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The BIG Picture Transcript
February 9, 2008
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  Part 1
  What the Next U.S. President Needs to Know About Energy
  FSN Follies:  Andy Looney
  The Next Great Depression - Part 4
  Part 2
  More Evidence of a Recession
  Other Voices: George Tsiolis, President and Founder, Agoracom
  Strategery
  Part 3
  Q-Calls

 Part 1

 What the Next U.S. President Needs to Know About Energy

JOHN:  If you tend to be looking forward, you notice that what it is the presidential candidates are discussing and what it is they will probably be dealing with when the next president, whoever he or she is, is seated in the White House Oval Office are two different things.  And it was interesting this week that Congressman Roscoe Bartlett was doing a presentation on peak oil on C-Span, so some of this information seems to be leaking through.  There is a slowly growing awareness, but it certainly hasn't hit the media and it hasn't hit the public largely because the public hasn't felt any pain. 

You know, last week we did an energy roundtable addressing this issue.  It was a real eye opener.  The information presented was made by some of the most knowledgeable experts in the world.  Jeff Rubin is an economist but, you know, all along, he's been right on the money as far as calls for oil.  He called for $100 barrel oil when his peers were calling for oil to decline; and Dr. Robert Hirsch did a briefing paper that he sent to each presidential candidate, and he believes it's going to become the single most important issue facing the next American president.  The response was not encouraging.  Surprise.  And what it means is this is not 15, 20 years out.  It is going to rush upon us with great suddenness, and you've got a copy of the presentation by the way, which is the subject of our first Big Picture topic today. 

So what we need to do is look at what this presentation entails because this is probably going to be the issue of the next Congress and the next presidency.

JIM:  The report that he presented and made available to every one of the presidential candidates, first of all, he gave a background and said who we are.  And if you take a look at the people that are behind this report, they are scientists, engineer, economists, they've been analyzing peak oil for almost five years, collectively both with 35 years of experience in the energy, government and academia.  They also wanted to point out, “look, we have no political agenda.  This is a nonpartisan report.”  These are also independent consultants.  They don't have conflicts.  In other words, these aren't people working for oil companies; and they've been extensively involved in the National Academy of Science and Energy Studies.

And what they've laid out to the candidates, why this is important to you, because it's occurring now or will soon, and secondly, you as president are going to have to deal with the economic consequences which will be extreme and long lasting.  And they'll make the case in the presentation, look, this isn't like the gas lines in 73 and 74.  We were inconvenienced for three or four months and the problem went away.  It came back again in 79 and then it went away again.  And they get to the point: Why should you care as a president?  Because the issue is brewing and it could burst on the public at any time.  And it's going to be costly for any candidate not prepared or taking the wrong stance on this issue.  [3:27]

JOHN:  You know, right now, our politicians are going to be more and more focused on global warming, especially if we have a Democratic president and Democratic Congress, which is something that may or may not occur in 4 years. 

Now, granted, some scientists are saying we may be at the tipping point right now where we have to do something and if we don't do it now, all...what will break loose?  Heat?  All heat will break loose.  But the focus on global warming has been on throttling back the economy rather than really strong promotion of what we can do in the meanwhile to make this transition.  Only recently did you hear the effort that global warming is going to be good for the economy.  Before, just a few months ago it was we've got to cut back on the economy at all costs because global warming is threatening the planet.  Now they are trying to flip this over.  But from now on in, you look at peak oil, okay, it's looking more like it's approaching our door step and when it arrives, the reaction could be similar to what happened to, well, remember what happened back in 1973 to the public consciousness and also in 1979.  I remember that.  I mean we had things like public panic.  There was recession, unemployment, a rush for supplies, which is normal. 

JIM:  Yeah.  People start to hoard when you can't get it.

JOHN:  They start to hoard.  There is a negative reaction in the stock markets that kicks in.  These are all of the things that we can potentially face because as we said, the consciousness of this issue hasn't crossed the public mind, and we really don't have a global warming problem as much as we have an energy policy problem of which global warming is only one corner.

JIM:  You know what's clear from this report and all sources, here's the problem the world is facing:  demand continues to grow, supply is struggling to keep up.  When Peak arrives, and this once again is where the issues get confusing.  It doesn't mean we've run out of oil.  It means we've run out of our capacity to increase production and production starts to decline.  And as Hirsch is reporting to these presidential candidates:  there aren't going to be any quick fixes this time.  You know, the central banks and the Fed can't print oil.  And probably what is the most alarming statistic that I've seen is that it's been over two decades –and this is something the cornucopians, the optimists never really addressed – but it's been over two decades since we've discovered enough oil in a year to replace what it is that we're consuming.  I mean that alone should tell us we've got a problem there somewhere. 

The other thing that stands out in the Hirsch report sent out to the presidential candidates is that the peaking of wells is a natural event.  And when it occurs, it can be quite rapid, as in the case of what we're seeing in the North Slope of Alaska.  We're seeing it in the North Sea.  The North Sea peaked in 1999, and it's already down 30, 40%.  Cantarell peaked in 2005, and its production is down 40%.  And what Hirsch was trying to do is alert these candidates that, look, 54 of the world's 65 producing countries have already peaked and are experiencing a decline in production.  This is a serious issue.  [6:36]

JOHN:  Yes.  I guess the question that the Hirsch report is posing to the candidates is what impact will it have on their presidency whether it arrives because unlike 1973 and 1979, it will not be brief.  This is going to be an ongoing issue.  What is going to follow is recession, unemployment, inflation and high interest rates.  That's despite whatever happens in the financial markets by themselves, so this is sort of a double whammy here.  People need to see these two trends colliding right here.  And the voters are not going to be happy.  I think there is going to be an increasing amount of pain because government, as usual, is asleep at the switch and when it does wake up, it comes out of its slumber and says, “let's pull this lever, let's jerk that one, let's do this.”  And that only makes everything worse.

JIM:  And what Hirsch is trying to warn these guys, they are saying, “look, if this appears on your watch and you don't have a program, a policy in place and you're scrambling and all of a sudden the public wakes up and says, ‘my God, this evidence has been out here for all of these years, why didn't you guys do anything about,’ you're going to be a one term president or a one term Congressman.”  The report also points out that, look, technology is not going to save you.  They show in this report that production in the US has steadily declined despite enormous technological advances here in the US, and remember, the US is one of the world's largest producers.  And the report goes on and outlines where the main problem lies.

And here is another issue that you're hearing on the campaign trail that is they are confusing apples and oranges.  Essentially what Hirsch is telling these guys is:  “Look, this is a liquid fuel problem.  95% of our transportation system runs on liquid fuels.  You can't fly a 747, power a freighter or a semi truck on solar and wind power.  So like it or not, this is a carbon fuel economy and you'd better start thinking about this.”  You've seen this, John, in the campaign, they are talking about, well, alternative energy, wind, solar, green stuff.  Okay.  That's great for electricity, but what is that going to do to put an airplane in the air?  What is that going to do to power a 900 foot freighter that brings cargo to the US.  Remember, we import a lot of our stuff into this country today.  Most of the stuff you see on shelves is imports.  And so that's what he's trying to alert these guys.  This is a transportation problem.  It's what makes the economy run and you guys don't have a plan.  [9:14]

JOHN:  Yeah.  The report also outlines where the main problem lies, and basically it is a liquid fuel problem as you've been talking about.  We don't have over head power lines like you do on some train tracks in Europe.  95% of the transportation system runs on liquid fuels.  You can fly a 747 but you can't do it on solar and wind power.  And Jim, this is were you need to address this because this is where everything gets fuzzy because everybody thinks these alternatives are all out there and just ready to go.

JIM:  No.  In fact, we don't have...and we'll get into the latter part of the report where he talks about mitigating the problem.  What are realistic options that the country has?  But this whole energy debate is confusing, especially when you hear these candidates talk about these alternative energy.  Okay, great, when?  Fine, that will get you electricity, solar, that will get you electricity, nuclear, that gives you electricity.  Are you going to power a 747 or a 777?  I don't think so.  And so they are trying to get – [10:17]

JOHN:  I just had this vision of all of these jets flying through the skies with big extension cords tangling behind them.  Can you imagine the tangle afterwards?

