Friday, October 31, 2008

A Must Read Interview of Paul O’Neill

Friends, Today I share an interview that I found on the newsletter I received from "The Daily Reckoning" ( with obvious thanks. I have highlighted some important parts, but I recommend reading every single word of the text.


From the companion book to I.O.U.S.A.

Paul O’Neill says he enjoyed being the 72nd secretary of the U.S. Treasury
(2001 – 2002), even though the job lasted only 23 months. O’Neill, who has
been analyzing the U.S. budget since he went to Washington, served in the
Bureau of the Budget, which later became the Office of Management and
Budget in the White House.

O’Neill came to American government in 1961 as a management intern, and
stayed for 16 years through the Kennedy, Johnson, Nixon, and Ford
administrations. The last 10 years of his tenure were spent at what was
the Bureau of the Budget, which became the Office of Management and
Budget. There he became deeply involved in the issues of fiscal policy,
budget balance, budget making, and helping presidents choose priorities
for how we spend the nation’s money.

Then he moved to the private sector in 1977. In 2000, he was asked by
President Bush 43 to come back to the government and be the Secretary of
the Treasury, which he did for 23 months before he got fired for having a
difference of opinion.

Q: When you took over at Treasury, how would you characterize the
financial health of the United States? Are you surprised at where we are

Paul O’Neill: When I moved into the Treasury as the 72nd secretary, what
we inherited from the Clinton administration was an economy that had been
rolling itself into a modest recession for a year and a half. By that
time, the dot-com bubble had burst and the economy had slowed down, and we
actually had some negative quarters that we didn’t really know about until
Clinton was gone and Bush 43 was in charge. But on the fiscal policy front
we were in a condition where we had, for the first time in a long time, a
budget that was in surplus.

I have to hasten to add that while it was in surplus, it was not in
surplus on a federal funds basis. It was only in surplus because the trust
funds were bringing in a lot of money and together, with federal funds and
the trust funds, the Clinton administration was able to claim three years
of budget surpluses, which we hadn’t seen since 1969. That was a year
where we were in budget surplus with the use of the trust funds. The last
year I think that we were actually in surplus on a federal funds basis,
without using trust fund money, was in 1960, so we’d been at this now for
47 years of basically living beyond our means – especially if you think
federal funds ought to be in surplus without using the trust fund money to
calculate balance.

So in 2001, when Bush 43 took over and I took over at the Treasury, we
were in a total surplus condition, and arguably (I think this was a
correct argument) we needed to reduce taxes because taxes had crept up to
the point where something like 20 or 21 percent of the GDP was being
effectively taken by federal government. Traditionally, our level has been
someplace around 18 percent or maybe 18.3. So I think it was correct to
say that we could afford to have a tax cut, which President Bush 43 had
run on in the 2000 election, and he set out to deliver what he promised in
the election and I think that was okay. The reason that I agreed to come
in as Treasury secretary was because I saw lots of things in our economy
and our society that needed to be done, and I was encouraged to believe
that Bush 43 was up for the difficult political things that needed to
happen to make course corrections. Those course corrections still include
fixing the Social Security and Medicare trust funds, and fundamentally
redesigning the way the federal tax system works. I thought there was some
prospect that President Bush would entertain the difficult political
choices that needed to be made in order to act on these things, and I
spent a lot of time thinking about these things over a period, better part
of 40 years, so I was anxious to have a go at it.

Q: How did it go?

Paul O’Neill: The first part was the easiest part. Cutting taxes is always
a cinch – it’s only a debate about who gets the credit and how big the cut
is. But then we had 9/11 and it really changed where we were. The economy
was still slow, although we were actually having positive growth in the
fourth quarter of 2001.

But there was still a lot of energy and President Bush himself was
bringing this energy that we need additional tax cuts. I honestly didn’t
think that was the right thing to do, because I continue to believe we
needed the revenue that we were then collecting to work on the
Medicare/Social Security problems. To work on fundamental tax redesign
after 9/11 while worrying about whether there was going to be another
attack or a series of attacks would cost hundreds of billions of dollars.
So I was against further tax reductions at the time, especially as we got
into 2002, as I became more concerned that we were also going to need
money since it looked to me like we were sliding into a war with Iraq. I
argued during the second half of 2002 we should not have another tax cut
because we need the money to work on important policy issues that would
shape the nation going forward, and we needed to have, in effect, rainy
day money for the prospect of Iraq and another set of attacks like 9/11.

That was not a popular view, and in fact, it led to a conversation with
the vice president where he basically told me, “Don’t worry about further
tax cuts, it’s okay. Ronald Reagan proved that we don’t have to worry
about deficits.” Which is really a shock to me because whatever you may
think about Ronald Reagan, I don’t think he or anyone else has proved that
it’s possible to ignore not just deficits, but federal debt as well. I
think it is true that you can be sanguine about deficits for a short
period of time, but you can’t be sanguine about mounting debt for the
United States of America. When we, the Bush 43 administration took over,
we had something over $ 5 trillion, maybe $ 5.6 trillion worth of national
debt. Today [Fall 2007] I think the number’s $ 8.8 trillion. That’s not an
innocent change, it is a monumental change in the debt service that we
have to do in addition to and on top of all of the other things that our
country needs to do.

Q: Toward the end of 2002, you wrote a report that said that the current
debt wasn’t the problem; it was the debt that we are stepping toward.
Shortly thereafter you were asked to leave. Can you explain to me what
happened the day you were fired?

Paul O’Neill: During 2002 I found myself being at odds with where policy
seemed to be going, I kept arguing that we couldn’t really afford another
tax cut and that we didn’t need one, since the economy was doing fine. But
my problems were not just differences about tax policy and social policy
and fixing Medicare and Social Security. I kept asking almost every week,
of the people from the CIA who briefed me, you know, where’s the evidence
for weapons of mass destruction? I see all of these allegations and
projections of trends from 1991 and what we knew in 1991, but I didn’t see
anything I considered to be evidence. One of the things I’ve been trained
to do for a long period of time is to know what you know and to
differentiate that from what you suspect or what someone alleges, so I
kept being a pain in the neck and asking, “Where’s the evidence? There’s
no evidence, there’s nothing I believe.”

