made America great was her unsurpassed ability to innovate.
Equally important was also her ability to rapidly adapt to the change
that this innovation fostered. For decades the combination has been a
self reinforcing growth dynamic with innovation offering a continuously
improving standard of living and higher corporate productivity levels,
which the US quickly embraced and adapted to.
This in turn financed further innovation. No country in the world could
match the American culture that flourished on technology advancements in
all areas of human endeavor. However, something serious and major has
changed across America. Daily, more and more are becoming acutely
aware of this, but few grasp exactly what it is. It is called Creative
It turns out that what made America great is now killing her!
Our political leaders are presently addressing what they perceive as an
intractable cyclical recovery problem when in fact it is a structural
problem that is secular in nature. Like generals fighting the last war
with outdated perceptions, we face a new and daunting challenge. A
challenge that needs to be addressed with the urgency and scope of a
Marshall plan that saved Europe from the ravages of a different type of
destruction. We need a modern US centric Marshall plan focused on growth,
but orders of magnitude larger than the one in the 1940’s. A plan even
more brash than Kennedy’s plan in the 60’s to put a man of the moon by the
end of the decade. America needs to again think and act boldly. First
however, we need to see the enemy. As the great philosopher Pogo said:
“I saw the enemy and it was I”.
news rocked the global gold market when an almost obscure line item in
the back of a 216 page document released by an equally obscure
organization was recently unearthed. Thrust into the unwanted glare of
the spotlight, the little publicized Bank of International Settlements
(BIS) is discovered to have accepted 349 metric tons of gold in a $14B
swap. Why? With whom? For what duration? How long has this been going
on? This raises many questions and as usual with all $617T of murky
unregulated swaps, we are given zero answers. It is none of our
Considering the US taxpayer is bearing the burden of $13T in lending,
spending and guarantees for the financial crisis, and an additional $600B
of swaps from the US Federal Reserve to stem the European Sovereign Debt
crisis, some feel that more transparency is merited. It is particularly
disconcerting, since the crisis was a direct result of unsound banking
practices and possibly even felonious behavior. The arrogance and lack of
public accountability of the entire banking industry blatantly
demonstrates why gold manipulation, which came to the fore in recent CFTC
hearings, has been able to operate so effectively for so long. It operates
above the law or more specifically above sovereign law in the un-policed
off-shore, off-balance sheet zone of international waters.
Since President Richard Nixon took the US off the Gold standard in 1971,
transparency regarding anything to do with gold sales, leasing, storage or
swaps is as tightly guarded by governments as the unaudited gold holdings
of Fort Knox. Before we delve into answering what this swap may be all
about and what it possibly means to gold investors, we need to start with
the most obvious question and one that few seem to ask. Who is this Bank
of International Settlements and who controls it?
ITS DEMAND: 1- loan demand from small
businesses is weaker, 2- demand for loans and credit from
creditworthy businesses has fallen, 3- the quality of loan
applications from small businesses has deteriorated.
factors help explain the decrease in small business loan demand:
1- the economic downturn, which has diminished sales for many
small businesses, 2- the uncertainty about business prospects
and the economic outlook, 3- the deterioration in small
businesses’ financial conditions.
NOT SUPPLY: 1- bank lending standards
remain tight 2- the availability of credit is restricted.
3- to extend new loans and renew old ones, banks require stronger
cash flows, larger collateral values, and higher credit scores.
4-One important reason why banks are tightening credit seems
to be their concern for THEIR current and expected capital and
The chart below shows the market's inflation expectations
for the next five years. It is the '5-Year
TIPS Spread', which is the difference between the yield on a
5-year U.S. government bond and that of a 5-year
inflation-protected U.S. government bond. Yet given that
Ben Bernanke is battling to prevent deflation, the chart below
is also a barometer of the market's confidence in Mr.
Bernanke's deflation-fighting credentials.
While there's been some volatility, since the end of April
we can see that Bernanke's deflation-fighting credentials have
deteriorated. Inflation expectations have fallen from 2% in
late April to 1.5% now, as shown below.This helps
explain the psychology behind Ben Bernanke's latest move.
He has signaled that he will keep easy-money policy tools on
the table in order to fight potential deflation, in an attempt
to reverse the decline in inflation expectations shown below.
