Unbefu*kinglieveable Dept

This has gotta get the conspiracy nuts spun right thru the ceiling ...

"Bless the Beasts and the Children

Photographer for White House child sex ring arrested after Thompson suicide

Tom Flocco | March 13, 2005

The Justice Department, acting through the FBI and the U.S. Attorney’s Office in Omaha, emerges from the record of the Franklin investigations not so much as a party to the cover-up, but as its coordinator. Rigging grand juries, harassment of witnesses, incitement to perjury and tampering with evidence--federal personnel were seen to apply all of those techniques in the Franklin case. (John W. DeCamp, Esq., The Franklin Cover-up , Second Edition, January 2005)

WASHINGTON -- Photographer Russell E. "Rusty" Nelson was recently arrested two days after journalist Hunter Thompson reportedly committed suicide four weeks ago on February 10, according to two phone interviews with attorney John DeCamp last week.

Nelson was allegedly employed by a former Republican Party activist to take pictures of current or retired U.S. House-Senate members and other prominent government officials engaging in sexual criminality by receiving or committing sodomy and other sex acts on children during the Reagan-Bush 41 administrations.
Hunter Thompson’s death and the news blackout of Rusty Nelson’s simultaneous arrest raise questions that someone may be attempting to limit Nelson’s freedom or threaten him, since according to testimony, both men had allegedly witnessed homosexual prostitution and pedophile criminal acts in a suppressed but far-reaching child sex-ring probe closely linked to Senate and House members--but also former President George H. W. Bush.

[In U.S. District Court testimony, Rusty Nelson told Judge Warren Urbom he took 20,000 to 30,000 pictures, 2-5-1999, p.52]

Pedophile victim Paul Bonacci--kidnapped and forced into sex slavery between the ages of 6 and 17--told U.S. District Court Judge Warren Urbom in sworn testimony [pp.105, 124-126] on February 5, 1999: "Where were the parties?...down in Washington, DC...and that was for sex...There was sex between adult men and other adult men but most of it had to do with young boys and young girls with the older folks...specifically for sex with minors...Also in Washington, DC, there were parties after a party...there were a lot of parties where there would be senators and congressmen who had nothing to do with the sexual stuff. But there were some senators and congressmen who stayed for the [pedophile sex] parties afterwards...on a lot of the trips he took us on he had us, I mean, I met some people that I don't feel comfortable telling their name because I don't want to --- ...Q: Are you scared?...Yes..."

DeCamp, a former Nebraska state senator and decorated Vietnam War vet, told TomFlocco.com "there are tons of pictures still left; law enforcement is currently looking for them," adding, "you can also assume there are senators and congressmen implicated; otherwise this would not be such a big issue." But no federal official has stepped forward to protect Rusty Nelson's life, as Congress would be reluctant to hold hearings or force a federal prosecutor to probe its own members for sex acts with children--still punishable by law.

Sex with minors?

In his testimony before Judge Urbom, Bonacci specifically named Congressman Barney Frank (D-MA) as having participated in the parties--also telling the judge he had "relationships with him" in Washington, DC and was flown to Massachusetts for sex in the basement of Frank's Boston home. [2-5-1999, p. 126]

However, Urbom did not subpoena all the photos and did not ask Bonacci to identify photos of specific senators and congressmen, or reveal their names in court transcripts and depositions we examined; nor did Judge Urbom explain why investigations have never commenced regarding which members of congress had sex with children.


The evidence DeCamp presented was so credible and substantial that Urbom awarded Paul Bonacci $1 million for child abuse on February 19, 1999 regarding his lawsuit involving Larry King. This, despite a Nebraska jury having already indicted Bonacci for perjury in 1990, ultimately sending an intentionally damaged, spiritually and physically abused young man to prison for five years--and despite his treatment by King, described in court testimony:

"They put guns up to my head. Had guns put in my mouth...Larry King sent out boys, men, to jump me...he had them pretty well beat the tar out of me from the waist down so nobody would see the marks...I had my fingers broken...I can remember them burning me with hot instruments...placing stuff inside me...almost what I call a cattle prod...But it would be put inside then they'd shock me inside my -- ...Judge Urbom: Anus?...Yes... And they would -- ...Judge: You mean electrically heated?...They would put it in and then push a button and it would shock me...Judge Urbom:..done by Larry King at his direction?...At his direction..."

