A real cliff of incompetence, excuses

As the stakes for our financial future ratchet higher, so do the rhetoric, political posturing and hypocrisy. And still the Federal Reserve and lax regulators escape blame.

By Bill_Fleckenstein Dec 7, 2012 3:01PM

Image: Dollar bills floating over U.S. Capitol © CorbisOK, everyone, buckle up. This is going to be a bumpy ride.


First off, I would like to turn to our eventual funding crisis. Yes, I have been talking about this for some time, and no, it hasn't started yet. But it will. One day the markets will take the printing press away from central bankers by spurning their bonds, and governments needing to get their debt funded will see rates rise dramatically.


Whether it will start here, in Japan or somewhere else I don't know, nor do I know when it will start. But I do know that the catalyst will most likely be the world losing its fear of a deflationary accident.


I decided to bring up the subject, thanks to the most recent letter from Hayman Capital -- that's the money-management firm run by Kyle Bass, who made millions betting against subprime loans. In it, he talked about the funding crisis, and I wanted to share his thoughts because they dovetail quite well with my own.


This Bass is not biting

In the letter, Bass summed up the financial predicament the world is in by saying, "We have a hard time understanding how the current situation ends any way other than a massive loss of wealth and purchasing power through default, inflation, or both."


He next quotes John Maynard Keynes on the subject of money printing: "'Thus, we might aim in practice at an increase in capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus.'" To that, Bass responds, "This is nothing more than a chilling prescription for the destruction of wealth through the dilution of capital by monetary authorities."


He continues, "It is both our primary fear and unfortunately our prediction that the quixotic path of spending and printing will continue ad infinitum until real cost-push inflation manifests itself. . . .Given the enormity of the existing government debt, it will not be possible to control the very inflation that the market is currently hoping for. As each 100 basis points in cost of capital costs the U.S. government over $150 billion, the U.S. simply cannot afford another (former Federal Reserve Chairman) Paul Volcker to raise rates and contain inflation once it begins . . .


"Our belief is that markets will eventually take these matters out of the hands of central bankers. These events will happen with such rapidity that policy makers won't be able to react fast enough. . . . A handful of investors and asset managers have recently discussed an emerging school of thought, which postulates that countries, as the sole manufacturers of their currency, can never become insolvent, and in this sense, governments are not dependent on credit markets to remain fiscally operational. It is precisely this line of thinking which will ultimately lead the sheep to slaughter."


Where there's a 'will,' there may not be a 'soon'

One thing I would like to point out is that while events will happen fast once they begin, this does not mean they will begin anytime soon. Look at what has transpired in Greece: It took quite some time to spin out of control, but once that occurred, events moved quickly. That will also be the case when the markets take the printing press away from the central bankers -- which does not mean that will happen shortly, though it could.


Bass also made an interesting point about the moves to the left by our government (ditto Europe), though he didn't quite set it up that way. Let me emphasize that I detest politics (and politicians), but from time to time it impacts economics, and thus becomes part of the financial equation and consequently must be analyzed. From that standpoint, I believe the country is in the process of making a strong economic move further to the left, and as such, is part of how I view the landscape.


Bass writes, "The current modus operandi by central banks and sovereign governments threatens to take us down Friedrich von Hayek's 'Road to Serfdom.' Published in 1944, its message, that all forms of socialism and economic planning lead inescapably to tyranny, might prove to have been prescient." (Research the book on Bing.)


"The genius in the book was the argument that serfdom would not be brought about by evil men like Stalin and Hitler, but by the cumulative effect of the wishes and actions of good men and women (emphasis added), each of whose interventions could be easily justified by immediate needs. We advocate social liberalism, but we also need to get there through fiscal responsibility (which is exactly how I feel). Pushing for inflation at this moment in time will wreak havoc on those countries whose cumulative debt stock represents multiples of central government tax revenue."


Unfortunately, we are pursuing the wrong policies, both fiscally and monetarily, which is a recipe for terrible stagflation, which is where I believe we are headed. That won't be good for financial assets, though certain stocks could do OK. But it is exactly that sort of environment that gold provides protection against.


Two-faced tax talk pays dividends

Turning now to the policy side, I have been particularly irritated lately by what I view as the disingenuousness of certain people regarding tax policy. To cite one example, last week the op-ed section of the Wall Street Journal noted Costco's (COST) board of directors announced that it would pay a special dividend in December (before higher tax rates kick in), and summed up the issue as follows:


"Here we have people at the very top of the top 1% who preach about tax fairness voting to write themselves a huge dividend check to avoid the Obama tax increase they claim it is a public service to impose on middle-class Americans who work for 30 years and finally make $250,000 for a brief window in time. If they had any shame, they'd send their entire windfall to the Treasury."


