Book: The Behavior Gap by Carl Richards

I recently read a good book entitled "The Behavior Gap" by Carl Richards and encourage you to read it. He writes that "...financial plans are useless...". Basically the author means that the "process" is vital but the "product" can be stagnant if it is based on a range of variables (no one knows for sure) combined with a long time period (that just compounds the inability to guess inflation rates, investment returns, etc.).

He uses cute "back of the napkin" simple charts that you can find at his website: http://www.behaviorgap.com

Here is an example quote from the book, "...decisions should be made on principles not on our feelings about what's going to happen...". The example he gives is someone who is unwilling to give up an investment that makes up too much of their portfolio. The principle: "...it is always a bad idea to have too much of your net worth wrapped up in a single investment..."

Aftershock Survival Summit

There is a video from NewsMax circulating the Internet entitled "Aftershock Survival Summit".

I am reminded of a quote from John Anthony Scott in his introduction to Sir Thomas More's book from the 1500's called "Utopia":

"...for the less a thing fits the hearer's ways, the less credence is it always given..."

So, since I disagree with the message in this video, I also give it less credence as the quote above warns me.

Here are my “9” comments on this NewsMax video (I actually read the entire transcript):

 

(1) The first stock market graph shown is misleading. In 2007 the DOW hit a high of 14,200 and today, though struggling now, hit 12,800 earlier in the year, so it is only off 10% from its high

(2) The graph on the drop in the dollar also looked precipitous but a close look at the graph shows it dropping from 88 -> 74 (it is a 16% drop but the graph was really misleading)

(3)  The Federal debt held by the “public” is smaller than the total debt. Newsmax reports the total.

(4) Somehow they tried to correlate stock market movements with personal income or GDP. It is not meaningful to do so. The stock market averages increases of 6-7%, GDP average 3% or so and personal income averages even less, so of-course, when you compare the market gains to these changes it looks like it is “off the charts” out-of-control. I disagree with this approach.

(5) Inflation of 30% or 100%. Silly. Oh yes, inflation is going to return (maybe 4-5% versus the 0-2% we have had for many years). Anyway, pure “scare tactics” to believe that the largest economy in the world would go through that kind of scenario. Printing money and money growth have not resulted in inflation to-date, in part, because to have meaningful inflation aggregate demand must outstrip supply and with unemployment at 9.2% it will be hard for this to happen. Not impossible, just difficult. 

(6) Yes, China and Japan own nearly $2 trillion of our public debt. So, if they decided to go elsewhere, where would they go?

a. Guess what? The U.S. – even if downgraded from AAA to AA is still the “safest” place to keep money

b. China and Japan need our US Treasuries just as much as we need them to hold them and buy more

(7) 36% of the U.S. debt, Newsmax says, is short-term. From this, they deduce that if interest rates go up, the U.S. interest on its debt will skyrocket

a. Hmmmm…if they are correct about the 36% (it does sound reasonable), then doesn’t that mean that 64% of the U.S. debt is held in longer-term securities?

b. In addition, how much do you think the interest rate was on 10-year U.S. Treasury bonds sold in 2001? 6-7%? Yes, and those are coming due now and being replaced by 10-year Treasuries being sold at 2.7-2.9%. And what about 30-year Treasuries sold back in 1981 at 16%+ rates?

c. WOW! So the interest rates could DOUBLE from 3% to 6% and it would have minimal effect on the interest paid on U.S. debt

(8) The graph on interest on the debt started at around $600 billion. Wrong. The interest on the debt today is about $260 billion and significantly less than it was just a few years ago when it was closer to $360 billion because of the rollover of older, higher interest bonds to lower rates today.

(9) Finally, their suggestions at the end of what people should do about the future crisis to enfold is:

a. Get a low, fixed rate mortgage and don’t pay it off early (I agree for the most part, 15-years)

b. Buy Gold through ETF’s or mining stocks (This is the way to buy gold, if you do, but I’d limit the amount to 1-5% of a total portfolio if at all).

c. Buy currency ETF’s (Many advisors recommend this but it is volatile and risky and, in my opinion, not necessary for most investors)

d. Subscribe to their newsletter (I will leave that up to you; personally, no)

ON THE BRINK by Henry M. Paulson, Jr.

