January 31, 2009

Has America Jumped the Shark?

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By James Quinn, Financial Sense
Originally Published on December 9, 2008

America has given indications that it has reached its peak and is on a downward slope. The U.S. government has taken measures in the last 11 months that appear to be a desperate attempt to keep our dysfunctional corrupt financial system propped up.

The phrase “jumped the shark” comes from the 1977 episode of Happy Days where Fonzi jumps a shark on water skis (watch video clip). It was so far outside the 1950’s nostalgia realm of the show that it marked the peak of the great sitcom. It was all downhill to its ultimate cancellation.

Have the extreme socialist schemes implemented by the President, Treasury, Federal Reserve, and Congress marked the climax of our great capitalist experiment? There is still time to get our Republic back on its original capitalist path, but time is running short. It will take straight talk from our leaders, intense political pressure from common citizens, politicians scared of losing their jobs, and Americans willing to change their ways and sacrifice for the good of the country.


According to the FDIC, there were 8,384 banking institutions with $13.6 trillion of assets as of September 30, 2008. Hank Paulson has dished out $180 billion to the largest 30 banks in the country in an effort to keep them solvent.

It has now become quite clear that the largest banks in the country, with the “smartest” MBAs, took excessive risk, created and then bought their own toxic derivatives, and lied to the public and their shareholders about their true financial position.

So, we had about 8,000 banks that loaned money to people they knew in their local communities, kept the loans on their books, and generally acted like George Bailey.

A handful of large banks did all of the damage to our global financial system and these are the banks who are receiving all of the TARP billions. Maybe just maybe we should be giving the TARP money to the 8,000 conservative banks run by George Bailey type bankers rather than the horrible, too big to fail, banks run by Mr. Potter type bankers. Badly run banks need to be replaced by well run banks. Every time a bell rings, another bad banker gets a billion dollars. I see many Potterville’s in our future.

The honorable professor from Princeton, Federal Reserve Chairman Ben Bernanke, couldn’t have been any clearer in his November 21, 2002 speech:
U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.
The U.S. dollar is a green piece of paper. The only thing that gives it any value is confidence and trust. Confidence and trust are the only thing that distinguishes a U.S. Buck from a Schrute Buck.

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The more that we print, the less valuable they become. The government certainly appears to be printing money and distributing it willy-nilly. In 2002, Mr. Bernanke honestly admitted he had no idea what the economic effects of injecting money into the system would be. I guess we will find out.

The chart put together by Barry Ritholtz (see article) details what the Federal Reserve and Treasury have accomplished in the last 10 months with your money. This hodgepodge of frantic programs has committed you, your children and grandchildren to a maximum of $8.5 trillion in bailouts for dreadfully run financial institutions. Our government officials have already dished out $3.1 trillion or $300 billion per month.

It was only a year ago that President Bush submitted a budget that showed surpluses by 2012. That President Bush is a real card. He should have submitted that budget with a Mission Accomplished banner behind him. These programs have been rolled out non-stop during 2008 and the result has been a stock market that is down 37%. The Federal Reserve has been printing dollars in mass quantities. Famed investor Jim Rogers observed that, “Bernanke’s gonna keep printing money ’til they run out of trees.”

When I take a gander at this chart I can’t help but hear Wagner’s Ride of the Valkyries playing in the background as Bernanke and Paulson fire up the helicopters and prepare to drop dollars rather than napalm. One helicopter won’t do when there is $8.5 trillion to drop.

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Colonel Kilgore explained why he was taking that particular beach with “Charlie don’t surf.”
Colonel Paulson could explain his latest bailout with “Citi don’t lend.”

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“I love the smell of napalm in the morning.” “I love the smell of bailouts on the weekend.”

If these efforts to revive our economy follow the plot of Apocalypse Now, it will end with Timothy Geithner gasping, “the horror, the horror,” when the hyperinflationary bust eventually brings our existing financial system down.


Our great country was founded upon trust; trust in our government leaders, trust in our commercial system, trust in our currency, and trust in each other. Without trust, a Republic will fail. A Republic is ruled by the people, not power hungry politicians, lifetime bureaucrats, or corporate interests.

Our currency is imprinted with the words, “In God We Trust.” It is not imprinted with “In Ben We Trust” or “In Hank We Trust.” Over time, trust in our government, financial leaders and corporate leaders has declined to the point where Americans cannot and should not trust anything they are told. It is essential that every citizen do their duty and skeptically assess everything they are told by politicians, bureaucrats and corporate CEOs. They will continue to speak authoritatively like they know exactly what will happen in the future. They are lying. None of these experts can even predict what will happen next week, let alone next year. If you don’t think my advice is applicable, just read what these “experts” have said in the last few years (see article).

The lesson that must be learned is that you cannot trust anything “experts” tell you. They are looking out for their own best interests, not yours. For the last two weeks I’ve watched “experts” conclude that the U.S. automakers must be saved and a stimulus package of at least $700 billion is needed to save America. The same experts that told us everything was fine a year ago are now telling us we must spend at least $700 billion to save our economy. Why should we believe them now?

Our country, our banks, our consumers, and our corporations are extremely overleveraged. We cannot stimulate ourselves out of this over leveraged situation. The debt must be paid off, and it cannot be done without much pain and sacrifice.

Stimulus is just another name for more leverage. President-elect Obama says that we can’t worry about the short term impact on the deficit. When was the last time that government worried about the short-term, medium term, or long-term impact of their actions on deficits? That is why our National Debt is $10.6 trillion and we have $53 trillion of unfunded liabilities. When this crisis subsides, the government will not recapture the stimulus spending and pay down our National Debt. There will be another crisis that “must” be addressed.

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