Simple Planet

A Glimpse Into the Self-Destructive Psychology of Sharks

2011-12-26T06:38:00.000-08:00

"You cannot survive without that intangible quality we call heart. The mark of a top player is not how much he wins when he is winning but how he handles his losses. If you win for thirty days in a row, that makes no difference if on the thirty-first you have a bad night, go crazy, and throw it all away."
-Bobby Baldwin

There still remains a large population of stubborn “fish” in the developed world, who are clinging on to hopes of an economic recovery like incredulous poker players cling on to hopes of winning all their money back by playing three cards to a straight or a flush. These are the people who continuously get their clocks cleaned and then reload their chips in a vicious cycle of defeat; the people who keep the game alive and profitable for the “sharks”.

At the same time, the bankrolls of fish have been diminished so severely and their egos bruised so badly that an increasing number are simply being forced out of the game for good. They can no longer ignore the fact that their lofty expectations have been flattened into silver dollar pancakes, and that they may find themselves lacking food to eat the next day if they continue gambling with what little wealth they have left.

A Glimpse Into the Stubborn Psychology of “Fish”

“It's only when the school of fish stream towards the exits in unison that the "game" becomes wholly unprofitable for solid players. Until that tipping point arrives, our bets will continue to scream "I have a monster!" at the top of their lungs, and the fish will continue to make crying calls in stubborn disbelief. The psychology of fish always leads them from a state of comfortable wealth to one of utter destitution over time, as they incessantly chase their losses, throwing bad money after even worse money.

As the total amount of money sunk into the pot exponentially increases along with net losses, the fish find it that much more difficult to simply walk away from the game. In the long-run, however, every fish goes for broke and is simply unable to purchase any more chips to play with. The solid players are then left with a minimal or non-existent edge at their tables, as the game begins to consume itself, and that's when you know it's time to get up, leave the casino and begin the long journey back home.”

In the financial investment world, anyone still speculating on rising share prices through “buy and hold” strategies, for example, would be labeled a huge “fish”. A fish could also be a country such as Croatia, who recently decided to become a member of the EU in 2013. That was a classic move of “chasing” losses, or throwing good money after bad.

After being downgraded to nearly junk status by Standards & Poor a year earlier, and struggling to achieve any economic growth whatsoever, Croatia panicked and stubbornly decided that its best play would be to shove the remainder of its chips into the middle of an imploding European Union, scurrying for the last deck chair on the Titanic.

The most striking example of fish remains the rabid consumers of the developed world, who still feel the need to trample each other during the Holiday season for some sense of short-term gratification. They draw down their savings and run up their credit cards at a time when their jobs could evaporate at any moment along with the value of their assets and retirement accounts.

So while there are still quite a few individuals, corporations and countries harboring the stubborn psychology of fish, it’s also clear that fewer and fewer people and entities can afford to remain in this category – i.e. we have most likely reached the “tipping point”. The point where there are no longer enough naive fish for the cut-throat “sharks” to feed on.

A shark is a solid, patient player who immediately assesses the playing styles of his opponents when sitting down at the game, and uses that information to pounce on every single situation in which the shark has a mathematical advantage. The shark is out to maximize value and profits like everyone else, but typically realizes many of his/her own limitations and does not hesitate to sit on the sidelines, patiently waiting for opportunities to strike.

The sharks also have a variety of tools at their disposal, including multi-layered deception and misinformation (something Bill Gross, the notorious financial shark, is familiar with) and an ability to make accurate probability assessments rather quickly with any given hand. Despite all of these advantages, even the most cunning sharks still share one fatal flaw – they are addicted to the game and refuse to quit even as the game collapses in on itself.

The #1 reason the sharks lose money in the medium to long-term is not because of bad luck or better opponents, but rather they beat themselves. They lose patience with bad players, they let their ego get the best of them against good players and they start to take unnecessary risks with their bankroll.

It could start off with small mistakes, such as getting into large pots with other players for the sole purpose of “out playing” them with weak hands, i.e. bluffing them off of the pot. These mistakes simply snowball on top of each other, as the inevitable losses pile up and the players begin to doubt their ability to remain patient and win.

Eventually, the losses and frustration build up to such a level that the good player feels compelled to move up in stakes and win some money back. So the player goes from, let’s say, a $500 max buy-in game to a game where one cannot play comfortably without a stack of at least $2000-$3000 in front. At this point, the formerly disciplined players have entered a self-destructive spiral of throwing bad money after good which they are very unlikely to escape from.

In a game of poker, the sharks can either put all of their available capital at risk on one game, or maybe leverage that capital up a few times by borrowing from a - pardon the pun - loan shark or the local bank, but that’s really about it. The desperate sharks in the world of international finance, though, can take their self-destructive attitude to a whole different level of extreme.

The highest stakes game in this world is obviously found within the shadow credit markets, where hundreds of trillions of dollars worth of derivative debt instruments are bought and sold between large institutional players. These games are established by the very largest players in smoke-filled rooms at the back of the speculative casino, and cannot be observed or regulated by any official exchanges.

ZeroHedge has been gradually piecing together what little we know about these “dark pools” to arrive at a more complete picture of how big this shark-infested game really is. It turns out that the total notional value of outstanding “over the counter” derivatives rose to a record $707 trillion in the first half of 2011, which was a $107 trillion increase in six short months. [1], [2]

$707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months

”So why did the notional increase by such an incomprehensible amount? Simple: based on some widely accepted (and very much wrong) definitions of gross market value (not to be confused with gross notional), the value of outstanding derivatives actually declined in the first half of the year from $21.3 trillion to $19.5 trillion (a number still 33% greater than US GDP).

Which means that in order to satisfy what likely threatened to become a self-feeding margin call as the (previously) $600 trillion derivatives market collapsed on itself, banks had to sell more, more, more derivatives in order to collect recurring and/or upfront premia and to pad their books with GAAP-endorsed delusions of future derivative based cash flows.

Because derivatives in addition to a core source of trading desk P&L courtesy of wide bid/ask spreads (there is a reason banks want to keep them OTC and thus off standardization and margin-destroying exchanges) are also terrific annuities for the status quo. Just ask Buffett why he sold a multi-billion index put on the US stock market. The answer is simple - if he ever has to make good on it, it is too late.

The description above almost perfectly captures the self-destructive psychology of sharks in action, as the game enters an entirely new phase of ridiculously high stakes and almost no margin for error. As the value of the shadow debt-derivative system implodes, the financial sharks are forced to throw ever-more leveraged money onto the table until they have nothing left, because the alternative is to simply quit the game and accept their current losses.

Peter Tchir provides some clues into what kind of derivative bets are being placed when he describes “The Ultimate Trade”. It was recently revealed that many European banks have been selling large amounts of CDS insurance on the bonds of their home countries, while also buying large amounts of the sovereign bonds themselves. In essence, they are going “all in” on the bet that those countries will remain solvent.

The Ultimate "All-In" Trade

"But why would BSC be so willing to sell protection [on itself]? Well, the markets were very wide because of the fear that they would default. You sell as much protection as possible. If you default what do you possibly care? Your stock is wiped out, your job is gone, and your strategy is totally explainable to future employees. If you don't default all this massive amounts of protection screams tighter and you have your best year ever. No brainer for the firm, an issue for the market.

So, why are French banks selling protection on France like it is going out of style? Why are Italian banks doubling down on Italy? Because if the bailouts work, it is free money. Huge tightening on top of the spread income until the bailout finally wins. If the sovereign defaults, is the bank really going to be around anyways?

It is the ultimate trade. If you make money, you get paid. If you lose money you were screwed anyways."

For the sharks swimming in the high seas of finance, current losses are so devastating to their balance sheets and their expectations that they cannot even conceive of a worse situation than leaving the game, so they double, triple and quadruple down using whatever capital and whatever leverage they can get their hands on through synthetic financial products. That’s the hallmark of a shark’s psychology right before he/she blows sky high:

“I’m such a clever player, yet so deep in the hole, that there’s no other choice but to let it all ride. Just give me one more game; one more hand to prove myself. If I win, I’m back even or maybe even booking a healthy profit. If I lose, then I simply end up in the dark and frightening place where I would have ended up anyway.”

The reality, though, is that this dark place ends up being much more frightening that anyone could have ever expected. After it’s all said and done, we can be sure the bruised and battered sharks will be begging the Lord Almighty to return them to the place where they were before they decided to make their final stand. But life simply doesn’t work that way, and that’s why we find our economies and societies held hostage to a self-destructive global banking system.

Reuters and Zero Hedge have recently cast some more light on the shadowy games played by the sharks of finance, as they examine the role of the “re-hypothecation” of collateral assets through a never-ending chain of large broker-dealers and banks. Boiled down to its most basic form (which is really all that matters), this process allows a single asset to be pledged as collateral for short-term loans an infinite number of times.

In the shadow banking system, many of these loans take the form of “repo” transactions, where the collateral security is “sold” for cash with the condition that it will be bought back at a specified date and rate of interest. These Escher stairs of OTC transactions, in turn, allow the financial sharks to potentially create an infinite amount of leverage behind their speculative derivative bets.

In this particular game, all of the big-name sharks gather in the City of London, where virtually no restrictions exist on how many times the same collateral can be “re-hypothecated”. The following are excerpts and graphs from an IMF report prepared by Manmohan Singh and James Aitken entitled, “The (sizable) Role of Rehypothecation in the Shadow Banking System”, courtesy of Zero Hedge.

The (sizable) Role of Rehypothecation in the Shadow Banking System

” The United Kingdom provides a platform for higher leveraging stemming from the use (and re-use) of customer collateral. Furthermore, there are no policy initiatives to remove or reduce the asymmetry between United Kingdom and the United States on the use of customer collateral. We show that such U.K. funding to large U.S. banks is sizable and augments the measure of the shadow banking system.

… Rehypothecation occurs when the collateral posted by a prime brokerage client (e.g., hedge fund) to its prime broker is used as collateral also by the prime broker for its own purposes. Every Customer Account Agreement or Prime Brokerage Agreement with a prime brokerage client will include blanket consent to this practice unless stated otherwise.

…On-balance sheet data do not “churn,” where churning means the re-use of an asset. If an item is listed as an asset or liability at one bank, then it cannot be listed as an asset or liability of another bank by definition; this is not true for pledged collateral... However, off-balance sheet item(s) like ‘pledged-collateral that is permitted to be re-used’, are shown in footnotes simultaneously by several entities, i.e., the pledged collateral is not owned by these firms, but due to rehypothecation rights, these firms are legally allowed to use the collateral in their own name.”

”Following the collapse of Lehman, hedge funds have become more cognizant of the way the client money and asset regime operates in the United Kingdom. For some, the United Kingdom provides a platform for higher leveraging (and deleveraging) that is not available in the United States. In general, post Lehman, one would expect an increasing tendency for those providing collateral to counterparties to ask for their collateral to be segregated from the counterparty’s assets and to place limits on its further use.

Our understanding is that the U.K. FSA has not yet made any changes on the use (and re-use)of collateral since their LBIE experience that would remove or reduce the asymmetry in the U.K. and the U.S.”

So, there you have it. The financial sharks are sitting down with each other in London to play one last game of incredibly high-stakes poker with infinitely leveraged capital, where absolutely none of them can afford to lose! Some of them will lose, though, and, when one or several major institutions do go down, it will become apparent that none of them really have the actual capital to back up their electronic chips.

In a sense, that is what has already happened with MF Global, and the liquidity crunch was only temporarily stalled by the coordinated action of the Fed and other central banks. To see why, we can return to the original article by Christopher Elias on rehypothecation for Thomson Reuters.

MF Global and the great Wall St re-hypothecation scandal

”MF Global's bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet.

The volume and level of re-hypothecation suggests a frightening alternative hypothesis for the current liquidity crisis being experienced by banks and for why regulators around the world decided to step in to prop up the markets recently. To date, reports have been focused on how Eurozone default concerns were provoking fear in the markets and causing liquidity to dry up.

Most have been focused on how a Eurozone default would result in huge losses in Eurozone bonds being felt across the world’s banks. However, re-hypothecation suggests an even greater fear. Considering that re-hypothecation may have increased the financial footprint of Eurozone bonds by at least four fold then a Eurozone sovereign default could be apocalyptic.”

As the institutional clients of brokers become increasingly fearful of having their funds effectively stolen through rehypothecation after the MF Global debacle, they will do everything in their power to make sure their cash cannot be further subjected to this process, which will only exacerbate asset sales to meet margin requirements, leading to lower valuations of toxic assets and more funding shortages at banks.

The most toxic assets right now are the sovereign bonds of peripheral Eurozone countries, up to and including Italy. If the banks turn to their governments (taxpayers) to re-capitalize them, then the countries’ own funding needs will worsen as their debt yields go up, which also exacerbates the funding needs of the banks. Yalman Onaran describes this “death spiral” in his article on Bloomberg:

European Banks Taking Cash From Governments Seen Sparking ‘Vicious Cycle’

”The size of potential losses at European banks has scared away short-term creditors, squeezing the region’s lenders. The European Central Bank has stepped in to replace funds being withdrawn, providing unlimited cash and lowering requirements on the quality of collateral it will accept.

“We’re in a death spiral,” said Andy Brough, a fund manager at Schroders Plc in London. “As the yields on the peripheral bonds increase, value of the bonds decreases and the amount of capital the bank has to raise increases.”

Basically, the amount of actual capital available for the pot continues to rapidly shrink, while the sizes of the outstanding bets and raises remain the same – a theme well-known to readers of The Automatic Earth. The central banks are trying to hold back a tsunami of margin calls that will produce waves of potentially infinite height, and therefore there is no way they can hold them back for very much longer.

As llargi outlined in his post, Cash for Christmas, the funding situation for European banks remains dire despite the coordinated CB swap lines designed to lower the short-term cost of borrowing dollars, perhaps because there is a massive shortage of euro funding as well, and there is very little chance it will improve.

What is truly frightening about these financial sharks is that their predictable psychology ends up being much more destructive to the rest of society than to themselves. In a poker game, the sharks playing recklessly outside of their bankrolls will self-destruct, go home in tatters and perhaps drink themselves into a coma. In the game of high finance, though, the sharks will be bailed out and/or go home with much their personal wealth intact, after the institution’s shareholders, creditors, employees, customers and just about everyone else associated with it is wiped out.

The sad fact is that we are all currently a part of their reckless poker game, whether we like it or not. There is only one way around that - the people must force their governments to hold the bankers criminally, civilly and financially liable for their actions and losses. If that doesn’t happen very soon, through whatever means necessary, then the only other option is to insulate yourself from the fallout through whatever means you are able and willing to undertake. The long journey from the casino back home is well underway, and now we must simply make it to that home, safe and sound.

The Debt Walkers Strike Back

2011-12-13T17:33:00.000-08:00

"There's a time when the operation of the machine becomes so odious—makes you so sick at heart—that you can't take part. You can't even passively take part.

And you've got to put your bodies upon the gears and upon the wheels, upon the levers, upon all the apparatus, and you've got to make it stop.

