Archive for the ‘Squid Sightings’ Category

So, do you have a fixed-rate mortage…

Monday, July 9th, 2012

… or one with “adjustable” rates that have been “fixed”?  Eh, Barclays?  And how do YOU plead, Team LIBOR?

Barclays “Fixed” Rates, eh?

Photo found at Gary Kaltbaum’s Site

Beware of Foolish Lenders!

Thursday, July 28th, 2011

Normally I love Dean Baker at CEPR, because he’s correctly figured out that our problem is horribly wasteful policies, such as the worst-in-class Medicare system.  But I don’t like many of his solutions, and I especially hope he stops writing these articles about the National Debt not being a problem.  I hope D.B. realizes at some point that the U.S. can and does have a really bad debt problem, even though lenders are willing to lend to us at low short-term rates.  Sure, we could borrow more money, but would we be spending it wisely to get out of debt in the future? I don’t see evidence of that.  And borrowing money simply to waste it is NEVER a good idea!

Right now the U.S. government makes the proverbial drunken sailor look like a pillar of rectitude!  After all, the drunken sailor can only spend money he already has — no one will lend to him!

In the case of Uncle Sam, just because the bond market is currently offering Uncle Sam what amounts to a teaser option ARM loan with zero interest for the next 6 months (or 3 for 10 years even), does not mean we should borrow the funds! The relevant timescale is far greater than 10 years, the bulk of our debt burden is on the short end, and the bond market is a fickle creature.  We could be cut off in less than a year — just ask the countries that have gone belly up in the last 100 years!  We shouldn’t borrow without a _really_, _really_ careful re-examination of what we are buying with the added debt, and an assurance that the marginal loan will produce a real improvement in our economy. Congress isn’t doing that, so the people need to force the issue.  We need to raise the price for our future debt servitude!

From another angle:  Just because the bond market is overflowing with rentiers who are desperate for safe “investments”, does not mean the U.S. can afford to borrow more. Federal debt-to-revenue already vastly exceeds sustainable levels, and there’s absolutely no Keynesian cushion for the next recession!! (Which, if we are back to the classic 4-year business cycle, is due in only a few months, given that the last recession started in Q4 of 2007…)

It makes no sense to borrow more funds for imperial wars, for wasteful tax breaks for people who are already very well-off, for wasteful tax policies that stimulate malinvestment in nonproductive assets, for a medical system that is grossly wasteful – the worst in the developed world. Etc. Dean, why should we lend THIS Congress another dime, without structural policy reforms?  What good will it do?

We need a smarter federal spending prioritization. We need better policies — policies that boost job creation without adding to the deficit. We need to encourage all the spare cash sitting on the sidelines to purchase tangible products rather than financial “investments”. Negative real rates ought to do it… and that would also push out some inflation to bring the nominal debt back to a reasonable proportion of the economy.

I’d be a lot more comfortable with this debt ceiling hike if Congress showed even an ounce of financial sense in terms of how to spend the money to fix the nation’s problems! I see no reason to give Congress more money if all it will do is continue to line the pockets of gluttonous special interests.  What we need is federal investments that deliver… sustainable gains.

Blindly borrowing more is just feeding the squid…

Break the Debt Cycle before it breaks us.

Tuesday, June 7th, 2011

The debt ceiling battle qualifies as a “Squid Sighting”.

It’s absolutely time to break the endless-increase-in-debt cycle.  It was time 7 years ago when the economy recovered from the dot-com crash. Several trillion dollars later, more waiting won’t improve the situation. It’s time to stop spending “more” and start spending “smarter”.The rate of debt increase since 2004, compared with the lack of corresponding sustainable GDP increase, strongly indicates that we’ve passed the point where additional debt yields worthwhile benefits to the nation (or world) as a whole. Whatever we’re borrowing for, it’s not worth it!

From a certain point on, more debt primarily helps the lenders (who get secured streams of long-term income), not the borrowers.  I think we passed that point a long time ago.  Now we’re at the point where even the lenders are starting to realize that more debt may not help them, because a loan to someone who can’t repay is money gone. Widespread default and insolvency is bad for everyone, and the banksters can’t shift the bad debts onto Uncle Sam anymore without risking losses.

