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OREWELLIAN FINANCIAL NEWSPEAK

“One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors" … Plato (quoted by Orwell)

“The study of money, above all other fields in economics, is one in which complexity is used to disguise the truth or to evade truth, not to reveal it.” … John K. Galbraith

"Make the lie big enough, and tell it often enough, and people will believe it"
… Joseph Goebels, Hitler's Minister of Propaganda

When Wall Street and corporate officers executed on their motive to deceive the public and the world into believing the “New Economy” myth, Fed Chairman Greenspan joined the great game to give it legitimacy, despite his amateur standing in technology. During the fraud perpetrated upon the American investment community, the US Treasury conspired as a clandestine participant. Secy Rubin executed the gold carry trade, whereby vaulted gold bullion fueled a massive USDollar and USTBond rally. After the stock bust in 2000, the USGovt statistical elves joined actively in the collusion. They desperately wanted to continue and further the impression that the US Economy would respond well and emerge on a robust course. Their motive is to keep foreign investors committed, who supply 45% of federal credit and about 35% of mortgage agency credit. In order to manage the ongoing task of fraud and deception, Wall Street, the USGovt administration, and the Federal Reserve saw the wisdom in altering the language of the economy and financial markets. Their motive is to influence thought and to condition the behavior of citizens, consumers, and investors.

The recent fantasy can be called the “New Macro” myth wherein gargantuan imbalances are professed not to be a problem. See the current account (trade gap) and federal deficits. This rings reminiscently from 1999, as an echo that valuations did not matter. Propaganda must once more be directed toward the masses. New definitions are promoted which pass through rose-colored glass filters. Puppeteers and shylocks are in our midst. George Orwell provided a vivid description in his classic novel of mind control and its function to wield power, to exert control, so as to maintain social order. What follows extends far beyond Fedspeak, which was dispensed as ivory tower editorial banter, transmitted from podium megaphones to keep even many experts confused. Many are the establishment’s brandished weapons, which are wielded like bludgeons over the unwitting bewildered and seemingly blinded masses in an attempt to wish an outcome and to bully foreign bankers. Greenspan acts as the general, reinforced by countless Fed governors, analysts, and leading economists who serve like dutiful officers. They seem like many dons within the financial mafia, who enlist overnight contract hits from the oyabun within the yen-peddling yakuza in Japan.

The subject of misrepresentation, obfuscation, deception, diversion, and collusion is much written about. See the following articles for a deeper coverage of this great game:

• “A Statistician’s Indictment of Economists”  by Jim Willie CB

• “Major Frauds of the U.S. Monetary System”  by Jason Hommel

• “Inflation or Deflation?”  by Hans Sennholz

• “The Three Stooges”  by Doug French

• “The Awakening Conscience”  from The Bear’s Lair, by Martin Hutchinson

• "Productivity Miracle & Other Myths & Fairy Tales"  by Richard Benson

The Federal Reserve, Dept of Treasury, USGovt, and Wall Street together have colluded to deceive the American public on where inflation comes from, how inflation works, what inflation outcomes are, how to measure inflation, even what it really is. My oft-used label is to call the Federal Reserve the Dept of Inflation, and Chairman Greenspan the Secy of Inflation. These labels are not used lightly. Our nation’s first peacetime deployment of an intentional policy of inflation occurred in the middle 1970 decade, in response to a highly damaging shock from quadrupled OPEC oil prices. We inflated away some debts, rendered energy costs comparatively cheaper, and made adjustments within the vast cost structures, but hardly without severe damage to the economy, stock market, bond market, federal balance sheet, and our national integrity.

A policy of inflation requires retraining of the national citizenry, who have long understood that inflation erodes their wealth, both from a standpoint of income and savings. They strangely regard real estate inflation as not inflation at all, but rather “appreciation.” Note that the government is complicit in giving the homeowner an assist, both with mortgage interest tax deduction and fostered liberal mortgage funding. This is the American dream. Speculation increases with each cycle, and do the debts incurred. Once inflation is systemically pursued, each successive cycle generates higher peak highs and lower trough lows, bigger booms and bigger busts, namely greater inherent volatility. We have been conditioned to regard this now as normal. It is far from normal.

