Submitted by Mark Grant author of the "Out of the Box" financial commentary
It is a curious world that we live in these days. America bumping along, China grinding down, Europe gaming the system, bonds trading off Treasuries compressing significantly, equities buoyed by new cash and the dearth of decent places to put capital and a risk factor that increases with each ratchet up of the great European pyramid scheme. It was on January 13, 2010 that I said Greece would default and yesterday S&P placed them in default which was so widely expected that the market yawned and turned its attention to the coming European LTRO. I think the markets will be surprised, during the next few weeks, with the consequences of the Greek default but that remains to be seen.
In the meantime, despite the ECB’s open spigot, one of the major banks in Austria needed to be recapitalized yesterday with Austria not only injecting new capital but taking an almost one billion dollar hit.
We are living in a world these days of semi-transparent “knowns” and great “unknowns” that provide a complexity for investing far past any normal scenario. Not only could the markets be turned on the proverbial dime but they could be violently ratcheted down the cliffs of Dover by any number of possible and not outlier events. Knowing about something and understanding the intended and unintended consequences are two different turns of the screw. As the last several years have unfolded I have noted a progress of events where markets rally on manufactured headlines, calm down and then react negatively as the entire story is understood. A pattern has developed in fact which is why I point out the grave dangers lurking now in the Great Game and why I continue to advise caution and cash as we veer off the bumpers in some strange pinball game that sometimes seems to have been mechanized by some hallucinating artist such as Salvador Dali. Europe continues to just barely pull the cat out of the hat but I shudder at the consequences when the trickery no longer produces the desired effects and the audience catches on to the magician’s deceit.
You will recall the days leading into the sub-prime meltdown; easy money, loans without documentation, a massive leveraging up of assets and then the crack in the Earth’s surface and the abyss that we faced. When I regard Europe these days I see a repeat of this cycle which now involves sovereign credits and European banks and easy money and loans without documentation and a massive leveraging up of assets and liabilities with unhampered capital provided by the printing presses at the European Central Bank. The similarities are there for all of us that would like to stop and look, which clearly is not many, but then that was also the case during the heady days of the subprime funding madness. First it was Greece and then Ireland and Portugal and now Spain is sinking into the quicksand and asking for better terms so it doesn’t have to plunge into even greater fiscal controls and austerity measures and the pressures on the fault lines are increasing dramatically in my opinion.
I point specifically to the reasons for my increasing concern; the European banks are three times larger than the European sovereigns, the ECB is not the Federal Reserve Bank of the United States, the leading economy in Europe, Germany, is 22% of the economy of America, that there are ever and always consequences for providing free money, that Europe is in a recession and it will be much deeper than thought by many in my view, that the demanded austerity measures are unquestionably worsening the recession and increasing unemployment, that nations become much more self-centered when their economies are contracting and that the more protracted all of this is; the more pronounced Newton’s reaction will be when the pendulum reverses course.
Now I am quite used to being ballyhooed. It was on December 27, 2007 when I identified the risks of subprime mortgages and CDO’s, my early call on Greece was when their ten year yield 4.38% and while perhaps not of giant intellect I am a reasonably good sleuth. I tout nothing but I warn plenty in an effort to keep all of you out of some gaping hole that is squarely in front of the path that we are taking. It is not gloom and doom that I pull around like Pig Pen’s black cloud but a giant warning sign that I plant firmly in the ground which says, “Don’t step here.”
Today I point at Europe and intone once again, “Don‘t step here.”
For four long years, the financial and political Status Quo has masked pervasive structural decay with artifice, pretense and lies. It's like we're living in a rotting mansion run by delusional megalomaniacs.
For four long years, the power-drunk Status Quo Elites have piled on pretense and illusion at the expense of truth. Welcome to the Crazy House.
The entire rotten edifice of global financialization was visibly crumbling by early 2008, and yet here we are, four long years later, still under the jackboots of artifice and lies. Instead of the cruel illusions of TARP, now we have HAMP, LTRO, The Troika, and assorted other acronyms and inanities passing for policy.
Welcome to the Crazy House, a rotting McMansion ruled by power-drunk megalomaniacs suffering from delusions of invulnerability and god-like powers.
Why are we here, you ask? Because the drunks who run the household make it so darned easy: just keep quiet, listen politely to their ravings, and you get subsidized meals, free rent, a houseful of techno-gadgetry and nonstop entertainment - and that's not even counting the amusement value of their delusional, sloppy-drunk ramblings out by the rust-stained pool.
It takes a while to habituate to the Crazy House; at first, all the artifice, illusions, delusions and lies are disorienting. The dysfunctional "family" that runs the place acts like the money is endless, as if borrowing money was the same as actually producing something of value.
Meanwhile, you hear whispers that everything's paid with credit, and some of the vendors are threatening to cut the mansion's credit. That would be curtains for the whole charade, of course, but the "leaders" pontificate about the magnificence of the rotting mansion as if still having credit was the same as having productive wealth.
It doesn't take long before you start noticing the whole mansion is actually falling apart. The surface grandeur is totally illusory: the handrails are held together with duct tape, painted to match the background; the dry-rotted steps have been patched with putty and covered with fresh paint (step on the rotted parts and they crumble); the roof leaks are masked by pans placed in the attic, and the foundation is buckling.
Once you see enough of this decay covered by slipshod repairs, you wonder how much longer the mansion can last before it simply collapses under its own rotting weight.
From a distance, the expansive pool looks inviting, but that's also illusion; the power-drunk "leaders" and their Elite guests have dropped so many wine glasses on the deck that the bottom of the pool is now littered with shards of essentially invisible glass. At first you wonder why nobody ever goes in the pool, and then a whispered explanation fills you in on the sordid truth.
The truth must be whispered, lest the "family" overhear some shred of truth; any challenge to their account of limitless, god-like powers sends them into a spittle-flecked rage. Rage, denial and fear rule the household: fear of the truth, fear of vulnerability, fear of having to face the real world.
Residents' meetings are bizarre, for the "facts" presented about the mansion's upkeep are so blatantly false that you wonder how anyone present can even keep a straight face. Yet they all do; eventually you get used to the complete disconnect between the "official reports" and reality, and you just shrug it off and seek out other more engaging distractions.
It takes much longer to learn how to stomach the "lectures" by the "family leaders," as the subject matter is once again totally disconnected from reality. The "lectures" always extol the glorious wealth the "family" controls, its equally glorious past, and all the "innovations" that are currently increasing the mansion's already immense wealth and reach.
Yet there is no sign of any meaningful innovation being put in place; there are only endless surface repairs and paint jobs to mask the underlying rot, and a front yard that is maintained specifically to display a completely artificial veneer of wealth and solidity.
Will we ever get sick enough of the lies to leave the security offered by the Crazy House? Probably not, because it's too easy to stay: the food is greasy and sugary but tasty, the rent is basically free, and there's plenty of meds, booze and drugs to fix whatever "healthcare" issues you might have. Of course none of the meds actually restores your health; they only treat the symptoms of ill-health and ruin.
The sad thing about living in the Crazy House for four years is how living a life of illusory security saps the will and perhaps even the ability to function in the real world. The grease-soaked sugar bomb food they serve has left everyone obese and malnourished, and all the electronic toys and entertainment has rendered them mentally and physically unfit and terminally distracted.
They know the reassurances of the "leaders" are false, and that beneath the surface, everything in the mansion is either squalid and falling apart or ripe with the rot of corruption and lies. But leaving opens a Pandora's Box of uncertainty and sacrifice; it's easier to stay and listen to the absurd claims of godhood and endless wealth, and phony exhortations of the mansion's mythical "can-do" spirit.
As long as the vendors keep letting the mansion's delusional megalomaniacs run up their credit tab, then it's easier to passively stay put than to face the challenges of truth and reality outside the rotting palace of illusion and lies.
Like the bubonic plague, financialization has a lifecycle that cannot be reversed by Federal Reserve or European Central Bank intervention.
Let's pretend the Federal Reserve can force the financialization lifecycle back into expansion. Why do we need to pretend this can happen? Because the entire U.S. economy and its expansionist Central State now depends on ever-expanding financialization for its survival.
Financialization is like the bubonic plague--it constantly needs new victims as it kills off its existing hosts. Housing? Dead, killed by financialization, aided, abetted and powered by the Federal Reserve. Now the Fed wants to "save" what it already killed via financialization--housing--by buying $1 trillion in plague-infested mortgages and brute-force efforts to keep interest rates below inflation, i.e. negative rates.
Interestingly, plague, financialization and the power of the Fed all follow the same curve of emergence, expanion, maturity, stagnation and collapse. Natural systems follow S-curves, as described in this seminal paper: A Simple Model for Complex Systems.
What is financialization? Simply put, it is finance infecting and hollowing out all levels of an economy by incentivizing leverage, debt, opacity, speculation, financial fraud, collusion and the perfection of crony capitalism, i.e. financial Elites' ownership of the government's regulatory and legislative bodies. Here is another less pungent description via Wikipedia: "Financial leverage overrides capital (equity) and financial markets dominate traditional industrial economy and agricultural economics."
Here is a chart of the financialization lifecycle. Just as the plague reaches a point of maximum infection, levels off and then eventually disappears into protected pockets, financialization reached its maximum penetration in the housing bubble.
Being an intrinsically destabilizing force, financialization led to the global financial crisis of 2008. Central banks went into panic mode, printing and injecting trillions of dollars of new infectious material into the global economy in the hopes of sparking a new even grander cycle of financialization.
But you can't create a new cycle of plague when the hosts are either dead or already infected. The world has run out of sectors that can be financialized; that plague has already killed or infected every corner of the global economy.
Ironically, all the central banks' attempts to reinflate the speculative leverage-debt bubble are only hastening the disease's decline and collapse. The global markets are cheering today because the plague-riddled corpse of Greek debt has been turned into a grotesque marionette that is being made to "dance" by the European Central Bank before an audience that has been told to applaud loudly, even though the ghastly, bizarre spectacle is transparently phony.
Greek debt is already dead; it can't be reinfected and killed again, and neither can the debts of Ireland, Spain, Portugal, Italy et al. Housing is also already dead, though the still-warm body is still twitching in certain markets around the world.
Why does this cruel stage-show have to continue? Because the Federal Reserve and the other central banks will decay and disappear if financialization can't be revived. But since it can't be revived, then we are stuck with a multi-year process of decline that will inevitably end with a massive fireworks-lit finale of collapse.