Thus this chart, the TIPS Spread, is where we'll see the
success or failure of Ben Bernanke's latest move. If inflation
expectations keep falling in the months ahead, his gambit
failed. If they rise, say back to 2%, then he'll have
succeeded. Today wasn't off to a good start, given that
inflation expectations fell, but it will take a few months
to make a fair assessment.
Until I began to examine the Dodd-Frank financial overhaul
bill I had no idea that it would so significantly change the
direction of the United States. It's scope is so vast and
pervasive that it is difficult to grasp its totality. I wrote
this article to try to explain this and why I believe it is so
important for us to understand it. Because of its complexity
it was not possible to do this briefly, so I wrote this major
"white paper" and divided it into four parts to make it easier
to digest. Please stick with me for the next four days; your
eyes will be opened.
The new financial overhaul bill is the greatest government
takeover of the financial sector of the economy since the National
Recovery Act of 1933 when Franklin Roosevelt attempted to
introduce central planning in America.
More than just a new law, the Dodd-Frank “Wall Street Reform
and Consumer Protection Act” (the "Act") gives government a
relatively free hand to set prices and wages, to make business
decisions, to promote or eliminate businesses, and to break up
businesses. It establishes a large new bureaucracy to enable the
government to dictate its wishes to the industry.
The Act marks the greatest legislative change to financial
supervision since the 1930s. This legislation will affect
every financial institution that operates in this country,
many that operate from outside this country and will also have
a significant effect on commercial companies. As a result,
both financial institutions and commercial companies must now
begin to deal with the historic shift in U.S. banking,
securities, derivatives, executive compensation, consumer
protection and corporate governance that will grow out of the
general framework established by the Act. While the full
weight of the Act falls more heavily on large, complex
financial institutions, smaller institutions will also face a
more complicated and expensive regulatory framework.
The Act isn’t directed just at the financial sector; because of
its vast scope, it is directed against everyone.
Startling as it may seem, the Act does nothing significant to
prevent the real causes of this or any future boom-bust cycle. At
best one may analogize this as the doctor breaking the thermometer
to cure a fevered patient. At worst it is a massive federal power
grab which will inhibit financial innovation, increase the cost of
money, and open wide the gates to a favored few where politicians,
politics, and lobbyists, rather than markets, determine the
direction of the financial sector of America’s economy.
While the new law has been signed by the President, it has not
yet been written. That task will be the job of federal mandarins,
the career lawyers and economists inside and outside of government
who live off of government regulation. As such the ultimate
consequences of this Act are unknown and will not be fully known
until years later after the regulations have been written,
agencies are established, and power is distributed among the
bureaucrats. In other words, the Act’s advocates have no idea how
the new law will impact the economy.
The ‘Failure of Capitalism’
The Act assumes that the economic bust was caused by a failure
of capitalism and a failure of government to properly regulate the
There are two questions you should consider while evaluating
the Act’s impact and scope that help explain this boom-bust cycle:
Why did the housing market become a bubble?
Why would any lender lend money to a home buyer who (i)
had a credit score of 500, (ii) made a down payment of 5% or
less, and (iii) didn’t have to prove his or her ability to
I would answer these questions by saying:
Only cheap money drives bubbles and there is only one
entity that creates cheap money and that is the Federal
Reserve—from 2000 to 2004 the Fed Funds rate went from 6.5% to
1.0% wildly distorting entrepreneurial behavior. This was
the cause of this boom-bust cycle.
No one would lend so carelessly unless they didn’t care.
They didn’t care because someone else, in this case the
government (Fannie, Freddie, and the FHA), would guarantee
Everything stems from these two factors yet there is nothing in
the Act that prevents the Fed from starting a new cycle or that
prevents Fannie or Freddie from again distorting the economics of
the housing market. The purpose of this article is not to go into
the ultimate causes of the bust as I have discussed them at length
articles, but these factors highlight the foundational
fallacies of the Act.
Law firm Davis Polk Wardwell calculated the number
of agencies involved in the rule making process. In the below
chart, the “Bureau” is the Bureau of Consumer Financial
Protection, the “Council” is the Financial Stability Oversight
Council, and the “OFR” is the Office of Financial Research:
Here is the reality: it will take many more years to write and
implement the regulations which really define the Act. It may be
that some of these regulations will never be written, something
that is not unheard of in Washington.
