"Jaguars, anyone? More credit? Here's a better idea: let's go back to using real money."

Jaguar Inflation
by Robert R. Prechter, Jr.

I am tired of hearing economists argue that government and the Fed should expand credit for the good of the economy. Sometimes an analogy clarifies a subject, so let's try one.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible.

To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing production with tax money. To everyone's delight, it offers these luxury cars for sale at 50% off the old price. People flock to the showrooms and buy.

Later, sales slow down, so the government cuts the price in half again. More people rush in and buy. Sales again slow, so it lowers the price to $900 each. People return to the stores to buy two or three, or half a dozen. Why not? Look how cheap they are! Buyers give Jaguars to their kids and park an extra one on the lawn. Finally, the country is awash in Jaguars.

Alas, sales slow again, and the government panics. It must move more Jaguars, or, according to its theory — ironically now made fact — the economy will recede. People are working three days a week just to pay their taxes so the government can keep producing more Jaguars. If Jaguars stop moving, the economy will stop. So the government announces "stimulus" programs and begins giving Jaguars away. A few more cars move out of the showrooms, but then it ends. Nobody wants any more Jaguars. They don't care if they're free. They can't find a use for them. Production of Jaguars ceases.

It takes years to work through the overhanging supply of Jaguars. The factories close, unemployment soars and tax collections collapse. The economy is wrecked. People can't afford repairs or gasoline, so many of the Jaguars rust away to worthlessness. The number of Jaguars — at best — returns to the level it was before the program began.

The same thing can happen with credit.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing credit and providing it to as many people as possible.

To facilitate that goal, it begins operating credit-production plants all over the country — called Federal Reserve Banks, Federal Home Loan Banks, Fannie Mae, Sallie Mae, and Freddie Mac, all subsidized by monopoly powers or government guarantees — to funnel credit to the public through banks. To everyone's delight, banks begin reducing collateral requirements and thereby offering credit for sale at below-market rates. People flock to the banks and buy.

Later, sales slow down, so banks cut the price again. More people rush in and buy. Sales again slow, so lenders lower the price to 1% with no collateral and no money down. People return to the banks to buy even more credit. Why not? Look how cheap it is! Borrowers use credit to buy houses, boats, and an extra Jaguar to park out on the lawn. Finally, the country is awash in credit.

Alas, sales slow again, and government and banks start to panic. They must move more credit, or, according to its theory — ironically now made fact — the economy will recede. People are working three days a week just to pay the interest on their debt to the banks so the banks can keep offering more credit. If credit stops moving, the economy will stop. So the government announces "stimulus" programs and begins giving credit away, at 0% interest. A few more loans move through the tellers' windows, but then it ends. Nobody wants any more credit. They don't care if it's free. They can't find a use for it. Production of credit ceases.

It takes years to work through the overhanging supply of credit. Banks close, unemployment soars and tax collections collapse. The economy is wrecked. People can't afford to pay interest on their debts, so many IOUs deteriorate to worthlessness. The value of credit — at best — returns to the level it was before the program began.

See how it works?

Is the analogy perfect? No. The idea of pushing credit on people is far more dangerous than the idea of pushing Jaguars on them. In the credit scenario, debtors and even most creditors lose everything in the end. In the Jaguar scenario, at least everyone ends up with a garage full of cars. Of course, the Jaguar scenario is impossible, because the government can't produce value. It can, however, reduce values.

A government that imposes a central bank monopoly, for example, can reduce the incremental value of credit. A monopoly credit system also allows for fraud and theft on a far bigger scale. Instead of government appropriating citizens' labor openly by having them produce cars, monopoly banking and credit machines do so clandestinely by stealing stored labor from citizens' bank accounts by inflating the supply of credit, thereby reducing the value of savings.

Twentieth-century macroeconomic theory — both Keynesian and monetarist — championed the idea that a growing economy needs easy credit. But this is a false theory. Credit should be supplied by the free market, in which case it will almost always be offered intelligently, primarily to producers, not consumers.

Would lesser availability of consumer credit mean that fewer people would own a house or a car? Quite the opposite. Only the timeline would be different. Initially it would take a few years longer for the same number of people to save enough to own houses and cars — actually own them, not rent them from banks. Prices would be lower because credit would not be competing with money to bid up these goods. And, because banks would not be appropriating so much of people's labor and wealth, the economy as a whole would grow much faster. Eventually, the extent of home and car ownership — actual ownership — would eclipse that in an easy-credit society. Moreover, people would keep their homes and cars because banks would not be foreclosing on them. As a bonus, there would be no devastating across-the-board collapse of the banking system, which, as history has repeatedly demonstrated, is inevitable under a system of central banking and other government-created credit factories.

