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It’s the unfunded wars and the financial fraud, and the unwillingness to reform

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from Jesse’s Café Américain
Posted August 7, 2011

YES, THE US HAS SOME VERY REAL LONG-TERM ISSUES WITH SOCIAL SECURITY AND MEDICARE. Social Security is being strangled by the refusal to raise the income limit on the Social Security withholding tax in response to the gradual creep of inflation. If this limit was raised periodically the Social Security ‘problem’ would be resolved. 

Medicare and in particular the drug portions of the program added by the Bush II administration are driving costs much higher. And this is more of a problem because of the structural cost problems in US healthcare system. Big Pharma in the US is a powerful lobbying force, and Americans pay MUCH higher costs per benefit for their health care services.  This is inhibiting the steps that are needed to restructure the US healthcare system.

But Social Security and Medicare, without the drug program, have not substantially changed since the 1990’s, when the US was running a budget surplus, and then Fed Chairman Greenspan was reassuring the public that the Fed had a plan to deal with the lack of debt.

So what changed?

The repeal of Glass-Steagall and the growth of unregulated financial products, the co-opting of the regulatory agencies, the growth of corporate influence in Washington, and two unfunded and very costly wars of long duration, founded largely on lies and distortions following a despicable terror attack by a small group of people, coupled with tax cuts for the wealthy.

There is relatively little discussion, much less investigation, indictments and convictions, from one of the largest financial frauds in history.

And within twelve months of the crisis breaking, Wall Street bonuses were back to record levels, even as the rest of the country began its long downward spiral into debt, downgrade, and despair.

That is the long and short of it. And it bodes ill that these issues are so infrequently mentioned in the political and economic discussions circling Washington and New York today. Rational discussion and factual analysis has been overwhelmed by a well funded program of propaganda and sloganeering, and bought and paid for politicians and media which serve to direct the discussions according to the program of the monied interests.

And this is why the outlook for the US is so negative. Governance has failed, the system has been thoroughly corrupted or co-opted, and the planning and discussions cannot gain traction. Some have recently referred to Obama’s clarity gap because it is so unclear what he stands for, what principles he is willing to fight for.

The politicians of both parties, the media, and the business leadership are caught in a credibility trap in which the root causes cannot even be discussed, must less addressed, because they have all been involved in or benefited from a massive injustice in the financial frauds. They are complicit, and cannot act openly and honestly for fear of losing control of the debate, and of subsequent discovery.

“Every thing secret degenerates, even the administration of justice; nothing is safe that does not show how it can bear discussion and publicity.” – Lord Acton

And who do we see on American television this morning, providing economic advice and promoting the Wall Street prescription for a cure through a return to more bank deregulation? The angel of economic death, Alan Greenspan, a man without shame or honor as one of the great authors of the misrepresentations and mismanagement that led US into the financial crisis which rewarded the few at the expense of the many.

“The liberties of a people never were, nor ever will be, secure, when the transactions of their rulers may be concealed from them.” – Patrick Henry

The real issue at the end of the day is reform. The US has been led down a dark alley and strangled in what history may recognize as a financial coup d’etat, and a campaign of economic war against the common people. The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery.

Here’s the Setup for the Con of the Decade

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by Charles Hugh Smith
Posted April 15, 2011

The Con of the Decade, which I described last July, is being set up nicely.

I described The Con of the Decade last July (2010). The Con makes me a heretic in the cult religion of Hyperinflation. I consider myself an agnostic about the destruction of the U.S. dollar and hyperinflation (basically the same thing), but my idea that hyperinflation is fundamentally a political process makes me a heretic. I skimmed a few of the dozens of comments posted on Rick’s Picks and Zero Hedge after they posted one of my expositions on this dynamic, and didn’t see even one comment in favor of this perspective.

The Con is being set up right now, and the outlines are clearly visible. The Con works like this:

1. The Financial Elites/Oligarchy raked in billions in private profit from the orgy of leverage, credit expansion, fraud, embezzlement and misrepresentation of risk that resulted in the Housing Bubble.

2. The losses were transferred to the public (Federal government, i.e. The Central State) or its proxy, the Federal Reserve (i.e. the central bank), via bailouts, backstops, guarantees, the Fed’s purchase of taxic assets, and an open window for the financiers to borrow billions at zero interest (ZIRP) for further speculations.