Start with debunking the term “Liquidity Trap” often heard, which implies a liquidity shortage, and elicits an acceptance of an amplified liquidity response, i.e. inflation. Japan did not suffer from the lack of liquidity. Few see economic deflation as a lagged outcome from chronic monetary inflation and misallocation. Japan suffered in the 1980 decade from extreme monetary inflation, which wrecked their stock market, real estate property, and banks. At no time did their system inhibit money supply, restrict liquidity, cut back on intervention efforts, or slow govt stimulus. Both Japan back then, and the United States now, suffer from the “Hyper-Liquidity Trap” syndrome, a condition characterized by massive monetary inflation, massive credit extension, falling prices for both products and assets, and falling interest rates following burst bubbles. Once in it, hard to exit it.

The condition has a solution within a longer timeframe of consolidation and adjustment, a path that Japan had the luxury to take. The condition has the delusion of remedy within a shorter timeframe, orchestrated by renewed speculation and accommodation without redress to problem areas (debt), a path that the USA has the audacity to pursue. The US Economy has a dependence on foreign capital, foreign finished products, and foreign raw materials. We have few advantages that Japan possesses. Japan got caught in a trap. We will not allow that to happen. If they had stimulated more, they would have destroyed more. We have stimulated and will stimulate until the cows come home. We strangely believe that healthy growth blooms from the embrace of inflation and leveraged gears. Unfortunately, the cow bells clang for higher production costs, higher household costs, higher energy costs, higher food costs, and lately higher import prices. Language is key to justify the perpetuation of desperate policies enjoining public cooperation. The masses display little fear of rising indebtedness or the imminent danger of a gradual collapse which might be irreversible from here onward.

We must rise and challenge economists for their incompetence, deception, and collusion. This profession has gotten off the hook, been kowtowed by ignorant politicians, and has been judged by the untrained. Economic advisors have failed miserably. The public is ripe for the deception, given its ignorance and illiteracy. One of my recorded charges is overt manipulation of the language itself. Special thanks are due to Jay Chen in Hong Kong for his contributions.

DECEPTIVE INDOCTRINATION OF ECONOMIC DEFINITIONS

Important terms and economic concepts must be redefined if we are to maintain a system whose foundation is built upon debt, whose commerce is dependent upon debt, and whose engines runs on debt leveraged to the extreme. The field of psychology has a technique called “framing” to put the best face on a situation, to position a relationship in a position light, to promote constructive actions and healing. Our financial world has employed this tactic par excellence, with the full complicity of brokerage firms and banking leaders, assisted by the press & media, but with wicked motives. The public had to be schooled to accept debt as good, despite its long history of being a destructive agent. Public ignorance of most things mathematical and almost all things financial is critical. Rampant gullibility continues to this day, as bubbles have reinflated in a more grand fashion. Any one action alone would be insignificant. However, taken in their totality as a pattern, a case can be made for magnificent collusion and indoctrination.

“legal tender is now money”

Since the abandonment of the gold standard, money used inside the United States cannot pass any constitutional test. Explicit requirements are stated whereby gold and silver, or notes backed by these precious metals, are the only valid form of money. A $20 bill will surely enable you to purchase a batch of groceries, or fill your car tank with gasoline, or buy new clothes, or complete other sales. That does not mean the $20 bill constitutes money. We pay for things with money, or so we think. No. We pay with legal tender, some medium of exchange approved for brokering a transaction between two parties. In ancient times, it could have been salt. In colonial times, it could have been beaver pelts or wampum. At some progressive food coops, it could be vouchers. No, our USDollar is no longer money, and contains less tangible value than salt or pelts. It is denominated debt. The USDollar is no longer represented by gold reserves safely secured in Fort Knox or Federal Reserve Bank vaults. USDollars we spend are actually debt denominated coupons which are widely used to satisfy debts and obligations, public and private.

