Michael Hudson: How the Chicago Boys Wrecked the Economy

[nathanhulick]

Re: Michael Hudson: How the Chicago Boys Wrecked the Economy

Go ahead spill the beans, tell us all about him/his conspiracy theories.

Well, lets see. He apparently has been diagnosed with some mental illnesses, according to some court papers he filed himself. He has stated that he has never earned >$30k in a year, even though he has "traded the Futures market for over 30 years", is a commodity trading advisor, etc.

He had his kids taken away from him because he apparently was unfit to care for them, not sure exactly what happened there, allegations of sexual abuse. He spent time in jail for attempting to kidnap his son, carrying a concealed weapon, etc. He also had some problems with failure to pay child support.

He lived/lives in a trailer park in Arizona. He thinks that 9/11 was an inside job and that George Bush planned the whole thing.

I could go on, but Im sure you get the point. He apparently likes to act as his own lawyer and has posted all of this information on the internet, some of it in lawsuits against his ex-wife, Children's services, etc.

I should probably warn you in advance, that agents of the government are apparently targeting Walter's backers, as he has warned about here.

http://www.rumormillnews.com/cgi-bin...cgi?read=32519

Apparently they set up John Wayne Zidar and the government has taken his $74 million fortune and tossed him in jail for 30 years for running a pyramid scheme. No doubt because Mr Zidar was bold enough to support Walter's plan to eliminate taxes for all us peons.

Also Walter claims he was actively trading commodities and making a great return, when the government deliberately manipulated the market to wipe him out.

Oh I forgot to mention, he is a convicted felon. He pled guilty to felony eluding when the cops tried to stop him from kidnapping his son.

Edit: I forgot to mention the most important part, he doesnt understand accounting, so he thinks that CAFRs show that the government is secretly stealing tons of money from everyone.

[c1ue]

Re: Michael Hudson: How the Chicago Boys Wrecked the Economy

The discussion of debt reduction via inflation and/or repudiation is a good thought exercise, but it does not address some of the other fundamental problems:

1) The entire securitization process is broken. Even with a nationalization of the present banking system and/or a bad debt moratorium, the underlying mechanism of offloading mortgages/credit card/student loan debt to investors is gone.

It is possible that something else will turn up, but I personally can't see a path.

And if this path is not found, then just going back to the early 1990s model of lending (i.e. holding to maturity) will itself affect the amount of credit available. It could be argued that the next model is actually from even earlier: the early '80s before the junk bond/Salomon saga.

We're talking about a 10x or more reduction in credit capacity irregardless of willingness or ability to lend.

2) Reduction of dollar purchasing power via inflation will have an additional (negative) effect from loss of fiat status. Just as when times were good, the dollar got an extra boost from fiat, the inverse will be true.

While higher priced cheap crap isn't itself a killer, on the other hand there have been studies recently suggesting that the main reason the pitchforks aren't out is that stagnant wages have been offset by equally declining real prices of consumer goods.

The dollar/fiat downward spiral would break this devil's bargain.

3) Trust. The US has enjoyed the fruits of its strong marketing message for many years. Every day going by, every foreign bank coughing up millions of dollars in losses from toxic MBS bonds, every central banker being held hostage by dollar depreciation of the CB dollar stash - is another brick eroded from this trust.

The US has been a flight capital center just as the dollar has been a store of value.

As one falls, so may the other.

And the 'free ride' engendered, lost.

The unpredictability of this situation is simply this: there is no way to tell what ultimately will happen because the fall of empires can be in a number of ways.

Empires going down also have ways of temporarily pushing back the clock.

Foreign adventures is a common one - but unlike Rome's multi-century fall, the US is not in any way the only military power around - at least as defined as the power to destroy (nuke). There isn't another nearby region to conquer and pass out parcels of land to the troops - even with Canada and Mexico - simply due to the US not being the only game in town.

I do agree that some of the negative effects of the economic regime change can be accomodated by simply reducing the standard/quality of average life here in the US, but it is easy to forget that there are huge numbers of educated and talented foreigners living in the US who contribute (possibly disproportionately) intellectually and financially to society here.

