of mental decline. The American military retreated from Lebanon after 220 Marines were killed in a terrorist attack. The stock market crashed, losing 508 points in one day, a 23% decline. The movie Wall Street with its amoral cynical view of the world captured the darkening mood of the country.

The first George Bush administration was marked by the Gulf War, which planted the poisonous seeds for our future War on Terror, and the recession which cost George Bush a 2nd term. The unraveling could clearly be seen in the 1992 Presidential election, as Ross Perot won the most votes as a 3rd Party candidate since 1912. During the Clinton administration the country continued to fragment, became more divisive, and cynical. Politics became gridlocked, which resulted in reduced government spending. A laissez-faire attitude was promoted by Alan Greenspan and Robert Rubin for the financial markets. This led to the Dot.com bubble and its eventual collapse. Trust in financial, government, and religious institutions continued to erode. The Oklahoma City bombing and the Columbine high school slaughter convinced many that something was very wrong with our culture. A distrustful alienation had solidified into an overwhelming gloom.

The Unraveling picked up speed during George W. Bush’s administration. The stock market continued to implode, the economy entered recession and half the country felt that George Bush was not a legitimate President. Then the country was shaken to its core by the 9/11 attack. For a brief time, the country rallied around the flag and fully supported the invasion of Afghanistan. This appeared to be the trigger for the next American Crisis. Instead, it resulted in an acceleration of the Unraveling. A true trigger for a Crisis period will rally the entire population (Fort Sumter, Pearl Harbor). The disastrous invasion of Iraq, horrific financial management of the economy by Alan Greenspan, individualistic greed and hubris of Wall Street, blatant corruption in Washington D.C., and complete lack of regulation by governmental agencies led to the collapse of the global economy in 2008. Decisive public action regarding $56 trillion of unfunded social liabilities, soaring public and private debt, and non-existent energy policy has been deferred for decades. Now there is no doubt that this paralysis and inaction will lead us into the next Crisis. The majority of Americans feel we are not on the right track, because we’re not. The coming catastrophe will truly test the mettle of our country.

Part II

...........Barack Obama became the 1st Generation X-er to be elected President of the United States. His background is a classic Nomad story. He has lived the life of a wanderer, living all over the globe, a child of divorce, fatherless, raised by grandparents, and a free agent in his career. Generation X grew up as abandoned children and alienated young adults. Generation X leaders will be pragmatic, savvy and practical. Obama has proven thus far to be pragmatic and able to get his agenda initiated. Previous Nomad leaders who proved to be highly competent doers during a time of Crisis include Dwight D. Eisenhower, George Patton, and Harry Truman. You may not agree with Obama’s plans or policies, but it is clear to anyone that he is an intelligent, pragmatic man that will institute dramatic change in the policies of the United States.

It is very likely that Barack Obama will lead the country into the next Crisis. He will not lead us out of the Crisis, as it is unlikely to subside until 2025. As the Unraveling transitions into Crisis the apathy reflected in historic low voter turnout will reverse itself as Americans become mobilized by the Crisis. The economy always undergoes wrenching transformations during a Crisis. The U.S. economy will likely be racked by panic, depression, inflation and war. We have witnessed a preliminary financial panic, but the real panic will be much more traumatic. The separateness and blame witnessed during the Unraveling will transform into gathering and family togetherness. McMansions will become useful as three generations will more frequently live under one roof. Immigration will decline as the population will fear outsiders and place strict restrictions on foreigners entering the country. During the coming crisis, our culture will likely be cleansed, censored, and harnessed for the public good. The current ongoing financial debacle will ultimately contribute to the Crisis causing trigger of a worldwide oil shortage...........

“Most of today’s adult Americans grew up in a society whose citizens dreamed of perpetually improving outcomes: better jobs, fatter wallets, stronger government, finer culture, nicer families, smarter kids, all the usual fruits of progress. Today, deep into a Third Turning, these goals often feel like they are slipping away. Many of us wish we could rewind time, but we know we can’t – and we fear for our children and grandchildren.”

The skies are darkening and a cold wind is beginning to blow. Autumn began with bright skies and warm breezes, but the atmosphere has gotten bitter as swirling winds rip the remaining leaves from the trees. Winter is approaching rapidly and it gives all indications that it will be a bitter, dangerous, harsh time for all Americans. We wish we didn’t have to face the coming trial, but there is no avoiding it. Generational moods are transitioning, and a Crisis will envelop the country for the next twenty years. Courage and fortitude on a level not seen since World War II will be required. The celebrity circuses like the Michael Jackson funeral, Britney Spears comeback tour, and Brangelina’s latest adoption will seem so trite during the coming Crisis. Wearing a blue rubber wristband and putting a yellow ribbon on your Mercedes SUV will not cut it. Previous 4th Turnings in U.S. history have involved total war. 

Deaths during the American Revolutionary War were approximately 50,000. Total deaths during the Civil War were 600,000. Total deaths during World War II were 73,000,000. How many people will die during the coming Crisis? No one knows the answer in advance. An integrated global economy, combined with nuclear weapons, advanced military killing machines, terrorists, and peak oil appears to be a recipe for death on a colossal scale. Anyone who doesn’t sense a turning in the mood of the country is just not paying attention. There is a foreboding feeling that something is dreadfully wrong with our country. For those addicted to cable television, we are about to leave the sheltered, superficial, coddled world of Housewives of Orange County and enter the frigid, dangerous world of The Deadliest Catch with 40 foot waves and the threat of a watery death at any moment. 

A dramatic event will soon shock the nation into action. The catalyst for the Crisis will likely be a sequence of events that will shift the mood of the country. The 1st event will be seen as the financial system meltdown in September 2008. The 2nd event will be viewed as the government’s reaction to the crisis. The remarkable sweeping steps taken by Ben Bernanke, Hank Paulson, Tim Geithner, and Barack Obama have further weakened the U.S. financial system and left it vulnerable to the next sudden shock. The approaching Crisis will be sparked by known existing threats that have been ignored and discounted by our Baby Boom leaders. These known threats include titanic current deficits, colossal unfunded future liabilities, and unavoidable Peak Oil. As the economy continues to hemorrhage jobs, Congress will do what they do best and spend billions more on stimulus pork. 

As the National Debt approaches $15 trillion in 2012, a spectacular collapse of the U.S. dollar becomes more likely. By 2012 the world will realize that Peak Oil is a fact. As demand outstrips supply, prices will rise dramatically. This is when a catalytic event is likely to plunge us into a harsh Winter of darkness and death. As the U.S. economy begins to collapse under the weight of debt and oil shortages, a terrorist attack using nuclear or biological weapons on U.S. soil would plunge the country into chaos. Other possible triggers could be a natural disaster such as an earthquake that destroys significant portions of California or a hurricane that destroys oil rigs and refineries in the Gulf of Mexico. Significant oil shortages will bring commerce to a halt. Food shortages would occur within a week of oil supply disruptions, as most of the food in our stores must be delivered by truck. As real unemployment reaches 25%, interest rates soar, and the dollar becomes worthless, civil unrest will breakout and the Department of Homeland Security will be called upon to fight and imprison its fellow citizens.

Past Crisis periods were marked by Prophets leading and Heroes sacrificing (Gandalf & Frodo) as the soldiers of the Crisis. In 2012 the country is likely to turn to a Baby Boom President with strong leadership skills such as Newt Gingrich or someone who will appear out of nowhere (Abraham Lincoln was an unknown two year Illinois Congressman). As the U.S. domestic crisis deepens, Russia and China will attempt to take advantage of U.S. weakness by expanding their influence and control in Eastern Europe and Asia. Countries with domestic problems always turn outwards for a real or created threat to rally the nation. With the oil crisis getting worse, the U.S. will go to war in order to secure the precious supplies needed to run our economy. 

With China also seeking oil supplies a military conflict with China and Russia is quite possible. If the conflict turns into a cyber war of destroying satellites and disrupting computer communications, world leaders could be fighting blindly. If one of these leaders panics and decides to launch some of their nuclear arsenal, the world could be changed beyond all recognition. This scenario seems impossible today. On October 24, 1929 when the Stock Market crashed, did anyone foresee a twelve year Depression with 25% unemployment, a World War that killed 73 million people, and the creation and use of an atomic bomb in the following sixteen years? The impossible becomes possible during a Crisis. A Crisis can end positively or negatively. Our previous Crisis periods have resulted in new golden ages. If the leaders we choose are strong, wise, and judicious and the Millennial generation can rise to the occasion as their GI generation grandparents did during our last Crisis, we can rejuvenate our national destiny. Winter always turns into Spring. But, Strauss & Howe offer a chilling warning:

“History offers no guarantees. Obviously, things could go horribly wrong – the possibilities ranging from a nuclear exchange to incurable plagues, from terrorist anarchy to high-tech dictatorship. We should not assume that Providence will always exempt our nation from the irreversible tragedies that have overtaken so many others: not just temporary hardship, but debasement and total ruin. Losing in the next Fourth Turning could mean something incomparably worse. It could mean a lasting defeat from which our national innocence – perhaps even our nation – might never recover.”

