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Generational Dynamics Web Log for 25-Nov-2008
One, Two, Three ... Infinity

Web Log - November, 2008

One, Two, Three ... Infinity

Watching the world spin out of control.

Anyone who was interested in mathematics in the 1950s and 1960s has probably read George Gamow's book, One, Two, Three ... Infinity. That's the title that's been popping into my mind the last few days, watching the process that's going on.

Last week, it seemed that the fervor for bailouts was finally subsiding. Half of the $700 billion bailout was going to be left for the Obama administration, and the auto maker bailouts seemed to be foundering.

But that was last week, an eternity ago. And now, as eternity comes to a close, the bailout amounts seem to be approaching infinity. Even George Gamow would be amazed.

President-elect Barack Obama is leading the way. In his radio address on Saturday, he said:

"I have already directed my economic team to come up with an Economic Recovery Plan that will mean 2.5 million more jobs by January of 2011 — a plan big enough to meet the challenges we face that I intend to sign soon after taking office. We’ll be working out the details in the weeks ahead, but it will be a two-year, nationwide effort to jumpstart job creation in America and lay the foundation for a strong and growing economy. We’ll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels; fuel-efficient cars and the alternative energy technologies that can free us from our dependence on foreign oil and keep our economy competitive in the years ahead."

How the $700 billion bailout money is being spent <font face=Arial size=-2>(Source: CNN)</font>

How the $700 billion bailout money is being spent (Source: CNN)

On Monday, Obama announced his star economic team -- and to show how serious he is, there wasn't a single loony leftist in the lot. Obama added the following:

"We have to make sure that the stimulus is significant enough that it really gives a jolt to the economy, that it is putting people back to work, that it is making investments, that it is restoring some confidence in the business community, that in fact their products and services are going to have customers."

Obama's team is putting out that things will change overnight when Obama takes office on January 20. His new team will "hit the ground running" when he takes office. He and the Democratic party Congress will cooperate to spend whatever money is necessary to "jump start" the economy on January 21. There are no limits.

And the amounts seem to grow by the second. Last week, it was just the $700 billion dollar stimulus package. But on Sunday, Senator Charles Schumer (D-NY) put out the word that "I think it has to be deep. In my view it has to be between five and seven hundred billion dollars."

And that's on top of the original $700 billion bailout. So within a few days, the original $700 billion bailout has doubled. The stimulus money will be spent on infrastructure projects -- schools, roads, etc. -- and on unemployment insurance.

$1 trillion deficit <font face=Arial size=-2>(Source: Boston Globe)</font>

$1 trillion deficit (Source: Boston Globe)

And where is all this money coming from? Just counting what's been planned so far, there's already a one trillion dollar deficit in the current fiscal year. Now we have the new $500-700 billion stimulus package will be on top of that deficit, so the deficit is approaching $2 trillion.

There's no doubt everyone is scared. The bailout of Citibank that was announced on Sunday is truly staggering. Citibank received a $20 billion bailout just a couple of months ago, and that was supposed to be the end of it. Now, Citi is laying off 50,000 employees, and still needs another $25 billion bailout, on top of the $20 billion.

And even that doesn't even come close to telling the whole story. In addition to the new $25 billion bailout of Citibank, the Fed will guarantee an additional $306 billion in loans and securities in Citi's portfolio.

And not just for Citibank, but for other banks as well. On Monday the US government said that it was prepared to spend $7.7 trillion to fight the credit crisis.

$7.7 trillion? Geez. A trillion here and a trillion there, and pretty soon you're talking about real money.

Let's take a nostalgic trip back in time, way into the past -- to October 14. The $700 billion bailout had just been announced a week earlier, and on October 14 a new bailout was being announced -- countries around the world moved to guarantee all bank obligations of every kind. I described it in "We're all Icelanders now, as markets rocket 10% around the world." Essentially, the world had turned into one huge hedge fund.

The move to do that was spearheaded by the UK. That was also the day when Paul Krugman won the Nobel Prize in economics because of his hatred for George Bush. Here's what he said about the new bailout:

"Worthwhile British initiative

Ask, and you shall receive. I asked plaintively for policy makers, at least once, to exceed expectations in this crisis instead of falling short — and it seems that the eurozone governments have delivered, more or less adopting the British plan.

And I should have given props to the British government, which vastly exceeded expectations last week — and has effectively shown the world the way forward."

Krugman made it clear that the new bailout would save the world, and that the bailout was taken because of leadership by the UK. The US didn't do it, according to Krugman, because of "ideology."

Well, it looks like Krugman was wrong. The bailout didn't save the world after all. Has Krugman ever gotten anything right? It doesn't matter -- getting things right is completely irrelevant to winning the Nobel Prize, as long as you have the right ideology.

Today, just five weeks later, that bailout looks small and quaint, compared to $7.7 trillion dollars.

Let's review, once again, the reasons why none of these bailout measures will do any good at all.

Thanks to a lethal combination of stupid Boomers and destructive Gen-Xers, both morally challenged, there were huge credit and real estate bubbles, creating hundreds of trillions of dollars of new investments and new debt.

The new investments turn out to be worthless, but the new debt remains, causing the massive bubble to leak a trillion or so dollars every week. We've been in a massive deflationary spiral for well over a year, and it's accelerating.

That's why the amount of money needed for the bailout is increasing so rapidly. It was a $700 billion bailout in October, and now it's a $7.7 trillion bailout. Soon it will be a $70 trillion bailout. One, two, three ... infinity.

People have been pointing out some claims by Ben Bernanke in a 2002 speech on avoiding deflation. In that speech, Bernanke congratulated steps taken by President Franklin Roosevelt in 1933 and 1934. According to Bernanke, the same steps can be taken now to fix the credit crisis.

This is just another example of why this great brain trust in Washington has no clue about what's going on. Following the bubble of the 1920s, the bubble had been leaking since 1929. By 1934, the deflationary spiral was almost completely spent, and by that time the economy would have improved whether or not the President did anything. This is not particularly difficult to understand, except by professional economists, who are incapable of understanding anything except their computer models, and certainly not anything related to generational theory.

There will be more bailouts attempted, but they will fail. Everything will fail. This is a generational catastrophe, and cannot be stopped any more than a ten mile high tsunami can be stopped.

It's time for people to realize that they should be preparing themselves and their families for the worst, instead of just praying for a huge miracle on January 20. Obama may be able to walk on water, but even he can't stop the huge generational catastrophe that's coming.

There's far worse to come. Expect a huge generational stock market panic and crash, including the imploding of tens or hundreds of trillions of dollars of CDSs and other credit derivatives, and the collapse of 401Ks, hedge funds, and money market funds. Expect many, many millions more of foreclosures, bankruptcies, and job losses. We are headed for a financial disaster of massive proportions, and it's time for people to stop lying to themselves and others about it.

(Comments: For reader comments, questions and discussion, as well as more frequent updates on this subject, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (25-Nov-2008) Permanent Link
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Generational Dynamics Web Log for 25-Nov-2008 One, Two, Three ... Infinity

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One, Two, Three ... Infinity