white paper letter sent to Bernie Sanders (US House Rep-VT)
a college roommate used to work with Sanders in Burlington VT
my friend has passed the following memo to Sanders
who will use it during Humphrey Hawkins testimony on Tuesday
hey, I may get the US Congress reading Gold-Eagle !!!
/ jim
To: Bernie Sanders
From: Jim Willie CB
Cc: Bruce Seifer
Subject: Humphrey-Hawkins Testimony date: 2/6/2004
Dear Mr Sanders :
During my college years, I was a friend of Bruce Sxxx. We have kept in touch for 30 years. I have great respect for him as a person and a business advisor. He has invited me to provide you with some defensible arguments and facts which might be useful to you. For that opportunity, I am very grateful. I believe Chairman Greenspan must be forcefully confronted for his profligate and totally irresponsible monetary policy since 1995. This white paper provides several focused questions to deliver to the Chairman during the upcoming Humphrey-Hawkins testimony. Evidence and some data accompany each posed question.
A. How can you account for broad price inflation evidence, which contradicts your claim?
B. Are you aware of the gross exaggeration of IT spending, in measuring GDP growth?
C. Are you aware that credit has grown over 6 times faster than the GDP, evidence of futility?
(is your monetary policy building the new powerhouse China?)
D. Why do you no longer talk about serious headwinds of debt burdens?
Why do you ignore three important factors which render an economic recovery unlikely?
(the declining USDollar currency, trade gap, and decline in manufacturing)
E. Your “Reflation Initiative” has caused production costs to rise, hurting business profits.
Do you see that monetary policy has resulted in acceleration of job outsourcing to Asia?
Let me preface my comments, before justifying and framing each question. The period from 1995 to 1996 represented a time where a tragic change in Fed policy took place. During the many previous years, monetary expansion was controlled in such a way that it kept pace, never to exceed, the economic growth as measured by the GDP. Of course, monetary stimulus occurred during quarters when recession had to be overcome. However, during economic expansions, money supply growth used to track GDP. In the fateful months following the “Irrational Exuberance” speech, Greenspan made a tragic decision, one which I believe was motivated to take him into public limelight, setting him up as a folk hero, and eventually forcing the Fed to become permanently accommodative to the stock market. They must now sustain bubbles.
In the last seven years, money supply has been permitted to grow almost unabated. In Greenspan’s new controlling policy, as long as the Consumer Price Index remains subdued, all manner of monetary expansion is released upon our economy, its financial markets, credit extension, and export of debt securities. The CPI remained quiescent for the many years that the USDollar grew in strength, and the asset bubbles developed in the United States. Nowhere does the CPI respond to the S&P, Treasury Bonds, or housing prices. Clearly, the CPI remained low as foreign imports came down persistently in price, even as misguided foreign investment capital inundated our economy. A solid argument can be made that Asian trade surpluses, combined with fractional banking, fomented an Asian Meltdown which had its roots in Thailand in 1997. I doubt the good Chairman sees it that way. By 2000, our exported monetary inflation began to come home to roost, finally creating enormous bubbles on the home front.
I have personally written in several articles about Greenspan and his errant genius, under the name of ”Jim Willie CB.” No, “CB” does not stand for central banker !!! I use a pseudonym, to protect my identity. If in 2001 and 2002 we witnessed the Soft Landing he promised in 1999, then I shudder to see the outcome of his reflation efforts currently underway. The man overshoots with monetary policy, only to hit left and right guard rails with equal propensity. He improperly encouraged stock investments leading up to the 2000 stock bust. He justified lofty stock valuations. He cited the naïve view that improved efficiency in information flow enabled reduced risk and higher prices for shares. A horrible Nasdaq crash might have taught him to question his fallacious, childlike, misled view of technology. One can readily liken the man to the Pied Piper, as hundreds of thousands of citizens were the last stock buyers in 401k accounts and mutual funds.
A reasonable man would look closely at the threat to labor markets from outsourcing by means of powerful technology, as well as to profit margins from efficient pricing via internet exposure and supply chain software. He was the principal cheerleader to Chapter One of the New Economy myth. The profit depression during the last decade should have dispelled his beliefs. The Bureau of Economic Analysis and Bureau of Labor Statistics revised productivity statistics, to rewrite and downgrade that miracle. The period 1995-2001 held productivity to grow on revised basis at a slightly lower rate than the preceding decade !!!
