U.S. Presidents: Two-Party Smoke and Mirrors

The two greatest presidents of the 20th century were Theodore Roosevelt and. . . . hey, what a coincidence, they have the same surname!

Anyone who thinks the Powers That Be hated Teddy and FDR doesn't get it. It really didn't matter that they came from different political parties; they secured the Elite's position by smoothing over the disparities which threatened to upset the peasantry enough to lead to revolt. So Teddy busted the Trusts while he built the Panama Canal and the Great White Fleet, and FDR (who served as Secretary of the Navy) saved capitalism and the Elite's power by introducing the crumbs of Social Security and the W.P.A. to keep the peasants from getting too restless and angry.

The history of the Presidency is best understood as the on-going battle by the Elite to have one of their own or at least a water-carrier for the Elite in the Presidency. Teddy Roosevelt, FDR and Jack Kennedy were slam-dunks: "one of our own" in the White House. This is always the Elite's preferred solution; it makes things easier. Various pretenders to the Throne like Nelson "Rocky" Rockefeller only made it as far as the Vice Presidency, but hey, he did his duty to the nation . . . and his class.

Due to the unfortunate necessity for elections, every once in a while a Cowboy--someone not of the Elite--threatens to become President. This poses a real problem, and that President has to be collared, contained and held to one term. The preferred solution is to position members of the Elite to advise the Cowboy president and keep him in line. Various politicos of either party have ably served as water-carriers, sustaining policies which maintain the Elite's domestic wealth and power. And if the U.S. can extend its global reach on that Cowboy's watch, that's fine, too, because that is ultimately an extension of the Elite's power.

Local Party politico Harry Truman rose to many great challenges in his presidency--ably aided by Elite advisors like Dean Acheson. But he was never trusted by the elite, who had him replaced with General/international player Dwight Eisenhower. Cowboy Lyndon Johnson was a master of domestic Congressional politics, but way over his head internationally. Even though he retained most of Kennedy's "Whiz Kids" Elite advisors like Robert McNamara and McGeorge Bundy, he was safely shunted aside after one term. The hope that populist Elite scion Bobby Kennedy would ascend to the Presidency was cut short by another assassin.

The problem for the Elite is when a Cowboy president refuses to be "guided" by Elite mandarins. Then the solution is to render him powerless, and shuffle him from office after one term in favor of an Elite or Elite-controlled president of either party. The two presidents who were uncontrolled Cowboys/Outsiders were Nixon and Carter. Here is a short list of the century's presidencies:
both Roosevelts: Elites. Served Elites better than even the Elites understood.
Hoover: naive do-gooder, over his head, had to be replaced with an Elite.
Truman: Midwest politico, but safely guided/served by Elites.
Eisenhower: Midwest General, but safely guided/served by Elites.
Kennedy: Elite. Was set to establish Dynasty, hopes disrupted by assassins.
Johnson: Texas Cowboy, unexpectedly rose to presidency via the assassination of Kennedy, over his head internationally and limited to one term. Safely guided by Elites. Enabled classic "liberal" solutions to relieve potentially dangerous demands of peasantry.
Nixon: Elites' worst nightmare: Western Cowboy, Big Board player, innovative, secretive, non-elite, a wild-card. Elite strategy: let his personal paranoia destroy his presidency. Replace with pliable "nice guy" midwesterner Gerald Ford.
Jimmy Carter: New South Cowboy, uncontrolled by Northeastern Elites, had to be limited to one term. Elite strategy: deploy media to undercut him at every turn, turn up heat on phony "Iranian Crisis" and wait for self-destruction.
Ronald Reagan: Western Cowboy, but brilliant "nice guy" shill for Elite interests. Sold peasantry on the notion that serving Elite interests was a "conservative values" issue. Survived assassination attempt but Elite George Bush was standing ready as VP.
George Bush: Elite's Elite. Private prep school, Yale, combat vet, CIA chief, the complete package. Consummate Elite who never carried cash (neither did Kennedy) and was amazed by a supermarket checkout. Never got "the idea/values thing" and was bumped out by Midwestern/Southern Elite Wannabe Clinton.
Bill Clinton: Midwestern/Southern Elite Wannabe, Rhodes Scholar, etc. Ably carried water for the Elites domestically and internationally, rewarded with two terms, a weak can't-win unlikeable opponent (Bob Dole) arranged as sham opposition.
George W. Bush: the perfect combination of "nice guy" sham Cowboy/Elite. Sold the peasantry on "values" which just so happen to serve the interests of the Elite; saddled with a botched war of domination, increasingly unpopular but still got his two terms anyway.

Perhaps the most threatening Cowboy was Californian Richard Nixon. Nixon was not over his head domestically or internationally; he was a master player on the Big Board, and he took the reins at a perilous moment for the Elite: Vietnam was a quagmire, U.S. prestige was low and dropping, the anti-war movement was disruptive, the Cold War was still threatening, and rising inflation and economic malaise threatened the nation's (and thus the Elite's) wealth and power.