JIM:  You know, the entire back of the panel.  Isn't it the Challenger which has some kind of -- I know they have some kind of solar cells on the satellites that they use, but we're a long way from putting a jet up in the air on alternative energy right now.  And this is the problem that we have.  And that's why he's trying to alert these candidates.  I was talking to these guys, and you remember this, John, off the air and what was very discouraging was this was a nonpartisan report that said, “look, guys, one of you guys –or ma'am – is going to be the next president of the United States, and this is the issue you're going to confront.  And it's not going to be technology.  You don't have a giant Saudi Arabia like we had in the 70s that as our production fell after it peaked in 71, we could start importing oil from.”  So there is nothing out there right now that's going to mitigate this problem and very little interest.  [11:21]

JOHN:  You know, back on ABC Nightline, President Bush was talking and on January 15th, he said –and he's talking about that Saudi Arabia here – “if they don't have a lot of additional oil to put on the market, it is hard to ask somebody to do something they might not be able to do.”  Now, what he is referring to here is before, if you we back into the late 1970s, we were able to go to the Saudis and say, “just give us some more oil because we need it,” and so increase the supply.  That may not be possible this time.  I mean there have been several warnings given to the government relating to the Hirsch original report.  There were warnings from the European Union on the situation, on the International Energy Association, the Council on Foreign Relations and the American Petroleum Institute, all of these groups have been issuing warnings, “hey, big green dragon ahead, take action.”  But it's obvious from listening to the candidates that not many of them take this issue seriously even though it's likely to be the biggest issue facing their presidency.  As I said, it was Congressman Roscoe Bartlett who yesterday –we just happened to flip into C-span – and there he is talking about peak oil with charts and everything else and talking about the Hubbert curve.  [12:25] 

JIM:  What I think Hirsch was trying to tell the presidential candidates, when this crisis hits, it will not be an ordinary crisis.  I mean oil is the life blood of a modern industrial world that we live in today.  It fuels 95% of our transportation system.  Think about that for a minute.  Everything you use or need in life today was created through energy, through either its production, its growing or its transportation to get it to the stores.  And the scale of this problem is going to be enormous, and the transition period is going to be unlike anything we have faced by a modern industrial society over the last 100 years.  I guess what they are saying here is there is going to be this tremendous shock factor.  John, you remember, the shock factor with the oil embargo in 73 and 74.  All of a sudden we woke up and we said, “oh, my, God, gas lines.”  [13:25] 

JOHN:  Yeah.  People were lined up and it lasted for a few months, but that was it.  Remember when people used to come out to service your car?  That's when everything began to change.  Do you remember that?  Some people aren't old enough to remember the fact that when you used to pull into a gas station, everybody used to come out and try to service your car.  And then they said, “nah, you guys can do it yourself.”  That's when that whole thing changed. 

JIM:  Well, they had to cut the margins, and they are always bashing the oil companies and the gas station owners.  The reason the energy companies have these fast service marts where they are selling Pepsi and Frito-Lay chips is they make more money on that than they do selling the gasoline.   [14:01]

JOHN:  And then there is Hirsch's mitigation analysis which was done for the Department of Energy.  And basically if we take a look at it and say where are we now and how fast can we bring alternatives on line, it's too late to avoid misery right now.  We've passed the critical point.  There are a few mitigation options, but believe it or not, they are not what people think and the market has not started to address the problem and probably won't until the last moment, meaning that there is going to be some kind of disruption.

JIM:  Yeah.  And what he's trying to say here is, look, this whole society that we live in in the United States, Mr. President, we're looking at a transportation system and here is the problem.  If you look at conservation, if you look at our transportation system, whether it's automobiles, light trucks, SUVs, heavy trucks, buses and aircraft, in the United States right now, we have 140 million automobiles, the median lifetime age is 17 years to replace half the fleet –half the fleet now – it's going to cost 1.6 trillion. 

If you take a look at light trucks and SUVs, we have 90 million in the US with a median life time age of 16 years.  To replace half that fleet is going to cost 1.3 trillion.  If you take a look at heavy trucks and buses, we have 7 ½ million.  The average age is 28 years, and that's going to cost 1.7 trillion.  And finally, we have 8,500 air craft, average age 22 years.  That's going to cost 1.3 trillion.  So you're talking, John, almost $5 trillion just to replace half of the transportation system. 

Then he goes on, and he said, “once again, guys, this is a liquid fuel problem.  Nuclear, wind and solar or alternative energy is a great idea.  That gives you electricity.  It does not give you liquid fuels.”  Then he goes on, “What about liquid fuels.  Hydrogen it's neither ready nor is it economic at this point.  Biomass, not economic.  Shale oil, not even commercial.”  So once again, he takes a look at this and he's saying you need to start focusing on this because even if we were to try to build a nuclear power plant today, I mean that's going to give you electricity, but what are you going to do about addressing the issue of what it is that you put in the cars and the vehicles that we drive, fly or sail?  [16:36]

JOHN:  Well, he does talk about some mitigation options, which are actually viable right now.  And what he says is the implication is really critical in the near term over the next 10 to 30 years.  He said number one, vehicle efficiency is really important.  Number two, gas to liquids, which would be a very important type of process; 3) there is heavy oil and oil sands; 4) coal liquefaction, which is very viable, especially for producing diesel type fuels or jet fuels and what is called EOR or enhanced oil recovery.  But he said they would need to do this on a crash basis right now to make this work. 

What people don't understand, you know, the psychology there, Jim, and I think he was talking to one economist about this recently and he said “oh well, I believe in the free market and the free market can come up to deal with this.”  And people have this muddle through mentality, not realizing it's not a matter of economics, it's a matter of physics. 

JIM:  And that's the problem that the economists have, as Jeff Rubin pointed out in last week's roundtable.  He said, “you know, most economists are thinking of upward sloping supply curves.”  And that works, John, when you have unlimited supply because as price rises, you would see more supply come into the market.  But as you're talking about here, this is really a physics or a geological problem.  When you have a finite supply, this doesn't work.  And he's finally telling the candidates who those he believes are sounding a warning and he gets down to:  Who is sounding the warning?  Okay.  Who are the people that are saying you've got a problem here, and who are the people that are saying that you don't have a problem? 

And it's amazing when you take a look at some of these people.  Who is sounding the warning?  the International Energy Agency, Chevron, Shell, now the large oil companies are starting to fess up.  Just a couple of weeks ago, the head of Shell said it.  Jim Schlesinger, the former head of the CIA, T. Boone Pickens, Matt Simmons, the Corps of Engineers, the oil company Total, automobile manufacturer Volvo, the Chinese government state oil, 13D research, and the vast majority of retired oil company geologists. 

Now, who is denying that we even have a problem:  OPEC, Department of Energy, Energy Information Agency, CERA and Exxon Mobil, and then mainly economists who keep thinking once again in that upward sloping supply curve. 

What they are trying to do here and are saying, “look, these are the people that have been telling you, warning you, these are people that are credible, they are scientists, international organizations that monitor this problem and you guys need to start paying attention.”  [19:19]

JOHN:  Well, let's face it.  This is a problem for candidates.  It's not going to be a pleasant picture because, first of all, they don't want to address it.  It's much easier to talk global warming and talk about caps and credits and trades and things like that.  And global warming is an issue that's 40 or 50 years out, although some people are saying that we may be past the tipping point right now, but that's still in dispute by scientists.