And you've got to indicate to the people who run it, to the people who own it, that unless you're free, the machine will be prevented from working at all."
-Mario Savio, UC Berkeley Speech (1964)

The dawn breaks on a cold, winter day in a major Western city. It’s Monday morning, and the air is permeated by an ominous, dry silence. Some cars remain idly parked on the street, reflecting calm, while others have their windows bashed and their steel burnt black, reflecting chaos.

The sidewalks are nearly empty and most of the storefronts are dark and devoid of activity as well. There are no buses running, the subway system is out of operation, airplanes are grounded and shipping ports lay dormant.

Interesting and unusual animals wander about in the streets and alleyways, as if they had all suddenly decided to escape from their cages in the Zoo, out into the real world. Every few city blocks there is a spattering of homeless or a roving gang of restless, frustrated, filthy-looking teenagers.

The streets are no longer fit for routine travel by casual drivers and pedestrians looking for something to do or someplace to go.

It is all a rather disquieting and terrifying scene – perhaps one from the latest Hollywood flick about a civilization collapsed by viral infection, transforming masses of human beings into flesh-eating zombies.

Or maybe it was the influenza pandemic that evolved to resist vaccinations and treatment, spread through major cities like a wildfire and wiped out 75%+ of the human population, leaving only a few survivors to rebuild society from the bottom-up. Or perhaps it's simply what the Evil Empire left behind in its war-mongering wake.

What’s more terrifying than the cannibalism, debilitating symptoms or war-torn landscapes, though, is the fact that the zombies left behind refuse to drive gas-guzzling SUVs, commute 20 miles to work or shop for Christmas presents.

No zombies flocking to cities from the suburbs, no zombies slaving away at the factory or the office, and no zombies spending their bimonthly paychecks at the mall on computerized gadgets and cheap trinkets. That, more than anything else, is what the consumerist empire fears.

In coming days and weeks, we are going to continue getting a lot of official and unofficial economic "projections", revised and re-revised, such as the economic growth and budget deficits of various countries by the end of 2012, 2013 and beyond.

In Greece, they’re already telling us the rate of economic contraction will slow down and the budget deficit will be cut in half, as long as certain painful austerity measures are adopted. Needless to say, all of these projections will be WAY OFF and much worse than expected, just as they were last year and the year before.

Most academics and pundits conduct analyses and make predictions in a Vacuum Universe, where nothing outside of a frighteningly simplistic model matters. One of many factors left out of these models is the predictable socioeconomic reactions to "structural reforms" and bankster bailouts imposed by "technocratic", unaccountable governments.

There will be riots and protests and perhaps even pockets of full-blown revolution in some developed countries. Call them the "Arab Spring" or the "European Winter" or whatever you want, but they will happen and they will render previous projections meaningless.

What will be most disruptive to the current system of mandated growth, though, are not the riots and protests, but the strikes. Direct action from the people always faces the potential of being met with violent repression from their governments, but refusal to participate in economic activity is a much more stealthy and subversive threat to our political and financial overlords.

The machine’s propaganda lever will be used to label these people "lazy bums" or "parasites", but they will continue refusing to operate any of the other levers, and instead hoist their bodies on top of its gears.

Our twisted market system has bred a whole new class of human beings who are up to their eyeballs in debt, struggling to find any remaining scraps of gainful employment and incensed with the corporate oligarchies that pass for representative governments these days.

We may as well label them an entirely new species of humans –perhaps "debt walkers" - because that’s how far apart they must feel from previous generations and from their former selves. Our label is not meant to disparage, but illustrate a general reality that has evolved.

Rioters, protestors, strikers – these are all the debt zombies who have grown in number and influence over the last few years, threatening to pounce and feast on the current neo-feudalistic economic order.

As small and sporadic groups making a "stand" here or there, they may not seem like a force to be reckoned with, but as a relatively organized bunch, with weekly or even daily events planned, it would be a huge mistake to discount their influence, as most agencies predicting future economic growth and budget deficits do.

In two previous articles, Bailouts, Austerity and Rage: Calm Like a Bomb and People of the Sun, I outlined how people across Greece, Ireland, Portugal and Spain were becoming increasingly infuriated with their banks and their governments, and, in some cases, staging violent protests and riots.

We should expect this trend to continue, but, as I mentioned above, there is another very important aspect to the rage of these zombie debt slaves – their strikes.

The strikers are the ones to keep an eye on, despite their distinct lack of publicity in the popular media. These "walkers" are plainly and simply refusing to participate in what most consider "normal" economic activity for significant stretches of time.

They will play repeated games of chicken with their employers and customers (individuals, companies and governments), discovering who really has the raw drive to hold out the longest, before one, both or the entire system breaks.

This new species of the Western world is best observed in Europe right now, both in its "periphery" and parts of its "core".

While Americans were preparing to feast on turkey, stuffing, mashed potatoes, gravy, and Egg Nog, generally warming up their hearts for future episodes of ventricular tachycardia, and to raid every Wal-Mart in the country with their little children and pepper spray in tow, the Portuguese were preparing for a general strike in their land across the Atlantic. As Andrei Khalip and Daniel Alvarenga wrote for Reuters:

Portuguese Strike Against Austerity

"Portuguese workers launched a general strike on Thursday to protest against austerity measures imposed as the price of an EU bailout designed to keep Portugal afloat and stem a deepening euro zone debt crisis.

Planes were grounded, trains halted and public services interrupted as workers across the nation of 11 million protested against job losses, tax hikes and pay cuts agreed between Portugal and the troika of lenders -- the European Commission, European Central Bank and International Monetary Fund.

The Naval Shipyards in Viana do Castelo in northern Portugal ground to a halt as all 700 workers downed tools, the local union leader, Antonio Barbosa, said.

All international flights to and from Lisbon and Porto were cancelled for the duration of the 24-hour walkout , according to the website of the airport authority ANA, and only minimum services connecting mainland Portugal with the islands of Madeira and the Azores were operating"

Perhaps these debt walkers realized that a country without functioning transportation networks is one without much exploitative economic activity. While the elite institutions continue running financial weapons of mass destruction across national borders, mounting a global attack on freedom, equality, justice and humanity, the Portuguese have decided to strike back. And here’s what they were chanting at the Lisbon airport while they did:

"The strike is general, the attack is global!"

The people of Portugal, of course, aren’t the only ones planning strikes. In Greece, millions of workers called for a general strike yesterday, a week before the Greek Parliament is set to pass a package of oppressive austerity measures mandated by the external authorities of the "Troika" (European Commission, ECB and IMF). Kathimerini (English version) reports on some of the details of this strike.

General Strike to Protest Austerity Measures
" Public services are to be paralyzed again on Thursday as thousands of workers walk off the job to protest an ongoing austerity drive in the seventh general strike this year.

As usual, tax offices, courts and schools will shut down, hospitals will operate on emergency staff and customs officials will walk off the job.

The national rail network will suspend operations all day as will the Proastiakos suburban railway service. Ferries too will remain moored in port as seamen join the 24-hour walkout.

…The metro will not shut down at all but trains will not run to Athens International Airport. They will stop at Doukissis Plakentias station.

The media held a 24-hour strike on Wednesday and will take part in work stoppage on Thursday to show their support for the protest action."

It’s unlikely this current level of popular resistance will actually force the politicians to change their votes, but it will certainly render whatever "structural reforms" they vote on next week meaningless over the next year. How does a country grow itself out of a deficit when many of its inhabitants simply refuse to accept slave wages and standards of living, and participate in “normal” economic activity, as long as the richest among them continue to live like kings?

It can’t and it won’t, not even in the short-term, and not until the politicians meaningfully respond to the resistance of their people. Their policy changes would have to be just as “radical” as the actions of the debt zombies, including a systematic cleansing of Greece’s banking sector and public debts, or else they may as well join the strike and not show up to their jobs, either.

That or the entire economy collapses in a disorderly process as the politicians dither, and then it finally gets a chance to start down a completely different path. Perhaps there are a few other options, but none that look very likely right now. What is certain is that there are plenty more strikes in the Western world that have occurred or will occur in the near future.

In Greece alone, we can take a look at the tourist website "Living, Working, Musing & Misadventure in Greece", and see a regularly updated list of ongoing and upcoming strikes and protests in the country (tourism in Greece contributes about 15% to annual GDP).

Meanwhile, the people of Britain launched their largest strike in decades two days ago. In what can only be seen as a reckless and insensitive provocation, Chancellor George Osborne shoveled on an unprecedented burden of public sector austerity on top of the already large “reforms” in his “Autumn Statement”, right before the strikes were due to start.

Mr. Osborne is probably also under the fanciful illusion that his government still has the upper hand with protestors and strikers (and voters), because the British economy will not be effected by their actions. Severin Carrell, Dan Milmo, Alan Travis and Nick Hopkins reported on this event for the Guardian:

Day of strikes as millions heed unions' call to fight pension cuts

”The UK is experiencing the worst disruption to services in decades as more than 2 million public sector workers stage a nationwide strike, closing schools and bringing councils and hospitals to a virtual standstill.

The strike by more than 30 unions over cuts to public sector pensions started at midnight, leading to the closure of most state schools; cancellation of refuse collections; rail service and tunnel closures; the postponement of thousands of non-emergency hospital operations; and possible delays at airports and ferry terminals.

Union leaders were further enraged after George Osborne announced that as well as a public sector pay freeze for most until 2013, public sector workers' pay rises would be capped at 1% for the two years after that.

In Scotland an estimated 300,000 public sector workers are expected to strike, with every school due to be affected after Scottish headteachers voted to stop work for the first time.

The UK Border Agency is braced for severe queues at major airports after learning that staffing levels at passport desks will be "severely below" 50% despite a successful appeal for security-cleared civil servants to volunteer.

"We will have the bare minimum to run a bare minimum service," said a Whitehall insider. Many major public buildings and sites, including every port, most colleges, libraries, the Scottish parliament, major accident and emergency hospitals, ports and the Metro urban light railway around Newcastle and Sunderland will be picketed.”

The TUC said it was the biggest stoppage in more than 30 years and was comparable to the last mass strike by 1.5 million workers in 1979. Hundreds of marches and rallies are due to take place in cities and towns across the country.”

It’s too bad that politicians like Osborne are not paying attention, though, because, if they were, they would see that these types of strikes are going to continue on for months and years if need be, and they are one of many factors that are screaming loud and clear that it’s all downhill for economic growth and public deficits for the UK from here on out.

Perhaps the British Lords of Debt should take a harder look at the report just recently produced by their own Office of Budget Responsibility, which took a hacksaw to its own estimates for growth that were produced a few short months ago, and mirrors forecasting trends in just about every other country in Europe.

Such huge downward revisions have become characteristic of just about every private and public institution in the business of making projections, as they desperately try and remain credible in the eyes of those people who have been living with reality for years now. They won’t be successful, though, because that credibility is long gone. Their analyses and models are just more garbage products that people will refuse to consume in the near future.

Why continue leading “normal” lives and playing by the “normal” rules when the system itself is so abnormal and unjust? Everyone, including the general public in all of Europe and America, should take a hard look at how the austerity cuts are hitting the poorest among us far worse than the richest, as illustrated by this graph from the Institute for Fiscal Studies:

All of this oppressive austerity and systemic inequality is not limited to the Western hemisphere by any means. The world’s second largest economy, China, also presents a stunning example of how fast one can go from a “booming” economy to a rock hard landing, both financially and socio-politically. The recklessly financed cheap labor, industrial export model is simply no longer working for countries like China, and their debt walkers are no happier about it than those of Europe. Ben McGrath of the Worldwide Socialist Website reports:

Strikes rock manufacturing centres in southern China

”Thousands of factory workers in the manufacturing cities of Shenzhen and Dongguan in China’s southern Guangdong province have taken part in strikes over the past two weeks to protest cuts to wages and other conditions.

On November 17, 7,000 workers stopped work at a Taiwanese-owned shoe factory in Dongguan. The Yue Cheng facility had recently fired 18 middle managers and cut overtime. Many workers also faced losing their jobs as the company prepared to shift production to inland China or another country, such as Vietnam, where labour costs are lower.

…The tensions continued this week, with security guards patrolling the industrial park. Workers told Reuters that the strike continued. They were clocking in, but refusing to work at the assembly lines. “We are willing to work but you must also pay us enough to survive,” one worker said. Another declared: “Even during the financial crisis [in late 2008 and early 2009] we didn’t see pressure like this.”

Starting from November 21, two-thirds of the 800 employees at lingerie maker Top Form International Holdings’ factory in Shenzhen staged a five-day strike against a piece-rate wage system and onerous daily production quotas.

On November 22, 1,000 workers at a Taiwanese-owned computer factory in Shenzhen, went on strike over excessive overtime from 6 p.m. to midnight.

…China’s export industry is based on cheap labour and sweatshop conditions. A shift toward domestic consumption would necessitate higher wages for workers, undermine export competitiveness and therefore accelerate job losses in the export sector.

In April, in an attempt to ward off growing social discontent, the Shenzhen authorities increased the minimum wage slightly from 1,100 yuan to 1,320 yuan a month. Even this meagre increase caused companies to speed up plans to reduce their workforces and shift production to cheaper provinces and other countries. Top Form International, where one of latest strikes occurred, is reducing its sewing workforce from 1,000 to 400, by moving to Thailand where wages are even lower.”

What we see in China is just a different type of “austerity” – one in which the private sector must suppress wages before a sizeable middle class ever gets the chance to even form, or the public sector ever gets a chance to over-spend with salaries and entitlements (and wars). The Chinese zombies have been forced into a state of leveraged fury, just like everyone else.

The only questions that remain now are (A) how long before the American zombies make like their debt-walking brothers and sisters across the Atlantic and Pacific, and generally strike back against a devolving financial consumer empire of exploitation, and (B) what kind of damage they can really cause to this system when that inaction gets going.

If localized resistance movements continue to grow and others follow in the footsteps of Occupy Oakland, which is quite likely at this point, then perhaps it won’t be very long at all. This particular flick may not follow a Hollywood script or have a Hollywood ending, but you can count on it earning its place in history as something real; something that followed its own script and helped change the world.

Democracy Isn't Dead Yet

2011-11-20T07:09:00.000-08:00

“Canned laughter” is frequently used on TV shows to create the illusion of soothing, comedic value in the minds of the show’s viewers. Anyone who has watched a show with “canned laughter” is familiar with the logic. One of the characters says something or another that isn’t very interesting or funny, the laugh-track comes on and then we find ourselves forcing a smile or snicker as an almost “unconscious” reaction. Almost, but not quite, because many times we are still forced to face our participation in this contrived reality after the fact.

The ongoing shows in the realm of the political economy are no different. They use their own versions of “canned laughter” to legitimatize a situation which is otherwise plainly illegitimate to those of us strapped into our seats, forced to watch along in agony. A great example of these political laugh-tracks is the “vote of no confidence” that is frequently held in Parliamentary countries, where the appointed governments almost always survive in one piece by maintaining “party discipline” or slightly modifying policies to corral dissenters in.

