Baltimore…best bet for investors?

We drove back into town on Sunday night. People moped around in front of bars. Groups walked uptown from the stadium, their shoulders down, the chins dragging. The city was dark…and unhappy.

There was no joy in Baltimore on Sunday night. Baltimore is a sports town. The Ravens — the only team we know named after a poem — had lost. They would not be going to the Super Bowl.

Baltimore is a funny place. We were happy to leave it for 15 years when we lived in Europe. And we are happy to be back. Living in Europe was hard. Here it is easy. Living in Europe was chic and fashionable. Here, moving to a trailer park would be moving up in the world. Living in Europe was expensive. Baltimore, meanwhile, is one of the cheapest cities in the world.

But we’ll come back to Baltimore in a minute…

What’s in the news today? The Dow rose 83 points yesterday. The 30-year, ‘long’ bond yield dropped below 3%. The price of gold rose to $1,749.

Bond yields signal a recession. Stocks hint at a recovery… Gold? The correction in the gold market didn’t go nearly as far as we expected. And now it’s over. What to make of it? Do people expect inflation? Why are they buying gold?

We know why the Syrians are buying gold. There’s a war on. Gold has always been the thing to own in a war zone. But here, people think the economy is recovering.

The public and the investoriat seem to think all is well. We’ve just had one of our best months in stock market history. Many investors are convinced that it is the beginning of something big.

Our old friend Mark Hulbert, for example, tells us that some of the oldest and wisest of the newsletter gurus are now bullish on stocks.

We don’t have any opinion about stocks. We just don’t like them. And we figure that if they were as valuable as people think, the owners wouldn’t be in such a hurry to unload them. At least, not to us. Instead, they’d hold on.

But some people are always selling. Others always seem to be buying. Prices go up…and down…the world goes ’round and ’round…

…and who are we to argue with it?

The trouble is, the economy is not nearly as strong as most people think. There is no growth to speak of. And without growth, it doesn’t make sense to pay so much for stocks. Forbes:

The Q4 2011 GDP reading of +2.8% produced what may appear to be a respectable headline number, a full percentage point above Q3 GDP growth of 1.8%. On the surface, the Q4 report also compared favorably to an increase in real GDP of 1.7% for all of 2011. But 2.8%, even at first look, is still softer than the 3.0% gain in real GDP logged for 2010, repeating a pattern that we’ve seen over the past few years: GDP rises, only to drop off again.

Although it may be tempting to look at the economy as a glass that’s half full, I’m afraid it’s far emptier than it looks. Diving into the Q4 GDP report, we see that two-thirds of the amount of growth reported (1.9%) was due to private inventory build-up. (According to standard accounting practice, growth in inventory increases GDP, while sales of inventory reduces it.) Drilling further, the stat that is most meaningful is the real final sales of domestic product — GDP minus the change in private inventories. This data point eked out only a 0.8% increase in Q4 2011, compared with an increase of 3.2% in Q3 2011. That is very telling.

Another weakness in consumer spending was reported by the Commerce Department: Personal income grew by 0.5% in December, up from a 0.1% rise in November. Spending was flat, however. The personal saving rate, meanwhile, was 4.0% in December, compared to 3.5% in November. Saving instead of spending may be good for consumers’ personal balances sheets, but it doesn’t do much good for an economy that needs to gain traction. Additionally, sales increases still appear to be driven by increases in debt which is not sustainable.

Without growth, the average stock will go nowhere. How could it? There’s nowhere to go. No growth means that the economy is no larger at the end of the year than it was at the beginning. So, for any company to grow, it would have to take sales and profits from some other company. For one to grow another must shrink. Overall, there would be no growth, and no capital gains for investors.

Trouble is the dividend yield of the stock market is only around 2%. That’s not enough. Take inflation and taxes into account, says our Family Office strategist, Rob Marstrand, and you need more than an 8% return just to break even.

So, if you’re buying stocks in a no-growth market…with a 2% dividend yield…you’re losing 6% on your money.

Heck, you’re much better off buying gold…or property in Baltimore.

Gold has been up every year for the last 11. Even last year, when it supposedly suffered a big correction, it still ended the year up about $300 — which is what you would have paid for a whole ounce of gold in 1999.

As for Baltimore real estate…

We’ve been looking at apartment buildings in B’more. This city is unusual, so you probably shouldn’t generalize. But we’re seeing buildings with “cap rates” of 10% and more…and return on cash as high as 20%. Interest rates are so low you can finance much of the purchase price at low cost…and leverage your investment to get a higher return.

How does that work? Well, the building we just looked at had 5 units. The sales agent explained it to us.

“You get gross rents of about $100,000 and you can buy the building for $800,000. You put down $100,000 and borrow the other $700,000. Then, you pay off your mortgage, pay the upkeep, property taxes, utilities and so forth… You also have to pay management…leave an allowance for vacancies and major repairs…and you end up with about $20,000.