“credit access is now wealth”

Tell any person, young or middle aged or old, that he or she has a brand new credit line of $10 thousand. Stand back, watch the reaction. Now observe the ensuing talk. It is centered on what the person now plans to purchase. Especially within the USA, economic participants extend debts by drawing upon credit lines. They do it in force, with fanfare, vigor, and enthusiasm. A new credit line of size enables people to feel suddenly more wealthy, despite no change to net worth, i.e. wealth. Opportunity seems to spring up. Ideas flow. Dreams are pictured. Unfortunately, use of that credit line comes with an obligation to pay back money to the creditor. That hardly gets in the way of spending, for most people. In fact, a more perverse common thread exists. Some people actually harbor the notion that they can always declare bankruptcy if times get tough, if things go bad, if control is lost. Bankruptcy and restructured debt is commonplace. Among the ranks of college students, fully 23% have already declared bankruptcy, a shocking statistic. We as a culture have come full circle apart from our parents and grandparents. They learned of the ravages of debt destruction during the Great Depression. Our generation celebrates debt, and abuses it to unbelievable levels. It has thoroughly confused wealth and credit access.

“monetary inflation is now liquidity”

When financial markets come in danger of lockup, seizure, and danger of aggravated losses, we have come to depend upon our bank leaders to provide the necessary liquidity to prevent a crisis from building. When the Asian Meltdown circled the globe and finally hit Long Term Capital Management, we depended upon more liquidity to fix the problem. When the World Trade Center hit and the stock market was jolted, we depended upon more liquidity to restore order. When bankruptcies, both household and corporate, ran rampant in late 2000, we depended upon the extreme liquidity solutions escorted by rock-bottom interest rates to stimulate the economy into economic recovery. The USGovt serves as a capable partner in the process, with tax rebates, tax cuts, other tax reform, and pervasive stimulative spending. One could go so far as to say that the Iraqi War kick-started the US Economy in March 2003. Spending for military supplies through contractors provided ample liquidity which flowed into the economy. All this is naked inflation, disguised as stimulus, labeled as liquidity.

“fiscal bankruptcy is now federal stimulus”

Former Treasury secretary O’Neill exposed the true nature of the full federal debt obligation. Federal deficits are rising at a greater than 10% annual pace. Operational funding requirements appear to be lessened after the confiscation of the Social Security Trust revenues incoming, another shell game. The Iraqi War exacerbates federal fiscal needs off the budget ledger. While the system is bankrupt, and getting worse by the year, we focus attention on federal stimulus. Most stimulus is regarded as constructive, in pursuit of a favorable outcome, with a stated purpose and goal. We have no clear purpose except to hide the bankruptcy and maintain inertia of the process.

“slow-motion recession is now jobless recovery”

Official statistics hide a real economy in a steep decline. Profits for over a decade are in gradual decline. Jobs are being slowly destroyed, from low-cost solution implementation, from lack of competitiveness, and from direct outsourcing. Domestic business investment has been slow for older industries, and brisk for infotech which paves the way for both service outsourcing and elimination of low-level tasks. Leaders want citizens to continue their spending, and even misguide them into believing that an economy can revive through consumption rather than investment and savings. They boldly urge an acceptance of job outsourcing as beneficial. An argument can be made that our economy suffers from stagflation, the dreaded combination salvo of recession and price inflation. This view is shared here. As large-scale layoff announcements continue, as India and China continue to expand jobs in provision of output under direction by US firms, a recession is unmistakable in the real economy. The financial sectors enjoy the bubbly pressured advances powered by bond speculation, negative real interest rates, and grand casino participation. This is not a jobless recovery, which is a blatant contradiction in terms. We are witnessing a bifurcated destruction underway. The real economy is being liquidated, even as it is encouraged to join the financial speculative game. See General Motors.

“deflation is now poor pricing power”

We have been taught to dread deflation, the other monster opposite inflation. Deflation leads to greater burdens for both repaying old debt and assessing new debt. Deflation is the direct aftermath of a longstanding inflation policy, when foreign economies use our exported inflation-born funds for building too many factories abroad. When their export output goes beyond demand, we see liquidation, product dumping, and intense competition, all resulting in lower prices. Vendors witness erosion in their ability to hold or raise prices, even if their costs (for whatever reason) increase. From 2001 to 2003, everywhere was heard that pricing power was nonexistent, and profit margins were under pressure. These are deflationary symptoms. We are taught not to regard these effects as evidence of deflation, but rather poor pricing power in need of greater inflation. Some people mistakenly believe that anytime falling prices prevail in a given sector, it suffers from deflation. Not so, but that is a different story. We face threats from far bigger than product inventory buildup. The giant threat is from a mountain of USDollar financial paper security inventory buildup worldwide.