The Act will be a siren call to lobbyists, lawyers,
accountants, and economists.
The Obama Administration today announced additional support to
help homeowners struggling with unemployment through two
targeted foreclosure-prevention programs. Through the existing
Housing Finance Agency (HFA) Innovation Fund for the Hardest
Hit Housing Markets (the Hardest Hit Fund), the U.S.
Department of the Treasury will make $2 billion of additional
assistance available for HFA programs for homeowners
struggling to make their mortgage payments due to
unemployment. Additionally, the U.S. Department of Housing and
Urban Development (HUD) will soon launch a complementary $1
billion Emergency Homeowners Loan Program to provide
assistance – for up to 24 months – to homeowners who are at
risk of foreclosure and have experienced a substantial
reduction in income due to involuntary unemployment,
underemployment, or a medical condition.
Lenders wrote off as uncollectible $11.1 billion in home equity
loans and $19.9 billion in home equity lines of credit in 2009,
more than they wrote off on primary
mortgages, government data shows. So far this year, the trend
is the same, with combined write-offs of $7.88 billion in the
Even when a lender forces a borrower to settle through legal
action, it can rarely extract more than 10 cents on the dollar.
“People got 90 cents for free,” Mr. Combs said. “It rewards
immorality, to some extent.”
The amount of bad home equity loan business during the boom is
incalculable and in retrospect inexplicable, housing experts say.
Most of the debt is still on the books of the lenders, which
Bank of America,
TrimTabs does a simple yet elegant analysis that seeks to
explain why US final demand is not only sluggish but declining,
and is ultimately the reason why the US government needs to
consistently pump more and more capital in the economy to keep GDP
at best flat.
TrimTabs focuses on the "consumer
spendables" indicator - It consists of the sum of three
components: 1. After-tax income from wages and salaries;
2. After-tax income from non-wage sources, such as capital gains,
dividends, and interest; 3. Cash harvested from home equity
when mortgages are refinanced.
As TrimTabs shows, and this
should come as a surprise to nobody, "much of the economic growth
in the middle of the previous decade was fueled by an explosion of
consumer debt. Consumers treated their homes like automatic
teller machines—cash-out refinancings topped out at $804 billion
in the four quarters ended in Q2 2006—and they borrowed freely on
low-rate auto loans and credit cards given to almost anyone who
could fog a mirror. Now that the era of easy consumer
credit is over, the economy is resetting to a lower level of
We believe the interventions of the Fed
and the government to try to head off this adjustment will do more
harm in the long run than the adjustment itself." In other words
the ongoing debate on whether the US is undergoing inflation or
deflation is moot - the primary driver continues to be
deleveraging, as Rick Santelli likes to shout on occasion. And all
the other monetary phenomena are merely a side-effect. Alas, as
long as deleveraging is the primary driver in the economy, nothing
else matters: it has long been our contention that deleveraging
must run its course. However, the Fed will not let that happen,
and in doing so, it will attempt the last thing in its arsenal -
in essence, suicide the economy, by destroying all faith in the
actual medium of monetary exchange. At that point inflation,
deflation and/or stagflation will be the last thing on anyone's
“In reality, however,
borrowers – not lenders, were the primary bottleneck in Japan’s
Great Recession. If there were many willing borrowers and
few able lenders, the Bank of Japan, as the ultimate supplier of
funds, would indeed have to do something. But when there are
no borrowers the bank is powerless.”
Richard Koo -- The Holy Grail of Macro Economics
ZH - Zero Hedge - Business Insider,
WSJ - Wall Street Journal, BL -
Bloomberg, FT - Financial Times
Gordon T Long is not a registered advisor and
does not give investment advice. His comments are an expression of opinion
only and should not be construed in any manner whatsoever as
recommendations to buy or sell a stock, option, future, bond, commodity or
any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory
agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your
own before making important investment commitments.
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Gordon T Long
is not a registered advisor and does not give investment advice. His comments
are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, we recommend that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
we encourage you confirm the facts on your own before making important