However, attempts to impose an artificial feeling of political satisfaction for the people and political legitimacy for the government cannot and will not be successful forever, under any and all circumstances, and that fact couldn't be any truer than it is now. It is evident from the “no confidence vote” that has just occurred in Greece, where Prime Minister George Panadreou was truly on the chopping block this time, and the one that will soon occur in Italy, where Prime Minister Silvio Berlusconi will be as well.

With regards to the former, G-Pap managed to survive with a slight majority of 153 votes (2 votes more than necessary), and is now claiming to be in talks with other parties about forming a “national unity government”, which he almost assuredly will not be the leader of. At first blush, one could be forgiven for seeing the developments of last week in Greece, culminating in this vote of confidence for a future government coalition, as marking an unmistakable death blow to “democracy” in the developed world.

G-Pap dangled the prospect of a truly democratic process in front of the Greek people as a ploy, to scare the opposition parties into throwing their support behind the oppressive EU deal of October 26 and joining a coalition government, after which both the referendum and the protection offered by “opposition” parties would be callously stripped away from the people. Indeed, a better example of blatantly anti-democratic tactics within a democracy cannot be found short of fiscal “supercommittees” and military coups.

G-Pap’s government has now managed to stay in power, albeit in a different form, gain stronger commitments from opposition parties to the EU bailout/austerity deal and postpone elections until after the deal passes and €8 billion from the IMF is disbursed to avoid “default”. Merkel and Sarkozy will now sleep better knowing that the Greek people will be forced to play their part as victims in an epic criminal exortion scheme, without any inconvenient democratic processes, such as a referendum, interfering along the way. Or will they?

Sometimes, when we get bogged down in the superficial details, we miss the bigger perspective that is evolving. G-Pap did win his confidence motion, but only by a slight majority of two votes, and it cost him his job. More importantly, it is not clear what kind of credible “coalition” government can be formed or whether it can really quell political dissent against the austerity deal. Now comes the part where ruling politicians must actually convince the various political factions that G-Pap's words to them in Parliament about “national unity” and “personal sacrifice” are more than just words. Deutsche Welle Reports:

Papandreou Wins Confidence Vote But Looks Set to Step Down

” It is a first in the constitutional history of Greece; parliament expressing its confidence in the prime minister so that he can soon resign.

… If the conservatives continue with their refusal to take part in any government of national unity, it would leave the Socialists with no choice but to form a shrunken coalition with the populist right and the economically liberal "Democratic Alliance" of former Foreign Minister Dora Bakoyannis – seen as a rather pointless exercise.

The leftist opposition signaled that it was particularly upset about the vote. "They want us to express our support for a government that is not even there anymore," said leader of the moderate Left Alliance Alexis Tsipras – with many commentators agreeing that there's an element of truth in Tsipras' assessment of the situation. “

CNN adds some more “clarity” to the ruling politicians' ambitious political plans for Greece (but against the people of Greece), and the ongoing negotiations with New Democracy opposition leader Samaras, who has so far refused to play his part in this Greek tragicomedy by demanding both G-pap's resignation and also snap elections for a new government within six weeks. Now it seems G-Pap has agreed to resign if a coalition government is formed, but Samaras refuses to be a part of any coalition until the resignation is put in writing, notarized and delivered to his doorstep, and only then will he be willing to discuss additional terms (i.e. when to hold elections).

Greek PM Expected to Resign After Coalition Government Formed

”Sunday's Cabinet meeting will be the last with Papandreou as prime minister, the spokesman said, according to media reports. The meeting will focus on issues relating to Monday's Euro group meeting, at which Finance Minister Evangelos Venizelos will represent Greece, the reports quoted the spokesman as saying.

Venizelos is likely to remain in his post as finance minister in a new government, sources told Greek television. Candidates for the prime minister's job include Petros Moliviatis and Loukas Papaimos, according to Greek television. The new government will have a life of four months, according to Greek television, citing sources, and elections will be held in early spring.

...Speaking briefly to reporters after the meeting, Samaras said that once Papandreou resigns, everything will "take its course" and "everything else is negotiable."

...But many questions remain unanswered. The main opposition party has showed little willingness to join the unity government, with Samaras making it clear he did not want to be part of a coalition.

In forming the new government, the PASOK party will likely seek the support of smaller parties. Samaras has called for a transitional government for six weeks, followed by elections."

The only clear result we can expect from all of this political haggling is that the Greek people will not take kindly to such a blatant betrayal of what little trust they had left to offer to their government. So underneath the surface of G-Pap’s despicably cruel, yet “successful” ploy against the representative interests of the Greek people, we see that there lays a sociopolitical situation that is as volatile and uncertain as it ever was. The Greek people, the opposition leaders and, really, the rest of the world were presented with the PASOK government’s “canned laughter” routine, and very few of us felt the need to smile or laugh along.

In a decades-long era where democracy has been severely lacking and dysfunctional at best, and entirely non-existent at worst, it seems that what has happened in Greece over the last week was net beneficial for the concept of representative democracy within a nation-state. The ruthless political brinkmanship of the Greek Prime Minister was laid bare on the table in full view for the world to see, and, more importantly, for the Greek and German people and their few remaining "representatives" to digest. It has left both him and his anti-democratic government with no credibility. Bloomberg reports:

Papandreou Seeks Unity Government

"The Communist Party of Greece, the third-largest party with 21 seats, and Syriza, which has nine, [in addition to Samaras' New Democracy Party], rejected the overture from Papandreou, and called for elections. “I won’t bow to blackmail,” Communist Party leader Aleka Papariga said.

The government will need the backing of 180 lawmakers to secure approval for Greece’s second aid package that was negotiated in Brussels last month. Disbursement of funds was halted after Papandreou’s call for a referendum was opposed by German Chancellor Angela Merkel and French President Nicolas Sarkozy.

“In the eyes of Angela Merkel and Nicolas Sarkozy he doesn’t have much credibility left,” Jacob Kirkegaard, research fellow at the Peterson Institute for International Economics, said in a Bloomberg TV interview. “Greece needs to have a new face to the rest of the world.”

We must also remember that the democratic ideal may have began in Greece, but now encompasses much of the world and especially the West, so it cannot be expunged from our collective consciousness quite so easily. It has taken many, many hits over the years, nearly becoming a heap of garbage in the dumpster of history in 2008-09, but it refuses to go gently into that good night. It’s resolve will next be tested in another critical (and much larger) member state of the Eurozone, Italy, and this time the odds that it comes out of the battle on top are that much better.

It has become quite clear that Berlusconi will not survive as the leader of Italy much longer, as many of his party members are refusing to support him. The financial “contagion” from Greece has rapidly enveloped one of the largest economies in Europe, as Italy’s sovereign bond yields have consistently hit record highs, and its ruling government simply does not know how to respond. Brussels wants it to effectively relinquish full fiscal sovereignty in a gambit to calm markets, but that is appropriately an untenable outcome for Italy, and Berlusconi is hoping the EU/ECB will offer to perpetually buy its debt until some political consensus is reached, which is also justifiably untenable for the rest of Europe.

The prospect for that political consensus is also drifting further and further out into the Mediterranean, as all of Europe "re-enters" a severe recession and credit markets weaken further. Given the way things have played out in Greece, anyone with the least bit of common sense knows that systematic austerity will not improve Italy’s rate of economic growth or debt-to-GDP levels, but only make them worse, and therefore further destroy its ability to remain solvent. Der Spiegel reports on how Italian politics is rapidly transforming to reflect the dire state of Italian finances.

Italy Becomes Next Euro Battleground

”It was a telling tidbit of news. This week, the French bank BNP Paribas announced that it had slashed its holdings of euro-zone government bonds, including €2.62 billion worth of Greek debt.

But it wasn't just bonds from Athens that the bank dumped. BNP Paribas also indicated that it had drastically reduced its holdings of Italian debt. In the three months prior to the end of October, the bank sold off €8.3 billion worth of bonds issued by Rome, reducing its exposure by 40 percent.

…Yet even as the turmoil in Athens dominated headlines this week, there were increasingly distressing indications that Rome may also be in trouble. For one, Italian borrowing costs soared earlier this week, with interest rates on sovereign bonds rising to 6.4 percent, perilously close to the mark which triggered emergency Italian bond purchases by the European Central Bank in August. Analysts consider a rate of 7 percent to be the level at which investors stop buying sovereign bonds.

Equally concerning are indications that the Berlusconi government may be close to collapsing. Several former Berlusconi loyalists published an open letter in the Italian daily Corriere della Sera on Thursday calling for a change at the top. One of the parliamentarians indicated that a rebellion could be mounted as early as next week, during a budgetary vote on Tuesday.

Reuters reported on Thursday that Berlusconi told European leaders in Cannes that he would call a confidence vote within two weeks. The Italian prime minister has survived 53 votes of confidence since 2008, the last of which took place on Oct. 14.”

Before any of the dust has even settled on the political machinations out of Greece, we can expect a whole new level of political turmoil in Italy, where Berlusconi cannot put together a “credible” austerity package and is losing the confidence of EU institutions, the Italian people, the opposition parties and much of his own party at a faster pace each and every day. And, once again, there is no separating the devolving European politics from the deteriorating European finances anymore, as is clearly illustrated by Italian Finance Minister Tremonti’s following statement to Berlusconi (translation from Italian news).

LINKIESTA: Tremonti to Silvio: Go Away or Monday Market is Bloodbath

Tremonti: “I am saying that on Monday there will be a disaster on the markets if you, Silvio, stay at your post and do not go. Because the problem for Europe and the markets, correct or not as it may be, is in fact you.”

In the evening, the Treasury has denied that Tremonti has said this sentence.

However, the chronicler of Linkiesta, along with a colleague from a major newspaper Anglo-Saxon, have personally heard the minister's statement that was later confirmed by government sources.”

So, despite the government’s best post-hoc denial, it appears that Berlusconi’s own finance minister has singled him out as not only being a political thorn in Europe’s side, but also a man capable of producing complete financial chaos on the Continent and around the world come market open on Monday. Now if that’s not something to laugh about, then I don’t know what is. A man whose biggest problem a few short months ago was a plethora of sex scandals is now being accused of potentially collapsing the entire EMU by his mere presence in Rome, and by his own man!

Even the Financial Times has stepped up to voice its opinion that Berlusconi has to go, in their lead editorial published on Saturday.

In God’s Name, Go!

“In a Group of 20 summit that fell well short of what was needed, the world’s most powerful leaders were powerless in the face of the manoeuvres by two European premiers: George Papandreou and Silvio Berlusconi.

The similarities between the two prime ministers are striking: both men rely on a thin and shrinking parliamentary majority and they are both squabbling with their own ministers of finance. Most importantly, they both have a dangerous tendency to renege on their promises at a time when markets worry about their countries’ public finances.

There is, however, one important difference: having reached €1,900bn, Italy’s public debt is so high that its potential to destabilise the world economy is way above that of Athens.

...After two decades of ineffective showmanship, the only words to say to Mr Berlusconi echo those once used by Oliver Cromwell.

In the name of God, Italy and Europe, go!"

The media critics and those within Berlusconi’s party, of course, believe he has to go because he is too weak when dealing with political opposition and unable to push through the savage austerity measures that the “Troika” (European Commission, ECB and IMF) requires of him. They are dead wrong. The truth is that there is no one on Earth "strong" enough to push such devastating and exploitative measures through, and Berlusconi is just a caricature of what happens when you make the foolish decision to be "that guy". Eventually, that guy is always swept away by the financial torrents that flow beneath.

Men like Berlusconi have only survived this long because institutions like the ECB have been willing to subsidize private and public finances through monetary policy, and namely asset purchases. That particular dose of canned laughter, however, is itself being exposed for what it truly is after a few years of diminishing returns and sociopolitical outrage. That's why ECB governing council member, Yves Mersch, told an Italian newspaper that his institution will not continue to defend the line in the sand for Italian bond yields and spreads indefinitely (a line dangerously close to being crossed after last week's action).

Reuters: ECB Debates Ending Italy Bond Buys if Reforms Don't Come

"Asked if this meant the ECB would stop buying Italy's bonds if it did not adopt reforms it has promised to the European Union, Mersch, who heads Luxembourg's central bank, replied:

"If the ECB board reaches the conclusion that the conditions that led it to take a decision no longer exist, it is free to change that decision at any moment. We discuss this all the time."

Since the ECB resumed its bond buying programme (SMP) around three months ago it has purchased some 100 billion euros of government bonds, a majority of which are thought to be Italian BTPs. Mersch said the ECB did not want to become a lender of last resort to help the euro zone solve its debt crisis and said it was concerned that its job could be made more difficult by governments that "don't meet their responsibilities."

Once again, neither Berlusconi nor anyone else can ever meet the "responsibilities" asked of them by the other Euro-crats. Some are foolishly more willing than others, but all fall short. Berlusconi "has to go" for the simple reason that he, like his obsolete colleague in Athens, refuses to represent the Italian people in any meaningful way or give them a voice to be heard throughout Europe, as representatives of their own best interest. It is because he has held 53 "canned" motions of no confidence in the last three years and each one of them was a bigger joke than the last.

And it gets even funnier. It is clear that the ruling politicians in both Greece and Italy are both scrambling to provide some "resolution" to their chaotic political atmosphere before Mr. Market opens on Monday, and that tells us almost all we really need to know. Every weekend has become a chance to smooth out the increasingly unprecedented volatility of the week that preceded it. To stifle the democratic processes of the economy, if you will. To prevent investors from voting with their accounts, and to prevent that from feeding back into actual political change.

Every weekend this happens, and every weekend the people who have to actually live in this world find the whole process less and less funny. All of these people aren't taking to streets to protest individual leaders, either. Many of them are protesting the entire Hollywood show, with all of the rigging and cheating and stealing and killing that goes with it. Some of us still wait in anticipation for the twists and turns, yes, but perhaps that is because we realize there is no longer only one way it could all play out. Bloomberg reports:

Thousands Rally in Rome, Pressing Italy’s Berlusconi to Resign Amid Crisis

"Tens of thousands of Italians gathered in Rome to call on Prime Minister Silvio Berlusconi to resign, as defections eroded his parliamentary majority at a time when the country’s borrowing costs are at a euro-era high.

Hundreds of buses and 14 special trains brought thousands of supporters of the opposition Democratic Party to the rally in front of the Basilica of St. John Lateran to hear calls for the premier to go. Demonstrators shouted “Shame”” and “Get Out” in the square that’s home to the first church built in Rome.

The premier, who generally spends his weekends at his home in Milan, remained in Rome in consultation with his top advisers after several lawmakers said they planned to abandon his People of Liberty party, threatening to leave him without a majority in Parliament before a key vote. Calls will increase for Berlusconi to resign if he loses the ballot to rubberstamp the 2010 budget report, likely to be held on Nov. 8."

Rest assured the next vote of no confidence, rumored to be held within 2 weeks (if the government even makes it that far), will not produce the automated response desired by Berlusconi. It may not produce the response desired by the rest of his party either, or the EU/ECB/IMF, or even the opposition parties. That’s the point, right? Democracy isn’t about getting exactly what you want or promoting economic growth or establishing “solidarity” in Europe. It is about one thing and one thing only, and that is giving a voice to the people so their opinions on these policy matters can be incorporated into action.

