Hussman Weekly Market Comment: Two One-Way Lanes on the Road to Ruin

Let's go back to the last line in Schumpeter's remark. Only when the lending ultimately results in a surplus of productive activity is the loan successful. Only then "has the bank done good business - then and only then however, is there also no inflation."

This point is crucial, because all of us are presently benefiting from the continued demand for default-free securities (specifically, U.S. base money and Treasury debt - which I do continue to view as default-free). It is only that demand that has allowed inflation to remain low despite the massive expansion of government liabilities far exceeding GDP growth, and of misallocated credit that has produced losses rather than surplus output. The overhang of mortgage obligations and sovereign debt, matched neither by current value nor future output, is an extraordinary threat. First, it contributes to keeping resources idle, because it forces consumers and whole nations to remain on a path of austerity and debt reduction rather than spending. At the same time, it prevents businesses from hiring, because they know that demand is not forthcoming. Finally, to the extent that we pursue policies that use public subsidies and money creation to make that debt whole instead of restructuring it, we can expect inflationary pressure in the back half of this decade, because the amount of credit created is not commensurate with the amount of productive capacity that has resulted from it.

Indeed, we have pursued policies that would be aptly described as Schumpeter's nightmare:

"Only in one other case could the banking world... arbitrarily determine the price level, not only without loss but even with profit: namely, if it pumped credit means of payment into the circular flow either by making bad commitments good by a further creation of new circulating media or by giving credits which really serve consumptive ends. In general, no single bank could do this. For while its issue of means of payment would not appreciably affect the price level, the bad commitment would remain bad and the consumptive credit become bad if it did not lie within the limits in which it could be repaid by the debtor out of his income. But all banks together could do it... The banks could do likewise if the state were to transfer the right to them in their interest and for their purposes, and common sense did not prevent them from exercising it."

Schumpeter was something of an optimist in that he dismissed this sort of nightmare, because he viewed it as "self evident" that such a possibility was "the chief reason why special legal restrictions and special safety-valves are actually necessary in practice."

Unfortunately, we increasingly have a situation where the entire thrust of our nation's economic policy is aimed precisely at "making bad commitments good by a further creation of new circulating media, or by giving credits which really serve consumptive ends." Those policies operate primarily for the benefit of banks and bondholders who made reckless and unproductive loans. To use Schumpeter's words, our public policy now operates "in their interest and for their purposes." It is the insistence of policy makers on making these bad loans whole, instead of restructuring the obligations, that is at the heart of our prolonged economic slump.

Warren Buffett Op-Ed: Stop Coddling the Super-Rich

OUR leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched.

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.

James Grant on WealthTrack

Rerun of March episode.


Link

John Mauldin: The Beginning of the Endgame

I came away from Maine, and meeting with some of the most astute economists in the world, with a series of impressions that will be the core of this week's letter. On Friday night, S&P downgraded US debt, and of course I need to comment on that. But as we talked the next two days and into the nights, I came increasingly to the opinion that this is indeed the Beginning of the Endgame. I must admit it has come about faster than I thought. But that is the nature of these things. And so, with no "but first," let's jump right in.

"Markets in Turmoil" call with Jeffrey Gundlach (8-10-11)

Found via the Corner of Berkshire & Fairfax.

Link to: Market Turmoil Conference Call Replay

NYT: Can Jeremy Grantham Profit From Ecological Mayhem?

Found via Paul Kedrosky.

Sitting in a Panera in Boston’s financial district in early July with Jeremy Grantham, I suddenly found myself considering how I might safeguard my children’s and notional grandchildren’s future by somehow engineering the U.S. annexation of Morocco. Grantham, the founder and chief strategist of the asset-management firm GMO, was reading aloud from a rough draft of his next quarterly letter to investors, in which he ranks some long-term crises of resource limitation along a scale from “merely serious” to “dangerous.”

