Re: [A-List] The Thoroughly Criminal Greenscam

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

This was posted by me to PKT on Oct 3, 2000:

The WSJ today (Oct 3 2000 page A2) reports that the Fed is now under the
influence of Wicksell on the relationship between interest rates, growth and
inflation. The Fed, while expected to leave interest rates unchanged in toady's
meeting, has left inflation adjusted real rates historically high.  Monetarists
who have dominated the Fed throughout its history subscribe to the theory that
inflation can only be prevented either by high rates to contain growth, or by
high unemployment to depress wages, which are two faces of the same coin.
Wicksell argued that monetary policy works best at containing inflation by
pegging interest rates to investment returns rather than money supply.  That
theory provides a needed cover for Greenspan's high interest rate policy.  Of
course, the Treasury, with the support of the Fed, has repeatedly declared that
a strong dollar is in the US national interest. And a strong dollar requires
high US interest rates in the current international finance architecture.  But
now, in addition to national interest justifications, a scientific theory has
been resurrected to support Greenspan's policy.
Field data have demolished the claim that low unemployment (below 5%) causes
inflation.  Greenspan calls his high rates "equilibrium interest rates".

The Fed, notwithstanding its intellectual pretense,  has always been a political
institution.  The politics of economics repeatedly resurrects from the
intellectual wasteland, the theoretical Siberia as it were, new
gurus to support its latest ideology.  Nobel winners are proponents of theories
that explain "scientifically" last year's political expediency.  The list
includes Hayek (free market), Freidman (monetary theory), Mundell (global
capital) etc, etc.   Wicksell makes it respectable for Greenspan to abdicated
his responsibility as Fed Chairman, by pretending to follow the market, to treat
interest rates as prices of money set by market forces, and not as a tool to
promote employment or growth.  The embarrassing question of why then we need a
Federal Reserve is never asked.  The fact is that the monetarists at the
Fed are fervently intervening in the market, the only difference between them
and Keynesians is that they intervene to safeguard the value of capital while
Keynesians intervene to protect labor from unemployment and low wages.  As Paul
Davidson said, everyone has an income policy; they just don't like the other
fellow's income policy but claiming their own is "free" market determined.

This creates rethinks on Wall Street.  Traders and investor may have to reverse
their knee-jerk reaction to sell when the Fed raises rates.  Unless, of course,
corporate profit falls amid rising rates, as they are
beginning to show.

Wicksell, Johan G. K, (1851-1926) was born in Stockholm, Sweden. His book:
Value, Capital and Rent (1893) was not translated until 1954)  His  Lectures on
Political Economy , 2 vols (1901-6,) and Selected
Papers on Economic Theory (1958) were read only by professionals. Wicksell did
rigorous work on the marginalist theory of price and distribution and on
monetary theory. The Lectures on Political Economy
has been aptly called a `textbook for professors'. In an unusually chequered
career  (including a brief spell of imprisonment for exercising his right of
free speech) he wrote and lectured tirelessly of
radical issues, which did not figure among the qualities that Greenspan admired.
He was an advocate of social and economic reforms of various kinds, most notably
neo-Malthusian population controls. In his later years he was revered by the new
generation of economists who became known as the Stockholm School. They
developed his ideas on the cumulative process into a dynamic theory of monetary
macroeconomics simultaneously with but independently of the Keynesian
revolution.

Greenspan's selective use of other people's idea is notorious.  His fondness of
Schumpetrean "creative destruction" which he cites in every speech, always
leaves out the second half of Schumpeter's conclusion: that creative destruction
tends to encourage monopolies (a la Microsoft) and accelerates the coming of
socialism.

