American Deficits Questioned By Lenders

All is not well for the American financial house. Although retail sales are rising, corporate profits rebounding, and the stock market enjoying a more than 30% recovery, there are other statistics which give cause for serious concern. For instance, the US Dollar has fallen 15 - 20% against the Yen, Euro and the Canadian Dollar although their central banks tried to stop the alarming fall of the Dollar.

More clear evidence of this is the dramatic 50% rise in gold during the past year, which overshadows the 30% rise of the S & P 500. Governments and banks around the world have lost their faith in the American Dollar. What is more, it is becoming increasingly difficult for America to finance its multi-trillion deficits. Although the budget deficit is merely a trillion dollars, the amounts poured into the financial system by the Federal Reserve to bail out big banks, investment firms and other corporations is closer to $10 Trillion. The amount is so immense that the global system may be unwilling to finance the American Government for borrowing. China is the largest lender, but it speaks for most other creditors. See the following N Y Times article on November 14.

China’s Role as Lender Alters Obama’s Visit
By HELENE COOPER, MICHAEL WINES and DAVID E. SANGER

"When President Obama visits China for the first time on Sunday, he will, in many ways, be assuming the role of profligate spender coming to pay his respects to his banker.

"That stark fact — China is the largest foreign lender to the United States — has changed the core of the relationship between the United States and the only country with a reasonable chance of challenging its status as the world’s sole superpower.

"The result: unlike his immediate predecessors, who publicly pushed and prodded China to follow the Western model and become more open politically and economically, Mr. Obama will be spending less time exhorting Beijing and more time reassuring it.

"In a July meeting, Chinese officials asked their American counterparts detailed questions about the health care legislation making its way through Congress. The president’s budget director, Peter R. Orszag, answered most of their questions. But the Chinese were not particularly interested in the public option or universal care for all Americans.

“They wanted to know, in painstaking detail, how the health care plan would affect the deficit,” one participant in the conversation recalled. Chinese officials expect that they will help finance whatever Congress and the White House settle on, mostly through buying Treasury debt, and like any banker, they wanted evidence that the United States had a plan to pay them back."

I have great sympathy for the American Government in its attempts to deal with the financial crisis, which had looked like a looming depression. Unfortunately however, there are very real limits in trying to buy a recovery through fiscal and monetary stimulus. I have mentioned this theme in several past blogs.

I hope America doesn't turn this financial challenge into a political drama of hurling blame at opponents. Everyone has helped to create this problem: government, banks, corporations and individuals, both rich and poor. Everyone needs to work together to rebuild the American economy. I believe the Obama administration is finally realizing the magnitude of the problem. They should be given support, at least until the 2012 election.

I wonder if a moderate depression would have been any worse than the likely prospect of stagflation (no growth, but with inflation) for a number of years ahead.

 
 
 
 

The Misuse of Government Economic Statistics

I have long argued that official statistics distort our true economic situation and cannot be relied upon to see where we are headed. This Harper's article by Kevin P. Phillips supports my viewpoint eloquently. Here are a few excerpts:

"..since the 1960s, Washington has been forced to gull its citizens and creditors by debasing official statistics: the vital instruments with which the vigor and muscle of the American economy are measured. The effect, over the past twenty-five years, has been to create a false sense of economic achievement and rectitude, allowing us to maintain artificially low interest rates, massive government borrowing, and a dangerous reliance on mortgage and financial debt even as real economic growth has been slower than claimed.

"..the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it actually is.

"The corruption has tainted the very measures that most shape public perception of the economy—the monthly Consumer Price Index (CPI), which serves as the chief bellwether of inflation; the quarterly Gross Domestic Product (GDP), which tracks the U.S. economy’s overall growth; and the monthly unemployment figure, which for the general public is perhaps the most vivid indicator of economic health or infirmity."

World Economy? Tough, but Normal: Reducing Expectations following the Artificial Wealth boom.

The economy is emerging from a severe downturn that may have been a small depression in much of the world. By “depression” I mean the 10% or greater decline in the real economy, not the governments’ distorted estimates of GDP decline.

In the past 18 months, world stock markets declined by 40% to 50%. Retail sales fell by more than 10% in the worst months compared to the prior year. World trade was down considerably more than 10%. Unemployment has soared and jobs are hard to find.

However the G20 nations, led by America and the UK, are conducting the most dramatic economic rescue operation ever seen. They are spending staggering sums to re-inflate sagging consumer demand. Stock markets are recovering some of their giant losses. Oil and other commodity prices, which fell considerably during the financial crisis, are now climbing back quickly.