If life really goes down to the standards in other nations, what is to prevent those foreigners from going back? And what would the result be if that occurred?

[D-Mack]

Re: Michael Hudson: How the Chicago Boys Wrecked the Economy

He thinks that 9/11 was an inside job and that George Bush planned the whole thing.

What is the consensus on 911 in this forum?

That Bush Jr and his pea brain planned it is obviously false, but the rest?

[ASH]

Re: Michael Hudson: How the Chicago Boys Wrecked the Economy

If life really goes down to the standards in other nations, what is to prevent those foreigners from going back?

Nothing?

And what would the result be if that occurred?

Screwed? So screwed!

=========

Then again, it is possible for the average American's standard of living to equilibrate with that in the rest of the world, while the top 5% continue to enjoy a much higher standard of living. Unless things get so far out of balance that society comes apart at its seams, perhaps the labor of a skilled foreigner will still be able to purchase a luxurious lifestyle.

Many Americans who became accustomed to the "middle class American lifestyle" in prior decades, when the value of their labor could support it, have held onto that lifestyle through the accumulation of debt. They will lose that lifestyle if easy consumer credit is no longer to be had. On the other hand, there is a fraction of the population whose labor can still command the type of salary required to pay for a "middle class" lifestyle in cash; this category includes most of the skilled foreign labor who I'd be worried about leaving. Having cash when no one else does, and when credit is no longer available, is a pretty comfortable position to be in... until things get pushed too far, and you get social unrest. Still, maybe there is some wiggle room between a collapse in lifestyle for skilled professionals and revolution, where we can hold onto some of our foreign talent.

One last note about quality of life: I have a talented Indian co-worker who regales me with tales of venal bureaucrats and tangled traffic back home. I get the impression that not having to bribe the DMV to get a driver's license has some utility. That must get factored into standard of living at some point, albeit with less weighting than take-home pay.

c1ue -- on a scale of 1 to 10, 10 being the worst, how badly do you think we're hosed?

P.S. I do see an end to American hegemony, and several of our competitive advantages, implicit in our financial problems. However, almost all the potential competitors I can think of will have their own demographic and entitlements problems. I think there's likely to be a power vacuum.

[jtabeb]

Re: Michael Hudson: How the Chicago Boys Wrecked the Economy

[quote=ASH;46128]

c1ue -- on a scale of 1 to 10, 10 being the worst, how badly do you think we're hosed?

quote]
I'm not c1lue but honestly,

Deflation everywhere exept in food or drink (energy too, but it wasn't as good a play on words). (asset and debt deflation, of course)


Dude, were at a 20. Yes this is bigger than the great depression, it's great depression 2.0, more leverage (like 100x), less wiggle room (no gold standard to remove ourselves from), even worse joe blow isn't even asking how bad it's gonna get "yet". Doesn't even realize, thinks things will return to "normal", maybe after the election? I don't think most of us CAN imagine yet.

Hence, take your worst case scenario and double it. (at least you'll be prepared)

Perfect description of presently unfolding events is in "Atlas Shurgged".
What we've got is an Inflation fueled deflationary collapse (loss of supply is my definition here for deflation).

Simultaneous collapse in asset values vs say, gold with highly inflationary overtones. You can't get worse than that. Stable inflation (poor choice of wording, but best I can do) or stable deflation would be much better.

In inflation debt default throught principle devaluation. In deflation debt default through outright bankrupcy.


On a happier note, my bullion order was filled today after three weeks delay.

[c1ue]

Re: Michael Hudson: How the Chicago Boys Wrecked the Economy

I'll freely admit I'm the dark cloud around every silver lining...

c1ue -- on a scale of 1 to 10, 10 being the worst, how badly do you think we're hosed?

Depends on who you are.

As an average American - it is going to be a 8

As a rentier - 3

As you and I: 6

Why? For the average American - think urban poverty. Not having anything to sell and needing money to survive does not yield a happy result.

But we're not Zimbabwe nor even Rhodesia, and won't be without active shooting inside the borders. But crime is going to go back up. Those who experienced the bad old days of the 80s crack epidemic - we will now get a chance to see how much of that was economics based vs. 'new drug' based.