Early in the administration, at a National Security Council briefing,
there were a bunch of photos put on the table and it was alleged that this
satellite picture of what looked like a warehouse that you could find
anywhere in the world was a production center for weapons of mass
destruction. I said, I’ve spent a lot of time going around the world,
producing goods all over the world, and have seen a lot of factories and
warehouses. How can you tell me this one is a center for producing weapons
of mass destruction? There’s nothing here that tells you that? You may
assign it that, but there’s nothing here that tells you that.

One of the things I found really interesting out of this experience is
that even today, people that I have a lot of regard for their intellect,
like Bill Clinton, still say they believed the evidence was there. I’ve
never had this conversation with him, but it’s hard for me to believe a
guy who’s as smart as he is doesn’t know the difference between an
allegation and evidence – especially someone who’s trained as he is as a
lawyer. I’ve been astounded, this is a bipartisan thing – people on both
sides don’t seem to get the difference between evidence and what they call
intelligence, which I would call not intelligence, just a bunch of
fabrications. So I was working my way to the margins of what endurance
that people had for me, both in economic policy and in everything else I
encountered. I have to admit some of the things that I said during this
period probably ought to have been tempered. For example, we were
struggling with trying to get the International Monetary Fund and the
World Bank out of the business of effectively bailing out private sector
lenders who’d given money to developing countries with the expectation
that the people of the United States and other tax-paying people around
the world would bail out the private sector lenders. I said (probably not
very advisedly), “Before we give any more money to Argentina, we ought to
make sure it’s not going to go to a Swiss bank account.”

Which was, I admit, not very diplomatic, but it was true – and
interestingly enough, in a few weeks a guy who had been the president of
Argentina said, without any prompting from me, “Well it was true he had
money in a Swiss bank account, but it was all his own.”

So in any event, as we moved past the election in 2002 and we had this
continued conversation, a really heated conversation with the vice
president about what I considered to be the inadvisability of a further
tax cut, I got a call, early in December. I was in my office having a
meeting with a group of people and my secretary came in and said, “The
vice president’s on the phone and would like to talk to you. The vice
president said, “The president’s decided to make some changes, and you’re
one of the changes. What we’d like to do is have you come over and meet
with the president and basically say that you’ve decided to go back to the
private sector, that you’re ready to quit your involvement with the

I said I didn’t think I needed another meeting with the president, thank
you very much. I thought I’d had plenty of meetings, and I thought he
probably didn’t need a meeting and I certainly didn’t need a meeting. And
I also said to him, “You know, I’ve been going along now for 65 years or
so and, you know, for me to say that I’ve decided to leave the Treasury to
go back to the private sector is a lie, and I’m not into doing lies. And
so what I want to do is issue a press release tomorrow morning before the
markets open so that they’ll have time to digest this news in case it
creates any stir. And I’ll send the president a note telling him I’m

And I think he was surprised by that. He didn’t try to argue me out of it,
I think probably because he’d known me long enough to know that it
wouldn’t do any good, that I’d made up my mind and that was it.

Q: What did it feel like to get fired?

Paul O’Neill: Well, it’s a first in my life – I’d never been fired before,
I’d only been promoted to ever-higher levels of responsibility. But it was
okay with me because I would have really been uncomfortable arguing for
policies I didn’t believe in. One of the things I actually said to
President Bush and Vice President Cheney when they asked me to come and
have lunch with them, and to ask me to serve as the secretary of the
Treasury, was that I had reservations about doing this. And one of the
reservations I had was that, having been the CEO of a very big corporation
for 13 years and the president of a very big corporation for the period
before that, I wasn’t sure how easy it was going to be for me to knuckle
under when I thought the policy was wrong. The thing I didn’t know is how
difficult it would be to knuckle under if you thought the policy was not
well vetted, that it was decided on the basis of ideology instead of what
was right for the country. At that point I really thought the decisions
were not being made on the basis of what was right for the country, they
were being made on the basis of what was right for getting reelected.

It’s probably altruistic, but I thought for a long time we need presidents
who are so devoted to doing the right thing with and for the American
people that they’re prepared to lose for their values and to hang their
values out in public for everyone to see them.

Q: Let’s revisit the conversation that you had with Vice President Cheney
prior to you being fired. Can you discuss the difference of opinion that
you had in regard to tax cuts and deficits?

Paul O’Neill: Sometime after the election – it must have been mid-November
– there was a meeting of the Economic Policy Group, including the vice
president. As we sat at the table in the Roosevelt Room, we talked about
where we were and where we were going. If I remember right, Glenn Hubbard
made a presentation that was displayed on the screen at the front of the
Roosevelt Room and showed where we were going and what different tracks
looked like and GDP growth and the rest, including the effects of the
proposed third tax cut. I made the argument, which I had been making over
and over again since maybe June or July, that it was not advisable to have
another tax cut because of the need to fix Social Security and Medicare
and to have some money to smooth the fundamental redesign of the tax
system. We needed to have in effect rainy-day money in the event that we
had another 9/11 event – and at that point it looked like maybe we were
going to go to Iraq, and it was not going to be cheap to do that.

So I argued that we should not have another tax cut because the economy
was going to be in positive territory and doing okay through the next
couple of years anyway without another tax cut, and there were all of
these other compelling reasons not to risk a deficit and not to risk
adding more to the national debt. And the vice president basically said,
“When Ronald Reagan was here, he proved that deficits don’t really matter
and so it’s not a consideration or a good reason not to have an additional
tax cut.” I was honestly stunned by the idea that anyone believed that
Ronald Reagan proved in any fashion, certainly not inconclusive fashion,
that deficits don’t matter. I think it is true on a temporary basis that a
nation can have a deficit and have a good reason for having a deficit. I
think the Second World War there was no way we could avoid having a
deficit, but when we came out of the Second World War we started running
budget surpluses again and did that through the ’50s and into 1960. It’s
interesting, it’s really only been in the last 40 years or so that we’ve
accepted the notion that it’s a bipartisan thing that we don’t have to
have fiscal discipline.

