Category Archives: Economy and Meltdown

The 10-Step Plan To End The Era Of Ponzi Finance

The developed world’s Ponzi scheme is caused by record-high levels of public and private debt. As Boston Consulting Group notes, it is exacerbated by huge unfunded liabilities that will be impossible to pay off owing to long-term changes in developed-world demographics. Addressing these challenges at any time would be difficult. To make matters even worse, however, BCG points out that they come at a moment when the developed world’s traditional model of economic growth appears to be broken. This is partly a consequence of the Ponzi scheme itself. The underlying issues cannot be ignored any longer. The developed world faces a day of reckoning. It is time to act. In this excellent layman’s guide to the the real world, not only does BCG explain the Ponzi, but they lay out ten critical steps that developed economies must take to definitively end the era of Ponzi finance. Some are sacrifices required of various stakeholders. Others are new social investments, both public and private, that are needed in order to return to a sustainable growth path.


The paper starts with the Origins of the Ponzi Scheme we call modern economies…

goes on to discuss the Broken Growth Formula…



Then lays out ten steps to any solution for developed economies…

Via Boston Consulting Group:

1. Deal with the debt overhang – immediately. A precondition to addressing the fallout of the unsustainable policies of recent decades is a fast cleanup of the debt overhang. In previous papers, my colleagues and I have discussed the various options for doing so.35 Put simply, some combination of writeoffs and restructuring, austerity, higher taxes, and sizable inflation will be necessary.


2. Reduce unfunded liabilities. Once debt restructuring is under way and the broader public sees that wealthy owners of financial assets are contributing to the necessary cleanup, it should be easier for politicians to take another painful step: addressing openly and directly the trillions in unfunded liabilities that are weighing down budgets and balance sheets across the developed world. It will require a combination of several measures to bring these unfunded liabilities under control.


3. Increase the efficiency of government. Parallel to reductions in government spending on social-welfare benefits, another key to reducing government’s share of GDP and increasing economic growth is to make government itself more efficient. A smaller government sector does not necessarily mean a weaker government. By defining the right “rules of the road” for society and business, governments can set the tone and priorities for development in a more effective as well as a more efficient way.


4. Prepare for labor scarcity. Countries need to start now to prepare for the coming era of labor scarcity. Doing so will require a series of initiatives to reduce the decline of the workforce.


5. Develop smart immigration policy. Even if developed countries take all these steps, it will still not be enough to reverse demographic trends. Therefore, these countries also need to become far more open and attractive to immigrants.


6. Invest in education. Education has to play a significant role in the future growth potential of the developed economies. Quality education will be the decisive factor in protecting and increasing GDP per capita. It is also the foundation of social mobility and a precondition to fully utilizing the innovative capabilities and entrepreneurial talent of a society’s members. For both reasons, it needs to be another key target of social investment.


7. Reinvest in the asset base. For more than a decade, the developed economies have reduced investments in public infrastructure and productive assets. Given the importance of the quality of capital stock to productivity and economic growth, it is time to reverse this trend.


8. Increase raw-material efficiency. The age of cheap resources may have come to an end. Developed countries have to increase their efforts to decouple economic development from resource consumption.


9. Cooperate on a global basis. Competition among countries will become more intense in the years to come. All countries will try to increase their exports; all will try to attract the best-educated immigrants; and all will try to secure scarce resources, from water to oil to commodities. This increased competition will pay dividends in the form of new and innovative products. But even as they compete, the world’s countries must also cooperate. The problems of the developed economies can only be addressed in a cooperative way on a global scale. Otherwise, the world risks descending into a vicious circle of beggar-thy-neighbor economic policies leading to much lower growth and slower improvement of living conditions worldwide.


10. Launch the next Kondratiev wave. Last but not least, the developed world needs to prove Robert Gordon wrong. By investing in a growing and highly productive workforce and making it easier for engineers and technologists to innovate and for entrepreneurs to start new businesses, the developed economies need to unleash a new Kondratiev wave of global economic development.


and ends with ideas for Negotiating The Fallout

Must Read!