3. The Treasury now borrows $1.6 trillion every year, fully 11% of the nation’s GDP, as the Central State has replaced private demand and credit expansion with its own borrowing and spending.

4. Non-U.S. central banks have largely ceased to support this unprecedented scale of borrowing, so the Federal Reserve now buys most of the Treasury’s issuance of debt via QE2 (quantitative easing, the direct purchase of $600 billion in Treasury bonds).

5. Unlike Japan, the U.S. cannot self-fund its own government borrowing: while U.S. investors, banks and insurance companies do own a significant chunk of Treasuries, the U.S. savings rate (capital accumulation) is still abysmally low, around 4%, which is half the historical average savings rate.

This is the result of the Keynesian Cult’s One Big Idea, which is to pull demand forward and encourage borrowing and spending now by any means necessary, and thus sacrifice capital formation/saving.

So the basic outline of the Con is that private losses from the financialization of the U.S. economy were shifted to the public. Now to keep the Status Quo and Financial Plutocracy from imploding, the public is on the hook for $1.6 trillion in additional borrowing every year until Doomsday (around 2021 or so).

Having secured the backing of the Central Bank and Central State, the Plutocracy’s only problem now is that it needs a risk-free source of high-yield income. Yes, it has a trillion dollars or so sitting in bank reserves, collecting interest from the Federal Reserve; this is certainly risk-free, but the Fed’s Zero Interest Rate Policy (ZIRP) keeps the rate of return absurdly low.

Here’s where we see the Con taking shape. The ideal setup for risk-free returns is to own Treasurys that pay a high yield. The way to get higher interest rates is to first make the Treasury market supremely dependent on a central bank or single buyer: Done. That buyer is the Federal Reserve.

Next, have that buyer stop buying. Suddenly, interest rates start moving up. If you don’t believe this is possible, or part of a larger project, then please explain why PIMCO sold all its Treasuries. Duh – because interest rates are set to rise, and not by a little bit or for a brief span, but by a lot and for years.

That means holders of long-term Treasuries (and other debt) will be cremated as rates rise. (Holders of TIPS will do OK, unless the government fraudulently sets the rate of inflation well below reality. Hmm, isn’t that exactly what’s it’s already doing?)

Once long-term rates have leaped up, then start accumulating the high-yield bonds. Why would rates jump? Supply and demand: as the demand for low-yield Treasuries dries up, the supply keeps rising: every month, the Treasury has to auction tens of billions of dollars of bonds, or even hundreds of billions of dollars. There is no Plan B, the bonds must be sold, and if there are no buyers, then the yield has to rise.

Once rates have been engineered much higher, the Financial Oligarchy accumulates the high yielding bonds.

Here’s where “austerity” comes in. Once rates are so high that they’re choking the real economy, then voices arise demanding the Federal government stop borrowing and spending so much. Austerity (forced or otherwise) soon reduces the supply of bonds hitting the market and so rates decline, boosting the value of the high-yield debt.

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First Fear, then Anger

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by Theodore Butler
Originally posted 8 May, 2011 

This is an excerpt from the Weekly Review of May 7, 2011

THE HISTORIC DECLINE THIS WEEK IN SILVER CREATES STRONG EMOTION. Watching great amounts of wealth disappear, quite literally in minutes amid disorderly trading conditions is a genuine fear for any investor. Worse is seeing no obvious legitimate reason to explain the carnage. If that doesn’t scare you, nothing will. Especially if you already harbored unease about how the whole silver market operated.

But fear is an emotion that burns out fairly quickly. A human being can’t stay in an intense state of fear of financial catastrophe without selling out at some point or mentally adjusting to the new level of price. Then the conditions that led to the fear in the first place are replaced by some other emotion. If evidence exists that the sudden financial loss could and should have been prevented, the new emotion becomes one of anger. Anger at who or what might have caused the loss and who should have prevented it. I think there is compelling evidence pointing to who and what caused this silver crash as well as who should have prevented it.