"I threatened to go to the police in California, thought maybe they would listen whereas in Omaha they were in his pocketbook...he had me hung out of an airplane with a rope by my ankles... If they wanted to get something passed through the legislature, he would put some people that were against it in a compromising position. By using us boys and girls ...Judge Urbom: Was this by your being the sexual partner of that person?...Yes...Judge Urbom: ...Any estimates of how often you participated as the sexual partner of one of these persons that he wanted to get some kind of control over?...There were times when it would be four or five in a night...on probably a couple thousand times...sometimes dozens of times with the same person..." [U.S. District Court testimony, 2-5-1999, pp. 146-151]

Curiously, Paul Bonacci told investigators that the sex ring was based out of Offutt U.S. Air Force Base near Omaha, having been taken there to be abused since he was three years old in 1970. At Offutt, Paul said he was "trained" by tortures, heavy drugging and sexual degradation. [Offutt AFB played a major role immediately following the 9/11 attacks as George W. Bush made the base his post-attack headquarters for a short period.]

So intent upon his physical harm, the government "moved Bonacci to different facilities--despite agreements worked out by DeCamp, purposefully given food to which he was allergic while his weight dropped, and denied a blanket for months...beaten several times in jail and placed with potentially violent people associated with Larry King," according to Decamp.

John DeCamp told us last week that "Larry King was released from prison on April 11, 2001 after serving about five years," adding "he's back in Washington, DC and now involved in this story again." [DeCamp's book also said "King went to prison for embezzlement, conspiracy and making false financial record entries...there was no trial on any other charges, and the evidence of child prostitution and abuse perpetrated by King was never presented in any court." Franklin Cover-up , p. 224]

John DeCamp just released an updated 2005 edition of his original book about the secret White House-linked national child sex-ring entitled The Franklin Cover-up [$12.95 + $4.00 shipping: contact decamplegal@inebraska.com for 2005 edition]. The carefully researched and graphic expose involves convicted [and recently released from prison] GOP operative Lawrence E. "Larry" King Jr. who allegedly hired photographers to capture legislators and high officials in compromising sexual positions with children while he managed the Franklin Federal Credit Union--according to court testimony on 2-5-1999. [Franklin was raided by federal agencies and shut down two days before George H. W. Bush was elected president in 1988.]

Past mysterious deaths, clandestine arrests, court testimony, and credible evidence of FBI and CIA participation in their cover-up also raise questions as to why elderly pedophile priests are removed from their pulpits, prosecuted and imprisoned for sex acts committed 40 years ago and why famous music entertainers are prosecuted for pedophilia; yet elderly pedophile federal legislators may still remain in the U.S. House and Senate--drawing a free pass for past criminal child-sex acts.

Regarding his role in taking blackmail photos of government officials, Rusty Nelson confirmed Bonacci’s testimony to Judge Urbom: "Q: Children on the airplane?...yes. Q: How young?...There was one situation went back to Washington, DC...he had probably 10, 12 years old...Q: Boys, girls?...Both...Q: Who attended the parties?...Prominent business people, very prominent high-ranking officials, politicians. The younger people. What would transpire was they would have a party and then a party after the party...after the party was more of a sex-type deal...That’s what Larry [King] would -- -- Q: These old politicians were having sex with each other?...Or people Larry would bring...some younger people...Did you take pictures of the parties?...I took pictures at some of the parties, yes..." [U.S. District Court testimony, 2-5-1999, pp. 89-91]

After the Secret Service allowed Paul Bonacci to have access to the White House on July 3, 1988, one of DeCamp’s investigators said the young pedophile victim was able to draw a floor-plan of the presidential inside living quarters of the White House--an area not available to the public--lending stong credence to a June 29, 1989 Washington Times front page story, "Homosexual prostitution inquiry ensnares VIPs with Reagan, Bush," when reporters Paul Rodriguez and George Archibald said "Call-boys took midnight tour of White House."

Presidential indiscretions--or criminal acts?