Whether those policies are trivial or absolutely critical to European stability is irrelevant at this time, like it or not. For now, it is clear that the European people are increasingly opposed to the tired old measures of the last two years, where people are squeezed from their jobs, benefits and homes just to keep the zombie banks alive for one more day, while economies across the world crumble. Some may ask whether the Greeks, for example, even know what they are protesting against, and what will happen as a consequence. UBS' Stephen Duo would probably answer "no", as The Guardian relays.

Eurozone Crisis: How Grim Would Bankruptcy be For Greece?

"There is no script to follow when a country goes bust, but as Greece stares into the abyss that would open up if it left the euro, the gravity of the situation has prompted UBS's Stephane Deo to quote Keynes: "Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency."

Deo added: "If a country has gone to the extreme of reversing the introduction of the euro, it is at least plausible that centrifugal forces will seek to break the country apart... monetary union break-ups are nearly always accompanied by extremes of civil disorder or civil war."

...Financial markets have already priced Greek government debt as worth less than 50c for each euro. But it's not the same for companies and individuals. If a Greek shipping company's debts are denominated in euros, the debts don't disappear, they just become dramatically more expensive to service.

NIESR can envisage that a Greek default would see the banks shut for weeks, even months. During a default, lending comes to a halt and corporate life seizes up. Unemployment and poverty soar; in Argentina's case, the jobless rate came close to 25%. By 2003, the numbers in "extreme poverty" reached 26% of the population, with more than 50% deemed below the poverty line.

One long-lasting impact of Argentina's bankruptcy has been the rise of worker co-operatives: they took over failed businesses and remain a feature of the country's economy. Local assemblies, which helped distribute food and organise health care, also sprang into being.

The flight of capital that precedes a default can also swiftly reverse. Once assets in Argentina became 80% cheaper than before the default, foreign buyers returned in force. Ireland, even though it has not defaulted, is seeing something akin to that today. Argentina has bounced back from the horrors of December 2001 faster than anyone predicted."

Although Duo (or The Guardian) isn't exactly the most unbiased observer in this whole discussion, he is correct to point out that Greece's economy and society will be dramatically effected by the aftermath of a default and devaluation. Business will not go back to usual anytime soon, and the "existing basis of society" will be overturned. The same is true for Italy, although Italians may have a much easier time of it given the size of their economy and export sector. It is certainly difficult to predict the exact developments that will unfold for the residents of these countries, and what dynamic will come to exist within its borders and between its international neighbors/partners. No one can ignore the fact, though, that whatever happens will be very painful.

Why, then, do the Greek and Italian people still show up in the streets just about every day to express their disdain for the current path of never-ending bailouts and austerity? It's not a simple question, but here's a simple answer - they believe only chaos is certain from this path. They look around and see that "austerity" is not reducing their country's debt burden, increasing its economic growth or promoting stability and peace among its people. For Greece, the bailout money goes in one public bank account, and out the privatized other, and for Italy, there isn't even any bailout money. In fact, there never will be, and everyone knows it.

We can repeatedly tell those people above, from a distance, how little they know about economic and financial history, or the extreme outcomes that have resulted from monetary hyperinflation, but I suspect we wouldn't really be telling them anything they didn't already know in the backs of their minds. It takes courage to understand the inevitable socioeconomic pain that will result from any political outcome, but still assemble with others, stand out there and express yourself. We should not doubt for a second that these people are informed and are simply doing what they believe is best, materially or spiritually, for themselves, their families, their communities and their country.

It is also clear that some level of transmission from these people to their representatives in Parliament, however slight, still exists. By and large it has been through interviews, protests, riots and strikes that the peoples’ voices have been heard, but the possibility of meaningful elections still looms around every dark corner in Europe. Down every dark alley, there is a Parliamentarian that simply won't play along anymore, for whatever reason, and is eagerly awaiting his/her moment to strike. So, despite the best efforts of the Troika, its cronies and their pursuit of a pan-European nightmare, democracy in the developed world isn’t dead yet.

"Democracy... is a charming form of government, full of variety and disorder; and dispensing a sort of equality to equals and unequals alike." -Plato

Deconstructing the Tower of Financial Babel

2011-11-05T11:58:00.000-07:00

The Tower of Babel, according to the Book of Genesis, was an enormous tower built in the plain of Shinar.

According to the biblical account, a united humanity of the generations following the Great Flood, speaking a single language and migrating from the east, came to the land of Shinar, where they resolved to build a city with a tower "with its top in the heavens...lest we be scattered abroad upon the face of the Earth."

God came down to see what they did and said: "They are one people and have one language, and nothing will be withholden from them which they purpose to do." So God said, "Come, let us go down and confound their speech." And so God scattered them upon the face of the Earth, and confused their languages, and they left off building the city, which was called Babel "because God there confounded the language of all the Earth."(Genesis 11:5-8).

"No one gets angry at a mathematician or a physicist whom he or she doesn't understand, or at someone who speaks a foreign language, but rather at someone who tampers with your own language." -Jacques Derrida

Even the mainstream can no longer ignore the fact that mainstream dialogue in the world of finance has become nothing more than an endlessly reduced, reused and recycled cloud of type-cast words. I first visited complex human language and its modern-day "meaning" [or lack of it] in Language, Logic and Lies, which focused on the UN Resolution to invade Libya. There we saw that statements asserted as true, according to the "logical positivism" of Alfred Jules Ayers, don't have any meaning unless they are tautologies or are empirically verifiable.

Since then, our coherence-starved language has been reflected even more fundamentally by the volatile action in markets over the last two months, during which an assortment of European headlines, rumors, "communiques" and random statements came to dominate the collective psyche of investors. The "final" EU Summit to end all Summits (sound familiar, Europe?) on Wednesday (October 26) predictably turned out to be just another feebly-constructed stepping stone in our vast sea of contradictions and double or triple-meanings that permeates a never-ending, mind-numbing game of WordCraft.

Here were some of the most painstakingly recycled words that were involved - leverage, haircuts, guarantees, bondholders, SPIV (combination of recycled words), restructuring, recapitalization, voluntary, default, solution.

Jacques Derrida, the [in]famous French "post-structuralist" philosopher, popularized the process of Deconstruction as a means of analyzing academic literature across the human sciences. More accurately, deconstruction is an endogenous process that occurs within a work, typically finding its roots in the contradictions or omissions of the work's periphery, which then creep along towards its core and devour the entire argument. From the perspective of systems theory, it could be analogized to a process by which certain evolutionary systems sows the seeds of their own destruction over time.

Derrida's most oft-quoted phrase is "there is nothing outside the text", which meant that all "signs" (sounds, writings, pictures, videos, etc.) involved in human communication rely on an endless spiral of subjective context to imbue them with meaning, rather than reference to an external, "objective" reality that exists independent of the signifier. That may come off as a radical and ephemeral concept, but it's practical significance is painfully evident in modern society.

Derrida's Deconstruction takes a microscope to these signs, not to figure out what they truly mean or how to destroy their meaning, but to show how their meanings are naturally unraveling in the depths of our minds. Entire theories and academic arguments can be toppled by the context in which their signs are used, as that context may reveal any number of internal contradictions and circular, self-referential "terms of art".

Derrida's critics may claim that he is sitting comfortably in an ivory tower of "nihilistic" philosophy, willfully ignoring the plain-as-day "objective" meanings communicated by people in the "real world" on a regular basis. It is indeed counter-intuitive to think that what typically passes as "normal" social interaction or communication in our world is actually an elaborate, yet feeble sandcastle, patiently waiting for its moment to be washed back into the sea. That, however, is exactly the dynamic which we see in modern society.

The vocabulary of structured finance and "crisis response", those haunting specters which mask the "real world" to form an impenetrable membrane, has become more abstract and more ephemeral than post-structuralist linguistic philosophy could ever hope to be. Beyond that, we are all also becoming more consciously aware of this reality on a daily basis as the paradoxical headlines unravel and filter through. We now merely sit back and watch the global economic and financial system face the wholesale deconstruction of its internals.

Indecent Bazaar: Derrida's Passion for the Impossible

Up to this point, and for more days/weeks to come, the structural flaws and gaping holes in the latest European "bailout" proposal have been analyzed to death by every multi-national parent corporation and all of their subsidiaries. As expected, very few details were actually provided on any of the key issues allegedly negotiated for days in a set of marathon Summits. Anything that could possibly shed some light on what exactly was agreed upon and how it can be accomplished will now only come in the upcoming weeks of November, at the earliest.

The sovereign debt markets have not taken kindly to the plan to make a plan, as Spanish and Italian bond yields continue to leak upwards. This article is not about re-hashing a previously conducted accounting analysis of a relatively non-existent plan (though some limited analysis will be included). It's about why every such iteration of the latest grand master plan will perpetually fail to provide any coherent and comprehensible "solutions" for our global economic predicament.

It's about using a specific example to establish an extremely general underlying point. One can label the argument a type of "doomerism" or "nihilism" if one wishes, but I suspect most readers have already recognized its significance in their own lives. Now, our systematic deconstruction of the "comprehensive and sustainable solution" out of Europe last week must start with the oft-cited "origin" of the sovereign debt crisis, Greece. Yet another bombshell has been dropped on European leaders and this time it comes from the Prime Minister of Greece, George Papandreou.

On Monday evening, G-Pap announced that the European plan allegedly agreed upon last week would not be accepted or implemented until it was put to the Greek people in a referendum. Make no mistake, this could be a terminal blow for the EMU. Regardless of what the Greek people vote to do (odds are not in favor of them voting for more austerity), or whether this referendum even occurs, G-Pap has just signaled that he is more than ready to give up on the pan-European Pipe Dream.

Greek PM Calls Referendum on EU Debt Deal

"The plan of initiatives calls for a confidence vote," Papandreou told his Socialist party lawmakers in parliament, moments after he had also announced a referendum would also be held on the EU deal. "The command of the Greek people will bind us," he said.

"Do they want to adopt the new deal, or reject it? If the Greek people do not want it, it will not be adopted," the prime minister said after protests were held around the country last week against his government's austerity policies."

The call for a referendum is an unprecedented move which tells the rest of Europe that the Greek politicians trust (or fear?) their own people much more than those other leaders attempting to impose economic reform on Greece from the outside, and that there will no be no "comprehensive" anything without the blessing of the average Greek citizen. Needless to say, this development was not anticipated by the EU leaders congregating last week, and it will completely undermine everything they had agreed to agree upon in the future.

Instead, the birthplace of democracy will be granted the right to exercise that democracy in perhaps the most important referendum ever held in the developed world. Like I said before, the odds are not looking good for a unified Europe, as depicted in the picture above and many similar ones. But leaving that issue aside for now, let's move on to deconstructing the "plan" further, under the generous assumption that it will survive a Greek referendum in the near future.

LEVERAGE,

1) The plan calls for the €440 billion in capital already pledged to the EFSF, €290 of which is still unencumbered, to be "leveraged" into €1 trillion by providing "first-loss guarantees" on sovereign bonds of distressed members (PIIGS) for private investors and/or raising capital from outside investors (private institutions, sovereign wealth funds, etc.) through a "Special Purpose Investment Vehicle" (SPIV)

Let's start with the word "leverage". Right off the bat, we are discussing a term with dual connotations, as it could imply an amplifying effect that allows extra work to be done with relatively small amounts of force, or it could imply a destructive trait of developed economies that greatly increases systemic risks. In the eyes of EU political leaders, it carries the former positive connotation, but it carries the exact opposite in the eyes of the German Central Bank and a portion of the European Central Bank:

Eurozone Bail-Out: Holes Emerge in the 'Grand Solution’ to Solve EU Debt Crisis

"Jens Weidmann, the president of the Bundesbank and a member of the European Central Bank, sounded the alarm over the plan to “leverage” the fund by a factor of four to five times without putting any new money into the pot.

“It is tied to higher risks of losses and to increased sharing of risks,” said Mr Weidmann. “The way they are constructed, the leveraging instruments are not too different from those which were partly responsible for creating the crisis, because they concealed risks.”

The already ambiguous "leverage" term that could signify two diametrically opposed forces is proposed to be accomplished in one of the following two ways, or maybe both (no one knows yet):

GUARANTEES, DEFAULT

a. The "first-loss guarantees" will be established by EU member states who agree to take a percentage of initial losses on peripheral bonds which are in "default".

What this scheme amounts to is the EFSF "guarantors" providing private investors with partial insurance on peripheral bonds, which will allegedly lower borrowing costs for the distressed states involved. Since a country cannot credibly sell insurance on its own bonds to lower costs (unless it's the U.S. doing it via the Fed and Primary Dealer banks), the guarantors will only be those states that are not in the process of drawing on the EFSF for aid.

The glaring contradiction in this proposed method of leveraging the EFSF through "guarantees" is found in the context of another part of the plan which deals with Greece. That part makes clear that a "50% haircut" [to be discussed more below] for holders of Greek bonds is not a technical "default" that triggers payouts on bond insurance contracts, i.e. credit default swaps. This is currently the position supported by the International Swaps & Derivatives Association (ISDA). The Wall Street Journal reports on this gaping conundrum:

Default Insurance Market Takes Hit by Serena Ng and Katy Burns

"A vast market in which banks, hedge funds and investors trade insurance against debt defaults got a jolt Thursday, sparking worries of new strains in the global financial system. Under the broad deal reached this week to stem the euro-zone's financial crisis, holders of credit-default swaps on Greek government bonds aren't expected to receive any payout, even though a preliminary agreement between financial institutions and European policy makers would recognize just half the face value of some Greek debt.

"The decision not to trigger the swaps raises questions about the value of the insurance-like contracts and exposes the limitations of the hedging strategies that banks and investors have come to rely on. The swaps are widely used by bondholders and major banks to defuse a wide range of risks, and by traders to bet on market trends. If the swaps don't pay out when bonds default, banks and funds that bought the insurance may face losses they thought they had hedged."

Bloomberg adds a bit to to the discussion as well:

Greece Default Swaps Failure to Trigger Casts Doubt on Contracts as Hedge by John Glover

"If they find a way to avoid a trigger event in the CDS, then people will doubt the value of credit-default swaps in general, leading to more dislocations in the market," said Pilar Gomez-Bravo, the senior adviser at Negentropy Capital in London, which oversees about 200 million euros. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements."

What seems to be missing in this discussion is the fact that the exact same logic can be extended to the EFSF bond insurance program, where "guarantees" are the equivalent of "insurance-like contracts" and would not have to be paid out as long as the remaining PIIS can restructure without technically "defaulting". There's very little doubt that Ireland, Portugal, Spain and even Italy will also be seeking to "restructure" their debts in the near future, as private deleveraging and austerity kills any remaining prospects for economic growth. They will want nothing less than the same deal Greece was offered.

Given the approach that has been taken by EU leaders and the ISDA with the Greek restructuring of allegedly 50% of its debt, it would appear very likely that a "default" can be avoided for any other distressed member state by the mere use of technically-laced propaganda, and therefore the guarantors would avoid any prospect of having to make good on their guarantees. All of that is another way of saying that, by definition, there are no guarantees involved in the new plan and the fund will not be leveraged through them.