The first thing we must recognize is that this was an unusually intense price smash. Silver fell 30% for the week, its biggest price loss in 31 years. The decline was highlighted by record trading volume on the COMEX and in shares of SLV. From any objective measure, the trading was disorderly, indicating little true liquidity despite the record volume. That’s because much of the trading was conducted by high frequency trading (HFT) computer bots whose clear purpose seems to be to cause disruptions to prices. These are the same disruptive traders that caused the flash crash in the stock market last year. I believe it was these traders who started the price decline with the $6 hit in 12 minutes on last Sunday evening. Their primary reason for existence seems to be causing prices to collapse.

Why these HFT cheaters are allowed to pollute our markets is beyond me. The only clear beneficiary to their trading is the exchange itself which pockets fees on every contract traded. After they crashed the stock market last year, I believe the HFT computer bots toned down their stock market activity due to regulatory pressure. That’s fine, but why were they then allowed to infect silver trading with their disruptive practices? This is just one question I have about this week’s events in the silver market and I will list them all in a moment. First I would like to get something off my chest.

I am appalled at what happened in silver this week for a very special reason. I can’t say this latest blatant take down looks out of place for a manipulated market which I have been alleging for 25 years. In fact, not that we needed additional proof that the silver market was rigged, but this intentional price smash provided that proof in spades. Admittedly, I look at silver differently than most folks, but there was something very special about this week. The special reason I am particularly appalled this time is that this is the first silver price smash for the record books that took place during the tenure of Gary Gensler as Chairman of the CFTC. There have been some multi-dollar price declines since Gensler was confirmed in May of 2009, but this week’s smash is the first mega-down move under his watch. That makes it very special to me.

As you know, I have put Gensler on a pedestal, repeatedly referring to him as the greatest chairman in CFTC history. Considering my past experiences with the agency, I still marvel at my transformation. I think he has done more than anyone ever to reform commodity regulation, including working diligently, although very quietly, to end the silver manipulation. As you also may know, I have generally come under great criticism and disagreement from many of you about my opinion of Gensler. I have respected that criticism and have used it to reflect on and test my continued belief in the chairman.

This week’s events in silver have created what may be a seminal moment. I still hold a deep belief in Gensler’s character and purpose, but it is important to judge how he and the Commission react to this week’s silver price plunge. Certainly, Gensler doesn’t answer to me, but he does answer to the public who he has sworn to serve and protect. The public was not protected this week in silver. I don’t think he had any inkling beforehand about what transpired this week in silver, but he is too smart not to grasp the significance of the silver price plunge and the circumstances that caused it. How he reacts to his first real-time case of blatant fraud and manipulation in silver will be a key test for him. I sure hope his reaction is different from the typical CFTC reaction before he arrived. You know, the three monkeys’ see, hear and speak no evil reaction.

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The sacred geese of Juno Moneta, and the origin of ‘money’

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by Prof. Antal E. Fekete
Posted originally Monday, 11 April 2011
from: “Hearken to the Sacred Geese of Juno Moneta”, Source: GoldSeek.com

The combined Federal Reserve credit creation of QE I and II exceeds one trillion dollars. There is no way underneath the Sun to come up with unencumbered collateral of that magnitude to make this miraculous money proliferation legal.

I FIRST CAME TO SUSPECT THAT IN INJECTING Federal Reserve credit into the domestic and world economy the Fed was in violation of the law when former Chairman Alan Greenspan inundated the money markets shortly after taking office following the stock market crash in 1989. My suspicion was that he got away with it by simply reversing the two-step creation of Federal Reserve credit, namely, FIRST STEP: posting collateral; SECOND STEP: issuing Federal Reserve notes and creating Federal Reserve deposits.

Reversing the process would have meant that Greenspan had FIRST issued the notes and created deposits and, SECOND: with them he had purchased Treasury paper pledging them for the purpose of creating credit ex post facto (retroactively).

To the uninitiated this simple reversal may look innocuous enough and, indeed, Greenspan could have argued that nothing more than a simple house-keeping change was put into effect that fell well within his authority. On closer scrutiny, however, it appeared that it was not a housekeeping change at all. It was, if indeed it happened the way I have assumed it did, an instance of usurpation of power that Congress alone has: to amend the Federal Reserve Act. No abundance of words would change the fact that, if Greenspan had done that, then he had created Federal Reserve credit in blatant violation of the law. The difference made by the reversal was the difference between issuing this credit lawfully, or issuing it unlawfully.