I think the markets know this, particularly after watching Iceland, Ireland, Greece and Portugal.  The U.S. has the advantage of the reserve currency, but we also have a lot of national obligations not consolidated into the national budget.

What I see is that Wall Street isn’t nearly as worried about the debt ceiling per se, as they are about the total unwillingness of Washington to face reality in terms of eliminating the structural deficits and bringing Uncle Sam’s spending back in line with tax income.

Some examples:
(1) Gold and silver have risen a lot in the past year.  It’s not because those investors are worried that there will be a deflationary government shutdown! It’s because investors are worried that there will be an inflationary spiral, unless we break out of our current print-and-spend and/or borrow-and-spend paradigm.

(2) TIPS yields range from -0.5 to +1.8%, whereas historically TIPS have had yields in the 2-3% range.  The historical TIPS yields reflect the fact that historically bonds yield 3% above long-term inflation.  The current low yields say that the market sees bonds as unlikely to yield as much as inflation (-0.5% TIPS for 5 years) or at most 1.8% above inflation.

(3) In stark contrast to the above, the overall low Treasury yields and hoarding of cash by household and corporations both suggest a strong fear of deflation as well.

Some commentators view the fear of deflation and the fear of inflation as mutually exclusive opposites, but they aren’t. It’s possible to be afraid of both, because our economic circumstances suggest that one or the other are becoming increasingly inevitable. For a nation with its own currency, excess debt must inevitably be defaulted upon, or repaid only in devalued money. The one is deflationary and the other inflationary. At this point, for us to avoid one or the other may no longer be possible.

Some people claim that Uncle Sam can borrow a lot more, since “interest rates are still low now”.  But Greek, Irish and Portuguese rates were low, too — even as they borrowed too much. But the lending markets aren’t omniscient, and can have a change of heart in a heartbeat. For those nations, once the market woke up, the credit markets shut down and the sovereign borrowers were doomed. We have to avoid having that outcome here!
Here in the U.S., we’ve got to take the foot off the gas pedal of manic deficit spending. Ideally we want to coast the budget into balance, rather than having a hard stop (or a crash over the cliff). But the most important thing is to quit accelerating our indebtedness.

To “spend smarter”, we will need a lot of thoughtful reprioritization and structural reform in how the government taxes and spends.  But we absolutely have to stop borrowing money for no good reason.  If we borrow money, squander it, and never repay the principal, all we’re doing is feeding the financial sector a perpetual interest income stream, stripped every year out of our nation’s productive output!  Right now I don’t think there’s much, if anything, on the margins of the federal budget for which we really want to further enslave ourselves to the bondholders!

Stop Feeding The Squid!

Must-Read Article: Breaking the banksters’ framing

Monday, June 6th, 2011

From Michael Hudson by way of Naked Capitalism (also circulating via Mauldin’s newsletter):

Michael Hudson: Will Greece Let EU Central Bankers Destroy Democracy?

The majority of today’s financial discussions use bank-centric framing and terminology to discuss the situations facing the debtor nations (and debtor citizens and corporations).  However, there are two sides to every contract, and it’s clear that the borrowers are not exclusively to blame for their over-indebtedness, as a result of fraudulent inducements, bribes, and all manner of self-serving spin from the financiers.  Moreover, when the bankers’ “solutions” consist of (a) more debt for the over-indebted, and (b) taxpayer bailouts for the bankers when the over-indebted finally stop paying, it’s clear that the bankers are part of the problem, not part of the solution — literally!

So I like the article above because it re-frames the issues (with emphasis on Greece and Iceland) in terms of the more fundamental, classical economic issue:  how do we reorganize to optimize national output?  It most likely does not entail continuing to enable the lenders to live off the labors of others, at least not as much as they do now.

