THE COFFIN SHAPED RECOVERY

THE COFFIN SHAPED RECOVERY

While often wrong, Bernanke is right about the recession. It’s almost over. But a depression is about to replace it.

There has been much discussion about this recovery, whether it will be a “U”, “V” or a “W” shaped recovery. The answer is none of the above. It is going to be “C -shaped” recovery, but not as in the letter “C” but as in coffin.

 

 

The Coffin-Shaped Recovery

It would be a miracle if trillions of dollars of debt could be wiped out with one stock market crash and be succeeded by a new bull market driven by another large offering of credit by the Fed.

But such a central bank-engineered miracle today is impossible. Capitalism’s natural cycles derive from central banker’s unnatural infusion of credit into previously free markets. The subsequent distortion causes market demand to expand (which everybody loves) only to be followed by the inevitable contraction—which everybody hates.

Usually, central banks wait until previous levels of excess credit have been absorbed in an economic downturn before embarking on a fresh round of credit creation. This time, however, it is different.

This time, the cumulative buildup of debt over previous cycles where contractions were cut short to minimize economic pain and attendant political consequences is now so large that any contraction is sufficient to bring down the extraordinary backlog of debt built up over previous cycles.

The current contraction is more than sufficient to do so as it is more severe than any downturn since the 1930s; and despite the frantic attempts of central banks to contain the cumulative forces unleashed by previous cycles of credit and debt, the enormous but fragile paper-based economy built by central bankers’ paper money is now collapsing.

To hopefully prevent the collapse from reaching its catastrophic end, central bankers have now intervened far earlier and with far more credit hoping to prevent the day of reckoning, a reckoning soon to be evidenced by an historic deflationary depression that will wipe out all accumulated unpayble debts, albeit at the cost of a functioning world economy.

Such is Ben Bernanke’s considerable task. Despite his outwardly positive demeanor, Bernanke is well aware that his desperate gamble hasn’t worked.

In these times, the last thing you want to be is Ben Bernanke’s sphincter.

(note: Martha declined to produce my relevant cartoon)

KEYNESIAN COPS, FRIEDMAN’S FOLLIES, AND THE FLAWED THEORY BEHIND THE RECOVERY

The current chairman of the US central bank is Ben Bernanke, a self-described student of the Great Depression; but, learning is limited by what is taught and regarding the Great Depression, Bernanke’s teacher unfortunately was Milton Friedman.

The reason why central bankers (and Ben Bernanke in particular) are flooding the global economy with money, i.e. borrowed, printed, or monetized out of thin air with such abandon (who would have thought bankers could act with abandon except, of course, when believing risk is non-existent and they’re betting someone else’s money), is because of Milton Friedman’s theory, to wit that economic contractions can be reversed by sufficient monetary expansion.

Laid bare, Freidman’s theory is another iteration of the Keynesian belief in the power of government intervention, albeit an intervention cloaked in Friedman’s more palatable—at least to those on the right—conservative garb.

Friedman argued that if the Fed had aggressively expanded the money supply in the 1930s, it would have then counteracted deflationary forces and prevented the Great Depression, an argument unfortunately as flawed as another of Friedman’s pet theories, i.e. thatfloating exchange rates would naturally over time bring global trade deficits into balance.

Note: When exchange rates were allowed to float in 1974 as encouraged by Friedman who also encouraged Nixon to abandon the gold standard in 1971, the US had a positive balance of trade. Thirty five years later, the US trade deficit is well over $800 billion and is growing over $20 billion each month (Hey, Milton, how much more time will it take to balance the trade deficit?).

Professor Antal Fekete warned several years ago that Friedman would someday be proved wrong and that we would collectively suffer the consequences; and, that just as during the Great Depression when banks hoarded the government’s cheap money instead of lending it, they would do so again when Friedman’s theory of monetary expansion was tried during another contraction.

Professor Fekete’s warnings have now come true. Today, US bank lending growth has entered negative territory at the same time cash reserves at US banks increased by 1,460 %.

Frank Shostak in Does A Liquidity Trap Pose A Threat, 9/23/09, on mises.org writes:

The latest data for lending in the eurozone the United Kingdom, and the United States display a visible weakening. In the eurozone, the yearly rate of growth of bank lending to the private sector fell to 0.6% this July from 9.3% in July last year. In the United Kingdom, the yearly rate of growth of lending to the private sector fell to 2.2% in July 2009 from 10.1% in July 2008. In the United States, the rate of growth of lending plunged to minus 3.8% in August 2009 from a positive figure of 8.6% in August 2008…At the end of July this year, [however], US banks were sitting on $729 billion of cash against $1.9 billion in July last year.

http://mises.org/story/3697 [bracketed words, mine]

Friedman’s theory is flawed and as suspect as the paper money Friedman and Keynes both promoted. Central banks can print all the money they want but that will not necessarily increase the money supply as central bankers are discovering.