Scattered diverse and almost uniformly unfavorable and dangerous events are unfolding, as the global economy and financial structure undergoes the equivalent of endless earthquakes and bombardment of solar emissions. Reporting is difficult, since information is distorted toward the sunny side. Events are moving fast, as quickly as the danger level is rising. As conditions worsen, the hype and spin has risen almost out of control. The political machine, tied at the hip to the banking apparatus, has ramped up the growth story even as the strain on the information spin has become more visible and subject to heavy criticism. A re-election year is always fraught with risk of unmasked falsehoods making headlines.
For some reason the Mayans have been lifted in prominence despite their cultural vanishing act. Like calling the dodo bird the epitome of future evolution in the aviary world of ornithology. The Jackass prefers the eagle, hawk, and falcon. Nonetheless, the list of acts on stage is replete with stories of collapse. A review is useful.
Keep in mind that whatever happens to Greece will serve as vivid preview of what is to come in Italy, Spain, and perhaps France. Much more ruin comes. Witness the great unraveling. The only winners will be tangibles, like gold, silver, crude oil, and farmland.
Greek Tragedy Turns Into Con Game Farce
Notice the debt solution to the debt problem handed to Greece, shoved down their throats. More specifically, observe the austerity budget requirements that assure economic deterioration. No exception has been offered, yet the same prescription is applied that results in job cuts, project termination, and greater deficits. Observe the bond swaps of new faulty bonds for old impaired ruined bonds. No solution there. Observe the strongarm methods of powerful coercion to enable the bond holders a cooperative role in the process. Observe the asset grabs and seizures tied to collateral in previous debt agreements. Observe the vacuum effect of money fleeing the Greek banking system. Observe the profound economic recession, far worse than reported. Observe the chaos in the streets, as the people are angry that decisions are made without their participation, acknowledgement, or approval. As the Greek debt default continues down the road, with delays and distortions to its view, the only assurance is the end point. The banks resist a liquidation or exit from the Euro currency, since it would spell sudden death failure for many large European banks. The nation must exit the Euro currency in order to write down its debt more effectively (rather than trade it), in order to be in a position to devalue it for a true stimulus, in order for a fresh start out from under the banker thumb. Let's watch the details of the Credit Default Swap, whether a default event is ordered. Be sure to know that the claimed $3.2 billion in net CDS payouts is a grand lie. If $200 billion is offset by $196.8 billion between Group A versus Group B (guessed hypothetical numbers), then know clearly that Group A is deader than dead, while Group B will never by paid by the dead counter-party. The CDS sham reveals mutually dead financial entities, not offsetting calculus.
Physical Gold Drainage Backfire
Amazing what can be done when 22 million paper gold ounces is dropped on the market on a single day, the Leap Year Day of all days. Witness the leap downward in paper gold price and perceived market integrity. No need for an honest market. The CFTC remains asleep at the wheel, or with eyes firmly fixed on their master clubhouse on Wall Street, the chain tugged hard.
The end result, as described by the notorious London Trader on King World News, is that a magnificent amount of physical gold is leaving the COMEX and LBMA.
The United States remains transfixed on the paper gold price. The real action lies in the physical London gold market, where Asians are fast draining the London gold supply. Once again, a powerful dichotomy exists. The Boyz can control the paper gold price, but they are therefore gifting the Asian buyers with a hefty discount that results in truckloads of gold bullion rolling out the ramps in delivery. As desperation rises to ambush with naked gold sales devoid of metal, enabled by USGovt and UKGovt watchful eyes, the gold inventory is fast vanishing. The divergence will continue to play out, as the paper gold price might decline but the physical gold price will rise. The COMEX will become an irrelevant arena empty of inventory, even as London rots hollow. The gold price on the real physical honest side must continue upward, since supply is fast doing a vanishing act. It is going from West to East and will not return in our generation, along with true power. The recent episode of vast paper gold sales without benefit of collateral metal cannot keep the gold price down. It is recovering. The rally to $2000 was not permitted. The event has merely marked the road with a support level. Nothing can keep gold down, nothing. It is real money in an era when paper masquerading as money is being revealed for its faulty makeup, subject to acid drips.
$ Trillion USGovt Deficit Locks 0% Rate
Few analyst seem to report a basic factor. The USGovt cannot afford a higher rate on borrowing costs than 0%, not now and not ever. So it will become permanent. This is the New Normal with ugly warts. There can be no Exit Strategy, since the government finances dictate no change. A normal borrowing cost would mean the debt finance cost would rival the defense budget in cost, and overshadow the Medicare cost. The USGovt deficit thus locks the 0% rate and puts the USFed in a monetary straitjacket. They refuse to discuss it, but instead wiggle around with feeble explanations of its continued policy. Notice the extension into 2014 of the accomodative 0% rate. What a farce! What a tragedy! What a pathetic excuse of a central bank! A vicious cycle is underway where the gargantuan federal deficits require continued 0% costs to finance them, but the 0% cost of money has its own heavy effect and damaging toll. The biggest insurance policy to the gold bull market is the USGovt and its runaway deficits.
Destructive Damage of 0% Money
The Jackass message has been steady and relentless. The 0% cost of money makes for a grotesque distortion in asset prices, all of them. Nothing is properly priced. The free money results in rising cost of everything rising. All categories rise inexorably within the cost structure. Wages do not, thanks to the forfeit of industry to Asia, in particular to China. So the squeeze on capital continues unabated and with ferocity. Capital is killed. By that is meant that marginal businesses and segments of business units within larger corporations will gradually respond to higher costs (equipment, materials, fuel, shipping) by closing the businesses. Workers are cut, but more importantly capital is retired, equipment is turned off, and capital is liquidated. A truck or machine or computer or telephone system might be sold off. The rising costs and more rigid final product prices dictate business shutdowns, since the profit margin is squeezed, then goes negative, forcing business decisions. The destructive effect on working capital from 0% money remains the singlemost blind spot of American and Western economists. They call it stimulative, when it is the exact opposite. They are badly educated. They are compromised by their paychecks. They are dead wrong, blind to the death of capital beneath their arrogant noses. Gold will benefit from the free money provisions, and head north of the $2000 price with ease. Gold will serve as capital sanctuary under attack.
Heavy Reliance on Monetary Inflation
As foreign creditors continue to shed USTreasury Bonds, the USGovt is left with a growing and near total dependence upon the US Federal Reserve to purchase its debt. It has no choice but to rely upon the inflation machinery apparatus to buy the USTBonds. Few bond dealers wish to continue, but their hope is not to be stuck with inventory, should the USFed stop buying. The dealers are acting as middlemen and nothing more. China continues to unload USTBonds, the latest month showing more of the same recent pattern. As Valery Giscard d'Estaing called it, the US benefits from the "Exhorbitant Privilege" of abusing the global reserve currency to finance its own debt in an unaccountable manner. Worse, the United States though the powerful forces of the Competing Currency War, has forced all major central banks to participate in the heretical 0% money policy. Nations that opt not to play the game will suffer from a rising currency exchange rate and damaged export industry. The major central banks are collusive in their policy, the effect being a Western world capital destruction slow burn. See the Global QE as it involves the US, Britain, Europe, and Japan not only in setting interest rates absurdly low, but in vast bond purchases wrapped in monetization schemes. Once upon a time 20 to 30 years ago, such schemes were called highly destructive and extremely unwise. Today they are normal tools. Gold will benefit from such powerful monetary inflation and debasement of money itself.
Collapse of Sovereign Debt Foundation
The con game is impressive. They call debt money. The entire foundation of the current monetary system is a complex array of paper currencies backed by sovereign debt. The problem for its managers is that the sovereign debt is crumbling. The degradation process began in late 2009 when Greece showed its first visible wide cracks in the debt facade. The preliminary event was the Dubai debt breakdown; call it the fuse. So the financial press, banking leaders, and political marionettes insist on calling this chapter a global financial crisis. It is more like a global monetary system collapse, if truth be told. But in today's age the truth is a dangerous commodity, kept down in value by a cooperative subservient press, devoted fully to the syndicate and its dark motives. Holding like pillars the debt-based monetary system are the major banks. Their profound insolvency serves as proof positive of the broken structures of the monetary system itself. This is so plain to see. A mere FASB paper mache glued onto a rotten pillar does not permit it to bear weight. The legitimate matter behind the pillars is surely being siphoned as mass to other locations, while the farce of patch solutions continues with each passing month. The inescapable fact is that the world requires a new monetary system. To put it into place requires the liquidation of the old banks and sovereign bonds, which would mean making paupers and vassals out of the elite masters. So the game goes on.
U.S. Economy Moribund Without Income
The concept of a jobless recovery is a bad joke. Such a concept does not appear in economics textbooks or its legitimate lexicon. The expectation of recovery without vast income machinery is a fantasy. The decision to ship US industry to Asia in the 1980 decade saw a climax in the 2000 decade with the advent of China. In doing so, the USEconomy lost its legitimate income sources and turned to inflating assets to power the national economy. It was the singlemost destructive trend in modern United States history on a financial basis.
Income was replaced by debt, and the rest is history, where economists should be forced to inscribe the epitaphs. Stimulus programs at the USGovt level are mere plugs for state deficits. Infrastructure projects turn out to be funnels for Chinese contracts. As Kurt Richebacher told me in August 2003, as best recalled, "A nation that lacks industry is doomed, as it must at least dominate in transportation and steel, but the United States does not anymore." The financial press and banking leaders curiously serve up endless nonsense in viewpoints, that the US consumer is the engine. It is not. The engine is industry, and the USEconomy sorely lacks it. Unless and until the USEconomy brings back industry, factories, and all the supply chain encoutrements, the nation will remain moribund and without adequate income. The latest data, the December trade gap, shows a record setting $52.5 billion monthly deficit. This is not an economy in recovery. The rising energy prices are yet another crippling factor. A loud echo can be heard in Japan, where the nation is shocked by the reality of steady trade deficits, never seen in recent history. The power structure is to be turned on its head.