So in the process of rendering sovereign CDS self-referencing (all countries are guaranteeing each others' debts), meaningless instruments of modern finance, the EU plan has also rendered its own plan for leveraging the EFSF through bond guarantees (insurance) meaningless as well. To assume that this inherent contradiction of the new plan is lost on institutional bond investors who rely on "hedging" strategies is to make a very dangerous assumption (Italian 5Y and 10Y bond yields are making record highs as I write). There can be no confidence in a market for insurance that consists of perpetual premiums and no credible prospects for payouts on the policy.

"SPECIAL PURPOSE INVESTMENT VEHICLE"

b. The guarantees will be established by external investors (private institutions, sovereign wealth funds, etc.) who agree to commit capital for peripheral bond purchases into the SPIV.

Here, we must refer to the over-arching context of an established plan to boost EFSF "firepower" to witness the absurdity underlying the proposed SPIV in the new EU plan. It turns out that those agreements reached by EU leaders in the wee hours of Thursday morning actually consisted of an agreement to travel around the world, hat in hand, asking for people to invest in the most publicized ponzi scheme in human history.

To get from €480 billion in existing capital for the EFSF to a proposed €1 trillion, the new EU plan apparently relies on outside investors (primarily sovereign wealth funds) to invest in the fund and expose themselves to even more toxic European debt. How can an agreement to "leverage" a fund through a "SPIV" be reached before some of the largest investors have even agreed to participate? It can't, and that's a fact weighing heavily on markets now, since China has once again said it will not be Europe's savior [Global Imperatives of a Chinese Exporter]. Al Arabiya News reports:

China's State Media Said Cash-Rich Country Won't Save Europe

"China’s state media Sunday warned that the country will not be a “savior” to Europe, as President Hu Jintao left for an official visit to the region including a G20 summit.

Hu’s visit has raised hopes that cash-rich China might make a firm commitment to the European bailout fund, but in a commentary, the official Xinhua news agency said Europe must address its own financial woes.

Europe is seeking to expand the European Financial Stability Facility (EFSF) to one trillion euros ($1.4 trillion), possibly through a special purpose investment vehicle or the International Monetary Fund.

China, holder of the world’s largest foreign exchange reserves at $3.2 trillion, said it wanted more clarity before investing in the bailout fund after head of the EFSF Klaus Regling, held talks in Beijing to try to win help."

More clarity, indeed. That's what everyone wants now, but they're never going to get it. The only thing that will be clear is that there cannot be any clarity in this world of WordCraft. China is well aware of this fact, and so are the major contributors to the IMF. The US is too politically volatile to bail out Europe in the approach to 2012 elections, the U.K. has already said it will not bail out Europe "directly or indirectly" and Germany has also made clear that its current contribution to the EFSF will not increase. Did anyone really think it would get around that promise through use of the IMF without the world taking notice?

RECAPITALIZATION

2) EU leaders have announced banks must "recapitalize" their balance sheets in the amount of ~€106 billion before June 2012 (Tier 1 capital ratio of 9%), by first seeking capital from private investors and then handing the beggar's bowls to their respective governments and/or the EFSF.

This aspect of the plan is perhaps the most circular and confounding. First of all, the estimate of what amount of capital is needed for the banks apparently materialized in the minds of EU leaders in the dead of night, like the ghost of Lehman's past. The IMF had previously put this figure at €200 billion, while a few of the banks themselves (granted, American banks) estimated the figure to be anywhere from €400 billion to €1 trillion (the size of the entire "leveraged" EFSF, if it were to ever materialize from pure hopium and desperatium into reality).

Second, this part of the plan is not really a plan to respond to the sovereign debt crisis enveloping Europe at all, but simply to tell European banks what they need to do, i.e. raise cash. How should they raise this cash? Well, that's still anybody's guess. They could go to the private capital markets, but the whole problem for the banks is that they are being progressively locked out of these markets as the reality of their exposure to deteriorating sovereign bonds becomes more clear. The plan to allegedly eliminate 50% debts owed by Greece (discussed below), to be followed by the rest of the Euro periphery, doesn't really help this cause either.

The other option is for the banks to go to European governments for capital directly, or indirectly through the EFSF, which, as explained above, is essentially a fund that consists of defunct "guarantees" from a bunch of tiny and/or insolvent countries, France and Germany. Simply put, this "option" is actually not even an option at this stage of the game, and so the banks are once again left to their own tricky devices for now. Bloomberg Business Week reports (and the article's title really says it all):

Europe Tries to Recapitalize Banks Without Injecting Capital

"European Union leaders ordered banks last week to increase the ratio of “highest quality” capital they hold by the end of June, creating a shortfall of 106 billion euros ($148 billion). Of Europe's 28 largest lenders, only eight will need to raise a total of 11 billion euros from investors, Huw Van Steenis, a Morgan Stanley analyst, wrote in an Oct. 28 report.

Rather than tapping investors or governments, firms are trying to hit the 9 percent core capital target by adjusting risk-weightings, limiting dividends, retaining earnings, reducing loans and selling assets. Banks had threatened to curb lending, risking a recession, to meet the goal rather than take government aid that would bring limits on bonuses and dividends."

Of course, both the banks and the governments are trying to spin this situation as one in which the governments have capital ready to hand out, as long as certain conditions are met, and the banks have the luxury of saying "no" to government aid, since they have their own resources to deploy and clever business strategies to pursue. The reality is that neither of those situations exist (the latter hasn't existed since 2008), and both the governments and the banks are simply consuming themselves with circular words and logic. There will be no systemic bank "recapitalizations", only systemic bank failures.

HAIRCUTS, VOLUNTARY, RESTRUCTURING

3) The plan calls for Greek "bondholders" to accept "50% haircuts" on the value of their bonds as a part of a "voluntary restructuring" of Greece's sovereign debt obligations.

Now here's a slice of WordCraft that couldn't be any more devoid of meaning than it already is. The term "bondholders", in almost any context, means all of the individuals or institutions which own the debt obligations of another individual or institution. Many times they are broken down by class according to seniority privilege or level of security. What that translates to in the new EU plan is a term that encompasses only a small fraction of those holding Greek bonds by value. Grant Williams explains:

Grant Williams: Things That Make You Go Hmmm

"Greece’s debt is roughly €350 billion. Of that, approximately €150 billion is held by the ‘Troika’ (including the €75 billion held by the European Central Bank) and this €150 billion is NOT subject to the haircut imposed on private holders of the debt. So that leaves us with roughly €200 billion.

Greek banks and pension funds account for (give or take a billion or two) another €85 billion and, though many number-crunchers apply the haircut to this slice of the debt pie, my own feeling is that it is untouchable as, if they are NOT ring-fenced these holders will be bust should they be forced to take the proposed haircut.

By my calculations, that leaves €115 billion needing to be ‘forgiven’. Apply the haircut to that number and you are left with a reduction in Greek debt of €57.5 billion - or 16%".

The point is not to figure out exactly how the new plan defines "bondholders", or what the "haircut" will actually be, but to recognize that the term can be subjectively twisted to have almost any meaning whatsoever, depending on who is doing the twisting, when they're doing it and to what aim. Now moving on to the term "voluntary", it is the most basic tenet of common contract law that an obligation made or modified under physical or economic duress is not enforceable.

However, what specific set of facts actually amounts to "duress" is not clear, especially in the relatively rare circumstances that have paradoxically become the normal circumstances of our financial environment these days, and especially in Europe. Does the threat of full-blown financial Armageddon count as a factor establishing the existence of "duress"? Maybe, maybe not. Regardless, that's exactly what was admitted to being threatened by EU leaders in the following statement, as Business Week reports:

Banks Were Persuaded by Leaders' Threat on Default, Juncker Says

Jean-Claude Juncker, President of the Eurogroup: "It was the fiercely rendered wish by the people, Merkel,Sarkozy, Juncker, that if a voluntary agreement with the banks was not possible, we wouldn’t resist one second to move toward a scenario of total insolvency of Greece, which would have cost states a lot of money and which would have ruined the banks."

That, then, is the state of "voluntary" financial decisions we are left with after some bureaucrats emerged from a hotel last week. It is no different from the one we had when Hank Paulson set foot in the U.S. Capitol Building in 2008, or when Merkel cautioned us not to take peace in Europe for granted before the last Summit began. The only difference now is that more time has passed, and more divisions have arisen between banks, the people and politicians. Greece couldn't make it to a 90% participation rate when the "haircut" was set at "21%", so good luck repeating the same mistake at "50%".

SOLUTION

So, let's finally turn our attention to the last word relentlessly flaunted about in our hallowed game of financial WordCraft - "solution". It is a sad, yet undeniable fact that, what EU officials and politicians hail as a "solution" to the European sovereign debt crisis, many working-class people and factions of the populist media in the towns of Greece analogize to "the final solution" of Nazi Germany. They see European leaders endlessly convening in meetings and issuing "statements" while the people continue to suffer.

Who is "Angela Merkel", anyway? Is she the solemn Chancellor of Germany trying her hardest to maintain a peaceful Europe "united", or is she simply the modern-day reincarnation of the Fuhrer, Adolf Hitler, guiding Germany's 21st-century version of the Third Reich? Yes, that's a shallow question to ask, but the point is that it's nevertheless a question on a lot of down-trodden minds. We can either dismiss its underlying reality and gloss over it with meaningless rhetoric, or embrace it and understand it. Perhaps the new Greek referendum will help mitigate the discontent, but only time will tell the tale on that front.

Daily Mail: Furious Greeks Lampoon German 'Overlords' as Nazis With Picture of Merkel Dressed as an SS Guard

"Newspaper cartoons have presented modern-day German officials dressed in Nazi uniform, and a street poster depicts Chancellor Angela Merkel dressed as an officer in Hitler’s regime accompanied with the words: ‘Public nuisance.’

...Opposition parties blasted the landmark agreement, with conservatives warning it condemned the country to ‘nine more years of collapse and poverty’. But it is the fury of ordinary Greeks which is raising eyebrows.

Greek government officials who agreed to the belt-tightening moves have been portrayed in cartoons giving the Nazi ‘Sieg Heil’ salute. And German visitors flocking to ancient tourist sites are being met with a hostile welcome from some Greeks."

Let's take those sentiments and apply them to every President, Prime Minister, and elected or appointed figurehead and scatter them throughout every major city in the developed world, because that is the reality we are now face to face with. The Greek and German WordCraft is no different from that of Spain, Italy, France, China, Japan, the U.K. or the U.S., and their hollow reverberations are simply failing to wash over the fearful and loathsome minds of the dejected masses.

Hateful rhetoric, mass protests, violent riots and unrelenting strikes - those are the consequences we reap from weaving our meta-narratives with such chillingly empty words. Talk is cheap, but it is still proving too expensive for a world without economic growth and without any sense of lasting confidence or trust. At a certain point, the human intellect can no longer function inside Schrodinger's box of self-referential labels and cannot continue playing games in our world of WordCraft.

We will always be disappointed with what is presented as a "solution", we will always be frustrated with the lack of meaningful "progress" and we will always be angry at those who refuse to let us outside of the box. There will be no satisfaction found in this virtual existence of binary outcomes, political avatars and manufactured meaning. Only when the system's structures are fully deconstructed will we find any relief in the language and meanings of our future.

"Whatever precautions you take so the photograph will look like this or that, there comes a moment when the photograph surprises you. It is the other's gaze that wins out and decides." -Jacques Derrida

Sinking in the Euroland of Debt-Sand

2011-10-26T06:12:00.000-07:00

It’s common knowledge that when one finds oneself stuck in quicksand and slowly sinking, it is most important to breathe deeply and relax. Frantically struggling to escape the sand in a fear-induced, panicked frenzy will only lead one to sink faster and make the situation that much worse. Well, at least that’s common knowledge for most individuals, but it is evidently very uncommon knowledge for large economies in modern society. Once the brainwashed collective finds itself in a predicament, it will be chaotic struggle until the bitter end. Exhibits A, B, C and D have all been spawned out of Europe lately.

For more than a year now, the European Monetary Union has been caught in wet, sinking debt-sand and has tried to escape by kicking and screaming its way out. First, the “solution” was to force over-indebted nations (Ireland and Greece) into more debt and gut their private economic infrastructure through austerity. When that failed and the contagion spread, they flung even more debt at another debtor nation (Portugal) to see what would stick. After they sunk even further past their hips and towards their chest (Italy and Spain), they began screaming at each other about how best to create more debt and implement more devastating austerity.

That’s where the EMU finds itself now. Almost up to its neck in private, public and derivative debts that are rapidly imploding. Its chest is tightly constricted by austerity, which makes it that much harder to fill its lungs with air and stay afloat, and it only has one metaphorical hand above the surface, hopelessly clawing for salvation. That hand is Germany and, when it gives up, there will not even be the appearance of hope for the Union to survive as it is currently structured. The last two weeks have been ones in which this sheer desperation is on display for the world to see.

It started with an announcement from Merkel and Sarkozy that a “comprehensive” and “sustainable” solution to the European sovereign debt crisis would be reached by the end of October. [The End of the Eurozone]. Essentially, they bet the farm that peripheral EU countries would be kept solvent, the core counties insulated from financial contagion when Greek debt is inevitably restructured and the European banks, with their highly inter-connected, cross-border exposure to bad debts, healthy. It only took a few days before it became clear that Spanish and Italian finances were sinking even faster into the debt-sand.

Merkel was then forced by economic and political reality to radically alter the previous language about a comprehensive solution, warning everyone that the EU Summit concluding on October 23 would bring no “dramatic course-changing events”. [Political Solutions for a Financial Crisis]. Translation: we are still sinking and we are nearly out of breath. The hand of Germany remained clawing, however, and that sad fact apparently provided plenty of fodder for the mainstream financial media to keep some semblance of hope alive in the markets. On Tuesday October 18, The Guardian made the following announcement:

France and Germany ready to agree €2tn euro rescue fund

”France and Germany have reached agreement to boost the eurozone's rescue fund to €2tn (£1.75tn) as part of a "comprehensive plan" to resolve the sovereign debt crisis, which this weekend's summit should endorse, EU diplomats said.

The growing confidence that a deal can be struck at this Sunday's crisis summit came amid signs of market pressure on France following the warning by the ratings agency Moody's that it might review the country's coveted AAA rating because of the cost of bailing out its banks and other members of the eurozone.”

The details of this alleged plan are irrelevant, because The Guardian’s report was immediately refuted by Dow Jones, who called it “totally wrong”, and the following day we found out that it was, in fact, totally wrong. France and Germany still could not agree on any of the significant issues, including if to leverage the EFSF, how to leverage the EFSF (Germany and the ECB firmly rejected France’s proposal to turn the EFSF into a bank that could borrow from the ECB), how much to leverage the EFS, and if or how to help shore up capital for Euro-area banks. Soon after, it was clear the weekend Summit was destined to go nowhere fast.

By the night of Thursday October 20, it was announced that there would have to be a “second summit” occurring “no later than Wednesday” before any firm “resolutions” could be made public. Now let’s be clear here. One could be forgiven if all of the above created the impression that, despite the barrage of unfounded rumors, developments in the European crisis response were occurring rapidly and were fluid, but the truth of the matter is that nothing has developed this entire time. The only thing that has happened is that European politicians and officials have publicly admitted they’ve sunken neck deep into the debt-sand and that they are well aware of it.