Pirates have taken over our government’s finances, and are getting ready to help themselves to the public purse. [They have already done so. –Aurick] These pirates apparently believe that members of the Legislative Branch, congressmen and senators, are simpletons. They can be easily persuaded that no more than a mere technical housekeeping change is involved. After all it is inconsequential, is it not, whether the cleaning people wash the windows first and scrub the floor afterwards, or whether they do them in the opposite order. The same is true, for the stronger reason, for the experts at the Fed.

It is time to blow the whistle. It is time for the sacred geese of Juno Moneta to honk, sounding the wake-up call for the sleepers to start defending themselves against mortal danger: that of being sold into slavery.

If you asked French boys and girls where the French equivalent of the word ‘money’ had come from, they would answer: “Why, it means ‘silver’, doesn’t it?” By contrast, most native English speakers don’t know the origin of the English word ‘money’. That’s a pity because the explanation is fascinating. It is wrapped in a fairy-tale like story. Well, schools do not teach fairy tales any more, even if they have a moral on which your life may one day depend.

Many years after the rape of Troy by the Greeks, Rome was similarly threatened by its enemy, the barbarian tribe of the Gauls that invaded the peninsula and put Rome under siege. Inhabitants took refuge in the Capitolium.

The patroness of Rome was the supreme goddess Juno, wife of Jupiter, the father of the Olympian gods and goddesses. The Romans built a magnificent temple for her honor inside Capitolium, the citadel at the top of the hill which doubled up as the Mint where the gold, silver and coper coins of Rome were struck. In the garden around the temple the sacred geese of Juno dwelt.

In the back of the temple the hill was steep and full of cliffs with no roads. The Romans expected the assault to come from the opposite side that was less steep and where the roads were. Accordingly, the Romans left the back of the hill undefended. The invaders decided to take advantage of that. They approached the hill from that side and wanted to surprise the inhabitants under the cover of the night and murder them in their sleep.

They climbed the cliffs. Their plan would have probably succeeded but for the sacred geese of Juno that started honking loud when they noticed the invaders. That in turn woke up the defenders who drove off the enemy and defeated them decisively in the battle that followed next day. Unlike the story of Troy, this one had a happy ending.

The Romans gave thanks to their patroness Juno and thereafter called her Juno Moneta (Juno the warner, or Juno the admonitor). And Rome went on to great things. Her coins carried her fame, glory and riches to the far corners of the known world. And because they were minted in the temple of Juno Moneta, people lovingly called them ‘money’.

Let this be the wake-up call for America. Terrorism is a red herring. The real enemy is already inside of the citadel. The pirates have taken over the Fed. The sacred geese of Juno are honking loudly.

May Juno Moneta once more save our civilization.


From Wikipedia: Juno Moneta

Juno Moneta, an epithet of Juno, was the protectress of funds. As such, money in ancient Rome was coined in her temple. The word “moneta” is where we get the words “money”, or “monetize”, used by writers such as OvidMartialJuvenal, and Cicero. In several modern languages including Russian and Italian, moneta is the word for “coin.”

As with the goddess Moneta, Juno Moneta’s name is derived either from the Latin monēre, since, as protectress of funds, she “warned” of instability or more likely from the Greek “moneres” meaning “alone, unique”, an epithet that every mother has.

‘Inside Job’ interview

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Charlie Rose interviews Charles Ferguson on his documentary, ‘Inside Job’

Charles Ferguson, who deservedly won an Oscar for his must watch movie of 2010Inside Job, which exposed such self-caricatures as Larry Summers, Napoleon Dynamite Sr, and Glenn Hubbard for the hollow shams they are, and who made waves by making the only logical statement at this year’s Oscar celebration by asking why nobody on Wall Street had gone to prison, appeared on Charlie Rose in yet another must watch interview.

Ferguson is once again given a chance to clarify his position on why nobody will likely ever go to prison for what amounts to the greatest generational and class heist ever witnessed: “Do you expect that there will be prosecutions for criminal wrongdoing coming out of what we now know?” The answer: “Whether there will be or not, is a function of political pressure because it is unfortunately disastrously, tragically clear that the Obama administration has no interest in doing anything about this.”

