Throwing Bad Money After Worse

You'd think investors would have learned a harsh lesson. Let's talk about that after the break:

Concerns are mounting that efforts by governments and central banks to stoke a recovery will create a nasty side effect: asset bubbles in real-estate, stock and currency markets, especially in Asia.

The World Bank warned Tuesday that the sudden reappearance of billions of dollars in investment capital in East Asia is "raising concerns about asset price bubbles" in equity markets across Asia and in real estate in China, Hong Kong, Singapore and Vietnam. Also Tuesday, the International Monetary Fund cited "a risk" that surging Hong Kong asset prices are being driven by a flood of capital "divorced from fundamental forces of supply and demand."

Behind the trend are measures such as cutting interest rates and pumping money into the financial system, which have left parts of the world awash in cash and at risk of bubbles, or run-ups in asset prices beyond what economic fundamentals suggest are reasonable.

Prices are surging across a host of markets. Gold, up about 44% this year, soared to a record high Tuesday. Copper is up about 50% in the past year. In the U.S., risky assets are rising rapidly in price: The risk spreads, or interest-rate premiums, on low-rated junk bonds have narrowed to about where they were in February 2008, before Bear Stearns and Lehman Brothers fell, according to Barclays Capital.

Before I start talking about the "why", let me sum up what you just read because, in truth, my eyes glazed over the first four times I read it, and I'm supposed to be interested in this stuff for a living.

In short, there's a lot of free capital out there that is not being reinvested in companies, or infrastructure, but in speculative investments. The laws of supply and demand, while imperfect, do apply here: opportunities are created when there is more money available than can reasonably be invested/spent.

Those bonuses at Goldman Sachs, that could be lent to struggling shopkeepers or small manufacturers are only the top of the iceberg of available cash that is being used creatively to whip up yet another frenzy.

Why?

Fair question, and a simple answer: addiction.

Greed is a drug. It is like alcohol or heroin, only greed destroys more lives than either of those.

When you've spent the past thirty years receiving double digit percent returns on your invested capital (yes, we've been in an overheated market for that long, despite the occasional bump and drop), you're not going to suddenly accept money market rates of 1 or 1.5% on your money.

You're going to force higher returns. You're going to look for pockets where the worldwide recession has not hit yet, and cycle your money in and out quickly.

How do I know this is what is happening? Personal experience.

Over the past three weeks, I have seen no fewer than three investment funds offer investors refunds on their invested capital. They've called for too much and were unable to complete investments they believed they could close on at an appropriate return.

They were, in other words, outbid by people willing to accept a lower-but-still-healthy return.

How does that work? Here's a thought experiment.

I'm willing to accept a 5% return so I bid to invest one dollar, expecting to get back $1.05.

I do this knowing that I'm faring better than the bank, who would give me a $1.01.

Someone else realizes they'd be willing to accept a 4% return, and so offer to invest $1.01, to get back the same $1.05.

The investment would be foolish to accept less money to pay back more in interest. After all, they get to keep an extra penny themselves.

Greed.

Basically, this is one step up from a Ponzi scheme. And it signals that we are far from out of the woods in this economy.

I'm not sure what the answer is. Part of me would like to see stronger oversight of the markets, but that might stifle true innovation. After all, green energy ain't gonna be financed at the prime rate for the foreseeable future. Neither is stem cell research.

On the other hand, the anarchist in me would like to see the entire capitalist system go cold turkey on stupidity. But that would destroy us in the process, and that kind of violent change only begets more violence.

This is not going to be pretty.

Lifting Clouds

The Fall is usually a time of bleaker economic news than the rest of the year. Not so much this year:

Aug. 27 (Bloomberg) -- Fewer Americans filed claims for jobless benefits last week, another sign the economy is pulling out of the worst recession since the 1930s.

Applications fell by 10,000 to 570,000, a higher level than forecast, in the week ended Aug. 22 from a revised 580,000 the week before, Labor Department data showed today in Washington. The total number of people collecting unemployment insurance fell to the lowest level since April.