We are left with two questions. Is this dramatic effort worth the trillions of dollars borrowed by governments? Will this bold rescue hold up for long?

I give world governments’ full credit for this rescue effort, since a big depression would be catastrophic. However, government debt is increasing by colossal proportions. This will inevitably lead to higher taxes and inflation.

We may already be starting a new inflationary trend (seen in commodity and stock prices) that will be hard to contain. That is why the price of gold has risen 30% and may rise further. Gold is a barometer of inflation.

Listening to some news reports and internet discussions, it would be easy to conclude that we live in abnormally difficult times. However the economy is actually close to normal, and decidedly better than the historic economy experienced by our parents and grandparents.

It is folly to think that the height of an economic boom is a long term norm that can be permanently maintained by government policies. Government should not try to interfere with the normal up and down cycles of the economy. In fact the Federal Reserve’s overreaching ambition to achieve such an optimal economy is what led to our recent financial collapse.

I am 62 years old and my parents were born before 1910. From my memories and from theirs, I realize how much better off we are now than people who lived fifty or a hundred years ago. Back then, most people in America, Europe and worldwide lived in wretched poverty by today’s standards.

The media gets transfixed by whether the economy grew or declined this year. We get agitated when our house value or retirement funds go up or down 20%. But really, our economy is quite good enough for any person willing to work hard and to save money. The economic world is challenging, as it always has been, but not exceptionally so.

A serious student of history would acknowledge that we live in one of the most fortunate times in human history. For one thing, our military conflicts are minor compared to the world wars that occurred during the past 100 years. Rarely in history have we been able to travel around the world so easily and safely. Our current “wars” rate no more than a 1 or 2 on the Richter scale of historical conflicts.

Despite continuing challenges for the American government and American financial system, the rest of the world’s economy is gradually getting back close to normal. The real challenge is getting past the unrealistic expectations produced by the artificial economic boom we enjoyed so much five years ago.

After the historic 9/11 events involving the destruction of the World Trade Towers in New York, the American Federal Reserve Bank over-reacted. They brought interest rates down far too low to counter fears of a major recession. Other central banks followed suit. As a result of the lowest interest rates ever, there was global boom in real estate and stock markets that created artificial wealth* for most investors and home owners. This financial euphoria led predictably to a grim correction in 2008.

This crisis was most acute for American banks, investment firms and real estate. For a while the world was terrified by the American crisis, but eventually they realized that the rest of the world was not as seriously affected. Once the liquidity crisis was past, Asian economies resumed their growth and Europe is also recovering.

America is left with both bigger challenges and greater resources than most nations. Unfortunately, the American mood seems sour. Everyone, rich or poor, feels especially deprived and unfairly treated. People are unwilling to accept that you can no longer enjoy high wages while living on inexpensive goods produced by cheap labour.

This is a time for discipline, for hard work and for financial prudence, and helping your community. Those who work hard and save 10% or more of their earnings can look forward to a reasonable future. Those who wait for a better economy or government job creation to rescue them will be frustrated.

The Obama government is disappointing nearly everyone – which is actually a sign of good government. Difficult choices need to be made that require sacrifices by all. The American financial system needs to be reformed. The American medical system is poor compared to other leading nations; hopefully a few steps can be taken towards universal coverage and to bring down the costs. But no one will be satisfied soon – health care will take years if not decades to fix completely.

So, turn off the news reports. Go outside for a walk. Call someone you love. Fix a good meal. This is a time for renewed hope. This is a time to build a good future for yourself and for those you love. The economy won’t get much better than this.

** For more insight on the artificial wealth created earlier this decade, please read this article.

US Unemployment High and still Growing

Bloomberg Finance News had an illuminating article today on the dire unemployment situation:

"This glass still looks half-empty to me...and this isn't even the real picture. It's been estimated that the real unemployment rate in the U.S. is closer to 20%. These estimates include “underutilized” workers in the U.S. (i.e., those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking). Prior to the early 1990's, this was the method of calculation. Now the government manipulates the number in order to suit its political aims..."

Read article

The Highway to Financial Success

There are many potential ways to get to most destinations, but usually just one reliable major highway. Side roads and unmapped paths are interesting, but these rarely help to reach your goals better and faster.

During my successful career in banking and as a corporate executive, I met a bunch of people who achieved amazing financial success. Many became millionaires. Others created fortunes of $10 million, $100 million, $1 billion, and one man I know is worth over $5 billion.