I invite you to examine an intriguing article by UPI Business & Economics Editor Martin Hutchinson, titled “The Bear’s Lair: Greenspan’s Ponzi Scheme” and dated 11/24/2003. The essential requirements of a Ponzi Scheme are outlined. A recent article of mine discussed the scheme in some detail, as it applies to our entire national economy, sadly gone out of control. While some might regard the comparison as ludicrous, I defy anyone to poke holes.
I include an excerpt below. See my “Broken Cycle: Spinning Gears” at
gold-agle.com
Martin Hutchinson defines the specific Ponzi Scheme criteria, and builds an argument for our economy and financial markets satisfying those requirements. The resolution of this trap will be higher interest rates, economic damage, and financial crises, probably later than sooner. The key ingredients to the pyramid scheme are:
- magic mushroom to deceive the public participants
(see the New Economy myth, and technology miracle façade)
- external sources of capital infusions
(see extreme capital dependence upon Asian supply)
- cheerleaders to promote the fraud
(see Greenspan and Fed Governors such as Bernanke, Meyers, Lindsay)
- deception within actual fundamental statistics
(see GDP, productivity, CPI, jobless, and questionable confidence measures)
Now Greenspan has taken the mantle of chief promoter of Chapter Two of the same New Economy myth, wherein the entire US Economy has become dependent not on real economy production, but on new “wealth production” coming from financial speculation in the real estate housing market and the stock & bond markets. Further rationalization is offered by the Chairman to account for the twin deficits (extreme trade gap & massive federal deficit) and our dependence on their foreign funding. He boasts of advanced flexibility in world capital flows, whose imbalances involve magnitudes never been seen before in modern history. The huge size in the imbalance invites a spontaneous natural reaction, typically foreign flight. Up to now, extraordinary complacency has been the mainstay, which I believe to be too generous in its assumptions toward stable continuity.
Historically, central bankers used to dampen political enthusiasm toward fiscal irresponsibility, to raise interest rates when speculation emerged as too prevalent, and to facilitate remedy to foreign capital dependence upon financed trade gaps. Central bankers have recently taken on the heretical role of apologists for speculation and chief agents for abortive intervention.
A. Mr Chairman, how can you account for the following items of evidence, which contradict
any claim that price inflation is tame?
Please do not cite the narrow and misleading CPI, which ignores insurance, tuition,
professional services, usage fees, taxes, and assets such as housing and bonds.
On its face, such claim is erroneous at best, and recklessly irresponsible at worst. A declining USDollar has led to numerous material price increases, as sources come from abroad. Monetary stimulus has led to other price increases, from speculation and housing demand. Chinese demand adds to pressures across the board. Take the following examples:
- copper is up 50% in price in the last 12 months
- silver is up 35% in price in the last 12 months
- soybeans are up 50% in price in the last 12 months
- certain steel products are up 15% in price over the last several months
- residential housing is up 30% in price in numerous cities since 2000
- home building standboard has gone from $150 per 1000BF last year, to $500 today
- ocean shipping rates are up 400% since last summer
- unfinished import prices are up 20% over the last two years
- finished import prices are up 6% (annualized) since the spring
B. Mr Chairman, are you aware of the exaggerated effects of hedonic adjustments to IT
spending, chain-weighting, and annualization when measuring GDP growth?
Gross Domestic Product is the central measure of economic growth.
Hedonic adjustments of information technology spending have been used to distort and elevate GDP growth on a systemic basis. Remove the hedonic lift from faster computer processors, faster storage access, and faster internet bandwidth to reveal both productivity and GDP growth at very tame levels. The Dept of Commerce has ordered an end to this deceptive practice, which you have never spoken against. For example, 2003Q3 was hailed as the launch of robust growth. Year-over-year, Q3 growth was about 3.5%, far below anything seen in early quarters of verifiable recovery. Official “annualized” GDP growth is claimed to be 8.2% for Q3, replete with fraudulent lifts from the three factors I mentioned. Without annualization, the 8.2% figure would be around 2.1% for sequential growth, which is unimpressive. The GDP deflator, although superior to the broken CPI index, still understates actual inflation.