We are in the Midst of the Great Baby-Boomers Economic Stagnation of 2007-2017
by Rodrigue Tremblay

Many observers think that “prosperity is around the corner” and that this recession, like others since World War II, will end as soon as the stock market, as a leading indicator, recovers and people start spending again. This is a myopic view of the current economic big picture. In fact, since the peak of the housing bubble (in the U.S.) in 2005, the onslaught of the subprime financial crisis in August 2007 and the beginning of the recession in December 2007, the U. S. economy, and to a certain extent, the world economy, have entered a period of protracted adjustments. For sure, there will be some quarters of positive economic growth ahead and the recession may be declared officially over in the coming months, but the radical economic reorganization that is taking place will go on for years to come.

Essentially, because we are at the very end of the 60-year inflation-disinflation-deflation Kondratieff cycle that began in 1949 when war-frozen prices were liberalized; and that powerful long cycle is ending now. The post 1980s era, i.e. the Reagan era, is over, but the excesses and bubbles of the last few decades have to be corrected, at a time when large population shifts are about to take place. Such adjustments will take years to unfold and this will entail a lot of efforts and a lot of changes. Indeed, the era of excessive spending and of excessive debt is over. The era of excessive government economic disengagement and of financial deregulation is over. The era of irresponsible Ponzi-scheme finance is over. 

The era of unregulated derivatives is over. The era of greed as an ideology is over. The era of wild and predatory capitalism is over. The era of cheap oil, of cheap transportation, of cheap commodities and of cheap food is over. The era of excessive concentration of wealth and income is also over. However, the age of political corruption, of incompetent politicians and of destructive wars of aggression is not over. What has arrived is the age of hyperstagflation. The central driving force behind most of these developments, besides the collapse of the financial sector, the debt pyramid and the derivative products structure, and irresponsible talk of larger wars by loose cannon politicians (as if there were not enough problems!) is going to be demographic. Indeed, we have entered a period during which the largest demographic cohort in the history of mankind, the post Word War II baby-boomer generation, has passed its spending peak. This is not something that can be reversed overnight. This is going to be a decade-long process of adjustment, of less spending, of more saving, and above all, of paying off excessive debt loads. Let's keep in mind that consumer spending represents 70 percent of GDP.

The economic consequences are going to be profound and will affect all sectors of the economy. We only have to consider how the automobile industry, once a major engine of economic growth, is presently going through a fundamental reorganization and downsizing. Even computer-based industries have matured and cannot anymore be considered fast growing industries. The only growth sectors left in the U.S. seem to be the health services industry, as the population is aging, and the war-related industries, as the U.S. military-industrial complex keeps on expanding. But even those sectors will have to slow down; lest they bankrupt the entire economy.

That's why I think these industrial and demographic trends herald a period of slower economic growth that could last many years. Governments better wake up to the challenges that such a slow growth environment entails. Very few people are prepared for such a prolonged period of economic stagnation that will be accompanied by forced debt liquidation, in a deflationary environment. This is particularly true of private pension plans that will have trouble paying pensions to recipients in the coming years. This is also true for employment that will expand at a slower pace than the working population, at least for a while, resulting in a rise in the level of unemployment.

Baby-boomers are those individuals who were born between 1946 and 1966. Because of its sheer size (more than 70 million people in the U.S.), this generation has been dominant in all spheres of life for the last fifty years. But now, it has passed its spending peak. This occurred in 2005-06, at the very top of the housing bubble. The average age of the baby-boomer demographic cohort was then 50, which is the age of top spending. At that time, the U.S. personal savings rate fell to a whopping minus 2.5 percent per year. As a comparison, it was 12.5 percent during the 1981-82 recession and it has now rebounded a phenomenal 5.7 percent in April 2009, and it's climbing fast.

Indeed, the end of the housing bubble, the financial crisis, and the economic recession altogether have sent a clear signal to Baby Boomers. You'd better begin saving soon, or your retirement will have to be postponed. And saving means consuming and spending less, while paying up debts, in order to boost net current personal assets to a level that could sustain retirement needs. But if the largest cohort of consumers cuts down on its spending and borrowing, what does it mean for aggregate spending and economic growth? It can only mean slower overall economic growth and some painful economic adjustments. Therefore, there is a high probability that this recession will be a super one that may linger on for years, being interrupted by short-run upside bursts, but soon being followed by a return of stagnant conditions. In Japan, in the nineteen-nineties, a similar financially and demographically induced recession lingered on for an entire decade. And even after twenty years, it cannot be said that Japan is out of the woods yet.............

A few weeks ago, I warned against the risk of future long term interest rates hikes and future U.S. dollar depreciation following the decisions by the U.S. Treasury and by the Fed to flood the markets with trillions of dollars of new Treasury bond issues and with newly printed money. The undertow is coming even faster than I thought. Only when the markets expect relative economic stagnation and a lasting deflationary environment will long term interest rates taper off. Brace yourself and hold on to your britches. There is a rough economic decade ahead.

Ageing Baby Boomers, the One Mega Trend NO ONE is Talking About
By: Graham_Summers

Thus far, analysis the financial collapse has been framed almost entirely in terms of money. All the research I’ve seen has delved into lending standards, securitization, inflation, interest rates, housing and the like. Yet underneath this veneer lies one larger, mega-trend that has driven all of these themes to a greater or lesser degree. It created one of the largest stock bull markets we’ve ever seen from 1982-2001. It helped drive the Bubbles in Tech stocks AND Housing. And now it will guide the coming collapse in stocks and consumer spending.

That trend is AGE: specifically the Boomer generation and its retirement. For the sake of simplicity, I will define a “Boomer” as someone born in the post war boom years from 1946-64. Using this data, today’s Boomers are between 45 and 63 years old. All told there are 76 million Americans in this age category. As of late 2008, Boomers:

• Comprised 38% of the US population
  
• Controlled $13 trillion (50%+) in American Household investable assets
  
• Controlled 50% of all discretionary income
  
• Purchased 43% of all new cars
  
• Accounted for 79% of all leisure travel spending
  
• Ate out four to five times a week
  
• Outspent younger generations by 2 to 1
  

You can see Boomers’ imprints on every major investment trend of the last 30 years whether it’s the rise in consumer spending, the Tech Boom, the Housing Boom, etc. These folks ARE the investing crowd or tide as far as money goes. Please understand, I am not BLAMING the Boomers for ANY of these developments. I am merely pointing out that these folks were the primary participants who drove ALL of these trends due to their ever-increasing economic clout. Between 1980 and 2007, Boomers were “the money” behind virtually every economic development in the US. The Boomers first came of age in the ‘80s (they were 16-34 years old at the start of the decade). Boomers were the first generation to fully adopt credit cards: between 1980 and 1990, credit card spending increased more than five-fold while average household credit card balances quadrupled. They were also the first generation to see stocks as THE means of securing ones retirement: stock-based 401(k)s were introduced in 1983.

By the time the ‘90s rolled around, Boomers had completely entered the workforce (ages 26-44). Thanks to easy credit and cheap goods from China (formal trade with the US opened on 1971), the Boomers operated under the illusion they were getting richer almost every year, when in reality they were spending their and their parents’ savings. Having seen stocks rise almost continuously from 1982-1990, Boomers were only too happy to take over own investment portfolios with the introduction of low cost online brokerage accounts. In 1950, 10% of US adults owned a stock. By the end of the ‘90s more than four in ten American adults were investing in the market. This massive influx of money helped, in part, to create the Tech Bubble.

By the end of the 20th century, Boomers were ages 35-53. They had truly come into their own as THE major wealth demographic, making most of the income and spending most of the money in the US. Having accrued debt for 30+ years without trouble and seen housing prices rise almost continuously during their lifetimes, they began speculating in homes and other higher value assets. This trend was fueled in large by Wall Street’s securitization and the dramatic drop in lending standards in the US. Which brings us to last year. In 2008, the Boomer generation was already in the process of or at least beginning to consider retiring. In the decade from 1992-2003, more than 70% of Boomers had seen their wealth increase by more than half. An additional 20% of them saw their wealth increase better than 25%. And they were set to inherit some $7.2 trillion in wealth from their parents over the coming decades.

Then the Financial Crisis hit and the Boomers got crushed. Last year’s collapse in housing and stocks wiped out $11 trillion in household net worth in the US. That’s roughly 18% of total US household wealth at that time. Put another way, the Boomers just lost nearly 1/5th of their wealth in a single year (the same goes for they money they were set to inherit from their parents which was largely tied up in stocks and real estate). Boomer wealth continues to plunge: commentators celebrated the fact that home prices ONLY fell another 0.6% in June, but none of them mentioned that this represents another $100 billion in US wealth gone.

Bottomline: the 20+ year expansion in Boomer came to a screeching halt last year. We’ve now entered what may in fact be the greatest period of wealth destruction in American history. The effects this will have on Boomer spending, investing, and the like will completely change the investing and economic landscape for the US REGARDLESS of what the Fed, Obama, or any other economic/ political authority attempts. In simple terms, Boomers are THE money flow for the US. In light of this, for the US economy to get back on track any time soon (whether it’s through Stimulus, job growth, etc), Boomers need to participate in a big way. The only problem is that they won’t.