Quick implications for debtor nations and investors therein:  (1) Stop feeding the squid!  Get out of debt if you can, and don’t fund the banksters’ shenanigans with your “investments”.  (2) Prepare for higher interest rates due to defaults and devaluation-driven inflation. Obviously more thought will be needed here, but as in the 1970s, a simple stock-and-bond portfolio may result in serious losses after inflation.  Watch and learn from the other nations, before it comes to our own doorstep…

Comments on “Scary New Wage Data”

Monday, October 25th, 2010

Over at, David Cay Johnson follows up on a Social Security Administration report with some “Scary New Wage Data“:

“Every 34th wage earner in America in 2008 went all of 2009 without earning a single dollar … Total wages, median wages, and average wages all declined, but at the very top, salaries grew more than fivefold.”

“Not a single news organization reported this data when it was released October 15, searches of Google and the Nexis databases show. Nor did any blog, so the citizen journalists and professional economists did no better than the newsroom pros in reporting this basic information about our economy.”


Corroborating this Scary New Wage Data is the chart on Page 21 of the National Economic Trends report put out monthly by the St. Louis Fed (a small PDF: )

Proprietors’ Income and employee “Compensation”, as a share of GDP, have been in decline. Only corporate profits have increased as a share of GDP. The latter have returned to pre-crash historically high “bubble” levels. Compensation is approaching series lows last set in 2006. Proprietors’ Income is declining from a peak in 2004-2005, which may reflect the heyday of many small housing bubble businesses. But it is still above historical norms.

I share David Cay Johnson’s (that is, the original author’s) concern that this information received minimal media coverage. But I suppose that one cannot expect corporate media, funded by corporate advertisers, to publish news which would suggest that actions should be taken to rebuild wages and proprietor’s income at the expense of corporate profits?

It would also appear that the Obama administration has been a great friend to business, given that corporate profits as a share of GDP have increased nearly 4% since he took office.

Mean reversion of corporate profits/GDP to historical norms is to be expected, and implies a 30-50% reduction in the ratio (with magnified impact on equity prices since P/E ratios will contract as well) … but by what mechanism?

Do NOT Feed The Squid!

Friday, October 15th, 2010

I’d like to welcome my readers (all 2 of them?) from my other blog, Do Not Feed The Squid!  “DNFTS” was a great idea (and still is, so I’ve put it in the tagline above!) but I do not have time to keep up two blogs.  Also, the idea behind “Do NOT Feed The Squid”, that we’re going to have to take personal actions to stop the large financial corporations from continuing to abuse the legal system and destroy the public trust, is no longer as politically radical as it used to be.  It’s no longer a distraction from the “Ethical Investing” and “Sustainable Gains” themes here.  In fact, it’s pretty clear that investors in the mortgage lending apparatus have failed to invest ethically and are discovering that their fraudulent gains are not sustainable.  (Whether they continue to succeed in ripping off the taxpayers, only time will tell… but hopefully the public will not put up with this any longer!)

The 6 posts from “Do NOT Feed the Squid” have been moved over here verbatim, without any updates to their timestamps.

For those who may not have reviewed the “Do NOT Feed The Squid” site, here’s a list of the 6 posts in, reverse chronological order:

Post-Squid Investing Attitude Shift

Squid-Free Investing (small victories)

Preventing the Next Crisis? Automatic Stabilizers?

Restoring the Federal “Reserve”

A Quick Guide to Squid-Free Banking

What is the Squid?

Preventing the Next Crisis? Automatic Stabilizers?

Monday, January 25th, 2010

Apropos of the current fears of another market panic in 2010, and a new topic for Do Not Feed the Squid fans: “How can we arrange economic matters differently, so that we do not have another crisis, either soon, or ever?”

There was an interesting discussion of the concept of “Automatic Stabilizers” to provide countercyclical fiscal policy, but like all other policy responses I don’t think auto-spending plans or other “stabilizers” will help to prevent future financial excesses. Centuries of financial history, as retold in books such as “Manias, Panics and Crashes” by Kindleberger, tell us that crash-preventing and crash-mitigating policy constraints tend to be undone by the same economic and political forces that lead to the financial excesses. It is not enough to imagine stabilizers, they must be implemented, and they must be implemented in such a way that they remain effective without being evaded or gamed.

