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Self-Interest and the Pathology of Power: The Corruption of America, Part 2

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by Charles Hugh Smith
Posted February 9, 2012
 
The self-interest of the alcoholic is to keep drinking. Is this truly in his best interests? The answer illuminates the pathology of power in America.
 
IF WE IGNORE THE LIP SERVICE SHOWERED ON “REFORM”, WE FIND THAT THERE IS REALLY ONLY ONE STRATEGY in America: extend and pretend. Individuals, households, communities, cities, states, enterprises and the vast sprawling Empire of the Federal government and its many proxies – all are engaged in extend and pretend.
 
The closest analog is a seriously ill alcoholic who tells himself he just has a hang-over when it’s abundantly clear he is suffering from potentially terminal cancer. With a hang-over, extend and pretend is the only strategy that works: you can try various “magic potions” to relieve the symptoms, but the only real cure is to give the body enough time to cleanse itself of the toxins you’ve created and pretend to be functioning in the meantime.
 
In the case of aggressive cancer, then extend and pretend is the worst possible strategy: ignoring the rapid progression of the disease only makes eventual treatment more difficult and uncertain. The only way to treat cancer is to face it straight-on, learn as much as you can about the disease and the spectrum of treatments, consider the side-effects and consequences of various treatment strategies, and then get to work radically transforming your entire life, mind, body and spirit to effect the cure.
 
Why do we perpetrate the delusion of a hang-over when it’s painfully clear we have cancer? We’re afraid, of course; we fear the unknown and find comfort in the belief that nothing has to really change. We call this denial, but it arises from fear and risk aversion. In the moment, amidst all the swirling chaos of fear and uncertainty, we choose extend and pretend because it seems to be in our self-interest.
 
This is the ontology of extend and pretend: a delusional view of our self-interest. The drunk is terrified of not being able to drink himself into a stupor; in that dysfunctional state of being, then he perceives his self-interest as denying he has cancer because he knows that treatment will require him to stop drinking. In effect, what he perceives as acting in his self-interest is actually an act of self-destruction.
 
Political and social revolutions occur when the productive classes realize the Status Quo no longer serves their self-interests. In other words, the revolution is first and foremost an internal process of recognition and enlightenment: all the propaganda issued by the Status Quo, i.e. that it serves the best interests of the productive classes, is finally recognized as false. As this awakening begins, a divergence between the definitions of self-interest by the Power Elites (financial and political) and the productive classes begins to open. This is extremely dangerous to the Power Elites, who are fundamentally parasitical and predatory: their wealth and power all flow from the labor, taxes, debt service and passivity/complicity of the productive classes.
 
The Power Elites’ time-honored strategy to protect their own wealth and grip on power has three components: one is to pursue a strategy of pervasive, ceaseless propaganda to persuade the productive classes that the system is sound, fair and working for them; the second is to fund diversionary “bread and circuses” for the potentially troublesome lower classes, and the third is to harden the fiefdoms of power and wealth into an aristocracy that is impervious to the protests of debt-serfs and laborers below.
In addition to “the system is working for you” social control myth, the wealth/power aristocracy also invokes various fear-based social control myths: external enemies are threatening us all, so ignore your debt-serfdom and powerlessness, etc. In the ideal Power Elite scenario, a theocracy combines faith and State: not only is it illegal to resist the Aristocracy, you will suffer eternal damnation for even thinking about it.
Ask yourself this: how much influence do you as a citizen, voter and taxpayer have over the Federal Reserve? If we’re honest, we must confess that the Federal Reserve is as remote to us as any branch of the North Korean government: we have zero influence over it, and the same can be said of our elected representatives. This is the definition of an aristocracy, oligarchy (a power structure in which power is held by a small number of people), kleptocracy, etc.
 
The Power Elite has a key advantage over the citizenry: its own self-interest is clear. The citizenry must entertain this question: is the Status Quo really working for me or not? The Power Elite aristocracy has no such confusion: the Status Quo is working beautifully for them, and the only threat to their wealth and power is the possibility that the productive classes might opt out and stop paying the taxes and debt service which funds the parasitical Power Elite. Thus the Power Elite has a single goal: to persuade and coerce the citizenry into accepting their powerlessness and debt-serfdom as a pathological form of self-interest.
 
There is another dynamic to the Power Elite aristocracy’s grip on concentrated wealth and power: the self-selecting, self-perpetuating pathology of the aristocracy and the Upper Caste that so slavishly serves them. Author Chris Sullins identified this dynamic as one of self-propagating fractals (The MacRib is Back! September 23, 2008):
 
There are readers who might feel I’m being very hard on the public with the comparison so far. But look how people have allowed their names to be changed. They have gone from being called citizens to consumers. A citizen is a very human word which denotes awareness, involvement, and participation. It’s a word that sounds active and conscious in its very nature. A consumer by contrast sounds far more passive. A lot of other animals and even inanimate processes consume things. A consumer sounds like sheep grazing.
 
Once a populace accepts a self-definition that strips out their participation as anything but passive consumers, then the maintenance of power boils down to test-marketing new social control myths and fear-mongering. This sophisticated level of marketing and predation requires a highly trained class of servants: an Upper Caste of technocrats, middle managers, marketers, lobbyists, “creatives,” engineers, etc. who do the heavy lifting that keeps the Power Elite’s wealth and status not just intact but expanding. The reward for this service is a hefty salary that enables the purchase of the signifiers of upper-middle class existence and an intoxicating proximity to power and status visibility, i.e. some measure of recognition as “being somebody important.”
 