According to a Nebraska state police report, Nebraska Foster Care Review Board letter to the Attorney General, Nebraska Senate’s Franklin committee investigative report, and a 50-page report by Omaha’s Boys Town welfare case officer Mrs. Julie Walters, pedophile victims Nelly and Kimberly Webb detailed a massive child sex, homosexual and pornography operation run out of Nebraska by Larry King--but with close ties directly to the White House.

Mrs. Walter’s Nebraska Dept. of Social Services report (3-25-86) revealed: "[14 year-old] Nelly said at these trip parties hosted by Larry King, she sat naked ‘looking pretty and innocent’ and guests could engage in any sexual activity they wanted, but penetration was not allowed...Nellysaid she first met V. P. George Bush at the Republican Convention where King sang the national anthem, and saw Bush again at a Washington, DC party Larry hosted...Last year [1985] she met V.P. Bush and saw him at one of the parties Larry gave while on a Washington, DC trip. At some of the parties there are just men (as was the case at the party George Bush attended)...Nelly said she has seen sodomy committed at those parties."

The Walters report continued: "On December 19, 1988, Nelly was contacted and voluntarily came to the FBI offices on December 30, 1988. She was interviewed by [FBI agents] Brady, Tucker and Phillips...in September or October, 1984 when Lisa was 14 she went to Chicago with Larry King and 15-20 boys from Omaha...She indicates she attended a party in Chicago with King and the male youths. She indicated George Bush was present...she sat at a table at the party wearing nothing but a negligee. She stated George Bush saw her on the table. She stated she saw George Bush pay King money and Bush left the party with a nineteen year old black boy named Brent. Lisa said the party Bush attended was in Chicago in September or October 1984. The Chicago Tribune of October 31, 1984 said Bush was in Illinois campaigning for congressional candidates at the end of October."

Bush 41 surfaced again in Lowe's May, 1989 review of reports by Thomas Vlahoulis from the state attorney general's office: "Sorenson told Vlahoulis that both Kimberly and Nelly [Webb] brought up the name of George Bush and indicated that they had both met him..."

In spite of four polygraph tests administered by a Nebraska state trooper who said he was convinced Nelly was telling the truth, a Washington country, Nebraska judge in December, 1990 ignored Julie Walter’s 50-page report, numerous debriefings of the girls by foster care officials and youth workers stating the sisters told the truth--specifically about George Bush Sr., and dismissed all charges against their foster parents Jarrett and Barbara Webb, who Nelly and Kimberly said had allowed them to be abused.

Regarding his role in taking blackmail photos of government officials, recently re-arrested Rusty Nelson confirmed Bonacci’s testimony to Judge Urbom: "Q: Children on the airplane?...yes. Q: How young?...There was one situation went back to Washington, DC he had probably 10, 12 years old...Q: Boys, girls?...Both...Q: Who attended the parties?...Prominent business people, very prominent high-ranking officials, politicians. The younger people. What would transpire was they would have a party and then a party after the party...after the party was more of a sex-type deal...That’s what Larry [King] would -- -- Q: These old politicians were having sex with each other?...Or people Larry would bring...some younger people...Did you take pictures of the parties?...I took pictures at some of the parties, yes..." [U.S. District Court testimony, 2-5-1999, pp. 89-91]

Gosch to Guckert to Gannon?

Cable television news reports have recently linked an alleged male prostitute to the present White House since George W. Bush permitted James Guckert to use an unprecedented Secret Service-approved alias (Jeff Gannon) while having access to the White House for two years as a pool reporter serving the younger Bush--before which Gannon had advertised himself on internet pornography sites as a male "escort" charging $200 an hour. [Gannon is the subject of independent news reports which have referred to him as the former kidnapped Des Moines, Iowa paperboy Johnny Gosch--forced into child sex-slavery.] John DeCamp told this writer "I believe Johnny Gosch and Jeff Gannon are one and the same person--but I am not in a position to know positively."
During a recent phone interview, Noreen Gosch told TomFlocco.com that she is still not sure whether her missing son Johnny is in fact James Gannon, because she has "not seen enough evidence." But having been abducted in 1982, Johnny Gosch would now be about 35-36 years old. Gannon claims to be 47 but his "male4male" website escorts profile lists him as 31 in 2000, which would also make him 35-36 years old today.