During the recession in the early ‘80s, Boomers were just entering the work force (ages 16-34). The market demographic was technically still in its infancy and growing in economic clout. In the recession in the early ‘90s, Boomers were ages 26-44. Now controlling most of the wealth in the US they could take a hit and come right back buying more stuff, using their credit cards, and investing in stocks and other investments. Moreover, in the brief recession in the early ‘00s, Boomers were ages 36-54. The younger Boomers were just coming into their own, looking to buy homes, advance their careers, etc. Which brings us to today… on the verge of 2010… when Boomers will be ages 46-64 and focusing on one thing: RETIREMENT.

Having just lost 18% of their net worth, potentially lost their jobs, and with record amounts of debt (one in five of Boomers owe more than $50,000 in non-mortgage debt), Boomers are no longer looking for growth or gains, they’re looking for security. Dreams of retirement are no longer soon to be realized (if they will be realized at all). And several key myths have been broken:

Myth #1: You can’t lose money with real estate
Myth #2: Stocks ALWAYS offer the best gains in terms of risk/reward.
Myth #3: Social security and medicare will work

Indeed, if one were to describe the Boomer market demographic in one word, it’d be “disillusioned.” And you can see this disillusionment playing out in the financial markets. First and foremost, many commentators make a big deal about the S&P 500 clearing 950… well that simply brings stocks back to where they were in July 1997. Boomers (who then were largely in their 40s then) have essentially seen NO GROWTH in their 401(k)s in 12 years. ..........

 The Boomers have caught on that paper money is not going to maintain its value (after all, the dollar has lost 4.4% of its value every year since 1971). So they are going to begin shifting their money into gold and other real assets......

Goldman Sachs, vampire squid
by JUSTIN FOX

Thanks to the persistence and assistance of commenter audiospaceship, I finally read the samizdat version of Matt Taibbi's Goldman Sachs screed. (Rolling Stone only posted excerpts, and while I may still go out and buy a print copy, I wouldn't be able to link to it.) I generally liked it, and I actually learned a bunch from the section on Goldman and the oil market. The only thing that bothered me was that it's all a bit of a bait and switch. Goldman hasn't "engineered every major market manipulation since the Great Depression," as the headline reads. At least, Taibbi offers no evidence for this. It's just played a key—although not always the key—role in the big bubbles and crashes of the past decade. As I put it in Fortune four years ago, after Goldman engineered the merger of the New York Stock Exchange (run by Goldman alum John Thain) with electronic trading network Archipelago (in which Goldman was a major shareholder):

For most of its 136-year history, Goldman was a second-string player on a Wall Street ruled by J.P. Morgan, its stepchild Morgan Stanley, and since-departed firms like Dillon Read and Kuhn Loeb. But over the past quarter-century Goldman has ridden successive waves of market upheaval to the top—thanks in large part, as the stock exchange deal shows, to its almost unerring sense of just how far it can push the boundary between serving customers and serving itself. "How remarkable that you can simultaneously act for all those people," says former investment banker Philip Augar, whose new book, The Greed Merchants, explores how the Big Three investment banks—Goldman, Morgan Stanley, and Merrill Lynch—have thrived in an era of deregulation and global competition. "But that's the system. It's allowed."

So yes, it's fair (if unpleasant) to liken Goldman, as Taibbi does, to a "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money," but that's true of all investment banks and a lot of hedge funds too. Goldman's just better at it. Where Taibbi does have a very important point is here:  The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth—pure profit for rich individuals.

Again, this is true of all of Wall Street. Goldman's just better at it. Also, it's not completely true: There is surely something to the economic theory that investment banks and hedge funds perform a useful function in allocating capital. But as someone who has just written a big fat book explaining that the evidence for Wall Street's brilliance at capital allocation has turned out to be pretty thin, I tend to think Taibbi is much closer to being right about this than the Wall Street mythology of a couple of years ago was. Finally, it's worth thinking a little harder than Taibbi did about why Goldman is in the position it's in. I've been reading Charles Fishman's book The Wal-Mart Effect, and it does a great job of explaining why Wal-Mart became so successful—because of a relentless focus on delivering the lowest possible prices for consumers. By now that relentless focus, in a company as giant and powerful as Wal-Mart has become, has brought all sorts of unpleasant side effects. But in itself it's actually sort of admirable.

At Goldman the focus has been on hiring the smartest group of people employed by any American institution, and putting them to work—in the most collegial atmosphere of any major Wall Street firm—in the relentless pursuit of arbitrage opportunities (a.k.a. money). It is Goldman's edge at talent acquisition and development, together with a slightly more public-spirited ethos than is prevalent on Wall Street, that best explains its colonization of the federal government. The end result of it all is deeply disturbing and problematic for our democracy—no argument from me there. But it has come about because Goldman is really good at what it does.

Dark-Colored Glasses
by Michael J. Panzner

..............Here are 10 reasons we are in even more trouble than the 9.5% unemployment rate indicates:

• June's total assumed 185,000 people at work who probably were not. The government could not identify them; it made an assumption about trends. But many of the mythical jobs are in industries that have absolutely no job creation, e.g., finance. When the official numbers are adjusted over the next several months, June will look worse.
• More companies are asking employees to take unpaid leave. These people don't count on the unemployment roll.
• No fewer than 1.4 million people wanted or were available for work in the last 12 months but were not counted. Why? Because they hadn't searched for work in the four weeks preceding the survey.
• The number of workers taking part-time jobs due to the slack economy, a kind of stealth underemployment, has doubled in this recession to about nine million, or 5.8% of the work force. Add those whose hours have been cut to those who cannot find a full-time job and the total unemployed rises to 16.5%, putting the number of involuntarily idle in the range of 25 million.
• The average work week for rank-and-file employees in the private sector, roughly 80% of the work force, slipped to 33 hours. That's 48 minutes a week less than before the recession began, the lowest level since the government began tracking such data 45 years ago. Full-time workers are being downgraded to part time as businesses slash labor costs to remain above water, and factories are operating at only 65% of capacity. If Americans were still clocking those extra 48 minutes a week now, the same aggregate amount of work would get done with 3.3 million fewer employees, which means that if it were not for the shorter work week the jobless rate would be 11.7%, not 9.5% (which far exceeds the 8% rate projected by the Obama administration).
• The average length of official unemployment increased to 24.5 weeks, the longest since government began tracking this data in 1948. The number of long-term unemployed (i.e., for 27 weeks or more) has now jumped to 4.4 million, an all-time high.
• The average worker saw no wage gains in June, with average compensation running flat at $18.53 an hour.
• The goods producing sector is losing the most jobs -- 223,000 in the last report alone.
• The prospects for job creation are equally distressing. The likelihood is that when economic activity picks up, employers will first choose to increase hours for existing workers and bring part-time workers back to full time. Many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because many layoffs have been permanent. Instead of shrinking operations, companies have shut down whole business units or made sweeping structural changes in the way they conduct business. General Motors and Chrysler, closed hundreds of dealerships and reduced brands. Citigroup and Bank of America cut tens of thousands of positions and exited many parts of the world of finance.

Job losses may last well into 2010 to hit an unemployment peak close to 11%. That unemployment rate may be sustained for an extended period.Can we find comfort in the fact that employment has long been considered a lagging indicator? It is conventionally seen as having limited predictive power since employment reflects decisions taken earlier in the business cycle. But today is different. Unemployment has doubled to 9.5% from 4.8% in only 16 months, a rate so fast it may influence future economic behavior and outlook. How could this happen when Washington has thrown trillions of dollars into the pot, including the famous $787 billion in stimulus spending that was supposed to yield $1.50 in growth for every dollar spent? For a start, too much of the money went to transfer payments such as Medicaid, jobless benefits and the like that do nothing for jobs and growth. The spending that creates new jobs is new spending, particularly on infrastructure. It amounts to less than 10% of the stimulus package today.

.............This process is nowhere near complete and, until it is, the economy will barely grow if it does at all, and it may well oscillate between sluggish growth and modest decline for the next several years until the rebalancing of excessive debt has been completed. Until then, the economy will be deprived of adequate profits and cash flow, and businesses will not start to hire nor race to make capital expenditures when they have vast idle capacity. No wonder poll after poll shows a steady erosion of confidence in the stimulus. So what kind of second-act stimulus should we look for? Something that might have a real multiplier effect, not a congressional wish list of pet programs. It is critical that the Obama administration not play politics with the issue. The time to get ready for a serious infrastructure program is now. It's a shame Washington didn't get it right the first time.

Comment:  The above is Panzer's summing up of the Zuckerman article I ran on this site yesterday.

Barney Frank, Chris Dodd Do Banking Back Flip
by David Reilly

Congress can’t make up its mind. First, legislators pushed to let banks take a rosy view of the value of some hard-hit holdings. Now, two key committee chairmen claim banks aren’t being realistic enough about the values of some loans. The allegation by House Financial Services Chairman Barney Frank and Senate Banking Chairman Christopher Dodd that banks are holding some loans at “potentially inflated values” should trouble investors, since it came just days before institutions like JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. are due to report second-quarter results. If some loan values are “inflated,” that again calls into question the quality of banks’ results. Why, after arguing for banks to have more leeway, is Congress now pushing back? Because many government responses to the financial crisis are more about manipulating prices -- and behavior -- than truly getting markets back on their feet.