Until very recently I reckoned this Upper Caste of loyal servants comprised about 20% of the American populace, but upon closer examination of various levels of wealth and analysis of advert targeting (adverts only target those with enough money/credit to buy the goods being offered), I now identify the Upper Caste as only the top 10% (the aristocracy is at most the top 1/10th of 1%). Wealth and income both fall rather precipitously below the top 10% line, and as globalization and other systemic forces relentlessly press productivity into fewer hands, then the rewards aggregate into a smaller circle of laborers.
 
As noted yesterday in Social Fractals and the Corruption of America (Of Two Minds, February 8, 2012), you cannot aggregate healthy, thrifty, honest, caring and responsible people into a group that is dysfunctional, spendthrift, venal and dishonest unless those individuals have themselves become dysfunctional, spendthrift, venal and dishonest.
 
This is the ontology of the pathology of power: If you want to join the elite levels of the Upper Caste, where “doing God’s work” is a daily practice of fraud, embezzlement, misrepresentation, collusion, purposeful obfuscation, all in service of a pathologically self-destructive notion of self-interest, then you must become dysfunctional, venal and dishonest (with becoming spendthrift in service of acquiring signifiers of status a close fourth).
 
Since non-pathological people will quit or be fired, then these fractals of corruption are self-selecting and self-perpetuating. This is true not just of financial America but of elected officialdom. Anyone who is still naive or delusional enough to think that getting elected to Congress or the state legislature will empower “doing good” will soon learn the ropes: the next election is less than two years away, and if you want to retain your grip on power you’re going to need a couple million dollars.
 
And if you want to “get something done,” you will need to take orders from your party leadership and service your donors. I once had a friend who by extraordinary effort got himself elected to the state legislature. Being a young idealist, he actually refused to vote as his party leadership directed: thus identified as a rebel, he was predictably out two years later.
 
So much for “working within the system.” By the time all the donors, lobbyists, leeches and parasites have been properly serviced, the “reform” bill is 2,000 pages long. As a result of the feudal structure of wealth and power in America and the self-reinforcing, self-propagating fractals of pathological servitude, the citizenry are increasingly remote from power. The aristocracy, like feudal lords in distant, fortified castles, demands obedient service of the powerless citizenry: work hard, pay your taxes and service your debt – and fears any awakening of true self-interest.
 
Just because a devoted member of the Upper Caste is allowed to enter the castle to do his work doesn’t mean he is part of the aristocracy. That glow of proximity to power is his reward for dutifully slaving away as a higher-order serf.
 
The American Revolution was triggered not by a sudden upwelling of noble ideals, but by the realization of the landed nobility and productive classes that the commercial and political domination of Great Britain was placing their wealth and liberty at risk.
 
Put another way: they awoke to the fact that the Status Quo no longer served their essential self-interests. When the Upper Caste and productive classes reach this same conclusion, then perhaps they will elect a transformational third party to sweep away the corrupt political class. This new party must embody a moral imperative that acts as a social fractal: retaining power is not the goal. If the people want to restore the pathological aristocracy to power in two years, then by all means let them have it. They will do so without our complicity, interest payments, labor and servitude, for we have opted out of pathology.

2012 – The year of living dangerously

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by Jim Quinn
of The Burning Platform
Posted on 8th January 2012 

http://www.theburningplatform.com/?p=27063

“In retrospect, the spark might seem as ominous as a financial crash, as ordinary as a national election, or as trivial as a Tea Party. The catalyst will unfold according to a basic Crisis dynamic that underlies all of these scenarios: An initial spark will trigger a chain reaction of unyielding responses and further emergencies. The core elements of these scenarios (debt, civic decay, global disorder) will matter more than the details, which the catalyst will juxtapose and connect in some unknowable way. If foreign societies are also entering a Fourth Turning, this could accelerate the chain reaction. At home and abroad, these events will reflect the tearing of the civic fabric at points of extreme vulnerability –  problem areas where America will have neglected, denied, or delayed needed action.” – Strauss & Howe – The Fourth Turning – 1997

IN DECEMBER 2010 I WROTE AN ARTICLE CALLED Will 2012 Be as Critical as 1860?, THAT PONDERED WHAT MIGHT HAPPEN WITH THE 2012 presidential election and the possible scenarios that might play out based on that election. Well, 2012 has arrived and every blogger and mainstream media pundit is making their predictions for 2012. The benefit of delaying my predictions until the first week of 2012 is that I’ve been able to read the wise ponderings of Mike Shedlock, Jesse, Karl Denninger, and some other brilliant truth seeking analysts regarding what might happen during 2012. The passage above from Strauss & Howe was written fifteen years ago and captured the essence of what has happened since 2007 and what will drive all the events over the next decade. Predicting specific events is a futile human endeavour. The world is so complex and individual human beings so impulsive and driven by emotion, that the possible number of particular outcomes is almost infinite.

But, as Strauss and Howe point out, the core elements that created this Crisis and the reaction of generational cohorts to the implications of debt, civic decay and global disorder will drive all the events that will occur in 2012 and for as far as the eye can see. Linear thinkers in mega-corporations, mainstream media and Washington D.C. focus on retaining the status quo, their power and their wealth. They believe an economic recovery can be manufactured through monetary manipulation and Keynesian borrowing and spending. They are blind to the fact that history is cyclical, not linear. In order to have an understanding of what could happen in the coming year, it is essential to keep the big picture in focus. As we enter the fifth year of this twenty year Crisis period, there is absolutely no chance that 2012 will see an improvement in our economy, political atmosphere or world situation. Fourth Turnings never de-intensify. They exhaust themselves after years of chaos, conflict and turmoil. I can guarantee you that 2012 will see increased mayhem, riots, violent protests, recessions, bear markets, and a presidential election that will confound the establishment. All the episodes which will occur in 2012 will have at their core one of the three elements described by Strauss & Howe in 1997: Debt, Civic Decay, or Global Disorder.