Severe monetary contractions that cause deflationary depressions are so powerful they, like monetary black holes, can destroy money faster than central banks can create it.

The on-going monetary contraction is now clearly evident. Ambrose Evans-Pritchard, columnist for The Telegraph UK, points out the glaring truth that Bernanke and most of his paper-weight brethren would like to avoid:

The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months… the M3 ‘broad money” aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.

“Monthly data for July show that the broad money growth has almost collapsed,” said Gabriel Stein, the group’s leading monetary economist.

On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.

The growth in bank loans has turned negative to a halt since March…. shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market. As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.

http://www.telegraph.co.uk/finance/economics/2795017/Sharp-US-money-supply-contraction-points-to-Wall-Street-crunch-ahead.html

This is not your mother’s contraction. Instead, this is the mother of all contractions, a contraction far greater than even that which sent the world into the Great Depression in the 1930s.

This time, the amounts owed are exponentially greater than what was owed in the 1930s; and, the greater the debts, the farther the fall. Debt does not just disappear without consequences, nor can it be outrun, sic outgrown, as economists are desperately hoping, especially today when economies are contracting, not expanding.

Economic contractions cannot be reversed by expanding the money supply any more than wishful thinking by itself will change the world. Despite the best efforts of central bankers like Ben Bernanke, Friedman’s flawed theory cannot save the world from what is now about to happen—the mother of all depressions that may be capitalism’s last.

Keynes and Friedman, both brilliant, were both believers in paper money. Paper money has many powers, not the least of which is the power to mislead and delude.

Milton Friedman thought a lot Of paper money and more Like Keynes and others who thought the same Milton showed gold the door And now our gold is spent and gone And so is Milton too And now we’re left bereft and broke Not knowing what to do But Ben Bernanke’s at the helm Of the sinking ship we’re on And soon like Milton and our gold We, too, will soon be gone So let’s make a toast while we’re still here To those who caused our ruin To those convinced that they were right But didn’t know what they were doing

WHO BENEFITS FROM THE FRAUD OF PAPER MONEY

The substitution of paper money for gold and silver has always been imposed by those who govern upon those governed; and, in the US it was done so illegally. The US Constitution explicitly defines the US dollar in silver, not paper money. The current regime of fiat money in the US is not only a monetary abomination, it is de jure unconstitutional.

The imposition of fiat money in the US was done without the consent of the governed. However, those who govern approved it. This is because the advantages of paper money accrue to those who rule; and it is in their interests, not society’s, that paper fiat money becomes the coin of the realm.

The disadvantages of paper money are borne by society-at-large, i.e. entrepreneurs, workers, businesses, retirees, savers, etc. who pay retail for the credit dispensed wholesale to those better connected, e.g. are you able to leverage your investments 50:1 as can JP Morgan Chase, Goldman Sachs, etc.; and, can you to carry your underwater investments at full book value and borrow against them as it does Wall Street? And were you bailed out last year as were the banks?

I have always been amazed at those who identify with a system that primarily serves the needs of others and only incidentally theirs. I can only conclude that such identification is symptomatic of low self-esteem, as self-interest alone would dictate otherwise.

We are now headed towards a rendering so extreme that such divisions will become clear and perhaps the many will finally cease identifying with a system that benefits the few closest to the fountainhead of credit while penalizing the many farther downstream which usually includes them.

Modern economics is a sophisticated Ponzi-scheme cross-pollinated with a shell game designed for the advantage of government, banks and those at the front of the line wherein money is created out of thin air to be loaned to others who will in the end be indebted beyond their means to repay and whose economic futures will be destroyed by the inevitable confluence of the bankers’ compounding interest and their constant inflation of the money supply.

 

If you doubt this is so, an article The Event by Eric Andrews, is a must read, especially the areas directly concerned with money and its creation. If you already believe this is so, Eric Andrew’s article is even more important. Clear, concise, and conclusive, it points out the inherent problems with our debt-based system of paper money, a system that contains its own seeds of destruction, seeds which are now flowering, www.financialsense.com/fsu/editorials/2009/0921.html.