(On a related note, as long as we're talking about the supposed rich in America, I think that $250,000 of income is a non-sequitur. Granted people who make that much are doing pretty well, thank you, but that does not make them rich, especially if they live in an expensive city with bad public schools.)


Speaking of tax BRKs

Coincidentally, in a Nov. 30  Forbes article by Daniel Schuchman, the author does a little sleuthing to illuminate just how, shall we say, "evolved" Warren Buffett's thinking has become on taxes. Schuchman analyzes the recent op-ed Buffett wrote for The New York Times in which he derisively noted that, "Never did anyone mention taxes as a reason to forgo an investment opportunity," and "Only in Grover Norquist's imagination" do people modify their investment plans based on tax decisions.


However, that is certainly not what he thought when he was building his net worth. In a 1963 letter to his investment partners he wrote, "My net worth is the market value of holdings less the tax payable upon sale. The liability is just as real as the asset. . . . Investment decisions should be made based on the most probable compounding of after-tax net worth with minimum risk" (emphasis added).


It strikes me as a bit unfair that, now that he has all his money, he is less in favor of other folks having a chance to make some for themselves. In that same 1963 letter, he also wrote, "I am an outspoken advocate of paying large amounts of income taxes -- at low rates." Obviously, his philosophy has changed.


'Do not imagine, comrades, that leadership is a pleasure'

The point I am trying to make is about inconsistency of telling folks to do one thing while doing something else yourself. It reminds me of my favorite line in George Orwell's "Animal Farm" on the propensity of certain people in power to think that their views are so good for society as a whole (even if their policies are detrimental to many) that they themselves should be exempt from them, i.e., "Some animals are more equal than others."


This is not to say there has not been a huge disparity in wealth creation, as the folks that are rich have gained to the disadvantage of the middle class and the poor. That is all true, but it wasn't as though people who made lots of money created the conditions to prosper at the expense of others. That was caused by the gross policy errors of the Federal Reserve.


Granted, many banksters in the world of Wall Street effectively broke laws in what they got away with running their financial institutions (and should have gone to jail). But that is no reason to set up a policy that might disadvantage the country as a whole. There is no point in punishing those with money or trying to earn money just because the Fed was incompetent and eviscerated the middle class.


To be clear, this rant is not about higher taxes, but rather about their politicization (which borders on class warfare). The maddening part of all the tax-rate posturing is that higher taxes by themselves are not going to solve the financial mess the U.S. finds itself in. They could be part of a solid, comprehensive plan, but that is not what any of this is about.


The public at large has been hurt not by the current tax regime but by a grossly incompetent Fed and government regulators who didn't do their jobs. While folks with a lot of money can afford to pay more (and will), it would certainly serve the country better if we could intelligently discuss the real roots of the problems and stop all the demagoguery.


Dec 9, 2012 11:49PM
YAY! and now the USDA just announced 50 million Ameikans are under SNAP. In August and September, over three times as many foodstamp recipients were added to the economy as jobs.  The best part was this "data" was delayed by the administration through the election...gee, I wonder why?  Chicago politics in the White House and you voted him there.  This country deserves what it gets at this point now.  "FORWARD"...yeah, my rearend.
Dec 9, 2012 10:28PM
 Mr Feckstein has things right.  Printing money will not and has never worked as others have alreadt noted!  However we do need to address the real problem in the world today.

 That problem worldwide is the rich not accepting that they have a responsibility to support the people who put them there and not "rape and pillage" as they are currently doing.

 It's a lose lose scenario if they continue on this way as the very people who make their companies profitable will soon no longer have the means to do so unless they realize that they too need a middle class to buy their wares!

Dec 9, 2012 10:21PM
Bill, I have a question about the debt / inflation relationship.  The debt that a person or government has accumulated today will be easier to pay off in the future as inflation makes that debt less, right?  So, the government will benefit the most from inflation.  That is why they have been printing so much money.  If a person is debt free though, inflation just lowers your buying power.  
Dec 9, 2012 9:19PM
Not enough wellness enrichment support of traits for party rise put`s a starve on the economy. Crew crash while discriminating and worry to capital the expenditure collar of principle are a self incriminating threshold of these [census] capital realty realities. The fore noted are also the federal fallacy that is the couture of the error of these capital realty realities.
Dec 9, 2012 8:39PM

Has everyone heard how the Grover Norquist Pledge signers have been able to communicate to each other? It's a device system similar to Twitter called the Norquist Initiative Twitter or Nit-Witter because Twitter was already trademarked.