Debt – On the Road to Serfdom

The world is awash in debt. Everyone is focused on the PIIGS with their debt to GDP ratios exceeding the Rogoff & Reinhart’s 90% point of no return. But, the supposedly fiscally responsible countries like Germany, France, U.K., and the U.S. have already breached the 90% level. Japan is off the charts, with debt exceeding 200% of GDP. These figures are just for the official government debt. If countries were required to report their debt like a corporation, their unfunded entitlement promises to future generations are four to six times more than their official government debt.

Any critical thinking person can look at the chart above and realize that creating more debt out of thin air to solve a debt problem is foolish, dangerous, and self serving to only bankers and politicians. The debt crisis took decades of terrible choices and bogus promises to produce. The world is now in the midst of a debt driven catastrophe. At best, the excessive levels of sovereign debt will slow economic growth to zero or below in 2012. At worst, interest rates will soar as counties attempt to rollover their debt and rolling defaults across Europe will plunge the continent into a depression. The largest banks in Europe are leveraged 40 to 1, therefore a 3% reduction in their capital will cause bankruptcy. Once you pass 90% debt to GDP, your fate is sealed.

“Those who remain unconvinced that rising debt levels pose a risk to growth should ask themselves why, historically, levels of debt of more than 90 percent of GDP are relatively rare and those exceeding 120 percent are extremely rare. Is it because generations of politicians failed to realize that they could have kept spending without risk? Or, more likely, is it because at some point, even advanced economies hit a ceiling where the pressure of rising borrowing costs forces policy makers to increase tax rates and cut government spending, sometimes precipitously, and sometimes in conjunction with inflation and financial repression (which is also a tax)?”Rogoff & Reinhart

The ECB doubling their balance sheet and funnelling trillions to European banks will not solve anything. The truth that no one wants to acknowledge is the standard of living for every person in Europe, the United States and Japan will decline. The choice is whether the decline happens rapidly by accepting debt default and restructuring or methodically through central bank created inflation that devours the wealth of the middle class. Debt default would result in rich bankers losing vast sums of wealth and politicians accepting the consequences of their false promises. Bankers and politicians will choose inflation. They believe they can control the levers of inflation, but they have proven to be incompetent, hubristic, and myopic. The European Union will not survive 2012 in its current form. Countries are already preparing for the dissolution. Politicians and bankers will lie and print until the day they pull the plug on the doomed Euro experiment.

The false storyline of debt being paid down in the United States continues to be propagated by the mainstream press and decried by Paul Krugman. The age of austerity storyline gets full play on a daily basis. Total credit market debt in 2000 was $27 trillion. It skyrocket to $42 trillion by 2005 as George Bush and Alan Greenspan encouraged delusional Americans to defeat terrorism by leasing SUVs and live the American dream by putting zero down on a $600,000 McMansion, financing it with a negative amortization no doc loan. Paul Krugman got his wish as a housing bubble replaced the dotcom bubble. Debt accumulation went into hyper-speed in 2006 and 2007 as Wall Street sharks conducted a fraudulent feeding frenzy by peddling their derivatives of mass destruction around the globe. By the end of 2007, total credit market debt reached $51 trillion.

In a world inhabited by sincere sane leaders, willing to level with the citizens and disposed to allow financial institutions that took world crushing risks to fail through an orderly bankruptcy process, debt would have been written off and a sharp short contraction would have occurred. The stockholders, bondholders and executives of the Wall Street banks would have taken the losses they deserved. Instead Wall Street used their undue influence, wealth and power to force their politician puppets to funnel $5 trillion to the bankers that created the crisis while dumping the debt on taxpayers and unborn generations. The Wall Street controlled Federal Reserve provided risk free funding and took toxic mortgage assets off their balance sheets. The result is total credit market debt higher today than it was at the peak of the financial crisis in March 2009.


Our leaders have done the exact opposite of what needed to be done to address this debt crisis. The country is adding $3.7 billion per day to the National Debt. With the debt at $15.2 trillion, we have now surpassed the 100% to GDP mark. The National Debt will be $16.5 trillion when the next president takes office in January 2013. Ben Bernanke has been able to keep short term interest rates near zero and the non-existent U.S. economic growth and European disaster has resulted in keeping long-term rates near record lows. Despite these historic low rates, interest on the National Debt totalled $454 billion in 2011, an all-time high. The effective interest rate was approximately 3%. If rates stay at current levels, interest will be between $400 and $500 billion in 2012. Each 1% increase in rates would cost American taxpayers an additional $150 billion. A rapid increase in rates to the 7% level would ratchet interest expense above $1 trillion and destroy the last remaining vestiges of Bernanke’s credibility. It can’t possibly happen in 2012. Right? The world has total confidence in pieces of paper being produced at a rate of $3.7 billion per day.