Jaguars, anyone? More credit? Here's a better idea: let's go back to using real money.

Connaitre son histoire pour ne pas répéter les erreurs du passé…

—

Si Wall Street est en déroute, c'est tout le contraire en Irak. En début de semaine, l'indice ISX de la Bourse de Bagdad a progressé de 8,39% ce qui a permis d'inscrire un nouveau record pour le plus haut sommet jamais atteint par l’ISX. Le secteur le plus dynamique de la Bourse de Bagdad ? Les banques !

Source:

ISX index hits record high

Depuis 2004, 1 emploi sur 7 a été perdu dans le secteur manufacturier au Canada.  Mais peut-on parler d'une crise pour autant ?

Voici comment ont évolué l'emploi et la production dans le secteur manufacturier depuis 20 ans:

Depuis 2004, de nombreux emplois ont été perdus dans le secteur manufacturier.  Par contre, la production est restée relativement stable.  Conclusion: on produit autant qu'en 2004, mais avec moins d'employés.  Autrement dit, la productivité a augmenté.

En 2008, le nombre d'emplois dans le secteur manufacturier était comparable au nombre d'emplois en 1997.  Par contre, en 2008 la production était 15% supérieure à celle de 1997.

Le secteur manufacturier n'est pas en crise, il subit une destruction créatrice.

Source:

Tableau 379-0027; Tableau 379-0027

Poids média de l'actualité américaine (16-22 février) selon le Pew Research Center:

Fresh Challenges, New Debates Drive a Grim Economy Story

A month into the Obama administration, the economic crisis appears to shifting from Job One to the worsening mega story of 2009. There were shifting elements in that crisis narrative last week. But the underlying message may be the frightening breadth and depth of the problem.

From February 16-22, coverage of the growing financial turmoil accounted for 40% of the newshole as measured by the Pew Research Center’s Project for Excellence in Journalism—the fourth week in a row it has reached or exceeded 40%. That represents a modest drop from 47% the week of Feb. 9-15. But those numbers don’t tell the whole story.

Last week, it was the variety of grim storylines that seemed as ominous as anything else. With the stimulus package signed into law, that narrative subsided. But as Obama rolled out his mortgage rescue plan, coverage of the housing and foreclosure problems rose up in its place. So did the troubled auto industry, which last week requested billions more in bailout funds. In addition some coverage of the mechanics of the new administration dealt with the economy’s impact on Obama’s relations with Congress.

In a sign of how the big domestic crisis is eclipsing coverage of other challenges facing the country, Obama last week approved a major escalation—17,000 additional troops—of the increasingly worrisome war in Afghanistan. That story accounted for only 3% of last week’s coverage—about the same amount generated by the fallout over the chimp who mauled a Connecticut woman.

Source:

Fresh Challenges, New Debates Drive a Grim Economy Story

Le Top 5 de l'actualité québécoise (17-23 février) selon Influence Communication:

Barack Obama ne fait pas le poids

Le seul dossier des frères Kostytin combiné à l’absence d’Alex Kovalev et aux déclarations de Jean Perron ont obtenu un poids médias de 7,58 %.  Si on ajoutait toute la couverture accordée à l’équipe, incluant l’analyse des derniers matchs on arriverait à un poids qui frôlerait les 20 % !  Il faut comprendre que l’intérêt démesuré de chaînes telles que RDS et CKAC ont considérablement contribué à l’inflation médiatique.

Barack Obama a donc dû se contenter du second rang avec un volume de 7,55 % dont 41 % pendant 24 heures.  Une belle preuve de la polarisation qui caractérise les médias québécois, la presse pan-canadienne a quant à elle cédé 3,10 % de son contenu à l’événement sur 7 jours.

De toute évidence, la crise financière risque de devenir un des dossiers les plus récurrents depuis les dernières années.  Encore une fois cette semaine, elle se classe dans le Top 5 avec 2,28 %.

Terminant la semaine au 6e rang à l’échelle canadienne, la bataille « médiatique » des Plaines d’Abraham a terminé au 4e rang au Québec avec 2,05 %.

La disparition de David Fortin a occupé 1,71 % des nouvelles.

En comparaison, voici les 5 principales nouvelles de la semaine à travers le pays.