It has been since March 22nd that I last wrote a blog entry. This first foray into writing again is a brief summary of Hank Paulson's book, On the Brink. It is a good book and I recommend it. It is a reminder of what we have been through, as he writes:

"...The crisis that began in 2007 was far more severe, and the risks to the economy and the American people much greater. Between March and September 2008, eight major U.S. financial institutions failed - Bear Stearns, IndyMac, Fannie Mae, Freddic Mac, Lehman Brothers, AIG, Washington Mutual, and Wachovia - six of them in September alone. And the damage was not limited to the U.S. More than 20 European banks, across 10 countries, were rescued from July 2007 through February 2009. This, the worst financial crisis since the Great Depression, caused a terrible recession in the U.S. and severe harm around the world. Yet it could have been so much worse. Had it not been for unprecedented interventions by the U.S. and other governments, many more financial institutions would have gone under - and the economic damage would have been far greater and longer lasting..."

Most importantly, Mr. Paulson writes, "...By early 2009, it was clear that our actions had prevented a meltdown..."

Actions by Dr. Ben Bernanke (Federal Reserve Chairman) and others at the U.S. Treasury and FDIC Insurance actions, "...stabilized the financial system, restarted credit markets, and helped to limit the housing collapse..."

Hank Paulson remains "...optimistic about the economic future of the U.S. and its continued leadership role in the global economy...." I also am optimistic and tired of the doom-sayers.

This book is well written and gives us all a chance to look back on the crisis and reminds us that we are now in "recovery mode" and, though slow, it is happening and there are encouraging signs all around us if we dare to look.

The Little Book of Common Sense Investing by John Bogle

Some highlights from this very good book by Vanguard founder, John C. Bogle:


(1) There are advantages to using financial planners and it is not investment selection. We provide peace of mind, can match risk with return (what so many individuals don't consider) and, most importantly, may help you stay the course (though some - not me - planners abandoned this during this crisis and let their clients forget their own strategy).


(2) The fund selection of institutional funds versus retail funds is of little consequence compared to index funds. The fees are less for institutional mutual funds but buying indexed funds eliminates this cost advantage. Stop trying to outperform the markets for all of your portfolio.


(3) Remember that any new paradigm of investing (and there are lots now after this market crisis) is always based on the past. If any strategy always exceeds the average return over the long-run, then all that means is that this particular strategy was consistently under-priced by the market during the period selected. Guess what? The question then should be not when to invest in this new idea but why was this strategy under-priced and why would anyone think that this under-priced situation would continue into the future?


Please read that again because this is a very important point.


(4) Wall Street is in the business to make commissions and the way to do that is to give the customers what they want. (This is why so many new ETF's are hitting the market in the alternative scene - long/short; bear 2x and 3x DAILY returns; commodities; single-country, etc.). These new funds take many months to come to market and by the time they do arrive, that methodology may already be old news and many times ineffective.


(5) John Bogle quotes Clifford Asness (of AQR Capital Management) with some simple, but not easy, advice for good investing (there happen to be 9, which I like for 9SimpleSteps):


DIVERSIFY - Keep invested in all asset categories

LOW COSTS - Index and low-expense ratios

REBALANCE (or REDIRECT) - If working, change your contributions not your existing balances

SPEND LESS - Less than you make

SAVE MORE - Calculate what you need in retirement (get help from a professional planner)

ASSUME LOWER RETURNS - Forget 10-12% average annual returns, be conservative

FREE LUNCH DOES NOT EXIST - If it is too good to be true, then it is false

STOP WATCHING THE MARKET NEWS - Forget the hype, no one knows tomorrow

WORK LESS ON INVESTING - Once your allocation is set, few things should side-track you, and you do not need an advisor to take 1-2% of your return year in and year out.


This book is an easy read and quite helpful to remind you that what you can control (risks and costs) are much more important than chasing returns.

Lords of Finance by Liaquat Ahamed (Part II of II)

After the stock market crash, came the recession that turned into the depression that became the Great Depression. This time around (2007-2009), the central bankers headed up by Dr. Ben Bernanke (who in my opinion has done a remarkable job) learned much from the mistakes of this earlier period and, indeed, avoided a catastrophe.

BABSON STATISTICAL ORGANIZATION (sounds similar to Morningstar today) provided charts and information on the markets based on two laws:

(1) The economy has ups and downs that operate according to definite laws

(2) Emotions are the most important factor in causing the business cycles

The Federal Government represented only 2.5% of GDP in 1929 (much nearer to 25% in 2009) and though they decreased taxes by 1% across the board it had little effect on the Wall Street collapse. The Fed reduced interest rates from 6% to 2.5% but again, too late to be effective.

During periods of investor fear, capital searches for security.