They are now going to spend the next three days coming to terms with that fact. The Germans, in particular, will be coming to terms with the fact that they cannot keep clawing at the surface forever, because it will not bring them any closer to escaping the debt-sand which threatens the EMU’s existence every single day. Germany’s finance minister has made absolutely clear that it will not approve of any plan to transform the EFSF into a leveraged bank. [1]. Furthermore, the German Budget Committee has stated that it will not allow EFSF guarantees to exceed 211 billion euros, which means it can only provide about one trillion euros (not enough) of insurance if everyone decides to go that route. [2].

It was also made clear that private investors would have to bare much more than 21% of losses on their Greek bond holdings. Perhaps even up to a 60% haircut, which would easily pull the trigger on the sniper rifles that have been training their crosshairs on French banks, and the ratings agencies [hesitantly] that have been training theirs on French sovereign debt, aiming to render France yet another liability for Europe. This for a country whose debt has been steadily increasing for years to reach over 160% of its GDP now. The Financial Times reports on the latest entirely unsurprising development on this front:

EU Looks at 60% Haircuts for Greek Debt

“The report also made clear European leaders are considering "haircuts" on Greek bonds far higher than previously known. The study determined that in order to bring a second Greek bail-out back to the €109bn agreed in July, bondholders would have to take a 60 per cent loss on their current holding.

That is significantly more than the 21 per cent haircut agreed in a deal with private investors three months ago. The analysis says that a 50 per cent haircut, increasingly considered the most likely scenario among European policymakers, would put the second Greek bail-out at €114bn, or €5bn more than the July deal. "Recent developments call for a reassessment," the report said. "The situation in Greece has taken a turn for the worse."

Yet another bombshell has dropped on the six-day “marathon” summit by the EU and IMF in a joint report, which essentially stated that Greece could end up devouring the entire 440 billion euros in firepower that the EFSF currently has. If that’s truly the case, then all of the hotly contested debates about whether to leverage the fund to one or even two trillion euros are made irrelevant. Greece’s relatively tiny economy would swallow at least 25% and most likely 50% of the whole fund. The Telegraph’s Bruno Waterfield reports:

EU Looks at 60% Haircuts for Greek Debt

”…without a [Greek] default, the Greek debt crisis alone could swallow the eurozone's entire €440 billion bailout fund - leaving nothing to spare to help the affected banks of Italy, Spain or France.

An EU already rocked by divisions between France and Germany over how to increase the "firepower" of the European Financial Stability Facility (EFSF) in order to save the wider eurozone from Greek contagion now faced the prospect of losing it all in one go.”

It gets worse for the sinking Union. The IMF has now told the Europeans that they must impose at least 50% haircuts on Greek bondholders, or else it will not disburse its contribution to the Greek bailout which amounts to a whopping 73 billion euros. That is more than twice the original percentage agreed upon in June, and if investors (Euro banks) don’t play ball and destroy their balance sheets, Greek will technically be in default. Then, there is nothing to stop the EMU from sinking in their debt-sand, the contagion from spreading to Italy and Spain (and maybe France) and the CDS contracts written by American banks from taking them down as well.

First Bloomberg reports on the lack of any idea about what solvency problems the banks are facing and how to deal with them, and then the Telegraph on the IMF condition:

EU Talks Yield ‘Limited’ Progress on Banks

“A 10-hour meeting in Brussels failed to yield a blueprint for banks’ role in a revamped Greek rescue as European finance ministers haggled over what they called a “credible firewall” against fallout from deeper writedowns.

The ministers’ meeting broke up at about 7 p.m. after reaching agreement that European banks may need about 100 billion euros ($139 billion) in capital after marking their sovereign-debt holdings to market values, according to a person familiar with the discussions. This amount is needed to reach a core tier 1 capital level of 9 percent based on a European Banking Authority test, said the person, who declined to be identified because discussions are private.

The struggle to get an accord on bank capital was just one piece of solving the two-year-old financial crisis. Governments also are pushing for deeper writedowns on banks’ holdings of Greek debt, a step the investors are resisting. “

EU Looks at 60% Haircuts for Greek Debt

The IMF would no longer be willing to pick up a third of the total bill for rescuing Greece, a contribution worth €73 billion, unless European banks were prepared to write off 50 per cent of Greek debt. "It was grim. The worst mood I have ever seen, a complete mess," said one eurozone finance minister. ”

The Telegraph article then goes to explain just how bitter the mood is between the German Finance Minister Wolfgang Schaeuble, French Finance Minister Francois Baroin and IMF Head Christina Lagarde. The former doesn’t want anything to do with expanding bailouts for anyone at this point, the latter is screaming to everyone that the math just isn’t working and the French minister is begging everyone to help him save French banks from their all but assured demise. Merkel and Sarkozy are floating around there somewhere too, giving each other the “evil eye” when they are not simply shouting at each other to no end.

On top of all that, the European Council President, Herman Van Rompuy, spewed out something about a plan to create a single European Treasury that could override national budgets and unilaterally impose austerity at will, to be located in Frankfurt or Paris. [3]. That may have also been the point where just about everyone else present started throwing tomatoes, or whatever was being served and within reach, at Rompuy's face. Basically, it was a ridiculous suggestion that only served to create even more animosity between all of the countries reluctantly attending the joke of a "Summit" where Germany and France endlessly argue and tick everyone else off.

So while the still clueless US equity investors wait with baited breath for some kind of “comprehensive” announcement on Wednesday, the people allegedly discussing the measures cannot even stand to be around one another anymore. They have been rapidly sinking into the abyss for months now, and who can blame them for not having even an ounce of hope or civility left. They will surely come up with something to say about increasing the “firepower” of the EFSF, creating a “credible” plan for restructuring Greek debt and backstopping Euro banks, but they won’t believe any of it and they won’t expect anyone else to either.

For all the reckless motions of conditioned bailouts, panicked conferences, and incessant shouting, screaming and clawing, the Euroland has simply left itself up to its eyeballs in debt-sand, and that has, in turn, left it with no more hope, comfort or credibility in any meaningful sense of those words. Rumors will keep coming in and going away even faster, but the muted sense of despair and an approaching denouement is what really lurks beneath. It will not be very long before the debt-sand envelops the Euroland’s entire body and leaves only one cold, dead hand as a reminder of what was once a Union sinking, but still alive, if only for the briefest of moments.

Revisiting The Limits to Complexity

2011-10-17T10:23:00.002-07:00

A little more than a year ago I wrote an article generally sketching out The Limits to Complexity that our global society faced back then and continues to face now. The speed at which some of these limits have materialized for the average consumer, business, investor, employee, taxpayer, politician and central banker in the developed world, while expected by many, has still been nothing short of flabbergasting. Before revisiting the complex "solutions" formulated by governments and central banks to address the problem of over-complexity, we should briefly recap what has happened over the last decade and a half, more or less.

During and after the implosion of the "tech bubble" and the brief financial recession of the late 1990s, major banks and corporations around the world realized they needed a new "asset" which could be leveraged by consumers and businesses to support aggregate demand and, therefore, their revenues and profits. With the help of aggressive fiscal policy, new government statutes (i.e. "Community Reinvestment Act"), the repeal of pesky "firewalls" ("Gramm-Leech-Bliley Act" repealing the "Glass-Steagall Act") and accommodating (low-interest) monetary policy, private banks pushed unfathomable amounts of debts onto people and businesses who could not afford them by any stretch of the collective imagination.

These same banks were also allowed to securitize many of the underlying loans, sell them off to various institutional investors and market derivative instruments to those clients who wished to gain exposure to the global sub-prime mortgage bonanza. When the greatest financial ponzi scheme known to man eventually collapsed in 2007-08 and it was clear that the global economy faced an imminent depression, governments worldwide decided to "respond". What this response amounted to was an attempt to maintain economic and financial complexity by adding on layer after layer of ever-more complex structures, and suspending/manipulating any measure of reality that was in the least bit accurate.

Those layers, in part, took the form of unprecedented fiscal and monetary policy, which funneled trillions worth of taxpayer-guaranteed funds to banks that were deemed too complex too fail. So how did this big dose of complexity fare after the flames died down and the smoke cleared? Focusing on the U.S., here's what I wrote last year about Obama's $820B "American Reinvestment Recovery Act" (ARRA):

The Limits to Complexity

"The [ARRA] allocated about $820 billion to various local governments and companies in an effort to create jobs. What they don’t tell you about the ARRA is how much of that money, as a matter of necessity, is wasted in bureaucratic institutions that distribute and keep track of the money as it is funneled down to economic actors. Much of the money also goes to funding extremely misguided projects, such as tax credits for homebuyers that incentivized the construction of new homes when there is already a year’s worth of excess supply.

Sometimes the money goes to fund the repair of roads that don’t even need any repair, as I have personally witnessed in my own community. New estimates have made clear that it is unlikely more than 1 million jobs were created by the ARRA stimulus, which amounts to $820,000 per job, some of which were not even productive for the general economy."

Despite the [misleading] BLS unemployment rate falling to 9.1% in 2011 (signifying more people who have given up looking for work), the employment situation has significantly deteriorated since last year. On Friday, the non-farm payroll numbers came in at +103K for the month of September, with about 40K of that coming from Verizon workers who ended their strike. The more accurate U-6 unemployment measure increased to 16.5%, its highest since December of 2010. Zero Hedge has calculated that at least ~261K jobs must be created for the next five years for the unemployment rate to return to pre-2008 levels, and this number has been consistently increasing every time it performs the calculation. [1]

The numbers for August were revised upwards for ZERO jobs created to 54K, which is still an overall dismal print. Manufacturing jobs declined by 13K in the month of September, while average duration of unemployment hit an all time high of 40.5 weeks. [2]. Initial claims have continued to hover around 400k per week for at least the last six months (and have been consistently revised upwards), which essentially implies no jobs are being created. [3].

It is quite clear, then, that Obama's stimulus did very little to spur job growth, and now he is facing an even bigger limit to complexity – a dearth of political capital to pass any new "jobs bills" through Congress. On the monetary front, policy mainly took the form of slashing the federal funds rate to near zero and launching asset purchase programs which targeted more than $2T in mortgage-backed securities and Treasury notes/bonds over the last two years. As the principal on the MBS was paid down, that money was reinvested back into Treasuries (and now more MBS) to maintain the value of securities on the Fed's balance sheet.

The Limits to Complexity

"The above policies serve to keep a floor on mortgage rates and finance our government’s deficits at low interest (what used to be stealth monetization is now just monetization), while also providing cash to banks with the alleged hope that they will lend it out into the economy, where consumers and businesses will spend/invest the loaned money. Out there in the real world, no such lending has happened, as the banks are sitting on $1+ trillion in cash and the Fed is caught in a liquidity trap.

...Private markets are currently saturated with debt and therefore very few people want to borrow money, and very few lenders want to make loans at affordable rates since debtors can barely pay back what they owe now. As mentioned before, interest rates have bottomed out and there is minimal economic activity to show for it. The velocity of money in the economy has collapsed, and the Fed’s policies merely transfer large sums of taxpayer money to major banks that use it to blow more speculative bubbles in stocks, bonds, commodities, and derivative bets on the price movements of those assets."

Since the time that was written, we have seen numerous destructive consequences derived from this monetary policy. The speculative bubbles mentioned above have led to soaring inflation in the Middle East, which, in turn, has been partly responsible for the ensuing sociopolitical unrest and violence. At the same time, global markets are largely back to the same valuations they were at a year ago when QE2 was implemented. Banks are now sitting on at least $600B of additional cash (excess reserves deposited at the Fed). [4]. Back then, I also mentioned that "equity outflows from institutional investing firms have continued for months unabated and have totaled over $50 billion year-to-date". Well, let's go ahead and make that a four-fold increase to $200B in the last two years. [5].

And since the Fall of 2010 is so out of style and the Fed does not currently have enough credibility to launch a similar asset purchase program, it has decided to merely shift the duration of Treasuries on its portfolio (swapping $400B in short-term bills/notes for $400B in longer-term bonds). This "twist" operation has done absolutely nothing to spark appetite for risk and is actually perceived as being net negative for financial markets, since long-term rates will compress and the yield curve will be flattened even further, thereby limiting the ability of banks to generate profits from interest spreads. Another limit to complexity, perhaps?

Ben Bernanke has consistently punted the responsibility for supporting "confidence" in markets and the economy to the Administration and Congress in recent months, and they consistently prove to us that they are both politically and financially unable and unwilling to do anything meaningful for neither one nor the other. Central authorities in the West have exhausted almost all of their tools for supporting financial markets, except for increasingly short-term liquidity measures. In addition, the policies they have enacted in the comfort of 2010 are now coming back to haunt them, as the publicly-sponsored complexity has made the system even more inflexible than it was before.

This layered complexity also took the form of Western governments placing an item misleadingly known as "financial reform" on their political agendas. In the U.S., "financial reform" amounted to federal politicians attempting to somehow regulate systemic financial stability into existence by creating a few new government agencies or sub-agency departments, which possessed a few more monitoring and enforcement mechanisms, and A LOT more bureaucracy. These agencies were essentially tasked with monitoring "systemic developments" in the financial sector whenever they felt up to the task. I wrote the following about this issue soon after the Dodd-Frank bill had been passed into law:

The Limits to Complexity

"...and the “finreg” bill failed to break up the TBTF banks, audit the Fed or create transparency for risky derivative products. More importantly, these new top-down regulations have the inherent feature of creating unintended consequences in our complex society, despite the alleged best intentions of their creators, and can even make the targeted problem worse.

The financial reform bill created new restrictions on “angel investors” which will inadvertently stymie the creation/expansion of small businesses, while the behemoth investment banks will continue to exploit financial markets by hiring teams of lawyers to easily bypass the new regulations that affect them (as they are currently doing with the “Volcker Rule”) or by simply buying off the regulators."

Fast forward to today and we can clearly see that not a single soul on Earth, let alone those moving the markets, believe the Dodd-Frank Bill did anything to mitigate systemic risk or even make sure it could be adequately identified before developing into another full-blown crisis (which has already begun). And then, of course, we have the unintended consequences of complexity. One major unintended consequence of the Dodd-Frank Bill that has recently asserted itself stems from the "Durbin Amendment" (introduced by Congressman Dick Durbin-D-Ill). What analysts are now labeling the "Durbin Tax" provides us with the quintessential example of diminishing returns to complexity. Forbes Magazine reports:

"Bank of America Debit Card Fees Slammed as "Durbin Tax"

"The law applies to those big banks – the ones over $10 billion in assets – and was ostensibly passed as an effort to increase competition. It was supposed to be pro-consumer.

But here’s the kicker: the Amendment gave the Federal Reserve the power to regulate debit card interchange fees and other bits of banking admin, which they’ve done. Over the summer, the Fed released the final rule on the matter. The combination of fees, restrictions and caps is thought to cost banks subject to the amendment nearly $14 billion annually.

