Tuesday, March 31, 2009

U.S. Spending 100% of GDP on Bailouts and Related Programs

As I have previously pointed out, Paul Krugman is calling for the U.S. and Europe to spend an amount equal to 4% of their gross domestic products on the financial crisis.

Today, Bloomberg notes:

The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.
In other words, instead of spending 4% of GDP, the U.S. is committing to spending close to 100%. This dwarfs spending during the New Deal:

For those who argue that much of the trillions being spent today is in the form of loans and guarantees, I would argue that taxpayers will never see most of this money ever again. It is spent, and gone. Indeed, most of the financial giants which the loans were made to are insolvent and will be out of business in a couple of years.

Mark my words, the chart above will end up showing that spending will soon exceed 100% GDP.

War is a Racket

War is a racket, according to one of the most highly-decorated military men of all time, and also the guy who stopped a coup against FDR (see this, this and this), Smedley Butler:

Or read
Butler's book online.

Off-World Events Effect Earth More Than Scientists Realized

Preface:Please read the endnotes before forming a conclusion on my views on global warming.

National Geographic reported in 2006 that the Earth's magnetic field is changing rapidly. However, according to the article, decreases in the strength of the magnetic field do not directly affect surface temperatures:

The decline in the magnetic field also is opening Earth's upper atmosphere to intense charged particle radiation, scientists say....

"It is in this region that the shielding effect of the magnetic field is severely reduced, thus allowing high energy particles of the hard radiation belt to penetrate deep into the upper atmosphere to altitudes below a hundred kilometers (62 miles)," Mandea said.

This radiation does not influence temperatures on Earth. The particles, however, do affect technical and radio equipment and can damage electronic equipment on satellites and airplanes, Olsen of the Danish space center said.

This confirms what NASA scientists have said. However, other scientists have concluded that the Earth's magnetic shield does affects climate.

In addition, two Danish geophysicists at Aarhus University in western Denmark propose that the increased cosmic radiation allowed by a weakened magnetic shield in turn changes the amount of rainfall at the tropics, thus affecting climate (they acknowledge that CO2 also affects climate, but state that climate is more complex than generally believed).

Nigel Marsh of the Danish Space Research Institute in Copenhagen also argues that clouds are scarce near the equator and thicker towards the tropics, because cosmic rays have a hard time punching through Earth's magnetic field at the equator, but can leak in through the relatively weaker field nearer the poles. If correct, this bolsters the Danish geophysicists' hypothesis that changes to the Earth's magnetic shield affect cloud cover (and thus precipitation and climate in general).

Moreover, it is known that intense solar activity can destroy ozone in the Earth's atmosphere, thus affecting climactic temperatures. See this, this, this, this and this. Indeed, the effects of solar energy on ozone may be one of the main ways in which the sun influences Earth's climate.

The sun itself also affects the Earth more than previously understood. For example, according to the European Space Agency:

Scientists ... have proven that sounds generated deep inside the Sun cause the Earth to shake and vibrate in sympathy. They have found that Earth’s magnetic field, atmosphere and terrestrial systems, all take part in this cosmic sing-along.

Indeed, the very position of the Earth and sun effect climate. Scientists know that Earth's weather is hugely affected by factors such as, according to a well-known treatise:

(1) the shape of the ellipitical orbit (with a time scale of about 95,000 years); (2) the tilt in the earth's axis of rotation (approximately 42,000 years); and (3) the time of year when the earth is closest to the sun, or perihilion (about 21,000 years)
The Earth periodically enters ice ages and warming periods, and scientists have attempted to work out the cycles according to the Earth's orbit, tilt, etc. When I studied climate at a university in the early 1980's, I was taught that the Earth is in an "ice age" most of the time, and that the warmer interglacial periods were more rare.

Scientists have recently discovered that cosmic rays from a "mysterious source" are bombarding the Earth (and see this). This is occurring at the same time that the protective bubble around the sun that helps to shield the Earth from harmful interstellar radiation is shrinking and getting weaker.

In addition, a recent study shows that increased output from the Sun might be to blame for 10 to 30 percent of the global warming that has been measured in the past 20 years. The sun is simply getting hotter. Indeed, solar output has been increasing steadily ever since scientists have been able to measure it. Another study shows that solar activity variations have a "marked influence" on the Earth's climate.

If extra-planetary events affect Earth's climate, wouldn't other planets in the solar system be affected as well?

Yes. In fact, there is evidence of global warming on Pluto, Mars, Jupiter and Neptune's moon. See also this.

The sun also apparently affects the amount of rainfall on Earth, which in turn affects climate.
Notes: I am not arguing for "doing nothing". I am all for reducing our reliance on oil and for developing clean energy alternatives. Oil does a lot of harmful things in addition to producing CO2. And I am strongly for alternative energy, as I believe that it decreases centralization and therefore increases democratic trends. Oil also produces a lot of plain old pollution, in the extraction, processing and burning phases.

But we shouldn't do something which will cause more harm than good, or which doesn't do much but make money for the same financial giants who created the economic crisis.

Like the Danish geophysicists discussed above, I believe that does increase warming trends. However, like them, I think that climate modeling is complex and that the effects from other causes have not been sufficiently taken into account. Indeed, if extra-planetary and other conditions align towards warming, then I think we could experience severe warming in the future. Under some scenarios, even modest warming at the Arctic could release methane, which could lead to dramatic results.

On the other hand, if the most important factors align towards cooling trends, then even with greenhouse gasses, we could experience cooling.

And - unless we understand the science of natural extra-planetary events - we could be sitting ducks if something really big happens "out there". I believe that the science of extra-planetary events on Earth is in its infancy. I passionately urge governments and universities to expand their research in this area.

Monday, March 30, 2009

Useful Idiots in Modern America

Paul Robeson was a great singer and a passionate activist for human rights.

But Robeson naively believed that Stalin - the murderous tyrant who killed millions of Russians and imposed tyranny on the Soviet Union - was a great man.

For example, when Robeson met with an old friend in a hotel room in Russia, the friend tried to tell Robeson that he was under arrest, was being persecuted, and might be killed by Stalin. But - the story goes - Robeson was so full of naive admiration for the communist leader that Robeson didn't notice what his friend (who disappeared shortly thereafter) was trying to tell him.