However, the banking system was allowed to fail and there was no FDIC insurance. In late 1931, Germany declared bankruptcy and refused to pay its debts to the world, the Bank of England dropped the gold standard and the Federal Reserve increased interest rates to 3.5%.

Production was down 50% (and some industries experienced capital utilization of as little as 12% of available capacity) in the U.S. and this was driving prices down at the rate of 7% per year. Can you say deflation unlike anything we have experienced in this 2009 calamity?

In 1933, as President Roosevelt took over the reigns from President Hoover, he closed all banks in March and when they finally reopened half had gone bankrupt and the average saver lost their savings. This did not happen in our economic crisis today thanks to FDIC insurance.

RECOVERY BEGINS

(1) When banks were reopened in 1933 deposits were guaranteed up to $2,500 stabilizing the banking industry
(2) Government salaries were cut 15% and all government department's budgets were cut 25% reducing government costs until the New Deal was to begin

And, most importantly:

(3) The U.S. abandoned the gold standard and devalued, therefore, the dollar by 40%
(4) This devaluation lifted prices, increased production and the real cost of borrowing plummeted. Stocks doubled in three months. The Great Depression was on the mend.
(5) GDP and prices went up on the average about 10% per year stopping deflation in its tracks

The last problem to go, unfortunately, was unemployment which was still high even as late as 1936.

IN COMPARISON TO TODAY

"In the 1930's, most depositors had to line up physically outside their bank to get their money. Now massive amounts of money are being siphoned off with the click of a mouse."

"In the current (2007-2009) crisis, central banks and treasuries around the world...have reacted with an unprecedented series of moves to inject gigantic amounts of liquidity into the credit market and provide capital to banks..."

I enjoyed this book and its viewpoint and now I am even more convinced that a repeat of the Great Depression with 25% unemployed and significant drops in production and prices is less likely with the safeguards now in place. Economic disasters may come but the recovery may come sooner too.

Lords of Finance by Liaquat Ahamed (Part I of II)

This is a wonderful book for those who would like a new perspective on the people who made the decisions behind the period 1914-1934. The subtitle to the book is "the bankers who broke the world" and the premise of the book as written in the final pages:

"The Great Depression was the direct result of a series of misjudgments by economic policy makers..." who burdened the world with WWI debts that required payments; a return to the gold standard when the gold reserves were unfairly distributed with 60% in the hands of the U.S. and the U.K.; and low interest rates that all combined to create the stock market bubble of 1929.

Some highlights:

(1) The Treaty of Versailles (November 11, 1919) required Germany, France and Great Britian to pay for WWI, in part, to each other and, in part, to the U.S. resulting in huge government deficits hurting the world economy

(2) Deflation or inflation was the way out

(3) U.S. and England chose deflation (contracting money in circulation with tight credit, high interest rates and the resulting recession and high unemployment hurting the borrowers)

(4) France and Germany chose inflation (devaluing their currency and thereby cheating investors and creditors out of the true value of their savings with increased money supply)

(5) John Maynard Keynes during this period stated "...inflation is more than simply prices going up. It is a subtle mechanism for transferring wealth..." (from savers and wage earners to the government, business and debtors)

The Dawes Plan of 1924 tried to improve upon the Treaty of Versailles but unfortunately resulted in continued hyper-inflation in Germany. In the U.S., in Florida, from 1921- 1925 the prices of real estate sky-rocketed (sound familiar). The author comments:

"Watching other people become rich is not much fun, especially if they do it overnight and without any effort."

But, of-course, 1929-1933 was just around the corner. Unlike what happened in 2007-2009 though, the stock market increased 30% and then from June of 1928 to October 1929 (a 15 month period) the market almost doubled. It is important to remember that only about 10% of the population was actually investing in the market in those days.

The Federal Reserve increased interest rates from 5% to 6% in August of 2009 just before the crash. And famous people like Irving Fisher (well-known economist) said "...stocks have reached what looks like a permanently high plateau..."

The stock market lost 50% in 6 weeks (through Black Thursday, Black Monday and Black Tuesday) and then went on to lose more in the following year as the central bankers of the world no longer knew what to do and made many errors of judgment.

The Great Depression by Ben Bernanke (2000)

This is a complex book for the average reader, with lots of formulas, but there are some nuggets that I will delineate here from this compilation of 9 essays. These were written over a 20 year period, by a variety of scholars working with Dr. Bernanke, our current Federal Reserve Chairman long before he took that position:


(1) Aggregate demand collapsed in the 1930's. Why? Because of a world-wide contraction in the world money supply from banking panics and business failures that choked credit.