George W. Bush has not explained how Guckert/Gannon--who had advertised himself as a male escort--could apparently operate in the White House as a reporter for two years using a Secret Service-approved alias and regularly be called upon by George W. Bush and press secretary Scott McClellan during nationally televised presidential press conferences.

Questions can be raised as to whether Gannon also had access to the White House living quarters as Paul Bonacci and other call-boys did during his father’s administration--as the Washington Times reported. Photos of George W. Bush and Jeff Gannon together indicate that they have a cordial personal relationship.

Noreen Gosch said her son Johnny is living under an assumed name after being abducted on September 5, 1982 while serving his Sunday morning paper route. During a clandestine visit from her son when he was 27 or 28, Mrs. Gosch said Johnny told her he was taken by a highly organized, very corporate global pedophile/pornography ring--linked to the Washington, DC congressional call-boy scandal during the 1980's.

Hunter Thompson directed child murder-sex film?

A controversial author, Hunter Thompson was allegedly linked to Larry King as implicated in Paul Bonacci's testimony in which the pedophile victim revealed that Thompson directed a graphic ‘snuff’ film [Franklin Cover-up, pp.102-105 & 327] made near Sacramento, California at a location called " Bohemian Grove ."

Bonacci--flown numerous times across state lines for sexual exploitation to Washington, DC and other cities--testified on videotape [5-14-1990] for Nebraska State Police investigator Gary Caradori. Bonacci said that while on a trip to Sacramento, he was forced at gun-point to commit homosexual acts on another boy before he watched other men do the same--after which the boy was shot in the head.

In separate testimony, Decamp said Bonacci told him "Larry King was smiling and laughing the whole time the film was being shown...as the men watched, they passed Nicholas [another victim] and me around as if we were toys, and sexually abused us." [U.S. District Court, 2-5-1999, pp.115-129]


Bonacci’s testimony has been evaluated as credible and well-informed by leading child abuse experts, psychiatrists, psychologists and polygraph tests; and he has also testified that he was forced to lure Johnny Gosch into being kidnapped--considered by many to be the most notorious U.S. child sex-slavery case.

Protecting legislators at the expense of children

John Decamp told TomFlocco.com that Franklin child-abuse witness "Alisha Owen was convicted of lying that as a minor, she had sex with Omaha Chief of Police Robert Wadman. She was placed in solitary confinement for years--the most brutal treatment of a female inmate in Nebraska history for a first-time offense," to which Decamp added, "it was done to keep her silent and away from other inmates, but also as a warning to the other children."

21 year-old Alisha Jahn Owen was sentenced on August 8, 1991 to serve nine to twenty-seven years in prison for telling a grand jury that she was sexually abused as a juvenile by a Nebraska District Court judge, by Omaha's Chief of Police, by the manager of the Franklin Credit Union, and others.

DeCamp said "Alisha witnessed abuse of other children and functioned as an illegal drug courier traveling nationwide for some of Nebraska's wealthiest, most powerful and prominent businessmen." But a local and a federal grand jury indicted the victim-witnesses for perjury--throwing the key young people in prison to cover up child-sex and illegal drugs.

The Nebraska State Senate’s primary Franklin Committee investigator Gary Caradori's March 14, 1990 notes revealed that on the day of the federal agents' raid on Franklin Credit Union, "a large amount of pornographic material was taken out of the credit union, including videos and photographs depicting sexual acts. I was told that if Friedrichs or any of the other people working for the CPA firm contacted by the government [audit] would say anything, they would automatically lose their jobs."

That evidence was never made available to the Nebraska Senate's Franklin Committee, nor was its existence publicly acknowledged by the FBI; and all raid warrants were sealed by United States Magistrate Richard Kopf--the same court official who ordered to have Larry King taken by federal agents to a federal psychiatric facility for "tests," on February 7, 1990 as President George H. W. Bush was coming to Omaha for a fundraising event.

Alisha Owen testified to the Franklin Committee on June 11, 1990 that the FBI attempted to influence federal witness testimony--that her former lawyer Pam Vuchetich had come to see her in the spring: "giving a proposal from the FBI that if I recanted my story then nothing would happen to me; I could get out of prison and no charges would ever be brought against me...they would write letters to the judge asking for my sentence reduction..."