The banks could try to recoup this money from somewhere else – like merchants. But merchants now have the ability to shop around a bit more and of course, they could refuse to accept cards altogether. It was quicker, cheaper and easier for banks to go straight to the customer."

Forbes Magazine is simply a shill for the big banksters, but the underlying point remains true. When politicians attempt to regulate "financial consumer protection" into existence by layering on increasingly complex regulations, they are bound to create unintended situations such as this one. They are also bound to not even recognize that these consequences have occurred. That is why Congressman Durbin can create legislation that has forced banks to impose fees on their customers, and then stand in the Capitol building a year later and tell those same customers to “get the heck out of” Bank of America, because it had the nerve to impose a debit card usage fee!

It's not just Bank of America either, but Citigroup, Wells Fargo and JP Morgan who are also proposing to institute similar debit card usage fees on their customers. For the time being, people will put up with this extortion because they see no other convenient places to park their cash or ways to make their purchases and pay their bills.

Rest assured, though, that these measures are a sign of desperation by the major banks, and will eventually lead to much fewer commercial transactions by consumers, which will dampen economic growth and decimate the profit margins of banks even further. Of course, the limits to complexity are not only present in the U.S. financial system, but the entire global economy, as Europe, China, Japan, Canada, Australia and many other "emerging economies" can attest to. Just last year, many of these regions were being hailed by mainstream analysts as survivors of the "Great Recession" and the future drivers of global economic growth. Now, their FIRE sectors are imploding and they are all following the U.S. and Europe down the swirling contours of the collective toilet bowl.

The financial topic du jour is, and has been for many months, the critical situation in the EMU. At this point, there is very little need to even point out the limits to the EMU’s complexity. One clear example, though, is the most recent discussions about the size and nature of the European Financial Stability Fund (EFSF). It was only a few weeks ago that the European leaders were discussing possibilities of expanding and/or “leveraging” the fund to adequately backstop the public financing needs of Italy and Spain, and prevent contagion from a Greek default. Today, some pundits and politicians are discussing whether the fund should instead be used to directly recapitalize Euro-area banks that are struggling to stay solvent. Stephen Castle reports for the New York Times:

Europe Calls for Infusion of Capital for Banks

”If Europe did adopt a regionwide approach to recapitalizing the banks, the question is whether that money would come from the bailout fund agreed to in July, which must still be voted on by a handful of member nations. If adopted, as expected, that bailout fund — the European Financial Stability Facility — would gain an effective lending capacity of 440 billion euros ($595.4 billion).

That might be enough to provide the necessary capital cushion to the region’s banks. But it would leave little cash to lend to any national governments that might require aid to protect themselves from a Greek contagion. Spain and Italy are seen most vulnerable on that count. “

Needless to say, there is bitter political disagreement on both of those issues and it is looking very unlikely that either will be done anytime soon, when the countries and banks need it the most to survive in their current form. [6]. Financially speaking, it is simply impossible for France and Germany to backstop the entire Euro periphery OR major Euro-area banks, let alone both of them. That fact becomes even more poignant when we consider another brutal limit to complexity in the form of France being downgraded by ratings agencies if it decides to bail out all of these other institutions. That would place enormous pressures on its own sovereign financing situation and effectively make it a non-factor in the bailout mechanisms.
From the NYT piece linked above:

”France’s caution over recapitalization illustrates how each potential solution to the euro zone crisis tends to become entangled in member nations’ domestic politics. A downgrade of France’s debt rating would be damaging to the French president, Nicolas Sarkozy, ahead of presidential elections next year.

“The problem is that if you recapitalize the banks, then you have a problem with sovereign debt,” said one European official not authorized to speak publicly. “That is Paris’s big issue.”

Sarkozy and Merkel are hashing it today (Sunday) to see if they can agree on just how badly the Western taxpayers will be shafted yet again. Paris has suggested to use the very recently expanded "stabilization fund", created to backstop sovereign bonds, and redirect much of it towards recapitalizing banks directly. Berlin has said so far that this is a ridiculous proposal and the fund is only to be used as a "last resort" for the banks. [7]. Although Dexia, the Belgian bank that scored highest on the EU "stress test" earlier in the year and was the first to implode, has once again reminded us that the banks' first resort is the same as their second resort and every other resort up until their last resort - taxpayer funded bailouts.

The problem for the panhandling elites is that these bailouts are not as simple and as much of a given as they used to be, which was evident in the decision over whether to bail out Dexia and to what extent. The bailout issue was finally “resolved” today as France and Belgium agreed to nationalize 100% of Dexia’s operations, which is 100% against the interests of Belgian and French taxpayers. The plan must still be submitted to Dexia’s Board of Directors, who are sure to approve of any public bailout they can get their greedy hands on. Reuters reports:

France, Belgium, Luxembourg agree Dexia Rescue

" The burden of bailing out Dexia led ratings agency Moody's to warn Belgium late on Friday that its Aa1 government bond ratings may fall.
The negotiations to dismantle Dexia, which has global credit risk exposure of $700 billion -- more than twice Greece's GDP -- are being watched closely for signs that Europe might be capable of decisive action to resolve its banking crisis.

"I am convinced that it is possible ... by tomorrow morning to have an agreement in which Belgium resolves the issue without pushing up the debt level of our country too high," Leterme told Belgian television before the talks began on Sunday.”

It’s not that Belgium may be downgraded, but that it will be downgraded if the deal goes through, and France’s ratings may come under some pressure as well. No matter what happens, Dexia is just the first of many European banks to pass the faux “stress tests” with flying colors that will shortly implode, including major French banks. When that happens, there is no way France will come out of that with their AAA bond rating intact, and a French downgrade will feed into the need for even more bailouts. Since the implosion of Bear Stearns and Lehman Brothers nearly three years ago, nothing has changed. The limits to complexity have been stretched out a bit, but now they are well poised to snap back even harder.

It turns out that everyone who participated in the mainstream dialogue for the last few years had bought into the narrative of a global economic "recovery" and had conditioned their policies and attitudes accordingly. Now, they are all left reeling from the strict, unflinching evolution of complex systems. The subject of "bailing out banks", which was too taboo to even discuss last year, is now priority #1 on the policy agenda in Europe (and will soon be in the U.S.), but there is simply not enough political or financial capital left to do the job. Soon, the global financial system will be forced to revisit the limits to complexity, just as we have done today, and this time it will not be so easy for our leaders to avoid their implications.

Global Imperatives of a Chinese Exporter

2011-10-09T09:33:00.000-07:00

Here are the two simple "equations" that all of the incessant rumor-inspired momentum chasers, equity bulls, peripheral EU bond bulls and relentless predictors of an imminent global Asia-backed bailout would do well to memorize:

1) Export Economy = Relatively Weak Currency

2) Chinese Economy = Export Economy

After the Parliament of AAA-rated Austria rejected any near-term possibility of expanding the "European Financial Stabilization Facility", which requires unanimous consent of contributing members, the continued existence of Greece and the current EMU structure as an "ongoing operation" has come to rely solely on the good will of China. Global equity markets are hanging by the skin of their knuckles on rumors that the Chinese are committed to assisting the EMU through its sovereign debt crisis and buying the toxic bonds of its debtor nations en masse. What these markets are soon to realize is that the Chinese government not only has its own domestic financial troubles to deal with, but is also not filled with brain-dead individuals who fail to understand the basics of global trade.

A truly significant bond purchase program by the Chinese would require them to re-allocate precious reserves into large EU member economies, such as Italy and Spain. These are economies that even other EU member states and their populations are both unable and unwilling to bail out. Such a drastic action by the Chinese at this stage of the game would be the equivalent of an extremely "sophisticated" investor voluntary agreeing to be the last greatest fool in a speculative financial ponzi scheme that makes the U.S. sub-prime housing bubble look tame in comparison. Li Daokui, member of the Chinese central bank’s monetary policy committee, has a few choice words to say on this point:

Telegraph (Ambrose-Evans Prichard): China States Price For Italian Rescue

Professor Li said China must stop investing its hard-earned wealth in western debt and switch its incremental holdings into "physical assets", including the equities of major western companies.

"China is the most patient investor in the world. Imagine if our $3.2 trillion in foreign reserves had been controlled by George Soros: financial markets would be in much greater chaos," he said

But, such irrational investments are made all of the time in our twisted system of "free-market" incentives, right? Wrong. That sentiment may carry some weight on the way up before the ponzi has begun its process of implosion, but the Eurozone sovereign debt ponzi is well past that mark. The Irish, Greek and Portuguese economies came under public financing pressure well over a year ago, and it has already been a few months since the "contagion" infected Italy and Spain. Even still, it may not be entirely ridiculous to believe the Chinese have convinced themselves that extremely risky intervention is needed to preserve the EMU and stabilize global financial markets, on which they heavily rely. Well, at least not until we factor in the fundamental equations of global trade in our current system that were presented above.

The only other reason the Chinese would be willing to go "all in" on the EMU is because it wants to preserve the economic health of its major export markets. There is little doubt that the Chinese economy does not have nearly enough internal consumer or investment demand to sustain moderate levels of economic growth, and therefore is utterly dependent on its export industries maintaining or increasing their market share in an era of rapidly contracting consumer economies. The only question is, how is this goal best accomplished from their perspective? By bailing out the entire Euro "periphery", or by letting nature take its course as some of the weak debtor nations are gradually pushed out of the Union by righteous members running a surplus and incredulous financial markets? The following graphs present the ECB's data on export/import value of the EU:

Value (thousands of Euros) of EU Imports From China [ECB Data]

Value of 2008 EU Exports/Imports [Graph of ECB Data]

Value (thousands of Euros) of EMU (17) Exports to Other EU Members (7) [ECB Data]

Both Chinese and EU exports have been steadily on the rise over the years running up to the global financial crisis, and have unsurprisingly managed to rebound on the back of unprecedented global intervention since then. The interesting thing is that the fastest growing export markets for both are nations within the EU and Europe itself. Now that the global depression has began to reassert itself with great force, the need to maintain export value and volume for both has become greater than ever. While many analysts view this import/export relationship as a reflection of a healthy dynamic which encourages mutual aid, it has actually become one that engenders aggressive, cutthroat competition. In this global system, and especially now, one does not gain market share by generously helping out the competition. The major competition, in this context, is Germany, France, Italy, Spain, the Netherlands and Switzerland .

We recently witnessed this dynamic when the Swiss became so concerned with an appreciating Swiss Franc and its consequences for a struggling export industry that its central bank decided it was willing to defy decades of history and undertake an unprecedented maneuver of pegging its currency to the Euro. Essentially, it decided that suppressing the value of its currency, even in the short-term, was worth destroying its balance sheet and ruining its credibility as a central banking institution by promising unlimited currency intervention. From their perspective, this currency suppression provides a desperately needed boost to its export industry by lowering the price of exports and stabilizing the private CHF-denominated finances of Eastern European countries. What do the Chinese think of this bold move?

Although there was no clear public reaction by Chinese officials, we can be sure that they were not thrilled by the SNB stealing a patented move out of their playbook. The Chinese Yuan is pegged to a fixed exchange rate against the U.S. Dollar, and the U.S. Dollar (USD) floats against the Swiss Franc (CHF) and the Euro. With the CHF now pegged to the Euro, the Chinese lose any export benefits gleaned from appreciation of the CHF as a safe haven relative to the Euro and USD. That has only added insult to a much deeper injury, as they have also had to deal with a Euro currency which has been constantly coming under downward pressure for the past year. This pressure obviously benefits the non-euro European export market share of German, French, Italian, Spanish and Dutch industries, as well as extra-Eurpoean market share.

The very mention of this “request” as a part of the numerous conditions to a Chinese bailout is essentially a big, fat NO to any such possibility. There is a reason why China has been the number one target of AD lawsuits, and that reason only becomes stronger in an environment of global economic contraction and struggling exporters. The WTO has been one of the fundamental mechanisms through which developed countries manage trade flows to their favor under the guise of promoting economic efficiencies through “free trade”. Now, net exporters must do everything they can to retain their share of a dwindling pie, and the WTO is still one of the most coercive means of doing so. An example of this dynamic from Wikipedia:

The consequences of not being granted market economy status have a big impact on the investigation. For example, if China is accused of dumping widgets, the basic approach is to consider the price of widgets in China against the price of Chinese widgets in Europe. But China does not have market economy status, so Chinese domestic prices cannot be used as the reference.

Instead, the DG Trade must decide upon an analogue market: a market which does have market economy status, and which is similar enough to China. Brazil and Mexico have been used, but the USA is a popular analogue market. In this case, the price of widgets in the USA is regarded as the substitute for the price of widgets in China. This process of choosing an analogue market is subject to the influence of the complainant, which has led to some criticism that it is an inherent bias in the process.

Chinese elites know that any firm commitment they make to purchasing bonds of EU debtor nations will not stabilize their public finances long-term, and, in addition, will not even make the Euro appreciate considerably against the USD or other established reserve currencies. It would merely serve to preserve the present situation, in which the Euro officially survives, but as a freak of nature that may be devalued at any time with nothing more than an unpleasant rumor, and major exporting nations continue to pursue considerable monetary interventions which the Chinese simply cannot afford to match due to their already under-stated rate of domestic inflation. From their perspective, the only "legitimate" option is to let the EMU splinter.

Regardless of whether the Euro is retained by core member countries of the EU or, in a more extreme situation, the core countries withdraw and re-instate their own national currencies, Chinese export market share is bound to increase relative to some of their largest and, therefore, most troublesome competitors. There is no doubt that the Chinese are worried about the financial contagion effects from a peripheral default, such as the increasingly imminent default of Greece, but so is everyone else in the world and there is very little anyone can do about it. At this point, it is merely a foregone conclusion and countries (and central banks) must try to prepare their best for it, by insulating their own financial systems to any extent possible. Chinese Premier Wen Jiabao implied as much in a few words to the World Economic Forum, which the markets seemed to have completely missed:

Telegraph (Ambrose-Evans Prichard): China wants to break the ultimate taboo and buy into Western companies such as Apple, Boeing and Intel

Chinese premier Wen Jiabao was soothingly polite in his speech to the World Economic Forum in Dalian, insisting that his country will play its part to "prevent the further spread of the sovereign debt crisis".

The language toughened a few notches when asked later how far China's Communist Party is really willing to go. The message was clipped and severe. Beijing will not sign a blank cheque for European states that have failed to carry out deep reform. "Countries must first put their own houses in order," he said.

But that’s the entire problem, they can’t put their own houses in order, and everyone, including Premier Jiabao, knows it. Besides, the Chinese are much more concerned with the health of the USD and Treasury markets than those of the EMU periphery, and capital flight from a splintered EMU will significantly boost those markets. For all of China's talk about becoming a powerhouse consumer economy, domestic companies moving abroad, investing in foreign companies, or its currency contending for the role of global reserve, we must remember that it is still by and large an export economy according to the dictates of the global market system of trade. The Chinese are under no illusion that anything has changed in the last few years for their economic model, and that means they must remain "competitive" until the bittersweet end. In this system, you don't stay competitive by bailing out the competition.

