A few weeks back, Michael Snyder at The Economic Collapse blog looked at U.S. GDP growth rates for the ten years 1930-1939 and the ten years 2007-2016. I didn’t verify his numbers but they seem plausible (referring to “real” or inflation-adjusted GDP). Snyder says:

1930: -8.5%
1931: -6.4%
1932: -12.9%
1933: -1.3%
1934: 10.8%
1935: 8.9%
1936: 12.9%
1937: 5.1%
1938: -3.3%
1939: 8.0%

When you average all of those years together, you get an average rate of economic growth of 1.33 percent.

That is really bad, but it is the kind of number that one would expect from “the Great Depression”.

So then I looked up the numbers for the last ten years…

2007: 1.8%
2008: -0.3%
2009: -2.8%
2010: 2.5%
2011: 1.6%
2012: 2.2%
2013: 1.7%
2014: 2.4%
2015: 2.6%
2016: 1.6%

When you average these years together, you get an average rate of economic growth of 1.33 percent.

The same! But wait, averaging them isn’t quite right. For math-y reasons, it’s better to take a starting index value like 100, then apply the growth rates year by year. I did that, and

• Real GDP grew 10% from 1930-1939.
• Real GDP grew 14% from 2007-2016.

Still not much difference! The point remains that the last 10 years have been super lame. President Obama was perhaps the first in U.S. history to never have a single year of real GDP growth over 3%.

And it’s possible that Obama’s record was yet worse. Remember, in recent years they’ve been padding the GDP numbers. They directly added nonsense to GDP. They also under-estimate inflation, which artificially boosts the growth estimates.

But for now, let’s stick with official numbers (where Obama’s overall record is nearly as bad as a Great Depression), and pivot to look at unemployment.

You may wonder: if we’ve been in a depression, how could the unemployment rate be down at 5%? The difference from the 1930s is that, in our time, the Establishment (or Political-Financial Complex) has been determined to fool people – to boil the frog (us) slowly, so to speak – and to cover for President Lightworker. Thus,

• They let him jack the national debt from $10 trillion to $20 trillion. Even a monkey could make GDP seem halfway-OK for 8 years, if you gave him a $10 trillion credit card.
• They had the central bank (Federal Reserve) conjure trillions of new money from thin air and inject it into the financial markets. It’s chicanery, but people say “At least my home and 401k are up.”
• And they baked the unemployment statistics. Remember, the official 5% number hides a huge decline in Labor Force Participation, plus full-time jobs being replaced with crappy part-time jobs.
  • If you add back the people who left the labor force in despair these last ten years, real unemployment is 11-12%.
  • And if you add the extra part-timers (assuming they would rather be full-time), it’s even worse.

Depression 2.0 has been with us, all this time. It’s part of why people were so unhappy with Queen Cersei in 2016 (who ran as the Establishment’s poster child).

What does all this bode for President Trump? Probably not well.

• He’s trimmed back some of Obama’s growth-killing regulations. That will help.
• And his infrastructure spending may go to productive works (unlike Obama’s 2009 “Porkulus” package), if he can get it passed. He wants to revive American manufacturing, which would be good.
• BUT, with so much debt on the books and so many Americans expecting handouts, our underlying economic problems are worse than ever.

Trump has inherited a sinking ship. The next recession should be a roller-coaster. If the American Left is krazy and violent now, just you wait.

Then again, maybe our leadership will hit on the solution quickly (a Free Enterprise system with smaller government, Rule of Law, sound money, cutting the Welfare-Warfare State, letting Washington and Wall Street fail, letting Main Street pick up the pieces). And maybe our leadership will use the media skillfully (plus a few well-placed arrests) to transition people’s minds to all that. Don’t tell me I’m dreaming.

OK, I’m dreaming. Time to buy more ammo.

President Trump keeps saying (in speeches) or tweeting things like this:

Donald J. Trump Retweeted FOX & friends‏ – Wall Street hits record highs after Trump pulls out of Climate pact

Donald J. Trump Retweeted Eric Trump – Eric Trump Retweeted Reuters Business – JUST IN: Dow, S&P 500 and Nasdaq set record closing highs.

I wish he wouldn’t. Let’s be clear.

• Stock market numbers matter to individuals; not the nation.
• Low numbers don’t mean a President is doing a bad job, and high numbers don’t mean he’s doing a good job.
• The stock and bond markets are bubbles, fueled by the Federal Reserve Bank.
  • As I said under President Obama, way back at Dow 14,000.
  • We also have bubbles in the real estate, auto loan, student loan, forex (USD) and cryptocurrency markets. But I digress.
• During the 2016 campaign, Trump knew it and correctly said “We are in a bubble.”

Now Trump is taking credit for the high (bubble) numbers. Big mistake.

