Wednesday, January 30, 2013

Going for Broke

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

The talk in 2013 has been of the great rotation from bonds to the U.S. stock market. This accompanies a new world record for the Russell 2000 Index (small-cap stocks). The S&P 500 has topped 1,500. It did so twice before, in 2000 and 2007. Here we are, again.

This U.S. stock market view is parochial. There are new world records wherever one looks. Flows (in 2013) into emerging-market stocks, emerging-market bonds, and real estate are raising prices and reducing yields. There are two reasons to step back from the spree. These will be taken in turn, to be followed by an excuse to go for broke.

First, asset prices have detached from reality. "There is a bubble in every market in the world," was the proposition laid before me last week. I muttered something about gold and silver having somehow exited the ionosphere, but noting an extra 10,837 short-interest, gold contracts added to the pig pile during the week of January 21, 2013, the precious metals do not lack attention. Back to the proposition, asset prices are growing, rising, and expanding. This is a consequence of greater debt-to-output multiples. The same is true around the globe. When more debt is need to produce the same output, there is a problem. Stock, bond, and real estate prices will revert, sometime.

Second, is the often-sited stabilizing influence of liquidity. As long as it is there, the fun will last.

Caution is recommended. In the January 21, 2013, Wall Street Journal, "Money Magic: Bonds Act like Stocks," described a late-inning investment strategy. Pension plan trustees are leveraging their bond positions because the bonds trade "in large, liquid markets, and [pension officials] say they have ample liquidity should they ever need to settle trading losses with cash." This sounds like 2007 again. Or, 1998.

When "ample liquidity" is the rationalization for participating in detached markets, you can depend upon it: the liquidity will not be there when it is needed most. Following the Long-Term Capital Management hullabaloo in 1998, Marty Fridson, then at Merrill Lynch, etched this identity in granite: "[LTCM] forgot that in times of panic, all correlations go to one."

Now, a reason to frolic: central banks of all stripes will not attempt to reign in the extraordinary excesses. Federal Reserve officials have made it clear they will nurture boundless spending and risk-taking. Nationalism in 2013 takes the form of unabated currency depreciation and endless money-printing (electronic crediting, for the literalists.) This will affect both real prices and asset prices. "Affect" is the selected verb, since, in an inflation, one can only play hunches of where prices will rise and fall in relation to each other.


Andy Lees (AML Macro Ltd.) wrote to clients on January 28, 2013: "One of the commentators at the conference I attended, who advises the government on international finance, said [Federal Reserve Chairman Ben] Bernanke's aim is to achieve 4% inflation to shock the public into spending." Stanley Fischer, Ben's Ph.D thesis adviser, has proposed a negative 8% real rate-of-interest (for example: interest rates of zero percent and inflation of 8%). Why is the Fed chairman is so tame?

He could say 4% or 400%, the result will be the same. Bernanke and Fischer have no idea what they are talking about, deficiencies on their chalkboard blot our lives with petrified Rorschach tests, one being the notion that central bankers can decide what level of inflation they will introduce. If central banks decide inflation must be stopped, they must act in a single manner: violently. The current crop will never do so, since they are chasing their tails. Money-printing operations (five years now, and doubling-down) cause lower corporate investment, fewer jobs, and a depleted GDP. The latter two are the central bankers' ostensible goals. The only avenue to pursue their daft course is to expand money-printing operations. But, the more they pursue this course, the objectives of lower unemployment and GDP will drift farther into the mist for the very reason that central bankers are increasing unemployment and reducing real GDP by pursuing this course. Their theme song could be The Impossible Dream.

Every couple of weeks, word spreads that the Fed is rethinking its money spree. Whatever the reason for these outbursts, the Fed will do no such thing.  "Dissension is Overrated" discussed the lost cause of any FOMC member who votes to tighten money. (A correction: "dissention" in the title, as originally written, was wrong. A fan letter followed: "in English, it's either dissension or dissent, no hybridization permissible." This was sent by the very strictest of constructionists, in both words and law, which raises the intriguing possibility that we are unlikely to find the latter without the former, and given the state of each: c'est tout.)