Her parents, Donna and Alvin Owen told the committee about the incident on June 21, 1990: "Q: You testified that your husband was there?...sitting in the living room, I remember...Q: Did she tell you who in the FBI made that deal, made that offer to her?...Mickey Mott...He works closely with Rick Culver and John Pankonon...

Curiously, state policeman Gary Caradori, died July 11, 1990 in a small-plane explosion, one month after FBI officials attempted to coerce a key child witness to recant her testimony--and even though a deputy sheriff first at the crash site said there was child pornography scattered all over the farmer’s field and the farmer said he witnessed the plane exploding in mid-air before crashing to the ground
Johnny Gosch’s mother, Noreen, said "undisclosed sources told her the FBI immediately arrived with three flatbed trucks [modus operandi of FBI and Gov. Jeb Bush confiscating 9/11 hijacker documents at Venice, Florida’s Huffman flight school?], grabbed the evidence from the sheriff’s hands, cordoned off the field, walked the field, picked up every piece of evidence, took the plane and all its parts and put it on the flatbed trucks, and told the peace officer, ‘This is confidential information and don’t ever speak of it again.’ The evidence has never surfaced again in Nebraska’s Franklin investigation or any other investigation." [ Ted Gunderson Report , June 28, 2000]

DeCamp's book reveals more clear evidence of witness tampering and possible accessory to murder: On the evening of July 11, 1990, the day her husband crashed to his death, Sandie Caradori received several phone calls from [key Franklin child-abuse witness] Troy Boner. She wrote in her notes: "I am familiar with his voice and can be 100% assured that I did in fact receive telephone calls from him...Troy: Gary wasn't lying. He didn't tell me what to say. What I told him was the truth. (He spoke rapidly, fighting back tears) They made me take it back. They threatened me...You don't understand, they threatened me. They made me take it back. I was so scared..." [pp. 186-187]

In 1990, according to DeCamp, "Troy Boner was going to provide the information in open court, under oath, that would blow the lid off the Franklin case and force a new trial for Alisha Owen...As Troy came into the courthouse, he was immediately ushered into a private room by county judicial authorities...the hearing was delayed for one hour...Troy was in the room with a "Special Attorney" and with other officials from the prosecutor's office-- the very same prosecutorial team Troy was about to testify against."

"... Troy leaned over and whispered to me, "Oh God, forgive me. They guaranteed if I talk here today, they will put me away for twenty years...told me I would be charged with perjury for my original testimony if I opened my mouth today in court...Look what they did to Alisha...Look what they did to my brother." [found dead after playing "Russian Roulette"]

DeCamp's 2005 edition incredibly reveals, " In late 2003 [just before the 2004 election campaign started to heat up], Troy Boner [key abused child witness to national sex-ring] walked into a hospital in New Mexico screaming "they're after me, they're after me because of this book." The book Boner was waving was The Franklin Cover-up . Boner was '... mildly sedated and calmed down...and put in a private room for observation .' "

"When nurses came back to check on him early next morning, Boner was sitting in a chair, bleeding from the mouth and quite dead. Former FBI Los Angeles Bureau Chief Ted Gunderson tried to get autopsy and other information and details that were promised him on Boner's death, but Gunderson and apparently every other entity, were totally shut out of all information. No news stories were published on Boner's death despite his "notoriety" in the Franklin case." (John DeCamp, The Franklin Cover-up ) Another witness was gone.

DeCamp added that the FBI had also confiscated Larry King’s flight manifests from various airline charter companies, thus helping to cover up proof of sexual exploitation of children and interstate transportation of minors across state lines for sexual purposes.

Washington, DC: child sodomy hotbed?

Rusty Nelson’s quick arrest following on the heels of Hunter Thompson’s ‘suicide’ and alleged assertions that Jeff Gannon could be Johnny Gosch may all have serious criminal implications, as Thompson and Nelson were said to be closely linked to child sexual criminality at the highest levels of government--acts still punishable by law and easily meriting cover-up attempts by powerful forces.

Paul Bonacci, forced to help kidnap Johnny Gosch into sex-slavery, also told Franklin Committee investigators he toured the White House at midnight on July 3, 1988 with Craig Spence--a lobbyist and political operative who arranged male prostitute visits to the White House but who turned up dead himself just three months after the 6-29-89 Washington Times call-boy headline. The police were quick to call a suicide.