Companies’ staff cuts are easing as government stimulus measures help stabilize the housing and manufacturing industries. At the same time, a rebound in hiring will take longer to occur, restraining the consumer spending that accounts for about 70 percent of the economy.

[...]A separate report from the Commerce Department showed the U.S. economy contracted less than forecast in the second quarter as a jump in government spending and smaller cutbacks by consumers helped mitigate a record plunge in inventories.

I won't bore you with an analysis of that last paragraph. Suffice it to say that companies are running leaner operations than they had been, and the economy is starting to drift back towards growth.

The wildly successful Cash For Clunkers program, ended Monday but launched July 24, wasn't even a factor in the 2nd quarter, which means that the 3rd quarter will probably show a further slowing in the rate of recession, if not a turnaround.

New homes sales rose ten percent in July, which is an amazing leap when you factor in the thought that mortgage lending was nearly non-existent until the second TARP bailout enacted under President Obama. Still, sales are off 13.4% from July 2008. July 2009 was the fourth straight month to show a gain in new home sales.

That's not to say housing is out of the woods yet. Lending to builders is still tighter than a maiden aunt's ass which means new home construction, a vital component of the American economy, is moribund. What you're seeing is the sale of previously built homes that sat empty.

Still, things could be much worse and the economy could be in a lot worse shape than it is. Right now, things are still teetering on the precipice like a Keystone Kops clown car. We could still tumble.

But at least I have faith that this driver is not going to put the car back into gear and drive us off the cliff like the last President nearly did!

Another One Bites The Dust

Yet another regulatory shortfall of the Bush era is going bye-bye:

The Obama administration is seeking to undo yet another leftover from the Bush years by strengthening antitrust laws, the New York Times reports in leading off its business coverage.

In a speech later today, the Justice Department antitrust chief, Christine A. Varney, will lay out new "plans to restore an aggressive enforcement policy against corporations that use their market dominance to elbow out competitors or to keep them from gaining market share."

During the Bush years, the newspaper points out, the cards were stacked in favor of the corporate defendants facing antitrust claims. The White House is looking to level the playing field, restoring a policy "that led to the landmark antitrust lawsuits against Microsoft and Intel in the 1990s," the newspaper writes.

Intel, it should be pointed out, is about to hear the EU decision on its monopolistic tendencies.

Why is this important now?

In the midst of an economic recession or depression, there is a strong urge, indeed a strong rationalization, that stronger players in iffy markets buy up the players who are on the ropes, essentially creating at the very least an oligopoly, if not an outright monopoly.

Indeed, one might make the case that Herbert Hoover's relaxation of oversight on business combinations paved the way for the Great Depression by allowing banks to create credit consortiums that effectively froze out smaller banks from access to money to lend to their customers.

And certainly, the case against Standard Oil was based squarely on its actions in the period running up to and including the recession of 1907.

The trick this time around is to increase the economic productive of weak sectors like banking and housing while avoiding the temptation to use public funds to create megalodons of the market.

The structure of this recession/depression is such that more monopolies are likely to form as credit lines remain dried up, meaning that only companies who can finance internally (through their own cash reserves or by issuing private debt) will be able to survive in style.

And naturally, that will imply size as a factor in survival. The American capitalist system has tended towards "bigger is better" for decades now, when in point of fact, classic capitalism requires quite the opposite: smaller players competing for expanding markets.

He's Not Even Pretending Anymore

Why does George W Bush hate America so?:

WASHINGTON — The White House predicted Monday that President Bush would leave a record $482 billion deficit to his successor, a sobering turnabout in the nation’s fiscal condition from 2001, when Mr. Bush took office after three consecutive years of budget surpluses.

The worst may be yet to come. The deficit announced by Jim Nussle, the White House budget director, does not reflect the full cost of military operations in Iraq and Afghanistan, the potential $50 billion cost of another economic stimulus package, or the possibility of steeper losses in tax revenues if individual income or corporate profits decline.

