This chart jibes with other analyses I have run here showing that the economy peaked around 2000, and the so-called Bush “recovery” was completely phony. What happened was that Fed Chairman Greenspan, re-appointed by Bush and backed by him, panicked after 9/11/2001 and inflated the dollar to record highs, which caused inflation. That’s why gas today costs four times what it did in 2000.

The inflation also goosed stock prices — but it all was fake. The Great Recession didn’t begin in 2007 or 2008, but in 2001.

President Obama and Fed Chairman Ben Bernanke only have continued the Bush-Greenspan inflationary folly. And new Fed Chairperson Janet Yellen so far is giving us even more of the same.

It’s mainly Republicans who are responsible for this. Reagan’s tax cuts of 1981 and 1983 sparked the huge increase in the real value of stocks, as with the rest of the economy, as the chart shows. Then in the late 1990s, the Republican Congress, led by House Speaker Newt Gingrich, worked with Democratic President Bill Clinton for tax cuts and budget restraint.

But Bush, Greenspan and Bernanke all are Republicans. And the Republican congresses of the early half of the 2000s — after Gingrich left — also were in charge and could have changed things, for example by putting us back on the gold standard.

Republicans’ campaign slogan this fall should be, “Give us more seats in the House and control again of the Senate so we can be just as irresponsible as we were 10 years ago.”

“Since 2008, the number of people who call themselves middle class has fallen by nearly a fifth, according to a survey in January by the Pew Research Center, from 53 percent to 44 percent. Forty percent now identify as either lower-middle or lower class compared with just 25 percent in February 2008.

“According to Gallup, the percentage of Americans who say they’re middle or upper-middle class fell 8 points between 2008 and 2012, to 55 percent.”

There are many bipartisan culprits. But let’s just finger one here: the Federal Reserve Board. The Democrat Paul Volcker, Fed chairman from 1979 to 1987, was the last one with decent policies. He was appointed by Democratic President Jimmy Carter. Volcker crushed the “stagflation” — stagnation plus inflation — of the 1970s with tight money and high interest rates. Prosperity ensued, also due to Republican President Reagan’s 1981-83 tax cuts.

Volcker gradually cut interest rates. But he kept rates always about 2 percentage points above the inflation rate. That way, people could save money in their passbook savings accounts. They could build for the future.

Reagan mistake

He was replaced in 1987 when Reagan appointed fellow Republican Alan Greenspan as Fed chairman. Greenspan later was re-appointed seemingly endlessly by Republican President George Bush Uno, Democratic President Bill Clinton and Republican President George Bush Dos.

Greespan was good for a while. But after the 9/11/2001 terrorist attacks, Greenspan panicked, inflated the dollar and cut interest rates to zero for most of his term. Doing so funneled too much money into the supposedly fragile economy. But meant the middle class couldn’t save money on its passbook savings accounts. Inflation came rushing back — that’s why 99-cent gasoline in 2000 now is $4.00 — also crushing the middle class.

Bush Dos appointed the next Fed chairman, Republican Ben Bernanke, in 2006. Democratic President Barack Obama re-appointed Bernanke in 2010. Bernanke continued the Greenspan policies. Along with the other bad policies by presidents and Congress (not covered here), the Greenspan-Bernanke zero percent interest rate policy set the middle class up for the Sept. 2008 economic collapse.

Zero percent

Zero interest rates mean money cannot be saved the normal way. With inflation at least 2 percent (probably more like 8 percent), the middle-class’s savings are drained away. Credit-card interest rates of up to 30 percent also gouge the middle class.

With people unable to save the normal way, they lose money on passbook savings, don’t invest or put what little money they might have into stock market speculation. The Fed inflationism also pours artificial money into stocks. Hence, the record stock prices of recent years, mainly benefitting the rich. But the “prosperity” all is fake, based on money creation and low interest rates.

Obama just appointed Democrat Janet Yellen as Fed chairperson. She said she will continue the Greenspan-Bernanke zero interest rate policy “for some time.” So the Fed will continue to gut the middle class, which just can’t save to lift itself up.

The middle class gets gouged for everything and by both parties: Zero percent interest rates on passbook savings, 30 percent interest rates on credit cards, preposterous college debt, declining pay levels and high inflation.

It’s a bipartisan, 13-year ripoff of the middle class.

And eventually this house of cheap credit tricks will fall down.

Here’s a YouTube of famed investor Jim Rogers. He points out that the 2007-09 recession was so bad because of the massive debt run up from 2001-2007 under the Republican Bush administration and the mostly Republican Congress. By contrast, the 1999-00 recession wasn’t so bad because, it’s hard to remember, we actually had surpluses for two years, thanks to Democratic President Bill Clinton and the Republican Congresses of those days.

As Rogers points out, the next recession will be a doozy because the debt now is much higher even than it was in 2007.