“That’s your return on cash. Not bad, huh?”

Well, it’s about 10 times what you can expect from the stock market.

Trouble is…trouble. Being a landlord in an inner city is trouble. You get trouble from the tenants. Trouble from the city. Trouble from the pipes, the roof, the wires…lead…asbestos — everything. Buy city apartment buildings and you are asking for trouble.

But if you can handle the trouble, hey…see you in Charm City.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.

Readers who expect an early end to this Great Correction are going to be disappointed. There is no sign of it reaching its conclusion anytime soon. Just the contrary…there’s no end in sight.

The Great Correction seems to be going along just as you’d expect. Or, just as we’d expect.

Here’s the latest from Reuters:

Home prices fell more steeply than expected in November, and consumers turned less optimistic in January, highlighting the hurdles still facing the bumpy economic recovery.

The S&P/Case-Shiller composite index of single-family home prices in 20 metropolitan areas, released on Tuesday, declined 0.7 percent on a seasonally adjusted basis, a bigger drop than the 0.5 percent economists expected.

Separately, an index of consumer attitudes fell to 61.1 in January from 64.8 the month before, as Americans turned gloomy about the job market and income prospects, said the Conference Board, representing private companies.

Some improving housing data in late 2011 had raised hopes the recovery was finding its footing. But weaker numbers this month have underscored how lengthy the healing process will be.

US housing prices have plunged by about a third from their peak before the financial crisis, and a combination of high unemployment, tight mortgage lending conditions and more foreclosures in the pipeline are holding back a recovery.

A report released on Monday showed spending was flat in December as Americans focused more on saving.

Once a key pillar of the US economy, Americans have taken a more frugal tack as many struggle with hefty debt burdens.

And guess what? The Great Correction is having the same effect in Europe. Here’s The Wall Street Journal:

LONDON — UK households made a record repayment of personal loans and credit card bills in December, Bank of England data showed Tuesday, underscoring households’ limited appetite for spending and heightening fears the UK may slip back into recession.

BOE figures showed UK consumers made a net repayment on unsecured loans of £377 million ($592.3 million) in December, the highest figure since records began in 1993. It was also the first time since last January that repayments exceeded new borrowings…

In some ways the situation in Europe is worse than in the US, depending on where you are. Youth unemployment is up as high as 50% in some areas. Even in supposedly strong economies it is around 20%.

And, oh yes, you want yield? How about a 10-year note from Portugal? It comes with a yield of 17%.

Portugal’s economy is shrinking at a 5% annual rate. Italy, Spain, Greece and Ireland are not in much better shape.

So what do the euro-crats do? Same thing as the US-crats. They give the banks money, hoping the nice bankers will spread it around.

Last month, the European Central Bank provided 489 billion euros in 3-year loans. “Super Mario” Draghi — formerly head of the bank of Italy, now head of the ECB — keeps the banks from going bust…and begs them to keep the governments from going bust.

The banks needed about 230 billion to refinance loans coming due in the first quarter of this year. They got the money from the ECB.

What a show! Draghi, Monti, Papademos and all the other ‘technocrats’ now managing the crisis are the very same guys who created the crisis. They worked for Goldman, ran central banks, and helped organizations such as the IMF and the World Bank make a mess of the world’s financial system.

Now, they’re solving the crisis the same way they caused it — by creating more debt. The banks can’t pay their bills so the central bank lends them money. Governments can’t pay their bills either, so the central bank lends them money so they can lend it to the government.

The ECB says it will give away more money on February 28th. Goldman Sachs is advising other banks to take the loot. As much as $1 trillion could be given out.

Let’s see, how does this work? You are deeply in debt. So, the bankers lend you money so you can continue making payments. You go even deeper in debt…and the bankers lend you more money so you can keep making payments…

…and so on…

Where does this end? We don’t know.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.

We’ve covered a lot of ground over the past few months. Not much action in the markets yesterday, so let’s stop here and take stock.

What we know so far…

First, it was clear from the get-go that there was a bubble in finance and housing. The only people who couldn’t see it were the people in finance and housing…and the feds. It reached its peak in ’05-’07…then, exploded.

Second, it was obvious that the US economy entered a period of debt destruction — a Great Correction, we called it. There was never really any hope of ‘recovery.’ Once it blows up, you can’t put the pieces of a bubble back together.

Third, the question then was how long the Great Correction would last…which depended on what it was correcting. No one knows. We’re still correcting the debt bubble, which could take another 10 years or so. But this correction could be tough; there are other things going on. Which led us to start asking questions about what we don’t know:

Can any government in the developed world survive? Will there be enough growth to keep them from going broke? Was the growth of the post-war period a fluke? Was the Industrial Era driven entirely by cheap energy…a ‘growth spurt’ that is now played out? Are the developed economies so burdened by zombie institutions that they can never hope to compete with the emerging markets? How do governments shuck off the zombies?

Those questions gave us something to think about.