“foreign dependence is now recycled trade surplus, and lately flexibility”

The concept first came into vogue after the 1973 OPEC energy shock. We convinced Arabs to recycle their windfall profits into the US Treasury market, only to endure 30-40% losses in the next years. Our inflation policy in the process cheated the Arabs. In the 1980 decade, a grand movement was pursued to send mfg processes offshore to Asia. We convinced the Japanese and the full cast of Pacific Rim Tigers to recycle their surplus profits into US Treasury securities in exchange for open markets. After the 1999 grant of Most Favored Nation status to China, the process has gone amok and out of control. Our foreign dependence has escalated to a dangerous degree. Asian trade surpluses now total more than a quarter of $1 trillion annually. The recycling has undergone evolutionary advancements lately. Individual corporations redeem their surplus into domestic currency, whether Japanese yen or Korean won or Taiwan dollar or Hong Kong dollar or Thai bhat. In turn their central banks soak up surplus capital. They often sterilize the effect by monetizing those surpluses, printing new money in exchange for the surplus capital to keep currency exchange rates intact. Recycled trade surplus has moved to a new unprecedented level of risk. Consequently, Chairman Greenspan has laid at our feet the new indoctrination term “flexibility” to justify international vendor finance and credit subsidy.

“capital hemorrhage is now global trade”

The entire notion of globalization has forever changed the world economy. For over a decade, the US Economy has served as the central economic engine. Stephen Roach of Morgan Stanley reports that the US was responsible for over 65% of world GDP growth in the last several years. We do not operate on a level playing field, the subject of a full essay in itself. Our nation purchases foreign made products, foreign supplied commodities such as crude oil, natural gas, copper, timber, etc. In return, trade partners abroad recycle to purchase our debts wrapped nicely in bonds and other securities. Each and every year, foreigners garner 1% more of our national wealth, as measured in GDP terms. That is not beneficial trade, but rather hemorrhage. In the 1980 and 1990 decades, as the USDollar was in the process of appreciating, foreign supplies of whatever kind did come down in price. Our costs did decline. Now, the process is in reverse as the USDollar is caught in a long-term decline. Those same foreign costs are rising. Sadly, global trade is having a difficult time disguising its true face. We must stem the blood loss in what is clearly a grand hemorrhage of capital.

“rising unemployment is now increased productivity”

This is a pure smoke screen utilized by Greenspan. He justifies massive monetary inflation by stating publicly (all too often) that with such low mfg capacity utilization, with such slack labor markets, with such strong industrial productivity, we can continue the accommodative monetary policy, i.e. low interest rates. It would be unpalatable, and plain bad form, to say the truth, that unemployment continues, that job outsourcing undermines our economy, that bankruptcies run at record levels. These are the powerful forces behind rising productivity. The chairman stresses our productivity as a factor behind economic recovery, when in fact it is a symptom of economic distress and destruction to the middle class labor market, if not a systemic liquidation of the real economy. Sadly, many believe abandonment of the real economy is a step forward in the evolutionary path.

“general market risk is now volatility”

Few seem to want to admit that extreme stock market volatility arrived on the scene late in the 1980 decade. Several years after our nation registered outsized trade deficits, paid bills with debts, we saw the Asian Meltdown and collapse of the Japanese stock and real estate markets. The USA exported inflation. As a corollary, economic accidents occurred in Japan, Thailand, Korea, and elsewhere in Asia. An inflation policy wreaked havoc with financial markets. Officials did not want to attach any association between inflation and stock risk of devastating declines. So we heard and continue to hear of volatility. The term is a euphemism for stock risk, closely tied to the ebb & flow of inflation & bust. Twenty to thirty years ago, no such volatility was common. Volatility used to be interpreted as a warning signal.