Besides, if peak oil is on our door step, it's actually going to solve the global warming problem.  And some of the global warming people have sort of figured that out; the few that are aware of peak oil that if we begin solving for peak oil, we'll be solving for the other.  And besides, on the politician’s side it's easier for them to give lip service and propose worthless remedies than it is to tackle hard issues like peak oil.  I mean look at the oil markets today.  Oil has come down from just tippy toeing from over $100 back to the high 80s because somehow there is this naive belief that if the economy slows down, that oil prices will fall dramatically.  They are confusing economic issues here with supply and demand issues.  The US markets are egocentric, thinking that energy market revolves around the United States and what they are doing is ignoring three billion people on the other side of the world who are industrializing, which by the way, is going to offset anything we do as far as global warming because they are exempt from this.  So as we're throttling back, they are going up.  It's a zero sum game.  And the market is also ignoring depletion which is running faster than discoveries are right now.    

JIM:  You know, it’s absolutely amazing, we did the roundtable interview last Thursday, and on Friday, I wish I would have had a copy of this when we did our interview.  The front cover, if you're listening to this program and you'd like to read it, and read something that's pretty scary, the front cover of Bloomberg markets, it's called The End Of The Oil Age, Scarce Crude And Global Warming Force Car Maker To Change Course.  And in this interview, it begins with a gentleman by the name of Bill Reinhardt, and Bill Reinhardt helps design Toyota Motors’ Prius hybrid.  And here is a guy that heads up the engineering department here for Toyota in California, and they are working on a plug-in hybrid.  And this guy is taking a lot of these issues as real serious.  I mean he's made trips to the oil sands, he's made trips to the large oil fields checking this out.  And you think about the intelligence of these people:  “Hey, we make a problem that runs on petroleum and we're getting reports now that we may not have a lot of this stuff, or we may not be able to produce a lot of this stuff;” which is the whole idea behind the concept of the Prius or the hybrid and they are coming out with even more.  Now they are working on electric plug-ins.  In this article, he said, “this car-based culture and business-as-usual building cars and trucks is going to change dramatically.  He said, basically, car makers are endangering themselves by basing sales and profits on the big fast cars that many US customers say they want, at least in 2008.  In five years, and this is a direct quote, “in five years as oil shortages and global warming intensify, car companies may be out of step with driver's demands for fuel efficient vehicles.”  And when he's taking a look at what we're facing today, he says, we don't have a past, a history or a database that allows us to explore the simultaneous impact of recessions, disruptions to the energy supply and climate change.  [22:52]

JOHN:  Well, you know, here you've got a company that produces cars and they want to produce fuel efficient cars because they recognize that at the current moment, 95% of what we have moving out there is running on liquid type of fuel, and there is a fleet conversion time because say, tomorrow, you put the most efficient alternative hybrid out there, we go home and plug it in or it will kick in after 50 miles or whatever.  It's going to take 15 years to rotate that fleet out, Jim.  People aren't going to all just rush out tomorrow and get one and dump the other cars.  That's not going to happen.

JIM:  Yeah.  And I'm quoting Reinhardt again.  He said, you know, when you're schlepping around two tons of sand for a barrel of crude, it already shows that conventional oil is already well into depletion and prices are ultimately going to ration demand despite the best efforts of government to try to subsidize it.  He's basically talking here that what are we going to do when we're seeing 200 dollar oil and $300 oil.  He goes on and says this is the stuff that keeps him awake at night.  He's got right now, for example, 300 engineers working full-time on basically trying to figure out a more efficient battery because part of the problem with hybrids is getting batteries that are more efficient and can store more power in the car.  He's got 300 full-time in-house engineers studying the chemistry of lithium batteries.  GM at this time has no in-house researchers for lithium chemistry.  So it just goes to show you, much like the 70’s oil prices we were just way, way behind in terms of what we should be doing. 

So as we sum up here, you take the Hirsch report as he summed it up to the candidates, he put it on a real simple basis:  The peak oil problem is going to over shadow anything else that's going to face your presidency.  Secondly, peaking may be happening now, if not sooner, and you must be prepared to respond or risk being blind-sided.  Successful mitigation is going to require time because of the magnitude of the program.  So you need to get started now developing a plan and finally when this arrives, there are going to be no quick fixes.  [25:12]

JOHN:  Maybe the best thing investors could do would be to ignore what is going to be a huge amount of short term noise and static and begin thinking critically and take steps to take care of themselves.  I mean both from a financial position and also getting better cars, making your house more efficient, something along those lines.  We're going to be doing shows on this throughout the year on how to start preparing for the peak oil.  It's really almost a peak energy situation; isn't it, really? As we slide over from oil to energy because at the same time that we're dealing with the peak oil issue, we're not soberly dealing with the energy infrastructure in terms of electricity in this country.  So it's all sort of mixed in together here.

JIM:  Yeah.  It was amazing because last night I was reading a 200 page report.  It was called The Growth of Scarcity, and one issue that, getting to energy, is China right now is struggling with power shortages caused by lack of coal, which in turn has been largely caused by infrastructure bottlenecks.  And that's going to impact the production of aluminum, steel, zinc, copper and lead.  South Africa is experiencing a power crisis.  That's going to impact the production of platinum, chrome, manganese, gold, thermal coal and aluminum.  So this energy crisis is already starting to surface.  I mean most people, their only exposure to this at this point has been where, let's say if you were in the southeast after Katrina and Rita hit, there were gas lines, there were shortages; but for most people right now it's an inconvenience, it's higher prices, but every time you pull into the pump, there is gasoline there.  [26:52]

JOHN:  You know, at the same time when we talk about this disconnect between what economists or analysts see versus a fundamental understanding to the physic of the situation  You have analysts calling for lower oil prices because of the US economy slowing down, not taking into account there are other dynamics outside of the US –supply-demand issues – that are pushing it up, and they don't seem to be following this.

JIM:  No.  In fact, if you look at the S&P energy sector so far this year it's corrected about 13%.  The only thing I can say is hold onto your energy holdings, keep your energy stocks and if you want to add to them, start buying now that they've corrected, after they've sold off.  And more importantly, if you don't own them, start buying them.  Get into energy companies.  Get into energy infrastructure.  Get into energy service.  Get into alternative energy because when the rest of the world wakes up –and I can just see it, John, and we've talked about this over the last four or five years, gosh, I've been writing about this thing for seven years –but we're going to wake up one day and you're going to see it on ABC Nightly News or you're going to see it on the front cover of Time magazine: peak oil is here.  And when that happens, that's when panic is going to set in and there is going to be a rush to own anything involved with energy. 

The one thing I can say is right now hold onto your energy holdings, keep your energy stocks, we've had the energy sector correct about 13% this year, so buy them now after you've seen the selloff because when the rest of the world wakes up, look out.  When panic sets in, you'll own what everybody else will want to own.  And I also want to say this. If you have no plans to get or own at least one economy car, start rethinking that.  Start thinking about perhaps trying to get either a diesel, diesel hybrid, a Civic, a Prius a Corolla.  Do so now while they are cheap and available because you're going to eventually see, now Matt has talked about this, you're going to eventually see gas rationing and owning a fuel efficient car now will determine whether you remain mobile or you'll be able to afford to drive.  [29:13]

JOHN:  So I would take it that the recent selloff isn't bothering you.

JIM:  No.  In fact, we tend to do most of our buying when we get these pull backs.  The most important thing, and I've said this over and over again –and we'll get into this in the second hour on a topic we're going to call Strategery – but the most important thing is all of these bull markets and bear markets go through phases.  And we've talked about these phases on the program.  You go from pessimism to skepticism, and that's where we are now.  Eventually, you go to optimism and then you go to euphoria.  In these first two phases, which are pessimism and skepticism, that's when you want to do your buying, that's when you want to do your accumulating.  And the only thing you care about, and this is the only thing that matters, stop thinking about prices!  And I mean that.  What you want to start thinking about is when you get to the third and fourth phase, which is optimism and euphoria, how many ounces of gold and silver do you own.  How many shares of the mining companies do you own?  How many shares of energy companies do you own?  The more shares that you own, the wealthier you're going to become and the better off you're going to be.  The more ounces that you own or barrels of oil that you own, the more wealthy and better off you're going to be.  So start thinking of ounces and shares or barrels and stop thinking about price.  Everybody knows everything about price.  They know very little about the fundamentals.  [30:45]

JOHN:  And you're listening to the Financial Sense Newshour at www.financialsense.com.   

