Quantum Pranx

by Zeus Yiamouyiannis, Ph.D.

from Of Two Minds, Charles Hugh Smith
Posted originally January – February, 2011

A uniquely clear-sighted article on the consequences of our corrupt financial-political Status Quo being exploited by a rapacious Financial Elite.

Part I:
Oligarchy Becomes Anarchy – Introduction

By now it should be clear even to the most optimistic observer that the global financial system has given itself over to systemic lawlessness. Once international banks were effectively allowed to print their own money in an unregulated “shadow” system and have it redeemed full value by national taxpayers, the charade was over. The only thing left, at this point, given the full cooperation of governments and an eerie world-wide non-enforcement of law, is for banks, like a cancer to savage and consume every concrete store of non-counterfeit productivity and asset value.

Not only have governments from China to the United States committed themselves to a chess game meant to eke out relative advantages on a sinking ship, but they have positively rewarded those who are speeding the collapse. A simple, cannibalistic economic rule now persists until a new system emerges: Economic manipulation, destruction, and extortion are simply more profitable, far more profitable, than good old fashion value creation. Disaster capitalism will be pursued full force.

Whether a country is communist or capitalist, authoritarian or marginally democratic, no longer matters. Citizens globally have been made to be the pawns and patsies of a universal financial Ponzi scheme that can only end in carnage. Who cares if this insures debt peonage for the world and likely mass austerity, suffering, and shortages. There’s a buck to be made! Who cares if my own children will be choking on the garbage I spewed into the financial air and water system. I’m rich!

When morality, reason, and sovereignty collapse together, we are left with outright anarchy, in everything but name. This is a reality so uncomfortable that hundreds of trillions dollars more of citizen retirement savings and other assets are likely to be tragically liquidated trying to regain stability and finance the “lean times” in the hopes of the promised upturn.

Act I: Oligarchy Becomes Anarchy

This anarchy and its suicidal impulse was brought to a head, but by no means started with, the collapse of Lehman Brothers and Bear Stearns. These crises did however confirm that the gatekeepers had become one and the same with the barbarians at the gate.

The same story kept repeating itself and was easily predicted by the news accounts of single “rogue” traders damaging storied banks in England, France, and other countries in the past decades: The techno-nouveau riche found vulnerabilities in the “civilized” corruption and racketeering of the establishment banks. These vulnerabilities expanded and softened as banks adopted unfettered gambling as a way to produce huge profits. When gambling didn’t pay, scapegoats were identified and jailed, the sins of the system were larded on those individuals, and nothing changed systemically.

Later, young guns armed with razor wits and high-powered computers saw that they could guarantee for themselves multi-billion dollar profits by not only betting on collapse but aiding and abetting (and even sometimes directly causing) a crash of the very banks they worked for or dealt with. Supported by a profit-by-any-means mentality, they simply took market manipulation to the next logical level, and a Pandora’s box of financial ills was loosed on to the world.

Consider Lehman Brothers. As detailed in Danny Schechter’s movie Plunder, Lehman Brothers was brought down by a spate of naked short selling simultaneously coupled with exotic very short-term anonymous short positions worth hundreds of millions of dollars. One can conclude with high probability given the established dynamic that those who engineered this and profited enormously from it were former employees or colleagues of said employees who migrated to hedge funds.

These players were insider enough to be privy to accounting tricks and frauds, the Repo 105 scams and so forth, being perpetrated by Lehman Brothers. They knew that Lehman Brothers was hiding gargantuan losses and skating on an illusory margin, so they devised a way to push them off the cliff by naked short selling and entrepreneurially betting on their own success. Why not teach the old farts a thing or two about their own game and laugh all the way to the proverbial bank.

With the repeal of Glass-Steagall and the collapse of the walls between conventional banking, investment banking, investment rating systems, and government regulation, the financier class had completed its nefarious project, a fungible two-tiered economic system “unhinging” finances from concrete reality, productivity, and value creation.