Dressing up bank balance sheets was a first-quarter political priority. Now there is a push to get banks to modify more troubled mortgages. That effort is being stymied by a rosy view taken by many banks of the value of home-equity loans and second-lien mortgages. Many banks have marked down these loans only by 3 percent to 4 percent, said Paul Miller, bank analyst at Friedman Billings Ramsey & Co. These loans in many cases would likely fetch about 40 cents on the dollar if sold in today’s market. The losses are “a big part of the toxic asset issues facing banks,” Miller added. A first mortgage on a house often can’t be restructured without the agreement of the holder of the second loan, which would entail writing it down in value. Banks have balked at doing that, due to the losses that would result. And why shouldn’t they? Congress, the Obama administration and regulators all told them earlier this year to hope for the best when it came to valuing their assets.

Let’s review. Congress this spring browbeat accounting rulemakers to make it easier for banks to ignore dour market prices for some holdings battered by the credit crisis. That was designed to help banks’ finances look better. Without subsequent rule changes by the Financial Accounting Standards Board, earnings at 45 banks and financial companies would have been 42 percent lower than reported, according to a report last month by Jack Ciesielski, editor of The Analyst’s Accounting Observer. The rule changes allowed companies to sidestep some impact of mark-to-market accounting on securities, many of them backed by mortgages, that have fallen in value for an extended period.

The “maneuver saved eight of the firms -- Prudential Financial Inc., SI Financial Group Inc., First Commonwealth Financial Corp., National Penn Bancshares Inc., Bank of New York Mellon Corp., Zenith National Insurance Corp., Sun Bancorp Inc. and American Equity Investment Life Holding Co. -- from reporting first-quarter losses instead of net income,” Ciesielski wrote. Another rule change allowed companies in some cases to ignore market values and use their own estimates for troubled assets. That helped Wells Fargo & Co. avoid what may otherwise have been a $4.5 billion hit to its capital. This was all part of ongoing and often unsuccessful efforts to push prices in a particular direction...............

Mobius Says Derivatives, Stimulus to Spark New Cr

A new financial crisis will develop from the failure to effectively regulate derivatives and the extra global liquidity from stimulus spending, Templeton Asset Management Ltd.’s Mark Mobius said. “Political pressure from investment banks and all the people that make money in derivatives” will prevent adequate regulation, said Mobius, who oversees $25 billion as executive chairman of Templeton in Singapore. “Definitely we’re going to have another crisis coming down,” he said in a phone interview from Istanbul on July 13. Derivatives contributed to almost $1.5 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg. Global share markets lost almost half their value last year, shedding $28.7 trillion as investors became risk averse amid a global recession.

The U.S. Justice Department is investigating the market for credit-default swaps, Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks, said July 13. Mobius didn’t explain what he thought was needed for effective regulation of derivatives, which are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather. The Bank for International Settlements estimates outstanding derivatives total $592 trillion, about 10 times global gross domestic product. “Banks make so much money with these things that they don’t want transparency because the spreads are so generous when there’s no transparency,” he said.

A “very bad” crisis may emerge within five to seven years as stimulus money adds to financial volatility, Mobius said. Governments have pledged about $2 trillion in stimulus spending. The Justice Department’s antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter. Treasury Secretary Timothy Geithner last week urged Congress to rein in the derivatives market with new U.S. laws that are “difficult to evade.” He said strong capital requirements were the key. Geithner repeated President Barack Obama’s call to force “standardized” contracts onto exchanges or regulated trading platforms, and regulate all dealers............ 

Emerging-market stocks “aren’t expensive” and will continue to climb, Mobius said. He said he favors commodities and companies such as London-based Anglo American Plc, which has interests in platinum, gold, diamonds, coal and base metals. In China and India, Mobius sees value in consumer-oriented stocks and banks, he said.

The Bernanke Market
By ANDY KESSLER

...........Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along. It's the ultimate Enforcer. In mid-May, Mr. Bernanke's outlook seemed to change. Maybe he didn't approve of the sharp housing rebound -- like we need more houses! Maybe he saw inflation in commodity prices -- oil popping to $72 from $35. Or, more likely, he finally realized that he was the market and took his foot off the money accelerator, as evidenced in the contracting monetary base (see nearby chart). Sure enough, things rolled over -- the market dropped 7.5% from its peak, oil prices dropped almost 17%, and even gold has lost some of its luster. But in July, the Fed started buying again and the market rallied.

Can the U.S. economy stand on its own two feet without Mr. Bernanke's magic dollar dust? Eventually, but apparently not yet. Unemployment stubbornly hit 9.5% in June, according to the Bureau of Labor Statistics. Housing prices are still dropping, albeit at a slower pace, and foreclosures are still rampant. But I think what really bothers the market is that the structural problems that got us into trouble in the first place still exist. We took the easy way out and, with the help of Treasury Secretary Tim Geithner's loose "stress tests," swept banking problems under the carpet. We waved off mark-to-market accounting and juiced bank stock prices to help them recapitalize, but all those toxic mortgage assets on bank balance sheets are still there as anchors on lending. All the pump priming and stock market flows didn't get rid of them. Hats off to Mr. Bernanke for getting the worst behind us......

Toxic skills keep their appeal
By Barbara Garson

For the book I'm writing about unemployed Americans, I had no trouble finding accountants, brokers, cashiers, or die casters. Admittedly, I had to go out of town to interview the die casters. But when I arrived, alphabetically, at unemployed editors, I had only to look in my address book. Financiers were further from my life experience than either die casters or editors. Yet the "do you know anyone who ... ?" method still proved an effective way of turning up unemployed hedge-fund analysts and bank loan officers - and within a week at that. It was only when I refined my search to ferret out unemployed financiers who had actually handled those infamous "toxic assets" that I hit the proverbial brick wall. Since mortgage-backed securities and the swaps that insure them had been the downfall of Lehman Brothers, Bear Stearns, Merrill Lynch, and the giant insurance company AIG, packs of bankers who worked on them must, I assumed, be roaming free on the streets of Manhattan. Yet I couldn't find a single one.

Finally, I phoned a law firm representing Lehman Brothers employees in a suit for the pay they were owed when the company shut down without notice. I asked the lawyer if he could possibly inquire among his unemployed clients for someone, anyone, who used to work with mortgage-backed securities and might be willing to talk about how he or she was getting by today. "I don't have to use real names," I assured him. Many of the unemployed people I'd already interviewed felt so lost and ashamed that I had decided not to use their real names. Unemployed bankers deserve anonymity, too. But the lawyer made it clear that that wasn't the problem. "Most of them were snapped up immediately by Barclays," he said. He represents other financial plaintiffs as well, and he seemed to think that the kind of person I was looking for hadn't remained unemployed very long.

How could that be? We've heard ad nauseam about mortgage-backed securities. They're bonds "structured" out of thousands, or tens of thousands, of home or commercial mortgages. The bond's owner was to receive interest out of the mortgage payments from all those property owners. He could earn a low 5% interest if he opted to be paid out of the first money that came in. (Institutional investors often chose that safe "tranche", or slice, of the security.) But back when mortgages seemed so safe, a hedge-fund gambler might have been happy to opt for the last mortgage payments to come in - in exchange for heftier 7% to 8% interest rates. Of course, that was the gamble. Too many missed mortgage payments meant little or no returns for his fund.

When last I heard, more than half of US mortgages were held this way, so it was a reasonable supposition that a lot of people had been employed structuring, trading, and insuring those bonds. But who in his right mind would touch this stuff now? While that lawyer sounded like an honest, helpful fellow, I still wondered whether he wasn't just brushing me off to protect his embarrassingly unemployed clients. Soon after, however, I met a bank corporate loan officer who confirmed that his colleagues on the "structured side" were indeed still employed. In fact, he thought he noticed a couple of new chairs at their trading desk in the bank's trading room. "Those damn things" had become so complicated, he speculated, that the people who put them together were now needed in similar numbers to "unwind the bank's positions" - that is, get them out of the deals.

That must be it, I thought, and recalled a moment soon after AIG got the last of its US$182 billion bailout from the government. At that time, the company braved a massive public outcry to award big bonuses to its top employees, including those who had created the "swaps" (short for credit default swaps, or CDSs) that swamped the company. Like so many other companies, AIG claimed that bonuses were necessary to retain the "best brains", especially those who understood the credit-default swaps. These swaps are a type of derivative that was supposed to represent a way of insuring the very bonds we've been talking about. Here's how it worked - at least theoretically, at least before the ship went down: On a given bond, say number 123456, an insurance company like AIG would essentially say to a large investor, perhaps a mutual fund, "You pay us $7,000 a month and, if you fail to receive the interest on that bond for, say, two months, then we'll buy the whole bond from you for the $200 million you paid for it." In other words, it was a private, custom-written contract to simply "swap" one of those bonds for money under certain agreed circumstances.