BCG Ending the Era of Ponzi Finance Jan 2013

Bah! Humbug And A Happy Hyperinflationary Christmas To All

There are, according to USA Today, 364 items that need to be purchased to create the ultimate gift basket from the epic holiday song “The 12 Days of Christmas”. Based on PNC Wealth’s Christmas Price index, the cost of this basket is $107,300 in 2012 (up 6.1% year-over-year). Since 2001, when the Fed embarked upon its uber-expansionary monetary policy experiments, the cost of Christmas has risen over 40% faster than the Government’s prescribed CPI (and if we use a different cost-base, since 2006, the cost of Christmas has risen 46% per year on average). And on an even more Bah! Humbug note, there is the important economic question of the Deadweight Loss of Christmas – i.e. gift-giving means consumption choices are made by someone other than the final consumer, with potentially sub-optimal micro-economic effects such as a mismatch with the recipient’s preferences. This wonderfully positive report finds that between 10% and 33% of the value of gifts ‘given’ is destroyed through this inefficiency (with cash – or gold – the least impacted?). Happy Holidays, everyone!



The Deadweight Loss Of Christmas – PDF here

Cost of 12 Days of Christmas in 2005/2006 – PDF here

How The Fiscal Cliff Talks Collapsed

The collapse of the Fiscal Cliff talks should come as no surprise to anyone (except, of course, for all those “expert” political commentators virtually all of whom saw a deal by December 31: a full list of names is forthcoming). The reason: a simple one – a House torn, polarized to a record extreme, and a political environment in which the two parties, in the aftermath of a presidential election humiliating to the GOP, reached unseen before antagonism toward each other. In this context, it was absolutely inevitable that America would see a replica of last summer’s debt ceiling collapse, which mandated a market intervention, in the form of a crash, and the wipeout of hundreds of billions in wealth – sadly the only catalyst that both parties and their electorate, understand. We had prefaced this explicitly in early November when we said that “the lame duck congress will posture, prance and pout. And it is a certainty that in the [time] remaining it will get nothing done. Which means, that once again, it will be up to the market, just like last August, just like October of 2008, to implode and to shock Congress into awakening and coming up with a compromise of sorts.” Which of course brought us to Thursday night’s mini-TARP moment.

If you missed Thursday’s ES flash crash, fear not: there will be more “TARP moments” as first the Fed is brought into action (as we reminded yesterday), and then, as the final deadline – that of the expiration of various debt ceiling extension gimmicks which takes place in March, and which is the real deadline for a deal. Nonetheless, there are those forensic detectives who are addicted to every single political twist and turn, and who are curious just where and when the Fiscal Cliff talks broke down in the past week. In this regard, the WSJ provides a useful timeline.

From the WSJ:

Mr. Obama repeatedly lost patience with the speaker as negotiations faltered. In an Oval Office meeting last week, he told Mr. Boehner that if the sides didn’t reach agreement, he would use his inaugural address and his State of the Union speech to tell the country the Republicans were at fault.


At one point, according to notes taken by a participant, Mr. Boehner told the president, “I put $800 billion [in tax revenue] on the table. What do I get for that?”


“You get nothing,” the president said. “I get that for free.”

Well, you can’t fault the man at not demonstrating “leadership” at crucial junctions: after all it’s only fair he gets something for free.

The White House’s first formal offer, presented Nov. 29 left Mr. Boehner incredulous. It included a request for $1.6 trillion in additional tax revenue over 10 years, a permanent increase in the debt ceiling and money for road projects and other year-end priorities. In return it offered spending cuts of $400 billion—25 cents for each dollar in new revenue.


Taking a drag on his cigarette, Mr. Boehner asked Treasury Secretary Timothy Geithner, who had presented the plan, a number of questions but didn’t fully engage him. Across the Capitol, Senate Minority Leader Mitch McConnell (R., Ky) said he laughed at the offer.


The same sticking points kept rearing up—the White House insisting on more tax revenue than Republicans could stomach, and the Republicans demanding deeper cuts than the White House would accept.


During one session in the Capitol with White House’s legislative liaison Rob Nabors, Mr. Loper from the Boehner camp asked, referring to a near-deal during last year’s debt-ceiling fight: “Can you get back into the zone of where you were in July 2011?”


“No,” Mr. Nabors replied. “We were probably overextended then, and there’s no way we would do it now.”