Andrews also points out where we are and perhaps headed without guessing when we will arrive. We face a minefield of possible scenarios as deflation, inflation, hyperinflation, or a combination thereof may soon be in our future as the bankers’ paper money is now about to self-destruct.

THE BARRICKADE TO GOLD CRUMBLES

We are in the final stage of the paper-boys’ efforts to preserve their crumbling fiefdoms against gold’s advance. In truth, gold is not advancing at all. It is standing still. It is the constant decline in the value of paper money that makes it appear that gold is rising. Extant virtue needs no movement.

While I am in deep admiration of Professor Fekete’s insights on gold and money, I do not envy the price he paid for his learning. Professor Fekete’s understanding of monetary chaos derives from a childhood in Hungary beset by a hyperinflation more severe than even that of the Weimar Republic or Zimbabwe.

Professor Fekete then escaped communist oppression in Hungary to make his way to Canada where he received a front-seat look at the central bank and corporate collusion underpinning capitalism’s fraudulent paper-money scheme.

Upon retirement, Professor Fekete had invested his savings in Barrick Gold Corporation, a Canadian gold mining company. But instead of an expected return on his savings, the professor got an unexpected education in how Barrick assisted central banks in suppressing gold.

Barrick’s forward selling of unmined gold from 1988 to 2003 put thousands of ounces of paper gold on the market which forced down the price of physical gold. For years, the forwards sales of Barrick and Anglo-Gold Ashanti were responsible for the downward spiral of gold’s price, a goal desired by investment banks doing the bidding of central bankers.

Professor Fekete, as a shareholder, clearly understood that Barrick’s forward selling (or so-called hedging operations) came at the expense of shareholders. It did, however, directly benefit the central banks who wanted to cap the price of gold. Today, the “Barrick-cap”, a major “Barrickade” against gold’s rise is no more.

This month, on September 8, 2009, Barrick Gold Corporation announced it was taking a $5.9 billion charge against 3^rd quarter earnings in order to buy back all its forward contracts, a considerable sum to pay for succumbing to the wishes of those in power.

Once again, Professor Antal Fekete was right. Sponsored by the Gold Standard Institute, Professor Fekete will be in Canberra, Australia, November 2-5 speaking on “The World Financial Crisis and the Vanishing Gold Basis”, see http://www.professorfekete.com. I consider the Professor to be a light in these dark times. I and others will also be speaking.

It is absurd to discuss the price of gold without discussing central bank or government efforts to force the price of gold down, an effort that may soon be ending due to the imminent advent of the end-game.

In my Youtube video, http://www.youtube.com/watch?v=5o36Dj-ukPo, I discuss the possibility of whether or not the US will again confiscate gold. I wish the possibility were not so.

But, today, governments cannot see an alternative to that offered by central bankers, the merchants of debt who have enslaved nations with their fraudulent debt-based paper money. As yet, there are no alternatives to the bankers’ offerings. But after bankers and governments fall—and they will—alternatives will then become clear

Buy gold, buy silver, have faith.

Darryl Robert Schoon

The Economy – Political Dreamland

On to Moscow!
By Bill Bonner

Last week, the European Central Bank squared its shoulders and joined ranks of the damned. The Times of London reported that in joining up with the US Federal Reserve Bank and the Bank of England, the European Central Bank “pulled out all the stops” in their drive to revive their economies. The ECB announced that it will cut its key lending rate to its lowest level ever and begin a form of “quantitative easing,” in which it will buy corporate debt in order to reduce commercial interest rates. Details to follow, it said. “Stops” are to central bankers what safety fuses are to electricians. You may take them out when you really want to get the juice flowing; but your house might burn down.

But thus did the European troops pull out the stops and get under- way. Reluctant allies, they set off to join the battle against capitalism…with no reliable maps…with insufficient supplies and a strategy elaborated by incompetents. Of course, the gods must have laughed at Napoleon too. His armies had been cut off and destroyed in Egypt. Then, his Peninsular Campaign was a disaster. But the plan to attack Russia topped them all; even the draft horses must have snickered.

It doesn’t seem to bother the Europeans that their American commander is the same fellow who failed to spot the biggest bubble in history until it blew up in his face. Nor that their field marshal has no idea of the lay of the land; nor that anyone on either side of the Atlantic seems to know where they are going; nor that, wherever it is, it will cost more to get there than they’ve got.

This week the Obama government revealed its new budget deficit. If nothing goes wrong, it will reach $1.84 trillion this year – nearly 400% of the record set last year. In 2009, the US government will borrow 50 cents for every dollar it spends. Accumulated deficits to 2019 will reach $7.1 trillion, says the forecast. Moody’s was so alarmed it warned that the US may lose its Triple-A bond rating, which it has had since 1917.

