Art and commentary by Kimberly Harris

Archive for the ‘Economy’ Category

The Man in the Pickle Barrel Suit

A man wearing only a pickle barrel is supporting the US Capitol

True to President Reagan’s vision of a shining city on the hill, this new Fabergé egg commissioned by Congress celebrates the symbiotic relationship between government and the citizenry, thanks to whose selfless sacrifices this glorious institution has flourished over so many years.

The Shining City on the Hill has never looked so bright
Resplendent in magnificence, brilliance and might
A tall proud city built on rocks stronger than the ocean
Symbolic of our leaders’ noble devotion
I’ve never seen so many tourists gawk in utter awe
At this hallowed monument to our nation’s law
I never saw that wooden suit that you’re wearing
I have been blind
Citizen in the Red

After the fanfare and celebratory atmosphere wound down in the wake of the country’s landmark second inauguration, Congress saw fit to commission a piece of commemorative art that would celebrate their accomplishments and their vision for the future of America.

Although no one conceded much admiration for the Romanovs, several prominent congressional leaders were mesmerized by the elegance and detail of the famed jeweled Fabergé Eggs that were produced for Czar Alexander III and later Czar Nicholas II, as symbols of the power and wealth of imperial Russia. They decided to commission an egg for the government of the United States.

Congressional staffers were instructed to contact the US Embassy in Switzerland to find Deepak Fabergé, one the few remaining descendants of Russian Imperial Jeweler Carl Fabergé who had been rumored to still be producing jeweled eggs in his attic workshop in Lausanne. As soon as he was located, an Air Force C-32 transport plane was dispatched to Geneva in short order to pick up Fabergé and spirit him off to Washington, DC.

After a few formalities and several bottles of scotch, a select Congressional subcommittee instructed Fabergé to produce an egg for display in the Capitol rotunda that would glorify the seat of power that has made so much progress possible and also convey the nation’s appreciation for all the support and sacrifice on the part of the citizenry. They told Fabergé that money was not a concern and to produce as elegant a piece as he could conceive.

It was a tradition in the Fabergé family of jewelers that each egg would contain a surprise inside, and not even the recipient, however prominent an individual, was to know the contents of the egg in advance of its delivery.

After Fabergé returned to his atelier in Lausanne to begin work, the committee members waited in anxious anticipation of the delivery of the egg. What surprise might this new egg contain? Jobs? Health Care? A balanced budget?

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The Tragedie of Macben and the Bubble Economie

Macben is posing next to his printing press which is churning out new US currency

Macben is saving the economie with his magick prynting presse

Act 4
In an abandoned Metro tunnel deep below the nation’s capital, three witches are conjuring up trouble for Macben. As they parade around a steaming cauldron, the faint rumbling of an Orange Line train can be heard in the distance.

First Witch
Thrice the brittle hedge funds stumbled

Second Witch
Thrice and once the walled street tumbled

Third Witch
Speculators cry “‘Tis time, ’tis time.”

First Witch
Round about the cauldron go;
In the poison’d debt throw:
Freddie Mac and Fannie Mae
A-I-G and B-of-A
Goldman Sachs and rich folks tax
Dash of TARP and spoiled carp
Medicare and Medicaid
Student loans and underwater homes
Securitize and monetize

All
Double, double, toil and trouble;
Economy burn and cauldron bubble.

Second Witch
Pundits mumble, never humble
Irrational exuberance and unwise bets
Greek debt and subprime mortgages
Offshored jobs and moribund industries
Bloated bonuses and insider trading
Bernie Madoff and R. Allen Stanford
Into the cauldron hot and deep

All
Double, double, toil and trouble;
Economy burn and cauldron bubble.

Three witches are stirring a cauldron full of poisonous ingredients

The triple witching hour has arrived and the Weird Sisters are preparing a potion to cast powerful spells upon the economie

Third Witch
Real estate crumble, derivatives fumble
Bankers grumble and Congress bumble
Unemployment riseth and inflation loometh
Administration waverth and GSA partieth
Treasury selleth and China buyeth
Liquidity traps and shadow stats,
Mark-to-market, bondholder haircut
Moody’s, Fitch and S&P
Sovereign downgrades and party of tea
QE1, QE2 and QE3 soon to be
Manipulate and stimulate

All
Double, double, toil and trouble;
Economy burn and cauldron bubble.

Second Witch
Cool it with a failed IPO,
Then the charm is firm and good.

