America Lost in a Bubble May 10, 2012Posted by Dr. Robert Owens in Politics.
Tags: Bush economy, Clinton economy, dot-com bubble, Dr. Robert Owens, economic bubbles, housing bubble, Obama economy
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All bubbles burst. This is a law of nature. No matter from what material the bubble arises. No matter what forces propel its expansion. All bubbles burst.
Actually the science of bursting bubbles has recently popped into the forefront of scientific discovery. Conventional wisdom has taught since the beginning of time that when a bubble bursts it simply vanishes. However, recent observations using high speed cameras has revealed that when a bubble bursts it leaves a circle of miniature daughter bubbles that pop so fast the eye cannot catch it. There is even the thought that each daughter bubble leaves a ring and each daughter bubble leaves a ring ad infinitum. All happening so fast it cannot be seen. And yet, each succeeding bubble bursts.
The physics of bubbles tells us that the pressure on the inside works against the tension on the surface and a ratio between the two determines when the bubble will burst. No matter how it bursts, no matter why or when it bursts one thing is certain: all bubbles burst.
In economics a bubble is the term commonly used for a cycle characterized by rapid expansion followed by rapid often dramatic contraction. What causes economic bubbles is often a matter of dispute among economists. Some believe they are a natural part of the economic cycle: everything goes up, and everything eventually comes back down.
Others believe they are caused by inflation. In this scenario everything has a natural price which is the intersection of cost and demand. The Bubble is the artificial rise of price over the natural price. Eventually the economy must correct itself and the inflated product will return to its natural price.
No matter which theory you subscribe to, one thing is certain: all bubbles burst.
Remember the Clinton years? Today the official History as dispensed constantly by the Corporations Once Known as the Mainstream Media is that the wise and benevolent rule of the man from Hope was a time of plenty. There was solid growth and balanced budgets. As the Progressive narrative goes, President Clinton alone was responsible for the growth of the nineties which Bush the Younger proceeded to destroy leaving a mess for President Obama who has fought valiantly to restart the economy and save the day. At least that’s the story as dispensed by the headlines and the talking heads.
The reality is approximately 180 degrees opposite of the spin.
President Clinton won a three way election with less than 50% of the vote (twice) and called it a mandate both times. The policies he opposed for his entire career had recently won the Cold War, and President Clinton reaped the rewards. He gutted the military and called it a Peace Dividend which he proceeded to spend on social engineering projects pumping up the economy with government spending. Then the Dot-com Boom turned into the Dot-com Bubble and the economy was roaring. Another plus for Clinton was the defeat of Hillarycare which would have torpedoed the economy just as Obamacare is now. He also profited by the election of a Republican House in 1994 which kept the promises in the Contract With America and led the way in cutting spending and building a budget that at least appeared to be balanced.
Everything was coming up roses. The economy was growing and so was the Dot-com Bubble, which everyone just knew would go on forever even though anyone older than the milk in the fridge should have known that all bubbles burst.
In 2000 George II won a contested election, and before he had time to change the drapes in the Oval Office the Dot-com Bubble burst. This led to a short sharp recession; this was the one that Bush didn’t blame on Clinton. He instead passed the now infamous Bush tax cuts and mailed out what he called rebates in the form of free money to spur the economy. All the while behind the scenes the housing bubble was beginning to inflate to epic proportions. Federal spending grew, the government grew, and the bubble grew.
During the go-go years people with no job, no money, and sometimes no ID were able to buy McMansions for no money down and walk out with cash in their hands. How could this ever go wrong? I remember hearing of people bidding on houses, offering 10% over the asking price and losing out to someone who offered more. Prices went up and up and up and somehow even sane people apparently thought it would never end.
Things looked good. Things looked very good. Following the recession which began seven weeks after President Bush took office, America had six years of uninterrupted economic growth. There were fifty two straight months of job creation producing more than eight million new jobs, the unemployment averaged 5.3 %, after-tax income per capita increased by11%, from 2000 to 2007, and GDP grew by more than 17 % adding almost $2.1 trillion. Exotic ways to paper over the fact that people with no money were buying houses fueling the boom kept everyone smiling and the bubble expanding.
The only problem was that eventually all bubbles burst. And when it did John McCain suspended his presidential race to fly back to Washington and add his hearty, “Me Too” to the bailout and seal his fate.