 FSN Follies:  Andy Looney

I'm Andy Looney.  I turned down my television set the other night and, oh, my.  It really is the silly season.  Look at all of those candidates for president making lots of promises.  Promises they can't possibly keep.  But my friend Charles says it makes for good sound bites on the evening news.  I couldn't stop laughing when they said they'll bring change to Washington.  After all, the remaining candidates are Washington insiders and it's the land of Oz, and Toto too.  You know, exactly what is change?  Hey, buddy, could you spare me some change.  Like President Clinton said, it depends on what your definition of change is.  I heard of changing clothes, changing of the guard, a change of venue, a change of job, a change of address, a change in the weather and changing your tires, but I still don't know what candidates want to change.  Do you?  I don't.  About the only thing I know for sure is they all want to change who lives in the White House, and that's going to happen anyway.  Nothing new there.  Some candidates want to change how we pay our taxes, but I don't have the change to pay the taxes.  Do you?  I don't. 

Maybe after President Bush's spare change rebate -- nah.  That's just short-change.  They say people aren't buying health insurance because they can't afford it, so they want to force you to pay the premium from your paycheck.  I don't get it.  If I didn't have the money to pay for it, what makes you think I can afford it when they force me to pay it?  Why is it every time the candidates feel my pain, it costs me more money?  Anyway, before you vote, ask the candidate:  What do you mean by change?  I think the change they are looking for is in my pocket.  Perverts.  Get your hands out of my pockets.  For Financial Sense, I'm Andy Looney. 

 The Next Great Depression - Part 4

JOHN:  Every once in a while you have this moment of deja vu when you think my gosh, I've seen this before and I'm getting to see it again.  The country seems to be sliding rapidly in the direction of populism; and that means they want government to go in and fix their economic pain.  And the economic pain, of course, originally being caused quite frequently by government policies and policies of the Fed, which is a government-related phenomenon.  So it's always interesting how the public in many, many countries always rely on the very people that got them into a problem to get them out of it. 

So what we've been doing, we have been covering what led this country into the Great Depression back in 1929 because things seem to be repeating themselves and history is very instructive of exactly how politicians are making the same mistakes today.  Recessions are an inevitable part of the business cycle.  It's the way that the system blows off toxicity, if you want to make a biological analogy, which is really just excess debt out there.  But it takes policy mistakes to turn a recession into a depression.  So today what we're going to do on this part of the Big Picture, and this is probably one of the most important things that we've been doing here over the last four weeks (this is now Part 4) is to cover the specific examples that drove the economy from a recession into the depression, and then show you what parallels are running today and where we stand at the reference point as far as where those were progressing. 

JIM:  You know, as mentioned in earlier programs over the last couple of weeks, John, as you said, recessions are part of the business cycle.  They are actually part, believe it or not, of the recovery process.  All of the malinvestments that were created – too much technology, too much broadband, or in the case we're in now, too much real estate – is liquidated.  Leveraged businesses, investments go under, balance sheets are rebuilt, savings increase and the economy cleanses itself.  And the most important thing when you're going through this cleansing process, the best policy that government can adopt is one of laissez faire.  Leave the economy alone.  Let the healing process complete itself.  Don't interfere with the market process.  Whether it's prices, wages or business liquidation. 

So the proper course of government is actually to cut the budget, cut taxes and leave the economy alone.  But that is not what Hoover did.  Hoover, by his training, was an engineer and a central planner.  And what became known as the New Deal really began in his administration, and it developed and it was sold to the public as an anti-depression remedy while it was actually creating the Depression.  But if you take the New Deal, it violated every tenet of laissez faire.  It was government intervention on a grand scale never seen before in this country.  And it was a program that was marked by extensive government economic planning and intervention at every stage and process of the economy, including the bolstering of wages and prices, the expansion of credit, propping up weak firms that were going to go out of business, increasing government spending, subsidies to unemployment and public works.  And it was amazing, none of this stuff worked.  [36:40]

JOHN:  That's the funniest part.  Actually, it was more tragic, as a matter of fact.  You know it was also a government that made itself hostile towards the markets and the economy at that time.  That's important.  Hoover raised taxes from 25% to 63%.  I mean that is a breathtaking increase.  He increased inheritance taxes and increased regulation on the stock market to eliminate speculation.  Well, it's no wonder that the stock market loss went to 90%. 

JIM:  Yeah.  The more that they tinkered with the economy, the more that they tinkered with the markets, the worse it became and the worse it got.  They said “we're not tinkering enough, so we need to do even more tinkering.”  And it's a real tragedy in terms of all of this, the way it turned out.  So you can look at the failure of the  Great Depression, John, look at the failures of the  Soviet Union or China under Mao with the Great Leap Forward, and it is amazing to see the failures.  And we've got great examples over the last 100 years, the Depression in the United States in the 30s, the Soviet Union and China and other communist countries. 

And I can remember, my parents are from Czechoslovakia, and I can remember my mom telling me –  this was a little over 10 years ago – she went back to her birthplace where our family came from, and she said, “you know, going back to that country, it was like going back to the United States 50 years ago.  I mean there was one car in the village, and they were so grateful.  The simplicities of life and what they had done without under that system.”  And here we are moving full force into this direction while the former communist countries, such as China and Russia have implemented low tax rates –a flat tax in Russia, low tax rates in China, low tax rates in Hong Kong – and these are the fastest growing, most prosperous economies in the world.  And it's absolutely amazing that here we are going right back in that direction again. 

But let me get back to Hoover, who essentially was a central planner.  And his first effort with the Depression was to force wages higher despite the fact that the money supply was contracting and the economy was experiencing real deflation.  His goal was that the first shock of the Depression was falling profits and not on wages, which is exactly the opposite of sound economic policy because it is profits that provide the motivation for business to expand.  Also, contrary to widely held beliefs, the Fed began to immediately inflate.  The week of the crash, the Fed injected $300 million in reserves into the nation's banking system, which was a considerable sum of money at that time.  It would almost be like injecting half a trillion dollars today.  And the purpose was to prevent wide scale liquidation of stocks by allowing banks to take over broker loans.  So when you have a correction, a recession, as we were experiencing between 29 and 30, the money supply, credit was starting to contract.  So what that brought is real deflation, falling prices, which was the after-effects of a contracting money supply.  It is these falling prices that allow the same amount of money in the economy to buy the same goods and services.  But what Hoover was doing is he was going, “oh my goodness, we have deflation, we can't have falling prices.”  He immediately began to cajole business into keeping wages high, and then government began to support prices, so immediately what Hoover was doing was interfering with the market price and mechanisms in the economy while the money supply was contracting.  [40:39]

JOHN:  They also tried to boost wages at a time prices were falling and then they tried to prop up the prices as well.  They tried to do everything artificially, but obviously market forces are much more powerful than that.

JIM:  Yeah.  And this is when farm subsidies came into becoming a major support program.  They supported artificially high prices.  They set up the federal fund loan system to lend money on long term mortgages to cooperative farm loan associations.  The Fed Farm Board urged farmers to withhold selling part of their crops and wait for higher prices; and despite these efforts, wheat prices continued to fall.  And more importantly, American farmers lost a major portion of the world market.  So at the time, government was encouraging farmers to increase production but withhold it from the market, so we were building these huge surpluses that were accumulating.  And it’s basic economics, if you want higher prices, you reduce output.  We were doing just the opposite, so grains piled up in useless storage. 

Meanwhile, as we withheld our grain from the market, Russia and Argentina stepped in, increased production and took our market share.  So government couldn't thwart the forces of the market because the market said, “okay, you guys aren't going to supply, we'll increase production on our side and we'll supply it.”  And that's exactly what Argentina and Russia did.  What was amazing, eventually, the stock piles got so huge that the government dumped the wheat supplies on the world markets and the prices plunged.  [42:16]

JOHN:  This is almost a boomerang from what we were talking about in the last part of the Big Picture as far as energy.  And government needs more to get out of the way than it does to try to manipulate how we're going to deal with this energy issue because if you look now, government is devoting 25% of the corn crop to ethanol.  And what this is doing is driving up the prices of grain and other food products, chicken, dairy, beef, especially like the feed corn that is used to feed, for example, dairy cattle and that's where the milk prices are affected. 