Like Johnson, Nixon was the consummate Outsider/Cowboy/Westerner. A Cowboy ( i.e. not Northeastern elite), a Quaker, a distrustful, private man with a fanatically loyal inner circle, he placed Elites (William Rogers et. al.) in weak "show" positions outside his inner circle. His chief advisor was outsider academic superstar Henry Kissinger, in whom he recognized a kindred Big Board player.

Though the Elite did not approve of Nixon--he wasn't "one of us"--they were so desperate to right the sinking ship that they swallowed their distaste and gave him their (mixed) blessing.

Here are two examples of Nixon's modus operandi as a player. During the Palestinian hijacking crisis of 1970, Nixon wanted to bomb the Palestinian positions (those that could be identified) but these wishes were not carried out due to "excuses" offered by Secretary of Defense Melvin Laird.

When the Israelis were in danger of losing the 1973 Yom Kippur War due to high losses of aircraft, Nixon had the 6th Fleet position aircraft carriers across the Atlantic. Limited-range A-4 Skyhawk combat aircraft were then hopped across the Atlantic to Israel, carrier to carrier, to replenish the Israeli air forces. The reinforcements enabled Israel to carry the day and overcome the Soviet-supplied air defenses of the Arab armies.

This annoyed the Saudis sufficiently that they embargoed oil shipments to the U.S., triggering the "energy crisis" of 1973 and the recession of 1973-74. Nixon imposed wage and price controls at the critical juncture and worked "Shuttle diplomacy" in the Mideast with Kissinger to cool off tensions and open the flow of oil. Needless to say, the Saudis remained our "pals" despite the little "lesson" they taught us.

Loathed by the Eastern Media Elite--and the entire Eastern Elite, behind closed doors--Nixon brought the messy Vietnam adventure to a costly, drawn-out close--but a close nontheless, and managed to pull together a "detente" which consolidated the U.S. position at the expense of the Soviets. By triangulating with China and limiting Soviet ambitions with the SALT I treaty, Nixon planted the seeds of the USSR's decline and ultimate failure, and the rise of China as a U.S. trading partner.

The Elites should have been delighted, but since he wasn't "one of us," he was never trusted. Reagan went on to mobilize his "Silent Majority," and many of Nixon's domestic innovations--block grants to state and local governments, for instance--were eventually recognized as good policy. In other words, like him or not, he was a Big Board player. The Elite was never comfortable with Nixon, however, and so his demise was no surprise. The more amenable water-carrier Gerald Ford was ushered in, with Elite "Rocky" Rockefeller as backup in case Ford was knocked out of office (he survived two assassination attempts).

I can hear the protests: what about Watergate? Nixon was a crook! Um, have you examined the obstruction of justice which has occurred in the current administration? Do you honestly think it's mere coincidence that Nixon's crimes (as Chairman Mao so aptly put it, "All Americans play with tape recorders") were splashed across page one day after day, while the crimes of this administration are mentioned on page A-17, if at all? Why is that? My thesis is: Bush is a coddled (incompetence is tolerated) scion of the Elite, a leader who is very adept at persuading the peasantry to fall on their swords to defend the interests of the Elite; therefore, he will be protected. Nixon was an Outsider/Cowboy, and his demise was therefore welcomed/abetted.

The sad irony is the very peasants who voted so enthusiastically for "values-based" Bush are the very peasants who will soon be bankrupted debt-serfs reduced to abject poverty by the policies of this administration. Meanwhile the President's cronies and pals will be living in unimaginable wealth, paying few if any taxes while their kids get plum positions of power--anything but military service, because, well, all that duty-honor-country crap is for peasants.

If you think I'm exaggerating, or merely indulging in "class warfare," you need to get out more--say, to Kailua-Kona Airport on the Big Island of Hawaii, an airport and area I know well, where the private $80 million jets are so numerous they're seriously overcrowding the tarmac. Homes in the $20 million range are as common as lava on the coast.

In sum: the "party affiliation" of the candidate is utterly meaningless. That "show" is the Coliseum entertainment of talk-show tirades and a lot of hooey about "values" to distract the peasants from noticing how they're serving the interests of the Elite. So who will meet with the EMEGD's approval?

Hillary Clinton: Yes. Has shown she's a willing water-carrier for the Elite, fundamentally an Elite wannabe like her husband. Will toe the line in all important matters and will staff her administration with Insiders and Elites.

Obama. Yes. Product of an elite prep school (same one I graduated from, Punahou School, hahaha), well-versed in "safe" liberal positions which don't fundamentally threaten the Elites wealth or reach, the consummate "American success story" and "trustworthy African-American" who will also staff his administration with safely Elite "liberal" advisors.

McCain: No. Classic Cowboy, Westerner, non-elite, wild-card "loose cannon" who can't be trusted to carry water consistently for the Elite. Adamantly no.

Giuliani. Maybe, but far from first choice. No evidence he'll be guided/advised by Elites, so why gamble?

Milt Romney: No. Religious element is untrustworthy; Elites are not interested in guessing who you will be once in office.