A more recent panic attack fell on the heels of a January 17, 2013, Bloomberg article: "Fed Concerned About Overheated Markets Amid Record Bond Buys." The purported significance being the Fed would not allow markets to run amok. There was absolutely nothing in the article to support the headline. Kansas City Federal Reserve President Esther George was quoted: "We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances." This is interesting but is consistent with the warnings George has made in the past, so there was no reason to excerpt her worries as a new-found "concern." (Since well before George took charge, the Kansas City Fed has published Farmland Bubble Bulletins.)


            Bloomberg also quoted the chairman. Ben Bernanke is "concerned." He had recently stated the Fed must "pay very close attention to the costs and the risks" of something, or everything. Bloomberg left this for the reader to judge. A few other experts were quoted. All was dross. This was evident to anyone who read the story rather than bought or sold when the headline caused such a ruckus. Does anyone read this stuff? Oh, for a few more strict constructionists. 

Thursday, January 24, 2013

It's All in the Flows

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

            The 2007 Federal Open Market Committee (FOMC) transcripts were released last week. Media reports have concentrated on the Fed's forbearance during the credit meltdown. Implied, but not stated (in what I have read) is the major reason for such nonchalance: The Fed only acknowledges flows, not stocks. This might sound boring. It is also very important to understand.

            This approach to central banking has not changed. All of the major central banks use the same framework. The media and Wall Street spend most of their time interpreting the meaning of central-bank talk. Central banks will never mention a growing concern about loan defaults since the academics can always thwart potential catastrophes by modeling preventive flows (e.g., liquidity). The catastrophic financial failure that most of us endured in 2007 and 2008 was not a failure at all, according to central bankers. Their models still conclude there is always a central-banking solution that will prevent any catastrophe. In conclusion: when the current financial bubble topples, there will no forewarning from central bankers, the media, or Wall Street. Given their processes of thinking, they will be more surprised than the average hairdresser.  

            "Stocks," in this case, does not refer to common stocks, but the accounts and categories in which assets (and their liabilities) accumulate. The Fed, a creature of academia, knows everything. Knowing everything limits policy to sufficient "liquidity": flows. It - to be more precise - its DSGE model, does not care about accumulations: stocks.

The Fed was taken unaware when credit cracked up in the summer of 2007. Unlike many local realtors and carpenters, the FOMC did not understand the connection between flows (bad loans pouring into off-balance sheet Special Investment Vehicles) and stocks (of mushrooming mortgage credit going sour). The Fed presumably noticed pieces of the mortgage machine (subprime lenders, appraisers, Fannie Mae, commercial banks, investment banks, CDOs) even though it did not comprehend the artificiality of this contrived structure. Hence, the Fed missed the connection between the economic expansion of the mid-oughts and its artificial nature. (As we know now, the Fed does not blanch at running an economy by rigging its prices, so, we know now, central banks do not understand an artificial economy is unsustainable.)

All of which is to say the Fed and its FOMC did not know a loss of forward momentum would be followed by an abrupt shift to backward momentum. Again, this has not changed. Despite talk of deleveraging, the U.S. economy has continued to lever up since the non-catastrophe of 2007 and 2008. Total non-financial debt has risen from 240% of GDP in the fourth quarter of 2008 to 249% of GDP after the second quarter of 2012.

The Fed does not understand the artificial credit created by central banks that has flowed since 1971 has coagulated into unsustainable imbalances around the world. The FOMC will be in the caboose when government debt loses its imaginary, "riskless" character (e.g., banks do not need to reserve against most sovereign bonds). As in 2007 and 2008, the stated price of artificially produced assets is illusory, so the assets cannot stand on their own without ever increasing flows to support prices. The flows accumulate in stocks, the artificial composition of which will topple.

The rate of non-financial debt production in the U.S. economy has slowed down. It increased by 4.6% in the first quarter and 5.1% in the second quarter of 2012. Third quarter growth was 2.4%. When forward momentum is lost, backward momentum will prevail.

The jig was up by the summer of 2007. Those monitoring the Mortgage Lender Implode-o-Meter website were waiting. The mortgage-makers on parade were not necessarily bankrupt but had, at least, abandoned a major segment of their lending activities. By the end of March 2007, the Implode-o-Meter list had grown to 49, including some of the largest vacuums that fed the machine: HSBC Mortgage Services, Ameriquest, ACC Wholesale, New Century, Wachovia Mortgage. Except for those who worshiped liquidity flows, it was impossible to miss the credit crash.