Robeson even wrote a poem called "To You Beloved Comrade" to honor Stalin.

Robeson and other Americans who were duped by the communist leaders - like playwright George Bernard Shaw - were called "useful idiots" by Lenin and Stalin. "Idiots" because they couldn't see the communists for the tyrants they were, "useful" because those tyrants could use them to spread propaganda to the West.

Useful Idiots in Modern America

Idiots were not just useful for the USSR.

Today, in modern America, there are useful idiots on the right who blindly support anyone who attacks Obama because Obama is a so-called "liberal".

Equally, there are useful idiots on the left who blindly support Obama and try to defend his bailouts of the financial giants, his escalation of the Afghanistan war, his defense of Bush administration torturers and war criminals, and other indefensible acts because they think he is the great liberal savior.

Stalin's useful idiots - like Robeson - were blind to the reality of what the communist tyrants were actually doing. They were too caught up in ideas about what was happening, instead of looking at the effect of the actual policies being carried out.

Those on both the left and the right who fall for the rhetoric of the Democratic and Republican party leaders are useful idiots who are failing to look at the effect that those parties' policies are actually having.

Nobel Economist Ed Prescott: "Don’t Subsidize Inefficiency.... Let These Businesses Go Bankrupt. They Gambled, They Lost. That’s Part Of Life"

Nobel economist Ed Prescott says:

Don’t subsidize inefficiency. Cut tax rates to get people to work more. This financial stuff is much ado about nothing. I don’t see any reason for the taxpayers to bail out Goldman Sachs in a roundabout way. Let these businesses go bankrupt. They gambled, they lost. That’s part of life.
Numerous economists agree with Prescott. See this, this, this, this and this.

What Do the Khmer Rouge, Pinochet and Bush Have in Common?

The prison chief for the brutal Khmer Rouge regime is finally on trial for torture and murder.

The Spanish judge who investigated and charged Chilean dictator Augusto Pinochet for war crimes has his eye on - and may prosecute - Bush Officials for torture.

Now, one of the lawyers pushing for prosecution has advised Douglas Feith to "get a good lawyer".

And next week, the Senate Armed Services Committee will release new details on the Bush administration's role in torture.

What is the legal basis for prosecuting Bush administration lawyers for torture?

As I wrote in 2005:

Even the lawyers and other people who aided in the [torture] effort may be war criminals; see also this article , this one, and this press release.

The Khmer Rouge, Pinochet and Bush administration officials have a lot in common: they are all war criminals who escaped justice for too long. And if the Spanish judge carries through with his investigation, they will all end up being convicted criminals.

The Missing Link in Climate Change?

New York Times bestselling author Gregg Braden claims that climate change is largely driven by the strength of the Earth's magnetic shield at any point in time.

Only a couple of months ago, NASA discovered an unprecedented breach in the Earth's magnetic shield (watch the NASA video), and the strength of the magnetic shield is known to vary in intensity over geologic time. So this is an interesting claim.

However, two NASA scientists explain that the strength of the magnetic shield does not have much effect on climate, as shown in the following question and answer exchange:
My question to you is whether anyone has ever attempted to correlate the Earth's magnetic field strength with climate changes. My layman's logic wonders whether a reduction in field strength of 10% would result in some additional solar energy reaching the atmosphere, and hence cause an increase in overall global temperatures. I understand that the geologic record of magnetic field strength may span far more time than the records of global temperature in the polar ice core samples (or however those estimates are made), but has any attempt at correlation of the data been made?


The "solar energy" received by Earth presumably includes sunlight and the solar wind (with the magnetic effects it brings with it). Let us compare.

Suppose the Earth had NO magnetism at all, so that the solar wind would hit its surface directly--as it hits the Moon, most of the time. The solar wind has a density of about 6 protons per cc, and velocity about 400 km/sec, so each square centimeter facing it is hit each second by as many protons as are in a column about 400 kilometers high and of 1 square centimeter cross section:

400,000 x 100 x 6 = 2.4 x 100,000,000 protons and each square meter (10,000 times larger) about 2.4 1012 protons

Each proton carries about 1000 electron volts, each of which is abut 1.6 10–19 joule So that each square meter gets about 4 10–4joules per second, that is, 0.0004 watt.

The "solar constant" of sunlight energy received by a square meter on the Earth perpendicular to sunlight is about 1300 watt. It's more than a million times larger.

The changing strength of the Earth's magnetic field may have less effect than its magnitude suggests. That field diverts the solar wind around the Earth, though some energy is transmitted in other ways, through reconnected field lines. If the field were only half as strong, the obstacle would be smaller, but still, most of the solar wind would flow around. The total effect remains roughly the same as before--that sunlight is more than a million times more effective as carrier of energy.

Any scientists wishing to weigh in on this question can comment below.

Sunday, March 29, 2009

Real Journalism Versus "Professional Journalism"

If Jon Stewart walked out of his studio with his camera crew, went to where establishment figures were speaking, and threw tough questions at them, you'd get something like We Are Change.

The We Are Change reporters have asked the tough questions - a la Stewart (well, minus the comedy) - to former presidents, secretaries of defense, leading Neocons and Iraq war architects, and many other establishment figures.

So their interviews are syndicated nationally and they've all received Pulitzer prizes, right?

Not exactly . . .

We Are Change founder Luke Rudkowski was arrested for trying to ask New York City Mayor Michael Bloomberg about his refusal to pay for the health care of 9/11 first responders.

The charges? "Impersonating a member of the press" and trespassing.

Saturday, March 28, 2009

Update on Torture

A second former high-level Bush administration official has confirmed that the neocons implemented a policy of torture. The chief lawyer for Guantanamo litigation - Vijay Padmanabhan - said that torture was widespread.

This confirms what Colin Powell's chief of staff, Lawrence Wilkerson, has said.

In addition, the Spanish judge who investigated and charged Pinochet for war crimes has his eye on - and may prosecute - Bush Officials for torture (for background information, see this).