Ron Paul, Dennis Kucinich: No way. Dangerously Outsider, both support ideas which could undermine the domestic wealth and power of the Elite. No, no, a thousand times no.

But what about all the "differences" between the parties? I hate to disillusion you, but here's how national healthcare will work: when the Elites' interests start getting squeezed, either by a peasant revolt or a reduction in profits and power, then a national plan will suddenly be hurried into law, over the objections of various entrenched interests who had successfully held it at bay for years (the AMA, etc.)

The main feature of the Plan will be that it is supported by taxes on wage-earners. Therefore its passage will have zero effect on the Elite, except in one way: by freeing corporations of the burden of providing health insurance, the Plan will increase corprorate profits. Like all products which serve the Elites, it will be packaged as a "non-partisan" bill that everyone can claim credit for. The peasantry will glance up from their entertainment and give a hearty cheer, somehow missing that the burden of paying for the plan falls to them, not the Elite.

Oh, and please don't tell me the canard about how the wealthy pay most of the taxes. The "wealthy" wage earners pay most of the taxes, but the truly wealthy (those with hundreds of millions in assets) pay little or nothing, because there are innumerable ways for them to avoid all taxes--ways we peasants cannot even grasp (interest rate swaps, offshore holding companies, and the like). A truly fair tax would be a percentage of all assets, including all assets held overseas and in tax-free bonds. Failure to comply would mean not a slap on the wrist but revocation of your citizenship (for starters) and criminal charges akin to money-laundering by gangsters--in other words, grounds to freeze accounts. This would collect a "fair share" of wealth from those who evade income taxes. Is such a plan even feasible? Don't make me laugh. The Elites go to a lot of trouble to control the poltical process, and the last thing they will ever allow is an asset-based tax because, duh, they'd have to pay something!

Some of you may be surprised that I would lump a radical Libertarian (Ron Paul) with a radical Liberal (Dennis Kucinich) but in my view, they are cut from the same cloth: outsiders who are feared by the EMEGD. I would support either one, because either one would be sure to upset the apple cart in favor of the peasants.

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Going to War with the Political Elite You Have

To paraphrase the recently departed Secretary of Defense: "You go to war with the political elite you have. They're not the elite you might want or wish to have at a later time, but as you know, it's always the same elite."

Wait--what did you just say? Let's consider this thesis:

The "two-party system" is a travesty of a mockery of a sham, a con perpetrated for the consumption of the peasantry.

I am a peasant, so I say this without irony. It is not demeaning, it is reality. What makes me a peasant? Do I own sufficient means of production or capital to live well without labor? No. Do I owe a vast sum of money? Yes. Do I pay more tax than a hedge fund manager who "earned" $360 million? Yes. (When the 15% FICA self-employment tax has no ceiling, and 15% of that $360 million goes to FICA, let me know--but don't hold your breath.) Am I politically powerless? Yes. I could go on, but you get the idea.

The actual political structure of the U.S.A. has roughly three moving parts: the Elite Maintaining and Extending Global Dominance (EMEGD), The Cowboys, and the peasantry/debt-serfs/occasionally-voters.

Most people don't understand the structure of the Elite because it's complicated. One of my old and dear friends earned a doctorate in cell biology at UCSF, and she had a poster depicting the immune systems' dozens of interacting cells.

The Elite is very much like the immune system: very complex, with hundreds of moving parts which interact on various levels to maintain the organism--in this case, the United States' global dominance. At a very superficial level, some pundits have sought a Master Control in the Trilateral Commission or similar elite gatherings. Such groups are certainly one cell within the EMEGD, but each is no more important than other parts, just as killer T-cells are just one of dozens of cell types in the immune system.

To be a part of the Elite, you need only be willing to carry water for one of the essential power structures. Many technocrats are members of the Elite, and they are rewarded with positions like Under Secretary of the Treasury or Assistant Deputy Attorney General or Deputy Director of the C.I.A. and the like.

Elites are also woven into the world of corporate interlocking-directories, where someone "liberal" like Hillary Clinton sat on the board of rabidly anti-union Wal-Mart for years. Conflict of interest? Are you kidding? You want to be a Player, you carry water whenever and wherever you have to. T

o be a power player, though, you need connections, which are most easily gained via a "good birth" and all that follows from that: elite prep schools, elite universities, powerful mentors, plum positions as first jobs, and so on.

Power and money are often confused as being one and the same. They are not. Andrew Carnegie was immensely wealthy, but he was not a player. He was a safely apolitical "do-gooder," just as Warren Buffet and Bill Gates are safe little "do-gooders," giving PCs to libraries and funds to eradicate nasty diseases. Now if Bill Gates were to give $100 milion to Ron Paul's campaign for Presidency, he would immediately become a threat, and moves would be made to bring him round or undermine his ability to influence matters of actual importance to EMEGD.

Put simply: $100 million spent relieving pain and suffering makes you a harmless do-gooder. Spending $100 million to buy some seats in Congress makes you potentially dangerous. But most people with that kind of wealth are securely in the Elite, because their wealth ultimately flows from MEGD--the global dominance of the U.S. which ensures a market for their products and services, and guarantees access to emerging markets.