My comment: This is why Dr. Bernanke's extensive studies of this period have him, in my opinion, in the best job for this crisis. It is why he has flooded the economy with money and encouraged other central banks to do the same.


(2) Expansionary monetary policies aided recovery and those countries that were first to abandon the gold standard were the first to experience a rebound. The U.S. was one of the last to do so.


(3) In 6 months (August 1931 through January 1932), 1,860 banks failed. All banks were closed from March 1933 through June 1933 to be re-evaluated by the government (think 'stress test' today) and only 25% were federally licensed to re-open that summer. The final number of bank failures was over well over 2,000.


(4) The Great Depression was caused by mismanagement of the gold standard, failure to defend banks and the decreased money supply. Unfortunately, to curb what the Federal Reserve (only in existence since 1913) considered a boom in the U.S. stock market of the 1920's, the Fed's contractionary policy (holding down the money supply) resulted in the depression being much longer and much more severe than probably it needed to be.


My comment: Of-course, we will never know for sure. But this time around, the expansion of the money supply appears to have slayed the deflation/severe depression dragon. It is bad enough that unemployment is as high as it is, hundreds of banks have failed and trillions of dollars of wealth has evaporated. What might have happened without the experience of the missteps of the 1930's not being repeated?


There are a few more interesting statistics:

(1) The annual deficit in 1929 was 9% of GDP; but by 1933 had grown to 19.8% with mortgage defaults in the 38%-62% range. Today's deficit (annual) has grown from 3% before the crisis to about 12% now (2009) for perspective.

(2) For those who had jobs (about 75% of the population; 90% today), nominal wages remained constant (no raises for awhile), but "real" wages increased because prices deflated for years. This "extra" spending/saving power helped the recovery in the stock market and the economy. Today we are experiencing no inflation right now and only mild deflation so we will not experience this kind of increase in "buying power" as they did back then.

(3) Inflation from 1933 to 1937 was about 20% in total - or about 4% per year - once the Federal Reserve and the government created aggregate demand increases by making credit more available and government spending programs took effect.

Your Money and Your Brain by Jason Zweig

This is a great book about how our behavior affects our investment decisions. Here are some highlights from Your Money and Your Brain by Jason Zweig (2007):



p. 55 "...the futility of financial prediction is especially frustrating because it seems so clear that analysis should work..."



Why it does not work is because the "...market consists of billions of daily transactions...there are transaction costs...and...there is a random nature of events..."



p. 57 "...the odds of flipping 3 out of 6 heads or 3 out of 6 tails is the same odds as flipping 6 out of 6 heads or tails..."



p.75 "...it is so vital to put 'sound practices' in place [an Investment Policy Statement] before your investing decisions can be whip-sawed by the whims of the moment..."



p.151 "...if you think a plunge in the value of your investments won't bother you, you are either wrong or abnormal..."



As Mr. Zweig further writes, "...the tension between thinking and feeling with investment decisions leads us to not wanting to be the only one left in stocks whenever others are selling and not to be the last one not invested when momentum has taken over..."



p. 220 "...to avoid greed, fear, over-confidence, surprise and regrets follow 'rules of investing' [again, the Investment Policy Statement and a 'good' financial planner's advice] and do not break them during emotional times. Since no one can predict the future, sit tight, and know why you did what you did when you did it. If you break your own guidelines then sooner or later it is bound to be a mistake..."



p.252 "...we suffer chronic confusion between the price of buying something and the cost [sometimes the opportunity of something else you could have bought or saved for] of owning it!...we are sensitive to the 'now' but insensitive to the 'later' costs..."

Inflation is a Monetary Phenomenon by Milton Friedman

Milton Friedman wrote "Money Mischief Episodes in Monetary History" in 1992. If you would like to learn about his thoughts on inflation causes/cures I recommend this book. Here are some highlights:





"...since 1971, every currency is now a fiat [no connection to a commodity, other than faith in itself] currency resting soley on the authorization or sanction of the government..."





"...how many dollars you have is not important...what really matters is what your money will buy..."





The reason for the future inflationary concerns are the trillions of dollars of increases in the money supply to get over this economic crisis and theories like Mr. Friedman's:





"...what happens to the money supply today affects what happens to income in the future...[with about a 6-9 month lag to change output, historically, and a 12-18 to possibly 24 month lag to change in prices]





The above comment is the reason to head this post: "Inflation is a Monetary Phenomenon"





...BUT...