Fed Chairman Bernanke, as Rogers says, has brought us “prosperity” only by printing money and keeping interest rates at 0 percent. Lucky him, he’s leaving office soon and won’t get blamed for the crash (except by guys like Rogers and me).

This deep recession, perhaps a Depression, will hit California’s state and local finances harder than the 2007-09 recession did. We’re going to see more bankruptcies. Instead of increasing spending and insisting California is “back,” Gov. Jerry Brown will be forced to cut spending again.

With Halloween approaching, to quote my Michigan landsman Alice Cooper, “Welcome to my nightmare.”

By Chriss Street

Last week in my article here, “Misery Index about to soar in CA, US,” I warned that a rise in a combination of inflation and unemployment, known as the Misery Index, could “distort financial markets.” And it could result in “significant capital losses” on their huge bond investments of the U.S. Federal Reserve. These distortions and losses would slam the economy, especially in California.

This week, Morgan Stanley heightened those concerns by stating that, if the economy contracted and inflation continued to rise, the U.S. government could suffer a loss of $547 billion on the Fed’s massive portfolio.

Given California’s heavy dependence on federal spending, the state’s treasury would be hit hard. According to a study by the California Budget Project, “In federal fiscal year (FFY) 2010, which ended September 30, 2010, $333.8 billion in federal funds came to California. Most of those dollars went directly to Californians without passing through the state budget.” Most of that money went to Social Security, Medicare, military pensions and other direct payments to persons.

Also, the study found that, for the state government, federal spending was “$91.5 billion in the 2010-11 budget — approximately 40 percent of total state expenditures.”

If the Fed’s portfolio loss leads to reduced federal-budget expenditures, California would lose the most of any state.

Bernanke testimony

In his semi-annual testimony to Congress on monetary policy and the economy this week, Federal Reserve Chairman Ben Bernanke was forced to try to reassure financial markets that there was only a very low possibility of an imminent financial crisis.  He calmly said, “Where the problem still remains unaddressed is in the longer term. And so it doesn’t quite match to be doing tough policies today when the real problem is a somewhat longer-term problem.”

Bernanke went to great lengths to make the case that central bank money printing and bond speculation were prudent stimuli to reinvigorate the American economy. He specifically pointed out that Fed’s easy-money policies have held down interest rates and helped a revival in the housing market and car sales.  The chairman also pointed out how a weak job market was more responsible than the Fed for keeping inflation low.

But as I had pointed out, the low inflation rate reported in of the Consumer Price Index has been dramatically understated because 41 percent of the index is real estate returns, which have been down over the last four years. And according to the McKinsey Global Institute Commodity Price Index; the prices for food, raw material, metals and energy prices rose over the last four years to historic highs.

During the same period, the price of a gallon of gas rose by 132 percent. And recently the costs of food rose by 8.1 percent. Now that the Fed money-pumping is providing below-market interest-rate financing, real estate inflation is jumping and the CPI will soon spike higher.

Sequestration

President Obama has been desperate over the last two weeks to try to avoid the 2 percent federal spending cuts that are part of the financial sequester.  But even after this modest reduction is implemented, the Congressional Budget Office projects that, over eight years, his administration will have engaged in $7.5 trillion in deficit-spending  and the national debt will almost have doubled.

Bernanke tried to help the president’s cause by uttering the usual concerns that suffering by millions of long-term unemployed was good reason to not make cuts until the economy recovered.

Bernanke was given good marks for his congressional performance.  The stock market rebounded and Diane Swonk, chief economist at Mesirow Financial in Chicago, said of Bernanke’s testimony, “Those worried that the Fed may end large-scale asset purchases prematurely should be reassured.”  But as I remember, those nice folks from Chicago were also very positive in November 2008 with the election of Barack Obama.

Wasn’t that right before the last financial crisis, where the stock market lost 50 percent of value and unemployment skyrocketed to more than 13 percent in California?

CHRISS STREET & PAUL PRESTON

Present “The American Exceptionalism Radio Talk Show”
Streaming Live Monday through Friday at 7-10 PM
Click here to listen:  http://www.ustream.tv/channel/american-eceptionalism-news

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By Wayne Lusvardi

Those desperately in search of a cure for cancer will often try apricot pits bought in Mexico, exotic herbs or light therapy treatments. None has been proven to be effective.

In an action with direct implications for California, the Federal Reserve Bank is conducting a third desperate round of “quantitative easing” as the therapy of last resort, what it’s calling QE3.

Quantitative easing is a sophisticated indirect way to print more money without having to use a printing press.  This process was once described as similar to dropping dollar bills from a helicopter by no less than Ben Bernanke, the Fed’s chairman.  Thus his nickname, Helicopter Ben.

Wise voters know that any nostrum or treatment peddled right before an election is often likely to be snake oil.