Another hopelessly naive view of the EMEGD is to see global corporations as the ultimate Power Behind the Throne. This is as misguided as thinking macrophages are the entire immune system. It isn't that simple. Sure, corporations provide donations and soft power, but they're just one node. To say that corporations led the U.S. into war in Korea or Vietnam is just plain wrong, and reveals how simplistic reductions of EMEGD are inevitably misleading. I

n the Big Picture, Microsoft, IBM, Coke, et. al. are bit players in the Game of Global Dominance. At the top level, the game is going very well for the U.S., despite the "bad press" and all that nonsense about the Decline of Rome.

China has been brought into the game, and is a key supporter of U.S. global dominance. Sure, we let them have the Olympics--a real money-pit--but basically the deal all goes "our" way: in exchange for a 100 million jobs, which keeps their peasantry in line and enables the Communist Party Elite to maintain and extend their power, then China buys all the worthless money we print, enabling the U.S. to print off $1 trillion to pay for the Iraqi adventure with virtually no sacrifice required by U.S. peasants (except those in the military) or the elite's interests.

Can you believe what a sweet deal this is for our Elite? The Chinese take on all the risk of a dollar collapse for a lousy 4% interest, and they also accept all the industrial pollution. Since they were pressured into allowing foreign ownership, Western corporations have been minting profits in the hundreds of billions by making stuff in China. In exchange, China gets the jobs--at least until the recession kicks in, or the factories move on to Vietnam and Africa.

Some naive souls expect China's own middle-class to support its industry. Nice fantasy, but the reality is the U.S. consumer is 20% of global GDP, and the 25 million truly middle-class Chinese are less than 1%.

When it all blows over, what is China left with? An oil-rich neighbor to the north (Russia) which is hardly a close ally, U.S. allies or trading partners to the south (Communist Vietnam would love to poach some industry from their Communist "friends" to the north), an Islamic hotbed to the West currently being subdued by the U.S., and to the East, a resurgent Japan and the wealthy island state of Taiwan, which the U.S. may or may not defend but which already owns a big piece of the mainland.

The U.S. plays coy about defending Taiwan because, well, that's in "our" interest. If we decide it's not worth it, then we abandon Taiwan, just as we did the Kurds and many other suckers who believed our promises. But if it's in the interests of Global Domination to defend Taiwan, well, China better be careful. The smart play is often ambiguity, because the other side has to guess--and they know they might guess wrong.

If you think a "Democratic" president isn't going to approve the development of a new family of smaller, more "practical" nuclear weapons--prepare to be disillusioned. The Chinese maintain about 100 long-range nuclear-armed missiles for "deterrent." Not a bad idea. The U.S. maintains several thousand strategic nuclear weapons and thousands more tactical (battlefield) weapons. To quote from my January 30 entry Vulnerability, or, Thinking About the Unthinkable:
Just for comparison's sake: The U.S. maintains 18 "boomers" (Ohio-Class Fleet Ballistic Missile Submarines--SSBNs), each armed with 24 D-5 Trident missiles, which are each armed with 5 independently targetable warheads (MIRVs). Each U.S. SSBN thus carries 120 nuclear warheads, launched within one minute and deliverable anywhere in the world. That's 2,160 nuclear warheads distributed among 18 very-hard-to-locate boats. Not all are at sea at any one time, but catching a few in dock would still leave 1,500 or so nuclear weapons available for a counter-stike. What nation would chance absorbing even one SSBN's load of 120 nuclear bombs?

Most of China's wealth is concentrated in a narrow band along the coast. Just one "warning" nuke on the Three Gorges Dam would do more harm than the Chinese nation could possibly afford. If you don't believe the U.S. would deploy nukes if "our interests" were at stake, I can only quote The Mogambo Guru: hahahahaha.

Sure, it's "only" military power. And yes, the U.S. is vulnerable to nuclear attack, too. But if push comes to shove, which military would you rather own?

Ditto for energy. Those without a thorough understanding of global reach are beating the drums about China's forays into Africa, but this is a sign of weakness, not strength. The U.S. has Mexico and the Mid-East wrapped up, so Africa is the only game left to the Chinese (and most of the big oil fields in Africa like Nigeria are wrapped up as well).

They've played there before, with zero success. Back in the Cultural Revolution days of solidarity masking global ambitions, the Chinese built entire railways in Africa. And what did they get out of it, long-term? Zip, nada, zero. So while the U.S. controls the big oil fields of Nigeria, the Chinese are forced to gamble for influence with the most treacherous, most hated regime on the planet, Sudan, for a few million barrels of oil.

Are they buying access, buying allies, or really supplanting the West? Time will tell, but the history of the past 50 years suggests political turmoil at home will reel in global ambitions and adventures fast.

EMEGD takes a long view. Sure, Chavez in Venezuela nationalized oil and is trying to build an alternative power structure, but he is, after all, limited to one lifetime. Like his mentor Castro who is dying, any dictator/despot/wonderful hero can only last a few decades. Once he's gone (or overthrown), then the EMEGD can "support responsible alternatives."