And as I - and many others - have written repeatedly, torture doesn't work. In other words, torture isn't the way to get any real information.

Now, even the Washington Post seems to be acknowledging this fact:

Nearly all of the leads attained through the harsh measures quickly evaporated [and were proven false], while most of the useful information from Abu Zubaida -- chiefly names of al-Qaeda members and associates -- was obtained before waterboarding was introduced, they said....

"We spent millions of dollars chasing false alarms," one former intelligence official said.

Despite the poor results, Bush White House officials and CIA leaders continued to insist that the harsh measures applied against Abu Zubaida and others produced useful intelligence that disrupted terrorist plots and saved American lives....

Since 2006, Senate intelligence committee members have pressed the CIA, in classified briefings, to provide examples of specific leads that were obtained from Abu Zubaida through the use of waterboarding and other methods, according to officials familiar with the requests.

The agency provided none, the officials said.

Friday, March 27, 2009

Experts On Third World Banana Republics: The U.S. has Become a Third World Banana Republic

Who are the leading experts on third world banana republics?

Probably those at the International Monetary Fund with years of experience lending money to corrupt regimes after their excess became so out of hand that they needed emergency assistance.

Today, two top IMF officials said that the U.S. has become a third world banana republic.

First, Simon Johnson, former chief economist of the IMF, says recovery will fail unless we break the financial oligarchy that is blocking essential reform, and calls the U.S. a banana republic. In his essay "The Quiet Coup" (which includes sections like "Becoming a Banana Republic"), Johnson writes:

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise. . . .

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse....

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large. . . .

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). . . .But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.The government seems helpless, or unwilling, to act against them.

Second, Desmond Lachman - a long-time official with the IMF and former chief strategist for emerging markets at Salomon Smith Barney - agrees, writing in an essay entitled "Welcome to America, the World's Scariest Emerging Market":
The parallels between U.S. policymaking and what we see in emerging markets are clearest in how we've mishandled the banking crisis. We delude ourselves that our banks face liquidity problems, rather than deeper solvency problems, and we try to fix it all on the cheap just like any run-of-the-mill emerging market economy would try to do. And after years of lecturing Asian and Latin American leaders about the importance of consistency and transparency in sorting out financial crises, we fail on both counts....

In visits to Asian capitals during the region's financial crisis in the late 1990s, I often heard Asian reformers such as Singapore's Lee Kuan Yew or Japan's Eisuke Sakakibara complain about how the incestuous relationship between governments and large Asian corporate conglomerates stymied real economic change. How fortunate, I thought then, that the United States was not similarly plagued by crony capitalism! However, watching Goldman Sachs's seeming lock on high-level U.S. Treasury jobs as well as the way that Republicans and Democrats alike tiptoed around reforming Freddie Mac and Fannie Mae -- among the largest campaign contributors to Congress -- made me wonder if the differences between the United States and the Asian economies were only a matter of degree....

If we insist on ... not facing our real problems, we might soon lose our status as a country to be emulated and join the ranks of those nations we have patronized for so long.
While such statements are generally taboo among officials or bankers in the U.S., even the former Vice President of the Dallas Federal Reserve agrees:

Gerald O'Driscoll, a former vice president at the Federal Reserve Bank of Dallas and a senior fellow at the Cato Institute, a libertarian think tank, said he worried that the failure of the government to provide more information about its rescue spending could signal corruption.

"Nontransparency in government programs is always associated with corruption in other countries, so I don't see why it wouldn't be here," he said.

How Much Is Left in Tarp?

According to the Wall Street Journal:

It appears that Treasury has, at most, $52.6 billion left in its [Tarp] rescue fund....

On Wednesday, Treasury Secretary Timothy Geithner twice was asked to specify how much remains in the Troubled Asset Relief Program. The question arose amid the series of new programs the Obama administration has announced in the past several weeks to boost ailing financial markets. In both instances, the secretary avoided a direct answer.

The first time came after Mr. Geithner delivered remarks to the Council on Foreign Relations Wednesday morning. The moderator asked the basic question: How much is left in TARP? Mr. Geithner's reply: "Very, very reasonable amounts of money -- significant enough money."

Is there "significant money" left in Tarp even though the Journal calculates there should only be left because Tarp was never actually limited to $ 700 billion?

Or is Geithner trying to bluff about having a bigger bazooka than he really has?

Leading Conservative Backs Nationalization of Banks and the Fed

I had assumed that virtually all conservatives were opposed to bank nationalization.

But Paul Craig Roberts, whose conservative credentials are pretty impeccable - former Assistant Secretary of the Treasury under President Reagan, former editor of the Wall Street Journal, listed by Who's Who in America as one of the 1,000 most influential political thinkers in the world, PhD economist - is calling for nationalization of both the banks and the Fed.

Roberts writes today:

Would it be cheaper for government to buy the shares of the banks and AIG at the current low prices than to pour trillions of taxpayers’ dollars into them in an effort to drive up private share prices with public money? The Bush/Paulson bailout plan of approximately $800 billion has been followed a few months later by the Obama/Geithner stimulus-bailout plan of another approximately $800 billion. Together it adds to $1.6 trillion in new Treasury debt, much of which might have to be monetized.

Could this massive debt issue be avoided if the government took over the banks and netted out the losses between the constituent parts? A staid socialized financial sector run by civil servants is preferable to the gambling casino of greed-driven, innovative, unregulated capitalism operated by banksters who have caused crisis throughout the world.

Perhaps the Federal Reserve should be socialized as well. The notion of an independent, privately-owned Federal Reserve system was never more than a ruse to get a national bank into place. Once the central bank is part of the state-owned banking system, the government can create money without having to accumulate a massive public debt that saddles taxpayers’ and future budgets with hundreds of billions of dollars in annual interest payments.
Many liberal economists, as well as Alan Greenspan, free market advocate Marc Faber, and many others have previously called for bank nationalization.

Congressman Dennis Kucinich is also calling for the Fed to be nationalized.

Thursday, March 26, 2009

And Now For Some Good News . . .

Here's some good news:

Pimco: Fed Needs to Double Its Balance Sheet

The world's biggest bond fund, Pimco, says the Fed needs to double the liabilities on its balance sheet to save the economy.