Mr. Nabors said if they couldn’t reach a deal, they should keep lines of communication alive. The typically serious Mr. Loper asked, “So, you’re breaking up with us?”


On Dec. 13, Mr. Boehner went to the White House at the president’s request, joking he was going to the woodshed.


The president told him he could choose one of two doors. The first represented a big deal. If Mr. Boehner chose it, the president said, the country and financial markets would cheer. Door No. 2 represented a spike in interest rates and a global recession.


Mr. Boehner said he wanted a deal along the lines of what the two men had negotiated in the summer of 2011 in a fight over raising the debt ceiling. “You missed your opportunity on that,” the president told him.


That night, the speaker and Majority Leader Eric Cantor (R., Va.) decided to make the biggest concession so far.


As the country the next day digested news of a brutal school shooting in Connecticut, Mr. Boehner called the president and for the first time offered to let tax rates rise—on income above $1 million. The president acknowledged the concession but said Mr. Boehner’s plan wasn’t raising enough revenue.


News broke the next night both about the concession and that the speaker was willing to extend the borrowing limit. On Sunday, the White House sent a plane to fly Mr. Boehner back to Washington for a morning appointment with the president on Monday, the day it now appears the deal fell apart.


In that session, the president held firm for $1.2 trillion in additional tax revenue, a second step down from his original offer. Mr. Boehner asked for another $100 billion in spending cuts but couldn’t get a commitment.


Finally, the speaker said, “Well, you and I can sit here and stare at each other,” or he could leave and they would talk later.

Eventually, Boehner managed to turn the tables on a president who was convinced he would get all the concession he demanded. Or so Boehner thought:

Back in the Capitol, Mr. Boehner told Mr. Cantor the president wasn’t moving. They agreed to call him. On the call, Mr. Boehner restated he needed $1 in spending cuts for every $1 in revenue raised. He dropped a prior demand to increase the Medicare eligibility age.


The president told Mr. Boehner that he was willing to make some concessions on taxes and spending, but cautioned that they needed to retain Democratic votes for the bill to pass.


The speaker raised the prospect of moving a backup bill. White House officials said Mr. Boehner didn’t reveal what Plan B comprised. Administration officials expected a few more days of back-and-forth, but the speaker thought the prospects were dim for a big deal.


Meeting with his leadership team in the afternoon, Mr. Boehner read from a script prepared by his staff, telling lawmakers he still wanted a big deal but the rank and file needed to know the plan by a 9 a.m. conference meeting the next morning, Tuesday. He encouraged his colleagues to accept the backup plan.


“I’m going to keep the proposal on the table,” he said of the broader deal. “As I told the president, I’m not making an ultimatum. The offer stays on the table, even if we move on Plan B.”


His lieutenants made clear they preferred Plan B to the one Mr. Boehner was trying to broker.


The speaker called the president with news the House would move ahead with the backup bill, which would preserve Bush-era rates for all income below $1 million. The president was incensed.

Everyone knows what happened what Boehner was finally unable to get even the votes needed for “Plan B.” And what happened after that too:

On Friday afternoon, the president spoke to both Mr. Boehner and Senate Democratic leader Harry Reid in a bid to resurrect a deal. Soon afterward he left the White House for his annual family vacation in Hawaii.

And from Reuters:

The president is expected to indulge in some of his favorite pastimes on the island where he was born and raised: golf, an expedition for the local treat “shave ice,” and an evening out with family and friends. He hit the links at the nearby Marine Corps base under sunny skies on Saturday afternoon.

Needless to say no deal will be “resurrected”, and the US economy, like the Coyote, will go right off the cliff, with hopes for a prompt fix in the early days of January, at which point, the thinking supposedly goes, all those managers who fired tens of thousands of workers due to the new “post-Cliff” reality will miraculously rehire them back. After all the market said so: the same “efficient” market which continued to plow higher for three days after it is now clear the deal had fallen apart.

Next steps: nothing out of Washington for three months, even as Obama crucifies the GOP at every possible public opportunity, and another credit downgrade of the US, which initiates the early 2013 risk off phase, and the scramble into the “safety” of US bonds once more as was the case in 2011. In doing so it will provide a cover to all those sell side “strategists” (all of them) who once again, erroneously, predicted a recovery for the US in the coming year. After all who could have possibly anticipated the most perfectly logical political outcome…  Because the one thing that is most important to both parties is to maintain demand for US paper, as that, and not taxes, in both the coming year and decade, will consistently be primary source of ‘funding’ for the US government.