Consider India. After jettisoning its ill-advised and ultimately worthless alliance with the defunct USSR, India is now a new U.S. ally--and in exchange for that alliance, the U.S. just slapped their wrist for getting nukes. And what does the U.S. get out of it? Nukes aimed at Pakistan, should that country ever threaten U.S. dominance, and a huge source of talent for U.S. global corporations, and new markets for U.S, goods. Oreos and hip-hop, baby. The dominance is on all fronts.

You might have thought it was a joke when U.S. troops played Jimi Hendrix's "Voodoo Child" over the loudspeakers to freak out General Noreiga, who was on his way out as frontman of Panama--that was no joke. Rock-n-roll and hip-hop are the "cultural shock troops" of U.S. domination--which is domination not just of financial and military assets, but of mindshare and cultural values.

Think about it: what has Germany, Japan or China "occupied" in mindshare in the global space? Hello Kitty, manga and. . . zip. Sure, dilettantes love War Kung-Wai, but on a global stage . . , have you seen a Bollywood film recently? The moves are hip-hop, the look pure Hollywood knock-off. The guy gets off the helicopter in shades and a three-day beard . . .

On to Iraq, where the Grand Strategy is playing out to the long-range benefit of the U.S., even if the actual war was botched by an incompetent administration and the U.S. military is suffering from the strain. But hey, EMEGD plays a long-term game--did you notice those U.S. Military bases in Japan and Germany, 60 years after the war ended?--and a couple thousand KIA a year is no big deal--it's not their kids dying, after all, and besides, a little war trains a new officer corps and allows the "fighting spirit" of the U.S. an outlet.

For if there's one thing the Elite understands, it's that the U.S. population is feisty and doesn't mind mixing it up when challenged. The Germans and the Japanese really didn't read the U.S. character well (i.e. "a nation of mongrels") and ironically, their challenging the U.S. enabled the U.S. to dominate both Europe and the Pacific for the duration.

My own father told me he bought two used cars as a senior in high school because he figured he would die in World War II (he enlisted in the Navy right out of high school in 1944) and he reckoned there was no point in saving his wages. His brother served as a gunner in the 8th Air Force, which suffered combat losses of about 50%--yes, half the guys died. This was only exceeded by submariners in the Pacific.

If you imagine sacrifice and bravery ended in WWII, you probably don't know any 'Nam vets or people who have served in the Gulf Wars. Despite the horrific personal losses suffered in Korea and Vietnam, those "holding actions" didn't dim the nation's willingness to fight.

So allow me to predict the end-state of the Iraqi war: the U.S. will maintain bases deep in the desert near the Iranian and Syrian borders, and maintain close ties with the Kurds (despite our abject betrayal in 1991, we're still the only game in town). Much of the personnel will be Special Forces or equivalent (Rangers, elite Marine or Navy units, etc.) The bases will soon be forgotten because they're so isolated, no hopeful suicide-bomber can even get to close them. They'll be there for "goodwill" like all those missions in Africa you don't know about, and to remind the Iranians and Syrians that there are limits to what will be tolerated.

We have to take a broad view when we read about "Imperial over-stretch." The U.S. maintains 11 carrier strike groups (CSG), while the entire rest of the planet maintains four--three British and one French. (Neither military should be taken lightly. Did I mention they're U.S. allies?) India bought a defective Soviet carrier which may never put to sea, and the Chinese have aspirations, but as of now, all carries task groups are U.S. or U.S. allies.

Does a carrier task force solve Iraq? No. Does it resolve political dilemmas? No. But it does project power, which separates nations into two groups: those who can and those who can't. Regardless of the party, Republican or Democrat, any reduction in U.S. military force will be resisted by the Elite. Chairman Mao rather famously said, "Political power comes from the barrel of a gun," and the U.S. Elite very firmly agrees.

Here is what will mark Imperial decline: a volunteer U.S. Military of 25,000 hardy souls, and an army of 450,000 mercenaries. We aren't there yet, so all predictions of U.S. decline are premature. When we're all dancing to Chinese New Wave music and eating Chinese cookies and practising New Taoism (having left the Baptists), then the U.S. "hegemony" will be over.

But it isn't over yet, nor is that decline in the cards. For the EMEGD have resources beyond what the Islamic Revolutionaries or the New Russians or the Chinese Communist Party can even dream of. $1 trillion spent on a foreign war? No big deal. 11 carrier battle groups? No big deal. 10,000 nukes? No big deal. The list goes on. Hip-hop. $1 billion-grossing films. Technology--iPods, blogs, Web2.0, Google, you name it. The top 500 Global Corporations: all U.S. or U.S. allies or U.S. trading partners--a group in which I place China.

But in the Long View of the MEGD, there's rarely need for force. Hip-hop, KFC and Oreos are the real "shock troops" which are busily conquering Iran and Syria despite the frantic efforts of their ruling elites to muster the old tired ideologies of the past.