A year ago there was this signing ceremony in the Rose Garden for the new
Medicare prescription drug entitlement, and it’s going to cost us
trillions of dollars. This event was not unlike any of the others in the
Rose Garden on a nice sunny day, with the president sitting at the signing
table with a bunch of grinning legislators behind him taking credit for
this “great gift” they’re giving the American people. But none of their
money was going to get given to make this happen, because the federal
government doesn’t have any money that it doesn’t first take away from the

There was no mention of the fact that this in effect was a new tax on the
American people, and we didn’t know how we were going to pay for it. It
was only grinning presidents and legislators taking the credit for a gift,
which strikes me as a ridiculous continuing characteristic of how we do
political business in our country.

Q: If we couldn’t afford it, why did we give it to the people?

Paul O’Neill: If you can get 51 percent of the people in the Congress to
agree with the President’s leadership initiative to say we ought to do
this, that’s all it takes. And I think it’s regrettably true there are a
lot of people who don’t understand that when they get a gift from the
American people, it’s from the American people and it can only be paid for
with taxes over time. I think the confusion is aided and abetted by the
fact that it doesn’t feel like we’re paying for it. It’s a lot like
running up credit card debt: As long as you can pay the interest charges
on your credit card debt, you can live way beyond your means. In fact, we
as a nation are living way beyond our means, and for a period of time,
there’s no doubt we’ve demonstrated you can get away with it. But I think
we only need to look at the fate of other countries who’ve lived beyond
their means for a long time to see you inevitably get into trouble.

If you look at Germany in 1923, they got to a point where their currency
was so worthless that you needed a wheelbarrow to haul the currency that
was needed to buy a loaf of bread. You get inflation where people stop
investing in your national debt, when they say, “We’re not going to loan
you money because you’re not going to be able to pay it back.” It’s the
same thing that happens to individuals and families. When you get extended
to the point that you can’t service your debt, you’re finished.

You know, so you go through a calamity – either you go through a terrible
inflation, which is a way of having a national bankruptcy, and you destroy
accumulated income and wealth, and in fact you have a taking from all the
people because suddenly their financial assets are worth nothing. You
know, are we going to have that right away? No. But should the people who
are in positions of political leadership know that and anticipate it and
do something about it for the American people, you bet – and now is the
time to begin doing something about it.

One of the difficult aspects of this debt problem is that it’s not very
transparent to people who are unschooled in fiscal and monetary policy. In
a way, this problem’s a little bit like the famous example of if you
throwing a frog into boiling water. If you throw him into the already
boiling water, he jumps out right away. But if you put the frog in the pot
of cold water and turn the heat on under it, the frog will let itself be
boiled because it doesn’t respond to slow increase in temperature. Our
debt problem is something like that. If we wait until we have a calamity
and financial markets shut us off because we’ve exhausted their belief
that we can service additional debt, it’s too late.

This is a problem that we need to deal with without letting the heat be
turned up some more.

I would hope we can demonstrate we’re intelligent people that don’t wait
until they create a calamity in their country before they deal with
problems that are obvious to anyone who’s ever studied economic policy and
fiscal policy and monetary policy. You only need to look around the world
to see places like Argentina, Turkey, and Germany after World War II whose
governments have effectively achieved a meltdown condition. Knowing this
can happen to modern nations, we should not let it happen to ours.

Thursday, October 30, 2008

The Common Mistake

When US markets hit new lows few days back everyone was bearish from regular analysts on CNBC to bloggers who post about markets and trends. But, there was a class of these species which thought its "the" bottom, while some thought its "a" bottom. I was in the last category and thought this should be "a" bottom for few sessions, then it will resume the downtrend and the last support is at 2002 lows.

My friend Moyo posted his views on his blog which I found quite a bit interesting. He says the markets have tested bottom and are poised for a rally, also, he says thursday (today) the data on GDP will clear things about wheather US is in recession or not. My first reaction was WHAT????? but instead of repying to that post I thought to post my detailed views here.

If one thinks the lows have been tested and a time for "sustainable" rally is here, then better go to some remote island and relax for few months. If its a vertical up move after such a big sell off, then certainly it is a bear market rally which will fizzle out sooner than later and chances of new lows are more than ever before. To all my readers: there is no BOTTOM for now. For traders, there is definitely a trading opprotunity, but for investors, its nowhere close to bottom.

As far as GDP is concerned, you should keep in mind that GDP of US of A is based on NOT the factory output BUT the consumption by people, which is illusiory by definition. How can Gross Domestic PRODUCT be higher by people buying things they don't need with the money they don't have !!! But, the fact is, people live in illusions and wouldn't listen to me and so they would believe their GDP is growing with increasing spending with borrowed money !!! All this is magic of Fiat Money combined with fat Fate.

Moyo says " Thursday is expected to be another interesting trading day, with the release of the third quarter GDP, this will help clear the air as to whether the US is in a recession or not". How come? US is definitely in recession. Why do you need more data to counter the FACT?

Anyway, what I say was not popular and I do not expect it in near future either. But, the facts can not be changed by data.

God bless America...
God bless humans...

Friday, October 24, 2008

Next Support on S&P 500

Today there is a panic in markets world over and primarily it looks like hedge funds are selling due to redemption pressure. The pressure of selling intensified today in almost every market and is continuing as I write these lines. Yesterday I told about Nifty and Sensex breaking major support levels and today they are more than 10% down.

In this scenario when most of the indexes have retraced more than 62% of their past bull market up move, the question comes where is the next support? Well, for S&P 500 it is very near - 768, the low of 2002 can be a support going forward (As I write this, the S&P 500 Future is trading near 850). But looking at the sentiment globally, even that is doubtful. For Nifty of India, logically it is too far away - 920! It sounds crazy when I even think about that!!!

I hope things stop being worse, but then my hopes don't matter...

Thursday, October 23, 2008

Nifty and Sensex Break Major Support

Today is the day to remember in history for Indian stock markets. The Benchmark BSE Sensex and NSE Nifty both the indexes CLOSED below what could have been ultimate support - the Fibonacci 61.8% retracement of past five year bull market. In other words, the past bull market which made thousands and perhaps millions rich in absolute wealth term is OVER.