Does anyone see a possible conflict of interest here?

The government hired Pimco to help run its mortgage-backed securities purchase program - a program which benefitted Pimco. Specifically, as of June 30th, 2008, 61% of Pimco's holdings were in the very mortgage backed securities that it was hired by the Fed to buy back on behalf of American taxpayers, according to a September Bloomberg report that cited data on Pimco's own website.

The government also hired Pimco to advise it of the value of $118 billion of assets guaranteed in the bailout of Bank of America.

There are a couple of other quasi-governmental hats which Pimco is wearing as well.

In addition, Pimco is buying toxic assets through the PPIP program.

It appears that the bigger and more numerous the government bailout programs, the more money Pimco makes. So I'm not sure that Pimco is the most independent, objective observer on the government's response to the economic crisis.

Self-Regulation of Derivatives Industry - The Sequel

When the financiers volunteered in 1999 to self-regulate their derivatives trading, that worked out well, didn't it?

Not so much.

Similarly, the International Swaps and Derivatives Association (ISDA) is currently putting the finishing touches on a new framework for trading and clearing North American corporate credit default swaps.

But above and beyond the fact that industry self-regulation is largely what got us into this financial crisis, under the new framework, "legacy corporate CDS in North America will not fall under the new standards." In other words, the derivatives industry will not deal in any fashion with existing American CDS . . . you know, those little things which caused Bear Stearns, WaMu, Lehman and AIG to fail, and which are necessitating bzillions of dollars in taxpayer bailouts for Citigroup, Bank of America, etc.

Should we trust the industry insiders or nobel economists like Myron Scholes, who says that existing over-the-counter CDS should be "blown up" and closed out?

America Is Changing Its Name

Top financial company AIG is changing its name to "AIU Holdings".

Top private defense contractor Blackwater is changing its name to "Xe".

Following AIG and Blackwater's lead, the U.S. has decided to change its name.

White House spokesman Joe King today announced that the U.S. is changing its name in order to decrease associations the Founding Fathers and thorny issues like taxation without representation.

"There is so much anger among the American public", said King at a White House press conference, "that we think it would be helpful to refocus our national attention and to calm everyone down so we can get on with the important work of economic recovery."

The new name for the world's most powerful nation: the United Swaps of America.

"After weeks of consultation with Larry Summers, Tim Geithner, and the CEOs of Citigroup, Bank of America, Wells Fargo, JP Morgan and the financial leaders, we have crafted a new name which accurately conveys President Obama's new vision of hope and change", King said.

Nobel economists Paul Krugman, Joseph Stiglitz and Myron Scholes confirmed that the new change was a fair reflection of current economic realities in America.

"I thought we should 'blow up' the credit default swaps", Scholes said. "Since the administration has decided to instead gear its trillions of dollars in bailout programs to pay them off at their full face value, the new name change is an accurate label."

"It is true that the credit default swap counterparties are the new constituents of government", Stiglitz said. "All of the economic programs appear to be aimed at making sure they get paid in full . . . I guess it is 'one swap, one vote', so the new name is a better description for the current system".

Krugman, who was a vocal critic of the Bush administration and had previously said that he is in "despair" over Obama's economic policy, said that he is now in a much better mood:

"I was really frustrated when I thought that this was a government of the people, by the people and all of that kind of stuff ...

Now that I realize that the government is really for counterparties to these swaps, I guess its working well enough."

King said that the old initials "U.S.A." will still be used.

Roubini Backs Geithner's Toxic Asset Plan

Nouriel Roubini is backing Geithner's PPIP toxic asset plan, saying

Secretary Timothy Geithner's new toxic asset plan is a serious step in the right direction in that it creates a public-private partnership to buy the troubled assets of financial firms - in other words, to do the necessary cleansing.

Roubini admits, though:

The government bears the risk if and when the investors take a bath on the taxpayer-provided loans. If the economy gets worse, it could get very ugly, very quickly. The administration should be transparent in making clear that there is still a wealth transfer taking place here - from taxpayers to investors and banks.

Also, while this plan is designed by the Treasury, many of the big guarantees are being made by the Federal Deposit Insurance Corp. and the Fed. Why not use only Treasury funds? Well, then the administration would have to deal with Congress. While the populist hysteria of last week suggests this end run might make sense, there is something a little worrying about circumventing the legislative process on such a huge investment.

So even Roubini admits that PPIP is a massive wealth transfer from taxpayers to investors and banks, and that Treasury funds are being used to sidestep Congress and their constituents - the American people.

Nobel economist Michael Spence has also said that PPIP has a good chance of succeeding in cleansing banks of toxic assets.

And UC Berkeley professor Brad Delong has also defended the plan.

On the other hand, nobel economists Krugman and Stiglitz - and just about every other economist who has publicly commented on PPIP - have shredded the plan, saying it is robbing the taxpayers and that it will fail to turn the solvency of the banks or the economy around.

What do I think about PPIP?

I think - for two reasons - PPIP will fail:

(1) Citigroup, Bank of America and other players are already gaming the program (and see this), which will create unintended consequences; and

(2) Credit default swaps are some of the primary "toxic assets" which need to be cleared out of the system. As Nobel economist - and the "intellectual godfather of credit default swaps" - says, we must "blow up" the credit default swaps and close out the CDS contracts at less than full value. Anything less won't work to purge the banks and give them - and the economy - a chance to become solvent once again.

Wednesday, March 25, 2009

Fractals: The Missing Link?

A scientist named Tim Palmer may have just reconciled the worlds of classical and quantum physics - which have until now seemed irreconcilable - using fractals.

Before launching into Palmer's theory, remember the idea that the geometry of the universe may create its properties has excited scientists for a number of years. For example, Garrett Lisi's E8 theory claiming that the physics of the universe stems from its shape (a 248-dimensional object) made quite a buzz.

Similarly, some physicists believe that the properties of gravity stem from the geometry of higher dimensions in which gravity is active. And years before, Einstein concluded that gravity was an effect of the space-time geometry through which objects fall.