Instead, he should be warning Americans about how poor the economy’s fundamentals still are (thanks to Obama – until a lot more of Trump’s reforms get enacted). And readying us for hard times in the next recession.

“Live by the sword, die by the sword.” If Trump is going to take credit for high stock markets now, people will slam him when they fall.

That dark title comes from Peter Schiff, the investment analyst and libertarian ninja. His article’s conclusion:

Ronald Reagan was the last Republican president who was swept into office promising great change. He made good on his “Morning in America” promises to cut taxes and regulations. But he failed in his promises to reduce spending. …[and now after others did even worse,] the economy of 2016 has far deeper problems than the economy of 1980. Reagan’s morning now looks more like Trump’s midnight.

Trump did not make this mess, but he will likely be in office to clean it up.

The question is: Will President-Elect Trump be able or willing to clean it up? As Schiff puts it:

…as bleak as the picture Trump painted of the current state of the U.S. economy, it was not bleak enough. Before things can actually get better, they must first be allowed to get much worse. Decades of government promises to supply voters with benefits taxpayers can’t afford must be broken, starting with many of the promises Trump made himself to get elected.

(Emphasis added) That has been my chief criticism of Romney (in 2012) and of Trump all along: Although they were “truthier” with the voters than their Democratic opponents, they still didn’t tell voters nearly enough of the truth.

After eight years of President Obama, we now have a national debt of $19.8 trillion by official figures; and something far north of $100 trillion when you include the “unfunded liabilities” (the future benefits promises that the government should report, under proper accounting standards – and does not). States, and especially their pension funds, also face a great crisis where they won’t come close to meeting their future promises. This is all very different from when Reagan took office.

Based on his speeches about “infrastructure” spending and his past track record, Trump’s first instinct might be to run up the U.S. debt up to even greater heights than Obama has. But at some point, Trump’s deficit spending will hit a wall: a full-on recession (it’s overdue) and a new financial crisis, wherein world markets simply won’t allow the United States to carry on as before.

What happens then? Will Trump give Americans the bad news about serious cuts to their benefits and hopes? Or will Trump flounder, protect special interests – maybe hyperinflate the dollar – and allow events to destroy him and us?

Anyway, it’s been fun to watch the left-wing butthurt over President-Elect Trump these last few days; but realism compels me to start being a wet blanket again. America’s problems, especially its debt problems, are beyond anything that even Trump had acknowledged.

He won’t be able to fix them by magic. And in a way, left-liberals are right: the next four years will be awful, for many.

If you ever wondered why places that are one-party Democrat fiefdoms (most rust-belt cities, for example) are so dysfunctional and miserable, John di Leo offers an explanation, that I think is in part on point, but misses another part. It’s a long article, but I’ll try and excerpt the main point.

In today’s case, we see the Left react to a very real problem – the downgrading of a city’s bond rating, which means that all new borrowing will become much more costly for the city than it was before – by identifying other very real problems – a plethora of empty buildings – without any hint that he knows why they’re empty or what steps are needed to fill them, without recognizing that these are all just more symptoms of other, deeper problems.

It is indeed the chicken-or-egg problem, on the grand scale.  Chicago has lost about two-sevenths of its population since its high-water mark in the 1950s.  Rather than seeming to care why the city is bleeding residents, it just looks on it as yet another challenge, not as a symptom of something else.

Ask the very same question of a conservative, and you would receive a very different answer.

Why was our bond rating downgraded again; what does this mean to us?

“That’s a softball question,” a conservative would reply. “it was downgraded because a city that’s been bleeding both population and jobs for generations, plagued with high crime, a greedy leviathan, and a welfare state population locked in stasis, is simply unsustainable. The idea that there’s enough duct tape in America to keep this wreck together indefinitely is obviously fiction.”

“But if you want a hardball question,” the conservative would continue, “ask how to solve it.”

Di Leo correctly identifies a symptom — the refusal of Democrats to govern in accordance with common sense principles of economics and the role of Government in providing basic services. But he doesn’t get into why Democrats govern that way.

Certainly, some of it is because politicians generally and Democrat politicians especially are corrupt. But even the ones who aren’t in it for the graft have motivations that are at odds with good governance. It’s not simply that they don’t grasp basic economics or the basic role of Government,  it’s that theygo into Government with the goal of imposing a Utopian Ideology on everyone else, and being lauded for it by their peers in the media.

While Democrats go on endless crusades to “Fight Climate Change,” outlaw the private ownership of firearms, and ensure transgender bathroom equality… they neglect the necessary and unglamorous work of Government.  I guess because People and Esquire don’t do fawning profiles of politicians who balance the budgets, fix the streets, and clean the deadweight out of state and municipal bureaucracies.