The new deficit numbers also do not account for any drains on the national treasury that might result from further declines in the housing market.

The real chilling part of this story comes a paragraph or two later...

Mr. Nussle predicted Monday that the deficit would more than double in the current 2008 fiscal year — to $389 billion, from $162 billion in 2007 — before shooting up to $482 billion in the 2009 fiscal year, which begins in about two months.

(emphasis added)

Well, the neo-cons got what they wanted. Grover Norquist must be chuckling behind his latte and scone. They've destroyed America.

The combination of enormous budget deficits, which seem to stretch ad infinitum, a recession, which will likely deepen into a Depression, although no one you know will ever admit to it in our lifetimes, and the ghastly costs of an irresponsible and illegal war, which will cost us in ways we can't even begin to monetarize, have created the perfect economic storm.

One that will force harsh choices on Americans in the coming administration. This is the ultimate "scorched earth" policy: spend, spend, spend and leave nothing in the till for the next guy.

It is, in my opinion, no coincidence that the two largest deficits in American history, $413 billion in 2004, and $482 billion next year, come at the nexus of elections that could see the shift of power from Republicans to Democrats.

In 2004, it was possible for John Kerry to win the election-- certainly he was poised to-- and Bush clearly wanted to destroy this great nation in a temper tantrum.

And now, with Bush leaving office to either his greatest Republican rival or to the Democrats, and with history's judgement of his administration already weighing in negatively, he's pooped his diaper again!

Even McCain is alarmed by what he has perceived from these numbers: he's being stabbed in the back once more:

“There is no more striking reminder of the need to reverse the profligate spending that has characterized this administration’s fiscal policy,” Mr. McCain said.

$482 billion dollars is a lot, to be sure, and that's just the half of it, newswise. See, the Iraq war is fought off-budget. The coming mortgage crisis package, as half-assed as they are, will add a minimum of $25 billion (and in my estimation, more like $75 billion) to the budget deficit short term.

And this is before the warning shot that the IndyMac bank bailout foreshadows!

For example, the S&L crisis of the Reagan years...funny how these always happen under Republicans...cost the government $125 billion over ten years. This crisis could make that crisis look like a bad day at the track! A March 2008 report said that the subprime mortgage crisis alone could cost the government $300 to $500 billion dollars to solve.

So forget the Iraq invasion. Forget Katrina. Forget September 11, and his cowardly dash to safety.

George W Bush will go down in history as the first President to truly hate his country.

And Now For News That Shouldn't Surprise Us...

Remember those touted "rebate checks" that were going to spur the economy?

Um...not so much....

MIAMI — The federal government is showering households with tax rebates to spur spending and invigorate a troubled economy. But many Americans are so consumed with debt and the soaring price of gasoline that they are opting to save the money or use it to pay bills, according to surveys, sales data and interviews with people from Florida to California.

Between late April and the end of last week, the Treasury handed out more than $50 billion of the $100 billion in tax rebates it plans to distribute to 132 million households. But only once in the last six weeks have chain stores registered an increase in sales, according to the International Council of Shopping Centers, whose weekly sales survey is a widely watched barometer.

“The initial sense is that people are not running out to the malls to spend their checks,” said Stuart G. Hoffman, chief economist at the PNC Financial Services Group in Pittsburgh. “It’s not quite proving to be a hot potato that’s burning a hole in people’s pockets.”

You read that right folks: only one week in the past 6 has seen an increase in consumer spending. I'd lay pretty good money that it was the second week in May, after everyone had sorted out their mortgages and rent, and decided, yes, the had a little extra to spend.

Here's where the lunatic logic of the Republican party comes into play: When tax rebates have been handed out to Americans, only 20 to 50 percent actually gets flushed back into the economy as fresh spending. THe rest, the other half to four-fifths, gets stuck paying down debts or otherwise improving the balance sheets of consumers.