Confidence in Ben Bernanke, Barack Obama and the U.S. Congress is all that stands between continued stability and complete chaos. What could go wrong? Debt related issues that will likely rear their head in 2012 are as follows:

  • A debt saturated society cannot grow. As debt servicing grows by the day, the economy losses steam. The excessive and increasing debt levels will lead to a renewed recession in 2012 as clearly detailed by ECRI, John Hussman and Hoisington Investment Management.

“Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street.” – ECRI 

At present, we observe agreement across a broad ensemble of models, even restricting data to indicators available since 1950 (broader data since 1970 imply virtual certainty of recession). The uniformity of recessionary evidence we observe today has never been seen except during or just prior to other historical recessions.-  John Hussman 

Negative economic growth will probably be registered in the U.S. during the fourth quarter of 2011, and in subsequent quarters in 2012. Though partially caused by monetary and fiscal actions and excessive indebtedness, this contraction has been further aggravated by three current cyclical developments: a) declining productivity, b) elevated inventory investment, and c) contracting real wage income. In summary, the case for an impending recession rests not only on cyclical precursors evident in productivity, real wages, and inventory investment, but also on the disfunctionality of monetary and fiscal policy. – Van Hoisington 

  • The onrushing recession will send housing down for the count. With 2.2 million homes already in the foreclosure process and another 13 million homes with negative or near negative equity, the recession will push more people over the edge. As foreclosures rise a self reinforcing loop will develop. Home prices will fall as banks dump houses at lower prices, pushing millions more into a negative equity position. Home prices will fall another 5% to 10% in 2012, with a couple years to go before bottoming.
  • The recession will result in companies laying off more workers. It won’t be as dramatic as 2008-2009 because companies have already shed 6 million jobs. The working age population will increase by 1.7 million, the number of people employed will go up by 1 million, but the official unemployment rate will drop to 7% as the BLS reveals that 10 million people decided to relax and leave the workforce. Surely I jest. The government manipulated unemployment rate will rise above 9%, while the real rate will surpass 25%.
  • The American people rationally increased their savings rate to 6.2% in the 2nd Quarter of 2009. When you are over-indebted and the country heads into recession, spending less and saving more is a sane option. Consumer expenditures accounted for 69% of GDP in 2007, prior to the economic collapse. The “recovery” of 2010-2011 has been driven by Ben’s zero interest rate policy, the resumption of easy credit peddling by the Wall Street banks, and consumers convinced that going further into hock to attain the American dream is rational. Consumer spending as a percentage of GDP has actually risen to 71% and the savings rate has plunged to 3.6%. The 20% drop in gas prices since April bottomed in December. This decline temporarily boosted consumer spending, but prices are on the rise again. With the State and local governments reducing spending, do the Wall Street Ivy League economists really believe consumers will increase their consumption to 73% of GDP and reduce their savings rate to 1%? If you open your local newspaper you will see the master plan. Car dealers are offering 0% financing with nothing down for 60 months. The GMAC/Ditech/Ally Bank zombie lives as subprime auto loans are back. The “strong” auto sales are a debt financed illusion. Ashley Furniture is offering 0% financing for 50 months with no payments through Wells Fargo Bank. When the Federal Reserve provides the Wall Street banks with 0% funding, banks are willing to take big risks knowing that Uncle Ben and the naive American taxpayer will be there to bail them out when it blows up again.
  • With recession a certainty as fiscal stimulus wears off, home prices fall, employment stagnates, and consumer spending grinds to a halt, what will happen to the stock market? The Wall Street shills paraded on CNBC and interviewed by the multi-millionaire talking head twits assure you that stocks are undervalued and the market will surely be up 10% to 15% by 2013. It’s a mortal lock, just as it has been for the last twelve years, with the S&P 500 at the same level as January 1999. The fact is the stock market drops 30% on average during a recession. The talking heads declare that corporate profits are at record levels and will continue higher. Not bloody likely. Corporate profit margins are at an all-time peak about 50% above their historical norms. Profits always revert to their mean. These profits are not sustainable as they were generated by firing millions of workers, zero interest rates for banks, fraudulent accounting by the banks, and trillions in handouts from the middle class taxpayers to corporate America.

In a true free market excess profits will draw more competitors and profits will fall due to competition. When corporate profits exceed the mean by such a large amount, you can conclude that crony capitalism has replaced the free market. Government bureaucrats have been picking the winners (Wall Street, War Industry, Big Media, Big Healthcare) and the American people are the losers. Corporate oligarchs prefer no competition so they can reap obscene risk free profits and reward themselves with king-like compensation. Mean reversion will eventually be a bitch. Real S&P earnings have reached the 2007 historic peak. To believe they will soar higher as we enter a recession takes the same kind of faith shown by Americans buying a $600,000 McMansion in Stockton with no money down in 2005. The result will be the same. Do you ever wonder how corporations are doing so well while the average American sinks further into debt, despair and poverty?

The brilliant John Hussman captures the gist of an investor’s dilemma in his latest article:

“With 10-year Treasury yields below 2%, 30-year yields below 3%, corporate bond yields below 4%, and S&P 500 projected 10-year total returns below 5%, we presently have one of the worst menus of prospective return that long-term investors have ever faced. The outcome of this situation will not be surprisingly pleasant for any sustained period of time, but promises to be difficult, volatile, and unrewarding. The proper response is to accept risk in proportion to the compensation available for taking that risk. Presently, that compensation is very thin. This will change, and much better opportunities to accept risk will emerge. The key is for investors to avoid the allure of excessive short-term speculation in a market that promises – bends to its knees, stares straight into investors’ eyes, and promises – to treat them terribly over the long-term.”