BSE Sensex closed at 9771.70, well below 9900 which was the Fibonacci 61.8% retracement from the low 2828.47 in October 2002 to the high of 21206.77 in January 2008. The NSE Nifty was supposed to take support at the 61.8% retracement of the bull market from 920 to 6357 in the same period of five years at 3002.

In my last post I stated my doubt about the markets holding these important support levels and my worst fears came true today. Now that the bull market of past five years is officially over, we should forget it for now and concentrate on the new reality. It does not mean that there will be no upside now, but the fact is even if a bull market starts sometime, it will be all new and will have new dimensions. Also, this effectively means that old leaders like Reliance will no longer be leaders if and when a new bull market starts, although such a possibility of a new bull market is at best bleak for some good time.

The reality is we are in a strong secular Bear Market and there are more chances of it to continue in at least short to medium term. Looking at fundamentals, there may be a time when it is "enough" for the fundamentally "not that bad" Indian economy and we see it going sideways for some time. Historically, Inidan markets are nervous during general elections and this means we should not expect a bull market at least till the coming summer next year.

Saturday, October 18, 2008

Indian Markets at Last Support?

Today I present something that is as obvious as oxygen in atmosphere and yet very rarely talked about. I am talking about the long term direction of S&P 500 of USA and NSE Nifty of India.

7th of October, 2008 was when S&P 500 broke the most important support of long term bull market. It was October (quite coincidentally), to be precise, 10th of October, 2002 when S&P 500 index hit a low of 768.63 and a new bull market started after that. On 11th October, 2007 (again a coincidence!), it touched a high of 1576 and as we know the bull market of past 5 years was over.
Taking Fibonacci retracement into consideration, the last support of 61.8% of this up move comes at 1077 and as I've already told, it broke that support decisively. It was last week but considering the interventions and interferences by various governments into capital markets and economy, I thought it might be a result of that. Officially, the bull market is over and if a new bull market starts it will be brand NEW one.

Nifty & Sensex Long Term Trend:
Now let us come to the Indian Markets. The benchmark BSE Sensex and popular NSE Nifty are both at a point which is most important support regarding Fibonacci for the bull market of past 5 years. The 61.8% retracement held this week and it will be interesting to see how these indices behave in coming days. Look at the graph below to see various Fibonacci levels on NSE Nifty:
Nifty Long Term Fibonacci Levels
So, what does it signify? Is the down turn over? Will the previous bull market that got broken in Jan this year resume?
I have simple view regarding this. In my opinion Fibonacci 61.8% is very important retracement level and if we see historically this number has almost always held. Rather than predicting the next move, I would suggest watching the action. If these supports hold, then the long term bull market is intact, otherwise, its over and we better forget that bull market. Had it not been the case for US Markets (that is the broken important support), I'd advise cautious buying here. However, given the importance of this 61.8% retracement level, it would be better to not be a bear for some time and be very cautiously optimistic unless this last support is decisively broken.

Friday, October 17, 2008

Weekend Fun

Today after watching Indian Markets collapse and volatile US Futures and European Markets, I feel how bad the position of assets has become worldwide. The BSE Sensex touched four digits and we saw nine handle on it which no one(except some like me) in his widest dream would have guessed a few weeks back! In fact the down swing may be too much but the primary bear market is still far from over.

For a change, let me present here a piece from Bill Bonner's "the Daily Reckoning" newletter in which he presents a hypothetical "letter"from the well known last Fed Chairman Alan Greenspan:

I, Alan Aurifericus Nefarious Greenspan, Chairman of the Federal Reserve
Bank, holder of the Medal of Freedom, Knight of the British Empire, member
of the French Legion of Honor, known to my peers as the “greatest central
banker who ever lived,” (I will not trouble you with all my titles. I will
not mention, for example, that I was the winner of the prestigious Enron
Prize for distinguished public service, awarded on November 1, 2001, just
days after Enron began to collapse in a heap of corruption charges) am
about to give you the strange history of my later years.

For I will dispense with childhood...even with young adulthood, and those
dreary sessions with that terminally dreary woman, Ayn Rand, who couldn’t
write a compelling sentence if her life depended on it. I’ll also dispense
with my own dreary years at the Council of Economic Advisors, and pass
directly to the time I spent as the most powerful man in the world. For
here are my real titles: Emperor of the world’s most powerful money,
despot of the world’s largest and most dynamic economy, and architect of
the most audacious financial system this sorry globe has ever seen.

Yes, I, Alan Greenspan, ruled the financial world. But who ruled Alan
Greenspan? Ah...I will come to that, and tell you how, while presiding
over the biggest boom ever I became caught in what I may call the “golden
predicament” from which I have never since become disentangled.

This is not by any means the first thing I have written. I have written
much over the years. But it was all written for a purpose, which only a
few were able to discern. Most readers foolishly saw the cluttered mind of
a dithering economist or the clumsy, stuttering pen of a professional
bureaucrat. Many listening to my wandering speeches and twisting sentences
thought that English was not my first language. They thought they detected
a faint accent, like that of Henry Kissinger or Michael Caine. They mocked
me as “incomprehensible” or “indecipherable.” They watched what they
thought was an obsequious bureaucrat squirm. They had no idea what I was
really up to and what I can only now reveal.

But they admired me, too. I knew it. Because they saw in me a kind of
genius...a Bernoulli of banking...a Newton of numbers...a Leibnitz of
lucre...a Copernicus of currency. My mind worked at such a high pitch,
they believed, that my thoughts were inaudible to most humans. They
counted on me to keep the great empire’s economy trundling forward. Little
(actually nothing) did they know of my real thoughts and designs.

But now, all has changed. Now, I can write clearly and speak the truth.
For now I am leaving my post. There is no further need for me to
dissemble; no further need for me to pretend to kow-tow before
Congressional committees; no further need to hide the real facts from my
employers and the American people. Now, I swear by the gods, what I write
comes from my own hand, and not from some overpaid, anonymous flack.

Some are born in crisis, some create crisis, and others have crisis thrust
upon them.