Spence had "hinted the tours were arranged by ‘top-level’ persons, including Donald Gregg, national security advisor to Vice-President Bush," according to the Washington Times [8-9-89], adding, "Spence, according to friends, was also carrying out homosexual blackmail operations for the CIA."

Spence and Gregg were reportedly close friends, as Spence had sponsored a dinner in Gregg’s honor in the spring of 1989 at Washington posh Four Seasons Hotel in Georgetown just before the White House prostitution scandal broke at the beginning of the Bush 41 tenure. [ George Bush: The Unauthorized Biography , Webster G. Tarpley & Anton Chaitkin, Chapter 21--Omaha]

A June 30, 1989 Washington Times report said "Rep. Barney Frank, Massachusetts Democrat and a self-proclaimed homosexual who several weeks ago threatened to reveal a list of Republican homosexuals in Congress, said he was ‘not surprised’ by the revelations."

The Times also said [8-25-1989], "A male prostitute convicted of drug trafficking and sex offenses against a minor used the Chevy Chase Elementary School in late 1987 to run his prostitution operation after the school's principal began buying sex from him."

"The call-boy was allowed to sleep and use phones in the school even after the principal left at 5 p.m., while teachers and the children were still involved in after-school activities such as chorus," said the principal, Gabriel A. Massaro, who also revealed "he had a four-year relationship with the prostitute and provided him with a guidance counselor's office and telephone at the model ‘magnet school’ even while children were in classes elsewhere in the building."

Also according to the Times, "Massaro acknowledged that he attended a meeting between Davis and his Alexandria probation officer at the Capitol Hill home of Rep. Barney Frank, Massachusetts Democrat, another client whose home the call-boy used to perform sexual services." The paper did not reveal the age or name of the call-boy or whether he serviced Congressman Frank.

A clearly unethical and likely illegal presidential appointment was also linked to the White House child sex-ring: "In August, 1990, Bush appointed Ronald Roskens of Nebraska to head the Agency for International Development (AID). Roskens had been fired the previous year as chancellor of the University of Nebraska, where Larry King was a member of his advisory committee.

[State Police "Franklin" investigator] Gary Caradori’s daily notes for February 19, 1989 record: ‘I was informed that Roskens was terminated by the state because of sexual activities reported to the Regents and verified by them. Mr. Roskens was reported to have had young men at his residence for sexual encounters." [ Franklin Cover-up , p.177]

DeCamp added that AID assignments have been used as a "cover" by CIA agents; and in spite of Roskens’ sexual background and termination by Nebraska educators and his clear potential for being blackmailed, President Bush appointed him anyway.

Karl: ‘Rove’ing DC, approving 'special' WH press passes?


The extent to which White House Senior Domestic Policy Advisor Karl Rove played a part in approving the Gucket/Gannon White House press passes is not known.

However, CBS News spoke of a Rove-Gannon connection , saying "Gannon's aggressively partisan work and the ease with which he got day passes for the White House press room the past two years make it hard to believe that he wasn't at least implicitly sanctioned by the "boy genius."

Following on the heels of Guckert-Gannon, Walter Storch, editor of the Barnes Review News reported a three weeks ago that "Karl Rove was seen by one of my people entering a private homosexual orgy at a five-star Washington hotel over the Mid-Atlantic Leather (MAL) weekend last year." [2004]

A Barnes reporter told Storch that "Karl greatly enjoyed the supervision of a certain hairy 350-lb. Leather Dominator who had won the Miss Virginia Daddy Bear title at the MAL festivities."

Storch wrote, "Karl used to hang out a JR’s, which is on 17th between P & S streets, before he became so well-known. This is a respectable gay bar for discreet people...," adding, "there is an expensive apartment...over near Dupont Circle that certain powerful senators take turns visiting with their pickups."

"Bush, via Karl Rove, was projected as a moral man who would return a hedonistic America to the simpler virtues of a bygone era. A large part of the American public, unhappy with what they saw as debilitating liberalism, abortion on demand, gay marriage and other forms of moral decay, put Bush back in office," said the Barnes editor.

"Now they have to deal with rampant male whores prancing around the White House in consort with a small army of closet queens, all of whom very obviously have the ear, and the confidence, (and hopefully, that’s all they have) of their ‘moral’ choice for President," said Storch.