Enter Geitnercate with three witches

Geitnercate
Oh well done! I commend your pains,
And every one shall share i’ th’ capital gains.
And now about the cauldron sing,
Like bulls and bears in a ring,
Enchanting all that you invest in.

Second Witch
By the picking of my stocks
Something wicked this way comes.
Open, locks,
Whoever knocks.

Macben
How now, you secret, black, and midnight hags?
Has the dreaded hour of triple witching at last arrived?
What is ’t you do?

All
A deed that goes by many names.

Macben
I conjure you by that which you profess—
Howe’er you come to know it,
Insider information or salmon coloured journal
Answer me.
Though you untie the currencies and let them fight
Against the banks, though the yeasty valuations
Confound hedge fund managers and day traders alike
Though swaps be lodged and derivatives blown down,
Though investment houses topple on their warders’ heads,
Though online brokerage firms do slope
Their revenues to their foundations, though the treasure
Of the world economy tumble all together,
Even till destruction sicken, answer me
To what I ask you.

First Witch
Speak

Second Witch
Demand

Third Witch
We’ll answer

First Witch
Say, if th’ hadst rather hear it from our mouths,
Or from our masters’.

Macben
Call ’em. Let me see ’em.

First Witch
Pour in the tears of analysts that hath eaten red ink
Add lobbyist’s grease that graced the Congressional palms
Into the flame

All
Come, high or low;
Thyself and office deftly show!

The ghostly disembodied head of John Maynard Keynes
.

A burst of light flashes down the darkened tunnel.
An apparition slowly rises from the steaming cauldron.
It is the ghost of renowned stimulator John Maynard Keynes


.

Macben
Tell me, thou long lamented sage

First Witch
He knows thy thoughts
Hear his speech, but say thou nought.

First Apparition
Macben! Macben! Macben!
Beware McRon, the thane of Paul.
Be seduced not by his gilded standard
Instead manipulate and stimulate
Dismiss me. Enough!

The specter descends back into the cauldron.

Macben
Wherever thou art, for thy good caution, thanks
Thou hast harp’d my fear aright. But one word more—
Will fair Fedres be occupied, audited or perchance abolished?

First Witch
He will not be commanded. Here’s another
More potent than the first

The ghostly disembodied head of Richard Nixon.

.

A thunderclap is heard. A second apparition slowly resolves from the cauldron’s steamy mist. It is the ghost of Richard Nixon, slayer of the gold standard and champion of fiat money.

.

.

Second Apparition
Macben! Macben! Macben!

Macben
Had I three ears and Siri too, I’d hear thee, o tormented spirit.

Second Apparition
Be greedy, bold, and resolute. Laugh to scorn
The allure of gold and its falsehearted charm
For as long as the presses roll
No harm shall visit Macben

Macben
Then preach on. What need I fear of McRon?
But yet I can’t be double sure, so I take my chance
That the fates will prescribe no nomination
And that I may continue to voice pale-hearted lies
And slumber roundly innocent of inflationary dread.

Nixon’s ghost dissolves back into the eerie fog

The ghostly disembodied head of Alan Greenspan

.

.

A lightning bolt flashes. A third apparition rises from the steaming cauldron. It is the doppelgänger of Alan Greenspan, the architect of the great housing bubble

.

Macben
What is this spirit
That rises like the issue of an elder,
Wearing upon his bald-brow creases of wisdom
While pronouncing equivocal fedspeak

Third Apparition
Be lion-mettled, proud, and take no care
Who chafes, who frets, or where investigators skulk.
Fedres shall never ruined be until
Great Bretton Woods to Foggy Bottom
Shall come against Macben.

Macben
That will never be.
Who can impress the forest, bid the tree
Unfix his earthbound root? Sweet bodements! Good!
Inflation dead, to emerge never till the woods
Of Bretton rise, and our high-placed Macben
Shall live the life of leisure, pay his breath
To time and mortal custom. Yet my heart
Throbs to know one thing. Tell me, if your art
Can tell so much: shall Bankwoe’s issue ever
Govern in this land?

The apparition condenses down into the cauldron

The ghosts of Keynes, Nixon and Greenspan appear to Macben

Macben recoils in horror when he is confronted by the ghosts of Keynes, Nixon and Greenspan and hears their dire predictions.

All
Seek to know no more.

Macben
I will be satisfied: deny me this,
And an eternal recession shall fall upon you! Let me know.
Why sinks that cauldron? and what noise is this?