Let me begin at the beginning. Scarcely had I settled into to the big
chair at the Fed when a crisis was thrust upon me. And it is true, I
responded in the conventional manner. There is no manual for central
bankers, but there is a code of behavior. Faced with a financial crisis of
any sort, a central banker’s first duty is to run to the monetary valves
and open them. This I did in 1987. I was new to the job and probably
didn’t open them enough. The U.S. economy lagged its rivals in Europe for
several years. My old boss, George Bush, the elder, lost his bid for
re-election in 1992 and blamed it on me. I resolved never to make that
mistake again. Faced with a slew of challenges, shocks, uncertainties,
crises and elections...ever thereafter, I made sure that every valve,
throttle, level, switch and sluice gate was wide open.

But it was on December 5, 1996, that I had my first epiphany. That was the
year that I made my celebrated remark about stock prices. I wondered aloud
if they did not reflect a kind of “irrational exuberance.” In truth,
whether they did or did not, I do not know. But what I came to realize was
this: 1) People, especially my employers, actually wanted prices that were
irrationally exuberant. And 2) they could become far more irrationally
exuberant if we put our minds to it.

I was 70 years old at the time. I had weaseled (why not be honest about
it?) my way to the top post by knowing the right people and by making
myself generally agreeable, and helpful, and by not saying anything anyone
could disagree with. That was the original reason for what the press
called “Greenspan speak.” My private thoughts remained mine alone. All the
public and the politicians got was gobbledygook, but for good reason.

They would not have wanted to hear what I really thought. So, I did not
tell them. For I knew well and good what generally happened when
politicians and central bankers got their hands on soft money and a
compliant central banker. I was not born yesterday. They use their control
of the money to cheat people. It is as simple as that. (I explained this
early on in my career; fortunately, no one bothered to read what I wrote.
Otherwise, I never would have gotten the job.) If central banking were an
honest m├ętier, there would be no reason to have it at all. Private banks
could do the job better.

But people are ready to believe anything. Somehow, they think that a
collection of rich financiers and power-mad politicians got together to
create and run a central bank for the benefit of the people! Well, I’ve
got news: it doesn’t work that way. Money is only valuable when it is
rare. It is like stock in a company. The shareholder is happy to hold a
few shares. But imagine how he would feel if the company issued a few
million more shares. His own ownership of the valuable thing is diluted.
He would be cheated.

Likewise, an honest banker cannot dilute his depositors’ money. He cannot
create real money “out of thin air,” as if he were issuing new share
certificates, without cheating his clients. But that is exactly what
central bankers do. They issue a certain amount of currency. Then, they
issue more and more of it. So, the people who got it and saved it lose a
little bit of the value each year. In effect, the value is lost by the
savers holders and captured by the people who control the currency. It is
really a very simple swindle. Who but an octogenarian Fed chief, on his
way out the door, would have the courage to say so?

People today act as if they had invented money themselves. But money,
central banking, and currency debasing have been around a long time. In 64
A.D., Nero decreed that the number of aureus coins minted from a pound of
gold would increase from 41 to 45 (each coin would be about 10% less
valuable). The silver denarius, meanwhile, lost 99.98% in the five
centuries before the sacking of Rome. Paper sheds value even faster. The
dollar has lost 95% of its purchasing power since the Fed was set up to
protect it in 1913.

A successful central banker, in the age of compliant paper money, is one
who is able to control the rate of ruin so that the rubes don’t catch on.
A little bit of inflation, they believe, is actually healthy. Haven’t the
economists told them so? Issuing a little bit more money each year makes
people feel they spend more; they hire more people; they build
more houses. Everybody is happy. Everyone feels richer. What an elegant
fraud! It’s almost a perfect crime, because no one objects as long as it
is done right. (My replacement at the Fed, Ben Bernanke, specializes in
controlling the rate at which central bankers can steal from dollar
holders without getting caught. He says that if necessary, he’ll “drop
money from helicopters” should the currency fail to lose value fast
enough. I predict that there will be a lot of people who will want to drop
him from a helicopter...for reasons I will explain here.)

I return to my narrative. After I made my remark about “irrational
exuberance,” I was called into Congress. The politicians who confronted me
were the usual oafs and know-nothings. They made it clear that if I wanted
to hold onto my job, I would have to stop worrying whether asset prices
were too high; instead, I would need to do all I could to goose them up!
It was on that very day, I recall it well, that what I had previously seen
only in foggy theory came out into the clear, bright daylight of applied
central banking.

No one wants honest money. No one. The politicians, bankers, investors,
voters, and householders – anyone with a voice in the matter wants “easy”
money. It is just too delicious to resist. (I wondered what kind of a
central banker would stand against them; he would need a backbone of
titanium like Paul Volcker, and a head as thick and hard as a vault.)
Debtors want a little inflation to lighten their burdens and put a wind to
their backs. Creditors want inflation to swell their asset values.
Politicians want to be re-elected. Businessmen want customers with money
to throw around. Is there anyone who doesn’t appreciate a little

And yet, of course, I always knew the answer. Easy money only works by
defrauding people into thinking they have more money than they really do.
Easy come; easy go. They get it; they spend it. Before you know it, you
have a boom. But people soon adjust their expectations. Prices rise to
catch up to new money. Debt levels increase, and with them come heavier
debt service costs. The magic fades. What can a central banker do? He can
do the right thing. He can “take the punch bowl away,” as my predecessors
used to say. But this is where the trouble begins. Take away the punch
bowl, and they begin punching you! I recall they burned Paul Volcker in
effigy on the Capital steps when he did it. They would have burned him
alive if they could have gotten their hands on him.

Why should I, Greenspan, suffer such a fate? No, it was not for me. This
was the “golden predicament” I faced. Yes, I knew well that the nation
would be better off if the punch bowl were removed, but I knew that I
would be removed too, if I did it. And I knew, also, that it would be just
a matter of time until the pressure for easy money would overwhelm any
resistance a Fed chairman could put up. No pure paper money system has
ever lasted. People can never resist the temptation to make the money
easier and easier...until it is so wobbly and woozy it falls on its face.
It’s better that it falls sooner rather than later. It’s better that the
lesson is taught now, rather than 10 years from now. It’s better that the
lean times come on the next man’s watch, not on mine! That’s what I owe to
old Ayn; she taught me who rules Greenspan – Greenspan! Ayn taught me the
number one rule: Look out for Numero Uno.