By the way, the Illinois “Human Rights Commission” has fined a Christian business owner $80,000 for declining to participate in a gay wedding.  Freedom of speech and freedom of religious conscience are apparently not Human Rights, as far as the state of Illinois is concerned.

Refresher: The Federal Reserve Bank is not a government agency. It is the world’s largest private bank. Government has given it special privileges to basically:

• counterfeit money (i.e., create it from thin air);
• fix key prices in the economy (interest rates);
• tax Americans indirectly (by creating inflation/money and financing government with the proceeds);
• goose the financial markets for the proverbial “one percent” – which includes government officials themselves;
• bail out irresponsible/incompetent banks – and (via measures of “regulation”) prevent up-and-coming banks from challenging them;
• generally plan the markets (create bubbles, followed of course by crises);
• plan the number of crappy, part-time jobs that Obama’s economy can create for the little people;
• and escape the Freedom of Information Act.

So, from The Hill’s coverage of Janet Yellen’s testimony to Congress on Wednesday:

The biggest challenge to the Fed’s structure is the growing movement to Audit the Fed via legislation from Sen. Rand Paul (R-Ky.)…

A GOP-controlled Congress has given the bill its best chances yet of passage, and that renewed interest led Yellen to deliver her most spirited opposition yet.

“I want to be completely clear,” she said. “I strongly oppose Audit the Fed.”

Surprise, surprise.

Hat tip, ZH.

Readers of GP’s Economy category know that I like to write about how money-printing, now called “Quantitative Easing” (QE), actually drags on the economy (rather than stimulating it). In the long run, QE is just a ripoff to inflate asset bubbles for the Point-One Percent – and stick the rest of the economy with the fallout.

The topic is obscure, but it explains much of what has gone wrong in the U.S. economy as well as Europe, Japan, etc. (Overgrowth of the State explains the rest.) But today, I’ll spare you my verbiage and refer you to Pater Tenebrarum’s. Key passage:

When central banks or commercial banks add new money to the money supply, not one iota of real wealth is created…

However, monetary pumping does disturb the finely tuned dynamic processes [of the economy], as it distorts interest rates and prices. Economic calculation is then falsified and malinvestment invariably ensues. Have the housing bubbles in e.g. Spain and the US not shown this quite clearly?…The emergence of such illusory profits leads to the consumption of capital..

Eventually it turns out that companies actually lack the funds to maintain their real capital. This is what we mean when we refer to the pool of real funding being under pressure: the capital structure has been damaged. Actors in the economy need to…”repair” [the economy’s real capital]…Then the economy is in “recession”, but this is really a healing process. It takes time to heal.

Additional money printing actively sabotages this healing process. It achieves nothing but even more impoverishment in the end, especially if it succeeds in igniting another boom by redistributing existing wealth and spurring more capital-consuming activities…

Inflationism is apparently more popular than ever. It doesn’t seem to matter how often and how consistently it fails to produce the desired results, there are always more people in the world who have an epiphany about saving the economy by printing money…[until] the economy has become so structurally damaged…that if banks indeed were to lend out more money [as the money-printers desire], they would be almost guaranteed to lose most of it.

If you have the patience, Read The Whole Thing.

Addendum: By the way, the Swiss don’t get it, after all. Last Sunday, 78% of Swiss voters were against having a sound currency. (Updates my earlier post, Do The Swiss Get It?)

UPDATE: The Japanese people suffer from their latest version of QE, even as their Nikkei stock index sits at seven-year highs. In the end, the U.S. will fare no better (and probably worse).

Some might disagree with my view that the U.S. is a centrally-planned economy (and thus, non-capitalist; more of a social-fascist economy). But it is. A central planning board carefully rigs the three most important features of a large economy: its interest rates, its money supply, and the practices of its financial markets and banks.

Of course, that doesn’t mean our economy always co-operates with our brave central planners. And it doesn’t necessarily mean that our planners even have a clue. This chart (via ZH) shows some of their cluelessness:

It tells a story like this:

• In 2009, they thought publicly forecast that they’d have interest rates back to normal by 2011.
• In 2010, they publicly forecast that they’d be rigging up some normal rates by 2012.
• And so on, with each new year. Today, they forecast having normal rates by 2016-17.

These are some of the very people (*cough* Janet Yellen) who had no clue that the 2008 Global Financial Crisis was coming.

As to the economy: If it were recovering (for real) all these years, interest rates would indeed have been back to normal by 2010-11. But our economy hasn’t been recovering much, all these years. Just the markets. (Oh, wait.)

In the comments to my recent post On Deflation (and “too-low inflation”), a commenter expressed a frequently-heard belief, that a negative “example of deflation is Japan from 1990 to the present.”