As a rentier - the chances of getting shot increase dramatically. From less than non-existent to small but real. After all, rentier's normal risks are 1 or 0. And the French and October revolutions DO happen - and frequently. Look back at the 1850s in Europe.

As you and I: we're relatively young. We hopefully have some expertise. But almost everything anyone our age works on ultimately depends on consumption (vs. subsistence).

Unless spanking new semiconductors are needed to grow food and/or pump oil, the switchover of American consumption to American debt repayment is not going to leave anyone happy.

Even biotech is primarily aimed at health care - and without the masses who are insured buying new drugs, the few super-rich still cannot finance the leading edge of new health care technologies on their own.

The worst of it is going to be that the entire entitlement system which has been enjoyed by those retired now and in the next 10 years, is not going to exist by the time you and I retire.

Retirement for us is going to be like a government military appropriation - always behind schedule and costing 3x as much as originally expected.

Sure the government will take up the slack on spending in the short term - that's a given for any 'democracy'. But will it be well spent? How much return on investment will occur this time around?

In 1929, there were plenty of potential dams, bridges, etc that could be built and contribute productivity. Today we'd be largely replacing or upgrading existing ones. A lot of the prosperity brought about by the WPA is what can be expected from any nation industrializing.

But we've never seen what happens when an industrial nation 'hits the wall'.

We will now.

[ASH]

Re: Michael Hudson: How the Chicago Boys Wrecked the Economy

I'm not c1lue but honestly...

Dude, we're at a 20.

Thanks. I'm interested in your opinion, too.

The main reason I asked c1ue directly is that he was asking some thought-provoking questions, and I felt like I was being led somewhere, but I wanted to be spoon-fed his conclusion.

I gotta say -- if things ever get as bad as I can imagine, I'm going to split long before they become twice as bad. If boat people can get here from Haiti, then... well, you get the idea.

[jimmygu3]

Re: Michael Hudson: How the Chicago Boys Wrecked the Economy

One last note about quality of life: I have a talented Indian co-worker who regales me with tales of venal bureaucrats and tangled traffic back home. I get the impression that not having to bribe the DMV to get a driver's license has some utility. That must get factored into standard of living at some point, albeit with less weighting than take-home pay.

I was talking to a friend who works as a liaison between US corporations and the Indian workers they employ. Not talking remote call centers here, but consultants, professionals and managerial workers here on US soil. He says he needs to find a new career in the next 4 years, as he will be replaced by an foreigner willing to work for $10/hour.

[kingcopper]

Re: Michael Hudson: How the Chicago Boys Wrecked the Economy

You guys are too pessimistic! I say this dog will soon turn on itself, eat it's own carcass, and then turn into a great golden phoenix! Just have some cash, some PHYSICAL metals, and some forward thinking ideas. In the land of the free to be lazy, we'll rule the roost!

[GRG55]

Re: Michael Hudson: How the Chicago Boys Wrecked the Economy

The discussion of debt reduction via inflation and/or repudiation is a good thought exercise, but it does not address some of the other fundamental problems:

1) The entire securitization process is broken. Even with a nationalization of the present banking system and/or a bad debt moratorium, the underlying mechanism of offloading mortgages/credit card/student loan debt to investors is gone.

It is possible that something else will turn up, but I personally can't see a path.

And if this path is not found, then just going back to the early 1990s model of lending (i.e. holding to maturity) will itself affect the amount of credit available. It could be argued that the next model is actually from even earlier: the early '80s before the junk bond/Salomon saga.

We're talking about a 10x or more reduction in credit capacity irregardless of willingness or ability to lend.

2) Reduction of dollar purchasing power via inflation will have an additional (negative) effect from loss of fiat status. Just as when times were good, the dollar got an extra boost from fiat, the inverse will be true.

While higher priced cheap crap isn't itself a killer, on the other hand there have been studies recently suggesting that the main reason the pitchforks aren't out is that stagnant wages have been offset by equally declining real prices of consumer goods.

The dollar/fiat downward spiral would break this devil's bargain.