On one hand, a shadow banking system created hundreds of trillions of dollars of counterfeit wealth through the construction and leveraging of derivatives and mark-to-model assets. This was sold and exchanged for real assets, i.e. businesses and real estate. In addition trillions of dollars more in real wealth were siphoned off in transaction fees, bonuses, and profit taking. Financial, criminal, and civil liabilities were, and are still being, avoided through regulatory and governmental capture. On the other hand, infiltrated real value assets are being simply taken over: foreclosed upon, reassigned, and used as guarantees for this colossal fraud. Shadow liabilities are being hidden or shifted on to taxpayers’ bills.

Unsurprisingly, hedge funds like Magnetar saw an opportunity to profit from this inequality under the law by lobbying banks to construct highly rated junk investment portfolios and then betting against those portfolios many times over. So you have the young amoral renegade side of the elite sparring with the crooked establishment side in what amounts to them as one big galactic video game. When they lose, they always have another life. When they win, they take home the money and the title. Someone else pays.

It has to be noted that there is no personal stake in this game. Naked short selling, for instance, is phantom selling, selling shares you don’t actually own. Phantom buying, which is what is currently propping up the stock market, is using Fed-funneled money to buy up your own stocks. Risk has been removed from the system. There is only liability, profit, and power. Those of power and size taking great “risks” can leverage those risks into an extortion demand: “take our liabilities off our books, allow us to valuate them for as much as we want, and/or hide them for as long as we like or we’ll blow up the system.” Governments, with the exception of Iceland, said, “Please, financial terrorist, don’t do that. We’ll do anything you ask.”

If free market capitalism existed and worked these banks would have been allowed to collapse, their losses eaten by bond and stock holders, and civil and criminal charges filed against institutions and individuals. However, to do so would have exposed the rot and common criminality in the interlinked global system. Accountability would have indicted the people and connections behind the curtain, so the entire anarchic enterprise has to be covered up and its costs shifted to taxpayers, in a vicious downward cycle, which only accelerates rapaciousness and irrational incentives and punishes savings and responsibility.

Savings interest rates have been near zero for years, lower than inflation. Unemployment is high and people are liquidating their assets to pay for their costs of living. In addition, their future earnings and children’s savings being charged in advance for the multi-trillion dollar malfeasance of banks. Pensions are being looted and/or liquidated along with other real assets.

The major U.S. banks, on the other hand, reported within quarters of the crash they created, that they were able to go through an entire quarter without a single losing trading day. That is pretty easy to do when so-called toxic assets are offloaded to the Federal Reserve for 100 cents on the dollar and when banks receive hundreds of billions of 0% interest rate money and turn around and buy Treasury bonds with 3% interest, “paying” taxpayers back with interest earned on the debt these same banks caused.

No violations are too egregious or too pervasive for the Department of Justice or the SEC to ignore, no infraction too obvious or ridiculous to be covered up. These offices weakly go after the penny ante “bad apples” and keep a bubble system propped up and hopped up on its own version of financial adrenalin. A short laundry list of the most tragicomic examples:

• Fraudclosure: hundreds of thousands of mortgages being processed by robosigners, recorded and shifted around electronically, and their paper trails neglected or destroyed, contrary to even the most basic commerce and property laws. Not a single significant prosecution yet.
• Exchanges selling shares in precious metals without even having close to the reserves in physical metal to back up and JP Morgan’s “alleged”
• Mortgage insurers simply not paying their obligations.
• Multiple insurance on the same properties paid out in multipliers above the actual value of the property.
• Verified cases of houses being “foreclosed” upon that were already bought with cash.
• Same property sold to different owners.
• Extorted “marked to model” FASB standards fraud.

With no effective reserve requirements, leverage limits, or accounting standards, institutions with power can simply make up any amount they choose. The above examples show how rampantly institutional entitlement has evolved to claim and sell any property they choose, and valuate and sell any instrument they conjure up.

Power is all about access, and evidence shows where the current power resides. National governments in full collusion and cooperation with gigantic international financial corporations, have opened the floodgates of access to the “little people’s” wealth through bailouts, Fed policy, and quantitative easing, and clanged shut the castle door of the financial elite by allowing them to establish the value of thei r own assets and to concoct, rate, and sell almost any financial asset or instrument with no accountability, transparency, or enforcement.

