segunda-feira, 1 de dezembro de 2008

Gideon Gono

"I think Obama should get Gideon Gono on his new team," writes a friend.

Never heard of Gideon Gono, dear reader? Well, he is one of the best economists who never won a Nobel prize.

Why? Because Mr. Gono is a proven deflation-fighter. No one knows more about avoiding deflation that Mr. Gono. That's why he was such an obvious choice for Secretary of the Treasury. If America's top financial challenge is preventing a deflationary meltdown & as everyone says it is & than Mr. Gono is our man. Other economists & notably, Ben Bernanke & have studied the question academically, but Mr. Gono has years of practical experience in the field.

He probably should have stayed in the field. Perhaps hoeing tomatoes. Instead, five years ago, the old crony was appointed to head up Zimbabwe's central bank.

Reuters reports on the results: "Zimbabwe's inflation estimated at 89.7 sextillion percent

"Johannesburg - Zimbabwe's central bank Governor Gideon Gono has been re-appointed for a second five-year term.... Appointed in December 2003, Gono's term has spanned the economic collapse of once-prosperous Zimbabwe, highlighted by shortages of basic goods and the highest inflation in the world, which the government put at 230 million percent in July. Washington-based Cato Institute foundation estimates Zimbabwe's inflation at 89.7 sextillion percent.

"In an effort to deal with hyperinflation, Gono has introduced higher denomination notes and lopped a total of 13 zeros off the currency - 3 zeros in August 2006 and 10 in August 2008 - but it has continued to lose value. Currently, the highest denomination banknote is Z$1 million, not enough to buy a loaf of bread and consumers have to carry huge amounts to make simple purchases."

But instead of bringing in someone who really knows how to keep prices from falling, Obama has appointed Timothy Geithner to head up the Treasury department. As head of the New York Fed, Mr. Geithner was practically in the room when the 'bad stuff was going down.' He was the G-man...the government's eyes and ears...right on-the-scene when Wall Street was packing its pipe bombs with subprime debt...filling its molotov cocktails with unsecured commercial debt...building its WMD with more than $400 trillion of derivatives. Apparently, he didn't see a thing!

Two of our English colleagues went to see economist Robert Shiller (of the Case-Shiller real estate survey) at the London School of Economics this week. They report that Shiller says he sent warnings to the NY Fed, while Geithner was in charge. But the feds didn't seem to care for his gloomy messages and stopped asking his opinion. Then, Shiller studied Geithner's remarks during the bubble period and came to this conclusion:

"He had no idea."

Now, Wall Street has blown itself up...and the whole U.S. economy seems to be caving in. Bring in Gono, is our advice. There's a man who knows how to gin up a little inflation when you need it. Or even a lot.

*** "Black Friday," they are calling it.

Today is usually the biggest shopping day of the year. Many people take the day off. Traditionally, they've got time on their hands and money in their pockets.

But not this year. According to one report, consumers are so tight "the holiday shopping season is already over."

"It's pretty grim," said an American friend with whom we had Thanksgiving dinner last night. "But at least people are reacting. That's what's nice about the U.S....people react. You can make deals. You can fire people. You can try to get back on your feet. Here [referring to France] it takes so long and costs so much money to fire someone that businessmen figure the recession will be over before they get rid of anyone. And cut prices? It's against the law!"

Our friend had just bought a new car. It's an Audi, made in Germany, only a few hours drive from here. But he bought it in America. Now, he'll ship it back to back to Europe.

"Is it worth it...I mean, with the shipping costs? And then, you've got to reconvert European standards..." we wanted to know.

"Oh yes...they will make you a very good deal in America. I saved a lot of money this way..."

*** Meanwhile, the rescue teams are at work. They're trying to squander hundreds of billions of dollars. But they're short-handed, says the Wall Street Journal. Apparently, a lack of staff is keeping the pork in the barrel.

"It's not just that," continued our friend, a government contractor. "Everybody expects instant results. But it doesn't happen that way. They have procedures that have to be followed...definition of the and architectural and administrative hoops you've got to jump through. It will be two years before any of these projects are actually begun.

"Of course, they can streamline the process, like they did for the Iraq War, but that just results in a lot of waste and corruption..."

Waste and corruption? No!

But you ain't seen nuthin' yet. This is the biggest government project in the history of mankind. Bigger than the pyramids...bigger than WWII. And there will be no overseers whipping the slaves...and no visible enemy threatening rape and pillage. Mightn't some grease help the whole process of spending? Will a few dollars slip through the cracks? Will a few insiders score some sweetheart deals? Will a billion here...and a billion there...possibly end up the hands of people who really don't deserve it...maybe even the very same people who are most to blame for causing the problem in the first place?

Oh dear reader...that's too easy...ask us something harder!

*** After the turkey had been put away, Americans started thinking...what's all this rescuing going to cost?

The $1 trillion deficit forecast for 2009 may turn out to be underestimated, says Forbes.

At the beginning of the week our old friend, Jim Davidson, had this calculation:

"Here's how this bonanza breaks down:
  • $29 billion for Bear Stearns
  • $143.8 billion for AIG (thus far, it keeps growing)
  • $100 billion for Fannie Mae
  • $100 billion for Freddie Mac
  • $700 billion for Wall Street, including Bank of America (Merrill Lynch), Citigroup, JP Morgan (WaMu), Wells Fargo (Wachovia), Morgan Stanley, Goldman Sachs, and a lot more. On top of $45 billion for Citibank, comes a guarantee of $306 billion in bad loans.$800 billion to buy mortgages issued or backed by Fannie Mae, Freddie Mac, Ginnie Mae and Federal Home Loan Banks.
  • $200 billion for the auto industry
  • $200 billion to buy securities tied to student loans, car-loans, credit card debt and small business loans.
  • $8 billion for IndyMac
  • $700 billion to $1 trillion stimulus package (from January)
  • $50 billion for money market funds
  • $138 billion for Lehman Bros. (post bankruptcy) through JP Morgan
  • $620 billion for general currency swaps from the Fed
"The numbers change so fast, it is hard to even add them up. Rough total: $3,651,800,000,000.00

"Note: This list will almost assuredly be out-of-date when you read it."

He was right about the end of the week, it was out of date. Kathleen Pender at the San Francisco Chronicle reports:

"The federal government committed an additional $800 billion to two new loan programs on Tuesday, bringing its cumulative commitment to financial rescue initiatives to a staggering $8.5 trillion, according to Bloomberg News.

"That sum represents almost 60 percent of the nation's estimated gross domestic product.

"Most of the money, about $5.5 trillion, comes from the Federal Reserve, which as an independent entity does not need congressional approval to lend money to banks or, in 'unusual and exigent circumstances,' to other financial institutions.

"Only about $3.2 trillion of the $8.5 trillion has been tapped so far..."

*** Let's see, Mr. Market has almost cut stock prices in half. And he's taken about 20% off housing prices. That's a loss of about $11 trillion. Hmmm...the government might be a little short.

Or looked at another much spending has been taken out of the U.S. economy? Americans enjoyed "home equity withdrawal" of about $800 billion per year & at the height of the bubble two years ago. And they saved nothing. Now, their saving rates must be going up fast (we have no data on this...yet)... and home equity withdrawals have almost disappeared. If the savings rate were to go to 10% of GDP that would mean about $1.4 trillion taken out of the consumer economy. Minus also the $800 billion in home equity withdrawal that no longer happens. If the government wanted to replace this, it would have to spend about $2.2 trillion MORE each year. That would be on top of the budget deficit for 2008 & about half a trillion.

How about a deficit of $2.7 trillion?

Does anyone have Mr. Gono's phone number?   

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