Felix Zulauf

BARRY RITHOLTZ: Tell us about your background…

FELIX ZULAUF: I grew up in Switzerland, in a small town, I went to all the school. After college, I decided to go [with] a banking career. I regretted it after a year or two because it was so boring — commercial banking, then I finally hit the investment department. It became more attractive. I asked my bosses why stock prices moved up and down, and from their end — I could very soon tell that they had no clue. So I tried to figure out if there were some other people who knew why the markets were moving. And I found some leading opinion people like Bob Farrell. They were all in the US, there were no opinion leaders in Europe. And I decided that I wanted to learn that business and foresee market moves in big ways.

And then I went step-by-step. I started in the equity stock market department in a Swiss Bank in Zurich. And then I transferred to Paris to a stockbroker for a year. There, I really developed my speculative activity. As a young chap, the owner of the shop gave me a credit of half a million dollars. Which was a dramatic amount for a 23-year-old guy, and I started speculating. Went short on the market in the fall of 1973 and you know what happened thereafter into the end of ‘74. So that year I made the first big money.

What was your actual first employer?

The Swiss Bank Corp. I was there for 2 years. And then I was sent off to Paris and to acquainted more with the French language and see another country and another culture and I didn’t want to go to a bank because I wanted to learn more about the investment business. So I went there, came back after a year, moved then to portfolio management (or what they thought was portfolio management), and then went to the US. So in 1976, or 1977, I stayed in New York, put together a trainee program for myself using all of the concept of Swiss Bank Corp. and I trained with Charlie Maxwell in energy and Bob Farrell in Market Analysis and Ed Hyman in Economics and trading in a shop called Salomon Brothers at that time. So I went through Wall Street and all of those firms and it was like paradise.

I’m still friends with many of those people.

It was fantastic. And then the bank called me back to Switzerland in ‘77. And then I changed horses and joined UBS because I wanted to learn money in a more aggressive way, and Swiss Bank didn’t offer me that job. That was ‘77 — I joined UBS and the mutual funds management department and research. And I ran the US equity funds and global equity funds and a raw materials fund and became a global strategist for the whole UBS group. And later I ran the institutional portfolio management department at UBS and then came 1987. I was very instrumental to push UBS equity allocations to the highest in all of Europe. At that time, 65% equity in balanced accounts was extremely aggressive in European standards. And in ‘87, during the summer, I tried to reduce that because I was also part of the investment committee, and I convinced the committee but general management then vetoed it and that upset me so much that I stopped there and liquidated all equities ahead of what thereafter became the crash of ‘87.

And it didn’t make many friends. By hindsight, I think it was the most difficult thing I ever did because I never got the credit for it. I got the blame because all of my friends and colleagues looked terrible next to me. You know, from a political point of view, it was not a good move. But from a trustee point of view, it was the right move and also from a professional point of view, it was the right view.

Then I decided I needed to join a smaller money management operation where I had more freedom and I joined a subsidiary of Credit Suisse at that time as an executive vice president in charge of the whole investment policy. And then came ‘89. The leading portfolio managers were very successful with Japanese equities and I turned very bearish on Japan and they took it as a personal insult that I turned very bearish on Japan.

At 39,000 and something, and I think it was January of 1990…I turned very bearish and pulled… And it then happened and it made it clear to me that I had to go on my own to manage money the way I thought was right.

Before you launched your firm, you had essentially rotated at some of the biggest banks in Europe and you had come to New York and worked at some of the biggest banks in the city. And the takeaway from all of this is that there are institutional impediments for a money manager and a trustee to operate on behalf of the clients.

So I became an entrepreneur and started a new financial management firm. I was 40 with two small kids and no client so the first six months were very tough because I could not attract any clients…which was very nerve-wracking. But after that, the ball got rolling and I managed individual accounts. i just wanted a limited number of individual accounts that I could manage in my own fashion so I could go long and short but not leverage. Which was basically the ways I ran my own money in earlier times. But later on, I moved away from leverage because too much leverage is where you make the most mistakes.


And did you set this up as a hedge fund or as a managed assets account?

It was managed assets for several years and then it was just too much work with individual accounts. I decided to channel everything into a fund and we launched Zulauf (Europe) Fund, the fund for Europe equities (long short) which became very successful. And later we launched a natural-resource related equities [fund] and later a global macro fund. And then I was very exhausted in the year 2000 because I basically did everything myself. I had a few employees — two portfolio managers and analysts but they left at 5 o’clock in the evening and they went on vacation. And if something went wrong, you know, the old story. Basically, you’re married with the company and you’re married with the markets and you cannot let go.

So at 50, and I have to mention that my father died at age 50. I made enough money so I decided to go slower and wanted to phase out really. I feared that I would kill myself. And then I started to sell my company and sold the majority of it to these two employees and for awhile it worked out very well. I was more the senior advisor and giving my advice and my input but I was not running the day-to-day business. They moved into a direction that was further and further away from my philosophy and that created problems because I had raised basically 90% of the asset. And then we decided to split the company and I took my share — one fund, one small global macro fund and kept the name and they changed their name. And we are totally unrelated these days. And so I have just a small shop where I run a conservative global macro fund and advise some large clients and institutions and family offices.

I have to mention that these times are so fascinating that I don’t want to give up running money but I don’t want to be glued to the screen 24 hours a day. And I am the senior advisor to a newly launched global fund in northern California — 300 North Capital run by a gentleman who is a very successful equity manager. He wanted to go global and macro and he asked me to help as a senior advisor and I will advise him on a weekly basis and, if necessary, on a daily basis. I will give strategic input and be the partner in terms of discussing any of his ideas.

This is a hedge fund.

So it’ll be global macro, and you’re going to be the senior advisor. Long/ short and not a lot of leverage. That’s the approach?

That’s right.

Let’s shift gears and talk a little bit more about global macro and your approach. When you’re doing your day-to-day work, what are you looking for? What is a day in the life of Felix Zulauf when he gets to the office?

Well, I’m a believer in cycles. I strongly believe that an economy — all economies — do not move in linear but in cyclical fashion. And so do financial markets. And my goal is to catch most of the up cycles and most of the down cycles, because assets are priced based on where we are in the cycle. So I do a lot of cyclical work. I do not moon cycle but the classic business cycle. There is the 3-5 year inventory cycle that they teach in basic economic theory, then there is the investment-related cycle which lasts 9 years. And then you have the 18-20 year real estate cycle and etcetera. I try to get a big picture of where the major economies of the world are moving and where the risks and pitfalls will be in the next six to 12 months. That’s my work — to find out where we are in the business cycle. And then I apply classic tools like monetary analysis, I do valuations because capital markets go from one extreme to the other. They never go in between and reverse to where they come from — that’s important to understand.

Once it hits an extreme (like in 2000), it does not go to a new level in the historical range in terms of valuations and then goes back to overvaluation again. It always goes from overvaluations to undervaluations.


Is that true for the housing market in the US?

The housing market has been a linear affair, particularly since the gold standard was abandoned. When you overstay a cycle by these aberrations like two expansive monetary policies, you could a stretch a cycle for a long time. But when you do that and overstay a cycle, you create more excesses and the correction, when it comes, will be happening in a much-altered time frame than normal. And it will be much sharper and much more painful.

Felix, you may be the first person I’ve heard who is blaming the US housing bust on Richard Nixon.

Well, in a way, you’re right. It all started with that [Nixon's taking the US off of the gold standard] but it added. The down cycle is usually here to shake off the weak participants in the system and to correct the successes that have been built up during the up cycle. When you do not let that happen, you take more and more excesses with you, which over the long term and over many cycles will build up to extremes — and that’s where we are now.

Would you say that the ultra low rates that we saw…after the US crash when the US fed took rates down to 1%…so in other words, we never saw the cleansing effects of the 2000 crash, we just kicked the can down the road?

The 2000 excess was really the result of the bailing out and the easy money after the 1980’s long term capital and the Asian Crisis and the Russian default.

So ‘97/ ‘98 begat 2000, which begat the 2003 crash which set up the ‘07/08/09 collapse.

That’s right.

So we end up with these cycles where intervention from the Fed and elsewhere, in an attempt to prevent the pain, just make worse and worse.

Yes, and now, we are at the point where over the last decade, the regulators for the banking industry allowed the banks to reduce their equity capitals step by step, which really was another element creating the boom and the bubble in real estate and other sectors. And now we are here suffering from the fallouts of that bubble bursting…In Europe, it is even worse than in the US. And the problem then comes that the banks have to be bailed out. And bailing out the banks in the system pushed government debts to much higher levels. The question is, what will we do next time when the governments need to be bailed out.