To be continued…

Illustration by Kim Harris
Story by Don Rudisuhle

Who are the bubble blowers?

Three individuals are seen blowing financial bubbles

Who is responsible for blowing the bubbles that are threatening America’s economy?

It seems like every time I pick up a newspaper or read the Internet news, there is a story about a menacing bubble of one sort or another that is threatening the stability of our economy and indeed the entire world order. I decided to do a little research to see if I could characterize each of the more prominent bubbles to gain a better perspective of the dangers that they may or may not pose. In particular, I wanted to understand the processes that were producing the bubbles and explore the dynamics of these phenomena that are putting so many people in peril.

The Stock Market Bubble

The stock market has had its ups and downs over the years but it now appears that there is an evolving disconnect from reality that is preventing investors from acknowledging that things aren’t as good as they used to be. There is still a deep founded belief that somehow today’s situation is different and that stocks will succeed in navigating the stormy times ahead and continue to provide the generous returns of the past. The analysts and financial pundits have said it is so.

Individual and institutional investors have been ignoring some of the more conspicuous risks that could stifle future earnings and ultimately affect valuations. Advocates of investments in securities have been seduced by the alluring earnings records of US corporations in 2011, part of which can be attributed to the extraordinarily low interest rate environment in today’s economy. This could be seen as a repeat of the “irrational exuberance” phenomenon that Fed Chairman Alan Greenspan alluded to in a 1996 speech that caused markets to shudder from Tokyo to Frankfurt. It is hard to see how the trend can continue as deficits are increasingly funded by the prolific creation of money by the Federal Reserve, and which will at some point trigger a bear market in US Treasuries.

Prominent financial commentators suggested the prospect of a Facebook “IPO Halo” whereby a rapidly rising stock price for the social networking company would lift other technology stocks with a rising tide. Reality, however, played out differently. The company’s $100 billion valuation may not have been entirely justified by its recent financial performance. After a week of trading following the IPO, Facebook’s stock was hovering at around 85% of its IPO price of $38. At the same time the NASDAQ roller-coastered a bit but remained unremarkable with a 1.8% gain for the week.

Evidently, George Soros did not see any halo on the technology horizon as it was reported that his hedge fund, Soros Fund Management, recently liquidated its entire position in Google valued at some $168 million and also sold off half of its investment in Apple Computer.

One cannot help but wonder what will be in store for the financial markets. There would appear to be a mounting crisis of confidence on the part of investors, and particularly, the smaller players. For some time now they have been facing higher risks while experiencing meager returns. It’s as if the average person out there has come to believe that the game is rigged, and nowhere is this sentiment more in evidence than in the litigation that has been initiated against Facebook and the Wall Street firms of Goldman Sachs, Morgan Stanley and JP Morgan, the three of which reportedly shared a $100 million fee for their underwriting of the IPO. The litigants are alleging that negative information was concealed from the public prior to the IPO and that this led to losses for them. Adding to the sector’s crisis of confidence, JP Morgan announced less than two weeks ago that it had experienced a $2 billion loss as a consequence of derivative trades that went bad.

It was further reported that investors withdrew $85 billion from their mutual funds in 2011 and have pulled out $6 billion just in the first four months of this year. One cannot help but speculate that this investor retrenchment is driven at least in part by a sense that the little guy cannot win in a system that is permeated with corruption and special interests. Nowadays with Greece circling the drain and the European monetary system facing meltdown, this pessimism is understandable.

The Housing Bubble

There was a time in the not too recent past when housing valuations appreciated so consistently year after year that people began to assume that the trend would continue indefinitely. This gave rise to a subculture of “flippers” who bought houses with little or no money down and then resold them shortly thereafter earning them spectacular profits as due to the high leverage they enjoyed. The phenomenon was driven by a number of factors including low introductory interest rates and a failure on the part of lending institutions to exercise proper due diligence in the vetting of potential borrowers.

Another contributing cause was pressure exerted by Congress on banks to provide financing for affordable housing. The lending institutions were granted guarantees on the mortgages extended to individuals that lacked the financial wherewithal to make good on their commitments, especially in an environment of a declining economy with rising unemployment.

All good things must end sometime and that day occurred in December 2008 following several years of slow decline in the housing market. The subprime loan catastrophe that ensued left a trail of foreclosed and abandoned homes in its wake, bankrupting builders, ruining lives and compromising the solvency of some of the nation’s largest financial institutions. The impact was so great that the federal government was forced to step in with a series of rescue measures to assist foreclosed homeowners and banks that had become insolvent as a result of the large volume of delinquent loans.