We saw, for example, that the theories of government were mostly wishful thinking, apologia, and claptrap. Government is raw force…used to transfer wealth and status to the insiders who control it. The reason for the triumph of democratic government is that it gives more people the illusion of power…and welcomes more people as insiders (however modest their participation). As time goes by, more and more groups get special privileges, contracts, jobs, tax breaks, bailouts, protections and redistributions. Eventually, there are more insiders collecting wealth than there are outsiders producing it. Then, reform is practically impossible. The political system is entirely under the control of the zombies. The only resolution of this is catastrophe — either in the form of bankruptcy, hyperinflation, war, revolution, or some combination.

Zombies are expensive parasites. The more political power they gain, the less flexible and adaptable the economy and the society become. Capitalism is corrupted. The ‘system’ cannot correct itself. Politicians may talk about cutting spending, balancing the budget, and protecting the nation’s finances. But they can’t do it. The leeches want more and more blood. Sooner or later, the host goes broke.

But bankruptcy is not the biggest menace — not for the US. An empire risks losing its soul as well as its money. That is the drama we are watching in the Republican presidential race. The devil has already laid his trap — the Pentagon budget, Homeland Security, Patriot Act, the Defense Authorization Bill, sidelining Congress, torture, the use of drones at home and abroad, the pre-meditated murder of Osama bin Laden. It is probably just a matter of time until it springs shut.

“Wait, Bill,” writes a reader. “You keep going on and on about the Pentagon. But the military is going to take the budget bullet, if you know what I mean. That’s where the automatic cuts are focused.”

Oh yeah? More below…

Of course, we don’t know what will happen. We’re just watching, wondering…guessing…like everyone else. We’re also probably a bit more ‘pessimistic’ than most observers. Because we have a lower opinion of our fellow man than most people do. Not that he is bad. But he is subject to influence. And sometimes the influences upon him are rotten. The average person we meet is a decent enough character; we almost always like him. But the average Roman in Caligula’s reign was probably a decent fellow too. Sometimes people get trapped…where the worst take over…and decent people can’t stop them.

Remember the meeting at Davos with the “remodeling capitalism” theme? We were suspicious and dismissive. After all, no one ever modeled capitalism in the first place. It seemed vain to talk about remodeling it.

Besides, we’ve seen these architects and decorators at work before. We wouldn’t want to live in a house they designed.

Stephen Roach, an economist with Morgan Stanley and Yale, took part in the discussion. His account of the conference confirms our guess: this was the most prestigious meeting of dumbbells on the planet.

One speaker urged a repudiation of materialistic values. Another wanted to confront human rights abuses. Another wanted to make some point about the Arab Spring.

Two thirds of the participants, writes Roach in The Financial Times, “felt capitalism was not working.” But none seemed to have any idea of what capitalism really is…or what might be wrong with it.

A group of Occupy agitators broke into a chant: “No speeches. No stage. Join us!”

Join us? Why?

“We simply cannot continue to cut our defense budget if we are to remain the hope of the Earth,” says Mitt Romney.

Where do candidates get this sort of stuff? Who writes lines like that? Who takes them seriously?

According to Romney, the Earth itself longs for more US military spending.

His adversary, Newt Gingrich, says he thinks that Obama’s Pentagon cuts will make the US as vulnerable to attack as it was before World War II.

But the Pentagon won’t really have less money to spend. They’re not really talking about cutting defense spending; they’re talking about cutting projected military spending increases. Even after the ‘cuts,’ the US military will still be spending more than the next 10 biggest spenders put together.

While Republican candidates try to out-Rambo each other, the president himself sends teams of Navy Seals to rescue American hostages…and never fails to remind Americans that he was the one who ordered the killing of Osama bin Laden.

All the candidates think the American people want war. Or…what?

Actually, Americans don’t want war. The latest Pew Research polls show them more opposed to foreign military adventures than at any time in the last 15 years. They’re more interested in getting a job…and protecting their retirements. Given the choice, they would probably want to see military spending cut back and the money put into their own pockets.

But they won’t be given the choice. The system is rigged. Between them and the outcomes are 10,000 lobbyists and millions of zombies. This is why representative democracy doesn’t work.

Decent people will generally have decent responses to decent questions. Put to a ballot, how would American’s vote?

1. Should the US balance its budget…or continue to spend $1.50 for every dollar in revenue?
2. If you have to give up something, which would you rather do without: foreign wars…or domestic health and retirement benefits?
3. Should Congressmen be forced to leave Washington after a maximum of 2 terms?
4. Should members of Congress be forced to live by the same laws as the voters?
5. What do you say to a flat 10% tax rate, on all income…across the board…? Yes or no?
6. Should the President be allowed to kill or imprison anyone he wants, without due process of law?

Our guess is that the voters would do the right thing.

But they’ll never get the chance. The system is in the hands of the zombies now. Lobbyists, lawyers, connivers, chiselers, contractors, layabouts and scalawags and world-improvers — each one takes a little piece of the old republic…until there’s nothing left.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.