Because the problem is that we are living in a fiction that we can enjoy a relatively high level of prosperity for our average citizens in industrialized countries by going more and more into debt. And Greece, in a way, was a stopping point. The markets said, “There is a limit, we are not financing it any longer.” And then the European Union was changed to a transfer union all of a sudden. Now, the next thing to drop is Spain, where we have a real estate problem that is bigger than in the US. There are more homes for sale in Spain than in all of the USA. And prices have so far only gone down 10 percent because there are no transactions. But once transactions are forced by the banks, because the banks are forced by the government to clean up the situation — then prices will come down 30 to 40 percent and probably end at 50 percent down and then the banking system is bust. And the insurance system is bust. And then the government has to bail them out and the government is bust. And then what?

So I see this problem of over-indedtedness moving from the periphery of our global credit system to the center. The center is the US. And believe me, the US has its own problems. Half of the US states are running deficits that are bigger than Greece.

I think this whole process will run another few years until it reaches the center. And the point is that at some point in time, the Central Banks [will] have to bail out the governments. And maybe on the way to that point, there will be some countries that will default, and then restructure — which would be the right thing to do, actually. But at the present time, Greece should have restructured. They should have claimed default and then the debt should have been restructured. But the problem was that the banks could not take that hit. So bailing out Greece was bailing out the banks.

I do not know what the final outcome will be. I think that historically, when you look at governments that are highly indebted, you have either defaults or you have printing money. I would assume that most of the European countries [aren't party to the latter] because they have the Euro and it is harder to run the printing press than if you had one country and one government that has sovereignty over its own currency. They [the European countries] will probably go towards restructuring. And within the group of sovereign countries (I would include the UK, Japan, and the US probably) — they will probably try to run the printing presses up and go into massive debasement of the currency. This will, of course, create a payoff later on in the currency markets and currency controls.

Do you think that members of the EU are at a disadvantage because they do not have the ability to inflict these loans upon themselves or does it work to their benefit that they’re forced to take unpleasant-tasting medicine to avoid much worse tasting medicine down the road?

Well, I don’t believe that a country like Greece can, through conventional steps, heal its situation. That’s impossible. They have a program to heal deficits…but they will kill themselves by doing it. It will push the economy into a massive deflation. And I do not think that it is politically possible for a long time — people will revolt.

So, in a way…the Euro acts like the gold standard in the 1930’s for the weaker economies. And in the 1930’s, those countries [the weaker nations] came out of the Depression first (that debased and devalued their currency relative to gold). And then they could recover. And I think that will be part of the solution. We have never had a situation like that — all of the major industrialized countries were hitting the fan at the same time, basically. This is a unique situation, and I would be lying if I told that I knew exactly what the outcome would be.

What’s your take on the obsession over every open, every close — especially now that you’re more of a weekly advisor than a daily tethered to the machines?

I’m one of those poor guys who never lives in the present but always lives in the future. In a way, I draw like a sine curve for a cycle. And according to my analysis of the big picture of a monetary factors of market prices and trends and momentum and valuations/ sentiments, I try to place on that sine curve where the economy and the different markets are at the time.

And then, based on that, I read reports and glance through the newspapers and I try to think whether the news today confirms what I think is where the markets are in the cycle. If they do, then [I] go on to the next thing. If they don’t, then I have to check it out and see if this is noise, or an aberration, or a delay, or whatsoever. That’s the way I look at the short term.

How do you avoid the classic investor foible of confirmation bias? Especially with the internet, you can very easily only read the things that agree with you and nothing else?

Every human being tends to be lazy, and tends to like people and opinions that tend to agree with him. My situation is that I really grew up in the whole industry as a maverick. I was never a mainstream guy. I can see best when I can see lonely. And the majority is on the other side. But I reason, I look at them, and I check it [their stance] out. And you know that the markets are horrible. The markets tell you, relatively quickly, when you’re wrong. So I’m very risk-averse. I like to make money, but I hate to lose money. So I’d rather make a little bit less and not lose money. That is something that I learned from my youth on. I wasn’t born with a golden spoon in my mouth, so I had to make my fortune first all through hard work and suffering. And I don’t want to lose it.

I’ve found that some of my bad calls have taught me a lot of lessons. Any in particular stand out for you?

In my younger years in ‘74, when I was bearish on the markets, I turned bearish on Japan and didn’t understand that market for some years. And that was a horrible mistake. It was a mistake by a missed opportunity and not by losing money, but it was a horrible mistake.

And how about more recently?

In March ‘09, I turned bullish for a rally. I saw that in 2 to 4 months it went up 25 to 40 percent and I didn’t expect that rally at the beginning when it started to last that long and go that far. Once it never corrected, I had to go back to my drawing board and do the homework and I sought a bet that was very similar to two previous cases in the history. One was in the US — that was in 1938 — that rally had the same characteristics in terms of fundamentals and in terms of technicals. And the other case was in Japan in 1995, ‘96. Both rallies lasted one full year. Both rallies were eventually fully retraced and that’s what I think will happen here too.

So now, here we are, it’s 2010. What stuff catches your attention? You mentioned before this is a fascinating time to be investing. What makes it so?

We came out of a time when monetary policy worked extremely well for quite some time. It worked well for the economy because when the Fed banks cut interest rates and stimulated the system, you had good growth following through later on with a time lag. You had chemical markets rallying and equity markets and credit markets and commodities and etcetera.

This time is different, because we have such a high level of debt that monetary policy has become very inefficient. And in ‘09, monetary policy alone would not have worked if the Fed and other central banks did not go out and buy, for trillions of dollars and Euros, financial assets in the market directly. Because monetary policy alone did not work. We have basically zero interest around the world in the major industrialized economies and that alone is not working. In a situation where you have too much debt and the private sector begins de-leveraging, monetary policy doesn’t work. It’s similar to the situation in Japan, although the problems there were even more severe. What works is fiscal policy, and fiscal policy gave us this kick in ‘09 and carrying through the economy up to this day. But these fiscal stimulus programs will have run their course very soon. And then we are back to final demand.

So we have three factors moving the market. One was the stimulus demand, the other was the re-stocking of inventory throughout the manufacturing sectors of the world, and the third was financial banks manipulating financial markets up to the point where they got the prices where they wanted them. And I think quantitative easing to that degree is not possible in the current environment without first having a crisis again because you run into political problems. And the same is true for government spending of the size we have seen last year. Because the political framework is such that some people are very concerned with the debt that we are piling up virtually everywhere. And therefore, the markets are now forcing the hand and you see that markets are beginning to break down. The deflationary forces are gaining the upper hand and the western world is really hoping that China will bail us out by buying all the goods that we want to sell.

I just came back from a three-week trip to China and my view is very different. I think China is in the early stage of a decline with economy weakening that will turn into a hard landing.

So you’re in the Jim Chanos camp that looks at China as another boom about to bust.

I’m bearish cyclically. I’m not sure about the secular framework, but it doesn’t matter at this point in time. At this point in time, the cyclical forces in China are bearish, and the biggest problem for the Chinese people are the run-up in home prices over the last 18 months of about 100%. Private sector debt in China is almost the same as in the US relative to the size of the economy. And the people cannot afford housing anymore so the government wants to bring housing prices down. And they will be successful with all of the tightening steps they have undertaken. The problem is — you cannot just hurt housing. The economy is a mechanism that is inter-linked. If you hurt housing, you hurt many other sectors too. I’m very bearish cyclically for the next two years or so. It could be also that we will never see 10 percent growth again. Maybe we will see 4 or 5 percent, that’s possible.

Ten percent growth in China?

That’s over.

By the way, I’ve been sort of critical about the consistent data that we get from China. How seriously do you take the numbers that we see from the Chinese central authorities?

You should take them with a grain of salt. I think they are trying to improve the numbers, I don’t think they are cheating intentionally so. You have to look at some statistics and compare them to other statistics and you see some flaws and you should take those numbers with a grain of salt.

Any areas of the globe that are looking reasonably attractive?

Well, never before has the world economy been as globalized as it is today. I have recently looked at GDP growth and I have looked at the growth of equity markets around the globe. And these are, historically, the highest correlation metrics. That’s why, being bearish on one major economy — you have to bearish on all of the other equity markets as well. They all move together. And being bearish on equities on a cyclical perspective over the next 2 years or so. I’m also bearish on commodities because of what I said about China.

Including gold?