But Hoover didn't stop there.  Oh, no.  If you're going to create a path of wreckage, you might as well do a good job of it.

JIM:  Yeah.  And as more of these things began to fail, he said, “oh my goodness, we just need more engineering.”  So the next disaster unfolded was the enactment of the Smoot-Hawley tariff, and this was a piece of legislation that virtually killed international trade.  And despite the urging from all of the nation's economists, we had more classical economists, and Austrian economists were coming into prominence at that time, and these economists were saying, “Mr. President, don't do this.  Veto this thing.  This is going to kill trade.”  Guess what?  He passed it, and the day he signed it, the stock market plunged.  [43:30]

JOHN:  Well, we'll have to talk about this in a second.  Anyway, what's amazing is you watch when these disastrous policies are put in place.  First of all, production falls.  That's to be expected.  Then the GDP begins to collapse, prices in the markets and economy and the markets plunge, foreign trades contracts further, hurting US manufacturing and then unemployment rose sharply, and the worse things became, the more they muddled – and that's maybe a better word, instead of meddled in the economy, they muddled in the economy – and the markets just driving it further and further out of trim.

JIM:  You know, you're absolutely right.  It is the imbalances that create a recession, but it was government mismanagement that turned it into a depression.  The government cure was to increase those imbalances, and Hoover's way of thinking, if you analyze it, the stock market crash was not caused by credit being too scarce to commercial borrowers, which is why he called on the Fed to provide more liquidity and credit to the market and lower interest rates.  The very same thing our politicians and the Federal Reserve is doing today.  [44:42]

JOHN:  Well, you would think after studying these mistakes that we would learn from them, but you have world-view issues – meaning collisions – between Austrian and Keynesian type of approaches to things.  And yet at the same time, I don't think politicians learn much of anything, to be honest with you.  Maybe that's a failure of the American education system.  But here we are 80 years later, and it seems like we're committing the same mistakes all over again.  People are opting to feel a lot of pain.  They may not know it as they go to the polls, but they are opting to feel a lot of pain.

JIM:  The one thing that we know studying the markets and the business cycle, booms are always followed by busts where you see these wasteful malinvestments whether it was technology in the first part of this decade or real estate and mortgages today. They need to be liquidated.  That is why recessions and depressions are actually the cure.  It's the economy's way of getting rid of economic toxicity.  When these bad investments are liquidated that is...I go back to biology again.  It's like your body reacting to toxins in your body trying to cleanse itself.  The recession is the very same thing.  It's the economy's way of cleansing itself from all of these malinvestments that were made during the boom.  But what happens?  We can't have a cleansing process, a healing process, government steps in thinking it can cure the patient by administering more drugs.  [46:11]

JOHN:  Or more toxins as the case might be, which is basically what they are doing.  So the economy contracted at that point, the stock market plunged, unemployment followed it on down into the abyss and prices fell despite all of the efforts of the government cure.  And that's why Hoover was out and Roosevelt was in. 

JIM:  And it was amazing too because Roosevelt ran against Hoover as a spendthrift and a tax raiser and of course, he just carried on those very same policies and carried them to even more extremes, but he had a better PR department.  That's what happens when government interferes with markets.  In the end, it's always amazing and politicians refuse to acknowledge this, the markets always win.  In a depression, it's so important that government’s fiscal burden on the economy is reduced, and we're seeing it.  What is happening today?  It's going to be increased because what the government needs to do is free the economy from the government's load of acquiring resources, lowering the burden on businesses and shift total spending in the economy so as to increase investment and lower consumption.  What you hear today in response to the real estate credit crisis is just the opposite: Money printing by the Fed; a dumb, dumb stimulus program that's going to exacerbate the budget deficit without any return; and they are urging consumers who are in debt to their eyeballs because of over consumption to go out and spend more money and go deeper into debt.  I mean it's absolutely insane to consider; looking back 80 years ago, we know this failed and here we are trying to repeat it.  [48:01]

JOHN:  I've got a question here.  As production fell back then, and as the business, the economy in the markets contracted, then the government’s response to increasing unemployment (which is the result of that obviously when businesses have to defend themselves against economic attacks so to speak, then they begin to lay people off, it's just a normal reaction –and of course that's where the public feels the pain)  was to raise taxes and start a government job's program.  Do you have any idea what the rationale of that was?  Did anybody in history ever look at that? 

JIM:  Well, their policies were creating more unemployment.  I mean they were hampering the market's ability and the economy's ability to cleanse itself of these malinvestments.  I mean Hoover was cajoling companies, “don't lay off workers, raise prices, keep your wages up” while the economy was contracting.  It was impossible because companies were losing money, they were going out of business.  And as business contracted, the government took a bigger share of the economy and the bigger government got, the more the private sector contracted in response.  And as unemployment rose, they increased wages, they reduced the hours worked.  This was tried in France a couple of years ago.  They were saying, “my goodness, people aren't hiring.  Companies aren't hiring, so you know what we'll do is we'll reduce the work week from 40 hours to 35 and those extra five hours left over will mean that new jobs will be created.”  I mean this is how dumb government does when it is planning.  So instead of unemployment being reduced, it kept rising and eventually, all of this intervention failed because the unemployment rose, wages fell, prices fell, the stock market lost 90% of its value and credit contracted.  So take everything the government did.  It didn't work.  [49:55]

JOHN:  So as things progressively worsened, they applied a move of the same measures making matters worse, they lengthened the Depression so the would take a worldwide war to bring us out of it, which, by the way, is an important point.  Whenever governments get into tight problems like this, whether it's an inflationary bust or whatever, they tend to get involved in or start wars just because --

JIM:  Because economic tensions build so much, there is a scramble for resources, a scramble for markets, economic tensions.  I think it was Frederick Bastiat who came up with the saying:  when goods don't cross the borders, armies do.  And that's exactly what happened.  John, it just kept getting worse.  The government created the RFC or the Reconstruction Finance Corporation to make loans to businesses.  We got the Home Loan Bank to discount mortgages and expand the Federal Farm Loan Bank system.  States enacted legislation in a similar vein to prop up prices.  You remember we got the Texas Railroad Commission to prop up oil prices.  I mean it was almost a nightmare.  The worse things got, the more the call was, “well, we're going to tinker with this more, and when we tinker with it more, the problem is we just haven't done enough tinkering.”  [51:10]

PRES. ROOSEVELT:  The only thing we have to fear is fear itself.  Nameless, unreasoning, unjustified terror, which paralyzes needed efforts to convert retreat into advance. 

JOHN:  Well, there we are, we were assured back in the 30s that all we had to fear was fear itself.  And of course what we really had to fear was the New Deal, which a lot of historians say bailed us out of the Depression, but which in reality took the existing disastrous policies that Herbert Hoover had begun, put them on steroids and then delayed the recovery of the Depression. 