But even as bad as it looks, Obama’s budget map is still fanciful – its mountains are made of whipped cream and its rivers run with Scotch. It imagines a loss of only 1.2% of GDP in the current downturn…and a quick return to growth, with a 3% increase in 2010. Yet, the last report showed the US economy contracting at a 6% annual rate. As for growth in 2010…where would it come from? Consumer credit is falling at its fastest pace in 18 years. Consumer incomes are falling too – down 1.2% in the last 12 months. If there were any lasting consequences of this downturn, opines the New York Times, it is likely to be the “shift to savings” by the US consumer.

Meanwhile, businesses aren’t exactly hankering to spend either. Even if they had the money, businesses wouldn’t expand; they don’t have to. Spiders build their webs on America’s remaining assembly lines with little risk of being disturbed; one out of every three factories is quiet. Until existing capacity is put to work, businesses will have no power to raise prices and no need to add to their facilities.

And yet, Napoleon Bernanke is upbeat. The troops will be home “before Christmas,” he says. But the central banks’ calendars are no better than their maps. In 2004, Mr. Bernanke credited improved monetary policy with having created what he called “the Great Moderation” – the period of strong growth and low-inflation since the mid-’80s. Specifically, he was referring to the Fed’s policy of ‘inflation targeting,’ which presumes that the inflation numbers carry all the information the Fed needs to guide an economy.

This was the map the Fed was using seven years ago. Then, a tiny recession took GDP down to all of 0.2% over an 8-month period. The Fed panicked. Its emergency policy pushed the fed funds rate well below the rate of consumer price inflation and left it there for two years. This was not merely a slight miscalculation. It was a fatal strategic error, say professors Carr and Beese of the University of Akron. Not only did the Fed’s map fail to warn them; it actually sent the economy over a cliff:

The low interest rates signaled…that credit was inexpensive and readily available…[then] the Federal Reserve moved from a low accommodative interest rate policy to one of a steady and consistent increasing of interest rates between 2004 and 2007…and became a prime cause of the financial services mortgage crisis of 2008.

Today, central banks use the same computers, same theories, and same maps they had seven years ago. With these feeble instruments, they set out to go where no central bank has ever gone before – borrowing, inflating, and intervening on a scale that would have been unimaginable a few years ago. Where will they end up?

We will take a guess: this grande armee sets off on the road to recovery with the wind at its back; it will end up in Moscow with snow on its face.

The Tax Men Cometh

Beset by plunging revenues, states step up their pursuit of corporate taxes.

Kate O’Sullivan – CFO Magazine

May 1, 2009

A small furniture manufacturer based in Arizona recently received a nexus survey — a questionnaire about the company’s business activity — from the state of Washington. With just two retail customers in the Evergreen State and a lone sales rep making an annual visit there, the Arizona company returned the form and thought that was the end of the matter. No such luck. Washington assessed the Arizona furniture manufacturer “a substantial income tax,” according to Marvin Kirsner, a tax attorney with Greenberg Traurig who represents the company. “One salesperson was there for a total of three days over four years. That was all it took.”

State budgets, which seem to flirt with disaster even in good times, are now in dire straits, and that has big implications for business. Plunging tax revenues now have more than 40 states facing budget shortfalls, and as many as 10 (including California, Florida, and New York) expect fiscal 2010 revenues to lag expenses by more than 20%, according to Harley Duncan, a managing director in the state and local tax practice at KPMG. To fill in the budget gaps, states are aggressively seeking more business-tax revenue via corporate income taxes, stepping up enforcement, interpreting nexus more broadly, and proposing additional business levies.

The 2009 CFO State Tax Survey, conducted with KPMG, shows that companies are bracing for the increased attention. Corporate tax directors expect many state legislatures — particularly California, New York, Illinois, New Jersey, and Massachusetts — to be very aggressive in their efforts to close budget gaps through additional corporate taxation and tax enforcement (see charts at the end of this article).

“The states are in an extremely difficult financial condition,” says Kirsner. “They pretty much have three choices: they can cut their spending; they can pass tax increases, which don’t make citizens very excited; or they can increase their enforcement efforts to raise [tax] revenues that have been lost.”