I appreciate all comments and, without picking on the person, I wanted to examine the claim. Is it true? Here is a chart (from tradingeconomics.com) that shows Japan’s consumer prices since 1990:

Points that stand out:

• Japan’s CPI today is over 10% higher than it was in 1990.
• It’s true that from 1998 to 2013, Japan had a slight CPI decline; perhaps 5% total, over the 15 years.
• Japan’s CPI is now shooting up again.

Clearly, Japan has not had a large deflation. But perhaps the commenter’s (restated) point might be that Japan has had basically-stable prices since 1990, and the stable prices have done nothing to help Japan’s moribund economy. Here’s how I would answer that.

Japan has long had a relatively government-planned economy. And, over the period shown above, Japan has pursued inflationary, “stimulus” policies of government spending, deficits, expanded national debt, and money-printing. How has it worked out for them?

It hasn’t worked out well. As we see above, Japan’s inflationary policies may have prevented a large-scale deflation (not that that is necessarily good; see my other post). The inflationary policies also seem to have done nothing to fix Japan’s multi-decades of a debt-burdened economy.

In the midst of a 20-year lame economy, stable consumer prices have been a saving grace for Japanese households. But now that Japanese CPI inflation is on the rise in 2014, real living standards in Japan are dropping and “Abenomics” is gaining well-deserved unpopularity among the Japanese.

Japan is not an example of the failure of pro-freedom and sound-money policies, because Japan didn’t try them. Japan is an example, rather, of the failure of what they did try: Big Government, pro-debt, inflationary policies.

UPDATE: David Stockman tells the story of Japan, with charts. RTWT. They inflated massive stock, debt and real estate bubbles in the late 1980s; the bubbles burst; and ever since, they’ve piled up more debt and money-printing in trying to re-inflate their bubbles. Like we’re doing – with no better results.

If inflation is about rising consumer prices, deflation means falling prices. If you have watched CNBC or any financial TV these last few years, you have seen people often raising the bogeymen of either deflation or his new buddy, “too-low inflation”. (A printed example here.)

The people raising these bogeymen are there to help Big Government and Big Banking. They gain from pro-inflation policies – such as high government spending and deficits, zero percent interest rates, massive money-printing (to cover the government’s deficits and boost the financial markets).

Who loses from such policies? You, the person with a productive job. Each year, the dollars you get from your wages, salary, pension or savings hardly go up – and buy you less than the year before. You’re the sucker at the poker game, and they frighten you into going along.

In reality, falling prices – or the steady, stable prices of “too-low inflation” – are a help to consumers in good times and bad. What sane person doesn’t benefit from (and desire) everyday low prices?

Inflationists claim that if consumer prices decline (as in deflation) or fail to rise (as in too-low inflation), the economy will suffer, because people will postpone buying consumer goods. You should ask: Really? When has the prospect of next year’s stable-or-lower prices ever stopped people from buying what they need and desire now?

Prices have been stable-or-declining for years on computers, smartphones, flat screen TVs, eye LASIK operations, game consoles, and more. Have people stopped buying them? Quite the opposite. Or suppose that prices stayed the same, or even went down, for gasoline, food, rent, health care and education. Would that hurt you and your family, or help you?

Inflationists also claim that deflation (or too-low inflation) means economic depression. And we’ve had an occasional episode, such as the Great Depression, where deflation was *correlated* with depression.

But remember the saying, “correlation isn’t causation.” In the Great Depression, the deflation actually helped a lot of people. By making paychecks go farther, it kept the number of people who were turned out of homes, starved, etc. from being even larger than it was.

And we’ve all been carefully ‘educated’ to forget that deflation and/or low inflation are historically *more correlated with good times*. Via Zero Hedge and The Cobden Centre, here is a chart on that. It shows how deflation prevailed in America in the 19th century, which century overall was the greatest for economic growth in our history.

Cobden Centre gives the source, and further notes:

In their research article ‘Deflation and Depression: Is There an Empirical Link?’ of January 2004, Federal Reserve economists Andrew Atkeson and Patrick Kehoe found that “..the only episode in which we find evidence of a link between deflation and depression is the Great Depression (1929-1934). We find virtually no evidence of such a link in any other period.. What is striking is that nearly 90% of the episodes with deflation did not have depression. In a broad historical context, beyond the Great Depression, the notion that deflation and depression are linked virtually disappears.”

Which makes sense, because in the real world, economic progress means lower prices. As more things are produced with greater efficiency for lower costs, their prices drop – so that you can afford to buy them. It’s a good thing.

What frightens the inflationists is that if we stop the money-printing and other bad policies, they’re out of jobs. The government would have to balance its budget; so the government would probably have to cut spending (i.e., bureaucrats). Companies would have to cut unproductive consultants. Universities would have to cut economists, among others.