• Crise financière: 3.21%
• Visite de Barack Obama au Canada: 3.10%
• Situation en Afghanistan: 1.78%
• Soirée des Oscars: 1.18%
• Crise chez le Canadien: 0.51%

Source:

Influence Communication

Jeudi dernier, Rick Santelli et les « brokers » présents sur le parquet de la bourse de Chicago se sont moqués du plan de relance de Barack Obama:

Le vidéo du coup de gueule de Rick Santelli est devenu viral et de nombreux Américains, exaspérés par le keynésianisme de Barack Obama, commencent à s’organiser pour manifester leur colère.

Pour plusieurs, l'État doit intervenir massivement dans les marchés bancaires parce que le crédit est gelé, c.-à-d. qu'il est impossible d'obtenir un prêt dans une institution financière.

Well, think again…

Dans la quasi-totalité des récessions, il y a eu un ralentissement important dans l'expansion du crédit sauf…  pour la présente récession.  Nous sommes encore bien loin d'une contraction du crédit et même si c'était le cas, ce ne serait pas la première fois qu'on aurait à faire face à ce genre de problème (zones rouges sur les graphiques).

L'État a causé la présente crise en facilitant le crédit et en intervenant pour rendre le crédit encore plus accessible, on ne fait qu'empirer la situation.  Le réveil sera brutal.

P.-S. Avant de m'accuser d'avoir fait du "cherry picking", je vous invite à consulter mes sources d'informations.  Vous y retrouverez une foule d'autres indicateurs qui vont dans le même sens que ceux présentés dans ce billet.

Sources:

Loans; Commercial Credit

La nouvelle trouvaille du PQ ?

La crise économique va servir de tremplin pour faire avancer la cause de la souveraineté !

Dorénavant, chaque fois que vous entendrez le PQ proposer une solution à la crise économique, posez-vous la question suivante: "Le PQ veut-il vraiment régler la crise ou cherche-t-il plutôt à la prolonger pour mousser l'option souverainiste ?"

Au fait, lors de la course au leadership du PQ l'opposant à André Boisclair, Pauline Marois avait déclaré que la souveraineté du Québec allait s'accompagner de 5 ans de turbulences économiques. Je doute qu'une aussi longue période de turbulences constitue une solution pour se sortir d'une récession.

"No matter what pundits say, we are nowhere near a laissez-faire situation."

Regulators cannot avert next crisis
By Johan Norberg

As usual after a financial crisis, we hear demands for new controls and regulations to stop it from happening again. But since every crisis has led to thousands of new pages of regulation, why is it that regulation doesn't stop crises from happening again? No matter what pundits say, we are nowhere near a laissez-faire situation. Look no further than the US federal institutions in Washington, DC, and we find 12,113 individuals working full time to regulate the financial markets. What did they do with the powers they had?

Made mistakes. American politicians, central banks and regulators were just as eager as speculators to expand the housing bubble. They just had a bigger pump.

The US Federal Reserve lowered interest rates from 6.5 per cent to 1per cent between 2001 and 2003, and housing prices soared. Starting in 1995, the government threatened banks and thrifts with regulations and legal challenges if they did not extend more loans to poor neighbourhoods and a government-sponsored company such as Fannie Mae used its state guarantees to purchase more risky loans and expand the sub-prime market.

Is the solution to the crisis really to give more power to people and institutions that contributed to bringing it about?

The problem with regulation is that it is always a response to the last crisis. Generals fight the last war and always try to avoid the mistakes made then. So we get new rules that target the mistakes that everybody already knows they must avoid. The next possible crisis and its causes are so far unknown, and our regulations may have no effect or even make them worse.

After the exposure of accounting scandals in companies such as Enron, we have seen more drastic accounting regulations. We all wanted to avoid another Enron. "Fair value accounting" was one of the results, which means that financial institutions had to mark their assets to market. If a bank has mortgage-backed securities for sale, their value is registered as the price it could get if it sold them on the market today, rather than taking historic prices into account.

It sounds reasonable, but the problem is that when there is panic in the market, no liquidity and no buyers, that price is very low. So suddenly all institutions see the value of their assets drop at the same time. If they sell to make up for the loss, the prices fall even more, and accountants keep marking down assets. The result is that a bank or thrift that looked very stable a few days ago can suddenly turn out to be insolvent, at least on paper.

William Isaac, who used to be chairman of the Federal Deposit Insurance Corporation, has said that if fair value accounting was in place in the 1980s, all the big banks in the US would have collapsed and the recession might have become a depression.

These accounting rules are "like fighting a fire with gasoline", as Steve Forbes has pointed out.