Housing Market Ruined
As China took a giant bite out of the US industrial sector, the world gave acclaim. Cheap stuff appears a good thing until the reality of lost income hits. The lower costs forced the US housing & mortgage bubbles toward their heights. The dependence by the USEconomy upon the housing & mortgage sectors became acute. The broken asset bubbles of homes and linked bonds spelled ruin for the USEconomy. A vicious cycle has developed, that even ultra-low mortgage rates cannot solve. The banks are becoming prominent owners of vast home inventory. They cannot dump their inventory. The big Fannie Mae presence is very much in play, a sign of corruption dominating since the agency covers up the mortgage bond fraud that reaches into $trillions. Each year, clownish voices proclaim a turnaround in the important housing sector. Each year the home prices go lower, precisely as the Jackass has forecasted. Imagine a nation so stupid as to depend not on industry and factories for legitimate income in value added enterprise, but instead on rising prices of home and property assets. Incredible! The next shoe soon to drop is the commercial sector finally, which has been protected and carried along for over three years. The dumping process has already begun. More bank balance sheet damage is to come. Neither the housing market can be liquidated, nor the bank sector can be liquidated, tied at the hip. The economy that depends upon both is surely halfway to the morgue. The collapse in progress should result in a different power structure.
Big Bank Liability Deals
The parade of legal deals to limit the vast bank liability is a travesty to watch. Any reasonable analysis puts the liability risk at $2 trillion or more. Yet the cap on managed risk will be set at a mere $25 billion in widespread alleged mortgage fraud abuse. Each deal that comes up has the final figure a mere fraction of the true fraud. That makes for a favorable bank outcome. It reminds one of the Wachovia money laundering deal struck in 2009, no guilt admitted, the case kicked under the rug. The big bank was caught with hundreds of $billions in laundered funds from the Mexican drug cartel. The ultimate fine turned out to be about 0.03 of one penny per dollar laundered. The cost of the mortgage fraud and bond fraud abuse will be similar, much less than 1% of the amount involved. The goal is not only to limit liability, but to move on to new structural arrangements that erase the past bond fraud. A new contract over-writes the old in a merger of contracts, technically speaking. What the big banks cannot shovel into the Fannie Mae outhouse under USGovt aegis, they will protect with ring fences built from court settlements that are vastly out of proportion to the crimes involved. Nothing new here.
Goldman Sachs Revealed
The GSax brand is being tarnished. To be sure, they remain a fixture in the USGovt finance ministry. Its diminutive leader Geithner makes absurd moronic pronouncements from time to time. A couple weeks ago, he claimed the crude oil price was rising from a strong USEconomy and its growth path. Nevermind the war drums over Iran. Nevermind the vast USFed monetary printing project. Nevermind the anti-US$ movement within the oil world. Geithner more recently proclaimed that more commonly seen Chinese Yuan bond issuance and loan grants would have a muted effect on the USDollar. He lives in a fantasy world indeed. In 2008, an important event occurred when a Russian fellow escaped with a proprietary GSax unix box complete with software, which enabled insider trading that peeked at the order flow. The FBI covered it up quickly and dutifully, in true Fascist Business Model fashion. But GSax has taken major blows. They have been caught concealing the Greek Govt debt condition, as it entered the Euro Monetary Union over ten years ago. Widespread investigations are ongoing within Europe, and the venerable firm cannot solicit protective help on the continent. Matt Taibbi would be pleased. The most recent case close to home involved Overstock.com, which was preyed upon by Goldman Sachs and Merrill Lynch, as the Wall Street firms engaged in naked shorting of its stock. But isn't Wall Street exempt from naked shorting statutes on the legal books? The court decision made the case known to the public, more details to come. A wise veteran once shared that to become a GSax vice president, one major fraud must reside on the professional resume, which was not prosecuted. He was not joking. It is a criminal enterprise. The Greek bond situation might still result in tremendous GSax loss if not censure. Let's see if the GSax preppy Monti remains in unelected office in Italy.
End of Equilibrium Market Forces
Even USFed members notice that financial markets are being rigged. The phenomenon is obvious to anyone with an above average financial IQ. To point a finger at regular 10am and 3pm stock market recoveries should include a mention of the Working Group for Financial Market. It never does in the media reports. The USEconomy is stuck in the worst and most destructive recession in modern history, yet PE ratios remain robust. The bond market is the toy of the USFed itself, propped by $trillions in purchases. The USFed purchases at least 75% to 80% of all USTreasury offerings. The Operation Twist has been stripped of its fig leafs. The Dollar Swap Facilities are mere QE programs with a beard. The fact that the bond market has few if any buyers should be the main story. Sadly, the USGovt requires a weak economy in order to create more bond demand. Another vicious cycle is at work. The market mavens tend to cheer for interventions, even though the integrity of the markets themselves is fast draining into the sewer pipes. The mavens cheer at USFed bond purchases for its liquidity infusion, without much awareness of the absence of legitimate money. The USFed has become the quasi banking system, ever since the subprime mortgage mess hit, ever since the commercial paper market dried up. Yet it is failing. The indirect consequence of 0% money is distorted asset prices and extreme distortion of financial markets, all of them. The stock market is intervened upon. The bond market is directly controlled. The currency market is managed by the Exchange Stabilization Fund, which never receives press attention. The crude oil market is a vast playground, like when the Strategic Petroleum Reserve is released, or when the Gulf of Mexico is shut down, or the Keystone Pipeline is rejected. The Brent versus West Texas oil price spread has gone to $18 again. The grain market is twisted by wrong US silo inventory data. No end in sight to muddy financial markets. The housing market is one of the most difficult to doctor, but even it has a vast hidden inventory held by banks.
Teetering Petro-Dollar Standard
The Iran sanctions have undercut the USDollar more than any other single item. The Petro-Dollar is at risk. Many times in my articles, a warning has been scribed that the Dollar Kill Switch is ready on the wall, fully constructed, awaiting word to flip the switch. Someday in the not too distant future, the Saudis will announce acceptance of non-US$ payments. They have already made the supporting decisions toward this highly important step, related to Persian Gulf security enforcement. The numerous bilateral oil trade deals with Iran have become an epidemic that infects the USDollar in its unilateral dominance for trade settlement. One big reason Saddam Hussein was removed was his decision to accept Euro payments for crude oil. Another was to steal his gold, just like what happened in Libya. Another was to abrogate oil contracts made between Iraq and Russia as well as between Iraq and China. So as the many bilateral deals are struck with Iran, the USDollar foundation in trade settlement is crumbling, in parallel to the sovereign debt crumbling (see PIGS debt), in parallel to the USTreasury Bonds crumbling (see foreign creditor departures). The bunker busters might drop, but the real damage is to the stable catbird seat for the USDollar itself in trade settlement. Such trade is conducted less and less in US$ terms. Asia and the Middle East are leading the movement away from the USDollar.
Global USDollar Revolt
The developing nations of the world are in revolt against the USDollar. They see no future in holding US$-based bonds in reserve. They see no future in accepting US$ payments for their raw commodities and finished products. The secondary central banks of the world are increasingly stocking up on gold bullion and less on USTBonds. Some are actively converting from paper reserves to gold assets, like China and Russia. Many other nations are following their important lead. A more recent development has the BRIC nations blocking the IMF. They are cooperating less in Brazil, Russia, India, and China. The concept of the Chinese Yuan is being pushed, like in compromise, which includes a greater voice of the East and a smaller voice of the West, in particular the United States. The gold price will continue to benefit as long as the global revolt continues against the USDollar.
Barter System Coming
The current system must be replaced. Watch for signs of a vast comprehensive barter system with wide participation. It will involve deals between nations at the highest levels. It will involve deals between corporations at the middle levels. It will involve deals with individuals at the lower retail levels. It will be more fair. It will relegate banks to utilities, a much more useful function. It will lock up deadbeat nations that attempt to take in valuable products in return for toilet paper that accumulates in a rancid pile subject to acidic decay. The new barter system must have a financial core in order to handle the short-term transactions and payments required. That core will be gold based. The United States will not be at the center of this new system. In fact, the US risks being shut out if it does begin soon to join the movement. Being an outsider nation looking in will result in high price inflation and more rampant shortages. Demand for gold will rise as the new system falls into place. The system has been endorsed and put into the implementation stage by Germany, Russia, China, and the Persian Gulf. The trigger for launching the barter system, so told to the Jackass by one of its participating architects and engineers, is the broad perception that the current system has collapsed. That day is nigh.
>>>Click here to learn the 37 food items vital FEMA is probably ignoring... <<<
We all know the world is in bad shape right now. Maybe it's the X-class solar flare that knocked out all of China's communication back in February ("X" is NASA's highest solar flare classification).
Not to mention the shaky state of the world's economies. Just look at Europe - they're worse off than we are right now!
But we can't forget the reality that our fragile food supply chain could be knocked by just the threat of a disaster (even if it was just a false alarm)...
what's a happening? whoah !
Martial Law by Executive Order
3 days ago
President Obama's National Defense Resources Preparedness Executive Order ... the new Executive Order is rooted in the Defense Production Act of 1950 which ...
The Global Financial Crisis (GFC) became an unmistakable reality in July 2007 when Bear Stearns admitted that two of its sub prime hedge funds had lost nearly all of their value because of the rapid decline in the market for sub prime mortgages. At the end of June 2007, Treasury Secretary Paulson had this to say about the problem: “We have had a major housing correction in this country. I do believe we are at or near the bottom.” When asked specifically about Bear Stearns, he went on to say that any losses had been “largely contained” and anyway, “It doesn’t pose a risk to the economy overall.”
When Bear Stearns hit the wall, there was no talk of a federal government bailout because of what Mr Paulson had stated in public. The other US banks refused to lend because Bear Stearns had refused to participate in the bailout of LTCM in 1998. Bear Stearns was left with two options. It could sell the “assets” in the hedge funds or it could bail them out with its own capital. For the one and only time in the GFC so far, a money centre bank tried to sell Collateralised Debt Obligations (CDOs) on an actual market. That attempt lasted hours.
When the auction was closed, the bids were coming in at 30 percent of the face value of the paper. The jig was up, the valuation of the collateral underpinning the entire banking system was revealed as fictitious. Not much more than a year later, that collateral was transferred from the US banking SYSTEM to the Fed, which has maintained its fictitious “value” ever since. Europe dragged its feet, but at the end of 2011 it did the same thing in regard to its own banks.
Ever since that episode of mid 2007, the “market” for pretty well every kind of debt-based financial “asset” there is - up to and including the sovereign debt of governments - has been progressively falsified by governments and their “independent” central banks. Mr Bernanke has now been quoted as describing this procedure as “a work in progress”.
It is indeed, and by this time its true nature should be clear to almost everyone. But still Mr Bernanke and all his counterparts in the seats of power all over the world bleat about a “recovery” which is just over an ever receding horizon. What the world needs to “recover” from is the increasingly desperate machinations of governments desperate to retain their power. What it needs to recover is freedom - money - and markets.