President Obama took office as the economy crashed into the deepest recession since World War Two. He immediately began blaming President Bush and hasn’t stopped yet. He passed the largest stimulus bill in American History, began a record expansion of the Federal government, and the largest spending binge since the beginning of time. All in the name of cleaning up the mess from the bursting of the housing bubble.
And what are all these trillions of dollars in reckless spending doing? Are they inflating another bubble? Change the words and you change the perception: spending becomes investment and responsibility becomes austerity. Those who are manning the pumps aren’t blowing up a financial bubble they are showing compassion for their fellow man and investing for the future. Anyone who warns of a coming crash or tries to slow the rate of spending is pushing grandma off the cliff for the benefit of millionaires and billionaires.
No matter how this mad dash to nowhere is spun one thing is certain: all bubbles burst
On the brighter side President Obama has perfected the cure for illegal immigration. The economy has taken such a massive hit that the illegal immigrants are leaving looking for greener pastures. And he has also brought the solution to a 10%+ unemployment rate. So many people have become discouraged that they have dropped out of the labor market, and according to our current administration this is good news. Perhaps we should take a cue from Mr. Obama’s favorite pastime and just consider his first term a mulligan.
Maybe the slogan for President Obama’s second term shouldn’t be “Forward.” Perhaps it should be “I deserve a re-do.”
Just remember: all bubbles burst.
Dr. Owens teaches History, Political Science, and Religion for Southside Virginia Community College. He is the Historian of the Future and the author of the History of the Future @ http://drrobertowens.com © 2012 Robert R. Owens firstname.lastname@example.org Follow Dr. Robert Owens on Facebook or Twitter @ Drrobertowens
History Doesn’t Repeat it Rhymes Again August 11, 2011Posted by Dr. Robert Owens in Uncategorized.
Tags: America downgraded, Crash of 2008, Dr. Robert Owens, financial bubble, home mortgage scandal, housing bubble
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When I was studying to become a Historian I ran afoul of the professors tasked with helping me arrive at my destination. When you study for advanced degrees in History you are required to choose an area of specialization and if you are particularly ambitious you might choose two separate areas. Being an over achiever who has always been blessed with an inquiring mind I choose four and proceeded to complete the necessary class work for all of them. Near the end of my career as a professional History student the professor in charge of the program told me I had to pick one field that would be my over arching area of study.
By this time I was writing opinion columns for the school newspaper much along the lines of the weekly columns I churn out today. In each article I would examine an event or situation from current events and place it in a historical and constitutional context. I called these articles the “History of the Future” which is what current events are. So, when asked to declare a comprehensive Historical Interest I told my professor that I had decided to specialize in the History of the Future, and if he was interested he could ask me in ten minutes and I would tell him what his last statement meant. He didn’t think it was nearly as clever as I did.
Although it was unknown to me at the time my professor was well aware of my writing and was therefore not dazzled by my answer. He was bemused, he was shocked, and he was angered. He thought I was irreverent in my approach to History and mocking in my tone toward Historians. Then, as now, I believed that if History doesn’t help us to live in the present it is merely curiosity or voyeurism that compels us to gaze upon the past. I believe I might have said that or its equivalent along the way, and this had not earned me the heartfelt appreciation of those whom I hoped to one day call my peers.
Once I successfully navigated the shoals and received my professional Historian’s badge I continued seeing History as a useful lens for the interpretation of current events presented in my weekly articles which I continue to call the History of the Future. However, as I continue to relate the present to the past in an attempt to discern the future I have noted my divergence from common knowledge and accepted wisdom when it comes to the relation of knowledge of History to actions in the present.
Everyone knows and many people say, “Those who fail to learn from History are doomed to repeat it.” I believe that a historical context is necessary for any understanding of the present. I also believe that a lack of historical context is one of the major contributing factors to the current state of affairs in America. I do not however believe that historical events repeat. Yes one war seems to inevitably follow another, but they are always different wars. World War Two followed World War One and in many ways completed one war in two acts but it was a war as different in strategy as it was in tactics. They were two different wars. Just as the current Great Recession follows the Great Depression and although they bear many similar aspects such as government complicity in their depth and duration they are most decidedly two separate catastrophes.