These deals were couched in such terms, rather than as straight insurance policies, because insurance is regulated and the regulations require setting aside relatively small amounts of money in reserve in case the disasters insured against occur. But swaps aren't regulated. Nothing need be set aside. Here's the remarkable thing: both the George W Bush and Barack Obama administrations decided that the government would make good on these non-regulated, non-insurance policies. The costs could be humongous. Now, here's an even more distressing complication. You didn't have to own the original bond to buy the swap that was really an insurance policy. An "investor" could approach AIG and say, "You know that Merrill asset-backed bond - number 123456? I'll pay you $7,000 a month, too, and if the bond defaults, then you owe me 200 million also."

It's as if any number of people could buy (or, really, bet on) your life insurance policy. Or think of a race track where anyone can go to the window and bet on any horse in any race - and collect if it comes in. (Or in this case, collect if mortgage payments didn't come in.) If our government were merely going to cover the original mortgage-backed securities, the maximum payouts, though large, would at least be calculable. If 50% of the mortgages in the US were, as they say, securitized, and if they all were to default, that would be a vast but finite loss. But since any number of people could buy into the swaps on those bonds, the swap payouts could be an unknown amount that would be many times the value of the real buildings. How many multiples of reality might that come to? Two times, 10 times, 100 times? Who knows? Remember, these are unregulated transactions.

And keep in mind that the "investment" being bailed out here has nothing to do with anything in the real world. Neither party to these "me too" swaps owned, built, or financed the original housing, or anything else for that matter. They were simply betting on whether a certain group of people would pay their mortgage bills. Why our government would underwrite these bets, and why such gambling contracts are legal in the first place, is beyond me, but as we know, they were placed on a vast scale. No wonder, I thought, that my swap men were all still employed. After all, even if there's no work for die-casters or editors, there's still all that "unwinding" to do by the people who did the winding in the first place. Then I read this headline in the Financial Times: "Strange but true - the credit specs are back." According to the column that followed by John Dizard, "Thanks to the Geithner Treasury's policy of reform, rather than dissolution, CDS trading has regained a vampiric strength that the real economy still lacks."

So, now I understood: the man I couldn't find, the man who wasn't unemployed, wasn't just doing that final bit of unwinding or cleaning up old messes. He was busy making new ones! How could Dizard be certain, though, that the debt trade is really booming again? He cites "one friend of mine in the credit fund trade" who has "made money on both the downside and the upside during the past year." Of course, who can know for sure? If there was a derivative exchange along the lines of the New York Stock Exchange, we'd have a good idea of the volume of the trade. But derivatives - I know you've heard this more than once - are unregulated. Obama's recent white paper on financial reform suggests that derivatives should, in fact, be regulated, except for what it refers to as "custom" products. That, unfortunately, sounds like just the right-sized loophole for the financial instruments I've described. And - I'm sure you won't be surprised by this - financiers are lobbying furiously to expand that hole.

Why is there such an interest in reviving the debt market and why are financiers so determined to keep it unregulated? Aren't they scared of it, too? Let me quote Dizard one last time: "After all, if the dictates of style and tax auditors say you have to go easy on conspicuous consumption, and if there's no demand for the products of real capital spending, then you might as well take your cash to the track, or the corner credit default swap dealer." In other words, people are speculating on derivatives and derivatives of derivatives because there's no action in the real world. You can't invest in new real businesses or lend money to old real businesses for expansion unless people can afford to buy the products they'll produce. That brings me back to where I started: our real world. You know, the one where just about everyone's unemployed except those swap guys.

After the storm comes a hard climb
By Martin Wolf

............De-leveraging is a painful process: it has barely begun. If, as is likely, the private sector remains prudent, the public sector will remain profligate. Moreover, so long as this period of retrenchment lasts, the risk will not be inflation, but rather deflation. The lesson from Japan is that fiscal profligacy and deflationary pressure can last longer than anybody imagines. The longer they last, the trickier and more inflationary the exit may prove.

.............If the exit into vigorous recovery seems still so uncertain, has the world at least been learning the right lessons for future management of the world economy? I believe not. The financial sector that is emerging from the crisis is even more riddled with moral hazard than the one that went into it. Its fundamental weaknesses are not yet redressed. Questions also remain about the working of the dollar-based international monetary system, the right targets for monetary policy, the management of global capital flows, the vulnerability of emerging economies, demonstrated in central and eastern Europe, and, not least, the financial fragility demonstrated so often and so painfully over the past three decades. However difficult the recovery may be, we must not ignore these questions. After my summer break, I look forward to addressing them in September.

Tapping the rich to pay for ... everything
By Jeanne Sahadi

There may be reasons to tax the rich more, as a lot of people in Washington are talking about doing. But to raise taxes on them, and only them, to pay for the country's most ambitious proposals like health care reform, is a problem, experts say. If nothing else, it makes for some bad math. "We don't have enough rich people. We could tax the wealthy to extraordinary levels. But we cannot afford everything we want," said Ken Kies, a former director of the Joint Committee on Taxation and currently a tax lobbyist for businesses including insurers. Yet, rich households are the focus of several revenue generating proposals to help pay for health care reform and other endeavors.

Income surtax: Key committees in the House on Tuesday released a proposal that would impose an income surtax on high-income families -- an additional tax on income over a certain threshold. The surtax applied in full would range from 1% to 2% for couples making between $350,000 and $500,000. It would range from 1.5% to 3% for couples making between $500,000 and $1 million. And it would be 5.4% for families making more than $1 million. The Joint Committee on Taxation estimates the provision could raise $544 billion over 10 years.

Millionaire's tax: The Senate is said to be considering a "millionaire's tax" of 5% levied on single filers making more than $500,000 and joint filers making more than $1 million.

Deduction limit: President Obama has proposed limiting the value of itemized deductions for high-income taxpayers. One idea under consideration in the Senate is to limit the mortgage interest deduction for the wealthy, although that idea is almost certain to face strong pushback from those with ties to the real estate industry, said Jaret Seiberg, the financial services policy analyst of the Washington Research Group, a unit of Concept Capital.

Expanded Medicare tax: Senate leaders are also considering applying the 1.45% Medicare tax paid by individuals to capital gains and dividends, and possibly also on income from properties and partnerships. Currently, the Medicare tax is only levied on earned income, such as wages. 

Health care isn't the only big-ticket item driving the push to raise rates on the rich. Obama has said he wants to make the tax system fairer and raise revenue by letting many of the 2001 and 2003 Bush tax cuts expire for high-income taxpayers. He also wants to help pay for Social Security reform by subjecting more income to the Social Security tax. Currently, individuals' half of the payroll tax is 6.2% on the first $106,800 of wages. Under a proposal from Obama, people would also then pay between 1% to 2% on income over $250,000.

Finally, Obama has directed his tax reform panel to recommend ways to raise revenue but not increase taxes for families making less than $250,000. That suggests those at higher levels are fair game. The problem with taxing only the rich Some of the big ideas kicking around Washington these days may have merit and may be worth pursuing. But they're not going to be enough if the goals are to enact new initiatives like health reform without adding to the deficit, and without taxing any family making less than $250,000, experts say.

"There's an argument for making the tax system more progressive," said Len Burman, director of the Tax Policy Center. "[But] people are going to have to pay tax or come to terms with smaller government. Right now there's enormous pressure for the government to do more and more." And by not letting the Bush tax cuts expire for families making less than $250,000, the administration is forfeiting an estimated $2.1 trillion in revenue over 10 years. Meanwhile, the federal debt held by the public is scheduled to rise from 41% of gross domestic product to 82% by 2019 under the president's proposed budget, according to the Congressional Budget Office. That already assumes the majority of Bush tax cuts expire for upper-income taxpayers.

At the same time, tax burdens across all income groups have been fairly low historically speaking. Although they pay the lion's share of income tax dollars collected, high-income taxpayers benefited disproportionately from the Bush tax cuts. But those same tax cuts also increased the ranks of those who end up owing no income tax - the majority of whom are not high income. The Tax Policy Center now estimates that after taking the tax breaks for which they're eligible, 47% of tax-filing households will have no federal income tax liability this year. Many tax policy experts believe fundamental reform of the tax code -- a reform that simplifies the code and broadens the base of payers -- could be one step toward resolving long-term shortfalls.

Evasion is another concern experts raise when rates are hiked too high or too frequently. If high income taxpayers feel their tax burden too burdensome, they are more likely to seek out legitimate tax shelters. But also the higher rates go, Kies said, "the more it creates an atmosphere for cheating."

The Depression Divide
by Lee E. Ohanian

.......The reason I attribute little of the recovery during the New Deal to aggregate demand is because there was very little recovery in hours worked, but according to proponents of the aggregate demand view, increasing aggregate demand is supposed to increase output by increasing labor.

Hours worked per adult--including government workers--fell about 27% between 1929 and 1933, and in 1939 remained about 22% below the 1929 level. Many people, including economists, are surprised when they read that there was little recovery in hours worked during the New Deal, because the unemployment rate declined, and typically declines in unemployment go hand-in-hand with higher labor. But changes in the unemployment rate don’t provide a good proxy for changes in labor during the New Deal because some New Deal programs included explicit work-sharing. By reducing the average workweek, the New Deal was able to spread employment across workers, but this doesn't mean there was an increase in the amount of work that was done.