The essence of debt serfdom is debt rises to compensate for stagnant wages.
I often speak of debt serfdom; here it is, captured in a single chart. The basic dynamics are all here, if you read between the lines:
1. Financialization of the U.S. and global economies diverts income to capital and those benefitting from globalization/ "financial innovation;" income for the top 5% rises spectacularly in real terms even as wages stagnate or decline for the bottom 80%.
2. Previously middle class households (or those who perceive themselves as middle class) compensate for stagnating incomes and rising costs by borrowing money: credit cards, auto loans, student loans, etc. In effect, debt is substituted for income.
3. The dot-com/Internet boom boosted incomes across the board, enabling the bottom 95% to deleverage some of the debt.
4. When the investment/speculation bubble popped, incomes again declined, and households borrowed heavily against their primary asset, the home, via home equity lines of credit (HELOCs), second mortgages, etc.
5. The incomes of the top 5% rose enough that these households could actually reduce their debt (deleverage) even before the housing bubble popped.
Here is a chart of real (inflation-adjusted) incomes, courtesy of analyst Doug Short: note that the incomes of the bottom 80% have been flatlined for decades, while the top 20% saw modest growth that vanished once the housing bubble popped. Only the top 5% experienced significant expansion of income. Notice that incomes of the top 20% and top 5% really took off in 1982, once financialization became the dominant force in the economy.
Interestingly, we can see the double-bubble (dot-com and housing) clearly in the top income brackets, as these speculative bubbles boosted capital gains and speculation-based income. Since the bottom 80% had little capital to play with, the twin bubbles barely registered in their incomes.
Bottom line: financialization and substituting debt for income have run their course. They're not coming back, no matter how hard the Federal Reserve pushes on the string. Both of these interwined trends have traced S-curves and are now in terminal decline:
Those hoping the economy is "recovering" on the backs of financial speculation/ legerdemain and ramped up borrowing by the lower 95% will be profoundly disappointed when reality trumps fantasy.
For the past four years I have been covering the progression of the global economic crisis with an emphasis on the debilitating effects it has had on the American financial system. Only once before have I ever issued an economic alert, and this was at the onset of the very first credit downgrade in U.S. history by S&P. I do not take the word “alert” lightly. Since 2008 we have seen a cycle of events that have severely weakened our country’s foundation, but each event has then been followed by a lull, sometimes 4 to 6 months at a stretch, which seems to disarm the public, drawing them back into apathy and complacency. The calm moments before each passing storm give Americans a false sense of hope that our capsized fiscal vessel will somehow right itself if we just hold on a little longer...
I don’t have to tell most people within the Liberty Movement that this is not going to happen. Unfortunately, there are many out there who do not share our awareness of the situation. Debt implosions and currency devaluation NEVER simply “fade away”; they are always followed by extreme social and political strife that tends to sully the doorsteps of almost every individual and family. The notion that we can coast through such a tempest unscathed is an insane idea, filled with a dangerous potential for sour regrets.
There are some people who also believe that the private Federal Reserve with the Treasury in tow has the ability to prolong the worst symptoms of the collapse indefinitely, or at least, until they have long since kicked the bucket and don’t have to worry about it anymore (the ‘pay-it forward to our grandkids’ crowd) . I can say with 100% certainty that most of us will live to see the climax of the breakdown, and that this breakdown is about to enter a more precarious state before the end of this year. You can only stretch a sun-boiled rubber band so far before it snaps completely, and America’s financial elasticity has long been melted away.
A pummeling hailstorm of news items and international developments have made the first half of 2012 almost impossible to track and analyze. The frequency at which negative information has surfaced is almost dizzying. However, a pattern and a recognizable motion are beginning to take shape, and, I believe, a loose timeline is beginning to form.
At the end of January, I covered the incredible nosedive of the Baltic Dry Index (a measure of global shipping rates that signals a fall in global demand) to historic lows. I pointed out the tendency of stocks and the general economy to crash around 8 months (sometimes a little longer) after the BDI makes such a dramatic downturn. Mainstream analysts, of course, attributed the fall to an “overproduction of ships”, which is the same exact excuse they used when the BDI collapsed back in 2008 just before the derivatives bubble burst. It would seem that the cable TV talking heads were wrong yet again, as the international market facade quickly evaporates right in line with the BDI’s almost prophetic knack for calling an economic derailment in advance.
Here are some of the most important reasons why every American should be prepared for much harder days, especially before the end of 2012:
The European Union Is Officially Dead In The Water
Stick a fork in er’, the EU is done! We are talking about full scale dismantlement, likely followed by a reformation of core nations and multiple collapse scenarios of peripheral countries. The writing is all over the wall in the wake of the latest election results in Greece and France, where, as alternative researchers have been predicting for some time, the battle between the government spending crowd and proponents of austerity has reached a fever pitch.
The Greeks and the French are royally pissed over draconian cuts in public programs and the destruction of pensions which have been a mainstay of their economies for quite some time. They are also furious over being sold off like collateral to the IMF and World Bank. Rightly so. Like the American taxpayer, the taxpayers of floundering EU nations are wrongly being held responsible for the financial mismanagement and fraud of their governments and global banks which have remained untouched and unpunished for their trespasses. The problem is, the voters of both countries are signing on to the socialist/quasi-communist bandwagon in response. In Greece, the Left Coalition Party, a splinter group of the traditional communist party, has now taken a primary position of power:
I have no doubt that the elections of the EU are as manipulated by elitists as they are here in the U.S., and I’m sure false paradigms abound. Have Europeans forgotten that it was overt government spending that set them on the path to calamity in the first place? Or, are they like Americans; just desperate for any change in the ranks of leadership? One would think that they would take note of the problems here in our country and realize that electing a socialist to replace another socialist is no way out of economic hardship.
Former officials like Nicolas Sarkozy may have claimed to be distanced from the socialist ideal, but, as with all globalist puppets, their actions did not match their rhetoric, and they have always supported policies of centralization and big government. The French and the Greeks have essentially replaced closet collectivists with outspoken collectivists, and will see NO relief from the crisis in the Euro-zone as a result of the political reordering. In fact, the stage has now been set for a volatile chain of dominos. Germany, which is the only economy left holding the EU together, has been unyielding on austerity cuts. A conflict between France and Germany is now inevitable. Neither will compromise their position, and I can see no other eventual result than a reexamination and perhaps abandonment of the EU charter.
How does this affect America? Being that international banks and corporations have forced our countries into interdependency through the engineered chicanery of globalization, any collapse in Europe is going to strike hard around the world, but the worst will hit the U.S. and China. Which is probably why China is disengaging trade away from the U.S. and the EU and focusing on other developing nations:
If you thought the Greek rollercoaster was a pain in the neck for investment markets, just wait until the whole of the EU is in a shambles!
Spain is next in line, with a 25% official unemployment rate and a massive black market economy forming. As I have been saying for years now, when governments disrupt the financial survival of the people, they WILL form their own alternatives, including black markets and barter markets. It is about survival. The Spanish government does not care much for these alternatives, though, and has now banned cash transaction over 2500 euros in a futile attempt to squeeze taxes out of the populace through digitally tracked payment methods:
Another major concern for Americans is the fact that Europeans are inching towards an abandonment of the dollar. Francois Hollande has openly called for an end to the dollar’s world reserve status, and with a majority backing of the French people, he could easily make this happen, at least where France is concerned. All it takes is for a few key countries to publically and completely drop the Greenback and the dollar’s reputation as a safe haven investment will be quashed. This could very well happen before 2012 is over.
QE3 Is The End
Here is the bottom line; U.S. growth is a theater of shadows. There has been no progress, no recovery, only the misrepresentation of statistics. Millions of Americans have fallen off unemployment rolls because they have been jobless for too long, which lowers the unemployment rate, but does not change the fact that they are still without work. Durable goods orders are dropping like an avalanche. U.S. credit has been lowered yet again by rating agency Egan-Jones. With China making bilateral trade deals in numerous countries on the condition that the dollar be dropped as the primary purchasing mechanism, and with the EU turning to economic mulch, the currency’s safety is nonexistent. Traditional investors who cling to the idea that a falling Euro spells dollar strength will be sorely disappointed when the currency is suddenly being rejected in international currency markets.
The Federal Reserve has already stated that any signs of “relapse” into recession (the recession that we never left) will be met with all options on the table, including QE3:
I believe that QE3 will probably be announced this year (due in large part to trauma from Europe), and, that this will trigger a mass movement by foreign nations to drop the dollar as the world reserve. QE3 will be the straw that broke the camel. How exactly this will play out socially and politically, I do not know (I could take a good guess though). But, the technical results are predictable. The Fed will respond to the lack of treasury purchases by ramping up fiat printing in order to cover the ever increasing costs of the government machine. The Greenback will immediately lose a large portion of its value, at least in terms of imported goods, causing inflation in prices. Oil and energy prices will skyrocket if OPEC follows suit (which they will, though the Saudis may still honor dollars for a time). Doing any traditional business will become nearly impossible, and price inflation will dominate the lives and the minds of average unprepared citizens.
The amount of time that it will take for these difficulties to unfold is also not clear. We are operating in uncharted territory, and dealing with a collapse scenario on a truly planetary scale. My best advice is to assume that the avalanche will move fast.
While markets in our country have seen only mild disruptions so far this year, their solidity is predicated on a host of props and costume pieces, any one of which could pull the rug out from under America’s suspension of disbelief if it strays but a little from the illusion. As long as the dollar holds, stocks can be infused with bailout juice through major banks. So can major companies and even desperate state governments on the verge of bankruptcy. The Dow will remain relatively friendly, and day traders and the public will remain happy. As soon as the dollar comes into question, all bets are off…
Does This Mean Doom, Or Just Another Bad Day?
The real beginning of today’s collapse is tied to the events of 2008. The pace of it has been deceptive, but also, in a way, it is a gift. Over the past four years, I have personally seen the awakening of thousands of people that may have never had the chance if the system had gone into full spectrum breakdown right away. The question now is, how much longer can the U.S. wobble along on one wheel? In my view, and from the evidence I see in markets at the moment, not much longer.
It is hard to set aside any expectations that the next leg down will be easy to digest for the populace. The reality of our predicament is starting to hit home. All the tax return checks have been spent. The credit cards have been maxed. The new cars have been sold off and traded in for ghetto-mobiles. The good jobs have been replaced with Taco Bell slavery. A trip to see The Avengers is now the family vacation. And, the distractions of reality TV just aren’t buttering our bread anymore. It’s the little things at first that really signal the financial mood of a society, as well as reveal the more vital and looming issues just over the horizon.