I remember it so clearly. I was sitting in a House committee hearing room.
My tormentors kept asking questions. I kept giving the kind of answers for
which I later became famous...answers that didn’t say anything. And I
thought to myself: if these lardheads want easy money, I’ll give them easy
money. I’ll give them the easiest money the planet has ever seen! I’ll
give it to them good and hard!

And so, I did.

Since I joined the Fed, outstanding home-mortgage debt has jumped from
$1.8 trillion to $8.2 trillion. Total consumer debt went from $2.7
trillion to $11 trillion. Household debt has quadrupled.

And government debt, too, exploded. The feds owed less than $2 trillion in
the second Reagan administration, a figure that had been almost constant
for the previous 40 years. But under my direction, the red ink has
overflowed like the Nile in flood – to over $7 trillion.

During the two terms of George W. Bush alone, the feds have borrowed more
money from foreign governments and banks than all other American
administrations put together, from 1776 to 2000. And more debt will be
added in the eight Bush years than in the previous two hundred. The trade
deficit, too, more than tripled since I’ve been at the Fed, from 150.7 to
756.8 billion, and will reach $830 billion in 2006. When I came to power,
the United States was still a creditor. Now, it is a debtor, with more
than $11 trillion worth of U.S. assets in foreign hands, a more than 500%
increase since 1987.

Who can argue with such a record? Who can compete with it? Who would want

But that is the smooth, perverse pleasure a cynical old man takes in his
achievements. I have practically ruined the nation, and I know it. If you
distributed the cost of the federal government’s programs, promises, and
pledges to the voters, along with the nation’s private debt, the typical
household, and the nation itself, would be broke. And yet, almost
everywhere I go, I am revered as a maestro...saluted as if I were a war
hero. It is as if I had won World War II all by myself. The same
numbskulls that wanted easy money 10 years ago, now praise me for causing
what they call “The Great Moderation,” as if there were anything moderate
about America’s borrowing binge.

Others say that my real legacy is that I finally “made central banking
work.” Yes, I made it work...just like it’s supposed to work, giving the
people enough rope so they could hang themselves. That’s what they’ve
done. Now, they dangle from a long rope of mortgages, deficits and credit

And I am delighted. Soon, people will be able to see how central banking
really works. And poor Ben Bernanke will get the blame for it. He and his
stupid helicopters...he almost deserves it.

I hope you enjoyed it...
Sincere credit to Bill Bonner of

Thursday, October 16, 2008

S&P 500 and Nifty Future Analysis based on Daily Charts

Friends, After some time I am back with my analysis of S&P 500 Futures of US and Nifty Futures of India based on Daily Charts. For some time I was scared posting my analysis fearing direct interference by those in power but now it seems they have exhausted their arsenal for some time and we can expect charts to show some direction on its own (not influenced by interference). S&P 500 Futures
S&P 500 Future Daily Chart
Looking at the S&P 500 Futures Daily Chart I arrive at following conclusion:
  1. It looks oversold in the short term. Last week we saw it showing eight handle (8xx) which confirmed my view that US Markets are in Primary Bear Trend.
  2. RSI (14) is showing divergence and possibly S&P 500 might find some support at current level (at the time of writing this its at 920).
  3. It is too far away from even 13 Period EMA which is again a signal of oversold condition. Although on Monday, it went up to touch 13 EMA and came down from there. The 34 EMA is near 1120 and the 55 EMA at 1160 !
Although it looks oversold, I would not advice "investing" and its only for traders to ride a short term long opportunity if it gives one. We should always keep in mind that the Main Trend is strong and it can remain oversold for some time given the primary trend is down. Nifty Future Daily Chart
Nifty Future Daily Chart
Looking at the Daily Chart of Nifty Futures, it made a hammer today, which means today's low can be a good support for short term. Following is my view based on the chart:
  1. It is too far below the Main Downtrend Line - Line1 which is near 4200, means it is in oversold zone for the short term.
  2. The EMAs are also far above and it almost reached 13 Period EMA on 14th Oct and fell from there. The 34 EMA is near 3975 and 55 EMA is near 4090, which confirms short term oversold condition.
  3. The tentative Previous Support Line - Line2 should act as resistance if it goes up, the level for that is around 3800.
Once again I would reiterate my position that even if a market which is in Primarily Bear Trend is oversold, only experienced traders should venture out with opportunistic long positions. An investor should stay away from markets unless a suitable condition is confirmed.

Sunday, October 12, 2008

Interesting Times

We are in interesting times. Some of us who survive would tell today's tale to our grandchildren, just like those who survived The Great Depression told theirs. Human beings evolve like other species but the evolution is limited to biological development and science & technology. Our race is stagnant in economics and politics as same mistakes are repeated time and again and poor public always trusts the rulers.

Last week I thought markets were oversold and there could be a bounce back. The bounce back did come but very small and the carnage in financial markets resumed. Note that this happened despite the "Crisis Postponement Plan" of USD 700 Bn and other measures by the "fed" and govt.

Globally we saw how govts tried whatever they can to calm markets but its the faith of investors which has been deteriorated so badly that they don't even want to look at those measures. In India, the hawkish RBI (Reserve Bank of India) cut CRR by 150 bps in single week but even that did not encourage buying into stocks.

The funny thing is that so called experts think the problem is of liquidity, while in fact it is of "trust". There is enough liquidity but zero trust and trust can not be created by merely "pumping" liquidity into system. Not at least by those people who had been lieing for almost two years about "soundness" of economy and their "ability" to get through the crisis.

In my opinion its the punishment that is required and not reward to those who created this situation in the first place. Why did SEC increase leverage limit to those 5 giants? Was SEC run by 5th grade students? Why not punish those CEOs and other executives who "played" with the system? Anyway, historically, perpetrators of such economic crimes are the ultimate beneficiaries.