Gold is not a commodity – gold is a currency and it is the only currency without liabilities and cannot be mismanaged by its own central bank….so gold is different. Gold, I think, can get hit here to around $200 on the downside and about a thousand or 1050 in a shakeout. There was recently too much noise in the gold market, but that was another opportunity to buy, because eventually gold is the best store for your savings over the next five years or so.

And let’s talk about the gold standard again. Can we go back to being on the gold standard in the future?

I don’t think we can go to a gold standard again, because if we go to a gold standard, there is not enough gold around to cover all the needs of all the companies to cover their currency. But gold, in one form or another, will play an important role in the next currency system once it is born out of the ashes of the current currency system. Therefore, I do believe that gold will be the best way to move your savings from the old world, that is in short of a final game until it breaks down completely and we have a new system.

So it sounds like you’re looking for something to be replacing the EU, and the US Dollar, and the Chinese system. Are we looking for some brand new restructuring or are we going to still see the old political lines? How does this play out?

I really do not know. I don’t think that our systems are functioning and we need a new generation of politicians who are completely free of the old thinking and Europe will be disintegrating. We will be going through a lot of pain and changes in the coming years and at some point in time, a new generation of politicians will arrive and they will tell the truth and they will tell the people – “We have a problem, it’s going to be painful to fix it, but we have to do it for the sake of our future and our children.”

In the US, we only have politicians who tell people what they want to hear, and very few who say “Here’s some medicine, it’s going to be uncomfortable, but you got to suck it up because the alternative is far worse.”

That is the case everywhere, but I’m hoping that can change. It doesn’t change just by saying things. You get strong leaders only after a period of pain and hardship. You don’t get them in a world of high prosperity.

So do you ultimately see the EU breaking up?

The EU may not break up, but the Euro…will most likely break up. I don’t see how that can survive. You have a currency for economies with completely different economic structures, and one size fits all in terms of monetary policy, and currency policy and fiscal policy just does not work. Because over the long term, the productivity differences are such that you build enormous imbalances and stress and currencies are here to balance imbalances. And if you take that factor – the currency – away, then you have to balance through the real economy adjustments and that’s much more painful.

What else do you think is interesting, what might you look into buying 1,2,3 years from now?

I think equities in the very long term are interesting investments. But we are not at the point where we should buy them long-term yet. We are in a structural bear market that started 10 years ago. I talked about the valuation cycle and we have gone far away already in valuation declines in Europe. We have gone from four times book value to about 1.2 times book value. We will probably go under book value. In the US, book value is 500 in the S&P. Usually, secular bear markets end slightly below book value, so there is still some way to go.

So that sounds like you think we’ll break the March 2009 lows.

I think we’ll see it again in the next 2 years, yes.

Third World America

By Janet Tavakoli

Arianna Huffington’s new book, Third World America: How Our Politicians are Abandoning the Middle Class and Betraying the American Dream, paints a grim picture of the State of the Union:

“Every day, Americans, faced with layoffs and tough economic times, are forced to use their credit cards to pay for essentials such as food, housing, and medical care—the costs of which continue to escalate. But, as their debt rises, they find it harder to keep up with their payments. When they don’t, banks, trying to offset losses in other areas, turn around, hike interest rates, and impose all manner of fees and penalties…”
Third World America, P. 77.

Our mediocre grammar school and high school educational system continues its downward slide. The Great Recession is squeezing school budgets. We are failing our children, our most important resource of all.

In 2009, the American Society of Civil Engineers gave the nation’s infrastructure a near failing D rating:

“Flip on a light switch, and you are tapping into a seriously overtaxed electrical grid. Go to the sink, and your tap water may be coming to you through pipes built during the Civil War. Take a drive, and pass over pothole-filled roads and cross-if-you-dare bridges. The evidence of decay is all around us.” P. 95.

The over-hyped American Recovery and Reinvestment Act of 2009 earmarked only $72 billion of the $787 billion appropriation of taxpayer dollars to projects to improve the country’s infrastructure.

Meanwhile, multi-national corporations avoid taxes, sheltering $700 billion in foreign earnings to end up with a measly $16 billion (2.3%) tax bill. GM is among those companies, yet it took almost a half billion dollars in bailout loans. Boeing and KBR Halliburton are among the defense contractors that avoid taxes, while enjoying government contracts worth tens of billions.

Banks (not Fannie and Freddie) Crippled the Housing Market

Fannie and Freddie do not make loans. They purchase mortgage loans and earn fees for guaranteeing payments on the loans. According to the Mortgage Bankers Association, in 2006, Fannie and Freddie accounted for 33% of total mortgage backed securities issuance. In the first half of 2010, they accounted for around 64% of new issuance. They were forced to pick up the slack and buy more when Wall Street’s private label securitization Ponzi scheme blew up.

Fannie and Freddie are Wall Street’s dumping ground. They would have had problems on their own, but their problems would not have been close to their current scale, and they did not create the housing bubble.

Congress twisted arms to make Fannie and Freddie buy more than $300 billion of phony “AAA” rated mortgage-backed securities from banks, not counting loans that didn’t meet their stated requirements. Today Fannie and Freddie want banks to repurchase tens of billions of these loans, since they fail to meet representations and warranties, and the banks are fighting this obligation.

Top subprime lenders included Wells Fargo; Countrywide, purchased by Bank of America; Washington Mutual, now part of JPMorgan Chase; CitiMortgage, part of Citigroup; First Franklin (now closed), purchased by Merrill Lynch, which was purchased by Bank of America; ChaseHome Finance, JPMorgan Chase; Ownit, partly owned by Merrill Lynch, which was later purchased by Bank of America; and EMC, part of Bear Stearns, which was purchased by JPMorgan Chase. Most of the rest depended on massive loans from Wall Street. Many of these lenders were sued by states for fraud and paid billions in settlements.


According to Inside Mortgage Finance, the top mortgage backed securities underwriters during 2005-2006, only two of the subprime abuse years, included now defunct Lehman Brothers ($106 billion); RBS Greenwich Capital ($99 billion); Countrywide Securities, which is now part of Bank of America ($74 billion), Morgan Stanley ($74 billion), Credit Suisse First Boston ($73 billion); Merrill Lynch ($67 billion), Bear Stearns, which is now part of JPMorgan Chase ($61 billion), and Goldman Sachs ($53 billion).

The above doesn’t even include the credit derivatives, collateralized debt obligations (CDOs), and structured investment vehicles (SIVs) that amplified losses. Yet, Arianna notes how America imploded while bankers soared:

“Someone like [Robert] Rubin is able to wreak destruction, collect an ungodly profit, then go along his merry way, pontificating about how ‘markets have an inherent and inevitable tendency—probably rooted in human nature—to go to excess, both on the upside and the downside.’ This from the man who, as Bill Clinton’s Treasury secretary, was vociferous in opposing the regulation of derivatives—a key factor in the current economic crisis—and who lobbied the Treasury during the Bush years to prevent the downgrading of the credit rating of Enron—a debtor of Citigroup.” P. 150.

Robert Rubin operated an economic wrecking-ball from prestigious positions of influence including: former co-chairman of Goldman Sachs, director of the National Economic Council, former Treasury Secretary under President Bill Clinton, board member and senior “risk wizard” counselor at Citigroup, member of the President’s Advisory Committee for Trade Negotiations, and member of the SEC’s Oversight and Financial Services Advisory Committee, unofficial econmic adviser to President Obama, and co-chairman of the Council on Foreign Relations.

Rubin is just one example of the many bankers, who helped destroy the economy while creating a connected financial oligarchy.

Hide Billions of Losses, Take Bailouts, Collect Billions, Skip Jail

Instead of apologizing for screwing up, the banks demanded the Great Bailout. At the start of the meltdown, the IMF and the U.S. administration estimated losses of $2 to $2.5 trillion. Unemployment and the losses are now shockingly worse. What was merely a recession escalated into the Great Recession.

How big are the actual losses? No one knows.

After destroying the value of major banks, banks used their enormous political influence—funded with taxpayer dollars—to get Congress to force the accounting board to change accounting rules (as of April 2009) so banks don’t have to recognize losses until they sell the assets.

According to William K Black, after the much tinier S&L crisis, there were over 1,000 successful felony prosecutions, several thousand successful enforcement actions, and roughly 1,000 successful civil actions.

This time Congress gave us the Great Cover-up. Bank officers dodged jail time and collected billions in bonuses. As one of my South American friends observes, he’s witnessed this third-world corruption before, and this time it’s in English.