But even the much larger number of people who never made big fortunes nonetheless became happy and successful if they followed the highway to financial success that I describe below. But first a brief detour.
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Millions of people last month bought tickets for the Lotto 6/49 Jackpot in Canada which had a grand prize of $49,851,871. While the lucky winners in Alberta obviously did well on their investment, the other 99.9% lost money and will continue losing money as long as they gamble. In British Columbia where I live, the Government lottery system pays out 27.5% of it revenues in prizes. That means if you had bought every single ticket, you would have lost 72.5% of your money. Regrettably, you would you would also likely have lost money if you purchased stocks or real estate during the past five years.

What many people fail to realize is that more than 95% of wealth is created in your own job or in your self-owned business. The stock market has indeed created many multi-millionaires; regrettably, most of these are the brokers, investment bankers and other professionals who sell investments to the general public. Only a very few investors make big dollars by investing – the rest of us live perpetually on hopes of winning in the investment lottery, but rarely collecting on a big win.

The same is true of the real estate industry; the fortunes created there are mostly for real estate professionals. Obviously, in times of rapid asset inflation such as we experienced in the past decade, a few lucky people got in on the inflation bubble early on and sold out before it burst. But those people are statistically few in number. In the recent downturn, many people including some of my smartest friends and relatives lost fortunes in real estate – it is a very risky business, particularly when you use borrowed money.

Forty years ago I analyzed the performance of the stock portfolios held by a number of successful business people, all whom had made significant money in their own businesses. Shockingly, almost none gained as much in their stock investments as if they had just held bank deposits. Over half of these successful business people actually lost money on their financial investments.

I have seen this pattern repeated many times again in the past three decades, in both good economic times as well as in recessions – ordinary investors rarely do well in financial investments. Certainly not well enough to risk so much of their money and time betting on the stock market!

I understand the counter arguments offered by those who use the Dow Jones index, the S & P, or other stock indexes to show high financial returns historically. But those indexes are badly flawed. Worse still, most investors do not buy these stock indexes. If they buy mutual funds, up to half of their gains go to the sales commissions and investment management fees, particularly if they hold the mutual funds less than 5 years. Few people realize how much of their investment income goes back in fees and hidden charges to the financial industry and how little gain remains to reward investors.

There is a sound investment strategy for people who have already made their wealth to earn 6 – 8% returns in the long run, but few people ever create their original wealth through their investments alone. Even Warren Buffet made most of his original money by handling investments for other people who paid him handsomely for doing such a good job.

So back to my main conclusion: virtually all wealth is originally created in your own job or in your self-owned business. Investing your hard-earned wealth wisely is a different challenge.

I will have more to say later about how to build a successful career or start your own business. But for now, please remember that the highway to financial success starts with your own job; nowhere else. Whatever you can do to build up technical skills in an area where you have a keen interest will facilitate your longer term career advancement.

Highways are very long – it can take decades to build up a great career and to reap the financial success arising from this endeavor. Pick a career direction and stick to it for the long term. There will be obstacles and detours ahead, but keep building around your core knowledge, interests and strengths. People who change career direction frequently almost never succeed financially.

Even humble careers based on trades and very basic services can ultimately lead to surprising satisfaction and success. Most people who start successful businesses do it with knowledge gained while working for someone else.

So get on the career highway and keep on this highway until you reach your desired destination. But please enjoy every mile (or kilometer) of the journey, because enthusiasm is hugely important to your success.

Bon voyage!

 
 
 

Inflation is Looming on America’s Horizon

Martin Feldstein, one of Harvard's preeminent economists, has confirmed what my blogs have been saying for the past year. This is worth reading! Click here

More Bad News -- American Deficit Reaching Astronomical Proportions

Some of my friends (in jest) accuse me of unfounded optimism. But I find so much daily evidence that I wonder why nobody has sent me a bottle of the intoxicating beverage that is propelling the stock market to a rebound. The market logic assumes Obama is fixing America, so that the export engines in China and India can roar forward later this year to supply the wonderful American consumer. Global growth is just around the corner. Or is it?

My concerns are echoed by Clive Crook of the Financial Times. Read his latest prognostication for a 10% or higher American fiscal deficit. That plus alarming monetary expansion spells "INFLATION" ahead.

That comes on top of a permanent trillion dollar American trade deficit from oil imports. But why let a few missing trillions spoil a good party? Go buy stock!

The Downturn is Far from Over!

One more time we are hearing that this sharp downturn has reached a bottom and now is the chance to buy - a house, a car, or especially some stocks or mutual funds.

There is some evidence that the economy is not headed for a complete collapse. There are even some monthly indicators that show upward movement.

No one can say for sure when the bottom will be reached in the stock market, but for my money the answer is not yet.

For the economy as a whole -- in terms of employment, consumer spending and GDP, I think the bottom is many months away, or perhaps even a few years away. My guess is that the economic news in the coming months will have far more negative items than real grounds for encouragement.