The Student Loan Bubble

Earlier this year the rating agency, Standard & Poor’s, warned of the mounting danger posed by a growing student loan bubble. The situation was created by a convergence of factors which include tuition costs rising at twice the rate of inflation, a lack of proper underwriting that allowed young people to assume levels of debt inconsistent with their future earning power, and disregarding a weak job market that has left more than half of this year’s graduates under- or unemployed.

The New York Federal Reserve estimates that as of the third quarter of last year, 27% of all student loans have become delinquent. Incredibly, this level of unsustainable debt now exceeds $1 trillion and has eclipsed the nation’s aggregate credit card debt.

As more student loan defaults occur, there will be far-reaching consequences that will impact the entire market as asset-backed securities are inevitably downgraded by the rating agencies.

In 2005, Congress passed the Bankruptcy Abuse and Consumer Protection Act of 2005 that makes it impossible to discharge student loan debt in bankruptcy. However, this is of little comfort to the creditors who are finding it difficult if not impossible to collect from insolvent students who are living in their parents’ basements with scant prospects of employment.

Since universities depend heavily upon the income derived from repayment of government guaranteed student loans, it is not inconceivable that some ivory towers of knowledge will follow Greece in its death spiral into the abyss of debt.

The Unfunded Liabilities Bubble

There has been much fretting and arguing amongst the presidential candidates regarding the snowballing annual deficits that have spawned the nearly $16 trillion public debt now burdening the United States. However, there has been less attention focused on the much greater danger residing at federal, state and local governments attributable to unfunded and contingent liabilities. At the federal level, these additional obligations of about $46 trillion are largely composed of mandatory payments for entitlement programs such as Social Security, Medicare and Medicaid. Originally conceived as pay-as-you-go programs, evolving demographics and changing economic conditions have resulted in a situation where tax revenues and other sources of government income are going to be woefully inadequate to meet projected cash flow requirements for the future.

Nowhere is this looming crisis more evident than in Berkeley, California where the city has accumulated nearly $330 million in unfunded liabilities of which nearly 2/3 represent defined benefit pension obligations for city workers. Articles in the press have reported that Berkeley’s recently retired city manager will be entitled to an annual pension benefit of some $280,000. Assuming an annual cost-of-living increase of 2% and the current 2% yield on five-year certificates of deposit, the city would have to set aside a fund of approximately $15 million just to provide the cash flow necessary to support this one individual. When one considers that the city of Berkeley has in excess of 100 pensioners receiving at least $100,000 per annum, the unsustainability of the system becomes glaringly evident.

Estimates regarding the total figure of the unfunded liabilities of the United States range from $62 trillion to $144 trillion, a staggering amount in either instance. Depending on which estimate is selected, the amount of unfunded liabilities could exceed $1 million per US citizen, and it is hard to envision how this debt will ever be satisfied.

Am I on target here? Does anyone have any other bubbles you’d like to discuss? Suggest solutions? Please leave a comment.

Illustration by Kim Harris
Story by Don Rudisuhle

Secretary Geithner’s Failed Rescue Plan

Alien UFOs are beaming up valuable items at the Treasury Department

After the value of their investment in T-Bills dropped dramatically, the extraterrestrials sent a repo fleet to Washington to collect all the valuable items they can find

Secretary Geithner’s ingenious rescue plan is thwarted by the unexpected demands of unusual and unexpected bondholders.

The warning signs of the stress cracks in the US financial system had been appearing for some time now, but the cunning team of Geithner and Bernanke had it all figured out well in advance. The Chinese will continue to buy our Treasury debt no matter what, because they need to continue providing fuel to the American consumers to buy products from China and help deal with the growing overcapacity in that country’s manufacturing sector. Also, a selloff of their US Treasury holdings could trigger a drop in the dollar, which would deprecate the value of their investment.

For some months now, the financial press has been abuzz with increasingly alarming stories about the unthinkable prospect of a default on US Treasury obligations. Opposing congressional factions are far from agreeing on the prerequisites for containing the burgeoning national debt and President Obama has made it clear that any compromise the legislators arrive at must also conform to his vision for the country. Otherwise, he will not hesitate to exercise his veto power.