Yet, following are comments from the August 7, 2007, FOMC Meeting:

CHAIRMAN BERNANKE: "I think the odds are that the market will stabilize. Most credits are pretty strong except for parts of the mortgage market."

            Of course, this is to be expected. Bernanke was quoted in October 2008 as not knowing if there was a housing bubble.

            More importantly, the man with his hand on the tiller, who should have enlightened the professors, was just as dense:

WILLIAM DUDLEY: "We've done quite a bit of work trying to identify some of the funding questions surrounding Bear Stearns, Countrywide, and some of the commercial-paper programs. There is some strain, but so far it looks as though nothing is really imminent in those areas. Now, could that change quickly? Absolutely."

Dudley ran the New York Fed's open-market desk. He is now President of the New York Fed. He had been an economist at Goldman Sachs. It is expected the academics are out-to-lunch, but Dudley had dealt in money from Goldman. His misunderstanding is appalling. (On August 16, 2007, Countrywide drew down its entire credit line of $11.5 billion. On August 17, 2007, there was a bank run on Countrywide. This was the real McCoy. The Los Angeles Times published pictures of customers lined up outside branches. The Federal Reserve cut its discount rate (not the fed funds rate) from 6.25% to 5.75% on the same day. After the August 7, 2007, meeting, the FOMC announced: "Economic growth was moderate during the first part of the year." Eight days later (the FOMC held emergency telephone calls on August 10, 2007, and August 16, 2007), the Fed justified the discount-rate cut by declaring: "Financial market conditions have deteriorated and tighter credit conditions and increased uncertainty have the potential to restrain economic growth.")

To conclude, a flavor of what was happening when the FOMC met in August 2007:

July 31, 2007 - "Mortgage insurers MGIC Investment Corp. and Radian Group Inc. said they might write off their combined $1.03-billion stake in a venture that invests in subprime mortgages on which payments were past due."

July 31, 2007 - "American Home Mortgage Investment Corp., which lends to people close to the sub-prime category, postponed payment of its dividend, took 'major' write-downs and said its lenders were demanding that it put up more cash. Its stock plunged 39%.
'Bankruptcy is not out of the question' for American Home, said Matt Howlett, an analyst at Fox-Pitt Kelton Inc. in New York. 'It needs to find a partner with alternative funding and hope the market turns around.'"

July 31, 2007 - "Insurer CNA Financial Corp. wrote down $20 million in sub-prime-backed securities."

July 31, 2007 - "In Germany, shares of IKB Deutsche Industriebank, which 10 days earlier said the [U.S.] sub-prime crisis wouldn't affect it, fell 20% in Frankfurt on Monday after it reported problems with investments in U.S. sub-prime mortgages."
August 1, 2007 - "American Home Mortgage Investment Corp. shares yesterday plunged 90 percent after the Melville, New York-based lender said it doesn't have cash to fund new loans, stranding thousands of home buyers and putting the company on the brink of failure."
August 1, 2007 - "Bear Stearns Cos., the New York-based manager of two hedge funds that collapsed last month, blocked investors from pulling money out of a third fund as losses in the credit markets expand beyond securities related to subprime mortgages."
August 3, 2007 - (Reuters): "AMERICAN HOME MORTGAGE TO CLOSE FRIDAY" - American Home Mortgage Investment Corp plans to close most operations on Friday and said nearly 7,000 employees will lose their jobs.... American Home originated $59 billion in loans last year, and mostly to people with better credit than risky subprime borrowers. About half of those mortgages were adjustable-rate loans, whose defining feature is an interest rate that can be adjusted upward. 'It is with great sadness that American Home has had to take this action which involves so many dedicated employees,' Chief Executive Michael Strauss said in a statement." [My italics - FJS]
August 3, 2007 - "Moody's Investors Service said this week it plans to take a harder look at bonds backed by those Alt-A mortgages, which are turning out to look more like subprime loans than it expected."

August 9, 2007 - (Reuters) - "American International Group, one of the biggest U.S. mortgage lenders, warned on Thursday that mortgage defaults are spreading. While saying most of its mortgage insurance and residential loans were safe, AIG made a presentation to analysts and investors that showed delinquencies are becoming more common among borrowers in the category just above subprime. Although acknowledging the "significant declines" in subprime securities, Chief Executive Martin Sullivan said AIG's tight underwriting standards had minimized losses and he was 'poised to take advantage of opportunities' in the mortgage market.'"