It is not surprising that governments around the world are trying their best to halt this slide. However, the methods being used in Washington may add fuel to the financial fire. Look out for inflation in the coming years, due to colossal deficits and extreme monetary stimulation. Buy gold or gold stocks to hedge against likely inflation next year.

I still believe we are headed for a small depression, that is a 10% or greater fall in GDP. It might even get worse than that.

The new trade barriers that are rising worldwide will surely dampen any global recovery. Few people realize how much global prosperity in the past fifty years has depended on free movement of people, money and products. If free trade dies, the world will become much poorer.

Fasten your seat belts for a prolonged bumpy ride!

From an article on History and Depression by Richard Cohen in the Washington Post

A depression, if it amounts to that, is not just an economic crisis. It's a historical mugging. Those of us who have been accustomed to exercising control over our lives are about to undergo an awfully frightening experience. This will hit the young particularly hard. If you asked almost any of them over the past 20 years or so why they did not read a newspaper or, really, care about the news at all, the answer was that news was irrelevant to their lives. It did not matter to them what was happening in Washington or London or even Baghdad.

An older generation still had a residual appreciation for the linkage of things -- how an event there could affect an event here and a job would disappear or a war erupt. It mattered because history mattered. One had the feeling that what with wars and famines, disease and ruthless economic cycles, one could never really control one's own life.

But generations that followed came to feel that they had mastered history and that it was, like polio, no longer a threat. The great exception in my lifetime was the Vietnam War and its suffocating draft. Rage was the result. The campuses exploded.

The rage that is coming will change the politics of our time. Barack Obama will either figure out how to channel it, as Franklin D. Roosevelt did, or he will be flattened by it, as Lyndon Johnson was. Obama's challenge might even be greater than FDR's. The people of the 1920s and '30s were tough, hard. They did not expect all that much from life, and they had learned to expect next to nothing from government.

Click here to read the entire article.

Don’t Buy It!

I retired a few years ago from a career as an international banker and corporate executive. In my economic blogs I have for two years been predicting a momentous global downturn, long before any official sources admitted such a possibility. (They are still partly in denial.)

Now I would offer this advice: Don’t Buy It. That is also my word to myself in these treacherous times.

Whether you are looking at taking a bargain cruise, buying a new TV, another car, a house, or making a financial investment, don’t buy it unless you really need it and can clearly afford it without borrowing. I am not buying much these days except groceries and small things I truly need.

It is not our obligation to rescue the American economy or the world economy. Our obligation is to manage our individual and household budgets prudently.

Many economists are telling us to spend more to get the economy going, but that will only put us further into debt, which is the root of our problem.

We are in an economic hurricane that is still gaining strength. There have been several premature announcements of a recovery in the stock market or housing market, but don’t buy this theory just yet. Obviously I wish this storm would be over soon, but I see no signs whatsoever that it is lessening.

In fact, this feels to me like a full scale depression in the making. I am not suggesting a 1930’s drop in GDP of 40%, although that might be possible; but I do expect a GDP drop of 10 – 20%, which would qualify as a real depression by any measure.

So let me suggest a more prudent way of looking at our predicament. What if the government is in fact virtually powerless to stop this incoming tsunami wave?

Franklin Roosevelt tried mightily for nearly a decade to stop the last depression without much success, although he was arguably the greatest president of the 20^th century. Today many economists and government officials have become perfect “Monday morning quarterbacks” who seem to believe that if they had been in charge, the 1930’s Depression could have been avoided or quickly repaired. Don’t buy those pretentious claims; they are unfounded and misleading, even if well motivated.

Various political leaders are claiming their unique expertise about what should be done to fix this mess, but in fact none of them saw this meltdown coming and they have no basis for claiming such profound understanding.

You should instead respect any leaders who admit honestly that they don’t know how bad it will get, or precisely how to avoid it. Our government should be concerned primarily with offering help to those who are hardest hit. Trying to stop the tsunami in its tracks is patent nonsense.

So where does this leave you and me? Hopefully not waiting for someone else to rescue us. That is our job: to rescue ourselves. And rescue does not mean getting back on top of the house of cards that has tumbled down around us. It means bravely starting over from where we have landed.

If you do the math, you quickly realize that the proposed $800 billion American stimulus package divided among a population of 300 million is less than $3,000 per person. How can that provide $40,000 jobs, or rescue $100,000 mortgages in default, plus pay for a new health care system, alternative energy research, and a host of other benefits that we desire? The expenditure per person to do all of that would be astronomical—many trillions. It just isn’t possible.