Okay, back to Palmer. As New Scientist writes:

What if there were a way to reconcile these two opposing views, by showing how quantum theory might emerge from a deeper level of non-weird physics?

If you listen to physicist Tim Palmer, it begins to sound plausible. What has been missing, he argues, are some key ideas from an area of science that most quantum physicists have ignored: the science of fractals, those intricate patterns found in everything from fractured surfaces to oceanic flows....

Take the mathematics of fractals into account, says Palmer, and the long-standing puzzles of quantum theory may be much easier to understand. They might even dissolve away....

Palmer's ideas begin with gravity. The force that makes apples fall and holds planets in their orbit is also the only fundamental physical process capable of destroying information. It works like this: the hot gas and plasma making up a star contain an enormous amount of information locked in the atomic states of a huge number of particles. If the star collapses under its own gravity to form a black hole, most of the atoms are sucked in, resulting in almost all of that detailed information vanishing. Instead, the black hole can be described completely using just three quantities - its mass, angular momentum and electric charge....As a system loses information, the number of states you need to describe it diminishes. Wait long enough and you will find that the system reaches a point where no more states can be lost. In mathematical terms, this special subset of states is known as an invariant set. Once a state lies in this subset, it stays in it forever....

Complex systems are affected by chaos, which means that their behaviour can be influenced greatly by tiny changes. According to mathematics, the invariant set of a chaotic system is a fractal.

Fractal invariant sets have unusual geometric properties. If you plotted one on a map it would trace out the same intricate structure as a coastline. Zoom in on it and you would find more and more detail, with the patterns looking similar to the original unzoomed image.

Gravity and mathematics alone, Palmer suggests, imply that the invariant set of the universe should have a similarly intricate structure, and that the universe is trapped forever in this subset of all possible states. This might help to explain why the universe at the quantum level seems so bizarre.

For example, it may point to a natural explanation for one of the biggest puzzles of quantum physics, what physicists refer to as its "contextuality". Quantum theory seems to insist that particles do not have any properties before they are measured. Instead, the very act of measurement brings their properties into being. Or, put another way, quantum systems have meaning only in the context of the particular experiments performed on them....

According to Palmer's hypothesis, the invariant set contains all the physically realistic states of the universe. So any state that isn't part of the invariant set cannot physically exist.

Suppose you ... measure the position of an electron. Then you ask what you would have found if you repeated the experiment, only this time measuring the electron's velocity instead.

According to Palmer, when you repeat the experiment you are testing a hypothetical universe that is identical to the real one except that the position-measuring equipment is replaced with velocity-measuring equipment.

This is where the fractal nature of the invariant set matters. Consider a place of interest you want to visit along a coastline. If you get the coordinates even slightly wrong you could end up in the sea rather than where you want to be. In the same way, if the hypothetical universe does not lie on the fractal, then that universe is not in the invariant set and so it cannot physically exist....

Just as our eyes cannot discern the smallest details in fractal patterns, quantum theory only sees "coarse grain approximations", as if it is looking through fuzzy spectacles....

[Palmer's] theory backs Einstein's view that quantum theory really is incomplete. It is, Palmer says, blind to the fractal structure of the invariant set. If it wasn't, it would see that the world is not only deterministic, but it never exhibits any spooky effects.

On the other hand, it also agrees with the view of Bohr and his followers: the properties of individual quantum systems are not independent of the entire world, especially the experiments we humans use to explore them. We are stuck with the disturbing fact that how we measure always influences what we find.

Palmer's theory has - tentatively - been able to explain some of the mysteries and oddities of quantum physics.

Whether or not Palmer is ultimately proven right, I believe that scientists will come to see that the geometry of the natural world plays a bigger part in explaining the observed physics than previously realized, and that we are in for some exciting discoveries in the years ahead.

Head of San Francisco Fed Bank: We Don't Know What We're Doing, So We'll Do More of It

The head of the Fed bank in San Francisco, Janet Yellen, has more or less admitted that the Fed has no idea what it is doing, but that such ignorance only argues for taking more aggressively action:

Yellen said that the wisdom of the Fed's approach is now the subject of "considerable debate." ...

Yellen admitted that it was hard to prove that the new programs were working.

"We simply don't have the experience needed to pin down the magnitude of the impacts," Yellen said.

But this was just another argument in favor of a broad, aggressive, approach, she said.
Mish called it a year ago (Yellen's statement more or less confirms Corollary Number Three):
Fed Uncertainty Principle:
The fed, by its very existence, has completely distorted the market via self reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed's actions. There would not be a Fed in a free market, and by implication there would not be observer/participant feedback loops either.

Corollary Number One:
The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.

Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Corollary Number Three:
Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Corollary Number Four:
The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.
Arianna Huffington says that we should "take the steering wheel out of Geithner's hands". We should pry it out of the Fed's hands, as well, for they are collectively steering us off of a cliff.

Geithner's Gaffe Roils Forex Markets

After Geithner said in a speech at the Council of Foreign Relations that he was "very open" to China's suggestion that the IMF's "special drawing rights" currency be used, the Forex markets went crazy, interpreting Geithner's statement as meaning that he endorsed China's call to end the Dollar as world reserve currency.

He quickly corrected his gaffe, saying that the Dollar would remain the world's currency for a long time. And Obama jumped in and reiterated that he was opposed to dropping the dollar as reserve currency. Australian Prime Minister Rudd gave his support by saying that replacement of the dollar was not on the agenda for this year's G-20 meeting. And Bernanke reiterated that he was opposed to moving away from reserve status for the dollar.

What does all of this mean?

Well, Geithner's gaffe was likely innocent (he hadn't read China's proposal at the time, and so he probably didn't understand the reporter's question).

The real meaning is that power is shifting away from the U.S.

Right on the heels of the call from China, Russia, the UN and perhaps the IMF itself for a replacement reserve currency, the fact that Obama, Geithner, Rudd, Bernanke and company are having to work so hard to reassure dollar-holders that the greenback will remain king speaks volumes.

When you have Washington Post headlines entitled "U.S. Vows To Sustain Dollar's Dominance: Geithner Defends Currency's Role", you know things are heating up.