Since the day the Fiscal Cliff articles started to appear via media to-date, Congressional pariah have spent MILLIONS wasting our time. Very shortly, we will reach a Point of No Return and head over. It should occur to all that there were MANY BETTER THINGs to do with those millions, so we will want Congress to repay it.

Dec 9, 2012 7:00PM
What is the matter with you legal American citizens, first they flood the country full of undocumented aliens which take our jobs and SSI, and now we have to hear how lazy we are and unappreciative of the work force, then they lawnder everything, with back door banking and under the table stocks, depending on where you are located for free cars, trucks,homes, air conditioners, heaters, etc. and now we have a fiscal clift and more coming.  I say all of you who receive free"gifts" from others stock portfolios, including mine, return the gifts and poof maybe the fiscal cflit will go with it!  And that goes for all of those free gray, white and red trucks and cars in Summerfield,  Florida, all for OJ Simpson who feels fleeced. Shall we thank Bill at Trustco Bank, Steve Parker and JTO for being loyal to acquitted  OJ Simpson.  How to fleece a PGA pro widow, with a SIM S CARD STARRING Sam sung.

Too many of you have been sticking your head in the sand, hoping this will all go away, keep dreaming!  Until you rectify the above, halt of free stuff, the  fiscal clift and worst hangs over your heads!

Wa ke up people if your neighbor is receiving all sorts of free stuff and you get squat, you still are going to have to deal with the fiscal clift and more, I say smarten up!
Dec 9, 2012 5:23PM
"If you dig a hole so deep that you cannot get out of........ Stop digging."
Apparently, Republicans dug deep enough to reach China, negotiate global drop ship enterprises, crawled back through and started whining about wages while giving each other raises. What we really need to do is plug the hole up while they are in it.
Dec 9, 2012 5:22PM
"I believe that Rick Santelli - who is awesome on CNBC, check him out sometime - believes we should return to the gold standard."
Not. First, you don't resort to a Gold Standard after foreign countries have spent what we have given them through "globalization" on gold. Second, a metals standard isn't going to do much more our debt. IF we resorted to an Erg Index (erg = work hour), then the value of our currency would be based on people working and generating revenue. It stops the wealthy from hoarding (counter-climatic) and affords precise pay for effort. Sorry, but the paper pusher crowd would get the least because they have no legitimate value. Craft or Skill would lead us out of debt and restore currency integrity.
Dec 9, 2012 4:22PM








Dec 9, 2012 3:47PM

I bet that the odds are pretty good that we will go off that there cliff. The politicians get what they want, government without really having to govern. The people get completely screwed, again. Another recession, more out-sourcing, more in-sourcing. Who cares? No big deal. Because our irresponsible and feckless government enjoys complete job security, with a guaranteed pension and health care -- all paid for by the biggest bunch of stooges that ever saw the light of day: the American People. This is all our fault. We did this to ourselves, even if  the democrats and republicans point the fingers at each other. Get ready.

Dec 9, 2012 3:29PM

Keynesian economic theory is a fallacy, because Keynes didn't say anything about it only working in an environment of open criminality.


Let's face it. As long as the people who were responsible for preventing, causing, creating, and reporting on (yes, you Bill Flecketein), for the worst financial collapse since the Great Depression, as long as these criminal shyster politicians and banksters remain unprosecuted and unjailed then nothing has changed. The game remains the same.


Except that this game ends very, very, very badly.