But if work wasn't significantly restored during the New Deal, how did output grow? The answer: through productivity. That is, changes in output per capita are accounted for by either changes in productivity--output per hour--or by changes in hours worked per capita. Output per hour grew about 30% between 1933 and 1939, which means that most of the increase in real gross domestic product during the New Deal is accounted for by productivity advance. And this is important, because increasing aggregate demand doesn't have much to say about productivity growth, which instead is the result of technological advances and inventive activity. And because there was so little recovery in labor, the economy, despite rapid productivity growth, remained well below its trend level at the end of the 1930s. Real GDP per capita, which was about 38% below trend in 1933, was about 27% below trend in 1939.

Now, in response to my work with Harold Cole, some say that achieving faster growth during the New Deal is unrealistic in an economy that was so depressed. But there is little doubt that growth should have been considerably faster during the New Deal, simply because there was so little recovery in labor. Moreover, the idea that an economy can't grow very fast when it is depressed is wrong. Growth tends to be fastest in economies that are significantly depressed and that also experience improvements in economic fundamentals, such as productivity. Between mid-1932 and mid-1933, which was just before the National Industrial Recovery Act (NIRA) took hold, industrial production grew 62%. That's right, 62% in a single year, and beginning from the trough of the Great Depression. What accounts for such remarkable growth? Milton Friedman attributed it to producers increasing their output in advance of the implementation of the NIRA, which they understood would raise their costs and broadly increase monopoly in the economy.

It is common for supporters of stimulus to cite declining unemployment and significant GDP growth as evidence that the New Deal was a success. And it is understandable why these statistics seem compelling. But by looking more deeply at the sources of GDP growth and seeing how little work was restored, we encounter a different picture, particularly for drawing lessons for today. It is doubtful that productivity growth today will provide anything close to the boost that it gave during the New Deal. Productivity growth, which usually is far below normal during a recession, has been at or above normal during most of the last 18 months, and it is unlikely to rise much higher than its current pace. This means that ending our current crisis and raising incomes and output will depend exclusively on restoring job loss--something that the New Deal couldn't accomplish.

Lee E. Ohanian is a professor of economics and the director of the Ettinger Family Research Program in Macroeconomics at UCLA.

Concerns about the Fed's New Balance Sheet
by James Hamilton

.....One of my concerns is that the Fed's new balance sheet has compromised the independence of the central bank:

The decision of where public funds are best allocated is inherently political. Any risks on the Fed's new balance sheet are ultimately borne by the taxpayers. The U.S. Constitution specifies that decisions of how public funds get spent shall be up to Congress, and with good reason. Citizens have a right to vote on which risks they choose to absorb. And of course there are powerful established interests with views on which sectors should receive an infusion of public capital. The Fed is simply being naive if it thinks it can become involved in those decisions on a weekly basis and yet still retain its independence from Congress and the President.

The reason I find that loss of Fed independence to be a source of alarm is the observation that every hyperinflation in history has had two ingredients. The first is a fiscal debt for which there was no politically feasible ability to pay with tax increases or spending cuts. The second is a central bank that was drawn into the task of creating money as the only way to meet the obligations that the fiscal authority could not. Every historical hyperinflation has ended when the fiscal problems got resolved and independence of the central bank was restored.

Surely it is not far-fetched to suggest that the U.S. faces a profound political challenge in using spending cuts or tax increases to meet its current and planned fiscal obligations. Here's an observation that brought that reality home to me on a personal level: in fiscal year 2006, receipts collected by the U.S. federal government from personal income taxes totaled $1.06 trillion. Thus, to a first approximation of what an extra trillion dollars in taxes would mean for me personally, I just take the number I paid in 2006 and double it. And then I ask myself, how likely is it that Congress would actually do such a thing? With budget deficits in excess of a trillion dollars annually for the foreseeable future, it seems we are already well past the point at which the ability of the Treasury to fund the expanded liabilities through tax increases would reasonably be questioned.

Moreover, the detailed cooperation between the Fed and the Treasury in the various new credit measures seems to have arisen from precisely such pressures. Congress is, in fact, unwilling to accept explicitly the risks to which taxpayers are exposed as a result of the many new Fed-Treasury initiatives. If I were the chair of the Federal Reserve, I would want to be asking, "why was I invited to this party?" The answer unfortunately appears to be, "because you're the one with the deep pockets." That the Fed should find itself in a position where Congress and the White House are viewing its ability to print money as an asset to fund initiatives they otherwise couldn't afford is something that should give pause to any self-respecting central banker............

It is natural and appropriate for our unusual actions in combating financial instability and recession to come under intense scrutiny. However, increased attention to, and occasional criticism of, our activities should not lead to a fundamental change in our place within our democracy. And I believe it will not; the essential role for an independent monetary policy authority pursuing economic growth and price stability remains widely appreciated and the Federal Reserve has played that role well over the years. The recent joint statement of the Treasury and the Federal Reserve included an agreement to pursue further tools to control our balance sheet, indicating the Administration's recognition of the importance of our ability to independently pursue our macroeconomic objectives..........

When All You Have Is A Hammer
by Karl Denninger

“Once excess capacity appears, the economy gets trapped in a vicious cycle,” Lin said. “The financial sector in developed countries may require more rescues in the future and the financial crisis may erupt in some developing nations.” Developing economies can avoid the fallout from the global recession by investing in projects with “returns high enough to generate higher growth,” Lin said, helping to boost government revenue and offset the costs of fiscal stimulus. “The main policy objective should be to create demand as quickly and efficiently as possible.” And how did we get all that "excess capacity"? Why we built it this way!

And now, having done so, the guys who have nothing to sell but more loans want us to..... borrow more money! PIMCOs McCulley is saying the same (dangerous) thing:

July 15 (Bloomberg) -- Pacific Investment Management Co.’s Paul McCulley said the Federal Reserve should push inflation above its long-term target to coax consumers to spend money if the U.S. economy stays mired in recession.

That man ought to be locked up as an enemy of the nation's prosperity; this sort of nonsense is pure self-serving tripe, and I'm going to prove it with mathmatics. Folks, we went from a personal deficit of $200 against roughly $8,600 in per-capita income (a 2.3% deficit) to over $4,000 against roughly $25,000 in per-capita income, or a 16% deficit. We managed to do this through debt. That is, we promised to pay in the future, $4,000 more than we made in 2005 on average, and that number went from a tiny percentage of our income (2.3%) in 1981 to a very significant percentage (16%) in 2005. Folks, it should be obvious that this deficit cannot continue to grow forever. Eventually you must spend less than you make and pay down that debt, or you will get into a situation where you are unable to make the payments and default. We are in this mess economically because we built capacity we do not need, and the World Bank wants us to take on yet more un-serviceable debt in order to "bring up capacity utilization"?

Are they crazy? No. Just blind. The ugly facts are that there can be no durable recovery in the economy until the excess capacity is removed, since there are no huge productivity boosters on the horizon, the only other way you can grow demand (that is, you must boost not only GDP-per-capita but more importantly per-capita income so that true demand is generated) is to reduce the debt load in the system. Note that per-capita GDP compared to per-capita income has gone the wrong way since 1981. That is, the "spread" (as a percentage) between per-capita GDP and per-capita income has increased, which is exactly what you would expect as debt service saps the funds in the economy available to go toward per-capita income!........

This is exactly what one would expect since much of the debt is in fact not "personal" - it is owed by corporations and governments that have "levered up", and they must pay interest too. As a consequence larger and larger portions of GDP are diverted not to per-capita income where consumers can spend it, save it, pay debt with it or form capital with it, but rather are diverted to the non-productive use of paying interest and in doing so damages the economy. "Stimulating demand" cannot be done on a true basis except by either: Dramatic productivity improvements to narrow the spread (that is, make possible dramatic wage increases paid for a given fixed GDP and money supply. Note that doing this by "pumping money" raises BOTH - that is in fact inflation, and does nothing for the ratio as both numerator and denominator change.) Defaulting the excess debt so that the percentage of parasitic drag on the economy from debt service is reduced, thereby contracting the spread and improving economic efficiency. Those are the only two ways to make it happen folks.

Anything that drives the efficiency ratio the other way (that is, which drives the spread higher) in fact does economic damage. The World Bank (and PIMCO) are wrong and promoting a self-serving agenda, and must be treated as all shameless self-promoters deserve.

Comment: For what it's worth, though I've always valued what Gross and El-Erian have to say, I've never found McCulley worth listening to much.

Who Watches over the New York Fed?
by Eric Jackson

We were all riveted last fall by the economic meltdown, which pulled down Lehman (now absorbed into Barclays (BCS)) and Merrill (now part of Bank of America (BAC)) and forced many of us to consider the previously inconceivable outcome of a total collapse of the capital markets. Through it all, then-Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and then-head of the New York Fed Timothy Geithner, tried to orchestrate an acceptable soft landing for all market participants. Many of the most pivotal planning sessions during that dark time happened at the offices of the New York Fed. Yet, who was watching over the New York Fed at the time? As it turns out, many of the market actors were central in the drama playing out, including Lehman head Dick Fuld, who was a New York Fed director then.