Interest rates would have to rise (to historically-normal levels). Real estate prices would come down (making homes more affordable). Stock and bond prices would come down (hurting Wall Street, but making retirement more affordable on Main Street). Bad investments would have to be liquidated (like some bad debts, or the craziest of the “green” or “dot-com 2.0” companies).

And, to allow for real growth and recovery, government would have to restrain itself (removing its jackboot from the economy’s throat; which Europe and even Japan have still not done). But at the end of it, we’d have a healthy economy where the working person can make ends meet; their wages, salary, pension or savings will buy them a good life. Which we don’t have, today.

It’s no coincidence that pro-inflation policies are pro-debt, anti-freedom policies. What we have today is the debt-bloated, gasping economy that you get after decades of such policies. An economy where the TV commentators tell you with a straight face that fast-rising prices (which make YOUR life harder) are required and, if we don’t keep inflation up at 2% a year or more, the world will collapse.

They’re partly right; their world (built on decades of bad policies) might collapse. But yours wouldn’t. Always remember the difference between their interests, and yours. Or who gains from inflation – and who loses.

In saner times of yore, people who spent their entire income were put down as spendthrifts, and people who didn’t were praised as savers.

It was well understood that savers financed the world’s productive capital and so helped to create the Industrial Revolution. The IR used capital to boost the productivity of labor, so that human beings could enjoy good stuff like higher living standards, longer lives, middle-class education and retirement, an end to infant mortality and child labor, etc.

In today’s crazy times, language is turned on its head (to keep the craziness going as long as possible). Savers are now called hoarders, people who hoard money.

Earlier this month, the Federal Reserve Bank of St. Louis published an analysis of our moribund economy, called What Does Money Velocity Tell Us about Low Inflation in the U.S.? The key sentences:

…the unprecedented monetary base increase driven by the Fed’s large money injections through its large-scale asset purchase programs [ed: Quantitative Easing, or “QE”] has failed to cause at least a one-for-one proportional increase in nominal GDP… [ed: though it has certainly boosted the financial markets for “the one percent”]

During the first and second quarters of 2014, the velocity of the monetary base2 was at 4.4, its slowest pace on record. This means that every dollar in the monetary base was spent only 4.4 times in the economy during the past year, down from 17.2 just prior to the recession…the sharp decline in velocity…has offset the sharp increase in money supply, leading to the almost no change in nominal GDP…

The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it. Such an unprecedented increase…has slowed down the velocity of money…

(Emphasis added.) Get it? If only people would spend all their money, again and again – rather than hoarding it because they need it for bills, or worry about the future – THEN the economy would grow. THEN the Dear Obama-Yellen’s plans would work.

In reality, the economy is restrained by excessive debt and even more, by lack of freedom. As government gets bigger and consumes (or takes over) more of the economy, the private sector shrinks. As government plans, regulates and intervenes more heavily, the private sector gets sicker, lazier and more fearful. Just as Big Government creates more problems than it ever solves, the opposite – Freedom – ultimately solves more problems than it creates.

But that’s not what Establishment economists, politicians, bureaucrats and media want people to know. They’d rather blame, in this example, people who “hoard”. Look for the scapegoating of so-called hoarders to become a drumbeat, as the economy continues to languish into the 2016 election.

If we hit a new financial crisis, they’ll also be sure to scapegoat mysterious “speculators”, as President Nixon did in the 1971 crisis. But they’ll never put the blame where it belongs: on 8+ decades of money-printing and Big Government.

Black teen unemployment rate in Chicago: 92% (Not an exaggeration)

Democrat Mayor of Chicago: “Let’s give city jobs to illegal immigrants.”

Sorry Blacks. Illegals are hot, and you are not.

We live in a world where the central bank (Fed) *rigs interest rates low, in order to rig debt levels and asset prices high* as they can possibly go.

I know it’s abstract and I comment on it ad nauseum, but I’m not sure it can be over-stressed. It has lots of bad effects.

• You think homes are unaffordable, compared to (say) 20-40 years ago? Guess why home prices aren’t a good deal lower. (There are many reasons – but try guessing the biggest.)
• Feel hopeless about your ever retiring? Take a guess why retirement income is hard to come by.
• Feel like you struggle to make ends meet every month, while wealthy people (having lots of financial assets) keep doing better and better? One more guess why.
• Feel like new, good jobs are impossible to come by? The Obama administration (including Obamacare) is a big drag, there. But the Fed doesn’t exactly help.
• Feel like the stock market is a crazy bubble again? Feel like we learned nothing from the 2008 crisis, and our economy is still much too ‘financialized’ and debt-ridden? Again, many causes – but one guess as to the top cause…

Interest rates are the most important price in the economy. They should be set by the People in free markets. I see no reason to have a Politburo which plans them – and plans them badly, in ways that injure society.