All of which leads me to my heretical belief that History doesn’t repeat it rhymes. Take for instance the current spate of sweetheart deals and cronyism that has led us down the road to the crash of 2008, the downgrade of 2011, and the ongoing inflation default as we attempt to print our way to solvency. Although this is unprecedented in size and scope, though it is the first economic crisis that threatens to cause America to spiral down from the first rank of nations, this is not the first time craven politicians and their crony capitalist supporters have sought to turn the public treasury into a personal ATM.
In 1863 the principle stockholders and executive officers of the Union Pacific Railroad Company launched a new venture Crédit Mobilier of America. The venture also had the support and protection of high level political leaders. This construction company officially sought to build and maintain the first railroad to span the continent. Unofficially the company looted the federal treasury of as much money as it could while doing as little actual construction as possible. The venture made enormous profits for some before causing a panic that ruined the fortunes of many innocent people resulting in a loss of faith in the practices of both business and government..
Crédit Mobilier was initially founded by Thomas C. Durant who was the vice president of Union Pacific. Within a short time actual control of the company was assumed by two well connected brothers from Massachusetts: Congressman Oakes Ames and his brother, Oliver.
Here’s how the scheme worked: The men who owned Crédit Mobilier controlled the Union Pacific Railroad which was at the time racing the Central Pacific Railroad to meet in the middle of the country and unite a nation mired deep in the Civil War. These men used their positions at the railroad to award no-bid contracts to Crédit Mobilier to complete the construction. They awarded contracts totaling $94,000,000 when the actual costs were less than $54,000,000.
A large percentage of the money had been provided to the Union Pacific from Congress in the form of low interest loans and enormous land grants. As the sums involved became larger and the Railroad plunged into unsustainable debt Congressman Ames sought to avoid oversight by selling stock to leading politicians for prices well below their perceived value. Like all pyramid schemes this one eventually ran out of enough new investors to keep the perpetual motion going. And as in all pyramid schemes first ones in and first ones out made fortunes while last ones in and last ones out lost their shirts.
In 1872 public indignation and economic ruin finally moved Congress to investigate. The resulting scandal ruined the reputations of numerous high officials including the Vice President, leading Senators, and Congressman. The crony capitalists were also exposed as grafters, and the first in a long line of Robber Baron looters who have used political connection and government preference to walk off with the public’s money. After a thorough investigation which left not one stone unturned although the principle actors were revealed no politician was thrown out of office, no one was ever prosecuted, and those who built the pyramid got to keep the cash. In 1897, the Union Pacific was completely reorganized and the present Union Pacific has no relationship to a scandal that rocked the nation and impacted millions.
Today crony capitalists and the politicians who advance and protect them have brought our economy to the brink of disaster. Once again after brutal investigations and maximum exposure no one has been expelled from the corridors of power and no one has been prosecuted. These same politicians who have spent the income of unborn generations are walking away with pensions and benefits, their crony capitalist pals are laughing all the way to the bank, and the citizens are left holding the bag. Day by day, hour by hour, minute by minute the headlines continue to reinforce my belief that History doesn’t repeat it rhymes.
Dr. Owens teaches History, Political Science, and Religion for Southside Virginia Community College. He is the author of the History of the Future @ http://drrobertowens.com View the trailer for Dr. Owens’ latest book @ http://www.youtube.com/watch?v=_ypkoS0gGn8 © 2011 Robert R. Owens email@example.com Follow Dr. Robert Owens on Facebook or Twitter @ Drrobertowens.
A Principle for Peter in the 21st Century November 13, 2010Posted by Dr. Robert Owens in Uncategorized.
Tags: credit crunch, Dr. Robert Owens, foreclosure moratorium, housing bubble, hyperinflation, Obamacare, QE2
The world is lining up to not buy our debt so we are buying it ourselves in a move we call by the innocuous acronym QE2, which is short for Quantitative Easing two. More traditional, or verbally honest, economists are calling this what it is: monetizing our debt. This is a move which has our creditors heading for the doors and our enemies smiling as poor old Uncle Sugar stands with his pockets turned inside out, a bewildered look on his face as he wonders, “Where did all flowers go?”