A final note: Some media reviews of the 2007 FOMC transcripts have given San Francisco Fed President (as she was then) Janet Yellen an A+ for anticipating the mortgage crash at early 2007 FOMC meetings. I doubt this. Since serving as Federal Reserve governor in 2004, Yellen has consistently wanted to cut rates. At one meeting, she was aghast when she learned the consumer savings rate had risen, since this would reduce consumption, push the economy into recession, so let's cut rates before the world ends. She's as witless as Simple Ben.

Tuesday, January 15, 2013

Bond Math

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

This is the year for stocks. So one would gather from the media. The Wall Street Journal offered a lukewarm endorsement on Monday, January 15, 2012, with the headline: "Investors Flock to Stocks - So Far."

The diffident prediction opens: "As 2013 gets underway, one of the biggest questions in financial markets is again bubbling: Will this be the year that investors dump bonds and return to stocks?" The question may have surprised some readers. The S&P 500 has risen 120%, or, at a 21 percent-a-year pace since March 2009. How did stock prices more than double since investors have dumped stocks and bought bonds? A second question: what might we expect of stock market returns if investors stop taking money out of the market and put it in - 40% a year?

In fact, the Wall Street Journal is on solid ground regarding flows between stocks and bonds. A more important question than the one posed, is how did stocks perform so well when they have been so relentlessly sold?

Fruitful as such a discussion may be, that is not the topic here. It is such an important question, though, that the investor returning to stocks should study this paradox before jumping in.

Today, two subjects are addressed. First, the loss of principle lying in wait for bondholders is underappreciated, but stocks will probably do worse.

The Journal mentions "a quirk of bond math" by which "losses are exaggerated when yields are low." This sounds as if bonds are planning a sneak attack, but mathematics has no opinion.

To see why rising bond yields at today's rates is of such importance, we will look at changes in bond prices at different yields. In 1981, when the peak yield on the (20-year) long bond at auction was 15.81%, further deterioration to 16.81% would have reduced the price from $100 (par) to $94.10. Today, the (30-year) long bond that matures on November 15, 2042 comes with a 2.75% coupon payment. It is trading at around 3.00%. This one-quarter percent change causes a similar loss of income to bonds that had sold off by one percent in 1981. If the 2042's were bought at $100, investors would be holding a 5% loss on principle now. (The bonds would be trading at $95.09). When the 2042's trade at a 4% yield, the price will fall to $78.34. At 5%, the loss will equate to a $35% loss ($65.31).

These are not unlikely scenarios. Humanity needs higher rates; "when" is the quadrillion question. Then too, where will the money come from if "investors dump bonds and return to stocks"? New World Records of issuance were set or approached in several bond categories last year. If the flows gobbling up CCC corporates and State of Illinois general-obligation, pension-funding bonds take a deep breath, they may decide a current yield of 4.00% (on the latter) is crazier than buying Webvan at its peak. The first wave may buy stocks but investors who miss the bond peak will be shifting much depleted funds.

            The stock market will look unappealing, though. Any significant rise in yield will probably cause greater losses in stocks than in bonds. Historically there is much evidence of this but more important than precedent is the reason the stock market trades 120% higher than four years ago. We must acknowledge the bizarre belief that central banks can prevent markets from falling. They will, at an undisclosed date, lose control of the Treasury market. In fact, they lost control a long time ago. Their bond-buying sprees are at least partially motivated by the knowledge that the Fed is the last dependable buyer of Treasuries. Bernanke is poised over an air shaft. 

Thursday, January 10, 2013

Dissension is Overrated

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)
            On January 3, 2013, stocks and gold collapsed upon release of FOMC minutes from the December 11-12, 2012 meeting. The bearer of Fed opinion was Jon Hilsenrath at the Wall Street Journal. Zero Hedge noted after the sacred tablets were disseminated that it took "Hilsenrath 12 whopping minutes to release a 589-word article analyzing the FOMC minutes. At least we know one of the people who had the embargoed version hours ago." The implication being the Wall Street Journal was permitted to read the minutes before the transparency-minded Fed let the rest of us know. Zero Hedge did not mention the FOMC Minutes are 7,044 words long and the market-moving FOMC discussion commences after 4,394 words. It is possible that Hilsenrath did not read the Minutes at all, but was handed a press release from one of the Fed's P.R. firms. The latter are best equipped to lead the public into the Fed's pre-approved ditch.