I know this sounds like an echo of U.S. Triumphalism, but it is simply a statement of fact. This is what drives frustrated French politicians to describe the U.S. as a "hyper-power," a force so pervasive that "super-power" does not do justice to its reach. If you research the U.S. military's presence in Africa--often a "goodwill" presence of medics--you will understand a tiny bit of the reach.

To play a little game to put things in perspective: which reins of leadership which would you want: Russia (declining in population, ruled by gangster capitalism, relying on declining oil reserves for its wealth), China (massive systemic corruption, widespread social unrest, horrendous pollution, huge unfunded social costs, heavy reliance on sales of manufactured goods to the West and Western investment, massive understated bad debts in the public banking sector, etc.) or the U.S.? Yes, the U.S. has a laundry list of huge problems, too--but be honest. Which set of conditions, strengths and problems would you prefer to own?

Yes, I anticipate a global recession, a decline in the dollar, and much suffering as a result of both. But to say the "hyper-power" is suddenly toothless and reduced to "only" military force--a skeptic has a hard time accepting such "politically-correct" views. Yes, there will be terrible costs to the U.S.--but these will be borne by the peasantry/debt-serfs, not the Elite--and therein lies the "universal truth" of the coming recession--in every nation.

One window into the Elite is the U.S. Presidency. Once you understand how it works, you realise just how illusory the two-party system really is. But that's the topic for tomorrow.

To view the chart, go to www.oftwominds.com/blog.html

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Housing Affordability: Crushed by Debt

Yesterday we considered the possibility that interest rates might rise for the next 15-20 years, effectively lowering the value of housing with each tick upward. Today let's consider affordability in terms of the percentage of household income which "should" go toward housing.

Back in the good old days, the calculation was simple: your mortgage payment shouldn't be more than a quarter of your gross income. This was also a simple calculation because few people had revolving credit or any debt other than a car payment.

No credit cards? You're kidding, right? I recall rather vividly the year my Mom started to complain about her Mastercharge bill (as Mastercard was called back then)--1968. Prior to that, a business type might have a Diners Card, which was not revolving credit but a charge card like American Express which had to be paid off monthly.

Sure, you might have had a Sears card, but the credit limit was $200--enough for a new washing machine or table saw and not much else. Credit was issued sparingly, and used sparingly. The typical limit on revolving credit was perhaps $1,000 or at most $2,000 in today's (depreciated) dollars--$500 was a big limit. Now just about all of us receive $20,000 credit-limit card offers every week.

Student loans? Nonexistent. Now people are still paying off student loans in their 40s, with their kids' college just a few years away. Talk about becoming debt serfs. Take a look at this chart and notice that deficit spending (living off borrowed money) has been the order of the day, violating decades-long trends of fiscal prudence. Frequent contributor Harun I. provided this insightful commentary on the topic: (emphasis added by me)

'I like to run and bike ride. As I ride and run through neighborhoods and look at the local real estate rag the whole affordability question has been nagging me. Anything listed at your modest $250,000 is a shack I wouldn't want Ned-the-wino to live in and yet people are buying homes $300,000 and up like everything is okay.

About.com's description of debt to income ratios

U.S. Census Bureau's Three-Year-Average Median Household Income

Call me old fashioned but consider the link that shows "traditional" debt to income ratios and then look at the link showing median incomes by state.

If we agree for the time being that traditional debt to income ratios were fiscally sound then for someone to afford your modest $250,000 the household income based on the first number would have to be $1,875 / .28 X 12 = $80357.14 annual gross salary. (I am not going to consider recurring debt because median household incomes simply don't support current prices using any sort of fiscal responsibility to begin with.)

This leads me to believe that most people are in over their heads and the problem is not just confined to sub prime borrowers. Considering the numbers above even many prime borrowers have bought more house than they could comfortably afford. With mortgage debt to income reaching into the 40-60% levels before we consider any other debt and living expenses it is no wonder that the savings rate is negative. We passed the affordability curve long before sub-prime became an issue.

With MEW (mortgage equity withdrawal) effectively shutdown people are turning to credit cards to stay afloat but how long can that last? With unemployment at historic lows the only place to go is up. Even if one person losing a job in a household will cause chaos. I think foreclosures will work their way up the food chain regardless of credit score."

As I write this Thursday, the stock market is down due to the "surprising decline" in retail sales. Meanwhile, the market was up just days ago on the "surprising rise" in consumer debt. No need to connect the dots--they're so close they're touching. As these charts show, consumers have been living off borrowed money for years; household debt has leaped. As an exercise, let's take the median household income of about $45,000 and see how much house that supports in a traditional (i.e. prudent) setting.
$45,000 X .28 = $12,600
$12,600 / 12 = $1,050 /month
$200,000 mortgage X 6% interest rate = $12,000 /year
$12,000 /12 = $1,000 / month

If we account for principal as well as simple interest, then a mortgage of about $180,000 looks do-able. With a traditional 20% cash down payment of $45,000 (try not to laugh too hard--as if that ever happens any more) then the median household income would support buying a $225,000 house ($45K down, mortgage of $180K).