Ten years ago, the Dollar's reserve status was so secure that they could have just laughed it off. And ten years ago, the Forex markets wouldn't have gyrated so wildly in response to Geithner's gaffe.

Whether it happens at next month's G-20 meeting (unlikely), by the end of the year, or in a couple of years, the fact is that the power of the Dollar is waning. No amount of temporary "safe haven" spikes in the Dollar can mask that long-term trend.

Tuesday, March 24, 2009

CNN Asks an Obvious Question: "Should USA Still be AAA?"

In an article entitled "Should USA still be AAA?", CNN writes:

According to credit rating agency Moody's, the amount of U.S. Treasurys held by the public, including foreign governments, is expected to rise to $7.8 trillion by the end of the government's fiscal year in September, up from $5.8 trillion a year earlier.

What's more, Moody's predicts that this figure could increase to $9 trillion by September 2010....

So far, major credit rating firms such as Moody's and Standard & Poor's have yet to take any steps to lower the U.S. credit rating -- despite the increased spending and concerns about rising budget deficits.

Still, some smaller rating agencies have already lowered their U.S. rating. Egan-Jones Group actually removed the AAA rating from U.S. debt four years ago, well before the current crisis in financial markets prompted trillions in government bailouts.

"There is little doubt that the obligations of the U.S. government have risen faster than their means to absorb those obligation," said Sean Egan, the firm's managing director. "Hopefully this trend will be reversed."

Egan doesn't think there is much threat of the government defaulting on its debt. But he said that government policies will lead to a severe devaluation of the dollar, which could leave investors almost as bad off as a default.

Nonetheless, officials with Moody's and S&P defend their current AAA ratings for U.S. debt. They say that the U.S.' debt level as a percentage of gross domestic product and interest payments as a percentage of tax revenue are well within the range found in the other 17 nations that still have AAA ratings. Most of them are in Western Europe, which some argue has a worse banking and credit crisis than the U.S.

"If you rate U.S. sovereign debt as less than AAA, then there's probably nothing in the world that should be rated AAA," said David Wyss, chief economist for S&P. "To some extent you have to grade on the curve here."

Still, officials with S&P and Moody's say they are concerned about various U.S. debt ratios. They insist they wouldn't be afraid to lower U.S. ratings if the ratio of debt to the size of the U.S. economy or interest payments to government tax revenues become too great.

"We don't have a magic number," said Steven Hess, senior credit officer for Moody's. "But if at any point we became convinced that the debt and ratios would continue to grow, [a downgrade] is something we would consider."

But Egan argues that S&P and Moody's would be extremely reluctant to cut their ratings on U.S. debt. So if anyone is going to downgrade their opinion of the government's creditworthiness, it will be the marketplace that reacts first, not the agencies.

Egan is right. The USA should not still be rated AAA. See this, this, this and this.

Geithner Talks Up Regulation . . . Will It Happen, and Would That Be a Good Thing?

Tim Geithner said yesterday that the banking crisis shows that the U.S. financial system failed a major test and is in need of a regulatory overhaul.

Geithner said that the Obama administration wants to put in place a stronger, more stable system with a modernized government regulatory structure: " Our system basically failed its most fundamental test. It was too fragile."

As AFP writes:

"To make the system more stable in the future, to end this cycle of boom/bust, major financial crises every five years or so," the Treasury chief told the CNBC network.

To that end, he said, there will be "better resolution authority" to unwind collapsed firms such as AIG and Lehman Brothers, and curbs on executive compensation after a furor over lavish bonuses paid out by AIG....

Obama says more permanent changes are needed such as a "systemic risk regulator" to sound the alarm before a collapse becomes imminent.

Officials say the government also needs new powers similar to the authority enjoyed by a bankruptcy judge to restructure a failed company, to cover not just banks but major non-bank financial institutions such as hedge funds.

And exotic investment tools that long operated under the radar, such as the "credit default swaps" blamed for AIG's demise, are expected to be brought onto open exchanges....

In an unusual joint statement Monday, the Treasury and Federal Reserve pledged to work with Congress "to develop a regime that will allow the US government to address effectively at an early stage the potential failure of any systemically critical financial institution."

Is this new push to regulate for real? And will it be helpful?

Will the Foxes Let New Guards Into the Chicken Coop?

Will regulation actually occur?

Well, the most powerful player in Obama's economic team - Larry Summers - is one of the three or four people most responsible for the deregulation in the first place. As a 1999 New York Times article entitled "Congress Passes Wide-Ranging Bill Easing Bank Laws" quotes Summers as saying:

''Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,'' Treasury Secretary Lawrence H. Summers said. ''This historic legislation will better enable American companies to compete in the new economy.''

The Times' article also quotes prophetic critics of the deregulation:

The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly.

''I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010,'' said Senator Byron L. Dorgan, Democrat of North Dakota. ''I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.''

Senator Paul Wellstone, Democrat of Minnesota, said that Congress had ''seemed determined to unlearn the lessons from our past mistakes.''

''Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,'' Mr. Wellstone said. ''Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.''

Will Summers - the most powerful economics player in the Obama administration - let any real regulation occur?

Will Geithner - the guy who let the banks run amok when he was head of the New York Fed, and who is adopting the banks' own fuzzy math in assessing their health today - really push for change?

I would like to hope so, but their track record doesn't make it seem likely.

If Regulation Is Enacted . . .

I agree that the system is in need of a regulatory overhaul.

The feds already have the authority to unwind collapsed companies. But I agree that more authority to unwind collapsed giants would be helpful, if for no other reason then that it might give more backbone to regulators to do so (by providing political cover in the form of explicit laws saying they can).

The Fed has been the bubble-blower-in-chief for decades. The Fed is a large part of the problem, and should be disbanded or brought under Federal control. In any event, don't give the Fed more powers to oversee and "stabilize" the economy. The Fed has proven for almost 100 years that it will botch the job.