“stock investment is now channeled savings”

In the 1990 decade, following the irrational exuberance finally endorsed by chairman Greenspan, national savings plummeted, debts rose without bound, and the American mindset was forever altered. We spent more because we viewed our stock accounts, mutual funds, and pension funds as savings. Wall Street, even the USGovt via 401k creation, encouraged people to put their money into the stock market. However, they did not want the public to regard their actions as investment with risk. So we were taught that we channel savings into equities. The last remaining investor hit the scene in 1999, and true to form, the stock market busted. Of course, foreigners had a hand at the top, but that was in part due to reduced federal deficits during the boom years, when capital gain taxes hit record highs.

“REFI-based consumption is now managing home equity”

The homestead palace now contains a bank sponsored printing press in the basement. One can refinance a mortgage, enjoy a lower rate, and easily extract a wad of spendable cash, all with no pain. Prudent practice is encouraged but not taught. Payment of credit cards can be accomplished by means of a home equity loan or a refinanced home mortgage. As long as job security and income sources are stable, sure, this is indeed prudent. Risk arises when income disappears after layoff, outsourced jobs, or a reverse in the housing expansion. If the real estate bubble deflates, then managing home equity turns to mismanaging home equity. Some call it burning your furniture to heat your home. For two years my label for housing property has been “hard asset impostor” fully dependent on huge bond liquidity, and foreign credit supply. As soon as mortgage funds become less available, or more difficult to secure, property will be seen for what it really is: an asset inflated by bond speculators. To be sure, a property and home is a physical asset. But its value is determined more by mortgage finance than supply & demand of a hard asset. Extraction of cash is a form of home liquidation.

“accounting fraud is now financial engineering”

A critical component to the New Economy myth, Ponzi scheme, and con game was financial accounting. It serves as a rigged meter attached to the speculative machinery. Incredible games are played to this day within the process. Entries are taken off the balance sheet if they look too bad, are built into Special Purpose Entities. The acronym SPE sounds better. Official number crunchers lead in the game, with usage of hedonic adjustments to triple the GDP growth reported, with reliance on uncounted workers to reduce the jobless rate, with undeclared gold sales on the balance sheets. Firms report adjusted earnings after removing routine fixed and non-recurring costs in a veritable shell game. Stock options are a clever inflationary device to print money in corporate basements. Arguments continue as to whether they should be accounted for. Interest rate swaps conceal true debt burden service costs. Inventory writeoffs can distort losses, and even (in the case of Cisco) augment future earnings. At times, new long-term debt is issued for the unexpressed purpose of share buybacks. There is no end to the type of games played. In the process, the public needed new terminology. Financial engineering has a sophisticated ring to it, surely better than fraud.

“derivatives are now off-loaded risk”

The primary engine power plant, as explained in sketched form last week, is leveraged bond speculation in the derivatives arena. Futures contracts, carry trades, options, and other exotic contracts make up the vast derivatives casino. When a mortgage agency originates a homeowner contract, oftentimes the mortgage is packaged among many others and sold to Fanny Mae. Risk is off-loaded. Behind the scenes though, sits Fanny and Freddy with vast hedge books which have morphed into speculative tables tied to great gambles. Freddy Mac recently admitted to unreported giant profits from such gambles. The US Economy depends far too much on lower interest rates, so it uses derivative to tightly cap them. Officials use derivatives to cap the gold price, to support the USDollar. Import-export business, farmers, international contractors all use hedges constructively. The size of the derivative pyramid is difficult to estimate. One hears $100 trillion in notional value. Once the number exceeds $50 trillion, many eyes glaze over and a fog is entered. It can be safe to say that financial derivatives, contracts whose value depend directly upon other securities, currencies, and commodities, have gone out of control. The language requires that we refer to them as mechanisms which off-load risk, which sounds constructive, effective, harmless, even prudent and sophisticated.