The Big Squeeze, Part 2:
Abused Fundamentals and Fake Markets: How They Play Out

So we have a lawless system. What does this mean for citizens and investors? In the near term it means that the fundamentals will not apply. Anything that maintains or augments elite wealth and increases elite options will be supported, and anything that consumes or converts common people’s wealth and labor and restricts their choices will be pursued. Anything that reinforces accountability, rational response, or cause and effect will be actively suppressed. Forget reversion to the mean. One only has to observe where the respective value/wealth of each party resides and where it gets channeled to know what the market will do and where policy will go.

When the stock market should crash, it won’t… until some time frame far longer than even the most generous fundamentals would dictate. I said as much to Charles Hugh Smith in an October 17, 2010 email entitled Stealth Monetization Keeping Market Up With Stock Buybacks, and so far I have been right on the money:

I’ve seen different parts of this puzzle in various articles, but here is why the stock market will remain artificially boosted until the mortgage fraud mess really gets cranked up.  Just like the Fed lends to banks at 0% interest as a way to funnel money back to purchasing low-interest T-bonds, creating an artificial demand (and guaranteed profit), and goosing the market there (and staunching the exodus of foreign money), so too can money be funneled through banks from the Fed to corporations who use it to buy their own stock, effecting the same scenario.  I believe this is happening now, and will likely happen more if there is a QE2.

Corporations will love it, because CEOs know that stock increases, no matter how you get them, mean big bonuses. [T]hey will, if anything attempt to hyper-accelerate low-interest money flow into their books and on to the stock sales block. How long that charade can persist is anyone’s guess, but if you can have insolvent, zombie banks making “profits,” and handing out, what, $144 billion, just in bonuses…

The more extreme the hubris, the more ridiculous the momentum, and the more spectacular the crash.  These guys think they can defy gravity, and so far they have [been able to] with a lot of help.  When the natural laws of finance kick in is anyone’s guess, but I see (the Dow Index) as I originally predicted, to be 11,000 to 12,000 (un)til at least March (2011), a shakeup, and some panicked back door bailout to obscure the fundamentals again until September/October (of 2011).

These guys are too arrogant, too insulated, and too single-minded to do anything other than attempt to force the world into their boxes.  At a certain point it will quit, but that only happens when things get very unmasked.  The mortgage fraud cases are the key, but those will be stonewalled.  These guys are tenacious because they are hanging by a thread of testosterone.  Tick, tock.

Analyses that try to predict near term market moves based on Laffer curves, Elliot Waves, and historical cycles will almost definitely fail. We don’t have a “new era”, but we definitely have unprecedented coordinated global intervention dedicated almost solely to the fortunes of the top 1%. That is the new rule that will govern until there is a serious breakdown. Warren Buffet got this insight after the financial crash in 2008. He knew the government was going to step in to save and subsidize the big banks so he swooped up their stocks, garnering himself a hefty tax break in the process.

In the near term, independent shorters will be routinely and consistently routed through market manipulation and collusion between large corporations and their government policy clerks. JP Morgan allegedly manipulates the silver market for its own profit, but also does so to keep fiat currencies stronger. Feeling they benefit, major world governments will refuse to prosecute and, indeed, actively collude for reasons of “monetary security.” However, if you happen to be JP Morgan, holding massive short positions on silver, and you get challenged by a coordinated democratic effort to “crash JP Morgan, buy silver”, then you simply offload your short positions into unregulated institutions and buy up the copper market.

Here are some of my predictions in line with this rich-get-richer-and-the-rest-of-us-pay near to medium-term trend:

The stock market will remain artificially high, between 11,000 and 12,000 with possible dips (7,000 – 9,000) and spikes into the 14,000 – 16,000 range, before running into serious trouble in September/October 2011 (lower probability and acuteness) and/or September/October 2012 (much higher probability and acuteness)

Wages will remain flat or decline, unemployment and underemployment will remain high, and the power of labor will erode further as unions continue to throw their younger members under the bus to fund entitlements and benefits of their older members. Worldwide labor will be cheaper, providing a near term boost to corporate profits (counteracted eventually by buyer revolt).

Sales numbers will disappoint indefinitely, making stocks of retail stores a very bad buy. Even the Wal-Marts will take a hit. People simply don’t have the money even for cheap luxuries. Dollar stores on the other hand will continue to do very well because the provide soap, paper, spices, etc. for a very cheap price. In economics, it’s called “substitution.” To the middle class and working classes it’s called “survival.” This will not stop the GDP numbers from rising, being recalculated, and being manipulated with debt-fueled government spending.