The median price of a house in the U.S. is about $215,000, so on the surface things look reasonably aligned. But we all know home values on the heavily-populated coasts are much higher than $215,000, The income is higher, too, but not by as much as you might think. California's median income is about $50,000--certainly not enough to justify median house prices in the $600,000 range.

If we factor in non-mortgage debt--auto loans, student loans, and credit cards--then the actual earnings left for mortgage debt service is lower than such traditional ratios as "28% of gross income" assume.

Simply put: people are carrying much higher consumer debt loads than ever before, and devoting a larger share of their income to servicing that debt than ever before. The actual net income left to service mortgage debt means the actual debt-to-income ratios are far higher and far less fiscally prudent than in decades past. To repeat Harun's question: With MEW (mortgage equity withdrawal) effectively shutdown people are turning to credit cards to stay afloat but how long can that last?

If you consider these charts, the answer is: not very long.

Check out the new entries in This Week's Readers Journal: Fred Roper on national health insurance, Loretta N. on housing and consumer debt and Alan D. on housing and the view from Canada.

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Interest Rate See-Saw

It's a given that rising supply (inventory) and slackening demand (fewer buyers) lead to price declines in any market--for instance, housing. Since interest rates fell for an entire generation (22 years) from their peak in 1981, the relationship between housing prices and interest rates has been largely forgotten or at least neglected.

As interest rates rise, the "see-saw" of higher rates and dropping house values will place pricing pressure on even the most desirable housing. Here is a simple depiction of the relationship:

please go to www.oftwominds.com/blog.html to view the charts

The current quasi-religious belief in "low interest rates will last forever" runs against both history and the inevitable decline of Chinese support of our low interest rates via their stupendous, unrelenting, trillion-dollar buying of our low-return Treasury bonds: As this chart reveals, the only reason U.S. interest rates have stayed low is the Chinese have poured virtually all of their dollar surpluses into U.S. Treasuries.

Interest and mortgage rates, as I have often noted here, aren't set by the Federal Reserve, but by the market. If there is huge supply (our government selling hundreds of billions in new bonds and rolling over hundreds of billions more each year) and slackening demand (the Chinese have announced they're diversifying their holdings into other currencies), then rates will have to rise, regardless of what's happening behind closed doors in the Fed or in the U.S. housing market.

History also suggests (see chart) that interest rates move in about 20-year cycles. We have clearly ended the cycle of declining rates and are just beginning a 20+ year cycle of rising rates.

So what's this got to do with the value of U.S. homes? In a word: affordability. The majority of home buyers are not cash-rich foreigners seeking investment property, but working stiffs whose chief concern is "making the monthly mortgage nut." As shown on our charts, a buyer with an adjustable-rate mortgage at 4.5% was able to "afford" a $500,000 mortgage with a "monthly nut" of $1,875. (For simplicity's sake, the principal payment has not been included.)

Alas, were interest rates to rise to 9%--historically, not even a high rate--then the home buyer can only afford a $250,000 mortgage payment. That means the price of the house being purchased has to drop 50%. Some 6 million homes trade hands every year. Some small percentage are purchased with cash, meaning the buyers are immune to interest rate considerations.

But prices of all commodities are set on the margin. Which means the price of 100 homes in a neighborhood are set by the last house sold. Even if 99 of the homes were purchased for $500,000, the value will drop to $400,000 the moment a comparable residence in the area sells for $400,000. As interest rates rise, then the next house might sell for $350,000, the next for $300,000 and thre next for $250,000. It would only take a handful of sales to drop prices 25% - 50%, and in a much shorter period of time than the market thinks possible.

In a time of declining interest rates, buyers could "afford" more house because their monthly payment stayed the same even as their mortgage rose. The reverse will work the same way, only in the opposite direction: the same payment will support a smaller mortgage, requiring sellers to lower the price of their homes to what is "affordable" to buyers.

Another factor which has supported higher mortgages and monthly payments over the past 20 years has been rising income and wealth. There hasn't been a decline in consumer spending since 1991. An entire generation has grown up and matured in a "permanent" Bull Market in stocks, bonds and real estate and ever-cheaper borrowing costs.

But the coming recession of 2007-2011 will very likely see incomes and wealth both decline in absolute terms. This reduction in net income will further reduce buyers' ability to finance huge mortgages at higher interest rates. As interest rates rise, bonds fall in value, and as recession cuts corporate profits, the stock market will decline as well. All these forces together will reduce buyers' perception of their wealth (the "wealth effect") and reduce the bonuses, raises and dividends which added to their income during the past 20 years of prosperity.

Please see the Readers Journal for new commentary on healthcare costs from Michael S. and a new essay on the recent elections in France by correspondent/author John Kinsella.

Thank you J.B. ($20) for your unexpectedly generous donation via check. I am greatly honored by your support. All contributors are listed below in acknowledgement of my gratitude.