            There was, in fact, absolutely nothing in the Minutes (reading from word 4,394) worth anyone's time. The discussion does not (as stocks, gold, Hilsenrath, and Bloomberg inferred) intimate the Fed may cut short its money-printing scheme in mid-2013. It was a meeting of confusion as to, not only how long the FOMC might continue its wealth-destroying scheme, but also what it should buy, what should prompt it to stop, and how it would identify an opportunity for a "smooth transition" towards removing accommodation. In short, paralysis reigned. The transition would include raising rates, a purely hypothetical discussion since the Fed can never do so. The notorious free market is the party that will decide when rates will rise.

           The FOMC Minutes do not disclose who said what. Following is some handy information that may save you time. Having read dozens of FOMC transcripts, released five years after the meetings (why has the Fed only released transcripts through 2006, in the year 2013?), you can take the following to the bank: the Federal Reserve governors are the only voices that matter.

There are seven governors. They meditate in the Eccles Building, are Washington toadies, and can all be counted upon to support whatever the chairman wants. That is particularly true today, since the governors are a pack of ambitious academics, so have never held an independent thought in their lives.

The 12 regional presidents are window dressing. All attend the meetings but only five vote at any one time. Thus, the governors hold a 7-5 advantage when the FOMC votes. I take Jim Bianco's word for it (Bianco Research) that Chairman Bernanke was embarrassed by three "nay" votes in August 2011. Simple Ben does not want this to happen again. One dissent is apparently not embarrassing since that is often what we see.

I take Jim's word for this nonsense, since, in a sane world, Chairman Bernanke would be more embarrassed every time he opens his mouth, given what comes out of it. But he's a lifelong bureaucrat, on campus and now a civil servant, so form matters since that's all they've got. If it were not for this needless decorum, opinions of Fed regional presidents could be entirely dismissed. As it is, 2013 is a bumper year for Bernanke since three of the five voting presidents express greater deference to Bernanke than Uriah Heep ever hoped to reveal. These are William Dudley (New York: the New York president is a permanent member of the FOMC), Charlie Evans (Chicago) and Eric Rosengren (Boston). Esther George (Kansas City) and James Bullard (St. Louis) round out the voting members in 2013. Both George and Bullard have independent streaks, but neither is consistent.

Charles Plosser (Philadelphia), Richard Fisher (Dallas), and Jeffrey Lacker (Richmond) make the news with occasional tirades against the Fed's policy, but they are not voting in 2013. Also, their bark is often worse than their bite. They make good copy but neither has consistently voted against the majority.

It could be said, that having destabilized markets and the economy to such an extent, 2013 looks like a "very good year for irrational exuberance" in credit. Thus said the last Federal Reserve governor worth listening to, Larry Lindsey. Here, he was warning Chairman Alan Greenspan at the December 1996, FOMC meeting that credit had run wild wherever he looked, including the stock market. Greenspan responded with a joke that fell flat. Lindsey never attended another meeting.

Saturday, January 5, 2013

Markets Vanish - "In a Flash"

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

          The same title cheered in the new years of 2011 and 2012 ("Markets Vanish - "In a Flash"," January 4, 2011 and January 8, 2012). These warnings described how quickly, and with no foresight by participants, markets evaporated in 1914. In 2013, markets have never been more susceptible to such a bolt of recognition. This is a consequence of such imperturbable faith in the prices set by besotted bureaucrats. What follows is a quick look at the nasty, brutish, and short results from government manipulations after such policy failures.

            There are few failures that compete with World War I. Having failed, the same bumblers garnered fame by subjecting their own populations to conquest. Whether it was the patriotic call to the trenches or confiscation of securities, there is no question those who had failed worst made out best.

            The British and the French governments were short of money to pay for supplies by 1915. Note: this was still a world in which non-redeemable, government, money-printing operations would not pass muster. If a hard-up, food- and munitions-famished government attempted to print pounds or francs for goods, the boat from London to New York would have made a round-trip after the counterfeit fodder had been sequestered and burned at the Customs House on Bowling Green. The customs officials would no doubt have been acting in good faith, an attempt to suppress the embarrassment due the British or French governments in the belief that some lunatic, war criminal had attempted to pass bad notes.