All indicators suggest that this year will be unlike any other before. In 2008, we saw the first trigger events for the collapse. In 2008/2009, we saw the creation of the bailout culture, setting the stage for inflation and dollar disintegration. In 2010, we saw the first bilateral trade deal cutting out the dollar between China and Russia, which is now the template for trade deals all over the globe. In 2011, we saw the first downgrade of the U.S. credit rating and the crisis in the EU become epidemic. In 2012, I see not just another difficulty to add to the mountain, but a culmination of all these detriments to produce something entirely new; a vast and subversive realignment forcing many of us to take a more aggressive stance in the fight for an economically and socially free America.
Financial disasters have always been a convenient catalyst for a host of even more frightening obstacles, including civil unrest, and blatant totalitarianism. This is the cusp. It is one of those moments that people of later generations read about in awe, and sometimes horror. The “doom” is not in the event, but in the response. What we make of the days approaching determines the darkness that they cast upon the future. It is a test. It is not something to be dreaded. It is something to be seized upon, and dealt with, as great men and women before us have done. At the very least, we know that it is coming. That, in itself, could well seal our success…
Debt, risk and employment are in a death-spiral of malinvestment and debt-based consumption.
Standard-issue financial pundits (SIFPs) and economists look at debt, risk and the job market as separate issues. No wonder they can't make sense of our "jobless recovery": the three are intimately and causally connected. An entire book could be written about debt, risk and jobs, but let's see if we can't shed some light on a complex dynamic in a few paragraphs.
Risk: As I described in Resistance, Revolution, Liberation: A Model for Positive Change, risk cannot be eliminated, it can only be shifted to others or temporarily masked.
Masking risk simply lets it pile up beneath the surface until it brings down the entire system. Transferring it to others is a neat "solution" but when it blows up then those who took the fall are not pleased.
Risk and gain are causally connected: no risk, no gain. The ideal setup is to keep the gain but transfer the risk to others. This was the financial meltdown in a nutshell: the bankers kept their gains and transferred the losses/risk to the taxpayers via the bankers' toadies and apparatchiks in Congress, the White House and the Federal Reserve.
Risk is like the dog that didn't bark. In the story Silver Blaze, Sherlock Holmes calls the police inspector's attention to the fact that a dog did something curious the night in question: it did not bark when it should have.
When scarce capital is misallocated to unproductive uses such as duplicate tests that can be billed to Medicare, sprawling McMansions in the middle of nowhere, etc., "the dog that didn't bark" is this question: what productive uses for that scarce capital have been passed over to squander the scarce capital on Medicare fraud, McMansions, Homeland Security ("Papers, please! No papers? Take him away"), etc.
Once the capital has been squandered, it's gone, and the opportunity to invest it in productive uses has been irrevocably lost.
Debt: Debt has a funny cost called interest. If you have a corrupt, self-serving central bank (a redundancy) that can lower interest rates by printing money to buy government bonds, then this funny thing called interest can be lowered to, say, 1%.
At 1% interest, the government can borrow $100 and only pay 1% in annual interest. That is almost "free," isn't it? The key word here is "almost." If you borrow enough, then that silly 1% can become rather oppressive.
Let's say the Federal Reserve is willing to loan you $100 billion at zero interest. You have an incredible sum of cash to use for speculation, and it doesn't cost anything! Wow, you must be an investment banker....
Now what happens when the interest rate goes from zero to 1%? Yikes, you suddenly owe $1 billion a year in interest. That is some serious change. You can of course pay the interest out of the borrowed $100 billion, unless you've spent it building bridges to nowhere and supporting crony capitalism.
Yes, we're talking about Japan--and Greece, the U.S., China, and every other nation that piled up staggering debts to fund an unproductive Status Quo. If you play this "borrow at low rates" Keynesian game for 20 years, then you end up with a debt that far exceeds your national output (GDP). That funny cost is now so large all your tax receipts generated by your vast economy only cover the interest and your Social Security tab. That's Japan today: all its tax revenues only cover its gargantuan interest on its unimaginably vast debt and Japan's social security outlays. The rest of its government expenses must be borrowed and added to the already monumental debt.
Interest creates a death spiral when the borrowed money was squandered on unproductive bridges to nowhere and consumption.
Jobs: Jobs have an interesting feature called productivity. If you pay me $1 million for a manicure (OK, you're an investment banker and can afford it), that money funds consumption, interest and taxes (presuming I pay taxes, which I might not if I hire the right Wall Street law firm). Once the money is spent on consumption (housing, energy, entertainment, hookers for the Security Guys, etc.), interest and taxes, then it's gone. It cannot be invested in productive assets.
If I invest the $1 million in software and robotics that produce equipment for the natural gas industry, then I will hire a software person to manage the software and technicians to maintain the machines, a few more to transport the raw materials and finished goods, a few more to oversee the accounts, and so on. The $1 million funds a number of jobs that will be permanent if the products being produced meet a real market demand and can be sold at a profit.
The $1 million spent on consumption pays for some labor, but it doesn't create any value. If we track where it went, it ended up in the government coffers as taxes, in the five "too big to fail" banks as interest, and in various agribusiness, food services and energy corporations. A few bucks were distributed as tips and donations.
Now imagine if that $1 million was borrowed. If the $1 million was squandered on consumption, interest and taxes, then it's gone in a short period of time--but the interest remains to be paid forever. If you're an investment banker and the Fed loves you (and of course it does), then you can roll that $1 million into a new $2 million loan. You use some of the $1 million in fresh debt to pay the interest, and then you blow the rest on unproductive consumption.
The causal connection between debt, risk and jobs is now visible. Debt is intrinsically risky because the interest accrues until the debt is paid in full. If the debt will never be paid--for instance, the $14 trillion in Federal debt--then the interest is eternal, or at least until the system implodes and all the debt is renounced.
If the money has been squandered on consumption (marginalized college degrees, medical procedures with minimal or even negative results, $300 million a piece F-35 fighter jets, etc.) then there are two risks: the interest that piles up must be paid, meaning potentially productive investments must be passed over to pay the interest, and productive uses that could have been funded by the borrowed capital have been passed over.
Consumption funds temporary labor, but there is no wealth created or sustainable employment created. When you borrow $100K for a marginal MBA, the money paid some staffers at the Status Quo educrat edifice and some overhead/profit, but when it's gone, the debt remains and the staffers need another debt-serf to fund their pay next semester.
If the borrowed money were actually invested in a marketable product (in our example, equipment for natural gas production), then jobs and wealth are created by the increase in productivity and output created by the enterprise.
What we have instead is a Central State and an economy that has borrowed and squandered trillions of dollars on consumption and malinvestment in unproductive "stranded" assets. The debt and risk pile up, while the labor that results from consumption is temporary and does not create wealth or permanent employment.
Figuratively speaking, we're stranded in a McMansion in the middle of nowhere, a showy malinvestment that produces no wealth or value, and we're wondering how we're going to pay the gargantuan mortgage and student loans.
Debt and the risk generated by rising debt create a death-spiral when the money is squandered on consumption, phantom assets, speculation and malinvestments. Sadly, that systemic misallocation of capital puts the job market in a death spiral, too.
We had one chance four years ago to escape this monetary madness with something on the order of a second great depression. Politicians knew it would end their careers en mass, so they abandoned common sense and listened to short sighted (elite) patrons who assured them that we could finally turn paper into wealth, water into wine . They chose to let the central bankers “stimulate” economies into growing faster than the debt could accumulate because, apparently, 50 years of empirical failure was insufficient evidence. We just never had before the perfect mix of central planners to set us free from the suffocating cocoon of debt, until now?
So now we’ve quantitatively eased 9printed from nothing) our way into the light of day, and find that our banking system is so concentrated, governments so dependent on financial legerdemain, savings so depleted, financial assets so manipulated and derivatized, and central banks so over-extended, that our economic flexibility is akin to a butterfly in the path of a class five hurricane. It doesn’t require a careening JP Morgan or Euro-debacle to break our wings, even though plenty of that heavy matter is flying about. In this storm, something simple will suffice; maybe an innocuous statement by a faceless bureaucrat or a third world peasant who loses faith in the system. Even the smallest straw becomes a deadly projectile when driven by the gales of massive un-payable systemic debt.
With Greece potentially on the brink of exit from the Eurozone before year's end, a lot of analysis out there has turned to what the consequences of such an event would be, and, specifically, what punishment Greece would receive from the EU and other international organizations, such as the IMF and perhaps even NATO. The general line of thinking here is that Europe will make such a devastating example out of Greece that no one else will dare to question the status quo setup ever again. While Greece is dragged down the Green Mile in shackles to its final destination, all the other prisoners will watch with an unmistakable sense of dread, and the ceiling lights will ominously flicker as the "juice" is turned on, electro-frying Greece into a crispy black corpse.
October 23, 1909. New York. "Duelling with wax bullets." Paintball 1.0. 5x7 glass negative, George Grantham Bain Collection.
In a recent Telegraph article by Ambrose Evans-Pritchard, the views of analysts at Bank of America and HSBC are outlined, and they just so happen to fit in very nicely with the above narrative (one that will only become more common in the coming weeks). First, they say that global markets will rally on a Greek exit due to the massive response it precipitates by the ECB, Fed, BOJ, EU and other Eurozone governments coordinated currency swaps, ECB interest rate cuts, ECB QE, Fed QE, SMP purchases of Spanish and Italian bonds, capital injections into Euro area banks and a "pan-European system of deposit guarantees", among other things.
They are relying on the quite cliched argument that BAD = GOOD in this market system, since the centralized authorities will unleash every tool at their disposal when the going gets rough. The other critical part of this bankster-floated narrative is that the Euro area will become better, faster and stronger once Greek is thrown overboard and left as chum for the sharks. Not only will the central institutions manage to prevent systemic contagion via the tools listed above, but the remaining member states will be scared shitless and will therefore do whatever they are told to do in exchange for remaining shackled to the new and improved Eurozone.
Here is a short passage from the Evans-Pritchard article (he is referencing the views of David Bloom, currency chief at HSBC):
Global banks see market rally on Greek exit Mr Bloom said the ECB is playing a game of chicken by waiting until it has secured maximum compliance from EMU's wayward states before coming to the rescue. "Once again it is holding everybody over the edge of the abyss until they scream for mercy," he said.