The middle class will continue to stay away from the housing and stock markets in droves through a combination of low income, lack of trust, and just plain angry refusal. This, in addition to baby boomer liquidation for retirement will put serious pressure on the Dow. This will be mitigated somewhat by those same baby boomers accepting that they will be working at least part-time until they die.

Middle class purchasing power will continue to be eroded as costs of necessities (food, water, fuel, health care, etc.) rise by several factors above inflation, and durable middle class assets (housing, savings) deflate in value. The material American Dream will become a distant ideal.

Scandals and finger pointing will erupt around the management of public pensions as it is discovered that pension managers have colluded with states and corporations to hide losses and true value of assets. CALPERS, the 200 billion dollar California public pension will be ruled effectively bankrupt, due to a combination of extravagant liabilities and collapsed high-return junk assets. Investment rating systems will, as a result, come under renewed scrutiny to no effect.

Metal markets will continue to be suppressed, even as countries and wealthy individuals and organizations buy them up as a hedge. Monetizations of debt, currency devaluations, will continue unimpeded. Other commodities, like rice, will experience huge volatility leading to huge price swings and escalating social unrest and resentment as investor parasites try to accentuate these swings for their own profits.

There will be serious talk of and moves toward a world currency and global accounting standards to establish a level “playing field” and keep nations from trying to undercut each other’s currency through trade policies and cooking their books. This will be treated with a combination of alarm (by libertarians) and derision (by progressives) as observers will joke that now governments are trying to “be consistent in the way they break the law and steal from their people.”

The Role of Savings

Why is saving so important? In short, savings are the holy grail. On the opportunism side, savings represent hundreds of trillions of dollars of stored wealth, just ripe for the plundering. On the supervisory side, savings are the last reality hedge. Savings provide the annoying anchor for financial sanity and fundamentals, and serve as a barrier to exploitation, outright debt peonage, and monetary tyranny.

I’m defining savings as any stored real, productive value: money in a savings account, paid-down house, gold, land, a business, etc. Savings have utility. Savings can be exchanged or used to purchase material needs and wants or make room for the non-material, experiential elements of the good life—time, leisure, education, travel. In order to make a financial coup complete, savings have to be rounded up and led to the slaughterhouse.

Meaningful, value-backed savings means autonomy and choice, and autonomy/choice represents power, ability resist, to “choose other” than what some financial power wants from you, your money, and your productivity. Restricting consumer choice is absolutely essential to maximizing corporate profit, since low quality and high prices improve profits short-term but deter consumption medium-term for uncaptured market players. Without personal savings that can be maintained, stored, and accessed a person has no leverage in their own finances nor in their ability to “vote” as an economic citizen. One is merely a debt slave.

It appears prevailing powers will go to any length to prostitute themselves against any true price discovery that would reward savers. Reversion to the mean, trading volume, velocity of money, margin, etc. all mean nothing when you can simply pour in an infinite amount of counterfeit currency. Along with this, it becomes almost impossible to assess and determine what is counterfeit because the official numbers, formulas, and information upon which accountability rests have been so distorted and obscured as to make value determination impossible (see calculation trends in employment numbers, inflation base line, etc.). Political pressures and decisions have simply caused a regauging of “undesirable” numbers to make it look like there is no problem.

Profit used to be an engine of savings and investment, the oil of small business, entrepreneurialism, and a growing economy. In the current global situation most profit has turned cancerous. It has simply come to mean parasitic wealth extraction. If I can profit by debasing your savings or forcing my debts on to your books, and you accept it as necessary to keep the system you’ve invested in from collapsing, I can control you and your future opportunities.

In short, I now possess your power as a citizen. This is why Thomas Jefferson was so clear about everyone owning property. One’s own means of support is necessary if a corrupt government emerges. One must be capable of refusing to participate, to exercise civil disobedience, and to be supported in a community significantly immune to upper-level manipulation.