QE3 is hospice care for the terminal debt crisis. It will get money flowing around the economy when the conventional economic stimulus method of cutting interest rates no longer works because the Fed already cut interest rates close to zero, and so can’t cut them any more.

Quantitative easing magically creates new money.  The Fed just increases the size of the accounts of in its member banks.  It then buys mortgage assets of banks so that the banks have more money to put into circulation.

Ben’s QE3 a boom for Bakersfield and Berkeley….

QE3 will push up the price of any commodity, whether it is houses, gold, food, or oil.  By weakening the purchasing power of the dollar, it boosts demand for hard financial assets and essential goods.

This means that communities in oil rich Kern County are experiencing a boom.  Bakersfield is already reported to be experiencing an economic “recovery” because of QE1, QE2, and now QE3, which is already four months old.

It also pumps up demand for housing with near-zero interest rates and escalating home prices occurring at the same time.  Bakersfield home prices are up 7.0 percent since last year. The 30-year mortgage rate for Freddie Mac was 3.55 percent last week, with monetary inflation for the past year running 2.4 percent.  The effective mortgage rate after inflation is about 1 percent. But after QE3, it may be a net zero percent, which is effectively free money.

According to Ruchir Sharma of Morgan Stanley Bank, in 2009 the lowest income groups had to spend 41 percent of their after-tax income on gasoline and food, with little money left over for luxuries.  Conversely, the top income brackets spent only 2 percent of their incomes on gasoline alone, which was only 25 percent of what the poorest income bracket spent.  All that QE1 and QE2 did was boost the stock market, which benefited the wealthiest 10 percent of the population that hold 75 percent of all common stocks.

This means that wealthy communities along the California coastline, such as Berkeley, are likely to be less damaged by the effects of QE3.  And cities like Berkeley have a higher percentage of homes with built-up equity that can be used to downsize into more affordable housing or serve as collateral for small business loans.

Those who have an oil-related economic base, like Bakersfield, and a low percentage of underwater mortgages and trust fund wealth like Berkeley are able to weather the storm of inflation better.

… and a bust for San Bernardino …

Even though home prices are also up 7.0 percent in San Bernardino, the effect of high gasoline and food prices from QE3 will make it hard for a housing recovery without an accompanying increase in jobs and incomes.  San Bernardino County doesn’t have the oil jobs boom that Kern Count does.  And it has a high percentage of home foreclosures and underwater mortgages.

All that QE3 will likely do in places like San Bernardino is penetrate through the inflated price of housing and stocks to higher prices for gasoline and essential goods.  This will result in less money to save up a down payment for a home.

According to Richard Green, director of the U.S.C. Lusk Center of Real Estate, “The constraint that is keeping people out of the housing market is absence of equity [down payment].  The drop in house prices means that many borrowers are underwater on their houses, and high unemployment has prevented potential first-time buyers from accumulating down payments.”

… as well as a bust for Gov. Brown’s Tax Increase Proposition

Sharma also said, “Inflated prices for commodities like oil carry the seeds of their own destruction, because the higher they rise, the more likely they are to stall the economy.”

Sharma reported that speculators are betting on QE3 diluting the dollar and driving up oil prices, thus putting the United States right back into another economic recession in 2013.

More inflation of gasoline and essential goods may spell doom for Brown’s Proposition 30 tax increase proposal on the November ballot.  Prop. 30 mainly would hit taxpayers making $250,000 or more a year. But voters aren’t likely to vote for a tax increase that doesn’t reduce their higher gasoline and foods costs and provides new private sector jobs.

As economist Michael S. Rozeff noted, QE3 is driving up government bond rates and the cost of government borrowing: Higher government bond yields are “a far larger negative to the government than any minuscule decline in mortgage yields” from lower interest rates or QE3-induced inflation.

QE3 is a treatment for the debt cancer that continues to spread in California. But it would only make the bottom-line economy worse for most households.

Politicians should be reminded that those afflicted with the QE3 debt cancer will still vote with their pocketbooks and don’t want political placebos.

(Editor’s note: The paragraphs in boldface were corrected from earlier versions.)

By JOHN SEILER

Californians keep looking for ways to boost our economy, which also would bring in more revenue to the state government. The Legislature still is struggling with a budget deficit of about $15 billion, after $10 billion in cuts were made.

Here’s an idea: Switch to using the Mexican peso as a currency.

Look at the following graph of the Mexican peso’s rise in value, from the x-rates.com site:

It clearly shows the peso rising against the dollar the past six months by about 10 percent. If that trend continues for the next six months, as it likely will, then the increase in the peso’s value for a full year would be about 20 percent.

So, if California were on the peso standard, our economy would be 20 percent larger for all of 2011, than it will be on the dollar. And tax receipts, therefore, would be about 20 percent higher.