To get it directly from Wicksell:
http://socserv2.socsci.mcmaster.ca:80/~econ/ugcm/3ll3/wicksell/interest.txt



Henry C.K. Liu




Anne Williamson wrote:

> The Golden Age of Things to Write Economics Term Papers About
> The Mogambo Guru
>
> - Greenspan's Fed couldn't contain itself any longer.  Total credit -
> Greenspan's Fed couldn't contain itself any longer. Total credit extended by
> the Fed jumped $12 billion last week. Twelve billion! Total Fed credit
> outstanding is now larger than currency in circulation. They managed to hold
> themselves to the relatively minor fraud of sterilizing a paltry $2.5
> billion for the same week. The Treasury jumped in and released another $5
> billion in fresh fiat currency.
>
> Man, these are exciting times for economists. We are in the epicenter of the
> bizarre endgame of pandemic central bank corruption, and in the future this
> will be referred to as the Golden Age of Things to Write Economics Term
> Papers About.
>
> - Thanks to Thomas Donlan of Barron's we know that tax receipts recorded by
> the Treasury are way down for this fiscal year already, and down about 11%
> for all of 2001. But spending is up 8%. Making less but spending more.
> Typical.
>
> And the CBO agreed both that the government is going to borrow $55 billion
> in the next quarter, and that the total deficit for the year will probably
> hit $150 billion. But everything must be seen as being just peachy, so today
> the Treasury released an announcement that they were paying down $2 billion
> in debt. Hahahahaha!
>
> Mr. Donlan also provided this pithy quote on the value of the dollar vis a
> vis the order of magnitude in anticipated raising of the government debt
> ceiling (now topped out at six trillion smackeroos): "But the United States
> of America will have taken one more step on the trail blazed by Argentina,
> Russia and so many other countries that are wealthy in resources and human
> knowledge, but foolish in the way they handle their finances. The dollar is
> only money because the world's people believe we won't abuse them."
>
> Huh? The world's people trust us not to abuse them? Since when? Hell, the
> people of THIS country don't believe the government won't abuse them. The
> dollar is only money, to correct Mr. Donlan's error, because the world's
> people do not understand the mechanism whereby the ubiquitous dollar, which
> has been a Rock of Gibraltar for as long as anyone can remember, would lose
> value.
>
> But foreign dollar-holders took a nice whack to the head in the last month,
> and this is providing them with a real education. The kind that sticks with
> you for years.
>
> - A guy named Wicksell came up with the idea of a "natural" interest rate
> and a "market" interest rate. The natural rate comes from the idea that
> there is an interest rate that produces an aggregate savings that is equal
> to aggregate investment (otherwise, where would the investment money come
> from?). The market rate is the rate actually charged by banks. When the Fed
> pounds down the market rate, creating too much money and thus reducing the
> market rate of money, the two are in disequilibrium. And the upshot is that
> the divergence between the two will, says Wicksell, cause a change in the
> value of money. We are seeing this now.
>
> And, as evidenced from the first paragraph above, the Fed and the Treasury
> are continuing to pound down interest rates by committing the overt fraud of
> sterilizing government debt at an accelerating pace, providing tons of
> credit to anybody that asks for it (like the IMF and World Bank), and
> printing up cash, further distorting the gap between the natural rate and
> the market rate, and thus further decimating the dollar.
>
> - The Fed's criminally-stupid behavior is now predicated on the fact that
> the insurance industry, the retirement plan industry, the Wall Street
> industry, Federal tax revenues and other vitally interested parties all need
> to invest in stocks and have stocks move up forever. They want, and need, to
> pump that sucker back up.
>
> Insurance premiums are already inflating at double-digit rates to make up
> for the fact that claims are increasing and investment performance is awful,
> producing losses for the underwriters. Corporate retirement plans are
> a-fixin' to require the companies to put much, much more money into them to
> make up for the losses. Federal tax revenues are suffering because of the
> drastic drop in reported gains to be taxed away. Tip o' the day: sell
> insurance stocks. Massively raising premiums to save your own butt does not
> mean that you will sell many policies at that high rate. Much better to just
> temporarily go out of business while there are still a few bucks left to
> start up again when things are better.
>
> - The weak-dollar/strong-dollar argument is still making news. One of the
> arguments for a continued strong dollar is that the US dollar is a reserve