Historical economics are premised on observations of human behavior converted into “natural” laws and forces, given certain conditions. Those conditions are being actively and systematically subverted. We are now seeing human institutions and behavior operating as purely synthetic phenomena. There is no Adam Smith’s “hidden hand,” no collective rational self-interest, but rather devolution to leveraged control and power.

We have the worst of neo-liberal state welfare, mixed with neo-conservative corporate welfare—a state for the corporation, and the corporation for itself. Citizens are being treated simply as productivity and investment batteries, like some twisted adaptation of The Matrix. With no protection from law or market fundamentals canny rational responses can be checkmated.

The Big Squeeze, Part 3:
The Quiet Rebellion: Civil Disobedience, Local Markets, and Debt Erasure

The collapse of elite authority and rise of democratic civil disobedience will come, but I think it will look very different than most expect. Given the tumultuous play-out of current conditions, one might imagine comprehensive, violent upheaval. There will be widespread and numerous local and regional examples of violence, John Brown style uprisings, especially in the worst hit areas. However, the overall rebellion will be mostly “quiet,” I believe. It is likely to commence as something far more sedate and private than a global public bloodbath. Moreover, it will be driven less by principle than by practical recognition and necessity.

Eventually, organized creative resistance and alternatives will emerge, but they will stem from widespread exhaustion in both senses of the word as in “used up” (environmental resources gone, savings gone, pensions gone, employment gone, retirement gone, American Dream gone), and in terms of “fatigue”. People will become too damn tired emotionally, physically, financially, and psychologically both to fight and to continue supporting a system that is sucking far more than it is providing.

The rebellion will start as individualistic refusal and grow into something more interconnected, social, and affirmative over time. People will in increasing numbers stop paying their taxes and their mortgages, refuse to buy (stocks, goods, etc.), take their money out of banks, and so forth.

From an October 24 email to Charles Hugh Smith:

[Citizen rebellion] will [start as] a kind of civil disobedience that looks like apathy and complacence, but will be actually closer to disconnection and non-cooperation, and subtle sabotage one finds at workplaces with intelligent, productive, but poorly treated employees.

These employees know they are getting screwed.  They know their bosses and owners are venal… They know they have no leverage to raise their wages, and that performance boosts on their parts will be rewarded with more exploitation and skimmed and highjacked productivity.  So what will they do?

“Okay, two can play that game.”  You abuse me and my productivity.  I’ll make it look like I am doing everything I’m supposed to, but I’m actually taking what I can out of the company, from office supplies, to internet time doing other things, to, you name it.

I think [strategic] mortgage defaults might follow this same pattern… The salt-of-the-earth types still have some integrity and desire to “do the right thing” but if doing so enables them to get screwed more and rewards vicious behavior, the new moral mandate with integrity is to do the conventionally moral “wrong” thing, so as to punish the evil-doers and to prevent self-abuse.

I described how this might evolve in another email to Charles Hugh Smith on October 13 in a post entitled “An Unintentional Prophecy” that extended a reader response I made to Gonzalo Lira’s well-known post on hyperinflation:

I have long argued (and laid out in some frameworks) how we are being forced in an accelerated fashion to move value from a material (including gold, commodities, etc.) to a non-material basis of meaning.  We have overcapacity technologically to produce food, but undercapacity to distribute it in a way the optimizes well-being rather than reinforcing misery.  ”Disconnected” profit acts like a cancer, hypercharging certain parts of the system and impoverishing other parts.

You cannot eat gold, nor even commodities that are not in your refrigerator or your pantry.  What value do these have?  Since the central states and their paymasters (the financial elites) will fail, what takes its place?  Most of the scenarios offered are of a survivalist bent, but I see this myopic, constrained guess … rather than an outflow of keen, intuitive grasp of the possibilities.

When Y2K came, the world did not end.  When New York City blacked out, people milled around… rather than storming the grocery stores.  Fact is, financial collapse will leave us to our own devices, and we will have to invent. We have some tools:  local currency, barter, microfinance, in which productivity can be linked back to (locally driven, globally linked) economic enterprise, and real quality of life can emerge as present- and people-directed, rather than future- and “disconnected profit”-directed, which (by and for itself) is nothing more than an agreement to exploitation and imbalance.