In short, rebates don't really work. Well, that's not true, they COULD work, but only when consumers have enough income coming in and their debt levels are in line with those incomes. Like when the economy is humming along, for example. Which is when they wouldn't need them, right?

A rebate has to be very carefully timed to be distributed at the precise moment when the economy is just beginning to go south, but the effects of the souring economy haven't been felt in the pockets of the average taxpayer, in other words. Since no government in their right mind is going to do anything but talk up the economy at that stage, rebates are esentially ineffectual.

Rather than distribute that money, what the government could have done was make it 100% fresh money in the economy, and spent it themselves. In an ideal world, this is how it should go, but in that world, pigs really do fly.

The government would spend this money on new initiatives, carefully targeted by sector and geography, and thus drum up further private investment. Things like economic development, seed money for small businesses, and other investments that would show a long term return of tax revenue would be ideally suited for this money.

Further, if the government really thought the country was going to go to hell in a handbasket, it could invest this money in infrastructure repair which would have a two-fold effect: it would prime the country for the eventually recovery at the same time it would provide jobs for the working class, those who are most affected by the current sordid state.

If only Bill Clinton could have run for a fourth term...

Well, This Is Ugly!

I guess you can add this to the Big Shitpile, as my buddy Blogenfreude likes to call it:

US banking giant Citigroup has said it wants to sell $400bn (£205bn) of assets over the next three years as part of its bid to return to profit.

It has $500bn of "legacy assets" that it wants to reduce to $100bn.

(ed. note: term of art: "legacy assets" = bad loans and investments)

For the largest bank in America, if not the world, to write off $400 billion dollars (roughly the GDP of Indonesia) is a serious blow to any "economic stimulus" the Fed rate cuts have provided. To make up for this slashing, Citigroup will likely have to cut jobs, raise fees and find new sources of income (read that as: dip deeper into your pocket). Particularly in light of the fact they've lost $15 billion in the last six months, and probably will post a loss for the second quarter again (even allowing for this announcement), this does not bode well for the American economy.

We need only look to Japan in the late 80s and early 90s for a lesson in this scenario: overvalued real estate creating speculative purchases creating a banking crisis (Shinsei Bank, I should disclose, is a holding of mine through a private equity venture, and is only getting back on its feet now) creating economic stagnation despite an equivalent prime lending rate of zero percent.

When your government is practically *giving* you money and your economy can't stir itself, that's a deep, deep depression.

A trailing economic indicator of any recession is the stock market indices. In Japan's case, a recession that began in 1989 didn't bottom out in the Nikkei until 2003.

Keep that in mind, since economists and Republicans tout the S&P 500 or the Dow as a marvel of the American economic engine.

Will we be hit as bad as this? Probably not. The American economy is more globally oriented today than the Japanese economy was in the 90s, altho the Japanese had strengths that America never really implemented (the keiretsu), and the real estate bubble doesn't seem to have affected commercial real estate here, as it did in Japan.

But make no mistake: the warning signs from Japan should be heeded.

Stimulate Me, Baby!

Yeesh!

After something on the order of 30 years of tax cuts having proved precisely one thing, you'd think politicians could come up with a better idea in the face of a recession:

In the long run, Americans can be confident about our economic growth. But in the short run, we can all see that that growth is slowing. So last week my administration reached agreement with Speaker Pelosi and Republican Leader Boehner on a robust growth package that includes tax relief for individuals and families, and incentives for business investment.

Apparently not. Now even the Democrats are bleating the same tired bull, albeit in a different key:

We heard last week and again tonight that Congress and the president are acting quickly on a temporary, targeted stimulus package. That’s encouraging, but you and I know that a temporary fix is only the first step toward meeting our challenges and solving our problems.

Can we talk honestly for a moment?