“Mr Magoo, Pied Piper, Wizard of Oz is now the knighted banking leader hero”

Our heralded Federal Reserve Chairman Alan Greenspan is far too easy to bash, given his arrogance, errors, and wide prestige. The investment community doubts his claims of tame inflation, doubts his forecasts of strong job creation, just as it doubts his reliance on productivity. He has horribly misinterpreted technology, its benefits, and its risks. Greenspan seems like a blind Mr Magoo who cannot see price inflation. He seems like a Pied Piper, as he directed and cheered the New Economy myth and now the New Macro myth. He led the masses to buy into the stock market bubble peak and to continue to this day. He is portrayed as a Wizard, who has engineered a tremendous wealth production miracle during his tenure, and brilliantly guides us through tough times. During his recent promotional speeches, he has stumbled through an erosion of credibility. See “Greenspan Attacks the Sacred Cows” for a discussion. He speaks on diverse topics in his conference meetings, but not much about his actual Fed responsibilities. Yet few understand him. Fewer challenge him. He wanted a chance to prevent the Kondratiev Winter, and has been given an opportunity. He underestimates the sheer power of secular deflation, not easily reversed by brute force monetary inflation. One cannot regard deflation as a commodity without location. Inflation does not cancel deflation.

The public in the grand indoctrination process has been duped, deceived, conned, misled, cheated, swindled, topped off by incredible mind games. The Nazis and Soviets wrote the book on disinformation. Our financial and economic leaders are using their playbook, and take its deceptive theme to heights never seen before in the financial world.

NEWS TIDBITS

Coke faces a grand jury probe over accounting and channel stuffing. The Amgen drug Enbrel is approved by the FDA for psoriasis treatment. Boeing resumes share buyback, increases dividend by 3 cents. El Paso revises 41% downward on gas reserves by $1 billion, in a four year restatement of earnings. Taser has declined almost 50% recently, as it endures negative articles in the Wall Street Journal and Barrons. Google announces it will not provide forward guidance on earnings. Nasdaq gives Global Crossing a delisting notice after it announces a total overhaul of past accounting. Construction spending rises 1.5% to $944 million in March, three times what was expectorated. The ISM index slipped one tick to 62.4 in April, in line. Exports tracked higher. The big item in the supply report was an 88 reading in prices paid, the highest level since November 1979. CIO Magazine reports fully 60% of officers plan an increase on security software in the coming year. Fed Open Market Committee meets tomorrow. All eyes are on the Friday jobs report for April. Warren Buffet agrees to serve as economic advisor to candidate Senator Kerry. Thomas Siebel steps down as CEO of Siebel Systems. Internet investment banker Frank Quattrone of CS First Boston was found guilty of three counts: obstruction of justice and agency proceedings, witness tampering.

Over the weekend, 11 US soldiers were killed in Iraq. ABC News survey of 2737 Iraqis revealed 51% oppose presence of coalition forces, 48% approve the Saddam removal, 56% note improved lives, and 64% put security as the top priority. Reprimands and court martials await 13 US soldiers for mistreatment of Iraqi suspects. Thomas Hamill escaped his captors inside Iraq. Gunmen attacked a Western engineering firm on the Red Sea coast of Saudi Arabia, as 4 westerners and several Saudi security men were killed. Israeli gunships destroyed the Hamas radio station. In Istanbul, 16 members of an Al Qaeda group were arrested before a planned attack of a NATO meeting. Mexico and Cuba recall their ambassadors after a spat.

On a sloppy wet track, Smarty Jones became the first unbeaten Kentucky Derby winner since Seattle Slew in 1977, after overcoming serious past injury. Shaq and Kobe saved their worst for last as the Lakers were defeated in San Antonio to open an NBA series. Yankees are on a hot streak, while RedSox on a cold streak in the MLB.

TODAY’S MARKET

Last week has a horrendous week, as Dow slid 2.2%, S&P fell 3.1%, and Naz dropped 6.4%. Today the Dow Jones Industrials wrapped up at 10,314 (+88), S&P at 1117 (+10), Nasdaq at 1939 (+19). TENS yield 4.50% (unch). Currencies closed with Euro at 119.26 (-0.44), JYen at  90.73 (-0.02), Can$ at 72.77 (-0.07), as London and Tokyo are on holiday. Metals finished with gold at 387.5 (-0.4), silver at 601.7 (unch), copper at 122.75 (+1.85). Energy ended with crude oil at 38.21 (+0.64), natural gas at 6.23 (+0.36), unleaded gasoline at 126.2 (+2.7). Prices are at major futures contracts.

Jim Willie CB

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