I am mainly posting this as palate cleanser between outbreaks of gay fascism (yeah, they’re only going to get worse after the Mozilla thing). Also, I want to see if it makes Jeff’s head explode.

I never knew that Casey Kasem was the voice of Shaggy. But I digress.

CBS recently did a good piece on High Frequency Trading (HFT), a means by which well-connected computers churn the stock markets and skim the cream. 15 minutes, here it is:

But a few things are odd about HFT as a story, or at least noteworthy.

First: the curious absence of government involvement. HFT has been going on for years (Zero Hedge started blogging it in 2009). Where have the vaunted government regulators been, all this time? Answer: Nowhere (until right now, as we’ll discuss in a minute).

The CBS piece praises Brad Katsuyama, a trader who figured out years ago how HFT works and founded a new exchange, IEX, to try to defeat HFT. That’s a great example of private enterprise being ahead of the regulators.

In fact, private enterprise has run circles around the regulators; first by creating HFT, then by being years ahead of government in working to defeat HFT. Could it be that government regulation isn’t effective? (cough)

The mainstream media’s absence from the HFT story until now (2014) is also striking. And that brings us to the second oddity: the timing of the CBS story. As if by magic, within days of its airing, we have also had announcements that the FBI will finally probe HFT. And that Goldman-Sachs will back IEX, the new HFT-free exchange. (Update: And the pr0n-watching SEC finally, also, investigating.)

I’m old enough to recognize a co-ordinated campaign. Granting that HFT is a real story, I still must speculate that the reason why HFT is suddenly on our collective lips, under investigation, etc., is because somebody powerful finds it convenient, at this time. (Where in the previous five years, they didn’t find it convenient.)

Who is that somebody? I don’t know. I did just note that Goldman-Sachs is rolling with the punches, at least. Over at Zero Hedge, they speculate that HFT is now being set up as the scapegoat for a coming stock market bubble-crash. The Federal Reserve is (by its QE, ZIRP and many other policies) the biggest market-rigger of all. The Fed has engineered the stock market bubble of the last five years. And, when that bubble bursts eventually, the Fed will want us all to blame something or someone else.

UPDATE: On CNBC, Katsuyama and a (truly obnoxious) pro-HFT guy get down-n-dirty. Good times.

Janet Yellen, who is President Obama’s new chair of the Federal Reserve Bank (Politburo that plans our economy), and who is thus the most powerful woman in the world, gave a speech yesterday where she bemoaned the fact that inflation isn’t high enough (in her view).

To humanize her speech, she told about three people who are long-term unemployed. If only there were enough inflation for these poor people to find jobs. It’s Yellen’s noble job to manipulate the economy until they can. But guess what? Two of the three have criminal records. Might that have anything to do with their unemployment?

One was Dorine Poole, who lost her job processing medical insurance claims when the recession hit.

“When employers started hiring again, two years of unemployment became a disqualification,” Yellen said in her speech yesterday to a community development conference in Chicago. “Even those needing her skills and employment preferred less-qualified workers without a long spell of unemployment.”

Poole was convicted of felony theft 20 years ago after she fell in with a “bad circle,” she said in a telephone interview…

Jermaine Brownlee, a skilled construction worker and apprentice plumber, “saw his wages drop sharply as he scrambled for odd jobs and temporary work,” Yellen said.

Brownlee said in a telephone interview that he was convicted of possession of heroin last year and currently is on parole.

OK, so was Yellen just caught by surprise? Did her speechwriter goof? Nope:

Yellen met personally with both people and knew about their records before the speech.

So basically, the most important person in our economy is determined to create inflation until she sees even the least employable people of all – namely, convicted criminals – in demand as employees. “Fasten your seatbelts; it’s going to be a bumpy night.”

CAVEAT: Lest the excitable accuse me of being a doomsday theorist (gasp!), I shall duly warn that in no way am I predicting instant hyperinflation as of tomorrow morning. In fact, for now, Yellen has officially adopted a less-inflationary stance as she “tapers” the Fed’s recent inflation-creating efforts. I have said “for now” and “officially”, because I think it’s Kabuki theater. As the Taper progresses over the next several months, it will cause markets to drop – whereupon Yellen will revert to full inflation-creating mode (gladly, under political cover). The point here, about her speech, is that it tips her hand.