A currency union without the encumbrance of Greece would be viewed as a stronger bloc by investors, but much would depend on events in Greece itself.
If a return to the drachma proved to be a "ruinous experience" for the Greeks – as HSBC expects – if would mightily deter Portugal, Spain, and other from such temptation.
The worst outcome for euro and monetary union would be a double whammy where the authorities fail to control EMU-wide contagion, yet Greece somehow manages to claw its way out of crisis and make a success out of a devalued sovereign currency, as Argentina did after breaking the dollar-peg in 2002.
The world according to HSBC is simple here - the European people are destined to wake up from the EU nightmare if Greece exits and manages to do well for itself (naturally), especially if the other Eurozone members follow in its footsteps and start planning for a new, anti-Euro, anti-bankster beginning. In order to avoid such a pleasant outcome, Europe must hope that both financial and psychological contagion is squashed immediately by the globalist institutions, and Greece is kicked in the skull so hard and so swiftly that it never recovers from the blow. Banks like BoA and HSBC want the head of Alexis Tspiras on a pike, bandied about from country to country as a stark reminder not to cross the callous elites whom they serve, and they also want everyone else to believe such tactics will be effective as the Final Deterrent.
I am here to remind you, though, that the reality of our situation is NOT what they would have you believe. Their arguments may be convincing when framed in a world of stability and expansion, but they completely break down in our current era of instability and contraction. The functions of Michel Foucault's "discplinary society" and Guilles Delueze's "control society" are rapidly becoming obsolete, as the institutions of global society can no longer leverage and arbitrage the peoples' fear and willful ignorance against them. In short, and for all practical purposes, the large-scale civilization's strategy of achieving conformity and normalcy through deterrence is dead.
When the Greek people finally exit the EZ, and if/when they are made to SUFFER at the Cross for their "sins", the Spaniards, Italians, Portuguese and Irish (and eventually, the French, British, Germans, Americans) will look on and realize that the Cross is not such a bad fate when compared to the tons of flesh that will be demanded by the globalist elites in perpetuity. In the short-term, it is quite possible that the bankster propaganda-and-punishment cycle succeeds in quelling further internal dissent within the Eurozone, but any such success will amount to nothing more than castles made of sand on the shores of a ravaging sea. As the tides of popular resistance continue to turn and grow with force, these castles will eventually crumble.
The Spanish are already suffering unemployment rates just as severe as those of Greece (25% of population, 50%+ of youth population), and their economy has been locked out of credit markets at just about every scale (households, businesses, regional governments). When Greece is ousted and the Eurocrats ride in to Madrid on their white steeds with promises of conditional backstops and bulletproof memorandums, it will be almost too late. No one will believe that the Powers That Be in Europe can do anything more for the people of Spain than they did for the people of Greece (bankrupt them and leave them to die).
This death of deterrence is as clear in the criminal justice system of the developed world as it is in the economic and geopolitical spheres of the Eurozone. Once a large enough portion of a population has been financially, socially and psychologically reduced to rubble, it becomes exponentially more difficult to scare it back into "playing by the rules". I mentioned in the TAE comment forum that the death penalty does not act as much of a deterrent to criminals in U.S. states which also carry the penalty of life in prison without parole (an assertion that has been studied to death by criminologists), but this issue goes much deeper than that.
The threat of state and/or federally-sanctioned punishment in EVERY realm of society is losing its credibility as time goes on and the pain of the disenfranchised masses festers like an untreatable infection. This is why Iran will never back down from their ability to pursue nuclear energy/weapons technology in the long-term, no matter how many theaters of war the Western powers decide to open up in the Middle East. It is why the growing police states in the West will always encounter some significant force of resistance, no matter how many people they assassinate or imprison without due process in FEMA camps or other pre-planned destinations. Yes, there will no doubt be many people who end up submitting to status quo out of fear (perhaps a status quo disguised as "something else"), and will continue to actively or passively support it.
Still, it is undeniable that a percentage of the masses will choose to defect/resist - a percentage that will surely make the globalists quiver in thier boots - because the other choices they are left with are dreadful and degrading beyond imagination. This is also why the Cold War era, game-theoretical fantasy of Mutually Assured Destruction will no longer function coherently in the near future. That is a scary prospect, but one that we must learn to live with. When pushed into extreme situations, and backed into corners with no apparent way out, people will resort to desperate and extreme measures for their perceived survival.
It is all part and parcel of an industrial, imperial, global capitalist system that has entered its terminal stages of decline - stages which will present us with grave threats, frightening prospects and unique opportunities. The traditional deterrence narratives spun by the elites will only work for as long as we choose to empower them; to validate them as persuasive arguments (like AEP does), rather than the putrid propaganda that they really are. Banks like BoA and HSBC, and, lately, analysts such as AEP, have been thoroughly immersed in this global propaganda campaign being waged for ALL the marbles, whether they know it or not (I suspect many of them do).
We must recognize, point out and discredit their myths every chance we get, because they already gained a huge head start in embedding them within our political culture. If we choose to believe that minority pockets of people on this Earth hold unparalleled amounts of power over individuals, families, communities and societies, then they will keep us deterred from freedom until it is much too late. But the reality that the elites want to see materialize is NOT the reality that they will get - if only we remember to always accept the truth and reject everything else which sullies its name.
Ashvin Pandurangi, third year law student at George Mason University
So lets "run" through the mechanics of a Greek bank run.
As the Greek people begin to smell a Greek exit and a conversion of their hard earned Euro deposits back to Drachmas, they will withdraw Euros from Greek banks. So the Greek banks will head to the BoG with some dubious collateral to beg for Euros to pay depositors. The BoG takes the collateral, gives it a minuscule haircut, and draws Euros via the ELA. This of course creates an increase in BoG Target2 liabilities. The BoG then sends the Euros to the Greek bank and the Greek bank then gives the Euros to the hard working Greek depositor standing in line waiting to empty the account.
Importantly, Greek banks ONLY run out of Euros if the ECB can justify a shut down in funding to the BoG ELA facility or the Greek banks directly. Now, as we heard last week, the ECB has already stopped OMOs with 4 Greek banks (which one could safely assume are the big ones). So the ONLY thing standing between a Greek depositor and his/her Euros is the ELA. No ELA, no Euros!! And, as mentioned above, the ECB has once before threatened to turn off NCB access to Euros via the ELA in the case of Ireland. So there is a precedent for this to happen again!
Now we have to look at the conditions under which the ELA could be turned off by the ECB. Looking back to the Irish case, it was the potential for a default on senior bank debt that triggered the ECB threats to the central bank of Ireland. As the rules stand, ELA lending can only be done to "sound" institutions. So the ECB in theory can shut down all lending, including ELA, if the NCB is failing to abide by the rules. And clearly, Irish banks that default on senior debt are easily proven NOT sound!
In the case of Greece, in the middle of a bank run, will it be hard to prove that banks are not sound? Hardly! But more importantly, the soundness of the Greek banks is 100 percent dependent on the 65b Euro capital injection coming as a part of the previous government's agreement to the MoU (Memorandum of Understanding, or what Tsipras calls the Memorandum of Barbarity).
That 65b is the ONLY reason why Greek banks have a chance of being deemed sound. Without the 65b, there is no way anyone could claim the BoG is lending to sound institutions and there is no way the ECB could continue to authorize the BoG to lend under ELA.
And that takes us squarely to Mr Tsipras, SYRIZA, the MoU/MoB and the Greek election. It will be very easy for Merkel and company up north to lay out a case for an ELA shut down for the BoG if the MoU is discarded by the Greek voters via a win for Tsipras! In a sense, Merkel's phone call on Friday to the Greek president was just that. It was actually the same call that was made to the Irish president a while back - and of course the Irish balked, caving to the German demands. At that time however there wasn't an Irish presidential vote. This time, with Greece, Merkel's message is really to the Greek people. And what is that message exactly? Vote for Tsipras and I turn off the Euros. Or, in other words, choosing Tsipras means choosing to leave the Eurozone. Of course, Greece could vote for Tsipras, discard the MoU, repudiate the dni8ceebt (including Target2 debts), still use the Euro and stay in the EU - but they would become Montenegro! The chances of that however are zero. The Greeks will want to print and control their destiny if they get cut off. No ELA will almost surely bring back the Drachma. And doing so would, in Merkel's view, be the choice of the Greek people. At least that's how it will be sold to the rest of Europe.
The problem for Merkel is that the Greeks will understand this and run the banks BEFORE June 17th - it is happening right now. On June 16th why wouldn't every Greek go to the bank with a sack and ask for the cash. Why hold Euros into the 17th? By that logic why not get them out earlier in case they shut the ELA pre-election. From the north's perspective, one could argue that Merkel should shut the ELA right now.
Allowing the Greek people to access all their Euros physically, while still holding the option to default on June 17th, is insane. She and the ECB would NOT be acting in the best interest of the Eurozone if they let this happen - there would be 300b in Target2 losses to split up between 16 member NCBs if the Greeks choose to leave after taking out all the Euros. If she gives the directive to shut off the ELA early she will at least keep the Target2 losses to 150b. And she will be telling the Greek people that if they vote for Tsipras, their Euros in the bank will not be available. This is a dangerous game for sure! But this way she can also blame the Greek voters for an exit, and hide behind ECB rules that imply access to funding can only be done to sound institutions. With this strategy she can have the Greeks decide on the 17th to keep the MoU, get the 65b and have access to their 150b Euros OR abandon the MoU, watch their Euros turn to Drachmas and leave the Eurozone. She didn't kick them out, they chose to leave!! Of course the few weeks leading up to the election with ELA turned off and a multi week Greek bank holiday would make for some crazy headlines.
As I said in Friday's piece, deciding what to do with the ELA for the BoG as we head into the Greek election "is the most important decision in the history of EMU". By turning it off, Merkel might scare the Greek people into complying, as she did with the Irish. By leaving it on, she makes it much easier for the Greeks to vote Tsipras and leave the rest of the zone to pay. She also makes it much more likely she will have to cave to Tsipras' demands.
The stakes are high, and while the decision is crucial for Greece, and their creditors, there are even bigger second order issues in play. A Greek run will certainly cause the Spanish and Italian folks to question the access of their respective NCBs to ECB funding and the ELA. It will be VERY hard to argue that Italian banks are sound if 100s of billions in deposits flow to Germany! And why wouldn't every Eurozone resident put their hard earned money in the safest bank possible if we start to see Greek depositors threatened? As soon as retail sniffs that there is a chance of a loss, a full scale Eurozone bank run ensues. If the Germans can turn off the Greeks or the Irish, could they turn off the Italians?