With tax receipts anticipated to be about $75 billion this year, moving to the peso would mean collecting about $15 billion more. That’s a number even larger than the $12 billion in tax increases Gov. Jerry Brown is demanding.

It used to be that the peso was the weaker currency, periodically being devalued by its central bank. For example, in 1994, the U.S. government forced Mexico to sharply devalue the peso during what was called the “Mexican peso crisis.”

Now, the roles are reversed, with the Yanqui dollar the weaker currency.

Hayek Explains It

This is why the great economist Friedrich Hayek, a Nobel laureate, recommended that countries end their fixation with having one national currency. He said said people and businesses — and state and local governments — should be allowed to use any currency deemed best, including using commodities such as gold or silver.

His essay, “Choice in Currency: A Way to Stop Inflation,” explains his reasoning. He wrote:

But why should we not let people choose freely what money they want to use? By “people” I mean the individuals who ought to have the right to decide whether they want to buy or sell for francs, pounds, dollars, D-marks, or ounces of gold. I have no objection to governments issuing money, but I believe their claim to a monopoly, or their power to limit the kinds of money in which contracts may be concluded within their territory, or to determine the rates at which monies can be exchanged, to be wholly harmful.

At this moment it seems that the best thing we could wish governments to do is for, say, all the members of the European Economic Community, or, better still, all the governments of the Atlantic Community, to bind themselves mutually not to place any restrictions on the free use within their territories of one another’s—or any other—currencies, including their purchase and sale at any price the parties decide upon, or on their use as accounting units in which to keep books. This, and not a utopian European Monetary Unit [which turned out to be the Euro], seems to me now both the practicable and the desirable arrangement to aim at.

Legal Tender Laws

Unfortunately, current U.S. legal-tender laws allow only the dollar, which is inflating rapidly, for use in the United States. Current law reads:

“Section 5103 of title 31, United States Code

§ 5103. Legal tender

United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.”

However, the Tenth Amendment Center points out that this law is unconstitutional:

The 1862 statute conflicted with the Constitution in several ways. In the first place, it was an ex post facto law. It was retrospective or retroactive. It impaired contracts made before the date of the law. Article I, Section 9, which applies to the federal government, says: “No bill of attainder or ex post facto Law shall be passed.” Article I, Section 10, which applies to the states, says: “No state shall…pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts.…

Meanwhile, other states are acting:

Introduced in South Carolina legislature is House Bill 4501 (H4501), which if passed would make Gold and Silver Coin Legal Tender in the state. Cited as authority in the legislation is Article I, Section 10 of the Constitution and the principle of reserved powers under the 10th Amendment.

A number of other states are also considering similar legislation –click here to view the Tenth Amendment Center’s Constitutional Tender Laws Tracking Page.

In Utah in March, the state enacted HB 317, which stipulates:

This bill recognizes gold and silver coins that are issued by the federal government as legal tender in the state and exempts the exchange of the coins from certain types of state tax liability.

California could do the same — as well as extending “legal tender” recognition to the rapidly appreciating Mexican peso.

Mexican Gas

A possible effect of the switch to a Peso Standard for California would be much cheaper gas. And cheaper gas would mean higher living standards for Californians, as well as increased economic activity, a higher tax base and, therefore, higher tax collections for the state.

KHOU.com in Houston reported last Friday:

Mexico’s cheaper gas lures Texas border residents:

HOUSTON — To beat the high cost of gas, some Texans who are living near the border are filling up in Mexico where gas is cheaper.

Shopping for the best gas prices used to be one of the benefits for Americans living near the border, but these days many Mexican border cities with lower gas prices are coping with escalating violent crime.

Despite that fact, one gas station attendant said motorists from the U.S. are still filling up in Juarez, which is Mexico’s murder capital.

All gas stations are full service in Mexico. The government oil monopoly sets the price at the pump nationwide. Right now gas is about a $1 cheaper a gallon in Mexico.

In addition to adopting a California Peso Standard, it may take further legislative action to integrate California’s gasoline industry with that of Mexico. But surely something can be done. That way, you wouldn’ t have to brave the wild streets of Juarez to save money putting gas in your flivver.

Where’s Jerry?

There is a computer game and TV series, “Where In the World Is Carmen San Diego?”

So, I’m wondering: Where in the world is Gov. Jerry Brown? In his first turn as governor, 1975-1982, he was so quirkily innovative he got the monicker “Gov. Moonbeam.” The second time around, he seems determined to prove he’s just an aging union hack.

Well, we need some of the that old Moonbeam magic to seep back into him. He needs to start generating new ideas, good or bad. He needs to be the straw that stirs the drink, as Oakland A’s baseball star Reggie Jackson once said of himself.

The dollar is being wildly inflated by the U.S. Federal Reserve Board — what its chairman, Ben Bernanke, euphemistically calls “quantitative easing.” So, why not switch California to a Peso Standard?