Cold Wind


Cold wind blowing today in the North East, fitting for the first day of winter. The whole country is having a bit of a cold spell. Even the poor folks in Palm Beach might see a frost (raises hell with the begonias).



I was feeling a bit sorry for the folks in the sun belt before I saw that it was down to –55F in Siberia. That’s cold, a fifty year low.



The topic of weather gets me to a story I’ve been following – the continuing drought in the mid-west. The odds say that two years of severe drought is unlikely, but that is what’s happening. The 30/90-day rainfall is a fraction of normal:




The lack of rain has many negative side effects. One is the water level on the Mississippi. The water is so low that ships, sunk and lost twenty-five years ago, are now visible.



A number of emergency steps are being taken to keeps the river navigable. Thirty miles south of St. Louis there is a rock formation that was once deep below water. Now it’s a risk to barge traffic, so they’re blasting it apart.



A more controversial step was taken to drain water from Lake Carlye. The hope is that the extra water will raise the northern Mississippi by six inches. Not a big deal considering it's already down by 20 feet. The water drained from Lake Carlye will keep the upper Mississippi navigable for, at best, another twenty days.



The river is already impaired; it’s getting worse by the day. There will be economic consequences to this. There are not enough trains and trucks to pick up the volume of goods that go by barge. Everything that goes up and down the river is going to get a fair bit more expensive in the very near future. A hell of lot of “stuff” gets floated up and down the Mississippi, so this is one to watch out for.




There is no connection between this weekend’s weather and climate change (It’ll be back in the 80s down in Boca next week), but I’ll jump to that topic anyway. For those of you who have strong feelings (either way) on matters of climate, there was an important development this week.


It appears that a significant motivation for Obama to nominate John Kerry as the next Secretary of State is that Kerry is going to lead a global effort to “Confront Climate Change”. The Hill has the story on this today (Link), some snippets from the article:


From Twitter:


“Confident John Kerry as state sec is good news for climate. Cross fingers his dedication will make climate a strategic priority. ” Hedegaard – E.U.’s commissioner for climate action.


“One of the most pressing challenges is to reverse potentially devastating climate change. Kerry understands the need to work closely with allies on the most pressing topics – including climate change.” Sen. Jeff Merkley (D-Ore.)





“I have absolute confidence that Secretary Kerry will be committed to action on climate change as he, is the most knowledgeable, passionate person to break the international logjams on this existential threat.” Rep. Ed Markey (D-Mass.)


“Sen. Kerry will bring vital expertise and knowledge on the issue of climate change as we endeavor to work toward a meaningful, balanced international agreement in 2015,” – Eileen Claussen, the president of the Center for Climate and Energy Solutions.


“As Secretary, Senator Kerry will face numerous issues that are crucial to both the security of our nation and the future of our planet, including critical decisions on the Keystone XL pipeline.” – Sierra Club Executive Director Michael Brune.


“Senator Kerry could certainly teach the President a thing or two about how to make a clear and compelling case for climate action. That starts with saying no to the Keystone XL pipeline and then continuing to use the powers of the presidency to regulate emissions and promote clean energy.” – Jamie Henn, co-founder of the climate advocacy group .


“We need a leader with John Kerry’s experience and talent at the helm of the State Department. There is much more to do on all of these crucial challenges, from nonproliferation to climate change.” – Hillary Clinton.



I thought it was interesting that Obama did not mention Kerry’s role as "Climate Defender" when he announced his nomination. I guess Obama understood that this is a very hot topic, and if the plan is for his new Sec. State to put the nix on the Keystone pipeline; he had better keep his mouth shut until after Kerry's Senate confirmation.


Anyone have any thoughts on this?

-Should the Secretary of State be leading a new global charge directed at climate change?

-Is there anything that might be done to influence the climate?

-Are humans responsible for climate change? Are Americans responsible for climate change?

-Does your opinion of Kerry, as Sec. State, change, now that you know that one reason he is getting the job is to push a climate agenda?


It’s cold out, I’m just trying to turn up the heat.