Today’s weakness in the Euro/USD (so far) has held important support in the 1.3080/50 area, which represents a former 6-week upside breakout plateau.

As long as EUR/USD respects the integrity of the support zone, the recovery rally off of 1.2620 (January 15) will remain intact.

As we speak, EUR/USD is rebounding off its intraday low at 1.3075 to 1.3135, which is providing a bit of a tailwind for spot gold prices.

As for gold, the earlier weakness probed, but did not break, the prior pullback low at $1714.32. Spot gold has since pivoted back to the upside to $1733 in what I consider to be a very impressive performance amidst a nasty risk-off adjustment period this morning.

If gold manages to hurdle its high at $1740.40 (Sunday evening), upside acceleration towards $1800 could unfold in the upcoming hours, also benefiting the SPDR Gold Shares (GLD).

Only a decline that breaks today’s low at $1716.39 will argue that a near-term correction likely is in progress.

 

Mike Paulenoff is a 26-year veteran of the financial markets and author of MPTrader.com.

Tutto va bene…

That was what the crew told passengers on the Costa Concordia just before it sank.

And it was what the crew of the USS America — the biggest cruise ship of all — were telling passengers last week.

Tutto va bene.

Trouble was, tutto was not going as bene as they claimed. Instead, the ship is sinking.

Stocks sank on Friday. Oil slipped below $100. And the yield on a 10-year T-note dropped to 1.89%. Gold kept going up.

None of these are signs that the voyage is going well.

The US economy has come back to output levels of ’07. But this feeble rebound not only holds the title of “weakest post-war recovery ever,” it also shows that something else is going on. Most economists have no idea what. So, they just think this “recovery” is unusually slow. Ben Bernanke, for example, has pledged to hold down interest rates (at negative real levels) for another three years. He also let it be known that he has his finger on the trigger, ready to blast out some more QE at a moment’s notice.

Last week produced news that the economy expanded in the previous quarter. It went up at a 1.8% annual rate, far below the 3% consensus estimate of economists. That returned it to ’07 output levels, but at what cost? The feds have added $6 trillion in new debt to regain some $600 billion in annual output. Whoa!

And indications are that growth will be just as disappointing this year as it was last. Bloomberg has the story:

US economic growth may not top 2 percent this year and a third round of quantitative easing by the Federal Reserve would have little effect, said Martin Feldstein, a professor of economics at Harvard University.

“We’re going to have a hard time reaching 2 percent this coming year,” he said… The economy is still in a “danger zone,” Feldstein said, even as the recession risk “is less now than it was.”

Feldstein, speaking before the GDP report was released, said last year’s growth in household spending was largely due to consumers drawing down their savings, which he said they won’t be able to maintain this year.

Another Bloomberg report tells that consumer spending is already weakening:

Spending at retailers lost momentum each month in the fourth quarter, slowing from a 0.7 percent gain in October to a 0.1 percent increase last month. Merchants including Macy’s Inc., Gap Inc. and Target Corp. cut prices to attract more business during the holiday shopping season…

Government agencies also struggled last quarter as they cut spending at a 4.6 percent annual rate, the fifth straight decline. For all of 2011, government spending dropped 2.1 percent, the biggest decline since 1971.

Our guess is that consumer spending will weaken further as the bear market in housing gets worse. December house sales were the worst in nearly half a century. AP is on the beat:

The Commerce Department said Thursday new-home sales fell 2.2 percent last month to a seasonally adjusted annual pace of 307,000. The pace is less than half the 700,000 that economists say must be sold in a healthy economy.

About 302,000 new homes were sold last year. That’s less than the 323,000 sold in 2010, making last year’s sales the worst on records dating back to 1963. And it coincides with a report last week that said 2011 was the weakest year for single-family home construction on record.

The median sales prices for new homes dropped in December to $210,300. Builders continued to [slash prices] to stay competitive in the depressed market.

And guess what? The outlook for housing is still not improving. Business Insider explains why:

Michelle Meyer, the well-known housing analyst for BofA/ML, has some bad news: The housing crisis isn’t over.

In fact, in her 2012 outlook piece, she says it’s “far from over” and that prices still have another 7% to decline nationally.

The basic problem: There are still tons more foreclosures or “liquidations” yet to come…our securitized products research team estimates another eight million homes will be liquidated over the next four years, which adds to the six million homes that have already been liquidated since 2007. All told, we expect 14 million foreclosures or a quarter of all homeowners with a mortgage.

Ms. Meyer’s estimates seem rather optimistic to us. We’d guess that house prices will go down another 20%. Maybe more. Because, people have less money to spend on housing. Real disposable incomes are lower today than they were a year ago.

People who buy houses don’t really worry too much about the price. What concerns them is the monthly payment. They buy as much house as their monthly income will allow.