Small Companies Beware
Companies can count on that third option. New York, for example, plans to raise $2.5 billion for its state budget from tax audits, according to McDermott Will & Emery attorney Peter Faber. “We’re seeing an intensification of audit activity for corporations, which is where I think the states feel the big money is,” he says. “And it’s not just in New York.” Kirsner predicts that small and midsize businesses will be the first to field surprise visits from state revenue authorities. “Smaller businesses don’t have big tax departments, and they don’t want to pay the fees for someone to do reviews of all the different states that they do business in,” he notes.

As that Arizona furniture maker learned, states are also stepping up efforts to establish nexus, the legal term for a taxable presence in a jurisdiction. Experts say tax authorities are actively targeting companies that have been doing business in their state but have not been filing either corporate income tax returns or sales tax returns.

Kirsner advises finance executives to consult with a tax professional before responding to a state’s nexus survey, even if they feel certain they have no tax liability in the state. Many companies may believe they are protected by a federal statute that says a state cannot impose income taxes on a company that is in the state simply to solicit sales. But as Kirsner points out, the statute doesn’t apply when a company is selling services. Nor does it apply when sales tax is involved, or when a state has a gross receipts tax instead of a corporate income tax, as Washington, Texas, Michigan, and Ohio do. In such cases, “Once you respond [to a nexus survey] and admit in writing that you were there soliciting sales, then the question becomes, How much were you there? In the state of Washington, one day is enough,” says Kirsner.

Recent court cases may make nexus even harder to avoid. While companies once were thought to have nexus only if they maintained a physical presence in a state, state supreme courts have held that conducting business in a state — through catalog sales, trademark licensing, or the solicitation of credit-card holders — can constitute so-called economic nexus and subject a company to tax. In the recent case of Amazon v. New York, an Empire State trial court ruled that if an Internet retailer generates at least $10,000 worth of sales through referral agreements in New York in a given year, it has nexus and must collect and remit New York sales tax. Amazon.com will likely appeal the decision, but in the meantime, other states, including Illinois and California, are considering adopting New York’s approach.

In Massachusetts, the state supreme court is considering a case in which a regional tire retailer is arguing that it does not have to collect use tax on tires sold in New Hampshire — the Bay State’s sales-tax-free neighbor — to Massachusetts residents. Massachusetts tax authorities contend that the retailer knew those customers intended to use the goods in Massachusetts, and should have charged a 5% tax and remitted the resulting monies to the Massachusetts Department of Revenue. If the state prevails, the ruling may affect other chain retailers with outlets in both states.

The last time the U.S. Supreme Court weighed in on nexus issues was in 1993, and it has indicated that any further action on the issue should come from Congress. Legislation regarding nexus has been introduced in the House, but it is unclear when or whether it will move forward. As a result, “the state courts are not getting any guidance, so they’re just saying we’ll do what we think is right,” says Kirsner.

Audit Thyself
Another approach gaining favor with state revenue departments is to require unitary reporting, in which companies must consolidate all their business units or affiliated companies and report their combined income in the state if any single unit conducts business there. The state can then levy a tax on that income based on a formula that varies by state, but typically considers the proportion of the company’s sales, property, and personnel in the state relative to its overall business. “It’s a way of bringing out-of-state business into your web,” says Faber.

Massachusetts is moving to unitary filing this year, says Paul Beecy, a Boston-based partner with Grant Thornton. Historically, states east of the Mississippi have used single-entity or some form of combined reporting, with every parent or sister company filing its own return, while those west of the Mississippi have generally taken the unitary approach. Now, a number of eastern states are considering unitary filing, says Beecy. Besides Massachusetts, Vermont, New York, and West Virginia have moved to unitary reporting, while Maryland is starting to gather data from companies about what their filings would look like on a combined basis.

“States argue that by considering these companies as a single entity, you avoid situations where the companies can shift income around into a low-tax or no-tax state,” says KPMG’s Duncan. Implementation poses a challenge for corporate tax departments, as each state approaches unitary filing slightly differently.

The move to unitary filing does not necessarily raise a company’s tax bill in any given state, notes Beecy. “Let’s say you’ve had a very profitable business in Massachusetts. What unitary filing means is you’re pulling into the tax base not only the income of non-Massachusetts subsidiaries, but also the losses,” he says. Of course, the hope for states moving to the unitary system is that they get a percentage, however small, of a much bigger pie.

Federal stimulus funds aside, states’ finances are unlikely to improve any time soon. Companies should therefore prepare for tougher scrutiny from tax auditors and creative tax legislation from state legislatures. Tax directors should conduct thorough self-audits, advises Kirsner, looking at every part of the company — everywhere the business has customers, offices, and full- or part-time sales reps. “Do your own review before the state tax authority does it for you,” he says.