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The Nightmare after Christmas

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by Detlev Schlichter
of The Cobden Center
Posted December 26, 2011

THE PATHETIC STATE OF THE GLOBAL FINANCIAL SYSTEM WAS AGAIN ON DISPLAY THIS WEEK. Stocks around the world go up when a major central bank pumps money into the financial system. They go down when the flow of money slows and when the intoxicating influence of the latest money injection wears off. Can anybody really take this seriously? On Tuesday, the prospect of another gigantic cash infusion from the ECB’s printing press into Europe’s banking sector, which is in large part terminally ill but institutionally protected from dying, was enough to trigger the established Pavlovian reflexes among portfolio managers and traders.

None of this has anything to do with capitalism properly understood. None of this has anything to do with efficient capital allocation, with channelling savings into productive capital, or with evaluating entrepreneurship and rewarding innovation. This is the make-believe, get-rich-quick (or, increasingly, pretend-you-are-still-rich) world of state-managed fiat-money-socialism. The free market is dead. We just pretend it is still alive.

There are, of course those who are still under the illusion that this can go on forever. Or even that what we need is some shock-and-awe Über-money injection that will finally put an end to all that unhelpful worrying about excessive debt levels and overstretched balance sheets. Let’s print ourselves a merry little recovery.

How did Mr. Bernanke, the United States’ money-printer-in-chief put it in 2002? “Under a paper-money system, a determined government can always generate higher spending…” (Italics mine.)

Well, I think governments and central banks will get even more determined in 2012. And it is going to end in a proper disaster.

Lender of all resorts

Last week in one of their articles on the euro-mess, the Wall Street Journal Europe repeated a widely shared myth about the ECB: “With Germany’s backing, the ECB has so far refused to become a lender of last resort, …” This is, of course, nonsense. Even the laziest of 2011 year-end reviews will show that the ECB is precisely that: A committed funder of states and banks. Like all other central banks, the ECB has one overriding objective: to create a constant flow of new fiat money and thus cheap credit to an overstretched banking sector and an out-of-control welfare state that can no longer be funded by the private sector. That is what the ECB’s role is. The ECB is lender of last resort, first resort, and soon every resort.

Let’s look at the facts. The ECB started 2011 with record low policy rates. In the spring it thought it appropriate to consider an exit strategy. The ECB conducted a number of moderate rate hikes that have by now all been reversed. By the beginning of 2012 the ECB’s policy rates are again where they were at the beginning of 2011, at record low levels.

So why was the springtime attempt at “rate normalization” aborted? Because of deflationary risks? Hardly. Inflation is at 3 percent and thus not only higher than at the start of the year but also above the ECB’s official target.

The reason was simply this: states and banks needed a lender of last resort. The private market had lost confidence in the ability (willingness?) of certain euro-zone governments to ever repay their massive and constantly growing debt load. Certain states were thus cut off from cheap funding. The resulting re-pricing of sovereign bonds hit the banks and made it more challenging for them to finance their excessive balance sheets with money from their usual sources, not least U.S. money market funds.

So, in true lender-of-last resort fashion, the ECB had to conduct a U-turn and put those printing presses into high gear to fund states and banks at more convenient rates. While in a free market, lending rates are the result of the bargaining between lenders and borrowers, in the state-managed fiat money system, politicians and bureaucrats define what constitutes “sustainable” and “appropriate” interest rates for states and banks. The central bank has to deliver.

The ECB has not only helped with lower rates. Its balance sheet has expanded over the year by at least €490 billion, and is thus 24% larger than at the start of the year. This does not even include this week’s cash binge. The ECB is funding ever more European banks and is accepting weaker collateral against its loans. Many of these banks would be bust by now were it not for the constant subsidy of cheap and unlimited ECB credit. If that does not define a lender of last resort, what does?

And as I pointed out recently, the ECB’s self-imposed limit of €20 billion in weekly government bond purchases (an exercise in market manipulation and subsidization of spendthrift governments but shamelessly masked as an operation to allow for smooth transmission of monetary policy) is hardly a severe restriction. It would allow the ECB to expand its balance sheet by another €1 trillion a year. (The ECB is presently keeping its bond purchases well below €20 billion per week.)

Deflation? What deflation?

It is noteworthy that there still seems to be a widespread belief that all this money-printing will not lead to higher inflation because of the offsetting deflationary forces emanating from private bank deleveraging and fiscal austerity.

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Gold, Eurodollars, and the Black Swan that will devour the US Futures and Derivatives Markets

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by Jesse at CaféAméricain
Posted December 3, 2011

THE EURODOLLARS ESTIMATE IN THE CHART BELOW IS BASED ON THE BIS BANKING ESTIMATES from Commercial Banks and may not include official reserves held by Central Banks. As you know the Federal Reserve stopped reporting Eurodollars some years ago, with the consequence that it also stopped reporting M3 money supply. I like to think of Eurodollars and banking system derivatives as the Fed’s off-balance-sheet method of monetization and policy implementation, with plausible deniability.

Swap lines are provided to other Central Banks, and they in turn make the loans to their member banks, and from there to their customers. So this eurodollar creation is made outside the real domestic economy, and therefore has no immediate effect on domestic money supply and prices at the end of the money chain. But the effect is there, and the smart money closer to the financial system sees it coming. I do not know if the Fed’s swap line activity actually shows up immediately in their Balance Sheet and therefore the Adjusted Monetary Base. But I think it is fairly obvious that if swaps are used to create dollars by foreign central banks, who in turn loan those dollars to their own members, the impact of that broader dollar creation will only be felt with a significant lag in the domestic US economy. But it will be felt at some point.