And putting CDS on exchanges is not enough, and does not address the fundamental problems. Nobel economist Myron Scholes has slammed the business-as-usual approach of the Obama administration to credit default swaps:

The “solution is really to blow up or burn the OTC market, the CDSs and swaps and structured products, and let us start over,” he said, referring to credit-default swaps and other complex securities that are traded off exchanges. “One way to do that, through the auspices of regulators or the banking commissioners, is to try to close all contracts at mid-market prices.”
By "close all contracts at mid-market prices", I think Scholes means reform the CDS contracts by insisting that counterparties take a haircut, insisting that the counterparties not get full value for the contracts, and that the CDS contracts be paid out and done with. That's what I've been pushing for months (see this, for example).

Finally, regulation should address the core issues that got us into this mess, including:
  • Reigning in fractional reserve lending
  • Reigning in leverage
  • Re-enacting Glass-Steagall
  • Reigning in all credit derivatives, including CDS
  • Reigning in any future financial instrument or scheme - no matter what it is called - which creates too much leverage
  • Making all financial institutions keep accurate books, and repealing all laws which give them wiggle room to cook their books
  • Preventing any company from becoming too big to fail

Poll: Do You Think Geithner is Worse than Paulson, Better, or More of the Same?

Leading economists have said that Geithner's actions are just more of the same. For example, Paul Krugman says that "Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy".

In fact, Geithner is throwing a lot more money at the banks, hedge funds and other bigs than Paulson did.

Do you think that Geithner is worse than Paulson, better than Paulson or about the same?

Final Poll Results:

Yes, he's worse than Paulson.
113 (13%)
No, he's better than Paulson.
25 (3%)
They're about the same.
56 (6%)
They all serve the same financial elites, so it doesn't matter who the Treasury secretary is.
617 (76%)

National Cancer Institute: Eating Too Much Red Meat Increases Mortality from Heart Disease and Cancer

The National Cancer Institute, in what has been called "the largest study of its kind", found that older Americans who eat large amounts of red or processed meat face a greater risk of death from heart disease and cancer.

In fact, a much larger study called "The China Study" was conducted years ago by one of the world's leading nutrition experts with the assistance of several country's governments. The China Study also found that eating too much red meat (or animal protein of any kind) caused heart disease, cancer and other problems.

I love hamburgers, pork and all other sorts of meat. I am hopeful that trying to eat grass fed and organic meat whenever possible, exercise, and eating lots of fresh fruits and vegetables will minimize the health risks.

But after reading The China Study, even I am eating a little more chicken and fish and a little less red meat.

Nobel Economist Stiglitz: Geithner Plan Will Rob Taxpayers, Won't Work

Nobel economist Joseph Stiglitz said that Geithner's toxic asset plan "amounts to robbery of the American people", is badly flawed and probably won't work, offers "perverse incentives" to banks.

He joins Paul Krugman, Dean Baker and many others in slamming the plan.

Monday, March 23, 2009

Head of China's Central Bank Proposes New World Currency

There have been rumors and announcements from China about a new reserve currency.

And the IMF has said that it is considering printing hundreds of billions of dollars worth of its own currency.

Today, the two stories came together in a dramatic development. Specifically, the head of China's central bank proposed making the IMF's currency the world's reserve currency, to replace the dollar.

Is this the start of a huge change, or just more posturing ahead of the G-20 summit next month?

Given that a U.N. panel will recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, the attack on the dollar from Geithner and Bernanke's various actions, and the fact that IMF is independently talking about printing large quantities of its own currency, the possibility that this is real cannot be totally dismissed.

We Asked for Change. But After Giving Trillions, We Only Get Chump Change

Change would be canceling the CDS contracts or at least cramming them down to a small dollar amount.

Chump change is putting up a trillion dollars of taxpayer dollars to buy CDS and other toxic assets.

Change would be stopping all bailouts to CDS counterparties, banks and other failed financial giants, and forcing the people who made money through illegal schemes give it back to the American people.

Chump change is making a big show about reducing a couple of hundred million in bonuses.

Change would be prosecuting Bush, Cheney, Rumsfeld, the Treasury and SEC regulators who let the financial giants cook their books, and all of the other clowns who broke every law in the book.

Chump change is throwing Madoff - and no one else - in jail.

Change would be immediately withdrawing from Iraq and Afghanistan, and announcing that the U.S. will no longer launch any imperial wars.

Chump change is escalating the Afghanistan war, launching more drones into Pakistan, leaving "only" 50,000 troops in Iraq, and leaving Cheney's foreign-leader-assassination-team in place.

We asked for change. But after trillions of our hard-earned taxpayer dollars have been frittered away, all we're getting is chump change.

What ARE the Toxic Assets Everyone Is Talking About?

Paul Krugman has already eviscerated Geithner's toxic asset plan in the New York Times (see this, this and this). So have Yves Smith, Mish and many others.

But very few are taking a step back and addressing a more basic question: what are the toxic assets that Geithner is throwing taxpayer money at?

The answer is that the toxic assets include:

  • Credit default swaps (CDS)
  • Collateral debt obligations (CDOs)
  • Mortgage backed securities
In fact, these different classes of toxic assets are related.

Some CDOs are bundles of subprime and other mortgages sold in "tranches" (when you use a fancy word which sounds French, people assume it must be good). The rating agencies like Moody's, S&P and Fitch's gave crazily high AAA ratings to many of the tranches on the assumption that real estate prices wouldn't fall nationwide.

They did, and so the CDOs plummeted in value and became "toxic".

Other CDOs - called "structured finance CDOs" - are bundles of mortgage-backed securities and other asset backed securities.

Moreover, some CDOs - called "synthetic CDOs" - are bundles of CDS and other credit derivatives.

Similarly, there were huge CDS bets made that the companies buying or selling CDOs would stay solvent. When those companies started becoming insolvent, the CDS became toxic.

Can you see the relationship between all of the toxic assets?

What Should We Do With the Toxic Assets?

I obviously agree with Krugman, Smith, Mish and everyone else who is not directly making money off of this scam that it is a horrible plan which will probably fail and end up sticking it to the taxpayer.

But what people should be discussing is cancelling the toxic CDS and CDOs. As I have written repeatedly over many months in different ways, the American people should demand that the government rescind the CDS and CDOs.