3) Trust. The US has enjoyed the fruits of its strong marketing message for many years. Every day going by, every foreign bank coughing up millions of dollars in losses from toxic MBS bonds, every central banker being held hostage by dollar depreciation of the CB dollar stash - is another brick eroded from this trust.

The US has been a flight capital center just as the dollar has been a store of value.

As one falls, so may the other.

And the 'free ride' engendered, lost.

The unpredictability of this situation is simply this: there is no way to tell what ultimately will happen because the fall of empires can be in a number of ways.

Empires going down also have ways of temporarily pushing back the clock.

Foreign adventures is a common one - but unlike Rome's multi-century fall, the US is not in any way the only military power around - at least as defined as the power to destroy (nuke). There isn't another nearby region to conquer and pass out parcels of land to the troops - even with Canada and Mexico - simply due to the US not being the only game in town.

I do agree that some of the negative effects of the economic regime change can be accomodated by simply reducing the standard/quality of average life here in the US, but it is easy to forget that there are huge numbers of educated and talented foreigners living in the US who contribute (possibly disproportionately) intellectually and financially to society here.

If life really goes down to the standards in other nations, what is to prevent those foreigners from going back? And what would the result be if that occurred?

I am much more optimistic than C1ue (and a some others around here). To these points I would counter:

1. The USA and the world functioned just fine before the mass securitization insanity that just ended. Unless you are a banker with dearly departed Bear, or with soon to flatline Lehman, the "end of securitization" is hardly the end of the world as we know it. Finally, securitization won't completely disappear, it's just going to get scaled back to a level where its function actually adds real value, as nobody is going to pay for anything more than that.
2. As the income disparity figures show, the benefits of the quarter-century FIRE economy have dispropotionately accrued to a small slice of the population. Most people are smart enough to know their real standard of living has been declining for quite a few years now. There won't be any pitchforks, there won't be a violent revolution in the USA. People know they can live just fine without cheap crap from China, whether it be lead painted toys, contaminated toothpaste, or questionable food [a little story: Recently a considerable amount of Chinese made plywood found its way to my area because it was priced much lower than North American made plywood. Once applied it delaminated in the first rainfall; the inspectors failed all the buildings. I am going to great lengths in the construction of my "bunker" to make sure I use NO Chinese components, and with the low US$ I no longer have to pay much of a premium for, say, properly manufactured plywood from one of US-headquartered Louisiana Pacific's North American mills]. As I've posted many times before, the USA has the most creative, innovative, adaptable and flexible economy in the world. By far. We can all hope that this creativity, etc is applied to something other than the FIRE sectors in the years to come. A failure to achieve that [e.g. a successful Fed & Treasury-supported resurrection of the FIRE economy] is the only real danger that I see.
3. To the degree that the loss of trust prevents a return of the FIRE economy, that is all to the good. However, to extrapolate that reaction and expect that suddenly the USA will no longer be attractive to "flight capital" is unlikely. In an increasingly dangerous world, where the rule of law [especially as it applies to private property] is steadily being subverted by xenophobic nationalists/populists/kleptocrats, the old habit of looking to the USA and the US$ as a safe haven [albeit the best of a bunch of bad fiat alternatives] won't go away. More importantly, the characteristics of the US economy I described in 2 above will ensure a healthy flow of risk capital into the USA will continue.

As for the issue of educated foreigners working in the USA, this is a real problem in my mind.


But not because they are suddenly going to abandon ship and head "home". Most of these people left their homeland for the USA (for education or jobs or both) because the USA offered more opportunity than "home". They took a personal risk that most of their countrymen would not...that risk-taking mindset is what makes them different, and so valuable to their adopted country. Most will never return [during their productive working lives] as permanent residents of their native country. That's been the pattern of immigrants for centuries, and something as trivial as the implosion of an overlevered financial system is not going to change this.

What could change this, however, is the incredibly dysfunctional US immigration policy; which is now sending the message that these people are no longer welcome, regardless of how well educated or qualified. That is a problem.

[raja]

Re: Michael Hudson: How the Chicago Boys Wrecked the Economy

Thanks. I'm interested in your opinion, too.