In other words, regulation that was introduced to solve yesterday's problems can easily become a big problem around the corner.

The only thing we know for sure is that we don't know where the next problem is going to come from. Our best way of preparing is to be flexible and to make sure that individuals and institutions are ready to learn and adapt as soon as new information is available. Regulation that locks in particular solutions or blocks others could stand in the way of that flexibility.

Another result of the accounting scandals was the Sarbanes-Oxley Act of 2002, which required US companies to introduce rigorous internal controls and to send regular, detailed financial reports to the federal authorities. The result has been new costs for American companies, fewer public offerings and a flight of talented directors.

The present financial crisis has swept away the independent investment banks on Wall Street. It is now obvious that they couldn't afford the risks they took without having bank deposits that have made life easier for big commercial banks. But why did independent investment banks evolve in the first place? Because American politicians outlawed universal banks as part of the New Deal, a ban that was in place for 66 years.

The Glass-Steagall Act, which enforced that ban, was repealed in 1999: one piece of deregulation on which some people now blame the crisis. On the contrary, it was important and it was done in the nick of time.

If it hadn't been repealed, J.P. Morgan would not have been able to buy Bear Stearns, Bank of America could not have bought Merrill Lynch and Morgan Stanley and Goldman Sachs would not have been able to save themselves by becoming bank holding companies.

Regulations and controls often result in new difficulties even when the intentions of policymakers are good and the hopes are real. That does not even begin to address the problem that a lot of new regulations are just symbols, enacted to show people that politicians have done something, even if they know that it does not really address the problem. It follows the politicians' logic from the British television series Yes, Prime Minister: "Something must be done. This is something. Therefore we must do it."

This logic is as old as the crises. After the collapse of the South Sea Bubble in 1720, the British parliament delayed the Industrial Revolution by impeding the free formation of joint stock companies for more than 100 years.

And after the Depression, American politicians made risk-handling more difficult for two generations by banning stock options.

Regulators and politicians always fight the last crisis, and when they do they run the risk of making the next crisis more severe.

As we don't know what the next trigger will be, we can't regulate against it without introducing such drastic measures that financial markets cease to function effectively.

And that would be a terrible loss, much, much worse than any financial crisis we could imagine. Buying bad assets from financial institutions may be a bad idea and may cost the US treasury $US700 billion ($935billion), but financial markets help the world economy to create that amount twice a week.

Speculators and investment banks have shown that it is difficult to keep a cool head when there are large sums of money at stake. But the same goes for politicians and regulators. And the only thing more dangerous than financial crises may be our way of responding to them.

Johan Norberg is the author of In Defence of Global Capitalism and a senior fellow of the Cato Institute in Washington, DC.

Cette semaine, Barack Obama fait pleuvoir des milliards de dollars sur l’économie américaine pour restaurer la confiance des consommateurs. Résultats, l’indice Dow Jones est à son plus bas niveau depuis 6 ans. Voici comment un peut expliquer ce paradoxe:

Les politiciens veulent adopter des plans de relance pour restaurer la confiance des consommateurs.

Mais pour que ces plans de relance soient acceptés de la population, les politiciens sont obligés de mener une campagne de peur.

Bref, pour faire adopter un plan de relance, il faut faire peur aux gens. Plus on fait peur aux gens, moins ils ont confiance. Moins ils ont confiance, plus les politiciens veulent faire adopter de nouveaux plans de relance…

Un cercle vicieux qui nous coûtera très cher…

Soit on pose l’avion dans la rivière Hudson, soit on s’écrase en plein milieu de New York en tentant de rejoindre l’aéroport.

Vous pensiez que l'élection de Barack Obama allait mettre fin à l'antiaméricanisme ?

Écoutez plutôt cet extrait d'une discussion entre Benoît Dutrizac et "l'humoriste" français Guy Bedos:

Il est incroyable ce Bedos.  Les Américains ont élu un noir à la tête de leur pays, chose qu'on ne risque pas de voir en France, mais les Américains sont encore et toujours des tarés à l'esprit fermé alors que les Français sont des parangons de vertu…

Aux États-Unis, vous ne verrez jamais de manifestations racistes lors d'un événement sportif alors qu'en France la chose est devenue si fréquente que les arbitres sont appelés à sévir contre les spectateurs fautifs.

Guy Bedos is full of shit.

Un diplôme, c'est payant.  Quelques chiffres sur le taux de chômage au Canada:

Le même graphique, mais sur une période de temps plus courte:

Source:

Tableau 282-0003