Re-Regulation Begins a Multi-Decade Road

RichardSchwartz — Mon, 06 Oct 2008 14:39:00 GMT

THE BIG PICTURE

Today’s Big Picture view revolves around the probable coming re-regulation of the financial markets. History shows regulation of markets is similar to a grandfather’s clock pendulum swinging back and forth although not as regular. A brief look back to the start of the 20^th century, shows free markets and a first age of globalization, with the introduction of the telegraph and telephone, steamships and railways, at a peak. Millions even migrated without passports while trade flourished meaning free markets were in charge.

· Governments Take Charge. Then, in August 1914, with World War I, that age ended abruptly. WWI left people disillusioned and looking for something better and many turned to socialism and communism. The Russian Revolution in 1917 drew followers and essentially sought to end capitalism for good, making private property illegal. Socialists and other government controlled economic systems were winning the battle of ideas, governments were in charge, free markets were in retreat. In less than 30 years, one third of humanity, including Eastern Europe, China and the Soviet Union, would be living under socialism or communism. Capitalism looked to be doomed except for in America. The 1920s in America was still a boom time, Americans buying cars, buying illegal gin, buying stock. Radio was the Internet of the 1920s. It was a classic bubble. Finally the 1929 stock market crash started Americans on the way to despair, a complete economic collapse "with no ability to earn, repay, spend, consume." Everything spiraled downward while about half the banks in the US closed. America turned toward government for help and thus re-regulation with President Roosevelt’s numerous new government regulatory agencies. Around the globe, governments gained power … over free markets. In Italy, Spain and Germany fascism took charge. World War II then arrived and even afterwards people all around the globe still blamed capitalism for causing the depression. The whole world kept moving towards more regulated economies. England even went socialistic as Winston Churchill, the great war leader, was beaten by the socialists! Most of the world operated under this sort of government planning process for the next 30 years.

· Free Markets Regain Control. But in the 1970s free markets began a resurgence. Margaret Thatcher came to power in England with free market thoughts as did Ronald Regan here in the US. with his Reganomics. Both cut back on government regulations, giving markets more ascendancy and free markets again starting coming to the forefront. England started privatizing its economy while President Regan cut taxes and let free markets regain control as epitomized by breaking the air controllers strike. Thus capitalism got a free hand which lasted for aboutt 30 years, even through the dot.com boom and bust. But after last year’s incredible debacle with investment banks, money center banks, insurance companies, etc. losing billions after irresponsibly leveraging up their investments 20 or 30 times, it’s apparent to most everyone that, just like in the 1930s, we can’t afford to have any similar financial market collapse spawning from totally free markets to happen again any time soon.

Schwartz View: So after reviewing the history of the 20th century and seeing how over long periods, market regulation swings back and forth, I have to figure we’ve just started a long term swing back on the way to re-regulation. For more on this topic, I recommend you watch Commanding Heights, the Battle for the World Economy, by Daniel Yergin and Joseph Stanislaw which was turned into a DVD and a PBS prouction, a wonderful esplanation of the battle for economic minds in the 20th century. Filled in some missing pieces for me and should for you all as well.

Once a Century Day of Reckoning Starting?

RichardSchwartz — Mon, 09 Jun 2008 13:44:00 GMT

THE BIG PICTURE

Ok, here’s a Big Picture of where America and we Americans stand today. A fairly downbeat Big Picture so buckle your seatbelts. America has been on the verge of a major comeuppance for many, many years. But its been postponed and postponed. Because the US dollar is the world’s reserve currency we’ve been able to play by different rules than the rest of the world but now we’ve pushed that special benefit to the limit and beyond. But each time we’ve come close to going into a major economic recession, which almost by definition means a near term cleansing out and thus longer term strengthening of the economy, we get “bailed out,” so to speak, by the Federal Reserve or by our much deteriorated if not totally corrupted political system, i.e., by the sitting president and his staff or by Congress. Our economic problems which terribly need to be resolved, just get more and more money thrown at them (which just makes them worse and more deeply entrenched) say by President Bush’s multiple tax cuts upon taking office in 2000 or by the Fed dropping interest rates rapidly or through the floor or both. For example, former Fed Chairman Alan Greenspan numerous, back to back to back interest rate cuts in 2001 and 2002 and current Fed Chairman Ben Bernanke’s dramatic rate cuts since September. So our economy has been artificially pumped up and stimulated by what I call, financial “steroids.” time and time again for many years now. But now this use of steroids just isn’t working. Now all the money the Fed is pumping into the system to mitigate the credit crunch and crisis is just causing a big bubble in gasoline (and heating fuel prices) in America which at $4.00+ a gallon is now being felt widely. I say $4.00 is the tipping point and things are going to get worse quickly now because of the four following examples over the past weekend. First, Lucy let her Honda get down to a quarter of a tank for the first time in a long time. She called the dollar cost to fill it up

“eye-opening” numerous times as we drove off and away. I could hear the wheels turning in her head. Second, a real estate owner told me he was feeling this recession with a massive increase in real estate taxes, etc. and that he never felt any previous economic downturns in his life. Knowing me I probably blurted out it was just beginning, but I hope not. Third, awhile after my Sunday early morning bird walk, while reading the paper and drinking my coffee I heard the morning manager of Stewart’s, the local all purpose convenience store, tell another customer, a bit desperately, she couldn’t afford to drive to work now. And lastly, when I called to wish my brother-in-law Happy Birthday, my sister, retired but who was a bank trust officer in Buffalo for many years, says she’s never seen anything like this looming downturn. All in all, I expect $4 gas or out of control oil prices in general, is what the stock market discounted roughly six months back, it’s normal advance foresight time frame, when it really collapsed back in January, it’s first leg down in this bear market.