When the Fed was tracking Eurodollars, I believe that they were not counting certain assets, or liabilities from the banks point of view, as money.  What exactly those assets might be and how liquid they are is a open question.  How much of them were held in Agency debt, and how much in Treasury debt?  Is a liquid obligation held by a foreign source part of the broad money supply, or not?  Since it can be quickly converted into dollars, and then into another currency, leaves little question that it is potential money at least.

At least part of the problem being faced by Europe in this crisis is the sharp point of the deleveraging of US assets underlying dollar denominated debt.   And if foreign confidence in the US dollar debt breaks, the losses would be daunting for the holders of that debt, so there will first be a rush into Treasuries and away from Agency debt and CDOs.  This will be like the ocean retracting, causing people to flock to the shore in wonder at the cheapness of the debt.  But eventually the returning tsunami of US dollars may very well swamp the Fed’s Balance Sheet and the domestic US economy and the savings of many. The hyper-inflation of financial paper is happening quietly and  off the books. The growth rate in derivatives held by the Banks is mind boggling. And how this will manifest in the real world economy is not fully known. A good sized chunk of the financial system may simply vaporise.  And I suspect that the policy makers will heavily allocate the damage to the least powerful members of the private sector.

Ownership of the real economy will continue to be concentrated in fewer and fewer hands. Stagflation is the most likely outcome because of this lack of reform and the rise of a self-serving oligarchy. As for the US Dollar, as I have said on numerous occasions, inflation and deflation are at the end of the day a policy decision. Period. Those who see a hyper-deflation or a hyper-inflation as inevitable elude my knowledge of the facts as they are. The Fed owns a printing press, and it uses it selectively.

Speaking of lags, I think the unusually long lag between the growth in Eurodollars and the price of Gold can be attributed to the gold sales programs by the Western Central Banks. Once those programs were suspended, and the Banks turned again into net buyers, the gold price rose dramatically. The most recent Eurodollar operation of the Central Banks in relieving the Dollar short squeeze in euro is not yet in the totals.

It should also be noted that there are other correlations one can use in determining the gold price, most notable ‘real interest rates.’ However, there are linkages amongst all the variables, given a non-organic increase in the money supply and artificially low interest rates for example being among them. So, when will the price of gold stop rising? Most likely when the Central Banks stop printing money, and return to transparently set market based interest rates and a productively reformed financial system. ‘Not on the horizon’ does come to mind.

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Why we are totally finished

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by D. Sherman Okst
Posted June 27, 2010 

In a nutshell: Corporatocracy has replaced capitalism

 

CAPITALISM FIXES PROBLEMS AND PRESERVES DEMOCRACY: Capitalism is what we should be relying on to fix our problems. Capitalism has it’s own ecosystem, just like biology’s ecosystem. An economic ecosystem that weeds out the weak, has parasites that eat the failures and new bacteria that evolves and grows replacements for that which failed. A system that keeps everything in balance.

The problem is we are no longer a capitalistic society. What we were taught in school is now utter and absolute nonsense. Capitalism is a thing of the past. As outlined in “It’s Not A Financial Crisis – It’s A Stupidity Crisis”, we created two back to back bubbles. The air out of the Tech Bubble was sucked up for fuel by our next stupidity crisis: The Housing Bubble.

Now, after the second Stupidity Crisis there isn’t a third bubble to inflate. If we still lived in a capitalistic environment the banks and financial institutions that created loans for folks who should have remained renters and then sold those loans as investments to pensions and countries would have been cleansed by capitalism’s ecosystem. But that isn’t what happened.

In a very anti-capitalistic move the government decided that stupidity and criminal activity should be rewarded. I’d say they took our money, but it is worse, we didn’t have that much money. So they borrowed the money in our name. The loan has a variable rate. They borrowed so much money that our kids cosigned the loan. In fact, our kid’s future kid’s signed on the dotted line.

That is unequivocally immoral. They gave that borrowed money to a bunch of morons as a reward for stupidity. Morons who created subprime loans, liar loans, no income, no documentation loans and other fraudulent instruments. Morons bundled that trash, got it rated AAA and then sold these turds or weapons of mass destruction that they had the audacity to name complex financial instruments or derivatives to pension funds, countries and other “investors”. Then it all blew up.

Big surprise. For blowing up the world’s economy this Stupidity Crisis was falsely named an Economic Crisis by CNBS and 535 morons on a hill in DC (Ron Paul and a few other fiscally responsible adults excluded). The idiots who created the mess were rewarded with a 700 billion dollar “bailout”. This “bailout” was anything but a bailout and had a price tag of anything but 700 billion. The actual price tag is closer to 11 trillion and puts us on the hook for another 13-17 trillion – not counting interest.

Think about that for a second. This stupidity crisis is the equivalent of our Federal Debt which took a generations of politicians over a hundred years to wrack-up. For anyone who still believes we live in a free country where capitalism reigns please show me one economic textbook which states that failure, and fraud get rewarded with borrowed taxpayer money. For anyone who believes we live in a democracy please show me a textbook that says the government will en-debt you and your kids and their kids to pay for a failed business. How is that democratic?