"...the only countervailing force to increased money supply is increased output..."





And because of the "great Recession" that precedes this massive influx of money, there is plenty of room for increased output. In his book, Milton Friedman explains the causes (and the cures) for inflation:





Causes:





(1) Government prints money to finance their activities - excessive money supply is the main cause


(2) Quantity of good and services (GDP, that averages in normal times about 3%) don't increase at same rate as money supply increases


(3) Wages increase faster than GDP (but this is NOT a cause, but rather a result of inflation)


(4) Oil price increases can reduce output and, therefore, increase prices


(5) A full-employment policy by the Federal Reserve





Cures:





(1) High unemployment offsets inflationary pressures usually (note: we did have stagflation (high unemployment and inflation) in the late seventies and early eighties but oil price spikes had much to do with this also)


(2) Index government borrowing to inflation (this has started with TIPS, I-Bonds, tax tables and other items indexed to inflation). Social Security wage base, however, was set in 1993 and never indexed to inflation, nor the AMT (Alternative Minimum Tax) and not capital gains taxes - the most egregious.




As an aside, Robert Hetzel in the April 25, 1991 issue of the Wall Street Journal stated that TIPS and other inflation-protected securities if ["if", since in 1991 they had not been offered] "...issued by the government could provide a continuous assessment of 'expected' inflation by the market..." [these products, may indeed, help contain inflation just by their existence and TIPS have only been around since 1997, after the inflationary '70's and early '80's].




(3) Higher taxes or more public borrowing, excluding the debt of federal agencies and the Federal Reserve.




By the way, it is important to understand that the $12 trillion in debt is not all held by the U.S. public. Some is held by foreign nations, yes, but some is also held by other government agencies. How can that be? For example, social security has taken in trillions of dollars more than it currently needs to pay out benefits and this excess is then lent out to other agencies. This is not necessarily as bad as some say (you often hear that all that excess in the social security trust fund is IOU's). Realistically, however, investing that excess cash in the government is safer than keeping the cash in a bank account or investing it in the stock market.

(4) Simply the public pressure of the largest economy in the world unlike the governments of Argentina, Bolivia, Brazil, Chile, Mexico, Israel, Germany and others that all experienced hyper-inflation at some point in their histories.

(5) Statistics (historically, of-course):

U.S. Debt as % of GDP (after WWII 106%; 1967 = 32%; 1991 = 46%; today hovering at 85%)

Long-term government debt's average maturity of its bonds (1946 = 9 years + 1 month; 1976 = 2 years + 7 months; 1990 = 6 years + 1 month). Because of the U.S. average debt maturity in years, a larger debt may be handled by issuing shorter maturities at lower rates and provide the ability of the U.S. to have a debt as a percentage of GDP that is higher than other countries would be able to handle.

Yes, this also has been studied extensively, and here is a 46 page study on the subject if you are interested: http://www.people.hbs.edu/lalfaro/maturity.pdf

Annuities for Dummies by Kerry Pechter

From the "for dummies" series, this book is an excellent reference for annuities.

My posts under the "annuity" label contain information from my own research on this topic and also from information gleaned from this book which is well written and easy to understand.

Published by Wiley Publishing, Inc. with a copyright in 2008.

Depression Economics by Paul Krugman

Paul Krugman is the recipient of the 2008 Nobel Prize in Economics and his updated version of his book entitled "The Return of Depression Economics and the Crisis of 2008" copywritten in 2009 is quite interesting. Here are some paraphrased highlights/statistics I list from this book with my commentary in between:

P.S. #10 is the real issue if you want to "cut to the chase", the rest is mostly historical.

(1) p.15 - 1973 and 1979 were severe energy crisis periods followed by severe recessionary periods
(2) Recessions can be cured by printing money

No one likes the idea of the Fed, the Treasury and the Congress loaning money, spending money and printing money that is happening but economists have learned something over the past 70 years: adding liquidity to the marketplace is an essential ingredient to recovery.

(3) p.43 - The curent account (think trade deficit for one) deficit must be offset by capital account (think U.S. buying assets in foreign companies and real estate, etc.) surpluses.

So when you hear on the news about trade deficits (which of late have actually gotten a little less), please remember that the U.S. is also owning assets in other countries, too. In the long-term, that should be good though short-term tougher.

(4) p. 72 - In 1998, Japan...was projecting a deficit of 10% of GDP and...government debt above 100% of GDP.

In 2009, the U.S. deficit (annual amount) may be pushing 8-9% of GDP and the debt (the total amount owed for all years cumulative) may be pushing 80% of GDP.