But the trillion dollar American government deficit will surely contribute to growing inflation and send the price of gold still further up. So if you are going to buy anything, buy gold, because the dollar is becoming worth less and less.

We have a choice. We can sit in a heap and cry about how desperate the economy is becoming or look at history and realize that we are still incredibly lucky. The economist Jeffrey Sachs has estimated that we are ten times better off than our ancestors were in 1750. We are even far better off than our grandparents. They faced war and depression and survived. We can too.

Our principle source of hope is in what we can do for ourselves and for those around us. This must happen at every level, with every person, company, family, community and at every level of government. We need to find entirely new ways to contribute to this stark new economy, whether in paid or voluntary work.

With a “can do” attitude, extreme frugality, and an enterprising spirit, we have every chance to survive and to rebuild our lives.

Wanting the Downturn to be Over

Like all of you, I want this downturn to end soon. Everyone who owns property or investments for retirement has seen their net worth plunge this year.

Many people are saying we are at the bottom and that now is a good time to invest again. I hope they are right, but I am not sure yet.

With the stock market down about 50% worldwide, this ought to be the bottom, compared to previous recessions. However, I wonder if we might not see a a second stage of this sell off in the next 3 - 6 months. I have no crystal ball to predict next year's headlines, but if they are as grim as what we have seen in recent months, it could mean more bad news for the markets. Furthermore, governments have reduced interest rates to virtually zero and maximized monetary and fiscal measures. If this huge amount of stimulus fails to break the downward pattern, we could be facing a long economic winter.

But even if my pessimism proves wrong about the stock markets, that would not automatically mean that that the broader economy will turn around quickly. On the contrary, I expect unemployment to rise for several years. I expect retail sales and manufacturing activity to decline for 1 - 2 years, if not more.

Obviously, I hope my gloomy assessment proves to be wrong. But many years ago I learned the error of assuming what I want to happen will be what actually occurs. My favorite sports teams and politicians win occasionally, but lose more often. I find it helpful to retain dispassionate objectivity even when I am sick and tired of watching disasters unfold.

So I am not buying into a recovery yet.

Obama’s One-Time Opportunity: to Restructure the American Economy

With worldwide equity markets down by 40 – 50%, it seems virtually certain that we are already falling into a depression. Hopefully it will be far smaller than the Great Depression of the 1930’s where the economic contraction was 40%. But a 10% or a 20% contraction of GDP is a realistic scenario in this dire situation. Already in March the Gallup Poll found 60% of Americans said a Depression is likely; today I suspect most Americans would admit we are already there.

President Obama is right to offer hope for the long term and to show compassion to those most injured by this storm. However, unless he tells Americans soon how terrible the economy is already, he will certainly get blamed for the inevitable continuing catastrophe. The American people can handle a candid assessment and will sacrifice to make the changes needed for an eventual recovery. But minimizing the challenge now will soon shift the blame to Obama, who didn’t create this regrettable state of affairs.

It is customary for a new CEO when taking over the management of a company in distress to clean house and to lower short-term expectations. This involves examining the books and disclosing hidden losses. It allows a more realistic set of goals to be pursued without useless baggage from the past, which should be thrown overboard.

The plunging financial markets have signaled severe economic deficiencies. Some people naively believe that our main challenge is how to restore the stock market and the housing market back to their former levels. But the precipitous stock market decline is due to a very sick American economy, not just an isolated problem in the financial sector.

What we are witnessing is not only the failure of some of the largest American banks and corporations, but also the financial disintegration of the government. Conventional wisdom says that the government must use every fiscal and monetary measure available to restore confidence and to increase consumer spending to help avoid world recession. But I see it differently.

Let me explain why. My international banking career has trained me in credit assessment of both corporations and of national governments. What has become abundantly clear to me throughout my 35 year financial career is that size alone is insufficient to protect any bank, any corporation, or even an entire nation from financial collapse.

So restoring economic growth alone will not restore our fortunes. In fact, too rapid growth – in house construction, in stock prices and in energy consumption – has caused the present problem. The US (and world) economy is entering into a time of intense contraction. This is a necessary antidote to the haphazard growth.

By every normal measurement, the US government’s financial health is poor and deteriorating rapidly. Let me put some numbers to this by comparing the United States and China, which are respectively the most profligate and most disciplined major economies in our world.

Although China’s economy is half our size, it has been growing 6 times faster. That rapid growth comes from having a three times higher national investment and savings rate.

China consumes 6.93 million barrels of oil per day, compared to America’s 20.8 million barrels of oil per day, despite having a four times greater population. That is the main reason that China enjoys a $300 billion trade surplus compared to our $900 billion trade deficit. It is also the reason we are the largest debtor nation and they are our largest creditor.