Quantitative Easing is a type of monetary policy central banks use to pump money into their respective economic systems. This policy is only used when the central bank has already reduced interest rates to or near to zero. In other words, they have tried to encourage lending but they’ve failed. What the central bank does next is create money with a printing press, using that money to purchase bonds from its parent government and from banks and corporations within the nation’s banking system. The second and third tier banks then increase the money supply even further through another process known as deposit multiplication wherein they receive 100 dollars but are only required to keep $20 on hand, so they loan $80. The person who borrowed the $80 deposits it in their bank, and then that bank keeps 20% and loans the rest, and so on and so on until the increased money primes the pump and the stalled economy sputters to life. At least that’s the strategy.
No strategy survives contact with the enemy. And in this case the enemy is a financial system still reeling from government produced or instigated shocks: the housing bubble, the credit crunch, the escalating costs associated with Obamacare, and now the threat of a foreclosure moratorium. The dangers of the QE2 strategy lie in two directions. One it could be too successful igniting inflation and maybe even hyperinflation or two it could fail to re-ignite the economy and then the uncertainty of future tax rates, what new regulations might cost and the prospect of irretrievable assets locked up in a foreclosure freeze causing banks to hold the additional cash as a hedge against the government caused uncertainty. This would put us right back where we started: a frozen economy which opens the door for QE3, QE4, and eventually the dollar won’t be worth the paper it’s printed on.
If you rob Peter to pay Paul you can usually count on Paul’s vote in the next election cycle. This has been going on since FDR’s political genius discovered the magic formula of spend, spend, spend, tax, tax, tax, elect, elect, elect. Years of getting Paul addicted to lying in the hammock of government safety nets and swilling a brewsky as the game dulls his senses haven’t worked. Likewise, years of socialist education teaches Paul he isn’t a parasite he’s a victim with an entitlement haven’t worked. At the end of the day even Paul is starting to see that this can’t go on forever.
The free trade policies of both parties may have brought in cheap consumer goods to make Paul with his diminishing buying power think things are getting better all the time, but these same policies have also destroyed the manufacturing base that once provided Peter with enough income to carry Paul on his back and still live a good life. Today the average Paul is obese and the average Peter hasn’t had a raise in years, has watched his friends get laid-off, and wonders how he’s going to send Paul’s kids to college on burger-flipping money.
This brings us back to the world not lining up to buy our debt and to the definition of monetizing our debt. This is the government version of paying your MasterCard with your Visa. It may relieve current stress, but it portends future catastrophe. Debtors may appreciate moving their debt around, but creditors want to get paid. At a minimum they want to know their investment is secure. If we owe someone 100 dollars they want to know that the 100 dollars they receive in payment will have the same buying power as the 100 dollars they originally lent out. If the money they receive in payment is only worth half as much, they have lost half their initial investment. This is why China is reacting negatively to the Fed’s plan to pump more money into an economic system strangled by red tape and bleeding red ink.
It’s just not that hard to recognize a ponzi scheme. The smart bet is to walk away as soon as you see the shill starting to move the shells around on the table and this is just what the rest of the world is beginning to do. But poor old Uncle Sugar still thinks he has magic in his hands and more than a smile to hide his motives. What happens if you have a bond sale and nobody comes? I guess you buy the bonds yourself.
Will the end of American preeminence come not with a Bang: not with a whimper but instead with a “cha-ching!” If America, once the engine of the world’s economy and the seedbed of innovation crashes due to unsustainable debt will this validate the 20th Century concept of the Peter Principle? This principle states that within a bureaucracy people tend to get promoted due to their competence until they reach a level of incompetence remaining there until over time incompetence fills every level. Or is it time for a Peter Principle for the 21st Century?
Now is the time for Peter to rise up and say enough is too much already! In the coming Tea Party Congress the father and son Paul Team plan to offer twin bills in the House and the Senate to dissolve the Federal Reserve and reassert congressional control of America’s economic destiny. The howls will be loud, the fight will be hard, but either those who want to see a second American Century will usher in a return to limited government and free enterprise or the national motto may soon be, “Help I’ve fallen and I can’t get up.” To avoid this I urge every Peter who’s tired of being taxed to support the Pauls, contact you congressional representatives asking them to support the Paul Team as they fulfill their promises and strike a blow for freedom. If all the Peters follow these Pauls maybe we can put Humpty Dumpty back together again.
Dr. Owens teaches History, Political Science, and Religion for Southside Virginia Community College and History for the American Public University System. http://drrobertowens.com © 2010 Robert R. Owens firstname.lastname@example.org Follow Dr. Robert Owens on Facebook.