> currency of foreign governments. Huh?
>
> Is that to imply that there are just so dangity-dang many dollars floating
> around the world that they are now just another commodity, but somehow
> immune to the vagaries of market forces?
>
> And is that to imply that the dollar is being used for buying and selling
> foreign products and services between foreign nationals?
>
> And is that reserve currency thing implying that those governments will
> always be happy to intervene in the currency markets to support the dollar
> by selling their own currency?
>
> And is that implying that foreign nationals are a dim-witted lot, always
> eager to have lots of devaluing money? So how valuable is a currency when
> the underlying economy is going down, the government is speeding down the
> highway to socialism, the citizens themselves and every level of government
> are a bunch of under-educated, self righteous, over-indebted yahoos, and the
> central bank is actively pursuing policies to devalue the currency and
> foster inflation?
>
> - The 2001 Financial Report of the United States Government had an
> interesting statement by Treasury Secretary Paul O'Neill. He noted that when
> the government uses the same accounting method that corporations are
> required to use, the federal deficit in 2001 was $515 billion. The
> government, that ignominious cartel of liars and idiots, said the budget had
> a surplus of $127 billion!
>
> The accountants working at the government had to invent a fictitious $17
> billion expense ("disappeared down a rat hole line item") to nominally
> "balance" the books.
>
> - Got a call from a guy named Ty who was adamant that the Fed is frantically
> buying up both equities and government debt to support the market. Well,
> duh. What was it supposed to do, sit there and let the chips fall where they
> may? After Greenspan has spent his entire Fed career working feverishly to
> foster one ridiculous bubble after another, committing one financial fraud
> after another, one egregious pile of flummery and stupidity on top of
> another? Now, after all that, he is going to let this bloated and cancerous
> mountain of preposterous economic glop collapse before he has a chance to
> retire? Hahahaha! Stop! Stop! I'm laughing myself sick here!
>
> And that brings up another interesting point; who is going to replace
> Greenspan? What congenital idiot would voluntarily walk into that mess,
> knowing that he or she is going to be blamed, his career and reputation
> ruined, for forcing childish and greedy Americans to stop eating candy by
> the literal pound? Not me!
>
> Of course, if you just wanted more Greenspanism, just give a retarded monkey
> the power to create more preposterous credit-creation by waving his little
> paw in the air. It worked for Greenspan. He became the most powerful man on
> earth with nothing more on the ball than the awesome power to create money
> out of thin air!
>
> - Gary North penned a nice overview of the large overhang of central bank
> short positions in gold, measured in the hundreds of tonnes. This came about
> as these banks loaned out their country's gold at essentially 1% interest to
> miners who sold it, instead of having to dig the stuff out of the ground.
> Now the banks still have the gold in their vaults, but it is not theirs
> anymore. The banks are mere custodians. Now the miners are in the un-envious
> position of having to repay the gold to the central banks at less than the
> market price of gold. They lose money on every ounce they dig up. A
> worrisome prospect, according to Dr. North, is the upheaval that will ensue
> when the citizens of those countries find out what has happened to their
> gold.
>
> He also had an unflattering remark about University of Chicago economists,
> with which I totally agree. Today's crop of economists resemble nothing more
> than the geocentric, Copernicus system of the cosmos, with astrologers
> wearing pointed hats decorated with half-moons, calculating complicated
> epi-cycles of the planets. Very entertaining and time-consuming, but
> completely worthless.
>
> - The SP500 is back to where it was in April of 1998. That's four years ago.
> So now the four-year results of using the trading system of selling short
> the market when it rises is paying off almost 100%. The only dip that hasn't
> been covered is the post-WTC September 2001 low. The beauty of this amazing
> New Theory ("only $39.95 from Whiz-bang Products! As seen on TV!") is that
> it requires no computers or even thinking. If the market goes up, sell
> short. When it falls some profitable distance below where you sold it short,
> buy it back and pocket the money. It has worked every single time (except,
> temporarily, the one) for more than four years running. The big upside blow
> off of the SP500 didn't really get started until January 1995, when that
> index was around 450. That was seven years ago.
>