Other: How ’bout that economy?
Jeff: The U.S. dollar’s days are numbered. I don’t know when, but sometime in the next five years (and maybe even beginning as soon as this year), the dollar will be kicked out as the key world currency.
Other: That’s crazy. We’re Number One. Other countries need us to trade with.
Jeff: Not necessarily. In fact, it would be good for other countries to keep more goods for their own people, rather than sending them to us just for our crappy paper dollars.
Other: But dollars are how you, like, buy stuff. Countries will always need dollars.
Jeff: Why? They can set up payment and trade systems in their own currencies, without us. And stupid Obama is helping to push Russia, China and India together as we speak. That’s half the world.
Other: But Germany and Japan will stick with the U.S.
Jeff: Really? Why? Japan is a sinking ship. Germany isn’t, but Germany traditionally does business with Russia and China. They could wake up and re-align at any time.
Other: That’s crazy. Germany has been pro-U.S. for 70 years. They’ll never change.
Jeff: Hmm, why are you so sure?
Other: How ’bout them Niners? It’s been raining cats and dogs.

Now consider this news item: Bundesbank, PBOC in Pact to Turn Frankfurt Into Renminbi Hub.

Germany’s Bundesbank and the People’€™s Bank of China agreed to cooperate in the clearing and settling of payments in [China’s] renminbi…

The central banks signed a memorandum of understanding in Berlin today…

“Frankfurt is one of Europe’s foremost financial centers and home to two central banks, making it a particularly suitable location,” said Joachim Nagel, a member of the Bundesbank’s executive board. “Renminbi clearing will strengthen the close economic and financial ties between Germany and the People’s Republic of China.”…

In a sign of closer economic ties between the two countries, China plans to open a fourth consulate in Germany…About 800 Chinese companies have bases in North Rhine-Westphalia, Germany’s industrial heartland…

German companies including Siemens AG, the country’s biggest engineering company, and Volkswagen AG are embracing the renminbi internally as a third currency for cross-border trade settlements…

This isn’t new; it’s a trend. China has been inking pacts with country after country in the last five years, so they can stop needing the U.S. dollar. That’s how and why the dollar is getting set for a fall.

I don’t think this trend has been reported much, in U.S. media. I try to spread the word, as I can. The U.S. has worsened its own problems in the last six years, and is moving toward some tough times. Get ready. Have your life in order: health & relationships fixed, debts paid, career solid. Also, don’t hide under a rock, but just in case things get really bad, consider maybe having some emergency supplies, gold and/or guns.

Don’t say you weren’t warned. Russia, China and India have problems too, but some (not all) of those problems stem from U.S. dominance and will be solved as they slowly re-organize the world in their favor.

To retire, you need a regular income stream. For a lot of Americans, that’s Social Security. But many will tell you it’s not enough; plus you only get it in your 60s. What would it take for a person to retire on their own, today?

For that, you need investment income. Hopefully, you invest capital safely and live off the proceeds. Let’s take a lottery-ticket approach. Say you’re young (no Social Security for decades, and your principal needs to last, so no dipping into that). How much do you need to win in the lottery, to get $50,000/year of investment income?

This will be verrrry quick-and-dirty. Let’s simply assume that you keep your lottery winnings half in 5-year bank CDs, and half in a U.S. stock market index fund. I won’t bore you with the math. In brief, currently you’d get 1.55% from the 5-year CDs (per bankrate.com), and 1.88% from the S&P 500. It comes out to your needing roughly $2.9 million.

$2.9 million, just to yield $50,000/year. But what’s interesting is how this compares to times past.

• 5 years ago (2009): the 5-year bank CD rate was around 3.5% (again per bankrate.com), and the S&P dividend yield was around 2.5%. You would have needed roughly $1.7 million.
• 10 years ago (2004): the bank CD rate was around 3.5%, and the S&P dividend yield around 1.8%. You would have needed roughly $1.9 million.

Again, these numbers are just for a long-lived person to get themselves a $50,000 annual yield. A person in their 60s, collecting Social Security and/or dipping into their principal, would need rather less money. Especially if the stock market goes well (we know that always happens, right?) so they get some capital appreciation.

But here’s the point that applies to everyone: the kind of change we can see in the numbers.

• Between 2004 and 2009, the cost of a $50,000 yield stayed roughly the same (going down 10% or so).
• Between 2009 and today, the cost of a $50,000 yield has skyrocketed (up over 60%).

And that’s why tens of millions of Americans now feel like they can never retire. They can’t retire because the cost of getting X amount of retirement income (from bank CDs or stocks) has skyrocketed, in the last five years. Whatever their own “retirement number” was, big or small, suddenly they need much more. So they can’t retire, and keep working.

This is one dark side of market bubbles. The Federal Reserve’s ZIRP and “QE” policies are designed to make the financial markets go higher. A stock market bubble means, among other things, everyone paying more money for small (or nonexistent) yields. Higher bond markets mean lower bank CD yields. High real estate markets mean higher housing costs. The financial markets are roughly like your price tag for retirement. In the last few years, Obama/Bernanke/Yellen have pumped some giant inflation into them. It’s not a good thing.