JIM:  You know what's absolutely amazing when you take a look at the premise of the New Deal which was expressed by one of FDR's brain trust, a gentleman by the name of Rexford Guy Tugwell.  And he wrote, he believed that more organization was needed in American industry, more planning, more attempts to estimate the needs and set production goals.  From this, they argued that investment to secure the needed investment could be encouraged.  They did not stress the reverse: that other investment s ought to be prohibited, but that was inherent in the argument.  All of this was, so far, in accord with the thought of the collectivists in Franklin’s brain trust who tended to think of the economy in organic terms.  And it was amazing, John, at that time, the Chamber of Commerce was calling for public work and federal relief.  The National Association of Manufacturers and the National Industrial Council urged public works and regulation of the purchasing power of the dollar.  I mean one organization after another was intervened, the oil producing states enacted law to enable government commissions to fix the maximum amount of oil produced.  I mean everywhere you looked, there was a whole consensus that came over the economy that we need to get into central planning.  And, you know, we're going to draw some parallels to this election what was going on, but it was a whole mind set and a change of thinking.  As these policies were implemented, as the government interfered with the marketplace and as it caused the failure, the greater the failure, the greater became the mistrust of the marketplace and the greater the argument was for more interference in control of the economy.  And as we all know, where did it all lead to?  There was a lengthening of the Great Depression that lasted probably 12 years and eventually was solved by a worldwide conflict.  [53:52]

JOHN:  You know, it's interesting because in the early part of the 20s, unknown to most Americans, if you go and read some of the memoirs of people who lived in and active in government there was sort of this flirting too with Marxism.  There was a quiet admiration among a number of people about the concept of central planning, etc.  So there was also pressure to try to do that in the psychology of the time.  But as you say, it didn't work.  Let's face it, FDR beefed up government spending, he asserted more control over the economy, increased deficit spending and in order to pay for it, increased tax rates to –brace yourself – 94%!  You've got to explain to me when we get done here how he would think this would help the economy.  He inflated the currency, took away the people's gold and then devalued the currency by almost 75%, which really was fraudulent.  You know if you arrived at that in a business deal, we probably would be prosecuted for it or something like that.  But why do you think moving things up to 94%, that was going to do something that would help the economy?

JIM:  Because as they tinkered with the economy, they worsened production, they worsened economic output.  Unemployment kept increasing, so they are thinking: “Well, the business sector isn't doing it.  We'll just take everybody's money and we'll create the economic growth and we'll create the jobs.”  So despite increasing the tax rates, here is the amazing thing.  Government tax receipts, we know this, oh, my goodness, I mean just read Charles Adam's book, For Good and Evil, it's not just the last hundred years we know it's a failure, it's been going on for 5,000 years.  But government tax receipts continued to fall, so as government tax receipts fell, the government's deficit got even worse.  And eventually, government rose to almost 25% of the economy, which was almost unheard of prior to the Depression.  And despite the cheap money, nobody wanted to borrow because of what the government was doing, and it caused the banking system to fail.  [56:00]

JOHN:  That's a point that should be raised here.  Banks are losing, what, hundreds of billions of dollars right now?  And they are very reluctant to lend, and yet politicians are urging them to keep the credit flowing, which I've been talking to some loan officers and they said it's getting really strange out there in the market because things aren't following the normal indicators that you should see out there.  So this is the same thing that happened in the 30s, and at the time, it had disastrous results as well.

JIM:  Yeah.  In a time of depression or a financial crisis, banks are going to be reluctant to lend or invest because they wanted to avoid endangering the confidence of their customers.  They don't want a run on the bank.  They want to avoid the risk of lending to or investing in ventures that are probably going to fail or default.  And the artificial cheap money policy in 1932 actually greatly lowered interest rates all around and they further discouraged the banks from making loans on investments because the spread was narrow; and that spread was narrowing at a time when risk was increasing, so the incentive to bear the risk, the prospective interest rate terms were lowered by government manipulation by interfering in the marketplace of interest rates. 

And it was amazing because during the 20s in a typical year, you had maybe 500, 600 banks fail.  In 1930, 1350 banks failed with deposits of 837 million.  In 1931, 2300 banks failed with deposits of 1.7 billion.  And in 1932, 1500 banks failed having 706 million in deposits, so this enormous increase in bank failures was enough to give any bank pause.  I mean if you're in the business and you’re seeing everybody around you going out of business, are you going to go out and make loans?  I don't think so.  And what was amazing, despite all of these inflationary policies, what defeated everything was foreigners lost confidence in the dollar, partly as a result of the program.  They drew out their gold.  American citizens lost confidence in the bank.  They changed their deposits into Federal Reserve notes, and finally bankers refused to endanger themselves even further, either using increased resources to repay debt to the Fed or allowing them to pile up in their vaults.  So unfortunately, the inflation by the government was turned into deflation by the policies of the public and the banks and the money supply actually contracted, and we got to the depth of the depression between 32 and 1933. 

JOHN:  Just amazing.  Well, there you have it, government planning failed in every aspect, which by the way it did in the Soviet Union as well.  It failed to reduce unemployment because unemployment actually increased to the point that one out of every four Americans was unemployed.  It failed to boost wages.  Wages fell.  It failed to protect banks because thousands of banks failed. 

And it's sobering to remember here, Jim, that just less than two decades earlier, the Federal Reserve was created to allegedly prevent any such type of failures in the future when it was the Fed once again that sort of precipitated the whole thing in 1929.  It failed to boost the economy –this is government planning! – the GDP fell by 44%.  It failed to increase government revenue despite tax rates which finally hit 94%.  The receipts to the government fell by 20%.  Government deficits mushroomed along with the national debt and eventually the hard times created around the globe led nations to war.  That's ultimately what they did.  The question remained, have we learned anything from this important piece of history, or are we just going to traipse down the trail and condemned to make the same mistakes? 

JIM:  John, you can just see this.  We're seeing it in this election.  It's been very fascinating.  If you look at the Republican side, the most free market Libertarian, constitutionalists, soundest economic policy person out there was Ron Paul.  He's only getting, well, probably about 5 or 6% of the Republican vote.  The next guy to Ron Paul was Romney, and he was rejected.  So the two guys at the top of the heap of the Republican party are populists.  Huckabee and McCain.  And likewise, over on the Democratic side, Clinton and Obama are both populists.  And if you listen to what their philosophy has been, if you look at their voting records, they advocate more government control and planning of the economy.  So here we are, as we have a class of Hooverites that are rising to the floor and the public is clamoring for these kind of people to lead this country out of the problems that you have. 

Now, we've been talking about that how the government created the Great Depression.  If you want to sort of follow this, you can go to Mises.org and you can download Murray Rothbard's America's Great Depression.  And after you read this book, you're going to begin to recognize the same policy mistakes being repeated today that is leading us down that same path.  Both parties are now advocating the same policies, and there are very few voices out there that are calling for a return to sound economic policies that preserve and protect the economic well being of most Americans.  As I mentioned, Ron Paul is warning of the consequences, but few people seem to be listening.  Instead, more citizens are crying for more government intervention in the economy. 

And I think if you read Rothbard it's going to warn you of the consequences that are going to follow in the wake, and one of the things that I think you're going to see, this great credit crisis is going to be the precursor of a great inflation.  In fact, there is nothing more damaging to the well being of an individual as inflation.  The majority of people suffer badly from inflation, and here is the problem that we have.  They most likely are blaming the free market for their plight rather than blaming the central bank for the debasing of the currency.  I mean Greenspan slashing interest rates from 6 to 1% in order to fight off a recession and the bursting of the technology bubble created the real estate and the credit bubble.  And so here we've had two bubbles already that have burst in this decade.  Remember that line, John, from Ron Paul where he was questioning Bernanke and he said, “so here we are, we have an inflationary crisis, we have a bursting bubble and your remedy is to apply more inflation.”  And the noted Austrian economist Ludwig von Mises wrote:

Nothing harmed the cause of liberalism more than the almost regular return of feverish booms and of the dramatic breakdown of bull markets followed by lingering slumps.  Public opinion has become convinced that such happenings are inevitable in an unhampered market economy.  People did not conceive that what they lamented was the necessary outcome of policies directed toward a lowering of the rate of interest by means of credit expansion.  They stubbornly kept to these policies and tried in vain to fight their undesired consequences by more and more government interference. 

So in summary, as an Austrian would look at this, the current credit crisis appears to be a precursor of a great inflation.  It was something I wrote back in October of 2004.  I had studied this for almost three years after I wrote my Perfect Storm series because I wasn't quite sure which way we were going.  And what I think we are going to see, John, is a recession.  I think we're on that path right now.  We're going to see anemic recovery.  Then because of policy responses next year with the new Congress and president, given who is leading both sides of the parties, we are going to see policies enacted that are going to lead us to another recession in 2010.  It's going to be very similar to kind of like the double recession that we had back to back in 79 and 81, and then it's going to be the policy responses to the recession of 2010 that is going to turn it into a hyperinflationary depression.  [64:38]

JOHN:  Does anybody make out during this time in terms of – I mean we were talking about concept of socialism for the rich recently. 