Perhaps the best stabilizer is a system which doesn’t tend to excess in the first place, so that the resulting crashes are not so severe. The Founding Fathers, within the constraints of the 1700s, were not unwise in this regard – Article 1 of the U.S. Constitution actually has the simplest of all financial stabilizers, demanding that only gold and silver coin may be used as tender for debts (Section 10), authorizing only Congress to borrow money on the credit of the United States (Section 8), empowering only Congress to coin money (Section 8), and that “No money shall be drawn from the treasury, but in consequence of appropriations made by law” (Section 9). Congress has managed to mismanage this. Why should they be expected not to muck up any other “automatic stabilizers”? (An interesting side note — the rest of the Constitution does not even mention money.)

Now, the 1800s had plenty of financial ups and downs, and politicians (seeking always to take credit for trying to make things better?) have muddled with the system, so that despite the constitution gold and silver coin are no longer money, Congress has delegated a lot of financial responsibility, and savers seeking to invest must deal with a lot more “political risk”… Meanwhile, financial crises still occur, and they are certainly more complex now, but are they any less severe?

This sort of thinking led me to the following rant, which I want to post here for posterity:

We HAD automatic stabilizers! But the problem with “automatic stabilizers” is that, in a credit mania, the political process leads to the dismantling of the stabilizers. How many defensive mechanisms were put in place after the Great Depression, and then dismantled in the 1990s and early 2000s, again? We had banks that could be “failed out” via the FDIC. We had Glass-Steagall separating speculation from honest lending. We had lenders who had to own the risks of their own lending, not pawn them off via “securitization” (what an oxymoron! no one was made secure!). We had a whole alphabet soup of regulatory agencies.

We HAD automatic stabilizers. But we threw them away! The regulators allowed both commercial and investment banks to hide toxic debts “off balance sheet” (as though, in reality, there could even be such a thing?). We let the banks leverage up well beyond historically prudent levels, ignoring centuries of financial history and thinking “it’s different in our time” (I.D.I.O.T. thinking). These failures were systemic and widespread and they did not come out of nowhere for no reason. They occurred because a long reign of prosperity had led to complacent outlooks. They occurred because an overly complex system was built up to hide the sausage, and the new system permitted trillions of dollars in hidden fraud (Galbraith’s “Bezzle”). They occurred because the people asking for the bending of the rules were making gobs of money, and the people who had the authority to say no, in far too many cases, were too interested in sharing in those gobs of money and not sufficiently interested in protecting the public interest. They occurred because too many people were too enthralled with fancy new marketing terms, and the few who were sufficiently quantitative and skeptical to realize that a “credit default swap” is the same as an insurance contract (and thus out to be regulated as such) were outvoted.

We had automatic stabilizers, and when we actually needed them, they weren’t there anymore. And probably in 60-80 years the automatic stabilizers that we will put in place will also be thrown away, and in 70-100 years there will another enormous crisis. Unless we truly do something different this time. But the gridlock in Washington and the entrenched resistance on Wall Street doesn’t give one any reason for optimism.

Why is it, again, that everyone who created this mess is still in power? Why are the same regulators now expected to actually enforce prudent fiscal responsibility, whose nonfeasance enabled the runaway banks to drive us to the brink of ruin? Why is the same clique of bankers still in charge of the “too big to fail” institutions, that failed and were bailed? Why are the same Congresspeople in charge, who failed to exercise their proper oversight of the executive branch agencies and ensure that regulation actually took place? Why is it that the Federal Reserve is being allowed to purchase outright securities that are not “full faith and credit” obligations of the United States Government, despite the very clear language in the Federal Reserve Charter limiting the Fed’s authority only to those securities? Where are the protests at the TARP vote (against the will of the vast majority of those willing to contact their Congress)? Where are the riots against the indentured servitude our children and grandchildren will face, paying interest on $15,000,000,000,000 in debt that they did not ask for and which does them no good? (Those used to be “astronomic” numbers… now they are “economics” numbers!)

Oh… we haven’t DEMANDED either manual OR automatic stabilizers, yet.

The crisis will continue until the national response improves.