Did Dick Fuld really deserve to have a say on whether BofA should buy Merrill, or on the fates of AIG, Morgan Stanley (MS) and Goldman Sachs (GS)? The board of directors of the New York Fed was poorly composed then, and it remains highly problematic today. Changes need to be made. The New York Fed is basically the on-the-ground interface between Wall Street's biggest banks and the Federal Reserve. It plays part policy adviser, part diplomat and part message-runner between the two sometimes very different worlds. The bank plays a critical role in how policy is set and implemented. During several critical moments last year (with the downfall of Bear and Lehman, the shotgun marriage between Merrill and BofA and later the pressuring of BofA to follow through with the merger) and no doubt in the future, the New York Fed has and will play a critical role in real-time decisions that can have ramifications on our markets and the broader economy for years.

It's reasonable to better understand who ultimately was responsible for directing and judging if Geithner was doing his job effectively last year. That responsibility falls on the New York Fed's board of directors. That group is divided into three classes of directors: three Class A directors who are from member banks and who are elected by member banks; three Class B directors who are elected by member banks to represent the interests of the public, and three Class C directors who are elected by the New York Fed's board of governors (who are all appointed by the president) to represent the interests of the public. The Class A directors have been problematic in the last eight months. First, Fuld was one of them last fall when his firm became the focal point of concern for the entire U.S. financial system. Later, Stephen Freidman, then-chairman of the New York Fed and formerly with Goldman Sachs, was forced to resign amid revelations that he had purchased stock in his old firm -- raising questions about his impartiality overseeing the entire financial system.

There's no evidence that either Fuld or Friedman took any actions that benefitted either of those firms in their New York Fed roles, but, in matters of corporate governance, appearances count. Currently, three of the nine seats on the New York Fed's board are vacant. It's not clear when they will be filled. Of the current directors, all three Class A directors are in place representing the interests of the member banks. Jeff Immelt of General Electric (GE) is the only Class B director. His job is to represent the public in that role. However, it's clear that his day job of overseeing GE Finance also makes him sympathetic to the needs of the member banks. Only two of the three Class C seats are filled (Lee Bollinger, the president of Columbia University, and Denis Hughes, the president of the New York State AFL-CIO).

Based on this composition, you could fairly make the case that the current board of the New York Fed is more weighted to look out for the interests of the bankers than the interests of the taxpayers and the broader economy. That needs to be immediately corrected. That means getting more experienced business executives like Pepsi (PEP) CEO Indra Nooyi back on the board as a Class B director and replacing Jeff Immelt with another business executive who runs a company not as financially dependent as GE Finance. Additionally, the open Class C position should be quickly filled with a director who is business savvy but will represent taxpayers first and foremost. Ideally, the Class C director should be someone who knows something about corporate governance and can bring that perspective to the New York Fed's board. Ira Millstein of the law firm Weil Gotshal & Manges would fit the bill nicely.

There have been other bothersome governance issues cropping up at the New York Fed recently. It was recently reported that former New York Fed President Geithner advised the current board members to select his former lieutenant, William Dudley, as his replacement. Although this happens a lot in companies (think Citigroup's (C) Sandy Weill telling his board to replace him with then general counsel Chuck Prince), it is always a bad idea. Former CEOs and presidents can have cloudy judgment on these kinds of issues, affected by legacy or loyalty. It's also been reported that it was due to Geithner's strong advice about hiring Dudley that former Class B director Nooyi recently stepped down from the board entirely. Take all these incidents together and you can't blame her. The New York Fed plays a critical role in the healthy functioning of our capital markets. In my view, member banks deserve to have a seat at the table of the board of directors, but the majority of views should be separate from Wall Street and ensure that Wall Street's actions are serving the interests of the entire economy. The Federal Reserve and the U.S. government should immediately take steps to ensure that this organization's governance matches the standards they wish to see implemented in the big Wall Street banks they oversee.

From direct democracy to direct federal financial rule in California
by Willem Buiter

California’s public finances are in many ways a microcosm of those of the US as a whole. Admittedly, the state government’s deficit is tiny compared to that of the federal government. The state of California has a budget deficit this year of $26.3bn (about 1.5% of state GDP, which was just over $1.8 trillion in 2007), on revenues of just $113bn. Its total outstanding stock of state debt is also small, with just $59bn in general debt, $8bn in bonds linked to securitised revenues and about $2bn in commercial paper. In contrast, the US federal government is about to run a budget deficit in the 13 to 14 percent of GDP range (that is, the federal deficit is about the size of the state of California’s GDP!). California, like every US state, will be hit by federal deficit and by the manner in which this is eventually brought under control again, be it through tax increases, public spending cuts, inflation or sovereign default. The state deficit, and the manner of its eventual resolution, represents pain for Californians on top of the shared misery they will endure as a result of California’s contribution to the resolution of the unsustainability in the federal public finances.

Like most US states, California has a balanced-budget rule that is supposed to prevent if from running deficits. Such a balanced-budget rule coexists a tad uncomfortably with a positive outstanding stock of public debt and with the need to eliminate a recurrent state deficit. Obviously, one man’s balance is another man’s deficit. Because California cannot achieve agreement in its state legislature on how to eliminate its deficit, the balanced budget rule continues to be flouted as it has been flouted during similar episodes of political stalemate before. The state is financing its unconstitutional deficit by paying suppliers and employees in funny money, or scrip, politely referred to as IOUs, which are simply interest-bearing bearer debt instruments issued by the state or transferable state bearer bonds that dare not speak their name...........

Direct financial rule would mean that neither California’s state executive nor the its state legislature would have any financial decision making powers until financial normalcy is restored. California’s ‘proposition mechanism’ would also be suspended for any proposition that would have financial implications for the state. A federally appointed Board of Overseers would have full powers to cut public spending, raise existing taxes or introduce new taxes or charges until the budget deficit has been eliminated in a sustainable manner. Such direct financial rule reduces the state of California to a legally and financially incompetent minor. Because that is exactly the way the state has acted and continues to act, this is both efficient and fair. The only irony is that this direct financial rule rule would be excised by an entity appointed by a federal government that itself is structurally incapable of putting its fiscal house in order. But that is an irony Californians will have to learn to live with. Beggars can’t be choosers.

Noise Reduction from Rosenberg
by Tyler Durden

Always helpful to hear Rosie's perspective as he ferrets out the important data from the noise. The highlighted section may be a worthwhile read to all who have claimed the recession is now over. What was key in the June retail sales data for the U.S. was the 0.1% MoM dip in what is called the "core" figure, which excludes gas, autos and building materials. With the downward revisions, this was the fourth decline in a row, and while spending is nowhere near as weak as it was at the start of the year when Armageddon fears were setting in, it is troubling that the consumer is still fractionally in reverse in the face of the massive tax stimulus that the Obama team offered the household sector over the last quarter. And, while there may well be some lagged impacts, by and large, the fiscal stimulus, at least directly on the income side, has basically run its course. There is more than just a remote prospect of a consumer relapse as summer moves to autumn because organic wage-based income has declined in three of the last four months and without more financial help from Uncle Sam, we would look for more negative retail sales data in coming months.

We also received business sales data for May — this is a proxy for nominal GDP, and it declined 0.1% during the month, and is falling at an 18% YoY trend, which is without precedent. The economy is clearly still in a recession. Excluding auto, the sequential decline was 0.3% and the YoY slide was 17.3% — a record as well. So the quick answer is "no" — this is not just an automotive story, it's rather broad-based. The inventory-to-sales ratio has come off its cycle highs, but at 1.42x, it is hardly low enough to spark the re-stocking that seems to be part of the mainstream economists' macro forecast (go to Signs of Upturn in Inventories Remain Elusive on page A2 of the WSJ). It will likely have to edge down towards 1.35x before we expect a renewed positive inventory cycle to take hold. Most likely a 2011 story (in fact, the bulk of the inventory improvement has been in the motor vehicle sector — excluding autos, the I/S ratio, at 1.35x, has barely budged from its seven-year peak). What is fascinating is to hear forecasts of the recession ending when so far, three of the four major ingredients — real sales, industrial production and employment — have yet to hit bottom (and real organic income, the fourth variable, is struggling to carve one out).

Why Economic Dogma Threatens Our Future Prosperity
By Rob Weigand

As we all know, there are many problems facing the economy and financial markets right now. One of the longest-lived and most pernicious problems is one of the least discussed — or even recognized. For example, this problem is responsible for many Americans' longstanding (and misguided) obsession with cutting taxes, which is the primary reason the federal debt has been allowed to explode out of control (and California is on the brink of bankruptcy). This problem fueled the market’s overvaluation in the 1990s, culminating in the infamous tech bubble. It lent a significant tailwind to the crazy lending standards and housing bubble that propped up the bull-market-that-wasn’t from 2003-2007, and the problem is still with us today, preventing us from clearly evaluating conditions in the economy and financial markets — particularly how we arrived at our current state of affairs.

Behavioral psychologists bestow two technical terms on this problem — cognitive dissonance and cognitive consonance — but they are two sides of the same coin, or in this case, two sides of the same problem. To understand these terms is to understand one of the major roadblocks preventing us from moving forward decisively as an economy and as a nation.