JIM:  Yeah.  You're going to see some people become very wealthy.  I mean if you were in gold, if you were in Treasuries and out of the stock market in a deflation as we had a deflationary depression in the 30s.  I mean Joe Kennedy sold all of his stocks, went into T-bills and municipal bonds and then in 1933 in the depths of the depression bought one whole block of downtown Chicago.  Bernard Baruch sold his stocks, got into gold, made a fortune and then went into government.  So there were a lot of people that made monies in this period of time.  And so given the fact that this is inevitable (and it is inevitable given the consequences of the policies that are being enacted and also the new policies that will probably be enacted) the best thing you can do is fend for yourself and take care of yourself because you can't change the political system at this point.  So you might as well look out and try to take care of yourself and your family.  [65:46]

JOHN:  Yeah.  Maybe that's the key thing we would tell investors here and that is you have to understand what is happening and then take whatever actions are, of course both legal, ethical and appropriate for the situation that you're in.  But the key to it is understanding what's actually happening versus what the public impression of what's happening is.  You're listening to the Financial Sense Newshour at www.financialsense.com.  We'll have more of the Big Picture coming up in the next hour.  We'll be talking about more signs of a recession and something new, strategery.  We're going to take a break and I'm going to practice wrapping my mouth around it.  We'll be back in just a minute.

 Part 2

 More Evidence of a Recession

JOHN:  This week Congress passed a stimulus package – I should say they passed a stimulus package quickly.  When have we ever know any of these guys to pass anything quickly.  Let’s face it, the impetus to do something was pushed by the fact if you look at the various reports that have been coming out lately – housing starts and sales were down, ISM service report dropped 41.  Basically now the message they’re trying to say is ‘don’t worry, be happy’ as they put out a stimulus package to make everybody happy.  And, oh, look at that! It just happens to be an election year.  There’s no relationship between these two.  You understand that; don’t you?

JIM:  No, no, no.  That’s incidental.

But you know one of the reasons I think they’re moving on this front, there is every evidence that the economy probably entered into a recession probably starting in December.  You have to understand that the National Bureau of Economic Research which usually pronounces a recession and makes it official, they usually wait anywhere from 8 to 16 months after a recession has started to make it official.  So usually by that time you’re coming out of the recession by the time that they announce it.  But if you look at the four variables that determine a business cycle peak and a trough –non-farm payrolls, industrial production, real personal income less transfer payments, and real business sales – the recent behavior of all these variables are down and most of them...I think one of the last ones peaked in December of 2007.  Both industrial production and real personal income peaked in September; and real business sales appeared to have peaked in October of 2007.  So we’re getting more and more evidence, whether it’s the Leading Economic Indicators, the ISM numbers as you made reference to; more of that stuff is coming in right now. 

And what they’re hoping is this stimulus package combined with a number of consecutive Fed interest rate cuts – remember, the Fed has cut interest rates now by 2 ¼% when it began last September.  So they’re hoping the combination of this will either 1) if we do enter into a recession, it’ll make it short and shallow – that’s the best hope of everybody; or 2), we can narrowly avoid one.

It was interesting to see some of the economists are already slashing their economic growth rates for every single quarter of this year.  I think the economy grew 0.6% in the fourth quarter and economists tend to use linear extrapolation, so it’s no secret that the growth rate for the first quarter of this year is expected to be 0.6%.  And let’s fact it, with the way they juggle the inflation numbers which subtract from nominal GDP, if we were using real inflation numbers you know I think it’s pretty evident that the economy is already in a recession.  [3:03]

JOHN:  Why is it takes the economists so long to figure that out?  Like you also say before:  A recession is officially reported...it’s sort of like having an altimeter while you’re skydiving which doesn’t tell you where you are until you’re a thousand feet lower than it indicates.

JIM:  Yeah, you just drop from 30,000 feet and at 1000 feet you’re beginning to see the ground below you.

JOHN:  But it doesn’t tell you that...

JIM:  It’s probably conservatism, and there’s probably hope and optimism; “Hey if the Fed’s cutting interest rates...” You know there’s always this belief that the Fed can avoid a recession.  Well, they didn’t avoid a recession in 2001, they didn’t avoid a recession in 1991.  You know, we’ve had two mid-cycle slowdowns, one in 94 and one in the mid-80s with recessions taking place at least in the last couple of decades every 10 years.  But the housing market affects more of the economy than let’s say tech stocks; so if you take a look at the technology boom, a lot of people owned stocks, they owned them through mutual funds and their 401K programs, most people were continuing to work, they were continuing to contribute to their program, they were saying, “hey, I don’t need the money for 10, 15 years.”  It didn’t affect the economy as much.  But when you start talking about the housing market, that has more of a direct impact on the economy and it also has more of a direct impact on the financial system which is what we’re seeing now.  So this gets back to our Oreo theory that in the first part of the year that dark outer shell in the first quarter where you’re going to see a slowdown in the economy, probably a recession.  And then also taking a look at some of the economic indicators whether it was the retail sales in the month of December, they’re coming in, chain store sales are coming in much weaker, so it’s obvious the consumer  is starting to slow down. 

I think the most important thing though,  however, at this time is the business sector because quite honestly, the business sector is in the best shape it’s been in a long time because the 2001 recession was a business-led recession.  After that recession, businesses cut payroll, they trimmed costs, they rebuilt their balance sheet, and despite a slowdown in profits we still have some healthy profit margins for most businesses.  So the real key point here is are we going to do something that jeopardizes business because that’s exactly what happened during the Great Depression in the segment we covered in the last hour, because there is this growing populism in both parties:  It’s time to lash back at business.  And you take a look at what a lot of these candidates are talking about, this could be a very negative environment going into next year if we are at that time coming out of a recession.  And if we are, it’s going to be a very anemic recovery before I believe we’ll head back into another one.  But you know, you take a look at whether you’re looking at payrolls...and the other interesting thing too was, remember in the month of January when the Bureau of Labor Statistics revised their birth-death model statistic, they showed the economy created roughly 380,000 jobs less than was reported.  So, just taking a looking around you, I don’t care if you look at a parking-lot indicator, you’re seeing it in the retail sector: a lot of stores are missing their sales, their estimates are lower; a lot of them are starting to contract now, closing outlets.  I think quite honestly, I think George Soros was right when he made a statement at Davos that the age of consumerism is over.  [6:42]

JOHN:  So what does that mean then if we say the age of consumerism is over?  Where will we go, what will we do?  It sounds like orphans here.

JIM:  Well, you know, it’s been imbalanced because what drives jobs, what creates wealth is production.  It is the creation of goods, the making of things and savings that creates wealth in an economy.  And if you take a look at the misplaced economic policies of government, the Federal Reserve and the strong emphasis...what do you hear today?  Consumption, consumption, consumption.  “Well, we’ve got to get the consumers to consume more.”  Well, goodness gracious, they’ve consumed so much that’s why they’re in trouble right now; their balance sheets are overstretched.  They’ve got a lot of debt on the balance sheet, their debt-to-GDP ratio has risen significantly.  And so the good side of this is if you allow this system to cleanse itself and get businesses, get people to start saving, get people to start investing, businesses to start investing, there are all kinds of things that we could be doing here. 

Now, the one glimmer of hope – and I hope they don’t destroy this, it is looking like we could be seeing a rebirth or a renaissance in manufacturing in the United States.  A number of foreign countries are relocating plants here because they can build things here more efficiently, you’ve got Toyota here, you’ve got Mercedes here,  BMW here, Honda here, they are looking to expand.  You have Airbus talking about coming here.  So that’s where you’re going to create wealth in the economy because it’s production, it’s the building of factories, the increase of manufacturing output that creates the jobs, the salaries that create wealth in an economy.  And so if government muck this up we can get through this and probably go on a more sound footing.  I mean consumers don’t need to increase consumption, they need to increase savings; just as businesses became overleveraged, they became overbloated with personnel, they downsized in the last recession in 2001, they trimmed back payrolls, they got more efficient, they invested in technology, productivity, they used profits to rebuild the balance sheet, you know, that’s what consumers have to do.  But what are we hearing from Washington especially with this rebate is they want people to go out and spend more money.  [9:08]

JOHN:  All right.  So quo vadis?  Where is this all going to wind up if we just take all of these projections lines and move them forward. 