Dec 9, 2012 3:20PM
Are there no prisons, are there no soup kitchens, are there no workhouses, for deadbeat countries like Greece?
Dec 9, 2012 3:18PM
Buck, Keynesian economics is simply a mathematical equation that creates an equilibrium between Savings, Interest rates, Employment, Inflation and Economic Growth. When used properly the Keynesian system maximizes an economies potential. In 2001 we left these principals behind by leaving interest rates abnormally low during a huge housing boom, resulting in economic collapse in 2008. From 2001 to 2009 America went on a massive spending spree after 4 straight balanced budgets, taking a $237 billion dollar surplus and turning it into a $1.3 trillion dollar deficit. In only 8 short years, bad management and departure from sound Keynesian economics ruined our financial system and now we really have no choice, but to dilute the $5 trillion in spending from 2001 to 2009 by printing dollars and deflating our currency, only revenue increases and spending cuts will cure this illness and it appears the Doctor is on His way, His name is Dr. Cliff.
Dec 9, 2012 3:15PM
Things have not happened at all with Greece. After one more boring year of nothing happening after another Greece is still here, broke, looking for a handout. Things are not happening fast enough at all. Like the insane homeless beggar that everybody is so tired of looking at, when will somebody finally get Greece off the world's street corner? I wouldn't mind if Greece just starved to death and disappeared but clearly that's not happening. When will something finally happen?
Dec 9, 2012 2:54PM
I cant agree more about regulators not doing their jobs, I also believe this is the sole problem with so-called entitlements, if the fraud in social security and medicare, medicade and defense spending were curtailed or at least greatly cut down, it would go a long way to balancing the budget, again, regulators not doing their jobs. And lets not talk about the impossible terms forced on the post office!
Dec 9, 2012 2:33PM
BILL FLECKENSTEIN NAILS IT!!  Not only that, he brings the sound and irrefutable logic of Kyle Bass into the mix.  I can't believe MSN allowed this truth to be published considering the propagandist trash they spew out day after day.
Dec 9, 2012 2:23PM
Revolution, Secession, Regime Change, not very practical and you end up with the same tyranny you fought against. What will revolutionize our government without the blood shed, is simply to stop the influence of special interest groups on our politicians and reformation of campaign finance laws. As long as politicians rely on special interest money to fund their campaigns, Banksters, Wall Street, Ag corporations, Oil Companies and Unions, will corrupt our system of governing. When our politicians are forced to spend half their terms scouring the country for campaign funding and are forced to vote in blocks by Lobbying groups, our Democracy is compromised. Until Lobbyist are outlawed and contributions limited to individuals and the amount capped, the corruption will continue like a juggernaut, self perpetuating. Bribery is a crime, except in Washington ?
Dec 9, 2012 1:57PM

Me thinks Adam Smith is the guy with the better ideas on the Economy.  Keynes, as I re-recall, is more often than not, out in left field on his pump priming and money and banking notions on lending to create more money (in circulation). That is the same as running the printing press.

Dec 9, 2012 1:49PM
A sane voice in the wilderness!  We need more John Maynard Keynes kind of thinking and action.  On the note of earnings and the wealthy, I note many top executives are paid (not earn) huge bonuses for doing their jobs that they are already hugely well paid to do--in the tens of millions of $ per year.  The $10 million to $120 million bonus to such a person is nothing short of robbing the corporate bank that should be used for growth and for paying dividends to stockholders.  No one is worth that kind of money and certainly no one EARNS that amount of money. So on that note, I say Obama is right--anyone paid more than say $24 million a year including bonus needs to pay Social Security Tax on the entire amount and be taxed at 90% on everything over say $ 24 million.  And I lean I to R in politics.
Dec 9, 2012 1:40PM
"Who wants to bailout Detroit?  Not me!"

Detroit can no longer be saved. Pity, it forebodes poorly for all other urban areas nationwide. Sadly, without urban cores, we become fully enslaved to sprawl and all the fossil fuel manipulation we can endure. Who sees thriving self-sustained economically ecologically balanced suburbs thriving now? Detroit was the Motor City. Too bad the motor makers left the city devastated by irresponsible industrial carnage they never paid to fix. It has only been about building a GOP Tower of Babel with the babblers getting the majority of profits while zillions of slaves keep lifting their penthouses up. Come on, America... you are allowing the government to send $60 BILLION to Hurricane Sandy damaged sandbar recovery, but won't buy Detroit some badly needed Police, Fire and Emergency vehicles (that cost much less). You shake your head in disgust but YOU caused it!!! Every state in America thrived on the back of the auto industry and now it complains about unionization but forgets that all those engineering, tier manufacturing and other industries all required a strong automobile industry to survive. Nearly everyone over the age of 50 owes almost 100% of their working years to a strong and vital Detroit in some way or fashion. now YOU condemn it? HOW DARE YOU. I don't condone it's government, nor do I support the state's handling of it. Detroit exists as it does today for only ONE reason... because it concentrated on developing a nation instead of keeping up with it's infrastructure. Go ahead and TRY to refute it... USE FACTS not your guttural racial loser Republican condescending BS you usually spew. Serious stuff... when Detroit goes, America will follow fairly quickly. no nation ever in HISTORY ever survived with only an administrative class and a slave class.
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Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



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