Consequently, our national debt is $14 trillion, 34 times as great as China’s debt. What is more, China’s treasury holds $1.5 trillion in gold and foreign currencies, while we have only $71 billion. Our financial cupboard is bare!

Putting the United States on a path to recovery of its financial health is an immense undertaking, but let me sketch out the top priorities.

• Guard the federal treasury against quick depletion. The titanic struggle to regain economic health will take years, if not a full decade. Every dollar of government resources is precious and should be used frugally. The government doesn’t have an endless well of financial resources.
  
  
  
• Reduce energy consumption drastically
  
  
  
• Balance imports and exports
  
  
  
• Reduce foreign borrowing
  
  
  
• Increase domestic savings and investment
  
  
  
• Discourage debt-based consumer spending
  
  
  
• Reduce military spending
  
  

These priorities would help restore America to an economic superpower once again. Here are a few specific suggestions:

1) Introduce gas tax measures to reduce energy consumption by half. While we should improve domestic oil production and develop new energy sources, these alone will never offset enormous energy imports. Why not follow Europe and most of the world by taxing energy much more? Their energy conservation plan has been proven highly effective for decades. Japan consumes 38% less oil per capita and Germany uses 53% less than Americans. That gives them an enormous economic advantage.

I suggest raising retail gasoline prices to the level of the rest of the world. Higher taxes should also apply to industrial energy consumption. This is a bitter pill, but the only alternative is continuous financial decline until this oil-import haemorrhage stops. The lessening oil consumption will do immense good for the environment. The tax revenue from this program could fund further tax cuts or new social programs.

2) Avoid huge bailouts to GM and other bankrupt companies. GM (together with GMAC LLC) has total liabilities of over $200 billion against $5 billion of operating cash flow during its best recent year, before the massive losses began. Even if GM recovered miraculously to its previous earnings in 2005, it has $150 billion more in debt than its cash flow could ever service. GM needs rescue, but after it goes though the bankruptcy courts. Why should the Federal Treasury shoulder an unnecessary further $200 billion for GM alone, which will only result in extraordinary gains for shareholders and creditors?

The current request by the three large automakers is disingenuous, to say the least. GM alone is losing $5 billion per month. Once the government steps in, the market will expect a continuous financial lifeline, which is in fact an implicit government guarantee. This would ultimately cost several hundreds of billions in the long term, like with Freddie Mac and Fannie Mae.

Airlines have demonstrated repeatedly that the bankruptcy mechanism rarely grounds planes permanently. They provide for an orderly restructuring. GM and the other car companies should be drastically restructured before tax payers help out. The priority of keeping a vigorous American car industry is worthwhile, but not at such a high cost.

3) Reduce consumer debt costs, particularly among the poorest citizens. Historically, American states restricted interest rates to 6%, 10% or 12%, but gradually this was raised to over 30%, and now there is no limit whatsoever on consumer interest rates and other excessive fees for debt. Why not limit consumer interest rates to 15% or 20% by federal law? This would discourage the spiraling growth of credit card debt and other consumer debt, which cripples low wage earners.

4) Provide much larger incentives for saving & investment. The United States has had the lowest personal savings rate among major nations for decades. Recently the savings rate has been about zero, when personal borrowing is netted against savings. Most of the leading economies apart from the USA have had high savings rates: Japan, China, Germany, and most of Europe. This is what pays for industrial investment.

Repairing the Damage — After the Global Firestorm

(This blog was previously published at The Huffington Post on October 30, 2008)

My father often told me the story of going into Tessmer’s General Store in Hartville, Ohio one day in1929, when he was 23 years old. Old Mr. Tessmer looked up at him from reading the financial pages of the newspaper and said: “Young man, you don’t understand yet what this stock market collapse means. But next year you will understand it.”

The jury is still out on how big the current financial firestorm will become. Is it a prelude to a deep recession? Is it the onslaught of an actual depression? With the unpredictable swings in the stock market, some people think that a recovery may already be starting.

I don’t have a crystal ball, even though I anticipated this crisis in various blog posts . On March 8, 2007, I wrote:

“Sooner or later, we will see fierce worldwide economic storms that make the Indonesian Tsunami and Hurricane Katrina seem like small local incidents. At some point in the coming years or decades, stock markets will likely plunge around the world in dismaying amounts. Potentially we could see 20%, 40% or even 60% of equity values wiped out in a very short time.”

I became increasingly apprehensive that soaring market exuberance would give way to severe financial disintegration. Opinions vary whether this was an inevitable long cycle wave as opposed to just poor management by government combined with new heights of corporate greed, or perhaps both.

