I tuned in CNBC and got the opening statements before Bernanke’s turn. Luckily, I caught the tail end of Ron Paul’s statement, observing that capital could only be rebuilt through savings and that the premise behind the stimulus and bailouts was completely “fallacious.”. Exactly correct, Ron, and that will be the last piece of truth spoken on Capitol Hill for today. It is not a matter of economic theory, it is a matter of accounting. Debt is only repaid by profits (or the household equivalent, savings). Households are rushing to increase their savings, if only because they can no longer borrow. Government is rushing to nullify their efforts by ramping up its spending, throwing any additions to savings away, to preserve the over-generous compensation packages of unnecessary government employees. And thereby eliminating any hope of economic recovery. Government, as usual, exists to serve government employees. Quite, quite insane.

David Brooks in the NYT writes:

I fear that we have a group of people who haven’t even learned to use their new phone system trying to redesign half the U.S. economy.

Only half? Not only have they not learned to use their phone system, they haven’t studied history. Sadly.

Freshman California State Assemblyman Tom Ammiano has introduced a bill in the California legislature legalizing marijuana.

California would become the first state in the nation to legalize marijuana for recreational use under a bill introduced today by Assemblyman Tom Ammiano, D-San Francisco.

Poor Tom, you don’t get it. This bill threatens large numbers of government employees with joblessness. If you legalize marijuana, then it is a small step to legalize others, like cocaine. Then drug prices and drug crime would drop dramatically. And then pretty soon, the law enforcement and penal systems would have very little to do, since drug crime is by far their largest occupation. The workload for police, judges, prison guards and so forth would be drastically cut. Their justification for seizing the property of citizens would be impaired. This would never do. Indeed, the livelihoods of huge numbers of government employees depend on a lively and profitable trade in illegal drugs, which would disappear. And of course, there are all the gangs of thugs, foreign and domestic, whose main source of funding would be suddenly and tragically be cut off. Tom, in this time of recession, how can you propose such a job-destroying measure?

I’m sitting here feeling rather sad, thinking about the myriad of personal tragedies, shattered hopes and dreams, ruined lives and worse. With the prospect of more to come. And behind all of these sad faces is the decision-making of a handful of powerful men in government. While these men – the members of the monetary policy committees of the Bank of Japan and the US Federal Reserve – had good intentions, they made bad policy that has driven the world financial system into convulsions.

While one could trace the bad decisions all the way back to the creation of the Federal Reserve in 1913, probably the best place to start is the Japanese asset price bubble of 1983-1989. Over that period, stock and real estate prices quadrupled, while consumer prices barely budged. During this time, the Bank of Japan (BoJ) ignored the asset price bubble and continued to lower interest rates, to 2.5%, based on the lack of consumer price inflation. The BoJ finally began raising interest rates, as high as 6.5%, in 1989, as consumer prices began to rise. The stock and real estate markets promptly collapsed. By the summer of 1992, the Nikkei had plummeted from its 1989 peak of 39,000 or so to 15,000. The BoJ reacted just as the Fed has today, lowering interest rates further and further. By 1998, interest rates were reduced to zero and “quantitative easing” was implemented in an effort to stem deflationary pressures. The money being created by the BoJ couldn’t be absorbed by Japanese borrowers, whose creditworthiness had been ruined by the collapse of the bubble. Therefore the cheap money flooded the rest of the world, the so-called “carry trade,” where yen borrowed at essentially no cost were swapped into dollars, and lent on at the much higher interest rates available outside Japan.

Western central banks ignored this flood of cheap credit. Lending became so profitable, because of the huge rate spreads available, that lenders took risks previously considered insane, and pressed money on anyone who could be persuaded to accept it. Credit, and therefore money, expanded rapidly and new instruments were invented so that anyone, not just the banks, could participate in the bonanza. This went on unchecked because Alan Greenspan, at the US Federal Reserve, had decided that the Fed would no longer manage money supply, only interest rates being considered important. Greenspan went so far as to testify in front of Congress that he did not know how to measure the money supply, and in any event it was not important. Of course, the consequence of this expansion of credit and money was an asset price bubble in stocks and real estate. Which the Fed chose to ignore, just as the BoJ had in the 1980s. With the identical consequences – a badly damaged economy and a banking system in ruins.

True to form, The Fed under Bernanke is now applying the same remedies that failed in Japan – zero interest rates, quantitative easing and massive government spending. Japan was able to export its way to something resembling health, but there is no sugar daddy for the US as there was for Japan. It is still unclear what the eventual outcome will be. A depression seems certain, but it may be hyper-inflationary like Weimar, Latin America and Zimbabwe, or deflationary like Japan or the 1930s.

Recovery will only occur when (and if) the government steps back and allows saving and investment to resume and rebuild the economy. For this to happen, the arrogant academic economists, and the doctrines which have caused this series of almost comic errors must be abandoned, and join the many other failed economic ideas on the trash heap of history.

George Soros seems to agree with  my view (”The Endgame“) that we are witnessing the end of an empire.

Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.

(Emphasis mine)

Edit: Thanks to Vytas for this must read: Social Collapse Best Practices.

So how do you prepare? Lately, I’ve been hearing from a lot of high-powered, successful people about their various high-powered, successful associates. Usually, the story goes something like this: “My a. financial advisor, b. investment banker, or c. commanding officer has recently a. put all his money in gold, b. bought a log cabin up in the mountains, or c. built a bunker under his house stocked with six months of food and water. Is this normal?” And I tell them, yes, of course, that’s perfectly harmless. He’s just having a mid-collapse crisis. But that’s not really preparation. That’s just someone being colorful in an offbeat, countercultural sort of way.