“Law of Morons”: Years ago, while serving on a committee I came to a sad realization. Like gravity, there is the another invisible force which I dubbed “The Law of Morons”. Put a group of very intelligent, well meaning people in a room together, put them on a committee or some governmental body that is devoid of guiding principles or merit-based decision making and “The Law of Morons” will prevail. The collective IQ will drop to the smallest shoe size in the room. And hope for loafers, because collectively this body won’t be able to tie anything together – not even a single shoelace.

Government Creates Problems: Basically our government is comprised of many well meaning intelligent people who for whatever reason, re-election, greed the “Law of Morons”, corporate puppet strings (read: lobbyist), self interest, corporatocracy or whatever else, do nothing but create massive problems. Lack of regulation, too much regulation.

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Fooled Again!

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by John Rubino
Posted December 2, 2011

THE PATTERN IS BY NOW SO FAMILIAR THAT IT DESERVES A PLACE BESIDE other technical indicators like moving averages and Fibonacci retracements. It begins with part or all of the global economy appearing to implode under its five-decade accumulation of debt. The public sector/central bank nexus responds with a liquidity injection, leading the markets to rally explosively and the pundits to declare the problem fixed. Then the markets gradually remember that liquidity and solvency are two different things, and that the mortgage lenders/money center banks/PIIGS countries/hedge funds/State and local governments, etc., are insolvent, not illiquid. And the cycle begins again.

But what to call it? “Sucker rally” seems a little too benign and prosaic for a process that looks more like fraud perpetrated on a learning-disabled, desperately-credulous victim.

“Death throes of a decadent system” is accurate but too pretentious and doesn’t convey the cyclical (and cynical) nature of the process.

“Financial terrorism” is better, since the regularity of the cycle — and the fact that central banks have absolute control over the timing — imply that there’s massive insider trading going on, possibly as part of a scheme by the (name your favorite elite conspiracy group) to suck as much wealth out of the system as possible before finally letting it collapse. Still, the term doesn’t convey the comic aspect of rich, supposedly-astute players getting suckered over and over. Incompetent money managers are funny.

In the end, what it’s called is less important than the fact that it’s a great trading indicator. Starting in 2007, if you’d gone long risk when the markets were falling apart — on the assumption that panicked governments would quickly intervene — and then taken profits and gone short a few weeks after the intervention, you’d have made a fortune from all the volatility.

The current market looks like another perfect set-up: A week ago, Europe was collapsing, China was slowing down and the US budgeting process was paralyzed. Stocks around the world had fallen hard, and a Euro-zone breakup was being actively planned for by governments and trading exchanges. Armageddon, in other words. So the central banks inject another hit of liquidity and Germany and the ECB appear to embrace the commingling of the continent’s balance sheets. And voila, the bulls are back in charge.

Now, trading strategies work until they don’t, and there’s always the risk that this latest bailout will actually fix the world’s problems and usher in a new era of consumer-led growth with soaring corporate profits, low inflation, and rising share prices. But…nah, why even give this possibility serious consideration? Nothing that was promised this week will make much of a near-term difference. Lower reserve requirements in China and cheaper dollar-denominated loans in Europe are just tweaks to already existing programs. More fiscal integration in Europe is inevitable if the common currency is to function as promised. But think for a moment about what this implies — Germany and France getting to micromanage Italy’s pension and tax system — and it clearly isn’t happening this month. Getting from here to a German-run Europe will take maybe five more near-death experiences, and in any event won’t address the fact that even Germany’s balance sheet (when you include its unfunded liabilities) really isn’t AAA.

So, the pattern should hold: “Risk-on” trades work this week, then things get choppy for a while. Then the markets grow cautious and finally terrified. The most likely catalyst for the panic stage is the massive, front-loaded refinancing schedule that Italy and Spain have unwisely set up for early 2012. But it could be anything. The point is to be short risk when it hits but not to marry the position, because more liquidity is on the way. The con will keep working as long as the world continues to see fiat currencies as valuable.

U.S. Corp and the impending IMF merger

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by Robert Denner
of Daily Economic Update
Posted December 1, 2011

BEEN LOTS OF TALK AROUND LATELY REGARDING THE COLLAPSE OF THE U.S. DOLLAR AND WHAT THAT WOULD MEAN FOR THE UNITED STATES OF AMERICA AND THE WORLD. There has also been a lot of talk about the Federal Reserve Bank of the United States of America and how unhappy the people of the US are getting with this largely unknown organization.

These two forces are converging together in what could be a very serious and detrimental way as it relates to the average US citizen. This article will rely heavily on flawed analogies to help the lay person understand the inner workings of both the IMF and the Federal Reserve Bank. This is not to be taken as an academic piece and I would ask that it not be judged as such. This is meant to help those people that have recently woken up to the reality that their country has been hi-jacked and those that are desperate to get up to speed as quickly as possible. So let’s jump right into the thick of it shall we? First we need to start with what I hope are simple lessons so that you can take what I am about to teach you and apply it to the real world.

There is one thing that bankers and computer people love to do and that is to use big scary acronyms to scare off the simple folk. So here is your first lesson.

IMF and the SDR

So right off the bat we are using acronyms that mean absolutely NOTHING to the lay person and yet that is an actual sentence believe it or not… IMF stands for the International Monetary Fund. The SDR is short for Special Drawing Rights and is the currency of the IMF. The International Monetary Fund is a private bank that is used to help sovereign nations engage in international commerce. Just like if you owned a company and you used bank A, and your supplier used Bank B, the IMF would be the bank that both banks A and B used to transfer payments and credits back and forth to each other. To Company A and B (using Bank A and B) it would be seamless.