JIM:  One of the key events this week was a change in the policy of the ECB (that’s the European Central Bank) hinting that they’re going to be possibly cutting interest rates.  Some are saying as soon as next month, some are saying as soon as April.  The timeline has moved closer as the European economy is starting to weaken and this whole decoupling thesis that well, the US was kind of standalone, it’s having its own problems but the rest of the economies of the world are going to be exempt.  That’s not happening.  Chinese economic growth this year will probably fall from about 11% to the upper 9% level; Europe’s economy, if they do not go into recession, it’s going to look like one, which is why the ECB is starting to change its tune here.  So what we’re going to see now is global reflation as all central banks, whether it’s the Fed, the ECB, Bank of Japan, the UK or Canada, all start singing the same tune and dancing in the same chorus line.  So what I think you’re going to have here is globalized reflation efforts.  The last hold-out has been the ECB and now there’s every bit of evidence that they’re going to start cutting here soon.  [10:29]

JOHN:  So, to go back to the Oreo theory that we keep thumping here, the Fed and all the other central banks –the major ones – are going to cut interest rates here.  They are moving if not in lockstep, but they’re moving in common directions.  And the government is going to spend money to try and goose the economy.  Is this going to create this creamy center that you keep talking about, in other words, crusty at the beginning, smooth – I’d say probably all the way through the elections, somewhere up into there?  And then after the elections and it’s a done deal it really starts to fall apart again. 

JIM:  Well, sure, because you’re going to have a stimulus package and look for perhaps another stimulus package when this one doesn’t quite do it.  So you could see another stimulus package pass late spring or early summer.  In other words, as the economic numbers worsen, as we saw this week with the ISM numbers, retail sales numbers.  As more and more of that evidence comes forward that indeed we’re probably in a recession, look for Stimulus II.  In other words, a second stimulus package and where they realize the first one was a political handout – basically, we’re trying to buy votes here and that ain’t working because a lot of these people who are going to take these rebates are going to pay down debt, they may use it to make house payments...[11:46]

JOHN:  The funniest one is they’re just going to turn right around and pay their taxes with it.  I’ve heard that coming at me already.

JIM:  Yeah, because I mean,  you take a look at even chain stores sales, where are sales going up?  They’re going up at the discounters, the big box stores like Walmart and Costco which are doing much better – especially Costco; Sam’s Club within Walmart was doing better.  And then the other thing that retailers were finding surprising is a lot of the gift cards that people got for Christmas, like at Walmart which was surprised that people were using it to buy groceries with.  So that’s how stressed consumers are right now, and here our government’s trying to urge them to  do that. 

But I would look for maybe another stimulus package to come because remember, Bush did the same thing in 2001 with rebates.  It failed.  It didn’t work and then they had to come up with stimulus package 2 in 2003.  And this being an election year look for some kind of thing they can agree on, maybe spending on infrastructure.  I know that’s being bandied about now that we need to start doing something about our bridges, our levees, a lot of the other stuff that makes this country run.  But look for that to come about.  And then eventually you’re going to get enough lowering of interest rates.  And the bulk of this, and all of this high-powered money created is going to find its way into the financial markets and so we can see a lift here. 

There’s way, way too much pessimism here.  I always try to balance what I read at night, but oh goodness, last night I basically by the time I got done reading a lot of this stuff I almost wanted to just get on my sailboat and pour myself a glass of wine and just sail off into the sunset.  I mean the gloom and doom and pessimism is I think a little bit premature.  I think the real big one...you know a lot of people are asking: “Is this it?  Is this the big one?”  I’m not falling into that camp.  I haven’t been convinced yet.  I think the big one is between 2010 and 2012.  [13:52]

JOHN:  Some time in that crisis window there.  But you’ve really got to stop calling me at 3 o’clock in the morning and crying and crying.  It’s ruining my beauty sleep.

JIM:  I’m just trying to pay you back for you calling me at six o’clock and crying.

JOHN:  All right, you’re listening to the Financial Sense Newshour at www.financialsense.com.  We’ll be back with the last part of the Big Picture right after Other Voices.

 Other Voices: George Tsiolis, President and Founder, Agoracom

JIM:  Well in this information age more and more investors are turning to the internet to get their investment information.  Whether it’s charts, news, information, the internet has become ubiquitous as it concerns the investment industry.

Joining us on the program is the proprietor of a new website.  It’s called Agoracom, George Tsiolis is its founder.  And George joins us this week.

George, why don’t you tell us about your website, how it got started and what its purpose is.

GEORGE:  Hey, Jim.  First of all, thanks for having me on Financial Sense.  It’s great to be able to speak to your audience.  I really welcome the opportunity to speak to them.

Agoracom is in essence an online community for both investors and management of small cap public companies.  That’s never, ever been done before where investors can come online to a specific hub that’s dedicated to a specific company, ask questions to management and then actually get answers back from management.  That’s never been done before and that’s led to great success on our website.  We’ve got about 130,000 people a month coming now and they’re reading about 10 to 11 million pages of information.  So this is only just the beginning and I’ll tell you why.  I know you have some thoughts on a very important matter which is a lot of your listeners have probably tuned away from online discussion forums because of the amount of profanity, spam and stock bashing and rumors, and all of the nonsense that’s gone on over the last decade.  Well, we’ve introduced a model that has eliminated all of that, so that investors can have professional, constructive conversations with each other so at the end of the day they can weigh the pros and the cons and at the end of the day can make their best investment decision possible.  And that has been the basis for our success.  [16:30]

JIM:  One thing that has surprised me over the years with the popularity of online forums is that you almost get the impression that there is no monitoring of these.  I have seen some of the worst profanity, some of the worst rumors – people send us all kind of emails here on the program and at our site and they go, “did you hear about this.  Check this out.”  Some of the profanity – I mean if I wanted to go on an online forum and say the president of a company is a drug dealer or a pedophile or something it goes unchecked and there is no policing of this.  Why don’t you contrast what goes on – and I’m sure our listeners have seen this whether it’s Stockhouse or even it’s Yahoo; why do you think there’s no policing of that?  Is it sort of the idea, well, this is the internet an freedom of speech?  What’s your opinion?

GEORGE:  Yeah, it’s a great question you bring up.  What a lot of people probably don’t realize is that discussion forums at some major finance portals – and you discussed a couple of them, Stockhouse and Yahoo Finance, and people probably remember Raging Bull as well – the problem is the underlying factor of how they are supported.  Specifically, they are supported by advertising revenue, so whenever you’re reading anything on Stockhouse or Yahoo Finance or these other sites, you’ll always notice they have anywhere from five to seven or eight advertisements running at the exact same time all around the messages.

As a result, it’s in their best interests for their own self-serving purposes to serve as many pages as possible, which means they are willing to sacrifice quality for quantity in order to be able to increase their page views and increase their revenues.  So they’re really not there to help you out.  They’ve taken an approach:  If you want to use these sites, use them;  if you don’t, well, you really don’t have an alternative.  And that’s been true for a decade.  There really hasn’t been an alternative out there, so investors have either been forced to actually accept the profanity and rumors and all the real nonsense that goes on online, or actually leave discussion forums.  Where we differ is that we set out to destroy that status quo because we knew how important it would be for investors to be able to have an avenue where they could actually get together and discuss investments in a civilized manner, like you and I would discuss investments face to face, on the facts and agree to disagree but leaving personal comments out of it.   So what we had to do was destroy the status quo and tear apart the model and say, “how do we come up with a model that helps investors, helps companies, and