Interestingly, TBRNews.org also counts "one Supreme Court Justice, several governors (all Republican) and at least one very prominent televangelist" among those high officials who are saying one thing and doing another with respect to Storch's closet queen issue.

While American citizens watch, unanswered questions remain as Democrats and Republicans ignore young witnesses with clear and credible evidence--refusing to hold each other's legislators criminally accountable for their unspeakable crimes against children.

MSN Money - Whom to believe -- Buffett or Greenspan? - Jubak's Journal

MSN Money - Whom to believe -- Buffett or Greenspan? - Jubak's Journal


Jubak's Journal
Whom to believe -- Buffett or Greenspan?
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The Oracle of Omaha foresees dire consequences for our debt-ridden ways. The Fed chairman predicts a soft landing and says the debt is no big deal. Who's right?

By Jim Jubak

The Oracle versus the Chairman. In terms of heavyweight bouts, they don’t get much bigger than this. What these two champions of capitalism are slugging it out over is no less than the future of the U.S. economy.

Warren Buffett, the Oracle of Omaha and the CEO of Berkshire Hathaway (BRK.A, news, msgs), charges the United States is headed for a massive dollar crisis caused by a trade deficit running at better than $600 billion annually. Bam! Alan Greenspan, chairman of the U.S. Federal Reserve, counters the economy is headed for a soft landing and the debt owed to foreign investors and savers is no big deal. Smack!

One of these guys is wrong. Before telling you who I’m putting my money on, let me put the two head to head so you can make your own call.

First, the numbers
Nobody has a better command of the data on the current state of the economy than Greenspan. And the picture he paints by his numbers isn't pretty. The national personal saving rate has plunged to an average of 1% in 2004, shockingly below the 7% average for the last three decades.

Indeed, we've been running up debt like there's no tomorrow. The unified federal budget (which is the budget that includes the current Social Security surpluses) is running a deficit equal to about 3.5% of gross domestic product. That deficit is only going to climb as outlays for Social Security, Medicare and Medicaid, now 8% of gross domestic product, climb to somewhere near 13% by 2030 as the baby boom generation ages and retires.

Meanwhile, the U.S. current account deficit, a measure of how much more we buy from foreigners than we sell to them, has climbed to 6% of gross domestic product. According to the Fed’s economists, you have to go back to the 19th century to find larger current account deficits as a percentage of the size of a country's economy. All this debt has been funded by an increase in the value of homes (and the size of home mortgages) on the domestic side, and the willingness of foreigners to hold IOUs denominated in U.S. dollars, such as U.S. Treasury bills and notes. Social Security.
Are you worried, too?
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Buffett's approach is data-lite, but the data he does cite agree with the details of Greenspan's picture. Last year, we purchased $618 billion more in goods and services from the rest of the world than we sold. To pay for this current consumption, we're selling off our accumulated national wealth to the rest of the world at a rate of $1.8 billion a day. "Consequently, other countries and their citizens now own a net of about $3 trillion of the U.S.," Buffett wrote to his shareholders recently. Our overseas borrowing to fund the current account deficit is equivalent, he notes, to a family that sells off "part of its farm every day in order to finance its overconsumption."

Same data, different conclusions
What’s so striking is that from this remarkably similar picture of the current situation, Greenspan and Buffett reach almost diametrically opposed conclusions.

To Greenspan, it's no biggie. Even though we're running that huge trade deficit, the dollar's real exchange value, despite its recent decline, remains above its 1995 low, he told the Council on Foreign Relations. Interest rates on Treasury notes maturing 10 years in the future remain very low, despite the size of the federal deficit and the huge retirement obligations we're putting on the books. And there's no evidence that households are facing "inordinate financial pressures as a consequence of record-high levels of household debt relative to income."


The United States, Greenspan notes, almost with surprise, "appears to have been pressing a number of historic limits in recent years without experiencing the types of financial disruption that almost surely would have arisen in decades past."

Buffett, on the other hand, believes that we're headed for real trouble. "A country that is now aspiring to an 'Ownership Society' will not find happiness in -- and I'll use hyperbole for emphasis -- a 'Sharecropper's Society.' But that's precisely where our trade policies, supported by Republicans and Democrats alike, are taking us."