To counter claims of strong growth, a closer look at treatment of information technology business activity in Q3 is highly revealing. Chain-weighted figures show $93.1 billion in IT spending, of which only $11.5 billion occurred in real terms. The remaining $81.6 billion, over 87% of the ledger item in the GDP calculation, incredibly was attributed to adjustment for speed improvements, a treatment called “hedonic adjustment.” The practice is highly deceptive, totally fallacious, and not based in any reality. Economies of scale and Moore’s Law of R&D are the phenomena which motivate such deceptive accounting. That extra eighty billion in dollars flows nowhere, is available for business expansion nowhere, can be devoted to worker payrolls or benefits nowhere, and appears nowhere on any financial balance sheet. It is pure fiction.
C. Mr Chairman, are you aware that extended credit in recent years has grown over 6 times
faster than economic growth, evidence of futility?
Are you not merely building the next Asian powerhouse, China, with monetary policy?
One might label this debt-to-growth ratio as a “Monetary Futility Index,” indicative of failed economic internal dynamics. The current proportion of our GDP devoted to debt service now stands at 78%, indicative of spinning gears. A flood of money entered the economy to ward off the combined ill effects of the stock bust and the World Trade Center attack. We see home mortgages applications being processed successfully with an average 7% down payment. We see automobile sales being financed with not only 0% loans, but also 0% down payments and often cashback incentives. We now see furniture sales and home electronic gear such as plasma televisions routinely enabled by 0% financing over six month periods.
What I called this Futility Index was in the 4.0 range during the year 1999. It was under 3.0 during the 1997 year. Clearly, greater and greater credit and new money are required to generate a single dollar in GDP activity. Debt is suffocating our entire economy, yet Keynesians defend our debt-based system of commerce and debt-backed USDollar currency. Your accommodative policy has made possible a huge increase in US household credit growth. The Chinese trade surplus growth rate has for some time equaled the rate of increase in domestic consumer debt. Your policy feeds China.
D. Mr Chairman, why do you no longer talk about serious headwinds of debt burdens at the
federal, corporate, and household levels?
And why, as a student of history, do you ignore three important factors which render an
economic recovery as highly unlikely?
I refer to the declining USDollar currency, the trade gap, and the decline in manufacturing?
Debt levels are much greater now than in 1993, when you first used the term “serious headwinds.” Levels are greater, even relative to a larger economy. Since 2000, consumption has grown almost 40%, while industrial output has actually declined a very small amount during that time. Debt has filled the gap, and has grown an order of magnitude faster than the economy. Consumer debt has approximately doubled since 1990. Three important measures should be cited, which either render a recovery as nearly impossible, or contradict its imminent likelihood from an historical perspective.
The concept of a US Economic recovery during a significant USDollar decline has no precedent. The decline ushers in higher commodity costs, higher energy costs, higher imported product costs, and reduced foreign direct investment. A college student should know better.
The concept of a US Economic recovery with 5% trade gap is utterly ridiculous. From a historical perspective, we should anticipate a recession, coupled with a trade-weighted minimum of a 25% USDollar correction. For reference, see your own Federal Reserve research reports. Only a steep recession would reduce final demand and cull current debt levels. In our case, pentup demand is nonexistent, and debts have worsened. We have not yet completed half such a US$ correction, whose estimated depth is based on much more favorable past numbers than exist today.
The unaddressed consequences of a burgeoning trade gap are the lack of domestic jobs, and lack of siphoned profit margins to direct toward capital investment. The trade gap helps to explain job growth absence and poor capital investment. A close look at distress to wages amplifies the point. Despite the widely held belief that new jobs are on the way, according to a report by the Bureau of Labor Statistics released in the last week of January, the average salary a US worker has dropped from $44,570 to $35,410 since 2001. This is clear wage deflation.
Manufacturing production typically rebounds the most quickly during recoveries. Output is now registered at 5% below the peak level in 2000. Worse still, the total number of factory jobs lost since the start of the recession in early 2001 is 2.4 million. Last year alone, the AFL-CIO reports that half a million union jobs disappeared. The unemployed change their spending patterns. Terminated jobless benefits will hurt the economy further.
E. Mr Chairman, your “reflation initiative” has caused production costs to rise, thus adding
pressure on US business profits. To what extent do you believe your policy has
resulted in American businesses to respond by accelerating job outsourcing to Asia?
Again, turn to the CRB index rather than the PPI, which is skewed by low used car prices.