It started out seemingly as an American crisis, but the infection is now truly global. The 35% drop in American stock prices is not as severe as the plunge in Europe and Asia. Foreign currencies have taken a battering not seen in 70 years. We are beyond doubt in global financial chaos.

Global commodity markets have participated in this pandemonium. After a market run-up larger than any seen in 50 years, we are now seeing a colossal commodity slump. Energy, metals, agricultural products, building and industrial supplies are now in massive oversupply.

What started in the financial sector has broadened quickly to most other industries, particularly automotive. Early indicators show consumers are dramatically curtailing purchases of nonessentials.

We are in a tailspin of historic proportions which cannot be sorted out with a few global meetings of world leaders. Regrettably, Humpty Dumpty cannot be put back together again by “all the king’s horses and all the king’s men”.

Hopefully, we will elect President Obama, not President McCain. But even Obama will not be able to fix this mess any time soon. Perhaps Joe Biden was politically naïve in acknowledging an inevitable crisis of confidence – but I for one agree with every word he said. People like me who supported Obama from the beginning will have our faith severely tested. Franklin D. Roosevelt was perhaps the greatest President of the 20^th Century, but he was unable to fully fix the economy in the 1930’s, even though anyone else would have surely done worse. And like Roosevelt, Obama is bringing hope and vision when these are in short supply.

Governments around the world need to provide emergency relief – to their financial institutions, to major industries, and to their poorest citizens. But the well of government resources is not infinite. Essentially, government can only provide credit or subsidy, whether to home owners or to businesses and financial institutions. These require government borrowing, which will ultimately be offset by either increased taxes, or by resurgent inflation; neither is desirable.

There is no magic cure for a situation that was built up by many years of bad decisions by most of us. Consumers took on too much debt to finance homes and cars. Companies paid extravagant bonuses for very short term growth, which should have been retained as equity for future development. Governments opened the monetary and fiscal floodgates in foolish spending that did not address the most important needs like healthcare, energy conservation, and industrial restructuring.

So now, many people are on the ropes. Seniors about to retire have lost up to half of their retirement funds. More and more people are losing jobs, whether white collar or blue collar, so they will be unable to service their debt loads.

Digging ourselves out of this deep crater will require our combined efforts at every level: by individuals, families, companies, schools, and governments.

I wish I knew how much longer the stock market gyrations will last; perhaps another few weeks or for several more months? But I expect that in the aftermath of the financial storm, the needed economic restructuring and full recovery will take quite a long while.

What Lies Ahead: Recession or Depression?

There is an old aphorism that when your friend loses their job, it is a Recession but when you lose your job, it is a Depression.

In fact, the term “Depression” has almost gone out of use now, except for referring to a psychological state, or, in historical reference to the “Great Depression” of the 1930’s.

Prior to 1929, there were a number of “depressions”, but since the Great Depression, we don’t even use this “D” word anymore. In fact our governments and economists have mostly avoided the word “recession” as well. However, now everyone concedes that we are experiencing a full-blown global recession, at minimum.

But might we be plunging into something worse than a recession?

Since the 1930’s governments have used three methods to contain economic downturns:

· Fiscal stimulus based on the theory developed by John Maynard Keynes, a British aristocrat-economist who advocated major government intervention to manage recessions and depressions. He recommended tax cuts and/or more deficit spending to give consumers the ability to spend and thus to restore a general sense of confidence in the economy.

· Monetary stimulus which also was strongly advocated by Lord Keynes, but later considerably refined by University of Chicago economist Milton Friedman, who greatly influenced the development of Macroeconomics. Milton Friedman argued that monetary growth needs to carefully pace productivity growth and consumer demand, or else inflation becomes rampant, since excessive expansion of the money supply is inherently inflationary. His theories enabled developing world countries suffering from hyperinflation to stabilize their currency and to achieve balanced growth. Now Friedman’s officially enshrined concepts guide the European Central Bank in setting their monetary targets.

· Managing consumer and market psychology. This is the favourite technique of all modern governments. I would love to attribute this populace control method to Machiavelli, but there is considerable evidence that spin control was already well understood thousands of years ago by Chinese and Roman emperors.

If I were an academic, I would love to write a book on the thesis that American governments since the 1980’s have been trying to stamp out recessions permanently, but regrettably without success.

Instead, they have created an unhealthy economy where excessive monetary and fiscal stimulus produced unnaturally high growth of the housing and stock markets. This paved the way for the current global financial meltdown. (This ill advised policy was more fully described in my blogs last January and February.)