Scary numbers! But also remember that after WW II, the U.S. had a debt ratio of 90% of GDP and the 1950's and 1960's had the typical recessions but no major setbacks. We do recover.

(5) p. 144-145 - Interesting price to rent ratio (housing prices divided by the average rent prices) make clear that the housing bubble was extreme and bottomed out in late 2004, early 2005.

(6) p. 143 -144 - Another chart; civilian unemployment rates increased in the 1991 and 2001 recessions and "...the conventional view... was that inflation would start accelerating if the unemployment rate fell below about 5.5 percent..."

The unemployment rate (page 151) rose steeply during the recession but continued to rise in the months that followed. The period of deteriorating employment actually lasted two and half years, not eight months. (which was the official determination of the length of the recession).

So, expect the unemployment rate, unfortunately, to go up, even after the official recession has ended.

But...

Inflation did not happen once the recessions were over but asset bubbles did occur instead.

(7) p. 147 - The real value (return less the excessive inflationary period) of stocks fell about 7 percent a year between 1968 and 1978.

This kept many investor's cautious during this period as Paul Krugman notes but for those who did not bail and waited until the end of this 10-year period and the 1982 recession, stocks never looked back on their old values. In retrospect, it was a great time to buy.

Reminder: market-timing does not work.

(8) p. 156 - The Panic of 1907 began with the demise of the Knickerbocker Trust...credit markets froze...and the stock market fell dramatically...a 4-year recession ensued with production falling 11% and unemployment rising from 3 to 8 percent.

Does this sound at all familiar to today? J.P. Morgan stepped in with money but bank regulations were reformed. J.P. Morgan did not have enough money to stave off the drain on productivity, and not nearly enough to stop runs on the banks in 1929-1932.

Those times, though, are past. We have FDIC insurance and other regulations in place today but you will see from #10 below that they still were not enough.

(9) p.158 - The Savings & Loan crises...in the 1980's...resulted in a government bailout..."which ended up being about 5% of GDP (the equivalent of more than $700 billion now)..."

Now, there is perspective. What happened to the stock market and the economy after the 1980's S&L crises? A drop in 1987 of 22% in one day on the DOW and more losses in the weeks before that fateful day. But the markets recovered from 1987 in about 18 months.

(10) p. 163 - Today's 2008-2009 crisis, ..."for the most part, hasn't involved problems with deregulated institutions that took new risks. Instead, it has involved risks taken by institutions that were never regulated in the first place..."

The crisis today as Paul Krugman so eloquently puts it is not Fannie Mae and Freddie Mac (to this date, I do not believe that they have used any bailout money) or the repeal of Glass-Steagall in 1999 (breaking down the barrier between banks and investment firms) or, this is bantered around alot, the Community Reinvestment Act of 1977 (required lending to sub-prime borrowers kind-of). No, it is auction-rated securities, CDO's and other structured and leveraged products, hedge funds that borrowed to the hilt and investment companies with debt to asset ratios of 30:1 (like Bear Stearns and Merrill Lynch). These mechanisms were not under the scrutiny of the government - maybe they will be to some extent in the future.

But Dr. Bernanke has done a tremendous amount to provide liquidity to these groups anyway through his auction facilities.

The market size of bank investments is approximately $800 billion but the credit market size that is in such disarray today is about $50 trillion in size - or was before this credit freeze began.

As Paul Krugman writes that the solution to our credit crisis is: "...A temporary nationalization of a significant part of the financial system...this isn't a long-term goal...and should be reprivatized as soon as it is safe to do so..."

In addition, "...fiscal stimulus (government spending)...The next one should be much bigger...as much as 4% of GDP (the first stimulus package in 2008 was too small - only 1% of GDP)...and should focus on sustaining and expanding government spending..."

I have to agree reluctantly.

Aid to state and local governments, building roads and bridges, etc. This is what is in the works in the new Obama administration and I don't like the idea but I fully agree that desperate times require desperate measures.

With enough spending and printing of money this era of depression economics may be less severe than without the interventions planned.

Paul Krugman's definition of depression economics, by the way, is thinking about the demand-side (rather than the supply-side) and this thought process has not been considered for a couple of generations (note: not decades) as we have had an economy that mostly worked without it.

In other words, Paul writes, "...insufficient private spending to make use of the available productive capacity..."

Many economists believed we would not have to worry about stagflation or disinflation or deflation again but these concepts have now reared their ugly heads.

I will write more about deflation later.