Quantum Pranx


Obama’s Katrina & other bits from the Mainstream

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by Bill Bonner The Daily Reckoning, posted 24 March 2009

 According to Frank Rich in the International Herald Tribune, President Obama may be having a “Katrina moment.” The storm caused by AIG bonuses just keeps blowing out windows and taking off roofs. Bailouts are stupid and corrupt, of course. But they play a key role; they help divert the public’s attention, like a guy who picks a fight in front of a liquor store, while his friends rob it.

So far, a poll found that Obama himself has avoided the public’s anger. But the poor AIG executives are being hounded, even at home. Employees are “living in fear,” says one press report, as “busloads” of protesters arrive in front of their Connecticut homes. Then, the TV cameras catch these poor schmucks as they tell their sad stories. “My husband lost his job at the carwash… and now I have to see these crooks living in houses that I could never even begin to dream about.”

Here at The Daily Reckoning, we do not envy the AIG crew. Nor do we have any desire to take their money away. They stole it fair and square, as far as we’re concerned. But the lumpen are much less open minded.

The House of Representatives actually passed a resolution imposing a 90% tax on AIG bonuses. The measure looks clearly unconstitutional to us. It’s a penalty tax…a Bill of Retainer, specifically outlawed by the Constitution. You’re not supposed to be penalized, after the fact, without due process of law. But who cares? Members of Congress never read the Constitution anyway. And it’s probably better that they don’t. If they took it seriously, they’d have to punish themselves.

But while all this wind was passing through the press, the important story was highlighted at Salon.com: “Economists agree: Print. Money. Now.”

What worries us is that this is all too obvious and too predictable. The economists agree, because they see no alternative. The real problem is not a lack of money for the banks to lend – they can borrow all they want from the Fed at near-zero interest. The real problem is too much debt. And printing money will help ease the debt burden. On paper, people will owe as much as ever, but it will be a whole lot easier to pay with the dollar going down by 10% …or 20%…per year.

So, print…money…now…is just what the Fed is doing. Bernanke said so. And he says he’ll keep doing it as long as necessary. 

This unsettles the Chinese, of course. They’ve got $1.4 trillion in dollar assets. They told the United States that they expected it to protect the value of the Chinese holdings. 

But how can the feds do that? Quantitative easing is an increase in the QUANTITY of money. Generally, an increase in the quantity means a decrease in the QUALITY of it. That’s how it works. And that’s exactly what the feds want. 

So, the poor feds! Out of one side of their mouths, they had to reassure their biggest creditor that they’d protect the value of the dollar… while out of the other, they have to reassure the markets that they will create enough inflation to get the economy moving.

They are caught between Scylla… and Charybdis… on the one hand the rock of deflation and on the other, the Chinese. What can they do?

Our guess it that they are aiming to muddle through…with just a little bit of QUALITATIVE decline in the dollar – not enough to cause the Chinese to panic – but enough to get U.S. consumers, investors and businessmen to loosen up. Good luck to them.

But there’s no such thing as a controlled “run on the dollar.” Once investors start running for cover, it’s every man for himself. And who knows where it will end up? Foreigners are already exiting U.S. agency debt. It wouldn’t be very surprising that they suddenly rush for cover from all U.S. dollar debt. Therefore, is it not obvious that the dollar will fall? And bonds will be crushed? And gold will rise? 

Almost too obvious. Still, we now have taken down our “Crash Alert” flag for the stock market. But we hoist another one: a Crash Alert flag for the dollar. 

The horror! The French leftist newspaper, Liberation, convened a forum of intellectuals to discuss how to get the world economy out of its funk. University professors, social workers, journalists – hundreds of them. We’ll wager that not a one of them had a clue about what is going on…and every suggestion they made would make the situation worse.

Meanwhile, we were surprised to see that the leftist English newspaper, the Guardian, actually shares our critique of the bailout efforts. “The rich need a dose of capitalism,” writes Andrew Lilico. “Capitalism punishes those who invest in companies that fail.” Well, that’s the way it’s supposed to work. But the meddlers, improvers, and chiselers are out in force. 

And what’s happening in that heart of financial darkness, Zimbabwe? The Guardian also reports that children are eating rats to survive. For many, only gold is keeping them from starving. 

Unfortunately, they don’t have much gold. The Zimbabwe inflation rate is still running around 230 million percent, despite recent reforms (we don’t know what happened after the government took 13 zeros off its currency; maybe it’s putting them back). So, the only reliable money is either foreign currency – or gold. Many people are panning for gold in the few streams where it is present.

Written by aurick

26/03/2009 at 10:59 am

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