In 1980, Ronald Reagan was elected on a platform that included tax cuts across the board for Americans, but tax cuts the primarily focused on the well-to-do. When he entered office, the annual national deficit was $80 billion dollars. When he left, he had accumulated deficits of $2 trillion with a final deficit of $ 155billion.

His tax cuts did increase tax receipts, but if you adjust for inflation, by less than twenty percent over his eight years (roughly 0.21 per working person per year). Meanwhile, Clinton's tax hikes increased tax receipts in the country by 3.1% per working person per annum.

Under his watch, unemployment skyrocketed to over 10%, finally falling back to a still-uncomfortable 5.5%. Inflation remained steady throughout his administration between 4 and 6%, something that today would have the Fed tightening interest rates to nearly-unheard of levels.

In 2001, Bush proposed the first of three tax cuts, which didn't even begin to stimulate the kind of growth that Reagan's first tax cut did, yet still hyperinflated the budget deficit AND national debt in one fell swoop. The national debt the day Bush took office was $5.7 trillion and falling.

It now stands at $9.2 trillion and skyrocketing.

OK, given all this evidence...what part of "tax cuts are bad" do we not get?

Maybe...maybe...highly targeted tax cuts that are directed at the middle and working classes in the form of immediate rebate checks would work. Maybe. But as Gov. Sebelius points out, those are really one-off, temporary hits to the family budget, and besides, an awful lot of people will use this check to pay down some of their credit cards and other indebtedness, which does nothing for the economy: that's already spent money.

Here's how I would fight this recession, already in progress, if I was NotPresident:

1) I would immediately end the invasion of Iraq, and bring half the troops home today. I would leave about half for a short time in order to ensure an orderly transition to the people of Iraq and to quell any violence that the Iraqi forces themselves cannot handle. I can't stress this next part strongly enough: ALL TROOPS WOULD BE CONFINED TO BASES (except for routine patrols around the base) UNLESS REQUESTED BY THE IRAQ COUNCILS.

2) That would free up, gee, just about $150 billion each year. I would take that money-- screw the tax cuts except maybe the rebate checks-- and plow it into infrastructure repair: fixing bridges, improving port security, paving freeways, installing better public transportation systems.

Also, I would initiate a "Greening of America" in both senses of the word. We need not only to become more energy efficient, dropping the need to get involved for national security sake in places like the hellhole that is Iraq, but also to improve and beautify America's public works and places. Each square foot of concrete is a square foot of real estate that could be used to fight climate change. I would offer tax credits for greening your roof, for example, planting grasses and wildflowers that don't require high maintenance, or, if you have a pitched roof, tax credits for installing solar panels, but tax credits that mean something when compared to the costs of installation.

We'd be creating jobs immediately. We'd be encouraging investment in America's future and research into new technologies that we could sell to the world, thus recapturing our amazing economic growth based on innovation and not obsolescence.

Energy production in this country provides roughly $35,000 per person to the US economy each year. That's an awful lot of money. And an awful lot of jobs. (For comparison, per capita, the national debt, at $9.2 trillion, is about $25,000).

Even John Edwards isn't talking about this issue in quite this way.

Yes, we need immediate relief from mortgage debt and the inability of people to keep up with their bills, and a security net for those who will lose their jobs. That's a no-brainer and here's one arena where conventional wisdom is good wisdom: extend unemployment, assist those who need the assistance to avoid default, even if it means declaring a moratorium on interest rate adjustments and mandatory renegotiation of any mortgage either in or technically in default, and so on.

But long term, we have an opportunity to do something positive not only for the nation, but for the citizens of that nation, the ones who really count.

The ones this recession is going to hurt, bad.

UPDATE: I realize I could write a book in one sitting on this one topic alone, but I don't want to bore you more than you already are.

The simple truths of recessions are these:

- Governments are the consumer of last resort, having the deepest pockets and therefore the ability to splurge.

- Governments SHOULD be creating opportunities during good times, so that recessions don't hurt as much. These opportunities SHOULD swell the tax coffers, allowing governments more of a cushion for the lean times, but also so that governments can invest more in creating more opportunities for its citizenry.