The government has that power. Indeed, the same arguments which have been made for the government's authority to cancel AIG's bonus contracts can be used to cancel CDS and CDO contracts. In order to receive any more bailout money (or to keep the money they already received), the CDS counterparties and CDO holders need to cancel their contracts. And for foreign CDS counterparties and CDO holders, the government could simply say "we will not loan your central banks any more money unless you cancel the contracts".

Do you think this is extreme?

Well, this is a much better plan that throwing trillions upon trillions of taxpayer dollars at banks (foreign and domestic), hedge funds, etc. And unlike Geithner's plan, this could actually work.

And this is a national emergency. Rescinding CDS and CDOs is is a much better plan than seizing gold or using governmental emergency powers in other ways.

The government can do something productive and force a rescission of all of the toxic assets (or at least the CDS and CDOs).

At the very least, the government must give the counterparties and CDO holders a haircut and cram the dollar value of those contracts down to a very small amount.

If Obama fails to do this, the economy will be poisoned for years to come and may not recover for a decade.

Headlines | 3-22-09

Some of the most important stories of the day . . .

Economy and Business

  • Dow closes up 497
  • Paul Krugman shreds the Toxic Asset Plan
Science and General Interest

This roundup may be updated periodically throughout the day.

Sunday, March 22, 2009

The Best Way to Predict the Stock Market and the Economy

Daniel Arnold may have discovered the single best way to predict what the stock market and economy as a whole will do.

Arnold is not an economist, and his technique does not use traditional charting tools like Elliot Wave or stochastics. Arnold is just a smart guy (electrical engineer with a master's in bio-mechanics, who became a manager and then consultant at General Electric, started a successful manufacturing company in Silicon Valley which got bought out by a bigger company, and did well enough to retire in his mid-40's) who wanted to get a handle on investing.

Big Spender

So what's Arnold's forecasting method?

He simply charts the number of 45-54 year olds in the population at any given time. This number is easy to calculate from census or birth records, and immigration numbers (immigrants average a certain age when they arrive, from which you can estimate how many will turn 45, 46, etc., in a given year).

Indeed, the number for any given period can be predicted fairly accurately several decades in advance.

Why 45-54 year olds?

Its nothing magical.

It is simply that people on average spend by far the most during this time of life, which is - on average - when they are paying for their kids' college, paying mortgage on the biggest house they will own during their lifetime, and otherwise shelling out more cash than at any other time in their lives.

It turns out that there is a stunning correlation between the number of 45-54 year olds and the stock market and economy as a whole, as explained in Arnold's Book, "The Great Bust Ahead". Specifically, the 45-54 year olds are the "big spenders" who drive the economy. When there are more as a percentage of the population, the economy as a whole, including the stock market, goes up. When there are less, it goes down. As Arnold writes:

Consumer spending accounts for about 60% to 70% of the economy as expressed by the GDP (Gross Domestic Product), and more like 90% when indirect spending of our income as taxes by the government(s) is included. When coupled with demographic analyses focused on who does the “big spending” within the population, the economic past, stretching back for about a century, is almost effortlessly accounted for with stunning accuracy.
Says Who?

Take a look at the following chart:

(there are better charts in the book).

The red line represents the number of 45-54 year olds in the U.S. population. the black line represents the Dow Jones Industrial Average, invested for inflation.

The correlation is pretty good for most of the chart, right?

Arnold describes the slight divergence during the early 30's as being an effect of the New Deal, and the point where Dow first starts permanently underachieving the demographic trends is when the Nasdaq became popular, sucking money from the Dow (the two indexes added together would presumably track the demographic trends more precisely). But even without these explanations, the correlation is really very good.

But the Dow Won't Hit 20,000 in 2012, So Isn't Arnold Wrong?

People like Harry Dent have tried to explain why Arnold's model has gone of the rails in the last year or so (the 20,000 figure for the Dow in 2012 is looking pretty unlikely given that we're already in a Depression). Dent adds a bunch of other cycles less grounded in common sense to explain the change in trends.

But I think Arnold's own explanation makes more sense:

  • 2008 was the victim of a self inflicted sub-prime financial crisis. This has nothing to do with the demographics based massive depression that is yet to come, as described in the book. The sub-prime consequences are however very similar though mild so far compared to what is coming our way. The book clearly spelled out that along the way unpredictable short-term (1 to 3 years) disruptive events could happen. The sub-prime crisis is just that. It should be regarded as the “warmer upper” or “hors d'oeuvre” for the big one that is now rapidly closing in on us all.

  • The great unknown at this point is whether the sub-prime based crisis will drag on beyond 2009 and then blend into the demographics based massive decline which, per the book, could begin as early as 2009-10. Being short-term by definition, this period is totally unpredictable.

  • There is the strong possibility that we will see an interim recovery manifested as a “last hurrah” rally in 2009 of perhaps 30% on the Dow after a new low of around 7,000. However, this is very speculative. The only historical certainty is that in the long-term the Dow always returns to the demographic. This lends some credence to such a rally as the immutable demographic, as you can see from the chart, remains in a very strong upswing as it moves toward its 2012 peak before crashing. Also waiting in the wings ready to surge back into the markets are trillions of dollars earning very little in money market funds.

If Arnold is right - and my hunch is that he is, given how close the correlation is between 45-54 year olds and the Dow - then the American economy will not only suffer from the collapse of the world's biggest speculative bubble in history, multiple financial crises caused by credit default swaps financial fraud and overleverage, lack of savings, and massive debt, but also from a drastic decline in the number of "big spenders" (45-54) who can drive the economy. Indeed, Arnold's demographic model predicted the greatest Depression in history simply from demographics, without taking into account the other crisis factors.

And if Arnold is right, using his demographic forecasting method may prove invaluable for deciding where to invest both during the Depression and afterwards.

Arnold's book is only $8.95 and only 57 pages long. Read it for yourself to see what you think.

Note 1: Arnold - like Dent - are proponents of holding bonds. They might be right, but I still think they underestimate how much political instability will drive up the price of gold.

Note 2: A reader said that Dent came up with this demographic theory, not Arnold. If so, Arnold seems to have tested it more thoroughly than Dent. In any event, credit where credit is due.

Note 3: I am not an investment advisor and this should not be taken as investment advice.