Let's Not Think

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

            On April 2, 2013, Peter Orzag, former director of President Obama's Office of Management and Budget, debated David A. Stockman, former director of President Reagan's Office of Management and Budget. Stockman is the author of The Great Deformation: The Corruption of Capitalism in America, a book that doses out unwelcome prescriptions for mending America. (Also a book that Amazon pledges to deliver within 3 weeks, a testament to the book's resonance with the reading public or publisher short-sightedness, the latter condition being practically redundant.) Orzag, who wanted to bury this uncomfortable debate, told Stockman and the TV audience: "The discussion has to happen within the bounds of what's, from a political economy perspective, remotely feasible. It does no good to be so far off from what's practical in terms of what could actually happen that it's a completely academic exercise."

It is Orzag who both ardently and fearfully attempted to lasso the debate within faculty parameters. Orzag is now a vice chairman of Citigroup. His attempt to live in the past resembled Citicorp Chairman Walter Wriston's (circa 1982) declaration that sovereign nations never default.

            Chapter 31 of The Great Deformation ("No Recovery on Main Street") shows how far the United States has wandered from a functioning economy. To those who are perplexed at the state of the union, this chapter is illuminating. What follows is a quick etching of how this trillion-dollar-a-year, deficit-financed economy has departed from sustainable reality despite the protestations of such establishment figures as Peter Orzag.

            One strand is the 21^st century swing towards HES jobs: health, education, and social services. They do not produce high-paying salaries. Stockman isolates these from "breadwinner" jobs, which, "on average paid about $50,000 per year - just enough to support a family." There were 72 million breadwinner jobs in the American economy in 2000. By September 2012, there were 66.4 million. Such jobs fell by an average of 35,000 each-and-every month over those 12 years.

            From the time the recent recession bottomed in December 2007 (not to be mistaken with the long-running ever-worsening Silent Depression), 5.6 million breadwinner jobs have been lost. Only 200,000 had been recovered by September 2012.

            Since the official recession ended in June 2009, three million jobs, of all types, have been recovered. More than half of those have been in what is often called the "part-time economy" including "retail, hotel, restaurants, shoe-shine stands, and temporary help agency" positions. The "part-time" shoe-shine boys and dish washers were positions restored after layoffs during the recession.

About 40% of the three million are HES positions. These are new jobs. Daunting is the recognition these positions have been deficit- and debt-fueled. Jarring is the recognition they could vanish if U.S. government spending is constrained.

HES jobs serve the economy. They are made possible by production. The current U.S. economy does not fit this mold. It is an economy boosted by rising debt rather than increased production. Stockman writes that HES job growth "was possible only so long as government and health plans could keep spending at rates far higher than the growth rate of the national economy."

From the turn of the century until 2007 (end of the housing-boom era), nominal GDP grew by $4 trillion. Total debt rose $20 trillion: $5 of new debt for every dollar of growth. More to the point, federal spending on Medicare rose from $300 billion in 2000 to $800 billion by 2012. Stockman writes: "Having gone from a modest surplus (the federal budget was in surplus in 2000 - FJS) to a $1.2 trillion deficit (annual - FJS) during the same 12-year time frame, it was evident the robust growth of federal health spending and the consequent bonanza of new jobs, on the margin, had been deficit financed."

Of education, from 2000 to 2012, student debt rose from $150 billion to $1 trillion. "The job count in nonpublic higher education had risen nearly 45 percent during the same twelve-year time frame..."

The reader may be forming a parallel picture to bulging mortgage credit, a building bonanza, and the associated growth in construction jobs.

Maybe Orzag is right. It's more comfortable not to think about where we, or these jobs, are headed.

Speaking Up for Deformity

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

In a favorable review of David Stockman's The Great Deformation: The Corruption of Capitalism in America, a critic winds down with a sigh. Stockman's prescriptions are "blue sky" and will not be adopted by today's Washington.

            Of course they won't, but, since he generally agreed with Stockman's take, what does the commentator want? A friend opines the reviewer "is like a lot of people out there who understand economic orthodoxy and how far off course we are" and struggles to imagine "how we can maintain [our] collective standard of living."

            Such a course is impossible. Leaving aside how far living standards have already fallen, the economy and our process of thinking have become so deformed there is no way back without a shattering of such illusions and of living standards. The United States is one among most nations with accumulated imbalances of finance, trade, profits, jobs and non-jobs that have reached such distorted levels because of the post-1971, non-redeemable, paper-money, printing experiment. There is no precedent and there is no getting around the need for markets to clear.

            The insiders will pretend they are still in charge until the end. They started to lose control around 1985. It was still possible to redeem our foul misadventure at that juncture, painful as it would have been. Paul Volcker's unpopular medicine between 1979 and 1982 demoralized large sections of the United States, many pockets long since confused by the inflationary 1970s. The Reagan administration then started to appoint establishment economists to the Federal Reserve Board. At FOMC meetings, the votes of pliant economists made economics popular again. So doing, we are in the muck today.

            "A Quarrel in a Far-Away Country between People of Whom We Know Nothing," (March 21, 2013) was, of course, Prime Minster Joseph Chamberlain's comment surrounding Germany's invasion of Czechoslovakia in 1938. To expand: "How horrible, fantastic, incredible it is that we should be digging trenches and trying on gas-masks here because of a quarrel in a far-away country between people of whom we know nothing. It seems still more impossible that a quarrel that has already been settled in principle should be the subject of war."