That was the real driver of the housing bubble of ’05-’07. Interest rates had been going down for 30 years, lowering monthly mortgage payments. That made it easier to pay a mortgage. Housing prices were going up steadily, giving the impression that houses were a good investment. And the mortgage industry would lend to anyone, solvent or insolvent, jobless or working, dead or alive. That put a lot of air into the housing market.

Now, interest rates are still going down, as near as we can tell. But with incomes going down and lenders much more cautious, the air has whooshed out of the market. It’s no longer pressure-packed. Now it’s vacuum-sealed.

Remember, household debt-to-income was only 70% at the beginning of the ’80s. Now, it’s 120%. In order to get it down, households need to unload debt — especially mortgage debt.

That is, they need to save. Savings rates have recently fallen…to 3.5% down from 5.7%. They will probably go back up as the Great Correction continues.

Which will mean…housing will fall, maybe by 20% more.

Let’s see, housing falling…incomes falling…consumers retrenching…negligible GDP growth…

Tutto va bene!

But back to why the US is going to hell…

The country has been at war in two out of three years since 1989. The interesting thing about it is that 1989 marked an historic juncture. It was the year that the US had no more worthy enemies. The Berlin Wall fell that year. The Soviet Union bit the dust. Francis Fukayama said it was maybe the “end of history.” Charles Krauthammer said it was the beginning of a new world, with only one superpower. He called in a “uni-polar world.”

But a country that has been taken over by its military industry cannot permit peace. It must make war — either against its own people or against some other people. Having no suitable enemies, the deficit-fatted pentagon, its rich lobbyists and the nation’s lard-butt patriots had to find some unsuitable ones.

One of our new, old-fashioned conservative friends explained what happened next:

They turned to the Mideast. Why? As enemies, the Arabs/Muslims have several advantages:

There are not many in the continental US; not enough to influence elections or run much of a counter-propaganda campaign

There’s oil in the Mideast; the oil companies contribute a lot of money to campaign coffers. And oil really is a strategic commodity

Americans don’t understand Arabs or Muslims…yahoo Christians don’t trust them. The Jews hate them.

They can’t really do us much harm. We can fight them forever…at huge expense and never win or lose.

It allows us to make common cause with Israel’s right-wingers…and brings in a lot campaign money from Jewish groups. That’s why all the Republican candidates — except Ron Paul — are pro-war.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.

An interesting thing happened to my experimental account lately. You remember — the one I blow up every few months or so. Over the past few months, that account has not just survived, but has actually thrived performing better than even some of my “real” money accounts.

Last week, I wrote that the one key change I made to my trading was to never, ever, ever, ever, ever, ever, ever, ever add to a losing position. That’s certainly been the key to my success over the past few months. But I also implemented another change that may have just as valuable.

For the past three months, I have set my default trade size at only two times leverage. In other words, for every $10,000 in the account I trade only $20,000 of notional currency in any one trade. That may seem laughably small to those of you who regularly trade with 20:1 or 50:1 lever factor, but trust me — it has made all the difference.

Trading small has allowed me to recoup from drawdowns with ease since no single trade clips me for more than 1% of my account. Furthermore what most traders fail to understand is that the leverage in your account is determined not by any one position, but by the aggregate amount of trades outstanding. Suppose I am long EUR/USD, GBP/USD and AUD/USD at 2:1 lever factor on each. For all intents and purposes that is simply one big anti-dollar trade at six times leverage. Now if your default trade size is set at 10:1 leverage you would in effect be levered 30:1 in your account at that particular time! And novice traders wonder how is it that they lose money so fast!

Amazingly enough, low leverage has not hurt my performance one bit. I am up 8% since the start of this year and I am up about 37% since my last orgy of averaging down in mid-October. Trading small has not stopped me from making money because I trade frequently, and as I’ve explained in the past, you can get the benefits of leverage two ways: you can borrow a lot or you can turn over your inventory several times per day. The former will almost always send you to the poorhouse in the end. The later is how you grow your account with minimal risk.

Boris Schlossberg serves as director of currency research at GFT, and runs bktraderfx.com.

Yesterday, investors digested the big news from Wednesday…the Fed’s announcement that it would continue handing out money, asking nothing in return, for the next three years.

Stocks went down. Oil stayed under $100. The yield on the 10-year note fell under 2%. And gold just kept going up.

The New York Times reported:

The Fed said that it now planned to keep short-term interest rates near zero until late 2014, continuing the transformation of a policy that began as shock therapy in the winter of 2008 into a six-year campaign to increase spending by rewarding borrowers and punishing savers.

“What did we learn today? Things are bad, and they’re not improving at the rate that they want them to improve,” said Kevin Logan, chief United States economist at HSBC. “That’s what they concluded — ‘We’ve eased policy a lot, but we haven’t eased it enough.’”