- Tax cuts, justified as "giving you your money back, because you know how best to spend it" (ed note: it's always about spending it, for these assholes), have their limits, and I think we reached ours in 1989. Guess what? The 90s and 00s show that maybe, just maybe, we don't know how best to spend our money.

Cut The Fatheads

You can be sure the economy is in trouble when Congress and Bush can agree on something to do. Cut taxes:

Democrats and Republicans on Capitol Hill are also suggesting that they might be able to put aside longstanding partisan differences and work on a stimulus measure, lawmakers and aides said Friday.

In a fresh sign of the possibility of an agreement on a roughly $100 billion package of tax cuts and spending to spur the economy, Nancy Pelosi of California, the speaker of the House, and Senator Harry Reid of Nevada, the majority leader, wrote to President Bush on Friday saying, “We want to work with you.”

That little mash note is interesting, since one could easily make the case for ignoring the economy and letting it fester while Bush twists in the wind. Naturally, you'd want to do just enough to duck accusations of doing nothing.

Democrats might be feeling a little heat from their base, however, with all the kowtowing and rubber stamping they did in 2007. I've been of the mind that Pelosi and Reid were figuring the first year was about setting up the second year of the 110th Congress. Sadly, there at about 800 Americans in Iraq who had to die as part of this strategy.

Some Democrats say they could support tax relief focused on lower-income people and, perhaps, even tax cuts for corporations, if the White House and the Republican Congressional leadership accept some spending increases like extended unemployment benefits or aid to states to help them avert spending cuts.

The unfortunate truth is, Bush's first three tax cuts...2001, 2002, and 2003...ultimately did not benefit the economy in any substantive way, as it was really the sub-prime mortgage business and the ripple effect low-cost mortgages had across the economy.

People spent because they borrowed. This was not current income, not taxable income, and yes, the tax cuts may have generated some tax revenues because the wealthiest among us started shedding some long-term assets because of the the more favorable tax treatment, but it wasn't in line with what was supposedly the "booming economy" that resulted.

Indeed, tax revenues under Bush declined for every year until 2006 when compared to Clinton's last budget. And 2006 only went up because "a big increase in individual taxes on stock market profits and executive bonuses."

Like I said.

Will a tax cut help this time? Probably not. But the key element of this plan is increased government spending: extending unemployment benefits now, before the recession hits, is a sure-fire way of lessening the impact on people and is actually helping to close the barn door before the horse can get out. If it takes a tax cut to get that implemented until a real President comes along, so be it.

I feel both Congress and the President are severely underestimating the nature of this recession (you read that right: our bonds are in danger of losing "government-issue" status!)...I'm pretty sure it will be a depression, as I've said here before...and if I was running for President, I would address this issue in greater depth. Suffice it to say that nature is about to hand us lemons, and I'd have a lemonade stand set up already. We are presented with an opportunity the way FDR was: to do good for a lot of people and help this country improve, at the same moment.

But I digress.

I hope the Democrats are at least listening to Ronald Reagan's old "Trust, but verify" shibboleth:

Democrats said the White House would have to agree not to try to attach favorite measures like repealing the estate tax or making permanent Mr. Bush’s 2001 and 2003 cuts, just as Democrats would have to refrain from attaching extraneous spending.

“It would make sense for the president to do something in a bipartisan way,” said Representative Charles B. Rangel, Democrat of New York and chairman of the Ways and Means Committee. “But I’m scared to death to even talk about tax rebates because of what that might open up.”

A senior Republican aide said: “Republicans will have to talk about making the tax cuts permanent and all that kind of stuff. Democrats are going to want things on their long-term agenda. But if you figure those cancel each other out, there’s probably a playing field where everyone can agree.”

Somehow, I see a fillibuster in our future. And that would be the greatest tragedy of all.