The reason, according to Ferguson for Obama’s (lack of) action is: “there is a menu of answers: he is personally very conflict averse, to cold-blooded political calculation, to lack of experience and therefore insecurity in large very scale economic and financial matters, and therefore being a prisoner of his advisors. Perhaps some combination of all of those things…”

In other words: true lack of change that banker pocket change can believe in. As for what would take to fix the broken system we find ourselves in: “(i) change the role of money in elections, (ii) to pay regulators well, and (iii) have law enforcement that is necessary to enforce the laws we have.” Alas the Inside Job director does not see any of these happening any time soon. Neither does anybody else. –Tyler Durden, Zero Hedge

Four time bombs that will blow up Wall Street

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by Paul B. Farrell, MarketWatch
Originally posted March 1, 2011




SAN LUIS OBISPO, Calif. (MarketWatch) — Put Goldman Sachs CEO Lloyd Blankfein in jail for six months, and all this will stop, all over Wall Street and America, a former congressional aide tells Matt Taibbi in his latest Rolling Stone attack, “Why Isn’t Wall Street in Jail? Financial crooks brought down the world’s economy — but the feds are doing more to protect them than to prosecute them.”

Taibbi’s right, everyone knows Wall Street’s run by a bunch of dictators who are doing more damage to democracy and capitalism than North Africa’s dictators. But jail the CEOs of Goldman, Citi, B. of A. or my old firm Morgan Stanley? Too late.

Only a revolution will stop Wall Street’s self-destructive capitalism. And watching the people revolt against dictators like Mubarak and Gadhafi reminds us of the spirit that sparked America’s revolution in 1776. But today we need a 1930s-style revolution.

During the S&L crisis two decades ago America had a backbone, indicted 3,800 executives and bankers. Today’s leaders have no backbone. Besides jail time won’t reform the darkness consuming Wall Street’s soul. We’re all asleep, in denial about the moral crisis facing America. Yes, we need a new revolution.

Jail time? We’ve heard that many times before. Journalists have been beating that dead horse for three years. Jailing CEOs made sense in early 2009. But our naïve president missed that opportunity, instead surrounded himself with Wall Street insiders as Bush did with Blankfein’s predecessor. Trojan Horses manipulating a Congress filled with clueless Dems mismanaging tired Keynesian theories.

Taibbi got it right: Washington’s error was in protecting Wall Street’s billion-dollar crooks when they should have been prosecuting CEOs for criminal behavior in getting us into the 2008 mess. So today, the political statute-of-limitations has run. Jail solution is wishful thinking, like praying to the tooth fairy for a miracle. Time for action. Time for a revolution on Wall Street.

Jail Wall Street? Old news. They got away with it. We chickened out

“Jail Bank CEOs” makes a great sound bite in the cable pundits’ echo chamber. Remember Taibbi’s earlier indictment of Goldman Sachs: the “world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

But so what? Just three years after Wall Street’s crooks “brought down the world’s economy” Goldman’s Blankfein and his buddies are paying record bonuses, and laughing at us.

Seriously, think about it folks: Since the 2008 meltdown magazines and newspapers have analyzed the 2008 crash to death. It really is old news, history. Journalists churned out book after book: “Greenspan’s Bubbles,” “House of Cards,” “Trillion Dollar Meltdown,” “13 Bankers,” “Dumb Money,” “Bailout Nation,” “All the Devils Are Here,” “The Big Short,” “Too Big to Fail,” “The Failure of Capitalism,” “This Time is Different,” “And Then the Roof Caved In,” on and on, ad nauseum. All talk, no action, and no effect.

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Travesty of a Mockery of a Sham, Phase II

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by Charles Hugh Smith
Originally posted in Of Two Minds
February 10, 2011


The U.S. economy has become increasingly dependent on asset bubbles, financial legerdemain, credit expansion, Federal borrowing and the manipulation of risk trades to maintain the illusion of “growth.” Compared to an economy based on organic demand and productive growth, the current U.S. economy is a travesty of a mockery of a sham, and has been since 2001.

There are a number of factors at work, but let’s start with two: the ratchet effect, and the Keynesian Project.