Now, Price Inflation. This commodity inflation, this cost of living inflation or price inflation, is starting to work its way through the economy in food prices as well. Watching the free marketplace work, in effect dramatically weeding out, killing off cattle herds because it costs too much to feed the cattle, that’s going to reverberate into higher hamburger and steak prices down the road. Plus Chinese wage demands will now work their way into much US clothing prices as well during this cycle. And if the US dollar keeps dropping, as it will because the US balance sheet is in such terrible shape, all prices will rise even faster. I’d go so far as to say commodity guru Jim Rogers’ and Peter Schiff’s predictions of hyperinflation are becoming a distinct possibility. All this rising inflation as the economy sinks and US wages stagnate or go lower and jobs shrink. So it’s not a pretty picture. And it’s possibly worse than a normal recession because we’ve put off this day of reckoning for so, so long. For example, in Trader Vic Sperandeo’s two early 1990s books, Trader Vic – Methods of a Wall Street Trader and Trader Vic II – Principles of Professional Speculation, he predicted a day of reckoning right then or very soon. And related to us a little history of how the US government operates, trying to paper over our problems by lowering rates, cutting taxes and whatever else they can think up to throw more money at our problems. This works and works and works … until it doesn’t work anymore. So far no one really has been able to predict when the day of reckoning will arrive. In the late 1980s/early 1990s was a flash point for trouble but we muddled through. Then another flash point around the dot.com bust from 2000 to 2002. But lower taxes and lower interest rates got us through. But now, 2008 -- 10 is the next flash point. Who knows? This time may indeed by the real thing. It sure looks it. Why? Obviously because the extremely important financial sector, the very area which has been driving the stock market higher by soaking up all the Fed and other government liquidity and manipulating it to make things look better and better on paper, has now imploded and gone bust. As Peter Schiff writes in his 2007 book, Crash Proof and Robert Prechter Jr. wrote in his 2002 book Conquer The Crash manipulating financial paper/assets/capital around to make it seem like we’re getting wealthier is a lot different than when America did grow wealthy by actual manufacturing, producing things people need and thus were willing to pay for. In the 1950s and 1960s we were the manufacturing colossus we lived on some of our profit and saved the rest. That’s how you build wealth. This disparity is one of Mr. Schiff’s key theses. Also one of Mr. Prechter’s major theses as well, just illustrated differently. Mr. Prechter, a chartist, says the US economy performed its best in the 2^nd leg up of this long term business cycle, say from the 1950s through the 1970s which shows this 3^rd leg up is nearing a major top. Schwartz View: So it’s all coming together now, seemingly. All the wrong paths we’ve followed for years coming home to roost now. That’s my guesstimate anyway. So, is this latest market decline really the beginning of America’s day of reckoning whereby the rest of the world finally loses confidence in America, waking up to the deception of the dollar as the world’s reserve currency, as Mr. Schiff describes it? Does the US dollar really head down as the world unloads our Treasury bonds, thus forcing up long term interest rates, which in turn ratchets up the already gigundo squeeze on America and us individual Americans and make the situation even worse? No one really knows for sure as Mr. Prechter reports these true economic disasters only occur about once a century! Like in the 1930s in the just departed 20^th century and once in the 19^th century as well. Why would this once in a century event be beginning now? As bad as things now look, maybe somehow we’ll get bailed out and the day of reckoning postponed once again. But since I began this stock market letter, 18 years ago in September 1990, I’ve watched things get worse and worse, not on the surface where we had a great stock market run in the 1990s, but under the surface, as democracy got pushed back and back, as labor unions lost power, as corporate statesmen became extinct, as much needed government regulation somehow morphed into a swear word and became despised, as liberalism or helping the unfortunate became obsolete behavior and as capitalism ran away unchecked, benefiting from fiscal and monetary stimulus over and over again whenever the economy lapsed into the normal down wave of a business cycle leaving us today with just a shell of the old wealth producing US economy. Yep, all looming economic crises and recessions have been pushed to the back burner by our dysfunctional political system which now listens only to corporations through their lobbying efforts. A system which even business if fed up with. Social Security, Medicare & Medicaid, pensions, health care, energy, the environment, a big wow! when I write them all down, all these long term vital issues have been avoided because of capitalism gone wild, because doing anything about them would “… hurt the economy and be bad for business … .” The same mantra Congress just used as its reason last week to kill a critical climate bill! Just awful action. Politicians should know there’s more to the economy than keeping the steroid sham going year after year, there’s more than keeping the business lobbyists happy near term and there’s more than their next election result. The US economy needs to be cleansed out from time to time and thus made fundamentally stronger for the longer term and more competitive in today’s new global economy. We still have the strongest, most fundamentally sound economic, financial and social system going from all I can tell. And the country has more than just our economy to worry about and strengthen for the longer run. We also need to re-strengthen our democracy once again after the loss of common man representation that’s taken place over the last 30 to 40 years. Actually, it’s no one’s fault, this push into Supercapitalism as Robert Reich terms it in his latest book of the same name, what has happened in America over the last few decades. But now it’s time to look at and push the flip side of the coin, to reawake democracy which is vital to American life as well. We need to regain representation for little towns and smaller groups, non-profits, etc., etc., all those groups who can’t get their sides of the story heard any more today as corporate lobbyists dominate. Again, I don’t blame anyone for what’s evolved. That’s capitalism, if left “unfettered” as even Republican presumptive presidential nominee Senator John McCain has described today’s economy, it will go to an extreme … as it now has. * For the record, one can get all five books I’ve just mentioned above from www.Amazon.com or elsewhere. And I recommend them all.

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Re-Regulation Begins a Multi-Decade Road

Once a Century Day of Reckoning Starting?