Restoring the Federal “Reserve”

Thursday, January 14th, 2010

[Comment originally posted at <a href=”;utm_medium=feed&amp;utm_campaign=Feed%3A+typepad%2FRUQt+%28macroblog%29″>Macroblog regarding “When Independence Begets Accountability”</a> ]

The Federal Reserve should get back to its traditional role as quickly as possible, and cease trading in markets for anything other than full-faith-and-credit obligations of the United States. This includes Fannie/Freddie debt!

The more complex role that the Fed has taken on in the past 1-2 years is too politically charged, and should be abandoned. There are many other ways that the government can react to a financial crisis. If the Fed’s retreat creates a gap in the policy options, put that issue on the table. But don’t put the Fed into the gap.

The Fed should pull back from the “regulatory” roles that it’s supposed to have. That hasn’t worked out properly, and it overly entangles the Fed with the banks. The Fed was so entangled that it couldn’t take away the punch bowl at the right time. If the Fed cannot do that well, it certainly cannot afford to take the blame for failing. Let someone else have that job, but protect what is essential about the Fed.

The Fed should not be an agency of anything other than pure monetary policy. It should simply manage the elastic money supply.

The Fed should be made far more independent of the banks that it interacts with. The only way to be able to take away the punch bowl is not to be drinking at it, and not to be buddies with the drinkers either.

It’s time to restore some honor and dignity to the system.

What is the Squid?

Wednesday, December 2nd, 2009

The original “Great Vampire Squid” reference was by Matt Taibbi, in “The Great American Bubble Machine“, printed in Rolling Stone in July, 2009.

Here at DoNotFeedTheSquid, I take a broader view, but let’s start with the original:

“The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who’s Who of Goldman Sachs graduates.”

The broader view taken here is that the Squid is a collective parasite, consisting of any person or organization (not just some parts of Goldman Sachs) which siphons human time and natural resources away from truly productive enterprises. (* This definition may evolve as we delve further, but it’s a good place to start…)

Unfortunately the examples are all too numerous. The Squid includes:

  • Failed financial and industrial corporations which squander billions of taxpayer dollars while refusing to reform their worst practices and unwise incentive structures.
  • Politicians, media, and their followers which glorify sensationalized trivia, while neglecting to study and understand the real news. (Meanwhile, bloggers eat their lunches, and historians prepare to excoriate them for nonfeasance or “failure to act properly when required to do so”.)
  • “Consumers” of all kinds, who fail to think before buying, and consequently let the squid feed on them unimpeded.
  • “Investors” of all kinds, who settle for too little and fail to demand quality products from the financial sector. (We can start with the fraud-ridden mortgage system and crappy 401(k) plans with high fees, but the list is much longer!)
  • And so on…

Part of the problem is that “We have met the Squid, and they are Us!” The Squid is not so much an organization, or a person, as it is a mindset, paradigm, or worldview. It’s a worldview which tolerates fraud, tolerates incompetence, tolerates inefficiency and waste. It’s a worldview which many of us (this blogger included) fell into during the long credit boom, when prosperity seemed boundless because money and credit were abundant… but those days are now over.

Many of us, perhaps nearly all of us who grew up during the Long Boom, were raised to believe in a system that worked for all. But we now see that the system worked far better for some than for most, and that during the Lost Decade of 2000-2009, declining incomes relative to inflation actually robbed the many to pay the few.

The Squid brought us wealth inequality and far too many individuals who feel that anything goes as long as no one catches them. As a result of this and other shortcomings, that system is now broken… and yet those most responsible for its failure have not been held accountable.

Here at Do Not Feed The Squid, the goal is to break the faulty mindset, to crack the broken paradigm, and to restore a more productive worldview. We feed the squid whenever we fail to think realistically about the human systems we have created, and let them run amok at our shared expense. We must learn from the recent failures, and fix the systems involved, but it is difficult to do so while the flawed mindset remains dominant!

I myself have much to learn, and can only dimly see the direction to go, not the destination to be reached. But I hope others will join me on this journey, and we will be able to make faster progress together. Hence doing this as a blog!

Readers may also be interested in my other blog, Investing for Sustainable Gains, which will focus more specifically on individual investing ideas. Do Not Feed The Squid is a more philosophical look at the broader national crisis.