Buffet sees dire consequences
Buffett isn't forecasting economic collapse because he believes that foreigners will continue to lend to us: Foreign investors, he wrote in his letter to shareholders, "may view us as spending junkies, but they know we are rich junkies, as well."

But the consequences are still dire, Buffett believes. If current trends continue, a decade from now, just at the time when we'll need every dollar to pay for the retirement benefits of baby boomers, the United States will be sending 3% of its current annual output to the rest of the world as interest on the debt run up by its past consumption.

That royalty would run forever, unless we export more and consume less. And given the way global trade policies work, Buffett concludes, massively expanding U.S. exports isn't likely. Hence paying off this royalty would require a huge decline in U.S. consumption, Buffett says, with all sorts of nasty consequences for the global economy and the lives of U.S. workers and retirees. Don't pay it off and the already-projected squeeze on such frills as health care and education spending just gets worse.

Greenspan: The landing is soft
Don't worry, Greenspan says. We're headed for a soft landing. Foreigners will continue to send us their savings without demanding a huge increase in U.S. interest rates. Market forces --a fall in the price of the dollar and a consequent rise in U.S. exports and a drop in imports -- will gradually defuse the potential bomb represented by the huge increase in the U.S. trade deficit.

What's his logic?

Because the federal budget deficit, the run-up in consumer debt, projections of huge future retirement liabilities and the buildup in the trade deficit haven't resulted in the expected crisis to date -- and, in fact, haven't even produced the big projected hike in U.S. interest rates or a crash in the dollar -- something must be different this time. "Has something fundamental happened to the U.S. economy that enables us to disregard all the time-test criteria for assessing when economic imbalances become worrisome?" Greenspan asks.

Answering his own question, it's the increasing globalization of capital markets that has made all the difference. What Greenspan calls the "home bias" that kept investor's money in their national financial markets has eased so that investors seeking higher returns or diversification have sent more of their savings overseas. And the United States has been the prime beneficiary of that trend. (As you'd expect from Greenspan, he has data to support his belief in a decline in home bias: One measure of the propensity to invest at home for the developed countries representing four-fifths of world GDP has declined to 0.8 in 2003 from 0.97 in 1990.)

My problems with Greenspan's theories
I've got two problems with Greenspan's formulation. First, as Greenspan admits, a change in home bias doesn't solve the U.S. current account deficit; it just delays the reckoning. But since economists don't really know -- and can't reliably project -- the lag between trade deficits and deficit corrections, we don't really have any idea whether we are currently just in the lag period for a business-as-usual correction of the trade deficit or whether we've entered some unspecified lag period created by Greenspan's increasingly global financial markets.

It's an interesting theory. But as a guide to investing strategies, it leaves me completely without a road map or timeline.

Second, we've been down this "it's different this time" path with the Fed chairman before. Sometime after his more famous remarks about the irrational exuberance of the stock market, Greenspan became an apologist for higher valuations by citing the extraordinary productivity gains in the U.S. economy in the late 1990s. Historical measures of danger weren't valid for the then-current situation because the U.S. economy was growing so much faster than it had in other periods. Frankly, having bought into the first "it's different this time" argument to my pain and chagrin, I'm reluctant to buy into this new version.

The rate of capital-markets globalization remains vague. And while we know there must be some point at which foreigners will stop putting money into U.S. dollar-denominated investments, home bias or no, we have no idea where that point might be.

I've also paid attention to Greenspan's recent characterization of the problems of using productivity growth as a guide to policy. If you change "productivity" to "financial globalization," they're a warning to anyone who wants to use the newest version of "it's different this time" financial globalization to guide policy in the current global economy. "Productivity is notoriously difficult to predict . . . We have scant ability to infer the pace at which such (productivity) gains will pay out and, therefore, their implications for the growth of productivity over the longer run."

A bet that globalization of the financial markets will give the capital markets time to engineer a soft landing is a bet on faith in the powers of omniscience of the Fed. That may be good enough for Congress, these days, but it doesn't hold much appeal to me.

No, my money’s on Buffett. He's not asking me to believe it will be different this time. Again. And he has actually put $21.4 billion of his company's money in foreign exchange contracts that will pay off only if the dollar declines.