People are probably more familiar with the term cognitive dissonance — the tendency to ignore, or underweight, information that contradicts our current opinion or set of beliefs. Cognitive consonance is the “flip side” of dissonance — we also have a tendency to overweight information that reinforces our opinions and beliefs. And, with our consciousness severely crippled by these two flaws, we bravely venture forth into the world as consumers and investors, fated never to live up to John Stuart Mill’s vision of homo economicus (”economic man,” the hyper-rational decision-maker in which most microeconomists still believe). Unlike Socrates, however, most of us don’t even know what we don’t know. The tendency to prefer dogma to facts is, in my opinion, one of the main factors that threatens our future prosperity. We can’t embrace a way forward until we fully appreciate the deep hole capitalism has dug for itself.

The Market’s Emotional Roller Coaster. I gave a talk on the economy recently, and my last slide was borrowed from Liz Ann Sonders at Charles Schwab Market Research (reproduced below). It’s entitled “The Market’s Emotional Roller Coaster,” and it depicts 12 stages of emotion that investors go through in a full bear-to-bull-market cycle.

Someone asked where I thought we were in the emotional cycle. Without hesitation I answered “We never finished the capitulation phase back in March, so we’ve been stuck at that point for months,” and everyone groaned — they wanted me to say we were almost through with the despair phase so they could justify not having to experience any further pain, and instead soothe their psyches with false hope for a big bull market in late 2009 or early 2010 — the bull that will bail out their 401(k)s and allow them to resume their borrow-and-spend consumerism. But I don’t think we’re anywhere close to that point yet (and I’m in good company — more on this below). The market lows of March 2009 represented a brief moment of realism, as equity valuations were accurately discounting the torrent of bad economic news we’ve had from just about every indicator — real estate values, consumer spending, employment, corporate profits, etc. But we couldn’t “bear” Dow 6,400 or S&P 666 (yes, that was the March low), so our collective consciousness created a better narrative — a market rally that sparked 3 months of drivel about “green shoots.”

This is as good a place as any in this little tale I’m telling for you, the reader, to wake up to the reality of our current situation. The average 1-year trailing P/E on the S&P 500 has remained in the low to mid teens during this bear market (see the graph below). The last recession and bear market that approached this one in severity, during the 1970s-1980s, resulted in a market P/E ratio of less than 8. The current recession is far more severe than that one, yet equity valuations remain far above their levels from 1981-82. If estimates of Q2 corporate earnings are reasonably accurate, the current level of the Dow and S&P imply a trailing P/E ratio of approximately 40. Without a dramatic rebound in earnings in the next couple of quarters — and how likely is that? — the implication is that stock prices could fall another 50-60% before equities are priced to deliver their “normal” long-term annual returns of about 7% (real). And even from much lower levels, earning 7% per year from stocks would require that GDP and corporate profits resume growing at their rates from previous decades — something few respected forecasters believe is possible (elaborated on below).

To understand why equity values discounted economic events more realistically in previous bear markets we need to ask “what’s changed since the 1970s?” The answer is “us.” Or, more precisely, the media we consume and the way many of us use it to fuel our dogmatic fantasies. We use our media subscriptions, the internet and television to indulge in cognitive dissonance and consonance to the point that many of us have talked ourselves onto a precipice of dogma. For those of you balanced on this precarious ledge, I’m going to try to talk you down. Why do I care if you jump or fall, someone might ask? Because, like it or not, we’re all in this together. If the dogma-addicted don’t get themselves into rehab they’re going to pull us over with them. What are some of the dangerously dogmatic opinions I’m referring to? Well, here are a few. Have you not figured out by now that Ronald Reagan is the engineer of our crushing federal debt? You might have to read that one again — Ronald Reagan is the inventor of borrow-and-spend government. He was a Keynesian, but instead of tax-and-spend, he preferred to borrow-and-spend; it’s basically the same recipe. The data are in, folks — $14 trillion of debt and counting — the fictional Arthur Laffer “tax-cuts-pay-for-themselves” narrative has been proven false beyond a shadow of a doubt. California tried its own version of this with Proposition 13 and they are on the brink of bankruptcy.

It’s not unthinkable that our federal government could be in similar straights soon. If a household cannot escape this basic common sense, then neither can a business or a government — you have to pay your bills as they come due. You either raise taxes or cut spending, but you have to live with a balanced budget every year. But once Reagan’s minions got us believing that a different alchemy existed, hundreds of politicians have reinforced that dogma in their hollow campaign promises to the point where about a hundred million Americans now accept something false as true. And these believers find it too painful to look at the simple, factual history of the situation — that’s cognitive dissonance. They instead prefer indulging in even more Laffer and Grover Norquist — cognitive consonance. Many would rather “feel” right than have to pass through a phase of recognizing previous opinions as wrong to ultimately arrive at opinions and views that are more accurate.

Here’s another one — are you all riled up over “news” stories about the shocking involvement of government in business? Especially those Karl Rove psycho-torials in The Wall Street Journal? Well, here’s another little fact you need to digest. Government gets involved in business because business asks them to. That’s right — pop your eyes back in your head and read it again — it’s another undeniable truth. Businesses in the U.S. spend billions every year begging politicians to intervene on their behalf. It goes by the politely sanitized term of “lobbying” — but we all know it’s a legalized form of bribery. Moreover, the worst-performing industries that wreak the most havoc on the lives of citizens spend the most. That’s right. It’s well-known that banking and finance spent at least $4 billion (officially) in the past decade lobbying politicians. Banking and finance — the industry that’s been in a crisis every 10 or 20 years since the 1800s.

In second place is — you guessed it — the health care industry. This is the industry that charges Americans more for prescriptions than the citizens of all other countries. It’s also the industry that makes us pay almost twice per capita for health care compared to Canadian and French citizens. It’s the industry that’s engineered a massive propaganda campaign to convince Americans that it would be too expensive for everyone to have health insurance and access to health care. Too expensive? How hard-bitten of a nation have we become when we elevate an economic issue (health care profits) over a human rights issue (access to affordable health care)? If we took a fraction of those lobbying fees and used them to hire consultants from Canada and France, not only would we have more affordable health care with better outcomes (Americans are unhealthy!), our housekeepers, landscapers, restaurant waitpersons and the person who cooked our dinner the last time we ate out could afford to take their kids to the doctor. Approximately 1 million Americans declare bankruptcy each year because of medical bills — and many of them have insurance.

So what type of cognitive dissonance are we engaging in regarding the economy? The carefully-scripted narrative that’s broadcast every day on Fox Business and CNBC must be recognized for what it is. Under the guise of “objectivity,” every negative opinion is immediately balanced by a guest suggesting that he sees “green shoots,” and the next great bull market is right around the corner. The market will come back because it’s always come back. We have forgotten the useful cliche, “Consider the source.” The programming on these business channels first and foremost serves their advertiser base — the financial services industry. The industry that wants to gather assets, at minimum, and even better, get you to trade as much as possible, while it continues spending a significant fraction of its considerable profits to buy the political influence that ensures that they’re free to do it again and again, regardless of the havoc they wreak on our economy and way of life. Thus programs with names like “Fast Money” and actors like Jim Cramer, who 5 days a week stars in a sitcom where an escapee from a lunatic asylum sneaks into a television station, raids the wardrobe department, dresses up as if its Halloween, and speaks in tongues.

In a world too full of mis- and dis-information, may I instead suggest that you let yourself be guided by the opinions of long-term thinkers with successful track records. They do exist. People like Warren Buffett (who warned us that “derivatives are weapons of financial destruction” many years ago), Jeremy Grantham, Bill Gross, and Mohamed El-Erian, all of whom are on the record regarding “green shoots” — they never existed. Bryan Marsal – whose firm is overseeing the unwinding of Lehman Brothers, which is about as close to the smart money as anyone gets — told CNBC on July 6 that he doesn’t see spending coming back — ever. In the past weeks and months, every one of these individuals has tried to guide our view of the future of capitalism to more realistic expectations.

The rampant consumerism and the leverage that propped up the economy for the past decade was not sustainable — game over. Corporate profits, when they begin growing again, will grow more slowly from their 2009 lows. Like Japan, we’re going to get older and save more. And that’s the good news. The United States may have recently passed into what I believe to be the ultimate indignity — we now have to manage the value of the U.S. dollar to please the Chinese, so that we can entice them to keep buying more of our nearly worthless debt. And the Chinese keep buying it — at least for now — but in ever-shorter maturities, which provides them with the option of not rolling over their holdings when these shorter-term T-notes come due over shorter horizons. Much of the recent steepening of the yield curve is due to financial, not economic events — when the Chinese buy shorter-maturity debt and shun longer-maturity debt, the yields on short-term debt stay low while the yields on long-term debt rise, and voila, we have a steeper yield curve. Not one that’s forecasting a recovery, however — one that sadly depicts how, like any profligate debtor, the U.S. is now forced to manage its financial affairs to please the whims of its foreign lenders rather than benefit its citizens.

The first step towards breaking free from this sad reality is to recognize it. The U.S. cannot make a shred of progress until we realistically assess what we’ve become as a nation, and how we got here. Tax cuts aren’t going to save us, nor is denying our neighbors and fellow citizens access to health care. That’s more dangerous dogma that will just dig us in deeper. When we embrace the same values that we claim to admire in the Great Depression/WW II generation — thrift, economy, modesty, charity, generosity and a strong work ethic — we’ll have taken at least one authentic step on the long path to being a great nation of great people again.