A national vulnerability to rising commodity costs is an unfortunate consequence of a strong dollar over the last decade, and depleted resources within our borders. Commodity prices are registering new highs across a long list of indexed materials. Metals, energy, and food dispute shallow claims of price stability. Check prices for gold, silver, copper, crude oil, soybeans, all at new multi-year highs. As well, corn, wheat, the soy complex, cotton, coffee, and lumber are at strong and rising price levels. Even intermediate goods, such as steel and scrap materials are rising in cost. Pricing power is not evident, thus a profit squeeze in underway.
The Japanese yen recorded a strong 12% rise since autumn. Some Asian imported products have increased in price. Not to be overlooked, energy prices are now higher than before the Iraqi War was instigated. The resulting pressure on production costs is enormous, just when pricing pressure is absent. Together, Chinese competition among consumer goods, and oversupplied liquidation item groups combine to force US firms to fight a constant battle. A new trend of shrinking profit margins in the non-financial community is emerging. Their response has been to accelerate the job outsourcing to Asia, primarily to India and China.
The most recent threatening evidence is the outsourcing of service jobs to India, which come increasingly from higher rungs on the skill ladder. We have witnessed major shifts and changes, which expose US vulnerability. First, offshore outsource platforms are maturing. Their technical abilities, language skills, and sophisticated equipment have caught up to our own. Second, computer system integration and connectivity now take advantage of the internet in a potent manner. The products of the heralded tech revolution are now being used as the very vehicles to outsource services primarily to India, China, Hong Kong, but to other locations as well. Third, cost containment has motivated a new phase which has led US firms to seek outsourced alternatives. New imperatives of cost control serve as the catalyst, which bring global labor arbitrage to life. High salaried service jobs, once protected, are the recent casualties in an escalating movement to relocate labor to Asia. The process is accelerating. The heretofore sacrosanct service sector is now more vulnerable than ever. Certain research reports such as one from McKinsey estimate a 10-fold increase in lost jobs by the end of this decade.
The Fallacy of Decomposition states that what is beneficial for individual firms might be disastrous for the aggregate, if practiced widely or universally. The pursuit of low-cost solutions, the dispatch of mfg operations to Asia for over 20 years, these are such disastrous practices. Without a national remedial policy, firms are forced to fend for themselves, even if the aggregate is severely damaged. Outsourcing and cost reduction have resulted in colossal trade imbalances, foreign dependence, reduced income, horrible debt, and a great weakening of our nation. Rather than progress, this is economic dismantlement.
Rising production costs may be the most significant fruit of your reflation policy, as viewed within the real economy. Not only is capital in the form of US Treasurys exported to Asia, but jobs are exported as well. The debt obligation groundswell has become a steady 1% of US GDP, going to Asian credit masters per year.
Conclusion from a leading website :
Rather than referencing GDP, put it in more human terms. I would say, between Nov 2001 and Nov 2003 and directly as a result of Greenspan's easy money policies, the American people borrowed $1.424 trillion dollars in new household mortgages and consumer debt. During the same period, wages and salaries were up only $193 billion. If we assume that the annual interest cost on that new $1.424 T is 6.25%, or $89 billion, well Mr. Greenspan, it's pretty hard to convince me that your policies have done anything at all, other than bury people in so deep, they will never crawl out.
Conclusion Overall :
I submit, Mr Chairman, that creation then bust of bubbles, the massive increase in debt at all locations in the economy, and the absence of jobs, these demonstrate the utter failure in your legacy. We have a sad state of affairs with the complete debasement of our entire monetary system, which I fully expect will erupt into a crisis within the next 2-3 years. I notice you speak publicly about a USDollar crisis, and Bernanke speaks of price inflation. Your topics of choice speak louder than your denials.
Only Asia has benefited from this so-called US economic expansion. Before long, however, China will be coerced into either slowing their credit and mfg capacity growth, or diverting capital export for domestic usage by their expanding middle class. I regard that to be the tipping point, certain to challenge our financial system in the current year. The next battle will be waged in the US Treasury Bond market.
Chairman Greenspan and the Federal Reserve do not act as benefactor to our system of commerce and trade. They represent great threats to its equilibrium and effectiveness. Proof positive are incessant official interventions, which they implicitly coerce foreign central banks to join. Current disequilibrium is so vast, that intervention is now a permanent fixture. The Fed has fought a ghost of inflation for years, and produced a deflationary economic environment that might prove difficult to contain. He boasts of overcoming “the effects of the broken bubble” very prematurely in my view. His two new speculative bubbles, bonds and housing, loom over our economy like the Sword of Damocles. |