The Germans have tried to play hard ball for 3 years. Every time it backfires and the Fed and ECB have to ride to the rescue with bazookas. My money is on the Germans going to battle with Tsipras. And in the end we create a Greek exit and a bank run throughout the periphery. The endgame looks like what I described in the commentary entitled "Angie ain't it time we said goodbye". In that analysis the Italians and the Spaniards, through the chaos of bank run and Greek default, force the Germans to wrap their debts via Eurobond or some sort of system wide European bank deposit scheme. In actuality, the Rajoys and Tremontis of the world may even try to incite a run in Greece - it gets them the German wrap they have always dreamed of! Using Greece as a pawn in the big Eurobond chess game is dangerous, but likely effective!
So where does the chaos from a Greek bank run and exit lead us. The end is of course ECB printing, Eurobonds and every developed market central bank dumping massive liquidity into the global financial markets as systemic risks rise - QE, LTROs, Currency swaps, and every funding facility under the sun come into play. The path to this end game will be bumpy, but make no mistake, the developed market central banks will dump so much fiat on the system to cover the losses, that risk free real rates will plummet to levels so negative that anyone left holding cash or cash equivalents will see massive destruction of real wealth. We may have to push risk assets a bit lower from here, but the global central banks will be firing howitzers and tomahawks very shortly, not bazookas! And you best be owning some risk when those bad boys are launched!!
To fully understand the Eurozone's financial-debt crisis, we must dig through the artifice, obfuscation and propaganda to the real dynamics of Europe's "new feudalism," the Neocolonial-Financialization Model.
Forget "austerity"and political theater--the only way to truly comprehend the Eurozone is to understand the Neocolonial-Financialization Model, as that's the key dynamic of the Eurozone.
In the old model of Colonialism, the colonizing power conquered or co-opted the Power Elites of the region, and proceeded to exploit the new colony's resources and labor to enrich the "center," i.e. the home empire.
In Neocolonialism, the forces of financialization (debt and leverage controlled by State-approved banking cartels) are used to indenture the local Elites and populace to the banking center: the peripheral "colonials" borrow money to buy the finished goods sold by the "core," doubly enriching the center with
1) interest and the transactional "skim" of financializing assets such as real estate, and
2) the profits made selling goods to the debtors.
In essence, the "core" nations of the E.U. colonized the "peripheral" nations via the financializing euro, which enabled a massive expansion of debt and consumption in the periphery. The banks and exporters of the "core" countries exacted enormous profits from this expansion of debt and consumption.
Now that the financialization scheme of the euro has run its course, the periphery's neofeudal standing is starkly revealed: the assets and income of the periphery are flowing to the Core as interest on the private and sovereign debts that are owed to the Core countries' commercial and central banks.
This is the perfection of Neofeudalism. The peripheral nations of the E.U. are effectively neocolonial debtors of the Core countries' banks, and the taxpayers of the Core nations are now feudal serfs whose labor is devoted to making good on any bank loans to the periphery that go bad.
To fully understand the Neocolonial-Financialization Model, we need to establish some basic characteristics of the Eurozone system. Do to that, let's start with the Eurozone and the euro.
The European Union established a single currency and trading zone for the classical Capitalist benefits this offered: a reduction in the cost of conducting business between the member nations and a freer flow of capital and labor.
From a Neoliberal Capitalist perspective, such a union consolidated power in a Central State proxy (The E.U.) and provided large State-approved cartels and quasi-monopolies easier access to new markets.
From the point of view of the citizenry, it offered the benefit of breaking down barriers to employment in other Eurozone nations. On the face of it, it was a “win-win” structure for everyone, with the only downside being a sentimental loss of national currencies.
But there was a flaw in the structure that is now painfully apparent. The Union consolidated power over the shared currency (euro) and trade but not over the member states’ current-account (trade) deficits and budget deficits. While lip-service was paid to fiscal rectitude via caps on deficit spending, in the real world there were no meaningful controls on the creation of private or state credit or on sovereign borrowing and spending.
Thus the expansion of the united economy via the classical Capitalist advantages of freely flowing capital and labor were piggy-backed on the expansion of credit enabled by the Neoliberal Capitalist structure of the union.
The alliance of the Central State and its intrinsic desire to centrally manage the economy to benefit its fiefdoms and Elites and classical free-market Capitalism has always been uneasy. On the surface, the E.U. squared the circle, enabling stability, plentiful credit creation and easier access to new markets for all.
But beneath this beneficent surface lurked impossible-to-resist opportunities for exploitation and arbitrage. In effect, the importing nations within the union were given the solid credit ratings and expansive credit limits of their exporting cousins, Germany and France. In a real-world analogy, it’s as if a sibling prone to financing life’s expenses with credit was handed a no-limit credit card with a low interest rate, backed by a guarantee from a sober, cash-rich and credit-averse brother/sister. Needless to say, it is highly profitable for banks to expand lending to credit-worthy borrowers.
Credit at very low rates of interest is treated as “free money,” for that’s what it is in essence. Recipients of free money quickly become dependent on that flow of credit to pay their expenses, which magically rise in tandem with the access to free money. Thus when access to free money is suddenly withdrawn, the recipient experiences the same painful withdrawal symptoms as a drug addict who goes cold turkey.
Even worse--if that is possible--free money soon flows to malinvestments as fiscally sound investments are quickly cornered by State-cartel partnerships and favored quasi-monopolies. The malinvestments are masked by the asset bubble which inevitably results from massive quantities of free money seeking a speculative return.
The E.U.’s implicit guarantee to mitigate any losses at the State-sanctioned large banks-- exemplifies the Neocolonial-Financialization Model. In effect, the big Eurozone banks “colonized” member states such as Ireland, following a blueprint similar to the debt-based one which has long been deployed in developing countries.
This is a colonialism based on the financialization of the smaller economies to the benefit of the "core's" big banks and their partners, the Member States governments, which realize huge increases in tax revenues as credit-based assets bubbles expand.
As with what we might call the Neoliberal Colonial Model (NCM) as practiced in the developing world, credit-poor economies are suddenly offered unlimited credit at very low or even negative interest rates. It is “an offer that’s too good to refuse” and the resultant explosion of private credit feeds what appears to be a “virtuous cycle” of rampant consumption and rapidly rising assets such as equities, land and housing.
Essential to the appeal of this colonialist model is the broad-based access to credit: everyone and his sister can suddenly afford to speculate in housing, stocks, commodities, etc., and to live a consumption-based lifestyle that was once the exclusive preserve of the upper class and State Elites (in developing nations, often the same group of people).
In the 19th century colonialist model, the immensely profitable consumables being marketed by global cartels were sugar (rum), tea, coffee and tobacco—all highly addictive, and all complementary: tea goes with sugar, and so on. (For more, please refer to Sidney Mintz’s book, Sweetness and Power: The Place of Sugar in Modern History).
In the Neocolonial-Financialization Model, the addictive substance is credit and the speculative and consumerist fever it fosters.
In the E.U., the opportunities to exploit captive markets were even better than those found abroad, for the simple reason that the E.U. itself stood ready to guarantee there would be no messy expropriations of capital by local authorities who decided to throw off the yokes of European capital colonization.
The “too big to fail” Eurozone banks were offered a double bonanza by this implicit guarantee by the E.U. to make everything right: not only could they leverage to the hilt to fund a private housing and equities bubble, but they could loan virtually unlimited sums to the weaker sovereign states or their proxies. This led to over-consumption by the importing States and staggering profits for the TBTF Eurozone banks. And all the while, the citizens enjoyed the consumerist paradise of borrow and spend today, and pay the debts tomorrow.
Tomorrow arrived, but the capital foundation of the principal—housing and the crippled budgets of post-bubble Member States—has eroded to the point of mass insolvency. Faced with rising interest rates resulting from the now inescapable heightened risk, the citizenry of the colonized states are rebelling against the loss of their credit-dependent lifestyles and against the steep costs of servicing their debts to the big Eurozone banks.
Now the losses resulting from these excesses of rampant exploitation and colonization by the forces of financialization are being unmasked, and a blizzard of simulacrum reforms have been implemented, none of which address the underlying causes of this arbitrage, exploitation and financialization.
Understood in this manner, it is clear there is no real difference between the monetary policies of the European Central Bank and the Federal Reserve: each seeks to preserve and protect the “too big to fail” banks which are integral to the Neoliberal State-cartel partnership.
Both are attempting to rectify an intrinsically unstable private-capital/State arrangement-- profits are private but losses are public--by shoving the costs of the bad debt and rising interest rates onto the backs of the core-country taxpayers (now indentured serfs). The profits from the euro arbitrage and Neocolonial exploitation were private, but the costs are being borne by the taxpaying public of both core and periphery.
The Power Elites are attempting to set the serfs of the periphery against the serfs of the Core, and this is necessary to keep both sets of serfs from realizing they are equally indentured to the Core's pathological Financial Elite-State partnership.
Heads A Deflationary Implosion - Tails A Hyperinflationary Depression...
Heads A Deflationary Implosion - Tails A Hyperinflationary Depression...
Originally published June 17th, 2012
The acute global economic crisis today is the direct result of the continued willful obstruction and overriding of the normal checks and balances that should operate within a capitalistic system of commerce. This interference has been perpretated by powerful banks and governments acting in collusion, for reasons of profit and power. At every instance in recent years when it looked like the economy was slipping into a necessary recession they have assumed a godlike role and stepped in to head it off. These periodic recessions are necessary to prevent excess debt building up within the system, but the banks liked the ever growing debt, because it meant ever bigger profits for them as they created money out of thin air and then lent it to everyone and everything and raked in massive interest payments. Being immensely powerful they exerted more and more control over governments and succeeded in bending them to their will, culminating in them "coming out" by actually making bankers into Presidents and Prime Ministers, as has recently occurred in Greece and Italy.
So there you have it - the world is now controlled and governed by bankers. The problem with this situation is that their objectives, which are the accumulation of ever greater profit and power, are at odds with those of the population at large.