> It peaked in April 2000, with the index standing at around 1,500. At the
> height, it was quadruple where the index stood in the early 90's. Perhaps
> coincidentally, that was shortly after Clinton (ugh) and Greenspan (double
> ugh) took over and had a chance to get up a head of steam, by the way.
>
> Now the decline in the SP500 has, on average, wiped out four of the seven
> years of big, outsized Wall Street profits from owning stocks. Isn't there
> something in the Old Testament about Seven Fat Years? Then comes seven what?
>
> - That some kind of war will be fought, if not actually declared, is a
> given. With the economic miseries besetting the USA and the rest of the
> world, a war is almost certain. Scapegoats must be found! The malefactors
> must, and will, be punished! Hooray for us, we're a-gonna get them rats and
> string 'em up!
>
> And why not a war or threat of war? Didn't our government idiots just spend
> an entire few decades bribing Arafat and all the other Mideast terrorists to
> make nice? We played patsy for one expensive, pay-me-off-before-I-kill-again
> extortion after another for as long as anybody can remember, and now
> suddenly we're not paying off terrorists anymore? Says who?
>
> - I figure that pretty soon somebody in government is going to get the idea
> to let IRA and 401(k) holders make limited, penalty-free, premature
> withdrawals from their retirement accounts. The gains tax would still be
> due, giving the Treasury some needed money, Congress some spending money,
> lessening the issuance of new debt, and giving the consumer a fistful of
> money to spend. And nothing really picks up stock prices more than rising
> demand for output. Even though such an increase in demand is thoroughly
> bogus, as it is merely more running down of savings. Present consumption at
> the expense of future consumption, and all that.
>
> - Bank lending has stopped. Putting savings in bank accounts has also
> stopped.
>
> - Foreign central banks are doing their part to keep the dollar alive; they
> have dramatically stepped up their purchase of US government debt. This does
> double-duty, as they first have to buy dollars (thus keeping the dollar
> strong) and keeps interest rates low (by buying debt and keeping prices up).
> This must be part of the "dollar as a reserve currency" argument that is so
> popular.
>
> - The various incarnations of the monetary base have started to go
> ballistic, as has currency in circulation. However, the M's are not
> cooperating.
>
> - The NYSE Members are still accumulating stocks with both hands, I assume
> because they anticipate a (another?) intervention by the Fed to funnel money
> into their pockets. The open interest of SP500 futures is going red-line
> also, as the end-of-half approaches. God forbid if investors have to open
> their mailboxes in July only to read that they lost yet another buncha money
> in the stock market. Ergo, it's time for the Fed to overstep it's bounds
> again, and engage in another huge scam of deceit, corruption and
> manipulation. All for "the good of America," you can be sure.
>
> - Manufacturing wages were down, for the jillionth month in a row. Service
> wages were up a little. But government employee wages zoomed. Perfect. The
> one sector of the economy that produces no wealth at all, but actively
> destroys wealth, got the biggest boost in income.
>
> Gains in spending also, for the jillionth month is a row, outpaced income
> gains, as Americans continue to rack up more debt on top of the other
> unbelievable amounts of debt to continue to finance a bizarre and
> dysfunctional lifestyle.
>
> - It was with a laugh that I saw a poll that ninety percent of Americans
> think that the stock market is too risky a place to be saving for their
> children's college tuition! Man! This is almost too rich!
>
> - David Tice has penned an impressive narrative of the bear case in the
> semi-annual Prudent Bear Funds report. He particularly takes to task the
> GSE's, especially Fannie Mae and Freddie Mac, for acting like
> give-'em-anything jackasses. Perhaps we'll soon see the wisdom of putting
> Franklin Raines at the head of Fannie Mae; when all else fails, pull out the
> race card. That ought to keep Congress on a short leash in investigating the
> housing bubble that has been created by these GSE's.
>
> - Many states are sharply raising taxes on tobacco to cover their budget
> shortfalls. This will not raise any money for them. It will, however, mean
> an increase in cigarette smuggling, associated crime, more
> extra-Constitutional powers for government agents, and more taxes and
> expenses to pay for it all. Ugh.
>
> Mogambo Sez: Speculative money must surely be dried up. Not for nothing are
> federal and state revenues so drastically curtailed. The wealth effect is
> surely gone, and so where is all the cash for big, lasting rallies going to
> come from? Go short.
>
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