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Risk

You read a lot about risk nowadays--as in "falling risk premium" and "thirst for risk." Why is risk "falling" and why is everyone "thirsty" for more of it? To outline the global nature of the situation, let's look at a story in the May 8 Wall Street Journal: Asia Taps Thirst for Risk:
Onetime Asian corporate basket cases are seeking investors, and foreigners are lining up to buy their stocks and bonds, as hedge funds and institutional investors -- many sitting on cash piles -- scour the globe for new ways to deploy their money.

Leading the way: Family-owned conglomerates whose borrowing binges a decade ago gave them a starring role in the Asian financial crisis of 1997-1998. Among the most recent is the family of Indonesian tycoon Eka Tjipta Widjaja. In 2001, one of its companies, Asia Pulp & Paper Co., was responsible for the largest emerging-market bond default in history: $13.9 billion.

Investors are still trying to get their money back. Nevertheless, last month another Widjaja company raised $540 million in a share placement on the Singapore stock exchange. After the placement, the Widjajas have a 48.5% stake in Singapore palm-oil company Golden-Agri Resources Ltd."

Allow me to summarize. Here are folks with a track record of defaulting on debt, and people are lining up to throw more money at them. Huh?

The reasons why the world is "awash in cash" are numerous--the yen carry trade, the U.S. trade deficit which dumps $800 billion into foreign coffers every year, the high savings rates in Asia and Europe, etc. But this does not explain the complete abdication of caution which now characterizes global financial markets. Here is the reason in a nutshell: free money.

The global money supply has grown by 18% a year for the past four years, even as global GDP growth has averaged about 4%. Clearly, money is being created a rate far exceeding actual economic growth. As a result of all this "liquidity" (cash, cash to lend, cash to borrow), then rates are low.

Let's say you could borrow $1 million for $1,000 a month. Would you be tempted to do so? Hey, why not? Couldn't I just park the million in Treasuries and earn $3,300 a month? That's the "Yen Carry Trade" in a nutshell.

How about buying a "spec home" with no money down, no closing fees and a monthly payment of $750? I mean, what have I got to lose? Nothing! If I can flip this house in six months, I've risked absolutely no capital and stand to pocket a hefty gain. That's the speculative housing market in a nutshell.

What if someone handed you $100,000 in free gambling chips at a casino. Would you play the "safe" game of blackjack, or would you be tempted to "try your hand" at the high-risk, high-return games like roulette? Most people would feel free to "risk" some "free money" on high-risk games because the perceived risk--hey, it's not even my money! If I lose it all, so what?--is near-zero.

When anything is free, it's wasted, squandered and risked without caution. Garrett Hardin's classic paper The Tragedy of the Commons, (Wikipedia entry) outlines how "the commons" of air and water become polluted--they're "free" to each individual. Those with gold-plated healthcare insurance pay nothing for every doctor's visit and every drug prescription, and lo and behold, they go often and take a staggering amount of medications. Those who pay cash for care and medications go rarely and use little.

We as a people have squandered $1 trillion in Iraq and hundreds of billions of borrowed money--"free" because you don't get the interest bill--on one fiasco after another. Frequent contributor Michael Goodfellow sent in this interesting blog on Iraq and New Orleans: New Orleans Isn't Very Different from Baghdad!

So how long can the global orgy of "free money" "invested" in risky bubble markets continue? That is unknown. We do know one thing: the misallocation of so much capital on such a stupdendous scale is setting the stage for financial losses on a scale previously unknown and currently unimaginable.

We are seeing the very first tentative tremors in the inverted global debt pyramid. Here in the U.S., it's the meltdown of subprime lenders--and those who bought that risky debt. For a look at the aftermath of one subprime mortgage lender, frequent contributor U. Doran recommended this article from The New York Times: A Cross-Country Blame Game: (free registration may be required)
"Visitors to Ownit Mortgage Solutions’ offices here are met by an abandoned reception desk and three dying potted plants that appear to have gone months without water. How appropriate.

Ownit filed for bankruptcy protection late last year; since then, several companies that specialized in loans to people with weak, or subprime, credit have followed it into bankruptcy as the once-thriving business has withered on the vine. Gone are the lavish parties, the extravagant trips and the executive salaries and sales commissions that routinely topped a million dollars.

Lenders like New Century Financial and Ownit, many of them based in Southern California, have cut an estimated 12,000 mortgage jobs in California since the start of 2006, according to MortgageDaily.com, a trade publication. Nationally, 16,000 jobs have been lost. What used to be a profitable partnership between subprime lenders and Wall Street banks has now degenerated into a cross-country blame game."

For another expose on how little risk management was performed by subprime lenders, Michael Goodfellow recommended this article from The Washington Post: Pressure at Mortgage Firm Led To Mass Approval of Bad Loans.

If you want to see an actual prospectus for a derivative, U. Doran kindly sent in the description of the beach-party-fun named Surf 100 AAA/AaaCPDO: A Breakthrough in Synthetic Credit Investments and this dated but still incisive report from the Brookings Institution: Somebody Turn on the Lights (November 1999).

Several readers (U. Doran and Cheryl A.) recommended this piece as well: Derivatives: Glowing Revelations.

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