Banks Stall the Recovery and Prolong the Great Recession

Unemployment marched upward, delinquencies soared, and banks stalled foreclosures. The longer banks delay foreclosures and sales, the longer they can avoid acknowledging losses. Phony accounting and zero cost funding from taxpayers created an illusion of recovery.

Stalling helps banks while they pressure Congress to bail out failed mortgages with taxpayer dollars. Instead of working out mortgages with homeowners, they can wait for a government program to buyout or subsidize their failing loans. The markets aren’t recovering, because banks own colossal chunks of mystery-meat assets.

It’s a black hole of debt. If banks were forced to price these assets at market values and sell them, the market would clear, and the market would make a faster recovery. When Japan did this, it stalled its economy for twenty years, and it still hasn’t recovered.

Voters Must Demand the Solution

Voters must demand that Congress uncovers and publicized facts and prosecutes the financial system’s massive multi-year frauds. This will mean thousands of felony prosecutions, enforcement actions, and civil actions.

Congress completely failed in genuine regulation and enforcement. It must start over on financial reform, regulate derivatives, commodities trading, update Glass-Steagall, and more. It will have to break-up the Too Big to Fail financial institutions.

CEOs of our Systemically Dangerous Institutions (SDI’s) fail to manage them, because no one is capable of doing it. Like a morbidly obese junk food addict, banks won’t even get on a scale. Our banks refuse to properly measure (account for) the problem.

Third World America, elegantly summarizes the way forward. Arianna Huffington names the culprits and gives a roadmap for solutions. The rest is up to us. We deserve better than a third world economy divided by ultra-rich on one side and debt-ridden middle class and dirt poor citizens on the other. Citizens must demand a clean-up of corruption and a foundation for healthy growth.

Third World America will be published September 7 and is available here

Inflating or Deflating

By Frederick Sheehan

The incessant debate of whether the economy is inflating or deflating suffers from a vocabulary problem. This is as it must be since some (Federal Reserve Chairman Ben S. Bernanke) discuss deflation as falling prices of stuff while others concentrate on the debt deflation of an overleveraged economy. The latter is what matters.

This debate often fails to address the important question of “what does it matter to me?” What matters most is the changing relationship of prices. For a worker who pays $3 instead of $2 for eggs, “inflation” is his greatest worry. If, at the same time, the worker receives a 20% pay cut, there may be many causes, and it is at least symptomatic of “deflation.”

The “inflation” and “deflation” debates (at least, in the major media) are of limited interest when they take an either/or approach. In fact – back to “what does it matter to me?” – both conditions are present and moving towards a chaotic conclusion. This should be expected when the Main Street economy is appended to a financial economy, which by its nature (and high-frequency trading) is more unstable than a production economy. Since money-printing is still ascendant, more violent changes in price relationships are certain.

The Bernanke, Geithner, and Summers economy (that is, the economy of the United States) is following the historical script to hyperinflation, total war or social disintegration. In War and Peace, Tolstoy describes the prelude, those halcyon days in Old Moscow: “in those brightly colored rooms – with the music, flowers, dances, the Emperor, and tables set for eighty … The mirrors on the landing reflected ladies in white, pale-blue and pink dresses, with diamonds and pearls … In the first hall were the nobility and gentry in their uniforms … In the noblemen’s hall was an incessant movement and buzz of voices.”

The atmosphere was about to change, as some knew but many chose to ignore: “On the arrival of the news of Austerlitz, Moscow had been bewildered. At that time the Russians were so used to victories that on receiving the news of defeat some would simply not believe it, while others sought some extraordinary explanation of so strange an event.” Chairman Bernanke chose (circa 2004) to believe such odd-ball theories as “the great moderation” and “the global savings glut,” both extraordinarily inept descriptions of a world about to turn over.

Today, still ignorant of the debt deflation that plagues the deleveraging economy, Bernanke gabs before senators of a fanciful world, akin to a shell-shocked survivor raving before the Muscovite cognoscenti of the great Russian victory at Austerlitz. The beautiful people find this reconstruction most pleasing, so choose to trust it. (This is also a simplified version of how the most (not best) educated Americans – who dominate government, the media, think tanks, Wall Street, universities and wherever else they bray – came to ignore Alan Greenspan’s grave deficiencies and to deify him.)

The best families in Moscow held the most possessions and prestige, so they, as is true of their current-day American counterparts, were the least likely to acknowledge Russian weaknesses. Respected Muscovites of title and pedigree were trusted by many of lower rank, and understandably so. Since princes and counts had the most to lose if Napoleon invaded Moscow, and, the aristocrats were privy to insider information from the very top, surely it was wise to follow their bettors’ example.

Alas, those who were surest of their own invincibility were the least prepared for Napoleon’s invasion. Tolstoy wrote of simultaneous inflations and deflations, vast redistributions of wealth, sometimes accumulated over generations, lost in a matter of hours: “Prices that day indicated the state of affairs. The price of weapons, of gold, of carts and horses kept rising, but the value of paper money and city articles kept falling … Peasant horses [ed. note: a humble breed] were fetching five hundred rubles each [ed. note: a life savings] and furniture, mirrors and bronzes were being given away for nothing.”

Not to be neglected are the recriminations. Said the Countess Rostov: “Listen to me Count, you have managed affairs so that we are getting nothing for the house…. You said yourself that we have a hundred thousand rubles worth of things in the house…. Look at the Lopukhins opposite, they cleared out everything two days ago. That’s what other people do. It’s only we who are such fools.” Live and learn, Countess. That’s what happens when you marry the decaying order.

Currently, inflation is present in the money supply, price of gold, and the U.S. stock and bond markets. These are old themes here, so will be held in abeyance to discuss an acute deflationary threat. That is income. It is falling and prices are rising.

David Rosenberg, economist at Gluskin, Sheff, an investment advisory firm in Canada, calculates that “private incomes” (non-government jobs and transfers) in the United States have fallen from $8.7 trillion in the third quarter of 2008 to $8.2 trillion in April 2010. Americans lived beyond their incomes for years. The main source of overconsumption was consumer credit which fell at an annualized rate of 3.75% in the second quarter of 2010. This demonstrates ingenuity on the consumers’ part given that “the big six issuers have trimmed total credit available to their customers by 25 percent, partly by shrinking credit lines and not renewing expired cards,” according to an analyst at Credit Suisse.

Again, there were other sources of spending for the consumer, such as home equity withdrawal (HEW). In 2005, homeowners cashed out over $800 billion of HEW. In the second quarter of 2010, this fell to $8 billion. It was hardly worth filling out the forms.

The government has plugged some holes such as its army of make-work census takers. (It cost the government $15 to count each head in 2000 and $25 per scalp in 2010. This is the Information Age?) President Obama intends to extend make-work to the far abroad, or, at least he did on June 30, 2010, when he told an audience in Racine, Wisconsin: “When you look at a place like Afghanistan, or you look at a place like Iraq, so many of our military personnel are having to engage in work that really should be civilian. So what I’m trying to say is, don’t put all the burden on the military. Make sure that we’ve got a civilian expeditionary force that when we go out into some village somewhere…. let’s make sure that we are giving them the support that they need in order for us to be successful on our mission.” [Italics added.] Who said government workers have no imagination?
Over 40 million Americans used food stamps in May 2010, more than one-eighth of the population. According to Bill King (The King Report), U.S. government anti-poverty spending has risen 89% since 2000 – from $342 billion to $647 billion. This includes such programs as Medicaid grants, food assistance, housing vouchers, and child nutrition programs. Unemployment benefits have been extended several times in the past two years, to 99 weeks at present. The Labor Department estimates that 1.4 million workers have been unemployed for at least that amount of time. Nearly 46% of the country’s 14.6 million unemployed have been without a job for more than six months. Despite the fevered attempts to put money into hands of Americans, there were more house foreclosures in the second quarter of 2010 – 269,962 – than ever before. That was a 38% rise from the second quarter of 2009.

This has the feeling of a dyke about to burst. The government’s finger is forestalling the flood with Federal Reserve mortgage security purchases and government agencies that now issue over 90% of home mortgages. This does not put beer on the table which is a reason to think the housing market is going to topple again.

It is rare for beer sales to decline, yet, as described in the May 28, 2010, issue of Grant’s Interest Rate Observer: “In the 10 years to 2007, American beer shipments rose by an average of 1% a year. They rose by even less than 1% in 2008 and fell by 2% – a virtual collapse in beer terms – in 2009.” (There has been a drift to wine and spirits, but an attempt to find comparable sales data was unavailing.) In another land with stagnant incomes, or, at least where the sun seems to be perpetually setting – Japan – “Spending by Japanese businessmen on beer and sake is at an eight-year low as tighter household budgets squeeze their entertainment expenses. Salarymen go out drinking on average 2.9 times a month, spending about 4,190 yen ($46) each time, a 19% decline from a year earlier.” (Bloomberg, June 10, 2010). Cigarette sales are also falling in the United States, and, in Europe, cell phone usage dropped 4% in the first half of 2009. These trends indicate that “necessities” may be defined down as well as up.