The new forecast showed that the Fed expects to hit its inflation target over the next three years, but to fall well short of its goals for unemployment. The Fed projected that unemployment would drop no lower than 8.2 percent this year, just slightly below the current rate of 8.5 percent, and no lower than 7.4 percent by the end of next year. By the end of 2014, the Fed still expects that at least 6.7 percent of people actively interested in working would not be able to find jobs.

How do you like that, dear reader? The Fed has goals for unemployment and inflation. Targets. And it moves its policies around in order to achieve its goals.

Of course, it doesn’t necessarily hit its goals. Still, we’re supposed to believe that by trying to hit them it somehow encourages them in the right direction…

Most people believe they are successful. Which makes us wonder. Maybe the Fed should set goals for other things? Weight-loss goals, for example.

The idea is that by changing interest rate and banking policies the Fed actually influences inflation and employment. So, there’s a logic to thinking that the Fed should set targets and try to hit them. Trouble is, if it could really change things for the better, why does it put up with an 8.5% unemployment rate now — four years after the subprime crisis began? Why doesn’t it exercise its magic to bring the rate down…?

Well, we all know the answer. It can’t. Once you’ve taken interest rates down to zero…and announced that you’ll leave them there for the next three years…what more can you do? Drop money from helicopters? Right!

But no point in getting ahead of ourselves. Right now, interest rate policy doesn’t work. Because the money supply is expanded by retail and commercial bank lending, not central bank lending. The Fed lends money to the money-center banks. They’re happy to take the Fed’s money. But that doesn’t mean they will multiply it out by risking it in the economy.

So, for the moment, they might as well set a fat goal…too…

Excuse us as we pause in admiration and shock…

We had a sneaking suspicion that Alan Greenspan, former Fed chief, was not as dumb as he pretended to be. When he was on the job he could barely say a straight sentence. Probably because he didn’t really believe what he was saying.

Since he’s been unemployed, he’s begun to speak more clearly. In yesterday’s Financial Times he has an opinion on capitalism which is actually among the best in the series. In it, he makes a good point. Anti-capitalists are not really annoyed at capitalism. What bothers them is “crony capitalism:”

“Crony capitalism abounds when government leaders, usually in exchange for political support, routinely bestow favors on private individuals or business. That is not capitalism. It is called corruption.”

Or you could call it zombification…or geriatric capitalism…or, as Kurt Richebächer used to call it, “degenerate capitalism.” But it’s not real capitalism.

The ‘greed’ that preoccupies Occupy Wall Street demonstrators is not a feature of capitalism, Greenspan points out. It’s a feature of human nature. He might have pointed out that socialists are just as greedy as capitalists. They are just more corrupt. Rather than get their gains by honest deception, they get it by brute force — by using the police power of government to take it from others.

Greenspan provides an example of a corrupt system, designed to protect the wealthy from competition — immigration law. It keeps out qualified foreigners willing to work for less:

“The H1B program is in effect a subsidy for the wealthy, a policy that is anathema to the supporters of capitalism.”

He goes on to suggest that “improvements” to capitalism, such as those to be considered today in Davos, are not likely to be good ones.

Good on you, Alan.

*** “Hey Bill,” writes a Dear Reader, “How can you say America is going to Hell? We’re the most Christian country in the world.”

The trouble with Christians is that from time to time they render unto Caesar far more than he deserves…and lose sight of their own faith. Hardly had the martyrdoms stopped under Emperor Constantine than early Christians began pointing the figure, calling one another heretics…and then murdering each other.

Christian crusaders sacked the Christian city of Constantinople on their way to the Holy Land …where they did even worse mischief. In the 15th century, Lutherans under Charles V gave Rome a worse sack than the barbarians had a thousand years before. They raped nuns, murdered priests, and stole whatever they could carry off.

And now, once again, Christian mobs are calling for blood. Jon Utley, who we met Tuesday night, explains why America’s evangelical Christians are an ungodly bunch. Logically, they should support Ron Paul. He opposes abortion, gay marriage and promiscuity. He’s never been divorced. Two of his brothers are ministers. And he’s a Baptist. What more could they want?

What they want, Utley explains, is to live by the sword:

Why…are evangelical leaders now opting for Santorum, and before him Gingrich? The one big area of disagreement with Ron Paul is war; foreign wars and the domestic one against drugs. For this they oppose him. Santorum supports unending war in Afghanistan, backing Israel without limit and a new war against Iran.

Earlier there was a major far leftist candidate who supported all the issues that evangelicals oppose, and was a vocal proponent for expanding Israeli settlements on the West Bank and promoting the war on Iraq. He was overjoyed when open homosexuality became allowed in the military, he supports abortion, gay marriage and the leftist agenda for big, intrusive government; power to labor unions as well as expanded, unconstitutional police powers within the US. Evangelicals adore him and went all out to support him 2006, when he lost his primary race and ran as an independent for the Senate. He is Senator Joseph Lieberman of Connecticut.