            Taken alone, this statement rings true. (The "in principle" is quite a stretch.) The same could be said of Federal Reserve Chairman Ben S. Bernanke's many bizarre comments, which, on their own, are neither wrong nor interesting.

            In 1940, George Orwell wrote of World War II: "After 1936, of course, the thing was obvious to anyone except an idiot." In 1938, upon returning to England from continental Europe, Orwell had written about the "familiar streets, the posters telling of cricket matches and Royal weddings, the men in bowler hats, the pigeons in Trafalgar Square, the red busses, the blue policemen - all sleeping the deep, deep sleep of England, from which I sometimes fear that we shall never wake till we are jerked out of it by the roar of bombs." The bombs flattened London in 1940.

What Orwell wrote of the establishment figures in 1940 need not be changed to describe recent Presidents, Prime Ministers, Secretaries of the Treasury, Senate and Congressional Banking Committee members, unaccountable central bankers, other sordid, government bureaucrats, think tanks, professional-certification money-machines, tenured professors, and editorial boards: "They had to feel themselves true patriots, even while they plundered their countrymen. Clearly there was only one escape for them - into stupidity. They could keep society in its existing shape only by being unable to grasp that any improvement was necessary." (We might amend Orwell to account for the international loyalties of bean counters and bureaucrats rather than to their fellow countrymen.)

            Again, Orwell could have been writing about the litany of trusted leaders who have betrayed us: "What is to be expected of them is not treachery or physical cowardice, but stupidity, unconscious sabotage, an infalliable instinct for doing the wrong thing. They are not wicked, or not altogether wicked; they are merely unteachable. Only when their money and power are gone will the younger among them begin to grasp what century they are living in."

            The Great Deformation: The Corruption of Capitalism in America names names and describes the atrocious position the U.S. finds itself in today. It is pure Bernankeism to wish (or believe) we can maintain our standard of living without redemption many magnitudes beyond the severity of that which could have sufficed in 1985.

In 1933, Winston Churchill wrote to a colleague who accused him of being old fashioned: "I think we differ principally in that you assume the future is a mere extension of the past whereas I find history full of unexpected turns and retrogressions. The mild and vague liberalism of the early twentieth century, the surge of fantastic hopes and illusions that followed the armistice of the Great War have already been superceded by a violent reaction against Parliamentary and election procedure by the establishment of dictatorships real or veiled in almost every country. Moreover the loss of our external connections, the shrinkage of our foreign trade and shipping brings the surplus population of Britain within measurable distance of utter ruin. We are entering a period when the struggle for self-preservation is going to present itself with great intenseness to thickly populated industrial countries. In my view, England is now beginning the period of struggle and fighting for its life.... Your ideas are twenty years behind the times."

Martin Gilbert, author of the book in which this letter is published, then writes: "The times were indeed moving rapidly; on April 7, [1933],Hitler formally imposed Nazi rule on each of the German states, ending their century-old autonomy."

Churchill's influence was muffled through the decade. The Baldwin and Chamberlain governments held him at a distance, John Reith of the BBC kept him off the air, and Geoffrey Dawson, editor of the Times, suppressed his warnings. He was nearing 60 and who wanted to listen to this windbag anyway? It was easy to dismiss him as a has-been. In 1935, no doubt creating more distance between himself and the cabinet, Churchill warned the House of Commons: "[W]hen the situation was manageable it was neglected, and now that it is thoroughly out of hand we apply too late the remedies which then might have affected a cure. There is nothing new in this story. It is as old as the sibylline books. It falls into that long, dismal catalogue of the fruitlessness of experience and the confirmed unteachability of mankind. Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong - these are the features which constitute the endless repetition of history."

Kicking off National Poetry Month, this morning's Wall Street Journal (April 1, 2013), published excerpts from W.H. Auden's "September 1, 1939," the day Germany invaded Poland. It starts:

I sit in one of the dives

On Fifty-second Street

Uncertain and afraid

As the clever hopes expire

Of a low dishonest decade:

Waves of anger and fear

Circulate over the bright

And darkened lands of the earth,

Obsessing our private lives;

The unmentionable odour of death

Offends the September night.

Orwell and Churchill make for compelling reading today because they looked into the future, understood it, and warned the public despite indifference or hostility.

Among the investment managers who saw the mortgage meltdown well in advance was Paul Singer, general partner of the hedge fund, Elliot Associates. In 2006, Singer made a presentation at the fall Grant's Interest Rate Observer Conference. A majority of those present probably anticipated the housing crash, but Singer understood the form it would take. Having dug through tranches of highly sought CDOs, Singer showed that, in one example, and given certain assumptions, a 4% fall in housing prices would wipe out 84% of the principal. His presentation astonished some of the long-time, mortgage-bears present.

Singer spoke again at the April 2012 Grant's Interest Rate Observer Conference. His financial prognosis is consistent with Stockman's dim view of the economy in The Great Deformation. Singer told his audience there is one big difference between next time and the last time, the last time being that in which money-losing tranches in CDOs caught such worthies as Standard & Poor's and the banks sound asleep. This time, the "guarantors of last resort" in 2007-2009 - sovereign governments and their willing accomplices - are under suspicion: "So at some point in this process of impaired growth, restive underemployed populations being egged on by politicians who get points and votes by riling people up against others, and investors inability to earn a return on savings," said Singer - "at some point, investors, Arab revolt-style en masse, may say quietly to themselves, but perhaps at a crystallizing moment: 'Enough.'"