Reduced circumstances will grow more acute as prices continue to rise. The U.S. government contends prices are not rising. Count Rostov could do a better job. Almost anyone who pays health insurance premiums (health costs are 16% of the economy but only 4% of the consumer price index); tuitions (Harvard’s are increasing 4% this year); utilities (“The Los Angeles Department of Water and Power is planning to boost the electricity bills of its customers by 37% over the next four years as part of its effort to cover steadily rising costs.” – L.A. Times, March 26, 2010); and cable bills (“Your cable bill is going up this year — and next year, and the year after that — with no end in sight.” CNN – January 9, 2010); and who buy food and gas are falling behind in relation to the nation’s income.

A food study might be most illuminating, but the reader will be spared such a discourse. It is worth remembering though, that food and energy are not priced in the United States. Brazil, which is booming, sends this reminder from a member of our happy Global Village: “Brazil is running out of beer cans and farmers are leaving crops in the field as surging demand and Chinese-like growth leads to shortages in Latin America’s biggest economy. Cia de Bebidas das Americas, the region’s largest brewer, had to import beer cans for the first time in its 125-year history after local supplies were exhausted. Acucar Guarani SA, the country’s third-biggest sugar producer by market value, left 10% of its crop sitting in the fields an extra 40 days because of a shortage of tires for its harvesters, even after the commodity hit a 29-year high in February.” (Bloomberg, June 8, 2010)

On August 3, 2010, Chairman Ben Bernanke told an audience in Charleston, South Carolina: “[R]ising demand from households and businesses should help sustain growth,” and consumer spending “seems likely to pick up in coming quarters from its recent modest pace.” Well, consumers will be spending more on sugar, beer cans, and cell phones (if they still use them) and Simple Ben’s money printing will ensure a chaotic, and impoverished, finish. The Countess Rostov should mop the floor with him.

The crisis of middle-class America

By Edward Luce

Technically speaking, Mark Freeman should count himself among the ­luckiest ­people on the planet. The 52-year-old lives with his family on a tree-lined street in his own home in the heart of the wealthiest country in the world. When he is hungry, he eats. When it gets hot, he turns on the air-conditioning. When he wants to look something up, he surfs the internet. One of the songs he likes to sing when he hosts a weekly karaoke evening is Johnny Cash’s “Man in Black”.

Yet somehow things don’t feel so good any more. Last year the bank tried to repossess the Freemans’ home even though they were only three months in arrears. Their son, Andy, was recently knocked off his mother’s health insurance and only painfully reinstated for a large fee. And, much like the boarded-up houses that signal America’s epidemic of foreclosures, the drug dealings and shootings that were once remote from their neighbourhood are edging ever closer, a block at a time.

What is most troubling about the Freemans is how typical they are. Neither Mark nor Connie – his indefatigable wife, who is as chubby as he is gaunt – suffer any chronic medical conditions. Both have jobs at the local ­Methodist Hospital, he as a warehouse receiver and distributor, she as an anaesthesia supply technician. At $70,000 a year, their joint gross income is more than a third higher than the median US household.

Once upon a time this was called the American Dream. Nowadays it might be called America’s Fitful Reverie. Indeed, Mark spends large monthly sums renting a machine to treat his sleep apnea, which gives him insomnia. “If we lost our jobs, we would have about three weeks of savings to draw on before we hit the bone,” says Mark, who is sitting on his patio keeping an eye on the street and swigging from a bottle of Miller Lite. “We work day and night and try to save for our retirement. But we are never more than a pay check or two from the streets.”

It only takes about 30 seconds to tour Mark’s 700sq ft home in north-west Minneapolis. Cluttered with chintzy memorabilia, it was bought with a $50,000 mortgage in 1989. It is now worth $73,000. “At one stage we had it valued at $105,000 – and we thought we had entered nirvana,” says Mark. “People from the banks kept calling, sometimes four or five times an evening, offering equity lines, and home improvement loans. They were like drug pushers.”

Solid Democratic voters, the Freemans are evidently phlegmatic in their outlook. The visitor’s gaze is drawn to their fridge door, which is festooned with humorous magnets. One says: “I am sorry I missed Church, I was busy practicing witchcraft and becoming a lesbian.” Another says: “I would tell you to go to Hell but I work there and I don’t want to see you every day.” A third, “Jesus loves you but I think you’re an asshole.” Mark chuckles: “Laughter is the best medicine.”

The slow economic strangulation of the Freemans and millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the ­multiple is above 300.

The trend has only been getting stronger. Most economists see the Great Stagnation as a structural problem – meaning it is immune to the business cycle. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start. Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility.

Alexis de Tocqueville, the great French chronicler of early America, was once misquoted as having said: “America is the best country in the world to be poor.” That is no longer the case. Nowadays in America, you have a smaller chance of swapping your lower income bracket for a higher one than in almost any other developed economy – even Britain on some measures. To invert the classic Horatio Alger stories, in today’s America if you are born in rags, you are likelier to stay in rags than in almost any corner of old Europe.

Combine those two deep-seated trends with a third – steeply rising inequality – and you get the slow-burning ­crisis of American capitalism. It is one thing to suffer ­grinding income stagnation. It is another to realise that you have a ­diminishing likelihood of escaping it – particularly when the fortunate few living across the proverbial tracks seem more pampered each time you catch a glimpse. “Who killed the ­American Dream?” say the banners at leftwing protest marches. “Take America back,” shout the rightwing Tea Party demonstrators.

Statistics only capture one slice of the problem. But it is the renowned Harvard economist, Larry Katz, who offers the most compelling analogy. “Think of the American economy as a large apartment block,” says the softly spoken professor. “A century ago – even 30 years ago – it was the object of envy. But in the last generation its character has changed. The penthouses at the top keep getting larger and larger. The apartments in the middle are feeling more and more squeezed and the basement has flooded. To round it off, the elevator is no longer working. That broken elevator is what gets people down the most.”

Unsurprisingly, a growing majority of Americans have been telling pollsters that they expect their children to be worse off than they are. During the three postwar decades, which many now look back on as the golden era of the ­American middle class, the rising tide really did lift most boats – as John F. Kennedy put it. Incomes grew in real terms by almost 2 per cent a year – almost doubling each generation.

And although the golden years were driven by the rise of mass higher education, you did not need to have graduated from high school to make ends meet. Like her husband, ­Connie Freeman was raised in a “working-class” home in the Iron Range of northern Minnesota near the Canadian border. Her father, who left school aged 14 following the Great ­Depression of the 1930s, worked in the iron mines all his life. Towards the end of his working life he was earning $15 an hour – more than $40 in today’s prices.

Thirty years later, Connie, who is far better qualified than her father, having graduated from high school and done one year of further education, makes $17 an hour. The pace of life has also changed: “We used to sit around the dinner table every evening when I was growing up,” says Connie, who speaks with prolonged vowels of the Midwest. “Nowadays that’s sooooo rare.”

Connie’s minimally educated father earned enough to allow her mother to remain a full-time housewife and still fund two children through college. Connie and Mark, meanwhile, struggle to pay off the stream of bills in a dual-income household. The state of Minnesota pays for Andy, their 20-year-old son, who suffers from acute autism, to study ­theatre at the local community college.

Strictly speaking, Connie actually lives in a four-income household. “When Andy was two, I was told to buy a karaoke machine because autistic children sometimes respond well to it,” says Mark, pointing at what can only be described as a postmodern antique. “That’s how I got into my karaoke ­business. I get about $100 every Wednesday evening. And on Saturdays I manage the local liquor store. We need all four jobs to keep our heads above water.”

So much for the rising tide.

From the point of view of most economists, the story so far is uncontroversial. Most agree on the diagnosis. But they diverge on the causes. Many on the left blame the Great ­Stagnation on globalisation. The rise of China, India, Brazil and others has undercut wages in the west and put America’s unskilled, semi-skilled and even skilled workers out of jobs. Manufacturing now accounts for only 12 per cent of US jobs. Think of the typical Detroit car worker 30 years ago, who had a secure middle-class lifestyle, good healthcare and a fat ­pension to look forward to. Today, he lives in Shenzhen.