We are now likely plunging into a global depression. Time will tell if it will become a great depression on the scale of the 1930’s, rather than like the more ordinary-sized depressions of the 19^th Century.

From my experience as a banker and CFO, I doubt that the global capital markets and financial institutions can be fully repaired in less than three to five years. Meanwhile, companies will have little access to either credit or to new capital. Industrial production will soon suffer drastically, as is already evident with automobile sales declining for lack of credit.

This crisis has now become much, much more than a “subprime mortgage” problem, although that may have been the trigger. Banks are starting to fail worldwide and central banks are desperately offering billions in fresh credit (printing money) to stave off a complete financial shutdown. So fasten your seat belts. This may be the mother of all bumpy rides.

Far too little has being written about this impending depression in the mainstream press, but I suggest reading an article published October 5, 2008 by Tony Jackson, in the Financial Times of London “Parallels with 1929 highlight need for radical thinking” (http://www.ft.com/)

But don’t panic. Our ancestors lived through worse crises successfully many times. We currently enjoy a standard of living unparalleled in world history. If necessary, many of us could cut our expenditures by a quarter, which is probably what we will need to do for several years. Communities and families need to work together to alleviate suffering for those hit the hardest.

We must find ways to restructure our economy on a more reasonable basis. The recessions that were avoided during the past few decades by excessive government intervention would have made industrial and financial restructuring more gradual. However, now we need to do it aggressively, depending on massive government guarantees. Our challenge is to put our financial and business structures back together right.

On Money and Wealth

In this time of economic challenge it is worthwhile to reflect on the difference between money and wealth.

Many people have been shocked by the financial and housing crisis; some of us may have lost part of our net worth (or retirement savings) measured in money. But we may not necessarily be losing much of our true wealth.

In working with millions of dollars during my financial career, I have been astonished that people rarely think seriously about what money truly is, even though they work so hard to get it.

Money simply measures how much we owe to others and/or how much other people owe us in terms of future goods and services.

If you study money in ancient times, you will find that started out being any commodity with which you could barter – such as salt, or grain or gold.

Later, kings began to mint coins made of gold, silver and other metals, which they used to standardize the values in trade transactions.

In our modern era, we have abandoned the “Gold Standard”. Governments now print money as they believe it is needed for their economy. Money is created at central banks, like the US Federal Reserve Bank, or the Bank of England.

In essence, money has evolved to becoming a series of accounting entries between central banks, commercial banks, corporations and individuals, which are utilized for the expansion of credit.

Regrettably, with this new flexibility to create money, governments have created money too quickly, which is why gold has risen dramatically in price.

Monetary expansion originally brought us rapidly rising stock markets and much higher prices for houses, but now we are discovering that our savings are being devalued by increasing inflation.

Furthermore, the world monetary system has become destabilized, which is why global stock markets have dropped so much in 2008.

What does all this mean to you or me?

Money as a scorecard is neither stable nor entirely accurate. Despite having lots of money, we may not feel rich. We might even suffer from anxiety or depression.

Wealth, on the other hand, is defined as having abundance or plenty. (An example which illustrates the meaning: “She brings a wealth of experience to the project”).

Wealth includes having plenty of both material and non-material resources. To be wealthy, is to have plenty of what you truly need.

Many of the greatest things in life cost us little, such as music, books, walking in beautiful places, conversations with friends, etc.

Wealth includes having a healthy body and mind together with emotional stability.

Wealth consists especially in having strong relationships: in marriage, family, community, and at work. These relationships are vital. No matter how rich we may be in money, without these we are poor.

Once while traveling on a corporate jet, I was struck by the realization that if I should lose my high-paying job and all my net worth, it would not be so tragic, if I still had my wife and children. But if I should lose all my family and my friends, I would be heart-broken. That is my real bottom line.

When I made some money through taking a company public, I was glad about my good fortune. But it did not make me noticeably happier than I had been in previous years, which I found surprising.

I have watched people accumulate large sums of money, but I have rarely seen it bring happiness. Some of the richest people that I know are sad and lonely.

Does this mean that money doesn’t matter? Of course not! All of us need money every day, like food and water.

Beyond a reasonable amount to meet our basic needs, having lots of money doesn’t usually bring great happiness. However, if we use it to benefit those around us, it can help to improve everyone’s wealth. Philanthropy is the only way of gaining true satisfaction from a big bank account.

We can enjoy wealth in both good and in bad economic times. Our monetary net worth will always fluctuate, sometimes wildly. But our true wealth will remain stable if we are working towards the right objectives.

Money is just a means to an end, not an ultimate goal in itself. Having this perspective is immensely comforting when times get tough.