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Grantham, who is 72 and has what’s left of a British accent after living in Boston for more than four decades, outlined this wildly distressing assessment against a bland backdrop of chain décor and piped-in smooth jazz. He marked up his draft with a pen as he went along, departing from the text at times to emphasize a point. “Phosphorus makes up 1 percent of your body weight,” he said, looking up from the page to catch my eye. “It’s a basic element, the residue of exploded stars. You can’t just make more.” He also pointed out that most economists see global trade as a win-win proposition, but resource limitation turns it into a win-lose, zero-sum contest. “The faster China grows, the higher grain prices go, the more people in China or India who upgrade to meat, the higher the tendency for Africa to starve,” he said.

Grantham argues that the late-18th-century doomsayer Thomas Malthus pretty much got it right but just had the bad timing to make his predictions about unsustainable population growth on the eve of the hydrocarbon-fueled Industrial Revolution, which “partially removed the barriers to rapid population growth, wealth and scientific progress.” That put off the inevitable for a couple of centuries, but now, ready or not, the age of cheap hydrocarbons is ending. Grantham’s July letter concludes: “We humans have the brains and the means to reach real planetary sustainability. The problem is with us and our focus on short-term growth and profits, which is likely to cause suffering on a vast scale. With foresight and thoughtful planning, this suffering is completely avoidable.”

Grantham’s quarterly letters, which command a cult following of readers within and beyond the financial industry, inspire even the most short-term profit-minded investors to do a little fate-of-the-world-scale thinking. I find that they have the opposite, equally mind-stretching effect on a passive investor like me. Although I’m normally happy to turn over my paychecks to the missus and not inquire into what happens to them, my encounters with Grantham tend to whip me into a state of alarm that has me thinking about acquiring tracts of arable timbered high ground, preferably defensible ones well inland from the rising seas.

John Mauldin's Outside the Box: The Geopolitics of Brazil

Just last week in Thoughts from the Frontline, we discussed the relative valuations of emerging markets. Any discussion of an emerging market is incomplete without understanding the underlying geopolitical forces that guide behaviors of countries and often predetermine the outcome of events. Today I'm sending you STRATFOR's geopolitical analysis of Brazil, a much-discussed emerging market. This is a long read, but it's the most thorough and enlightening analysis I've seen thus far on how the continent's geography has shaped Brazil's history to date, and the major challenges the country faces today.

June 2009 Paper: “No One Saw This Coming” – by Dirk Bezemer

This paper was mentioned in Steve Keen’s new and expanded edition of Debunking Economics, which comes out in October in the U.S. I was fortunate enough to receive an advanced proof of the book, which is one that I think is going to be very important for both investors and non-investors alike. I’ll have more on the book as I get a little further along.

This paper presents evidence that accounting (or flow-of-fund) macroeconomic models helped anticipate the credit crisis and economic recession. Equilibrium models ubiquitous in mainstream policy and research did not. This study identifies core differences, traces their intellectual pedigrees, and includes case studies of both types of models. It so provides constructive recommendations on revising methods of financial stability assessment. Overall, the paper is a plea for research into the link between accounting concepts and practices and macro economic outcomes.

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Related book: Debunking Economics - Revised and Expanded Edition: The Naked Emperor Dethroned?

Related link: Steve Keen’s Debtwatch

Adam Seessel on Bloomberg (Aug. 4)

Link to: Adam Seessel on Bloomberg

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Related previous posts:

"The Forgotten Man" - by Frank Martin

Martin Capital Management: 2010 Annual Report

Robert Cialdini Interview by SUCCESS Magazine

Robert Cialdini has spent his entire career learning and teaching the science of influence. His book Influence: Science and Practice has sold more than 2 million copies and can be found in 26 languages.

Cialdini’s immense knowledge of the subject has earned him the title of “The Godfather of Influence,” and he is one of the most cited living social psychologists in the world. Cialdini is currently regents’ professor emeritus of psychology and marketing at Arizona State University and president of Influence at Work, an international consulting, strategic planning and training organization.

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Related books:

Influence: The Psychology of Persuasion

Influence: Science and Practice

Yes!: 50 Scientifically Proven Ways to Be Persuasive