Another group singles out the explosion of new technology, which has enabled the most routine and easily automated jobs to be replaced by computers. Think of the office assistant, who once took dictation and brewed the coffee. She is now a ­BlackBerry who spends half her life in Starbucks. Or the back office person who, much like those shoemakers in the fairy tale, now stitches your accounts in Bangalore while you sleep.

Then there are those, such as Paul Krugman, The New York Times columnist and Nobel prize winner, who blame it on politics, notably the conservative backlash which began when Ronald Reagan came to power in 1980, and which sped up the decline of unions and reversed the most progressive features of the US tax system.

Fewer than a tenth of American private sector workers now belong to a union. People in Europe and Canada are subjected to the same forces of globalisation and technology. But they belong to unions in larger numbers and their healthcare is publicly funded. More than half of household bankruptcies in the US are caused by a serious ­illness or accident.

Such are the competing (but not contradictory) ­theories of what causes it. The “lived experience”, as sociologists would say, is another matter. Much like the ­Freemans, whose street is boxed in for about a mile each side by long commercial roads pockmarked with boarded-up shops, ­dollar stores and fast food joints, the Millers could be living anywhere in the US. Only the sultry heat betrays that you are in Virginia and thus in the American South.

Such are the competing (but not contradictory) ­theories of what causes it. The “lived experience”, as sociologists would say, is another matter. Much like the ­Freemans, whose street is boxed in for about a mile each side by long commercial roads pockmarked with boarded-up shops, ­dollar stores and fast food joints, the Millers could be living anywhere in the US. Only the sultry heat betrays that you are in Virginia and thus in the American South.

While incomes in America are stagnating, the cost of education is soaring. Since 1990, the proportion of Americans who are paying off more than $20,000 in student loans a ­decade after they graduated has almost doubled. Lawrence Summers, Obama’s chief economic adviser, who has long worried about the growth of what he calls America’s “anxious middle”, points out that of the major economies, the US has the highest share of graduates in the workforce. But if you take the 25-34-year-old age group, America is not even in the top 10.

More and more young Americans are put off by the thought of long-term debt. “It’s not only fear of the debt – it is the four years of lost earnings,” says Ruth Miller, who was raised a ­Mormon and, to the bemusement of her parents-in-law, has converted Dustin to the faith. During my visit two expressionless Mormon “home visitors” wearing identical shirts and ties turned up and whisked Dustin, Ruth and their two-year-old son into their bedroom for counselling. “I would love to know what they’re saying in there,” says Shareen in a stage whisper.

Having been apolitical, Shareen had a road-to-Damascus moment three years ago after she was contacted by Mark Warner, now one of Virginia’s senators, who asked to fill “a day in her shoes”. The episode, which was used for publicity in Warner’s election campaign, made a fan of Shareen. Having seen how tough Shareen’s work could be, Warner bought her a $6,000 outdoor lift that enables her to bring in wheelchair-bound Marissa through the patio. “What a wonderful man he is,” says Shareen. “I’d love to meet him again.”

So far, Warner’s governing Democratic party has taken only limited action to address the Great Stagnation. On the campaign trail before the downturn, Obama often talked of the long years of “flat incomes” that most Americans had ­suffered and promised to turn their situation around. His administration has taken some steps, such as lifting budgets for community colleges to retrain workers, and launching the widely praised $5bn “race to the top” award for states to improve their schools. But the White House, too, has been overwhelmed by the immediacy of the recession.

The impact on people such as the Millers and the ­Freemans has been acute. First there was stagnation. Then came the recession. “It is like continually bailing water out from a sinking boat and then they take your bucket away,” says Mark Freeman. Out went the pestering calls from the banks ­urging them to take on even more debt. In came the bailiffs. “One day, the banks are sucking up to you, the next they hate your guts,” he says with a Gallic shrug. Only through the help of a friendly lawyer did they escape foreclosure. The Bank of America, which received a $45bn taxpayer bail-out in late 2008, lost the Freemans’ paperwork several times. Each time they had to go through the laborious appeal process again.

“I suspect the bank wanted to foreclose because we were so near to paying off the mortgage,” says Mark. “It was more profitable for them that way.” Eventually the Freemans proved they could keep up with the payments. Mark calculated they have paid $163,000 so far on a house they bought for less than one-third of that amount. It could all have been for naught. More than four million homes have been repossessed in the past three years. “Things have gotten so bad that before the price of copper fell, people were breaking into boarded-up houses to strip them of their wiring,” says Mark.

What, then, is the future of the American Dream? Michael Spence, a Nobel Prize-winning economist, whom the World Bank commissioned to lead a four-year study into the future of global growth, admits to a sense of foreboding. Like a growing number of economists, Spence says he sees the Great ­Stagnation as a profound crisis of identity for America.

For years, the problem was cushioned and partially hidden by the availability of cheap debt. Middle-class Americans were actively encouraged to withdraw equity from their homes, or leach from their retirement funds, in the confidence that ­property prices and stock markets would permanently defy gravity (a view, among others, promoted by half the world’s Nobel economics prize winners, Spence not included). That cushion is now gone. Easy money has turned into heavy debt. Baby boomers have postponed retirements. College graduates are moving back in with their parents.

The barometer is economic. But the anger is human and increasingly political. “I have this gnawing feeling about the future of America,” says Spence. “When people lose the sense of optimism, things tend to get more volatile. The future I most fear for America is Latin American: a grossly unequal society that is prone to wild swings from populism to ­orthodoxy, which makes sensible government increasingly hard to imagine. Look at the Tea Party. People think it came from nowhere. While I don’t agree with their remedies, most Tea Party members are middle-class Americans who have been suffering silently for years.”

Spence admits he is thinking aloud and going “way beyond the data”. And he concedes that America probably still retains its most vibrant strength in its still world-beating capacity for technological innovation. Most economists are not as bleak as Spence. But it is in the neighbourhoods among ordinary Americans that his pessimism gets its loudest echo. “To be pessimistic about the future is so new for Americans and so strikingly un-American,” says Spence. “But most people grasp their own situations way better than any economist.”

Every now and then the Freemans invite their neighbours round to their front porch, to watch the world go by, drink beer and eat Connie’s justly renowned dish of ­Minnesota wild rice. In the best American spirit, Mark and Connie are active neighbourhood people. They are the types who shovel your snow, volunteer for school events, and coach the baseball little league – Mark has done all three.

It takes optimism to be like this. But in the past few years the Freemans have been running low on it. “I guess the penny dropped in the last 18 months when we finally realised that it’s always going to be like this – we are never going to be able to retire on our savings,” says Connie. “As for Andy,” she says, referring to her painfully shy but acutely observant son, “the future really frightens me. If you’re young, it’s bad enough nowadays. But for a kid with autism?”

When I asked what the American Dream means to them, Mark looked despondent. “It’s not a dream,” he said. “I would hate to sound like one of those Tea Party people but I really do want my country back. I just don’t feel like that is going to ­happen.” His words reminded me of a famous quip by George Carlin, the late, great American comedian – “It’s called the American Dream because you have to be asleep to believe it.”

Having been told that karaoke had worked miracles on Andy’s autism as an infant, I asked whether he still liked to croon. Mark and Connie both instantly beamed. “You should see Andy down at the club singing word-perfectly and playing up flirtatiously to the women,” said Connie. “He turns into a different person.”

When Andy came outside, I asked if he would sing. Without skipping a beat he launched into a flawless rendition of “The Impossible Dream”, the song from Man of La Mancha, the 1970s Broadway hit. His performance was uncanny.

“To dream the impossible dream, to fight the unbeatable foe, to bear with unbearable sorrow, to run where the brave dare not go. To right the unrightable wrong, to love pure and chaste from afar, to try when your arms are too weary, to reach the unreachable star. This is my quest: to follow that star, no matter how hopeless, no matter how far.”

It was one of those only-in-America moments. When Andy stopped singing, I turned to Mark and Connie. For an uncharacteristic moment, they were both silent


Edward Luce is the FT’s Washington bureau chief

Country Western

Top Ten Country & Western Songs

10. I Hate Every Bone In Her Body But Mine

9. I Ain’t Never Gone To Bed With an Ugly Woman But I Woke Up With A Few

8. If The Phone Don’t Ring, You’ll Know It’s Me

7. I’ve Missed You, But My Aim’s Improvin’

6. Wouldn’t Take Her To A Dogfight ‘Cause I’m Scared She’d Win

5. I’m So Miserable Without You It’s Like You’re Still Here

4. My Wife Ran Off With My Best Friend And I Miss Him

3. She Took My Ring and Gave Me the Finger

2. She’s Lookin’ Better with Every Beer

And the Number One Country & Western song is…

1. It’s Hard To Kiss The Lips At Night That Chewed My Ass All Day

Billionaire; You Too

By Richard “Sunnyside” Heinberg

What can you do to optimize your chances in the case of hyperinflation, a deflationary economic Depression, an oil crisis, a famine, or a series of horrendous environmental disasters? If you don’t already know, you’d better wise up fast—because some or all of these exciting opportunities are on their way to a neighborhood near you! In fact, one or two may already be tapping you on the shoulder and asking to make your acquaintance.