The main reason I asked c1ue directly is that he was asking some thought-provoking questions, and I felt like I was being led somewhere, but I wanted to be spoon-fed his conclusion.

I gotta say -- if things ever get as bad as I can imagine, I'm going to split long before they become twice as bad. If boat people can get here from Haiti, then... well, you get the idea.

Where would you go?

It's my impression -- and correct me if I'm wrong -- other places in the world are either going to experience the same economic problems, or they are already poor and the existing low-level of law and order will only worsen.

I have a friend married to a Philippine woman, and her stories of her home village are quite surprising -- murders, thefts, people taking the law into their own hands.

I have heard similar stories about Belize . . . .

Compared with the rest of the world, I can't think of anyplace else I'd rather be than rural America.

[GRG55]

Re: Michael Hudson: How the Chicago Boys Wrecked the Economy

What is the consensus on 911 in this forum?

That Bush Jr and his pea brain planned it is obviously false, but the rest?

Go here...

http://www.itulip.com/forums/showthread.php?t=4853

...and please spare the rest of us a repeat trip down that path on this thread.

[c1ue]

Re: Michael Hudson: How the Chicago Boys Wrecked the Economy

I am much more optimistic than C1ue (and a some others around here). To these points I would counter:

GRG,

The irony is, I AM being optimistic in my own lights.

You'll note I did not peg any of the numbers at 'worst case'.

Worst case for me is descent into Zimbabwe-like conditions.

Why not worst case?

I have been thinking for years about when/how/why/if the worst case could occur in the US.

I think, or at least I hope, that I and my immediate family are mentally prepared for major wrenching lifestyle changes, and furthermore that we will have the option and ability to relocate should these changes prove unacceptable.

But for the vast majority of people who have been living the '3' or the '1' in their own eyes, a switch to a '6' or and '8' is not going to be a fun experience.

For those who cannot recognize that times are changing and are not the top 5% or top 2% of asset and income earners, there won't be many opportunities to adjust.

And before you say it cannot happen in the USA, it already has several times.

1) The South in the Civil War. Middle and upper middle class being destroyed - including not just plantation owners big and small but all those servicing them: shopkeepers, service industry, etc etc: 'Gone with the Wind'.

The wealthiest Southerners survived just fine because their money was outside of the South in Europe, but no one else did well - and I include a significant chunk of the slaves and their descendants.

2) Great Depression. Another case where a LOT of people got hurt.

Sure, there wasn't famine, nor plague. But there was Weimar-esque hyperinflation in the former followed with tax and foreclose policies, and there was a virtual socialization of the nation in the latter which arguably only ended due to the windfall economic profits post WWII supplying the rebuild of Japan and Europe.

As I've noted - the situation we're in is one for the record books: a military and economic hegemonic power with fiat currency falling into a monstrous debt trap.

A Mauldin-esque 'Muddle Through' may be what occurs - it is in fact the safe prediction.

But I say that the assumption that everything will be all right is not the safe proposition it has been in the past 2 generations.

Sure the government can and will socialize American labor and capital (i.e. savings) in an attempt to cope.

But where will the windfall profits be to break out of this spiral?

Other factors:

I'm no anti-war protester - and do believe there was and is benefit in booting Saddam out, but nonetheless the increasing amounts of purchasing power devoted to the foreign military adventures in Iraq and Afghanistan are a continuing drain on US resources - not even counting the many foreign bases (and leases).

Iraq has been $550B and counting - by official government budgets.

The reality is that the everyday population in the US has suffered nothing despite this monstrous expense. But the free ride from the fiat dollar is now ending.

If the US pulls out of most of its foreign entanglements, what happens to what's left of the fiat dollar? The petro-dollar?

My suspicion is that these foreign entanglements are the interest payments to keep up the fiat/petrodollar.

Irregardless, any recovery will have the gigantic foreign military expense tacked on as a handicap weight, right up there with the Boomers and their upcoming retirement and medical expenses.

A straight line analysis of this yields a different version of the Soviet Union:

1) socialized medicine (called Medicare A B C D E F G H, the latter 4 being future 'innovations')

2) A huge military as a percentage of the economy. Only they are 'volunteers' instead of conscripts. As voluntary as needing to pay for ever increasing education costs can be. Then there's the old 'debt draftee' ploy: debtors prison or join the Army.