And all of that is aside from the question of inflation in general: the fact that $50,000 today won’t buy you what it did 5 years ago. (Gasoline and medical costs, for example, are way up.) “Thanks, Obama!”

Last week, President Obama released his new budget proposal, which in February he said would be the end of austerity. First let’s ask, what is meant by “austerity”? As a policy, was it ever tried?

As discussed by myself and others, “austerity” means tax hikes (not spending cuts) in practice. Lefties hurl the word “austerity” to demonize the idea of spending cuts. But few of the countries which left-liberals accused of cruel austerity in the last few years cut their overall government spending levels; the majority continued to increase spending. So spending cuts can’t explain those countries’ poor economic results. What can? Well, most of them raised taxes.

Clearly, we should end (or reverse) the tax hikes. That would be a great “end of austerity”. But Obama’s meaning is that we should undertake spending increases; which, for reasons touched on below, probably mean deficit increases.

Before going into Obama’s proposal, let’s review the current state of the U.S. budget. (more…)

The Treasury Department appears to make a subtle concession of the impact of Obama’s massive public spending and Quantitative Easing policies on the value of the currency of the United States.

Most of us know the term “QE” as the central bank’s euphemism for creating lots of new money, but if you are not sure, I have an explanation here.

Recently, President Obama nominated Janet Yellen as the new Fed chairman. She is expected to continue or increase QE. At her confirmation hearing, she said:

I consider it imperative that we do what we can to promote a very strong recovery. It’s important not to remove support [QE], especially when the recovery is fragile and the tools available to monetary policy, should the economy falter, are limited given that short-term interest rates are at zero. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases [QE]. Supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.

Yellen’s comments are tragic because QE cannot and does not promote economic recovery. It does the opposite. Why is that?

Jobs come from something called the division of labor. It’s the fact that people can produce more when they specialize intelligently. A “job” is really a package of specialized tasks that an employer needs someone to do because the specialist can do more for less (or can help the whole organization to do more, etc.).

The superior productivity of specialized labor comes, in turn, from something called capital.

• Productive capital is the accumulation of knowledge, tools, machines, organizations and infrastructure that enables human labor to be productively specialized.
• And financial capital is the accumulation of money (cash, shareholders’ equity, savings, etc.) that will buy or develop productive capital and direct its motions.

It is crucial to understand that not all capital is created equal. It takes work, sacrifice, talent and vision to form productive capital. Capital can be invested badly (called malinvestment, which flourishes under QE and 0% interest rates). Thus, raw investment spending levels do not matter. Financially sustainable jobs come only from the capital which has been invested well, for productive success.

QE undermines productive capital. When Obama/Bernanke/Yellen print money, they devalue money; they make it buy less than it would otherwise. So the financial capital of successful business people doesn’t go as far. QE, and 0% interest rates, also kill the return on capital: the incentive to use it very carefully (productively). Thus, QE messes up the economy’s capital, making financial capital perversely less effective for good projects and more available for bad projects, a toxic mix that injures the division of labor (the creation of economically efficient, valuable jobs). It’s as if the economy is on a narcotic and gradually getting more stupid.

The way it looks to businesses is: They thought they had some good capital, but now their capital doesn’t go as far. Everywhere they look, costs are a little higher than projected (or much higher, in the final stages of QE). Simultaneously, at 0% interest their marginal (unproductive) projects look better than those projects are. For both reasons, businesses’ capital is wasted. It somehow doesn’t go as far on their good projects – at the same time they’re tending to either idle it, or blow it on bad projects.

Businesses then need to squeeze out greater financial profits just to maintain their capital base. They do it by hiring fewer people. Some businesses seem very healthy (high-profit) after their job cutbacks. But fewer new businesses are started, and the healthy ones tend to grow by merging with (or buying out) competitors, which lowers employment. The overall economy either stops growing, or grows in unhealthy directions. The unemployed survive on government aid (which is surprisingly plentiful), while stories abound of people who ‘score’ with speculative investments, which tend to rise.

Does all that sound like the world we live in? Yes! Remember: The price of gasoline, the stock market, and the welfare/disability rolls have all roughly doubled in Obama’s reign so far. While new jobs have been far harder to come by. QE enables (at least) those disparate effects.

To be clear, QE is not the only reason Obama’s recovery has been lame. Other Obama policies also increase the cost of employing people, and other costs that businesses face. But QE doesn’t help; it adds to the economy’s burdens.

If you can think of a country that has emerged into vibrant economic recovery because of their doing large-scale QE, please post it in the comments. I haven’t been able to think of an example. And Japan, which has been doing QE since the 1990s and now faces rising costs, clearly isn’t an example. Neither will we be one.