In the ratchet effect, increases are easy and resistance-free: it’s incredibly easy to hire more employees in bureaucracies, for example. But once the ratchet has advanced, it is nearly impossible to return to the previous tooth in the gear.

So for a city government to expand payroll from 10,000 to 20,000 employees was effortless, to reduce a 20,000 person payroll back to 10,000 is exceedingly painful.

The ratchet effect is a key feature of addiction. When one beer no longer creates a “buzz,” then the consumer drinks two, and so on, until a six-pack is the new baseline. Below that level of consumption, the addict gets panicky, for the entire necessity of creating a buzz is at risk of catastrophic failure.

The U.S. economy is now addicted via the ratchet effect to unprecedented levels of Federal borrowing and Federal Reserve credit creation and manipulation. Let’s set aside the fact that America’s Central State has by some calculations guaranteed some $13 trillion in private financial assets via TARP, AIG’s backstop, the takeover of Fannie Mae and Freddie Mac, etc. – roughly the size of the entire GDP of the nation.

Let’s focus instead on the fact that the Federal government must borrow and spend 11% of GDP ($1.5+ trillion) every year, and the Fed must buy $1 trillion in impaired private assets or new Treasury debt annually (another 7% of GDP) just to create an illusory GDP growth of 2.5% a year. So we’re spending/injecting 18% of the GDP to conjure a “growth” of 2.5%.

That means we’re spending/injecting $7 to create $1 of “growth” in GDP. And thanks to the ratchet effect, there’s no going back now without systemic disruption. Does anyone seriously believe spending $7 to birth $1 of “growth” is sustainable? If so, then let’s eliminate that $1.5 trillion deficit spending and the Fed’s $1 trillion-a-year purchases of impaired debt and Treasury bonds, and see if GDP “grows” via organic demand and production.

Everybody knows what would happen: the wheels would fall off the illusory “recovery.” The “recovery” is precisely analogous to an alcoholic who claims to be sobering up but who is actually drinking seven beers a day to get a buzz when a few years ago he only quaffed two or three a day.

Here is the Keynesian Project in a nutshell. Unfettered Capitalism works in straightforward cycles: the organic business cycle of expansion, overcapacity and overleverege inevitably leads to a credit bust in which those whose borrowing exceeds their ability to service their debt go broke, and the dominoes of overcapacity and credit expansion topple as losses mount and consumption based on increasing debt falls.

Bad debt gets wiped out, along with “pyramid-scheme” type assets (mortgaged assets are leveraged to buy more mortgaged assets) and excess capacity. As production declines, workers are laid off and consumption declines, further pressuring impaired financial assets.

As Marx had foreseen, these cycles increase in depth and severity. Though Marx invoked dialectical theory and history rather than the ratchet effect, the basic idea is the same: Capitalism becomes increasingly dependent on financial capital, and the resultant crises eventually become severe enough to take down Capitalism as a sustainable productive system.

Keynes’ proposed to counter these worsening business cycle implosions with massive injections of Central State borrowing and spending. The atmosphere of fear as assets, credit and consumption all contracted would be replaced by a revival of “animal spirits” (the magical elixir of Capitalism), consumption would be stimulated by direct government spending on capital projects and welfare (fiscal stimulus), and banking credit would be restored via stimulative Central Bank credit expansion (monetary stimulus).

But Keynes failed to grasp what Marx had intuited: the ratchet effect. Once the Central State ramped up deficit spending and expansive credit, then the organic economy became dependent on that new level of Central State spending and credit expansion.

As I described in the Survival+ analysis, in effect the central State rescued Monopoly Capital by partnering with it. This results in a financial/State Plutocracy which “saves” the organic economy by taking control of its income streams, credit creation and financial assets.

That is the U.S. economy in a nutshell: a travesty of a mockery of a sham. The consumer became dependent on easy, cheap credit and home equity extraction to maintain his/her consumption. The student became dependent on easy, cheap credit to fund his/her increasingly costly college education. Monopoly capital became dependent on financial slight-of-hand, the debauchery of credit, fraudulent mispricing/masking of risk, stupendously leveraged bets on risk assets, etc. for its swollen profits. Politicans became dependent on unlimited borrowing and spending to keep the illusions of competence, sustainability and “growth” alive.

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