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John Lounsbury
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John Lounsbury, Managing Editor and Co-founder of Global Economic Intersection, provides comprehensive financial planning and investment advisory services to a small number of families on a fee only basis. He has a background which includes 34 years with a major international corporation, 25... More
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  • Michael Clark
    , contributor
    Comments (12006) | Send Message
    Funny you should mention this, John. I'm rewriting and polishing my book, "Turn Out the Lights" to try to get it ready for publishing (if I can find a publisher -- know anyone out there I could send a manuscript to?)


    Anyway, I re-read and wrote a rejoinder to what I wrote a couple years ago, which is almost exactly what you are saying.


    *** *** ***


    As home prices fell, mortgage defaults rose. Banks holding the new breed of mortgage bonds did not even know how much risk they had assumed, because different grade mortgages were all bound up together, low-risk paper with high-risk paper.
    The banking system began to implode.
    Greed had trumped good judgment; and now default and bankruptcy were going to trump the seductive intoxication of a bull market in housing and the pure blue sky of Greenspan’s ‘free market’ religion.


    The economic catastrophe was further exascerbated in 2007-8 by a decline in the U.S. Dollar which fueled a wild spike in commodity prices, a third major bubble that formed under the Greenspan-Bernanke watch. (Bernanke was a ‘good son’ of Greenspan, from the same school of thought, continuing the old man’s prescient policies.) Oil shot up from $60 to $150 dollars a barrel. All major commodities followed this oil spike: copper, wheat, corn, gold, silver, aluminum, titanium, heating oil, natural gas. Commodity-heavy indexes and hedge funds spiked. Suddenly Canada, Russia, Australia, and other commodity-heavy economies were markets at which professional investors threw money. But the price of doing business for almost all other businesses escalated dramatically. Companies, already hurt by frozen credit-lines attendant to the banking crisis, now had to deal with escalating materials prices. American consumers, reeling from a popped housing bubble, now sagged under the heavy burden of skyrocketing gas and fuel prices.
    In June 2008, the dollar reversed, as investors sought quality paper in response to the global banking crisis; and this flight to quality burst the commodity bubble. (So much for the theory of supply and demand regulating the marketplace. Speculators had created a demand in commodities as a response to a declining U.S. Dollar. But now the investment-banking and hedge-fund giants got caught in their own trap, as the unexpected return-flight to the dollar destroyed overnight their huge profits in commodities.)
    A deflating stock market, a deflating housing market, and a deflating commodity bubble cut trillions of dollars out of the global economy in a matter of months. This was just the beginning. Decades of price inflation and wage deflation had created a top-heavy tower that was crashing. The unwinding of debt wil take a generation to be accomplished.


    (Re-reading the above paragraph, the loop that Bernanke is caught in becomes clear. Quantatative Easing is the only thing Bernanke can do, without biting the bullet and raising interest rates, which is something he is philosophically incapable of doing. His entire life has prepared him for this battle: what if the Federal Reserve had inflated America and the World out of the Great Depression in the 1930s? He can’t go back. Bernanke’s current policies are driving prices higher – in almost everything but housing, and income . These policies are not leading to organic business growth, which they can’t, in fact. Remember: growth is by definition the empty glass filling up. Inflation is the empty glass filling up AND the full glass continuing to be filled, over-filled.
    If Bernanke allows the US Dollar to rally again, then he risks another massive collapse, such as the one that occurred in 2008, when his anti-dollar commodity bubble popped and dragged everything down with it. So his policy is to crucify the US Dollar, to knock it down and keep it from getting up, which, is also a sneaky way of attempting to monetize US debts: taking on more debt but devaluing the currency to try to make such actions a wash -- taking money from one pocket and putting it in another.
    Of course, now we have skyrocketing prices for food and for industrial commodities. Inflation has been exported to foreign countries through the anti-dollar policy (and the spike up in commodity prices). Food riots are breaking out all over the globe. Countires are now raising interest rates to try to fight off the new inflation created by Bernanke and, admittedly, other Night-Cycle factors – China is raising rates, India, Thailand; England is next. Civil wars are breaking out in about ten Arab countries, in Thailand, in Ivory Coast – violent class street revolts have also appeared in Greece, France, Germany, England; Greece, Spain, Ireland, Italy, Spain, Portugal – in fact, all European countries except Germany – are approaching and will face default in the near future. American states and municipalities are also heading for fiscal extinction.
    This, my friend, is the Big Crunch. The Big Crunch cannot be avoided. Take it like a man: raise taxes, cut spending, raise interest rates, and become a Saver Nation. Our time as the world’s great Spender Nation is over for a while.)
    24 Feb 2011, 01:11 PM Reply Like
  • John Lounsbury
    , contributor
    Comments (4052) | Send Message
    Author’s reply » Michael - - -


    How sacrilegious! Haven't you read the holy book? (Note the lower case holy, I don't want to commit a real sacrilege.)


    Doesn't the holy book say that there is no problem that can't be solved with a tax cut? Doesn't it say that deficits don't matter because you can grow your way out of any hole?


    You are lucky you don't live in old Salem. You would be taken to the nearest stake and burned.


    A little more seriously, I am reminded of a few reactions to my recent articles which came to a conclusion that not only have we been consuming more than we could afford to pay for, we have also been consuming more than we have the ability to produce. I guess maybe the two are ultimately related.


    A couple of people have told me that I was missing the points that I just attributed to the "holy book". I guess once one is convinced a mirage is real they will believe it even as they are dying in the desert.


    Good to hear from you.


    24 Feb 2011, 02:40 PM Reply Like
  • Michael Clark
    , contributor
    Comments (12006) | Send Message
    Good to hear from you, John. You are not missing the point. Lowering taxes and lowering interest rates are supposed to be a panacea.


    My favorite metaphor: the Growth Cycle in the Business Cycle consists of filling up the empty glass. What the Fed has been doing since 2001 is continuing to fill a full glass, thinking this would inspire growth. But growth, by definition (by my own definition) requires the glass to be emptied BEFORE we start filling it up again. The glass now is full of DEBT and needs to be emptied out.
    25 Feb 2011, 06:50 AM Reply Like
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