But the IMF does a whole lot more for the global economy. They are the creditor of last resort for a lot of countries. For if you want to engage in international commerce in the free world (meaning the world now) you must be a part of the IMF system. Should a country that is part of this system become over leveraged because of mismanagement and debt accumulation, the IMF stands ready to come to the rescue. To understand how this relationship has worked in the past (and the present); I MUST go into some history. I will keep it brief I promise.

To understand how the global monetary/commercial world works you have to go back to the end of World War II. Following the war the United States was alone as a major industrial power. The rest of the industrial countries were in shambles. The United States was also nearly alone as a producer of oil. It is this later point that needs to be highlighted.

The United States used its vast oil reserves and coupled it with a highly trained industrial labor force and put it to work in its vast expanse of industrial capacity to re-build the rest of the world. It is this fact that is at the very center of our current monetary system some 60 years later. So I will start with my first analogy…

The US Corp could be seen as a huge company like General Motors. Following WWII US Corp was the only company left with the capacity to make things and it had the working capital and energy to do what it wanted. US Corp went out into the world and started to acquire other businesses. First was Japan Corp which US Corp had beaten into a pulp during the war. US Corp decided that it was in its own best interest to build Japan Corp back up but it needed to make sure that it never again could threaten US Corp the way it did in WWII.  Japan Corp used its own currency called the YEN and US Corp obviously used the Dollar. So to make this all work, US Corp had to make sure that the workers at Japan Corp didn’t feel like the last of their country was being taken from them. To keep them vested in the viability of their own country it was very important to let them keep their own currency and their own political structure, albeit greatly modified under the surface. We allowed Japan Corp to keep their figurehead CEO (the Emperor) and we installed a new board of directors (Democratic institutions). We linked the Bank of Japan to US Corp’s bank the Federal Reserve Bank through a new institution called the International Monetary Fund and the World Bank.

If we were to compare this to General Motors this would be like GM buying another company and bringing it under the umbrella of the GM brand. So in this case Japan is like Pontiac and they are given free rein to run their subsidiary the way they see fit, SO LONG as they abide by the parent companies rules.

This setup worked wonderfully and within a decade Japan Corp was back on its feet and was supplying cheap labor and products for US Corp and with every single barrel of oil Japan Corp bought on the international market it further linked them with our monetary system.  To keep the Japanese citizens from feeling that it was the US Corp in charge of everything we came up with the International Monetary Fund and the World Bank. Of course these institutions were funded initially by the United States and Great Britain and as such they were just pseudo US institutions. But it worked and the Japanese subsidiary of US Corp gladly bought oil and products from the United States in its own currency (the Yen) but it was linked via the IMF to the US Dollar. For you see US Corp linked everything that the industrial world needed to the US Dollar. All gold/oil/silver/food/etc were priced first in US Dollars and depending upon the relative “strength” of your currency to the US Dollar, this would dictate how much of your currency it would take to purchase a barrel of oil or an ounce of gold. This gave US Corp a huge advantage in the world as we produced almost everything anyways. We had most of the world’s oil supply and a very large portion of the food supply. We were the largest producer of the big complex things the world needed to rebuild. We allowed the smaller subsidiaries to produce the little stuff we needed or wanted. Japan Corp was great at the later, supplying us with small radios and other cool electronic gadgets.

US Corp built a company with dozens and dozens of subsidiaries, each one of them bringing something to the table either large or small. And as the world re-built, other countries wanted to get in on the good times and they voluntarily sold themselves to US Corp. Other countries were very reluctant to join our big happy company. Those countries fell into two groups. Either they were affiliated with Russia Corp or they wanted to stay neutral. But in a world that was moving fast towards globalization it became apparent that each country would have to choose a side lest they be shut out of the global market. For remember that the only way to gain access to US Corp’s vast array of markets and supplies is to be a part of the IMF/World Bank. It was the only way to convert your currency to other currencies (like the US Dollar to buy OIL!!).

I will end this history lesson there as I could get sucked in for hours explaining how US Corp and Russia Corp went to economic(and sometimes real) war with each other and how Russia Corp tried to have it both ways by linking themselves partially to the IMF to gain access to US Corps vast supplies and labor.

I will leave that to YOU to go out and study on your own as it is a story to rival any fictional book you have ever read. The important thing to take away here is that the International Monetary Fund and the World Bank are institutions that were created by the United States and Great Britain. It is a global system that allows countries using different currencies to exchange their goods and services with each other almost seamlessly. Remember also that the system was setup INITIALLY to allow US Corp to control the world’s most important supplies. Things like FOOD, OIL, COMMODITIES (gold,silver,etc) and the rest. At the time this system was created it was the United States that was supplying the lion’s share of these items. But as the decades have come and gone, these items have increasingly come from other parts of the world.  And a good portion of these countries are ones that were FORCED into our system either out of necessity or by direct manipulation of their country by forces outside their borders(meaning the US and the IMF).

CONFESSIONS OF AN ECONOMIC HITMAN

This next part of our story is centered on how the US has maintained its spot at the top of the economic order even in the face of massive budget deficits and seemingly unending debt loads. The title of this section is called Confessions of an Economic Hit Man, as I give a nod to a book of the same name written by a man named John Perkins. Mr. Perkins is a trained economists and his specialty was international finance. His job was to go out into the world and sell foreign leaders on US Corp and to convince them to get on board with our system. Or more importantly, it was his job to make sure that they were forever caught up in our system and that they did not attempt to leave our company.

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