Connected profit, in conjunction with people and planet (triple bottom line) can be transformed into a quality-of-life value-added marker, rather than a power grab and concentration.  We are coming to the big face-off between top-down control by those who would be gods over us and impose value on us, and bottom up creativity which recognizes that any “god” (energy, good, intelligence) comes up through us and is connected between us.  It is this “within” and “between” well-negotiated and exchanged that produces real value.

We are reaching the limits of physical exploitation and growth (as shown by its effects on environmental health).  We need to transfer that growth and “frontier” mentality to non-scarce, non-material assets like learning, intellect, culture, music, community, family, creativity, human connection and interest.  This cannot happen until the grip of the former is dashed by its own means, by its own unraveling. This is now happening.

This may look like pure idealism to some and capitulation to those observers needing cathartic overturn of the old system, but it will be in reality the acceptance of the death of an era, and the start of an open and creative building of the next. Quality of life must migrate by practical necessity from worth determined by material wealth and monetized value toward worth in which non-material harbingers of value— learning, community solidarity, multicultural experience and exchange, environmental advocacy, etc— become the mainstays of a good life.

Those websites talking about purely individual responses to catastrophe, for instance, those suggesting stocking up on physical silver and gold, and using it to trade for your necessities, will ultimately look foolish. How will this solve the systemic problem? What merchant will accept on faith that what you hold is real? Your “silver” ingot could simply be coated zinc. Is that grocer going to take out a test kit and a drill? Trade will be in currency, but mainly locally-based paper currency backed by local goods, faith, and productivity. Medium-sized cities (like a Madison, WI or an Ithaca, NY) near farmland and colleges with a well-educated progressive populace, farmer’s markets, and a vitally functioning social infrastructure and comity will probably do best.

This movement will be driven by the younger, Generation X and millennial generations. Educated, well supported, idealistic, pragmatic, socially and multiculturally experienced, (and with lots of time on their hands) they face a world in which they have few to no job opportunities, huge debts, deteriorated expectations, a polluted future, and increased burdens to take care of the older generations. They don’t believe the promises of future return they’ve been sold, nor should they.

In addition they are increasingly multi-ethnic, multi-cultural, and global in perspective, less motivated or swayed by nationalistic or racist tensions. Their loyalties are more to their own interconnected experience than brands, flags, or classes. They are smart as a group and very able to work collaboratively and effectively as seen in their impressive participation in the Obama campaign (before Obama completely dismissed them).

Baby boomers may follow, but probably only after initially resisting, and trying to make the system work long enough so they can cash in their corporate 401(k)s and extract their welfare state entitlements. Additionally, baby boomers’ identity is more deeply motivated by heroic individualism over shared service. The boomers’ deep-rooted hope for the material American Dream is likely to extend the time line for a global coming-to-terms with an obsolete system, but eventually they will have to capitulate, find a renewed purpose, dust off their 60’s idealism, and reapply themselves.

On a grand scale the only way to erase counterfeit money and assets of hundreds of trillions of dollars is to erase the debts associated with those fake assets. (Let me underscore again, these are not “toxic” assets, they are fake assets.) In one way or another, this will have to happen. What about those homeowners who bought more than they could afford, will they get off scot-free? The answer is, “not entirely,” though full responsibility and accountability is likely to take on a new face.

Zeal for imprisonment of the fraudsters and the comeuppance of the loose spenders will likely yield to a requirement for defrauders and debtors to return fully what they have taken plus interest through financial compensation and in-kind pro-social work (not pennies on the dollars like the present situation). Though this would not exactly involve breaking rocks with a sledgehammer, it would help build up an infrastructure badly in need to renovation.

Forgiveness in general, and forgiveness of debt in particular, stand as virtues if they free us up to acknowledge, address, and learn from our culpability, start anew, and create forward. There will still be a necessity for systems of prosecution and restorative justice to prevent abuse. However, giving to society, whether to correct a wrong or to simply contribute as a concerned citizen should not be viewed as a punishment. It can, and should be seen, both as a social necessity and a personal avenue for fulfillment.

We will have turned the corner when contribution to our collective well-being is not seen as an obligation but an opportunity, and exploiting others is understood not as an opportunity but a crime.

By Zeus Yiamouyiannis, Ph.D., copyright January, 2011