Pointy-headed intellectuals have been warning us about this stuff for years. Decades. Who cares? Who’s had the time for depressing, worrisome, gloomy, hard-to-understand statistics and graphs? There’s been work to do, money to be made, kids to put through college, new episodes of American Idol to watch.

Until now. We have finally arrived at the fabulous convergence of two Earth-shattering developments: First, real environmental and economic catastrophes are starting to happen and are tugging on our Comfy Cushion of Consumer Complacency, requiring us to actually Do Something. Second, someone (guess who?) has figured out how to frame these mega-scary events in such inviting, entertaining, and potentially profitable terms that the irresistible win/win euphoria of it all can make you almost completely forget just how abysmally awful our situation actually is.

Welcome to my book, YOU can Be a BILLIONAIRE Without Doing Anything!!! In it, you will learn why the U.S. economy is now the butt of jokes in Chad; why the stuff that makes your car go is about to become as rare and valuable as . . . as . . . as something actually rare and valuable; why the global food system is making more and more people watch their waistlines (as they shrivel); and why Mother Nature seems to be puzzlingly mean-tempered lately—almost as if we had done something to annoy her.

And, best of all, you will learn how to anticipate and cash in on the lucky breaks opened up by these seeming calamities. You will thrill to the sheer ease with which you and your family can surf the waves of change lapping at the thighs of a dazed and sadly un-opportunistic world. You will adopt as your new motto: A crisis is a terrible thing to waste!

With this book you just can’t lose: If you decide not to take my advice and not to do anything to save yourself from the smorgasbord of apocalyptica to which we are all about to be treated—well then, you might as well chortle in the face of certain destruction. You can still revel in the fresh, snarky prose with which your grisly fate will herein be detailed. You still win!

But you stand to win even BIGGER if you get with the program! Each of the following chapters will inform you of fun ways to profit from global collapse—so get ready to get ahead!

Chapter 1, “How to Become a Billionaire Without Doing Anything!”, will prepare you to thrive in a period of hyperinflation. Remember Germany in the early 1920s? Well, I don’t either. But I’ve actually seen an old picture on the Internet of a German lady heating her home by tossing bricks of currency into her furnace. How could money become so worthless? Easy: If the government decided to print gazillions of Papiermarks, or Dollars, or Euros, Baht, Drachmas, Guilders, Nakfa, Pesos, Pounds, Rand, Rubles, Rupees, Shekels, or Yen in order to pay for obligations it otherwise could not meet. With more money chasing an equivalent quantity of goods and services, individual units of currency would lose value. Soon a loaf of bread that used to cost only two Tugrik could cost hundreds, then thousands, then millions, eventually billions of Tugrik!

Of course, this could never happen TODAY, in our enlightened modern world run by politicians and economists with their profound scientific understanding of how to keep monetary systems oiled, tanned, and buff. Nevertheless, there is always the theoretical possibility that, in a poor and corrupt backwater nation somewhere, a power-mad Prime Minister or President could decide to borrow colossal amounts of cash to pay for social programs and infrastructure projects (knowing these debts could never be repaid), which would eventually cause the national currency to lose nearly all of its value. If you were to find yourself in such a country then, you could become a billionaire without doing anything!

Think of the opportunities! Like the government, you could inflate your debts away! Your total mortgage of 1,000,000 Ringgit could easily be paid off with a single month’s salary . . . assuming, of course, that you still had a salary and that salaries were keeping up with prices. You see, there are some strings attached: when the waiter gives you a dirty look after you leave him what you thought was a generous 50,000,000 Dinar tip, you might start to think that being a billionaire isn’t all that you expected. Your savings would have been inflated away by this time and society might be shredding at the edges.

But . . . you’d be a billionaire!!!

As we’ll see in more detail later in the chapter, there are plenty of things you can do now to get ready for life under hyperinflation: Stop investing in Wall Street and start investing in your community! Stock up on things of real and enduring value that you can always trade or barter! And develop skills that will enable you to be useful to people in your community when the monetary system breaks down!

Naturally, you will only be able to benefit from hyperinflation if you haven’t already lost everything to deflation—which brings us to Chapter 2, “How to Buy the House of Your Dreams for $1000!”

Deflation is in some ways the opposite of inflation: If lots of loans are being defaulted upon, if new loans aren’t being written, and if loads of people are losing their jobs, then money starts to disappear from the system. Money is worth more than it was before, but there is less of it to go around. This is what happened in the U.S.A. during the Great Depression of the 1930s, when 40 cents could buy a decent meal, a two-bedroom bungalow came with a monthly mortgage payment of $35, and a new Chevrolet could be had for $20 down and a series of $15 monthly installments. You could live well on $100 a month—but who had that kind of money?

Of course, this could never happen TODAY, in our enlightened modern world run by politicians and economists with their profound scientific understanding of how to keep monetary systems oiled, tanned, and buff. Nevertheless, there is always the theoretical possibility that, in a poor and corrupt backwater nation somewhere, a cabal of greedy bankers could create a set of bizarre investment instruments that appear to generate enormous amounts of wealth but in reality are nothing but an elaborate con game, so that at some point all these investments would lose their perceived value and several fantastigillion Taka’s worth of apparent wealth would just evaporate, causing the stock market to implode in a puff of smoke and leaving millions upon millions of people without jobs or income of any sort. If you were to find yourself in such a country at such a time, and you still had a few Taka in your pocket, you could buy yourself a Rolex, a car, a house, maybe
even your own judge or police chief!

Naturally, that would only hold true if you did indeed still have those few Taka and hadn’t lost all your savings to hyperinflation (see Chapter 1). And, to be sure, there are some downsides to deflation: You might be out on the street, and society could splinter. But hey, does that Rolex look great or what?

As we’ll see in more detail later in Chapter 2, there are a few things you can do now to get ready to make the most of life under deflation. And some of them look a lot like ways to protect yourself from hyperinflation: Buy your support system ahead of time (hand tools, solar panels, and other items that will help move you toward self-sufficiency)! Develop and improve your tradable skills! However, in this case an additional strategy might be helpful: If your community starts a local currency now, then as your national currency collapses you’ll still have some basis for trade. Invent your own money—do it today!

In Chapter 3, “Pick Up Any Guy or Girl with Three Magic Words!”, you will learn that, in an inevitable future in which gasoline is unaffordable and oil shortages are commonplace, the words “I’ve got fuel” will make you instantly attractive.

You see, our entire transport system is petroleum-dependent: cars, trucks, trains, planes, ships—they all run on diesel, gasoline, or bunker oil (with the exception of about twenty Tesla Roadsters and Arnold Schwartzenegger’s hydrogen Hummer). But over the past century or so the petroleum industry has guzzled up all the cheap, easy-to-find Texas Tea and is now undertaking a Journey to the Center of the Earth to get those last few tasty slurps of light, sweet crude. Meanwhile, today’s remaining oil-exporting countries are using more and more of their precious petrol domestically, which means that oil-importing countries (like the U.S.) will soon be up a creek without a drill rig. How soon? We’re not talking centuries here, we’re talking a decade or so at best, maybe only a few years.

It would be sensible for towns and cities in the U.S. to ready themselves for that fast-approaching future by building robust, energy-efficient electric public transit systems that could potentially run on solar or wind power—but instead most are using Federal stimulus money to build or widen highways. Why? It’s because urban planners are required by law to assume that the future will look just like the 1960s, only more so. Smart! Well, that’s bad for cities, but good for you if you’re looking ahead!

People need to travel. If they have no alternative to cars but can no longer afford to own and operate their own vehicles, then ingenious new sorts of carpooling services might pick up the slack. Start now to plan how you’ll run your informal jitney business—gathering up carloads of passengers along semi-regular routes, dropping folks off one at a time close to where they need to go, while collecting nominal fares (a couple of eggs, a few potatoes) to make it all worthwhile. Form friendships now with the people most likely to have access to fuel (including home-made biodiesel) when the shortages hit. Figure out what kind of vehicle you intend to buy (don’t purchase it yet!—wait until nine-passenger vans and SUVs are virtually worthless due to deflation and fuel shortages). When the time comes, if you’ve followed these simple instructions, you’ll be picking up guys and gals on a regular basis!