The reason that things are coming to a head now is that global debt has grown to such gargantuan proportions that the parasites, the banking elites, are now killing their hosts, which is everyone else - Federal governments, State governments, businesses and ordinary citizens. Even the parasites realize that if they kill their hosts, their profit potential is going to be reduced, which is why they have clamped interest rates in interest years - the hosts are totally maxed out on debt and the idea of the interest rate controls is to allow them just sufficient resources to survive, while siphoning off as much profits as possible from their labor. To put it in a nutshell, the banks are farming the world for huge profits, and reducing the global population to a state of feudal serfdom - rather like some sports shoe companies have done with their laborers in places like Indonesia.
The situation has now become dangerously unstable, because everyone and everything is maxed out with debt, which we should not forget is frequently leveraged to far greater extremes via derivatives, and in many instances victims have gone way beyond their capacity to repay. This can only mean one of two things - default or repayment or servicing of debt in devalued coin. In such circumstances it only takes some spark - a catalyst - to bring the whole system crashing down, what we might term a "gigantic global reset", which is actually necessary and is going to happen as a deflationary implosion, or happen later as a result of accelerating QE via hyperinflation and its resulting economic wasteland. That catalyst is Europe.
The discordant buffoons running Europe have created such an unholy mess that it is unraveling at extraordinary speed. Realizing that their creditors are not going to be able to repay them, the banks are scrambling to push the bill for their excesses onto governments and taxpayers via bailouts and austerity measures, which they are able to do because of the power they wield over politicians, many are who are severely compromised. The citizens of Greece and Spain don't need to be told that a deflationary implosion is already underway in their countries, with a vicious circle of falling productivity and reduced tax revenues well underway that is getting worse and worse, so the austerity measures look set to backfire on the bankers and their political representatives. If these austerity measures and associated deflation spread we are looking at a global depression, since Europe is the world's biggest economy. European leaders, which is to say Central Bankers, are well behind the curve with this and need to get cranking the QE money pumps without delay, in order to put off the onset of depression. This will buy time, and is thus the most attractive option for them, but will still lead to a collapse that is first preceded by hyperinflation.
What is set out above is "The Big Picture" of the world economy. The world needs a long and deep depression in order to purge itself of excess debt and the distortions, inefficiences and mis-allocation of capital resulting therefrom, and it is going to get it, QE and hyperinflation first or not.
All the daily noise in the media about the Greek election, or any elections, or the hyped up Fed meetings and pronouncements, or what Mrs Merkel thinks and says etc is just irrelevant fluff, detail and distraction for the unthinking masses, and ultimately is not going to avert the grim outcome of this appalling mess. Not until all this debt is repudiated and the world has gotten the usurious banking system off its back, with its tentacles reaching deep into government everywhere, will the world be able to move forward again. Then at long last we will be able to hail the return of true capitalism and the free market.
Doug Casey, Casey Research writes: I think there are really only two good reasons for having a significant amount of money: To maintain a high standard of living and to ensure your personal freedom. There are other, lesser reasons, of course, including: to prove you can do it, to compensate for failings in other things, to impress others, to leave a legacy, to help perpetuate your genes, or maybe because you just can't think of something better to do with your time.
But I'll put aside those lesser motives, which I tend to view as psychological foibles. Basically, money gives you the freedom to do what you'd like – and when, how and with whom you prefer to do it. Money allows you to have things and do things and can even assist you to be something you want to be. Unfortunately, money is a chimera in today's world and will wind up savaging billions in the years to come.
As you know, I believe we're into at least the fourth year of what I call The Greater Depression. A lot of people believe we're in a recovery now; I think, from a long-term point of view, that is total nonsense. We're just in the eye of the hurricane and will soon be moving into the other side of the storm. But it will be far more severe than what we saw in 2008 and 2009 and will last quite a while – perhaps for many years, depending on how stupidly the government acts.
Real Reasons for Optimism
There are reasons for optimism, of course, and at least two of them make sense.
The first is that every individual wants to improve his economic status. Many (but by no means all) of them will intuit that the surest way to do so is to produce more than they consume and save the difference. That creates capital, which can be invested in or loaned to productive enterprise. But what if outside forces make that impossible, or at least much harder than it should be?
The second reason for optimism is the development of technology – which is the ability to manipulate the material world to suit our desires. Scientists and engineers develop technology, and that also adds to the supply of capital. The more complex technology becomes, the more outside capital is required. But what if sufficient capital isn't generated by individuals and businesses to fund further technological advances?
There are no guarantees in life. Throughout the first several hundred thousand years of human existence, very little capital was accumulated – perhaps a few skins or arrowheads passed on to the next generation. And there was very little improvement in technology – it was many millennia between the taming of fire and, say, the invention of the bow. Things very gradually accelerated and improved, in a start-stop-start kind of way – the classical world, followed by the Dark Ages, followed by the medieval world. Finally, as we entered the industrial world 200 years ago, it looked like we were on an accelerating path to the stars. All of a sudden, life was no longer necessarily so solitary, poor, nasty, brutish or short. I'm reasonably confident things will continue improving, possibly at an accelerating rate. But only if individuals create more capital than they consume and if enough of that capital is directed towards productive technology.
Real Reasons for Pessimism
Those are the two mainsprings of human progress: capital accumulation and technology. Unfortunately, however, that reality has become obscured by a morass of false and destructive theories, abetted by a world that's become so complex that it's too difficult for most people to sort out cause and effect. Furthermore, most people in the OECD world have become so accustomed to good times, since the end of WW2, that they think prosperity is automatic and a permanent feature of the cosmic firmament. So although I'm very optimistic, progress – certainly over the near term – isn't guaranteed.
These are the main reasons why the standard of living has been artificially high in the advanced world, but don't confuse them with the two reasons for long-term prosperity.
The first is debt. There's nothing wrong with debt in itself; lending is one way for the owner of capital to deploy it. But if a society is going to advance, debt should be largely for productive purposes, so that it's self-liquidating; and most of it would necessarily be short term.
But most of the scores of trillions of debt in the world today are for consumption, not production. And the debt is not only not self-liquidating, it's compounding. And most of it is long term, with no relation to any specific asset. A lender can reasonably predict the value of a short-term loan, but debt payable in 30 years is impossible to value realistically. All government debt, mortgage debt and consumer debt and almost all student loan debt does nothing but allow borrowers to live off the capital others have accumulated. It turns the debtors into indentured servants for the indefinite future. The entire world has basically overlooked this, along with most other tenets of sound economics.
The second is inflation. Like debt, inflation induces people to live above their means, but its consequences are even worse, because they're indirect and delayed. If the central bank deposited $10,000 in everyone's bank account next Monday, everyone would think he were wealthier and start consuming more. This would start a business cycle. The business cycle is always the result of currency inflation, no matter how subtle or mild. And it always results in a depression. The longer an inflation goes on, the more ingrained the distortions and misallocations of capital become, and the worse the resulting depression. We've had a number of inflationary cycles since the end of the last depression in 1948. I believe we're now at the end of what might be called a super-cycle, resulting in a super-depression.
The third is the export of dollars. This is unique to the US and is the reason the depression in the US will in some ways be worse than most other places. Since the early '70s, the dollar has been used the way gold once was – it's the world's currency. The problem is that the US has exported about $7 trillion in exchange for good things from around the world. It was a great trade for a while. The foreigners get paper created at essentially zero cost, while Americans live high on the hog with the goodies those dollars buy.
But at some point quite soon, dollars won't be readily accepted, and smart foreigners will start dumping their dollars, passing the Old Maid card. Ultimately, most of the dollars will come back to the US, to be traded for the title to land and businesses. Americans will find that they traded their birthright for a storage unit full of TVs and assorted tchotchkes. But many foreigners will also be stuck with dollars and suffer a huge loss. It's actually a game with no winner.
These last three factors have enabled essentially the whole world to live above its means for decades. The process has been actively facilitated by governments everywhere. People like living above their means, and governments prefer to see the masses sated.
The debt and inflation have also financed the growth of the welfare state, making a large percentage of the masses dependent, even while they've also resulted in an immense expansion in the size and power of the state over the last 60-odd years. The masses have come to think government is a magical entity that can do almost anything, including kiss the economy and make it better when the going gets tough. The type of people who are drawn to the government are eager to make the state a panacea. So they'll redouble their efforts in the fiscal and monetary areas I've described above, albeit with increasingly disastrous results.
They'll also become quite aggressive with regulations (on what you can do and say, and where your money can go) and taxes (much higher existing taxes and lots of new ones, like a national VAT and a wealth tax). And since nobody wants to take the blame for problems, they'll blame things on foreigners. Fortunately (the US will think) they have a huge military and will employ it promiscuously. So the already bankrupt nations of NATO will dig the hole deeper with some serious – but distracting – new wars.
It's most unfortunate, but the US and its allies will turn into authoritarian police states. Even more than they are today. Much more, actually. They'll all be perfectly fascist – private ownership of both consumer goods and the means of production topped by state control of both. Fascism operates free of underlying principles or philosophy; it's totally the whim of the people in control, and they'll prove ever more ruthless.
So where does that leave us, as far as accumulating more wealth than the average guy is concerned? I'd say it puts us in a rather troubling position. The general standard of living is going to collapse, as will your personal freedom. And if you're an upper-middle-class person (I suspect that includes most who are now reading this), you will be considered among the rich who are somehow (this is actually a complex subject worthy of discussion) responsible for the bad times and therefore liable to be eaten. The bottom line is that if you value your money and your freedom, you'll take action.
There's much, much more to be said on all this. I've said a lot on the topic over the past few years, at some length. But I thought it best to be brief here, for the purpose of emphasis. Essentially, act now, because the world's combined economic, financial, political, social and military situation is as good as it will be for many years... and a lot better than it has any right to be.
What to Do?
No new advice here, at least as far as veteran readers are concerned. But my suspicion is that very few of you have acted, even if you understand why you should act. Peer pressure (I'm confident that you have few, if any, friends, relatives or associates who think along these lines) and inertia are powerful forces.
That said, you should do the following.
Maintain significant bank and brokerage accounts outside your home country. Consider setting up an offshore asset protection trust. These things aren't as easy to do as they used to be. But they'll likely be much less easy in the future.
Make sure you have a significant portion of your wealth in precious metals and a significant part of that offshore.
Buy some nice foreign real estate, ideally in a place where you wouldn't mind spending some time.
Work on getting official residency in another country, as well as a second citizenship/passport. There's every advantage to doing so, and no disadvantages. That's true of all these things.
One more thing: Don't worry too much. All countries seem to go through nasty phases. Within the lifetime of most people today, we've seen it in big countries such as Russia, Germany and China. And in scores of smaller ones – the list is too long to recount here. The good news is that things almost always get better, eventually.