All this shows how evangelical leaders put support for wars ahead of their social values. Their support includes every new law giving Washington ever greater police powers over American citizens, such as the Patriot Act, Military Commissions Act and the recent National Defense Authorization Act which tear asunder much of the Bill of Rights. Most also supported torture of prisoners of war (with the notable exception of Chuck Colson of Prison Fellowship). All this comes with their “social values.”

They loved George Bush. They were major supporters of the two wars against Iraq and the occupation of Afghanistan. Fear and ignorance of the outside world joins together with a belief that God uniquely favors America. Mostly poorer Southerners they also have strong affinity for the American military and its industrial complex. In addition, author Chris Hedges has written about how they are joined by many Northern blue collar families hurting from new technology, globalization, and poor schools in seeing government as out to undermine their communities and social values. Their solace is to hope for Armageddon.

Evangelicals like to quote a biblical text that God favors those who favor the Jews. However, for them they mean only Jews who make wars and contribute to chaos in the Middle East. Jewish peacemakers are cursed in their view. No tears were shed for Yitzak Rabin who negotiated peace with the Arabs until Israeli fanatics killed him. Indeed Pat Robertson said that Rabin was killed because he was trying to thwart God’s plans.

Herein lies their antipathy to Ron Paul, who in all other respects is a family values conservative. Indeed, most of them are Baptists who used to look upon Catholics with suspicion. Today they would prefer Senator Santorum or Newt Gingrich, both Catholics, to Ron Paul, who is Baptist. Santorum is no libertarian believer in limited government (he would use government to enforce his social values) and urges absolute support for Israel and the military industrial complex. These evangelicals don’t want peace because it would mean postponing Armageddon. That’s why their leaders oppose Ron Paul.

Jon Basil Utley is Associate Publisher of The American Conservative.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.

“The US is going to hell,” we told the group at the Watergate last night.

“You mean the economy is really going to get worse, huh?”

“No, I mean it’s going to hell.”

We had been invited to watch the State of the Union address with a group of dinosaurs…a group approaching extinction with dignity and intelligence. You might call them ‘thinking conservatives,’ ‘paleo-conservatives’ or ‘constitutionalists.’ Whatever they were, they were not like the scoundrels currently running for the Republican nomination or the yahoos who vote for them. They were more like a renegade, retrograde group…like a secret society of White Russian intellectuals after the Revolution of 1917. They cling to hope…that the nation will come to its senses…that the constitution will again be honored…and that the old republic, established by the founding fathers, will be resurrected…

…they will hang on to their hope…until they are hanged by a rope.

“What do you mean?”

“I mean…it is on the road to hell… This isn’t just about losing money. Heck, the US is going broke. But you can go broke with honor. Good people go broke. Smart people go broke. Dumb people go broke. You can’t go to hell with honor. Bad people go to hell.”

“You’re saying the American people are bad?”

“Not by nature. No people are bad by nature. Even Republicans are not bad by nature. Or good. They’re all subject to influence. And now Americans are under a bad spell…being influenced to do terrible things…”

We turned to the TV. There was the commander-in-chief. The gist of his message was that the economy was getting better…thanks to all the feds’ nifty programs and fixes. He spoke of all the wonderful things he and his group of fixers had done.

But he didn’t seem content with what he has achieved. Something vexed the chief executive. It was not the economy. Nor the constitution. Nor the foreign wars.

What stuck in POTUS’s craw was ‘fairness.’ He didn’t seem to think there was enough of it. And he felt it was his job, or part of it, to determine what was fair…and how to make sure it happens.

In his wisdom, he has determined that it isn’t fair for a rich person to pay less than 30% of his income to…well…to the feds.

Here’s the Bloomberg report:

President Barack Obama, offering an election-year prescription to spur the economy, said the wealthiest Americans should pay more taxes in the name of fairness, to bring down the deficit and ensure those trying to make ends meet don’t have to “make up the difference.”

In his State of the Union address last night, Obama called on Congress to embrace a tax plan named for billionaire Warren Buffett that would require those making $1 million or more pay at least 30 percent in taxes. With congressional gridlock heightened by the 2012 election, there is little chance the proposal will pass.

“You can call this class warfare all you want,” Obama said in a nationally televised speech before a joint session of Congress. “But asking a billionaire to pay at least as much as his secretary in taxes? Most Americans would call that common sense.”

The president’s 65-minute address was directed at both voters and Congress. The populist themes — tax fairness, help for homeowners, cracking down on US financial crimes and unfair trade practices in China and investigating the lending practices that preceded the housing crisis — are those he will be repeating as he campaigns for a second term.

On the same day that Barack Obama revealed that 30% was fair, Mitt Romney revealed that he paid less than 14% of his income in US federal taxes.

Fourteen percent of income seems like more than enough to us. Serfs in the Dark Ages paid less. But it’s not enough to satisfy our main man, Barry Obama. He wants more. And all the low-life zombies who decide elections want more too. ‘The rich’ should pay more, they say.