3) To go with the huge military, a huge defense complex.

4) As times get tougher, immigration reverses and birth rates plummet.

5) Instead of 'Pravda', we get 'Murdoch'

The list can go on and on.

I damn well hope none of this happens.

But I equally still cannot dismiss the over growing possibility.

[D-Mack]

Re: Michael Hudson: How the Chicago Boys Wrecked the Economy

Go here...

http://www.itulip.com/forums/showthread.php?t=4853

...and please spare the rest of us a repeat trip down that path on this thread.

I'm surprised, just scrolled a bit through it, for some the PPT and rigged CPI/GDP is a conspiracy for others it isn't, it probably depends on what background you have.

[Jim Nickerson]

Re: Michael Hudson: How the Chicago Boys Wrecked the Economy

I am much more optimistic than C1ue (and a some others around here). To these points I would counter:

1. The USA and the world functioned just fine before the mass securitization insanity that just ended. Unless you are a banker with dearly departed Bear, or with soon to flatline Lehman, the "end of securitization" is hardly the end of the world as we know it. Finally, securitization won't completely disappear, it's just going to get scaled back to a level where its function actually adds real value, as nobody is going to pay for anything more than that.
2. As the income disparity figures show, the benefits of the quarter-century FIRE economy have dispropotionately accrued to a small slice of the population. Most people are smart enough to know their real standard of living has been declining for quite a few years now. There won't be any pitchforks, there won't be a violent revolution in the USA. People know they can live just fine without cheap crap from China, whether it be lead painted toys, contaminated toothpaste, or questionable food [a little story: Recently a considerable amount of Chinese made plywood found its way to my area because it was priced much lower than North American made plywood. Once applied it delaminated in the first rainfall; the inspectors failed all the buildings. I am going to great lengths in the construction of my "bunker" to make sure I use NO Chinese components, and with the low US$ I no longer have to pay much of a premium for, say, properly manufactured plywood from one of US-headquartered Louisiana Pacific's North American mills]. As I've posted many times before, the USA has the most creative, innovative, adaptable and flexible economy in the world. By far. We can all hope that this creativity, etc is applied to something other than the FIRE sectors in the years to come. A failure to achieve that [e.g. a successful Fed & Treasury-supported resurrection of the FIRE economy] is the only real danger that I see.
3. To the degree that the loss of trust prevents a return of the FIRE economy, that is all to the good. However, to extrapolate that reaction and expect that suddenly the USA will no longer be attractive to "flight capital" is unlikely. In an increasingly dangerous world, where the rule of law [especially as it applies to private property] is steadily being subverted by xenophobic nationalists/populists/kleptocrats, the old habit of looking to the USA and the US$ as a safe haven [albeit the best of a bunch of bad fiat alternatives] won't go away. More importantly, the characteristics of the US economy I described in 2 above will ensure a healthy flow of risk capital into the USA will continue.

As for the issue of educated foreigners working in the USA, this is a real problem in my mind.


But not because they are suddenly going to abandon ship and head "home". Most of these people left their homeland for the USA (for education or jobs or both) because the USA offered more opportunity than "home". They took a personal risk that most of their countrymen would not...that risk-taking mindset is what makes them different, and so valuable to their adopted country. Most will never return [during their productive working lives] as permanent residents of their native country. That's been the pattern of immigrants for centuries, and something as trivial as the implosion of an overlevered financial system is not going to change this.

What could change this, however, is the incredibly dysfunctional US immigration policy; which is now sending the message that these people are no longer welcome, regardless of how well educated or qualified. That is a problem.

I agree GRG, and here is an anecdote that demonstrates exquisitely American ingenuity and innovativeness.

A guy calls 911 and tells the person his wife has just been attacked by a warthog. When asked for his address he said, "2202 Eucalyptus Street," to which the emergency clerk replied: "Can you please spell that for me, Sir"?

The innovative genius without hesitating replied, "I'll just drag her on over to Oak Street and you can pick her up there."