Yes, there are some trade-offs and risks attached to the impending oil crisis. Forget that yearly vacation at Disney World—or anywhere else that requires air travel (sorry, there will be no electric 747s in our future). And you might have to deal with a bit of social upheaval from time to time. But why dwell on the downside? Just think of the bonuses! You will get to know your neighbors better and we’ll all get lots more exercise riding bicycles—as long as bike tires are available (too bad they’re made from oil).

Chapter 4, “How to Lose 40 Pounds Without Even Trying!”, offers advice on a sure-fire way to beat the obesity epidemic. It’s called global famine!

Now, I know this one sounds terrifying at first. But remember: the more enormous the crisis, the huger the opportunity!

A whopping big famine is a safe bet sometime in the first half of this century. That’s because we have a still-expanding human population (nearly seven billion of us now and counting) with growing appetites; but we’re eroding or salting our topsoil (losing 25 billion tons a year), we’re facing water scarcity (so much for increasing food production through irrigation), the amount of arable land available globally is starting to decline, we’re depleting world rock phosphate supplies (phosphorus is essential to modern industrial agriculture and there’s no substitute for it), bugs and weeds are becoming resistant to nearly all our pesticides and herbicides, and—to top it off—our entire food system is totally dependent on the use of depleting petroleum to fuel tractors and to transport farm inputs and outputs. Oh yes, I almost forgot to mention that we’re over-fishing the oceans, so that by mid-century most wild commercial fish species will be
depleted, endangered, or extinct. It’s a food system that’s virtually designed to fail!

You think it’s going to be tough to find the bright side to this one? Think again! We’ll be swimming in silver linings!—those of us who are prepared, that is.

If you can figure out how to grow food sustainably, starting now, you are guaranteed to become a Very Popular Person. In fact, your biggest problem could be TOO MUCH popularity! Your whole neighborhood might want to start hanging out with you every day to share meals. Some neighbors might even want to visit you (or your garden) in the middle of the night. Cozy—maybe too cozy! But if you plan ahead for all of this popularity, you could find ways to put all your new friends to work weeding, planting, and harvesting. You could turn this into a system—a feudal system, to put a name to it—with you as the, um, facilitator!

And you thought global famine was going to be a big downer. Silly. There’s always an upside for those with a smile and a can-do attitude!

And that brings us to the concluding, inspirational Chapter 5, “Ten Ways YOU Can Change the World!”

Not all profits are financial in nature; sometimes the best things in life come simply through knowing that we’ve made a difference. We all want to leave our mark; we want future generations to remember us. Often, this longing gets frustrated along the way: when we’re young, we have dreams of doing something great and being famous, but the requirements of making a living tend to mire us in mediocrity. After we’re dead, we might be remembered for a while by a few close relatives, but then it’s off to oblivion. Gone and forgotten. Meanwhile the world shambles on as before, not much different as a result of our having been here.

That all may have been true a few decades ago, but not anymore! Haven’t you heard? It’s the New Age of globally interconnective instantaneously hyperactive feedback loops! In other words, we’ve arrived at a point in our development as a species where we can change the world in truly dramatic ways, just by each of us doing our own little bit. No, it’s better than that: it has gotten to be so easy to change the world that today it’s actually much, much harder NOT to! What an amazing species we are! What a time to be alive! Yes we can!

Massive oil spills, climate change, species extinctions, resource depletion, deforestation, air pollution, water pollution, rapid population growth, widespread reproductive disruption among vertebrates due to environmental toxins, ocean acidification . . . the list could go on and on. These are BIG changes—so big that their traces would be obvious to alien geologists visiting our world millions of years from now. With global warming alone we are turning the Earth into a very different planet from the one on which civilization developed (author Bill McKibben says we should give the planet a new name, “Eaarth,” as a way of celebrating our collective achievement). And all we have to do to contribute to these great smacking big planetary changes is to continue doing exactly what we are doing right now! Fly and drive! Use plastic bags! Eat fast food! Turn up the air conditioner! Have lots of children! Buy stuff and throw it away! It’s so fun and easy
to change the world!

Sure, those space-alien geologists may not credit you personally for making such a big difference to our world. But rest assured: You’ll have been part of a socio-economic phenomenon that future human generations, if there are any, will remember intensely. In fact, they will probably think about us every single day of their lives!

* * *
Okay, enough with the cynical sarcasm. It should be fairly clear by now why this book should never be finished. (My publisher: “Keep it to one category, please. Two, maybe. Three, absolute tops. This—this is ridiculous!”)

Of course, the main reason the book shouldn’t be written is that, rather than reveling in planetary collapse or trying to profit from it, we should be doing everything in our power to prevent or minimize it. That means not flying and driving, not using plastic bags, not eating fast food, not turning up the air conditioner, not having lots of children, not buying stuff and throwing it away.

Nevertheless, the tough truth is that hard times are on the way regardless of what we do at this point. Over the past century or so we humans have set processes in motion that cannot entirely be halted even if we change our ways dramatically and instantly. During the next few decades, humanity will (one way or another) make the transition from a mode in which it relies primarily on the extraction of non-renewable resources and giddily grows its population and per-capita consumption rates, to a mode in which non-renewable resources are mostly depleted and population size and per-capita consumption rates are constrained by the availability of the world’s remaining renewable resources. Along the way, we will reap the unintended ecological consequences of our Big Binge even as it passes into collective memory: climate change, habitat destruction, soil erosion, and aquifer depletion will be gifts that just keep on giving.

Our economic situation doesn’t look any cheerier. You see, during those last couple of centuries, while we were developing our ability to extract Earth’s fossil fuels and minerals on a grand scale and transform them as quickly as possible into carbon dioxide and landfill, we got the idea that this could go on forever. We developed economic dogmas that said growth is good and normal. And we created currency and finance systems that only work properly when the economy is expanding. Now that it’s getting harder to extract Earth’s remaining non-renewable resources, economic growth is no longer a given. Indeed, year-over-year world aggregate GDP growth may already be a thing of the past—over, done with, extinguished, extinct, kaput. Whether or not we’ve already reached that inevitable point, when we do our economic system is going to careen either into deflation or hyperinflation—there will be no middle ground to cling to.

All of this is fairly plain when you stand back and look at the trajectory of human history with the laws of thermodynamics in mind. Yet most people are so invested in business-as-usual that they simply can’t allow themselves to contemplate the possibility that time has run out on our current round of Wheel of Fortune. Some environmentalists are painfully aware that nasty impacts are in the pipeline, but don’t want to frighten away their potential audience. So they focus on easy, painless, little things that average people could do to reduce those impacts (even though hard, painful, big actions by governments and corporations are actually necessary), and they daydream about how abundant life will be in a promised eco-groovy future (while in fact the best way to describe what’s in store is austerity compounded with more austerity).

In short, we live in a state of denial. The mainstream media occasionally scare us into paralysis with CGI-laden disaster documentaries, but then proceed to label people who talk rationally about the coming challenges and how to prepare and adapt as “survivalists” and “prophets of doom”—that is, as individuals so far outside the mainstream as to be worthy objects of derision.

So it’s a challenge to get across to policy makers or the general public any sense of what’s ahead and how to respond.

Those of us in the business of trying to do so have to accomplish many things at once: Get real about the scale of the problems and the risks, and avoid freaking out. Be hopeful and deadly serious. Help people improve their own survival prospects and work for institutional change so as to minimize impacts.

It’s a difficult balancing act. In fact, it’s more than anyone can do. What are the natural human responses to situations that require us to stretch us far beyond our capacities? Often we either laugh or cry.

So here’s to laughter (we’ll do the crying thing another time, I’m sure). My final advice, offered in all seriousness: Adopt a cheerful and helpful attitude. And cultivate a sense of humor during this trying period—doing so will not only preserve your mental health, it could help you and your family survive.

Remember: When life hands you a lemon, don’t just make lemonade . . . make limoncello, and make enough for friends!

ABOUT THE AUTHOR

Richard “Sunnyside” Heinberg is the author of nine books including Blackout: Coal, Climate, and the Last Energy Crisis, and The Party's Over: Oil, War and the Fate of Industrial Societies. He is Senior Fellow-in-Residence at Post Carbon Institute and is widely regarded as one of the world’s foremost Peak Oil educators.