UPDATE

Apparently, I'm not alone in my belief:

The measures now being debated in Washington and on the campaign trail — tax rebates, added help for the unemployed and those facing sharply higher heating bills and, most immediately, a move by the Federal Reserve to further cut interest rates — could certainly moderate the severity of a downturn. Democrats and the Bush administration are considering a package of such measures that could reach $100 billion.

But the forces menacing the economy, like the unraveling of the real estate market and high oil prices, are too entrenched to be swiftly dispatched by government largess or cheaper credit, some economists say.

The Ugly Times

If you're old enough to remember the Carter administration (1977-1981), then you'll remember the ugly phenomenon, unprecedented in a free-market economy, of stagflation.

Loosely defined, stagflation is when the economy is stagnant (i.e. a recession, in which economic activity slows) coupled with hyperinflation (when prices skyrocket through the roof).

The Carter stagflation hit when OPEC decided to play games with the price of oil. Since America was far and away the single largest consumer of OPEC oil, this was targeted directly at us, likely as a result of several foreign policy factors (Iran being number one among them).

Now that oil is flirting with its all-time record highs, as adjusted for inflation, as improbable as it may seem, we look likely headed down the stagflation path once again.

It's hard to describe what living in those times was like. The prime rate was up around 20%, while inflation ran at a then-unheard of (in America) rate of 15% (some studies indicate inflation may actually have reached higher levels in the past, like during the Civil War, but there's no clear measure of these incidents).

So the government was borrowing money at credit card rates, while families were seeing their incomes deteriorate at about one and a half percent a month, meaning if you made $30,000 a year, which was a really comfortable salary in 1979, by the end of that year, effectively you were making $25,000, but still paying taxes at the $30,000 rate, I should add. Further, banks stopped lending money at points in the incident, because if prime lending rates were 15%, say, but inflation was 16%, they were actually losing money in the deal.

Let's look at the current situation, tho: the housing market has cooled off and begun to drop nationwide. Housing prices have traditionally been the source of "wealth" in America, a fairly nebulous term that really means, "in a pinch, can I sell my home for more than I paid and pay down my credit cards?"

So long as the answer was "yes," people felt secure and kept on buying. Now the answer is "Eh. Not so much!"

This morning, we've seen clear signs that the economy is in serious trouble. While the Producer Price Index, the average cost to produce a good and bring it to market, shot up 3.2% on an annual basis in November, retail sales were up only 1.2%.

Which means that the entire increase in retail sales can be attributed ONLY to inflation (and the PPI doesn't include direct energy costs!), meaning the consumer economy dropped by about 2% in November. People bought 2% less in November. Period.

The consumer markets make up about 70% of the gross domestic product (the entire economic activity of a nation), so we'll call this a drop of about 1.75% in the economy.

In other words, a recession. A contraction. Not a good thing.

In current economic theory, you fight inflation by raising interest rates. This tightens available credit, forcing companies to put off infrastructure investment, and also means people like you and me pay more interest on our credit cards.

But the Fed has had to lower interest rates in response to the crippling sub-prime mortgage crisis, which has rippled now into prime mortgages. Anyone who believed this crisis was contained in the sub-prime markets is an idiot, including Ben Bernanke.

No rational borrower in his right mind is going to see Ditech.com offering 0% adjustable rate mortgages and not bite their banker's ass about paying 5%, even on a fixed rate loan! Hell, I bitched about paying 1.9%!

This clearly ripples through the credit markets, and is a far larger problem than we've been led to believe.

And don't think this is only an American problem. England's Northern Rock bank debacle shows that it's at least hitting the EU, and many central bank heads believe that we might see the first global stagflation in history.

You wanted to be a war president, Herr Bush? You will be, in 2008. A global stagflation will mean more poverty, more starvation, more angry young men and women in the streets of poor countries with weak tyrannical leaders.

The pieces are in place, ladies and gentlemen, for a true World War III. And we have only ourselves and our greedy overlords to thank.