There is meeting going on among Eurozone nations and perhaps they reach some point of solution by the evening. The trouble is any solution that they have must be global in nature and chances for that are slim. In times of crises nations tend to safeguard interests of their own citizens first. Moreover, the interbank lending is so complicated that its very difficult for all nations to stick to one universal solution. A global bank guarantee by govts can help but will they do that? I doubt.

Let us see how the premiers arrive at some "solution". Interesting times we are certainly in.

Tuesday, October 7, 2008

World Markets in a Storm


Yesterday we saw almost all stock markets in the world selling off. Asia, Europe, US and Emerging Markets, all were down substantially. Russia and Brazil were most nervous ones as they had to be closed for hitting lower circuit! The NSE Nifty and BSE Sensex of India opened gap-down and resumed downward movement for the entire day, showing slim signs of recovery at close. The US Markets including S&P 500, Dow Jones and Nasdaq, all plunged to 7 - 9% down intraday and Dow Jones showed nine handle (9xxx) for the first time after 2004.

Is this significant? Yes it is for sure, very significant. Stocks markets have more less gone back 4-5 years !!! And this happened despite the US govt interfering (mainstream media says its "intervention") with all its might, into the normal activity of markets. This confirms my view that this is basically a Main Trend Bear Market.

All said and done, now what should we expect? Well, to tell the fact, all markets around the globe are in somewhat oversold zones. The Nifty and Sensex of India are into very oversold zones and its somewhat overdone for the time being. I expect a short term bottom near 3600 on Nifty and 11800 on Sensex. There may even be some relief rally. As for US Indices, the intraday recovery was much better and almost half the loss was over before close. The S&P 500, which was down nearly 8% intraday recovered more than 4%.

When I say for short term there can be halt to the down move and even a relief rally, I do not recommend "investing" here. Its only for traders to take advantage of it and in my view the Main Trend is still BEARISH, unless charts prove otherwise.

Sunday, October 5, 2008

Letter From A Wise Man

Dear Friends,
Today I am posting what I received in a newsletter from
I have just copied it from the original letter and pasted here. To remind you, this is from Dr. Ron Paul, one of the only remaining sane persons in US of A.


by Dr. Ron Paul

The financial meltdown the economists of the Austrian School predicted has

We are in this crisis because of an excess of artificially created credit
at the hands of the Federal Reserve System. The solution being proposed?
More artificial credit by the Federal Reserve. No liquidation of bad debt
and malinvestment is to be allowed. By doing more of the same, we will
only continue and intensify the distortions in our economy – all the
capital misallocation, all the malinvestment – and prevent the market’s
attempt to re-establish rational pricing of houses and other assets.

[On September 25] the president addressed the nation about the financial
crisis. There is no point in going through his remarks line by line, since
I’d only be repeating what I’ve been saying over and over – not just for
the past several days, but for years and even decades.

Still, at least a few observations are necessary.

The president assures us that his administration “is working with Congress
to address the root cause behind much of the instability in our markets.”
Care to take a guess at whether the Federal Reserve and its money creation
spree were even mentioned?

We are told that “low interest rates” led to excessive borrowing, but we
are not told how these low interest rates came about. They were a
deliberate policy of the Federal Reserve. As always, artificially low
interest rates distort the market. Entrepreneurs engage in malinvestments
– investments that do not make sense in light of current resource
availability, that occur in more temporally remote stages of the capital
structure than the pattern of consumer demand can support, and that would
not have been made at all if the interest rate had been permitted to tell
the truth instead of being toyed with by the Fed.

Not a word about any of that, of course, because Americans might then
discover how the great wise men in Washington caused this great debacle.
Better to keep scapegoating the mortgage industry or “wildcat capitalism”
(as if we actually have a pure free market!).

Speaking about Fannie Mae and Freddie Mac, the president said: “Because
these companies were chartered by Congress, many believed they were
guaranteed by the federal government. This allowed them to borrow enormous
sums of money, fuel the market for questionable investments, and put our
financial system at risk.”

Doesn’t that prove the foolishness of chartering Fannie and Freddie in the
first place? Doesn’t that suggest that maybe, just maybe, government may
have contributed to this mess? And of course, by bailing out Fannie and
Freddie, hasn’t the federal government shown that the “many” who “believed
they were guaranteed by the federal government” were in fact correct?

Then come the scare tactics. If we don’t give dictatorial powers to the
Treasury Secretary “the stock market would drop even more, which would
reduce the value of your retirement account. The value of your home could
plummet.” Left unsaid, naturally, is that with the bailout and all the
money and credit that must be produced out of thin air to fund it, the
value of your retirement account will drop anyway, because the value of
the dollar will suffer a precipitous decline. As for home prices, they are
obviously much too high, and supply and demand cannot equilibrate if
government insists on propping them up.

It’s the same destructive strategy that government tried during the Great
Depression: prop up prices at all costs. The Depression went on for over a
decade. On the other hand, when liquidation was allowed to occur in the
equally devastating downturn of 1921, the economy recovered within less
than a year.

The president also tells us that Senators McCain and Obama will join him
at the White House today in order to figure out how to get the bipartisan
bailout passed. The two senators would do their country much more good if
they stayed on the campaign trail debating who the bigger celebrity is, or
whatever it is that occupies their attention these days.

F.A. Hayek won the Nobel Prize for showing how central banks’ manipulation
of interest rates creates the boom-bust cycle with which we are sadly
familiar. In 1932, in the depths of the Great Depression, he described the
foolish policies being pursued in his day – and which are being proposed,
just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments
brought about by the boom during the last three years, all conceivable
means have been used to prevent that readjustment from taking place; and
one of these means, which has been repeatedly tried though without
success, from the earliest to the most recent stages of depression, has
been this deliberate policy of credit expansion.

To combat the depression by a forced credit expansion is to attempt to
cure the evil by the very means which brought it about; because we are
suffering from a misdirection of production, we want to create further
misdirection – a procedure that can only lead to a much more severe crisis
as soon as the credit expansion comes to an end... It is probably to this
experiment, together with the attempts to prevent liquidation once the
crisis had come, that we owe the exceptional severity and duration of the

The only thing we learn from history, I am afraid, is that we do not learn
from history.