Instead, force majeure was employed. The following description by Harold Nicholson goes beyond the specific point addressed here (underlined) since the nearly insurmountable problem of those governments is unfamiliar in an age of quantitative easing. Yet we are approaching the point (yep, any day now baby, just you wait) when worthless Bernankes, Draghis, and Abes will call for just such a calculus: "[W]hereas American exports to Great Britain alone had in 1914 been $594,271,863, they increased in 1917 to $2,046,812,678. This enormous expansion in the American trade export trade was due, of course, to the European demand for more war material and food. Such purchases could no longer be paid for in goods and services; only a small proportion could be liquidated in gold; the purchases for 1915 alone were some $700,000,000 in excess of gold capacity; the balance had to be financed by credit. How could such vast credits be obtained? Three separate systems were adopted. The first was the export of gold; a billion dollars of gold were transferred to the United States between 1914 and 1917. The second method was to commandeer the American securities held by British and French nationals. This method was first put into operation in January 1916, and in the end provided the British government with the collateral of $2,425,000,000 and the French government with the collateral of $51,000,000. The third method was just confidence." J.P. Morgan acted as agent to the British and French governments.

To imagine governments would take such action demanded the mind of a Houdini in 1914, even after markets had vanished in late-July. In the United States, a country without an income tax in 1912, and a continent away from the fighting, a 77% surtax on incomes was imposed after Americans embarked on its holy mission to save European from itself. President Wilson told the leaders of the Federal Council on Churches: "[Y]ou have got to save society in this world, not in the next.... We have got to save society, so far as it is saved, by the instrumentality of Christianity in this world." Wilson went on to compare Christianity to the highest form of patriotism since they were both "the devotion of the spirit to something greater and nobler than itself."
This was in December 1915. In 1916, Woodrow Wilson was reelected to a second term as president with an appealing campaign slogan: "We didn't go to war." During the presidential campaign, he wrote to his Secretary of the Navy: "I can't keep the country out of the war." Nor, did he.

Having abused trust with the American people under the banner of a holy crusade, the Wilson administration took measures inconceivable before 1914. This is the lesson to be contemplated in 2013. We have two Holy Crusaders, one at the Fed and one in the White House, both of whom (this is where it gets very dangerous) view humanity in the abstract and who preach in the dreadful certainty of the former Princeton College president (that would be Wilson).

After the U.S. declared war on European Sin (May 6, 1917), Wilson refined his impersonation of American Gothic: "Woe be the man that seeks to stand in our way in this day of high resolution when every principle we hold dearest is to be vindicated and made secure." A Rip Van Winkle who had been asleep since 1914 may have wondered if the "we" included a mouse in the parson's pocket. George Santayana expressed doubts about such blending of the material with the spiritual. Wilson and his fellow travelers were "fanatics, who redoubled their efforts after losing all sense of aim." Santayana had left his teaching position at Harvard in 1912, sailed to Europe, never to return, but bequeathed a compelling indictment of American letters, especially the poisonous, pious, and inert influence of Harvard upon American consciousness, as true today as a century ago, and just as stubbornly ignored.

One sample of World War I financial mischief was the Liberty Bond. The first of these offerings (in 1917) was a $2 billion issue, over ten times the size of any previous effort. Given the scale, was a 3-1/2% coupon inadequate compensation? Not by any means. Americans would buy them whether they wanted to or not, (and who would?) Charles G. Dawes, chairman of the Liberty Loan Drive, declared: "Anybody who declines to subscribe for that reason, knock him down."

This captures the spirit of U.S. economic policy ever since. In the Holy Quest for GDP Growth, post-millennial economic policy has unerringly chosen to "knock him down." The Greenspan Fed sustained an overextended economy with the Internet bubble. Those who played it to the end got knocked down. Greenspan fanned the housing bubble, handed the baton to Bernanke, who battered credulous mortgage-buying Americans back to the stone age.

The 3-1/2% Dawes bond yields look gargantuan given today's investment alternatives. This is not so much a question of yield as it is of quality. First and foremost, money is not what it was. Most of what is considered money today is a claim on a non-existent asset. This is a far deeper problem than when the British and French governments ran out of real money during World War I. (They both abandoned the gold standard, with consequences beyond today's discussion.) Given how easily governments bullied and confiscated private citizens' property a century ago - a far more civilized period than today - and the flagrant lawlessness of Financial Repression today, the commandeering securities can be accomplished in an instant of double-talk.