The storm clouds began to gather back in March when Pacific Investment Management Co sold off all the government debt from their $237 billion PIMCO Total Return Fund, the largest mutual fund in the world. Then, in April the respected ratings agency Standard & Poor’s announced that it was revising the United States’ AAA sovereign credit rating from ‘stable’ to ‘negative.’ That move was precipitated by the agency’s concern that a budget ceiling agreement between the parties might not be reached in time to be implemented and thus lowering the US’s creditworthiness with respect to other peer sovereigns who enjoy the same coveted rating.

Treasury Secretary Tim Geithner promptly shrugged off S&P’s ominous announcement and told Bloomberg Television that the low cost at which the US can borrow is proof that both local and foreign investors believe that the US economy is strong and that its debt will hold its value. However, S&P placed US sovereign ratings on formal credit watch, stating that there is a 50-50 possibility that the agency could downgrade the country’s debt. Yesterday, S&P reiterated that the country’s rating could be cut to AA as early as August, move that would likely trigger an increase in short and long-term interest rates.

At present, just days short of the predicted meltdown deadline of August 2nd, the polemics in Washington continue to rage unabated, with legislators seeming oblivious to the implications of S&P’s stern warnings which were soon echoed by Moody’s Investor Service, who also put the US on a downgrade watch. The Chinese credit ratings agency Dagong followed on Moody’s heels with a similar warning of their own, citing the sluggish growth and persistent deficits in the US.

Andy Xie, the former chief economist for Asia for Morgan Stanley, recently stated that China’s financial policy makers are “very, very bearish” on the US dollar and are seeking to diversify the country’s holdings away from America’s faltering currency. China’s purchase of euro-denominated bonds may provide them with some diversification of risk, although the Chinese recognize that the euro might be a poor substitute for the dollar due to the precarious financial state of the PIIGS countries, all of which may have to be bailed out in the future as the European Central Bank attempts to contain that continent’s sovereign debt crisis. Citing John Maynard Keynes’ supranational currency proposed back in 1940, the ‘Bancor,’ Zhou Xiaochuan, the Governor of the People’s Bank of China, has advocated replacing the US Dollar with IMF Special Drawing Rights (SDRs) as the new centrally managed global reserve currency.

Unbeknownst to Geithner and Bernanke, officials at the People’s Bank of China secretly devised a novel strategy to decrease their exposure to the dollar component of their portfolio currently estimated to contain in excess of $1 trillion in US Treasuries.

Those who follow UFO events are likely aware of the rumored existence of a secret alien base located in the vicinity of the Kongka La Pass in the disputed area of Aksai Chin on the India-China border. This bleak, frigid, inhospitable Himalayan pass sits at 17,000 feet elevation and has a population density of only 3 people per square mile. It is here where strange glowing cylindrical objects and silent triangular craft are said to emerge from the ground and depart vertically at unearthly speeds.

The Chinese have been aware of this base for a long time and some years ago established a friendship with the extraterrestrial beings who have built a vast underground facility in the area. At some point during a casual discussion concerning the mineral resources on Earth, the aliens mentioned that gold exists in abundance on their home planet and is mined principally for use in electronic circuitry, as it has no other real value to them. The Chinese delegation got the aliens’ immediate attention when they told them about their vast holdings of interest-bearing paper instruments issued by the richest and most powerful nation on the planet. The aliens were unfamiliar with the concept of lending something of value and actually getting back more than you lent out, and rapidly warmed up to the Chinese proposal to trade gold for US Treasury obligations.

A quick back-of-the-envelope calculation was performed, and it was agreed that the People’s Bank of China would trade 20,000 tons of gold in exchange for $500 billion of US Treasury notes. The deal, which represented about a 50% discount on the current market value of gold was quickly consummated and a cargo saucer was dispatched to fetch the gold.

Well, the end result was predictable. In spite of all the effort put forth by the Congress and President Obama, the dollar declined in value, interest rates soared and bond values collapsed. The extraterrestrial investors were outraged as they had been led to believe that their investment would be backed by the ‘full faith and credit’ of the most powerful nation on the planet

However, when the extraterrestrials went to cash in their T-Bills, they found them to be worth a lot less than they had been told and so they sent a repo fleet to collect whatever Earth items of value they could find. They felt it was appropriate to start with the US Treasury Department, so upon arrival they quickly put their tractor beams and giant vacuums to work to collect everything they could interpret as collateral.

Illustration by Kim Harris
Story by Don Rudisuhle

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