The very people who have spent the past several years assuring us that the
economy is fundamentally sound, and who themselves foolishly cheered the
extension of all these novel kinds of mortgages, are the ones who now
claim to be the experts who will restore prosperity! Just how
spectacularly wrong, how utterly without a clue, does someone have to be
before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a “rescue
plan”? I guess “bailout” wasn’t sitting too well with the American

The very people who with somber faces tell us of their deep concern for
the spread of democracy around the world are the ones most insistent on
forcing a bill through Congress that the American people overwhelmingly
oppose. The very fact that some of you seem to think you’re supposed to
have a voice in all this actually seems to annoy them.

I continue to urge you to contact your representatives and give them a
piece of your mind. I myself am doing everything I can to promote the
correct point of view on the crisis. Be sure also to educate yourselves on
these subjects – the Campaign for Liberty blog is an excellent place to
start. Read the posts, ask questions in the comment section, and learn.

H.G. Wells once said that civilization was in a race between education and
catastrophe. Let us learn the truth and spread it as far and wide as our
circumstances allow. For the truth is the greatest weapon we have.

In liberty,

Ron Paul
for The Daily Reckoning

Editor’s Note: Congressman Ron Paul of Texas enjoys a national reputation
as the premier advocate for liberty in politics today. Dr. Paul is the
leading spokesman in Washington for limited constitutional government, low
taxes, free markets, and a return to sound monetary policies based on
commodity-backed currency.

Dr. Paul is known among both his colleagues in Congress and his
constituents for his consistent voting record in the House of
Representatives. He never votes for legislation unless the proposed
measure is expressly authorized by the Constitution. In the words of
former Treasury Secretary William Simon, Dr. Paul is the “one exception to
the Gang of 535” on Capitol Hill.

To learn more about Dr. Paul, see here:

Congressman Ron Paul

Thursday, October 2, 2008

Continuing Crisis? Or Starting Depression

Dear Friends,

For several days we are witnessing big drama in US and Europe. The fiat money magic that was the center of attraction and had created unprecedented prosperity throughout the globe is in trouble now. For more than three decades we continued enjoying the intoxication that this fiat money gave and consequently the exponential growth built up so big that its falling of its own weight now. Mankind evolved so fast in the post WWII world and along with it there were so many brand new inventions. There were some that benefited us, like technology, and some that immensely(but negatively) benefited us. One such was the invention of "new age financial engineering products". The magicians (or conmen) invented new age financial instruments like derivatives of derivatives which seemed to change the very definition of economics. People found a new meaning to the word "leverage". The financial engineers applied their brains and created an all new dimension associated with leverage. They found if they could leverage some existing instrument, they could also leverage non-existing ones, what they required was only the "belief" and trust of market and people. The government of US in particular and others in general aided those engineers. It was always looking to result in what is happening today, but no one wanted to be left behind and dprived of his share of benefit. Banks increased their lending and stretched to the limits of what fiat money regime permitted. Central banks like Bank of Japan (BoJ) and Federal Reserve Bank of US facillitated such banks with lower interest rates and regulators like Securities and Exchange Commission (SEC) upped the leverage limit for bankers to 30! No one was worried with the exesses being created then. These people who are crying for support now - Bush & Co., Paulson, Greenspan, Bernake and other reknowned ones were there and there job was to keep eyes open to what was happening around the streets. But they were partying and did their best to make sure the party goes on. The new found credit was taken with both hands by "now poor" people and they spent the money they did not have on the things they did not need. Everything looks good in sunny weather.

Its not that such a crisis happened for the first time in this post goldilocks era. There have been several crises that were as bad as this one but all were taken care of. The S&L crisis (savings and loans) in 1980s was very similar to the current one. There was a bubble created in real estate and when it burst in late 80s, the govt bought bad investments worth $394 Bn!!! through creating a trust - Resolution Trust Corp. (RTC). It was about 7% of GDP then. What was the result? the crisis was POSTPONED and instead of letting the bubble burst, govt helped inflate it further. Then there was Japanese Real Estate Bubble which burst in 1991. The govt in Japan reacted with interest rate cuts to stop the crisis into entering mainstream econmy. The result - even after 17-18 years of interest rates near zero, the Japanese stocks are down. Then there were crises like Asian Currency meltdown etc. but somehow, so far, the new age engineers managed to postpone the bigger outcome - a global slowdown / recession.

The question is why did the govt not learn anything from past crises? Why were they sleeping when conmen around Wall Street were delivering magic of new found fiat money to the dumb consumers? Why did the consumers were spending beyond their means and with the money they actually didn't have?

The answer for govt is - the govt in itself is just a political party sitting in office. Every ruler in today's democratic world wants one thing - prosperity in his ruling period. who cares about the long term views and basics? Why would Bush care about what happens after he leaves office?

The conmen of Wall Street learned the lesson well, though. They learned from the S&L crisis that whatever mess they create, govt will bail them out - in the name of saving economy. And they were almost right, had this not turned out to be a crisis bigger than they could even dream about.

The consumers? what about them? Well, the consumers are not bothered about things that happened few years back. There is a saying - public memory is short. It actually is. Consumers / public tend to forget a crisis as soon as it's over. By nature humans are greedy and public wants their share of the pie as well.

Most of you belong to the third category - the public/consumer. Can anyone has the guts to go ask Bernake, Bush and Paulson why they repeatedly were reporting "No Danger at all" as late as last month? Why they were "sure" this crisis would be contained? Its not that all economists were happy with the credit growth in bubble forming time, many well known economists warned against it but they more or less became subject of laughter in the mainstream media. Even when the crisis was quite well known, there was another breed of greedy people who were looking for stock market bottom on every selloff.

Dear friends, now there is real panic in global markets and the new effort by govt to put forward a "CRISIS POSTPONEMENT PLAN" WORTH $700 BN (which they call bailout plan) will not be able to solve this trouble. Take my words for that. This is not a "once in a year" kind of thing. This is once in a century kind of thing. Some say it is equal to what happened in 1929, The Great Depression, but I say it will be bigger than that. The Great Depression was followed by WWII, will this also lead to such a thing? who knows? The geopolitical scenario favours the pessimists.

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