Even a lot of the world’s rich people think so. Also in the news was a report telling us that a group of very nice billionaires has gotten together at a very chilly place and suggested that they should all pay more in taxes.

Ukrainian billionaire Victor Pinchuk wants to talk about income inequality. So does Irish billionaire Denis O’Brien and Indian billionaire Vikas Oberoi.

The three are among a contingent of at least 70 billionaires who are joining more than 2,500 business and political leaders at the World Economic Forum’s annual meeting in Davos, Switzerland, this week, according to a list of attendees and promotional materials obtained by Bloomberg News. A half-dozen of the richest participants, interviewed in advance of the conference, say economic disparity needs to be addressed.

Some sessions in a series labeled “Ensuring Inclusive Growth and Development” will touch on income inequality, said Kevin Steinberg, chief operating officer of the forum in the US. A panel titled “Remodeling Capitalism” is scheduled for Jan. 27 at the Swiss Alpine High School auditorium, six shuttle- bus stops away from the conference’s main location.

See there. A group of people in Davos is going to figure out how to ‘remodel capitalism.’ Out with the dowdy old rattan furniture. Throw out the chintz. Let’s get contemporary!

Already, there’s a problem. If you think you can remodel capitalism you are hopelessly already lost. You must presume someone modeled it in the first place. Who? When? How?

Fact is, capitalism is what you get when you don’t have master designers on the job. It’s what happens when POTUS and the feds leave it alone. It’s what you get when people are allowed to work out their own designs, one by one, willingly… without a gun to their heads… When they can make money or go broke themselves…and Washington doesn’t care.

But that’s the trouble with Davos. They’re all meddlers. They’re all world improvers. And they’re all making the world a worse place.

“If James Madison and the rest of the people who were at the constitutional convention came back to the US they wouldn’t recognize it,” said a man we met last night at the Watergate.

“They’d be appalled. They put all that work into the US Constitution…using every trick they could think of to limit the power of the executive branch. Because they knew that if you let the executive branch get away with it, it’s only a matter of time before it becomes a tyrant. It doesn’t matter whether you call it a king or a dictator…or an emperor…once you put too much power in one man’s hands, you will corrupt the man who has the power…and destroy the society that gave it to him.

“That was the whole point of the constitution. It was to limit power. They put in checks and balances…and the Bill of Rights. They thought about it. They figured it out. They wanted to be sure that the US really was different. The people were meant to be sovereign. They were meant to be in control.

“And the role of the government…and the only role of the government…was to protect the liberty and sovereignty of the people. And they knew too that the main threat to individual liberty was the government. That’s why you needed warrants…you need to have a trial by a jury of your peers…you needed habeus corpus. They built all these protections into the system to protect the individual from the government. They weren’t there to protect the individual from Al Qaida or from China. They were there to protect the individual citizen from the government.

“And now, with this anti-terrorism bugaboo all of those protections have gone away. The president has the power to put any American citizen in jail — for life. No charges. No witnesses. No hearing. No trial. No nothing.

“He can have you tortured. He can have you killed.

“I mean, President Obama has powers that King George would have envied. And he got those outrageous powers without a word of protest. Nobody said anything. Congress said nothing. The people said nothing.

“Yeah…I guess that’s what you mean about Americans going to hell. I guess they deserve to go to hell. But, of course, that’s exactly what we’re trying to stop…

“And now the prez has more power than Louis the 14th… And he was upposed to be an absolute monarch I mean, Louis had to pay for his wars. He had to pay for his public buildings. He had the nobility against him much of the time. He had much of Europe against him.

“America was lucky. It was far from Europe. It was protected by oceans from foreign domination. Every backwoodsman had a rifle and he knew how to use it. You know that when King George sent troops to put down the revolution a letter appeared in the London paper. It came from a man who had lived in the colonies. He told his countrymen that if they were shipping out to fight the Americans they should be sure to write their Last Wills and Testaments before they left. Because the Americans all had guns and knew how to use them.

“And that is also why the new government of the US went to such lengths to try to curb the power of the army. There was to be no standing army. The whole idea was a nation of free men. Armed and ready to protect themselves. And the constitution was very clear, if the president wanted to make war he had to convince congress not only to approve it…it also had to raise an army and raise the money to pay for it.

“But now the president can make war on whomever he pleases with no act of Congress. He doesn’t even have to ask the congress for money. There’s so much money sloshing around in the Homeland Security and Pentagon budgets that he can make war on anyone.

“The apologists for this kind of thing say the president will only use his new powers for good causes. But that’s not what history tells us. Even if one or two presidents resist…and govern more or less benevolently, like Caesar Augustus…it won’t be long before we get a Caligula, a Nero, or a Gingrich…

“So now we send out drones and hit squads to kill people in Afghanistan and Pakistan. And soon — it is just a matter of time before the power corrupts the US president, if it hasn’t already — that the drones and hit squads target Americans on American soil.”

“Yeah…you.”

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.