Besides, the Chinese are much more concerned with the health of the USD and Treasury markets than that of the EMU periphery, and there is very little doubt that capital flight from a splintered EMU will significantly aid both of those. For all of China's talk about becoming a powerhouse consumer economy, or domestic companies moving abroad, or its currency becoming a potential global reserve, we must remember that it is still by and large an export economy according to the dictates of the global market system of trade. The Chinese are under no illusion that anything has changed in the last few years for their economic model, and that means they must remain "competitive" until the bittersweet end. In this system, you don't stay competitive by bailing out the competition.

Bailouts, Austerity and Rage: People of the Sun, Part II - The Portuguese & The Spanish

2011-09-06T12:21:00.000-07:00

"Check it since 1516 minds attacked and overseen, now crawl amidst the ruins of this empty dream.

With their borders and boots on top of us, pullin' knobs on the floor of their toxic metropolis.

But how you gonna get what you need to get? The gut eaters, blood drenched, get offensive like Tet.

The fifth sun sets get back reclaim, the spirit of Cuahtemoc, alive and untamed.
Now face the funk now blastin' out your speaker; on the one, Maya; Mexica.

That vulture came to try and steal your name, but now you got a gun.
Yeah, this is for the People of the Sun...

It's comin' back around again; this is for the People of the Sun!"
-Rage Against the Machine: People of the Sun

Part I in this series, Calm Like A Bomb: The Greek & The Irish, described why the future of bailouts and austerity in Europe will reveal its future of systemic social unrest as well, focusing on the sociopolitical mood in Greece and Ireland. The populations of debtor nations are forced to accept huge reductions in their standards of living to subsidize major bondholders, as a condition of previous IMF/ECB bailouts, while the populations of nations running a budget surplus are forced to contribute their increasingly strained incomes and revenues to do the same via the new "European Financial Stabilization Facility” (EFSF).

The recent step towards a "fiscal consolidation" of the EMU, through its modified EFSF, does nothing to reduce the austerity burdens of Southern Europe or Ireland, while simultaneously placing greater burdens of contribution on the populations of Northern Europe. The Greek and Irish people have already traveled far down the path of bailouts conditioned with severe austerity measures, and, while the latter have appeared to be relatively calm over the last year, they are simply acting as any high-powered explosive device would. The bomb lays still for awhile and, then, it detonates with a deafening BANG!

The next debtor nations to be fitted with I.E.D.s by the EMU hit parade are Portugal and Spain. The latter has not been offered subsidized rates for its public debt by the modified EFSF, and there has been no specific bailout or bond "haircut" plan set in place for it just yet. Given the recent and rapid deterioration in the bond yields of Italy and Spain, which were at one point topping 6%, the ECB has temporarily stepped in stick their bonds on its balance sheet, until the modified EFSF can be implemented. These measures have proven to be wholly inadequate in mitigating systemic fear, however, as French banks are now coming under tremendous pressure to boost capital reserves before they become utterly destitute.

The EMU now truly resembles a chicken with its head cut off, as it cobbles together temporary and ineffective measures to reassure investors. Meanwhile, it continues to exert enormous pressure on member states to implement excessive austerity measures, which are sure to make their financial predicaments even worse. Portugal and Spain, for example, have imposed austerity programs for their populations in response to weak growth in their private economies, threats of "financial contagion" and direct and indirect coercion by the ECB, with the latter doing so without an official bailout in place. In a painfully ironic twist of fate, the former colonial giants and conquistadors have evolved into the oppressed colonies of supranational finance; their populations, the People of the Sun.

PORTUGAL

The mood in Portugal over the last year is probably best described as "helpless shock" over its fragile public financing situation. Unlike Greece, Portugal had not extensively lied about its debt over the last decade, and, unlike Ireland, it did not have to systematically bail out a reckless domestic banking sector on the brink of insolvency. Even the housing bubble in Portugal was tame in comparison to that of Spain. The fiscal situation of the Portuguese was certainly influenced by all of the above factors to some degree, but at its heart was something more fundamental. It has fallen prey to the internal instabilities built up through years of systematic globalization and financialization.

Der Spiegel, Seeking a Path Out of the Crisis in Portugal (by Alexander Yung):

"The country is deep in a state of crisis, but it seems foreseeable that the worst is yet to come. Interest rates are going up, borrowing is getting more expensive, banks are lending less money, companies have stopped investing, some are going under as a result of the credit crunch, and the unemployment rate continues to rise. Surprisingly enough, there is hardly any sign of resistance in the country. Many Portuguese are simply shocked.

Unlike the Greeks, the Portuguese did not become involved in questionable business practices. Their banks did not issue nearly as many high-risk loans as their Irish counterparts. And a real estate bubble did not develop in Portugal, at least not to the same extent as it did in Spain. But now the Portuguese are in the same boat as several other ailing European economies. They are hopelessly in debt and their economic future seems questionable at best. Concerned citizens are asking themselves how this could have happened."

Essentially, Portugal's productive economic growth had stagnated for the last decade as both jobs and investment capital were siphoned away to lower-cost regions such as Eastern Europe and Asia, decimating its ability to develop a valuable export sector and leading to high rates of unemployment. Meanwhile, private consumer credit growth skyrocketed to make up the difference in value between what the people consumed and what they produced, as government-financed expenditures also increased. If the above sounds a lot like what has happened in the U.S., then it's not a coincidence. The difference for now is that Portugal, unlike the U.S., cannot unilaterally direct its own monetary policy and is part of a Union that openly encourages brutal austerity.

While Portugal will be eligible for the low 3.5% borrowing rates under the new EFSF, it is currently not in line for any more bailouts or a Greek-style plan for bondholders to “voluntarily” take minimal haircuts on the value of their holdings. Now that the former Prime Minister Jose Socrates and his "Socialist" government have been taken out of power for failing to burden their citizens with harsh austerity measures, the new Portuguese government has adopted sweeping measures to reduce its budget deficit 3.3% over the course of this year. The government has made it perfectly clear that the new EMU plan will not slow its relentless drive towards economic suicide.

REUTERS reports:

"Last week's EU summit that gave a new lifeline to Greece was favourable for Portugal, but the country cannot soften its austerity drive under a 78 billion euro bailout, Finance Minister Vitor Gaspar said on Monday.

He told a banking conference the summit reduced the chances of the Iberian country getting caught up in debt crisis contagion and allows for better market access while Portugal faces at least nine consecutive quarters of economic contraction with growth only expected to return in early 2013."

So Gaspar doesn't feel the slightest need for his country to temper its plan to reduce its deficit by more than 30% this year, even though the Portuguese economy is set to contract for at least the next 2+ years. That's not a bold move or an act of courage; it's foolish and it's an act of cruelty exercised upon a majority of the population. The austerity programme adopted by the Social Democratic Party in early June contains the now boilerplate terms of severe cuts to public sector jobs, salaries and benefits, as well as public spending on health care and social programs.

The government has also established a timetable for privatizing state-owned corporate assets, such as the power utility EDP, the power distribution company REN and the banks, BPN, TAP and CDG. [1]. In addition to major reductions in public spending and the sales of the people's corporate assets, a number of devastating taxes, tolls and regulatory changes will be imposed on the general population as well. These changes will include the following terms, as they are described by the Irish Examiner:

Irish Examiner, Portuguese Youth Protest Joblesness:

"- An increase of between one and two percent in the VAT from its current figure of 23 percent is widely forecast by analysts to be brought forward from its initial projected date of December 2011 to as early as this month.

- The payment of these additional taxes will also be joined by the loss of a number fiscal privileges. Every year, taxpayers claim back tens of millions of euros in expenses, with costs regarding children or interest paid on mortgages set to be removed from the equation when they file their tax declarations in 2011. Council tax exemptions are also expected to be cancelled, though existing agreements will remain in place.

- The charging of tolls on previously unpaid motorways is also firmly back on the agenda after the previous government went back on its decision to introduce them by 15 April as the general election approached.

- The government is also looking to change the way bank holidays are taken in order to boost productivity and avoid long weekends becoming ‘longer’ by limiting the days upon which they can be enjoyed to Mondays and Fridays.

- The government had also previously agreed to change labour laws and limit the damages workers are paid when they are sacked. “We will align severance payments for open-ended and fixed-term employment and submit legislation by end-July 2011 reducing severance payments for all new contracts to 10 days per year of tenure”, Portugal has pledged, adding it will “present a proposal to revise severance payment entitlements for current employees in line with the reform for new hires by end-2011, without reducing accrued-to-date entitlements.”

- Portugal has further undertaken that it will also reduce the maximum duration of unemployment insurance benefits to no more than 18 months, while any increase in the minimum wage will take place only if justified by economic conditions and agreed in the context of regular programme reviews."

The government has also suspended most current and future infrastructure programs for an indefinite period, including a high-speed rail line that was in being built between Lisbon and Madrid. The scariest aspect of these plans is the fact that Prime Minister Pedro Passos Coelhos has been bragging about his intentions to go over and above the deficit reduction targets set by the IMF/ECB, in an attempt to outdo the foolish audacity of his Finance Minister.

The Guardian, Portugal’s Cutbacks Halt High-Speed Train to Spain (by Sandrine Morel):

"In exchange for a €78bn European bailout plan, the Social Democratic party (PSD),voted in on 6 June, has committed itself to a number of measures and reforms to reduce the public deficit to 3% of GDP by 2013. But Passos Coelhos, who has boasted that he will exceed the austerity targets agreed in the EU-IMF bailout, has added objectives that weren't on the cards, including the postponement of the Iberian high-speed line.

In Spain, that Portuguese zeal is not appreciated. The Spanish transportation minister, José Blanco López, has described the Portuguese decision as a "bad" one and reminded his neighbour that "the project has obtained European financing". Madrid fears that the European funds allocated to the railway will be scaled down if the Portuguese decide to pull out permanently. To press his point, Blanco has asked to meet his Portuguese counterpart at the earliest opportunity.

In the Spanish regions that were to be covered by the high-speed train, there is concern about the local repercussions in terms of jobs and tourism, although according to the president of Extremadura, Guillermo Fernández Vara, "this decision won't affect the Spanish end of the line". Last week, the Portuguese prime minister announced that further budget cuts would be put before parliament."

Spain may have a right to be a little peeved with Portugal's decision to halt construction on the rail-line, given the fact that its government had already expended significant funds pursuing the project and is just as broke, but that's really nothing compared to what the Portuguese people must be feeling right now. The world was provided a glimpse of this fear, frustration and incipient rage in March of this year, when thousands of young protesters took to the streets of 10 different cities in the country.

The Irish Examiner:

"Some 30,000 people, mostly in their 20s and 30s, crammed into Lisbon's main downtown avenue, called onto the streets by a social media campaign that harnessed a broad sense of disaffection. Local media reported thousands more attended simultaneous protests at 10 other cities nationwide. A banner at the front of the Lisbon march said: "Our country is in dire straits" while another said: "We are the future."

...But after a decade of feeble economic growth and a huge debt burden that has forced the government to enact crippling austerity measures, Portugal's economy can't deliver the opportunities that trained young people are seeking. The jobless rate stands at a record 11.2%, and half the unemployed are under 35. In the third quarter of last year, 68,500 college graduates were idle - a 6.5% increase on the same quarter the previous year, according to the National Statistics Institute.

...Four graduates in their 20s were inspired to organise the unprecedented protests after a pop song struck a chord with their despairing generation. The song, called "What a fool I am" by Portuguese band Deolinda, was an unexpected hit in January, even though it hadn't been released yet. An amateur video of a concert performance of the song posted on YouTube went viral as it set a generation's simmering grievances to music.

The song's lyrics - including the lines "I can't go on like this/This situation's dragged on for too long" - built into a battle cry."

Sign: "The Slave/Carnation Revolution"

This event was no doubt a populist expression of deep frustration with Portugal's economic path, but it was generally only concerned with unemployment and under-employment, and was also relatively timid compared to the protests and riots in Greece this year. As time moved on and new austerity measures came to light, however, the people of Portugal returned to the streets several different times to express more frustration and anger over the increasingly specific and brutal plans. They are now beginning to realize that their government will continue to ignore their cries, and choose instead to bail out large Western banks through the IMF/ECB/EFSF, maintaining the status quo of oppressive inequality at all costs.

The Portugal News Online, May Day Demonstrators Denounce Austerity, Bailouts Talks:

"In the capital, several thousand people braved heavy rain on Sunday [July 3] to participate in two peaceful marches organised by the country’s rival trade union confederations. Incidents were only reported from the industrial city of Setúbal, south of Lisbon, where a small group of black-clad “anarchists” clashed with police, leaving three protesters lightly injured.

At the biggest demonstration in Lisbon, the head of the leftist CGTP union federation, Manuel Carvalhoda Silva, accused the caretaker Socialist administration of burying the country in debt in order to rescue scandal-ridden banks, not to aid the poorest or the unemployed. Many of the demonstrators sported red CGTP t-shirts and shouted slogans like: “We don’t want the IMF here”!

Carvalho da Silva called on supporters to vote against the Socialists, in power for six years, and centre-right parties that governed earlier in snap elections set for 5 June. At the smaller UGT rally, some 2,000 protesters heard leader João Proença reject any austerity move to cut vacation and year-end subsidies or reduce the €475 monthly minimum wage.

The unemployed youth and struggling workers of Portugal are rapidly becoming fed up with their government's stubborn march towards neo-feudalism, as it desperately hopes to remain in the favors of a European Union run by bankers and corrupt politicians. Prime Minister Coelhos announced in mid-July that his government found a "colossal" $1.7B hole in its current budget plan, along with weak economic data, and therefore new austerity measures must be adopted. What he didn't announce is that they are going to fill that hole up with the skeletal remains of the Portuguese population.

EuroNews, Portuguese Austerity Tax on Bonuses Sparks Protest:

“We want higher pay”: that was the message from thousands who marched in Lisbon on Thursday [July 14], heeding union calls to protest against recent austerity measures in Portugal. They include an extraordinary tax on end-of-year bonuses, announced by the prime minister Passos Cuelho.

The move goes beyond Portugal’s bailout terms – because, he says, new figures on the economy show it is necessary. The demonstrators beg to differ.

“I’m here because I think the measures being brought in are very unfair. I am here because it’s through this workers’ struggle that we can fight against the rising cost of living,” said one young woman.

A man said:

“I’m a worker, living conditions today are bad and are likely to get worse so I’m here to fight for my interests, for the workers’ interests.”

Yes, Mr. Coelhos, the "new figures" on your economy are indeed very weak and your budget deficit isn't getting better, because you insist on funneling the productive capital of Portuguese workers to your unproductive banker overlords as interest on the unproductive debt instruments that they hold. You, me and everyone with half a brain knows that the solution to Portugal's economic woes is not oppressive austerity and blatant extraction of wealth, but you insist on doing just that anyway. The people on the street, though, cannot be silenced for generations like the Native Americans were. You can rest or lay awake assured that their future demonstrations will not be quite so peaceful.

SPAIN

The public balance sheet of Spain, like Ireland, has been entirely at the mercy of its reckless and insolvent banking sector, especially its 12 "cajas", or savings banks. The extent of this insolvency is easily implied by the extent of the housing bubble that was financed by these banks over the previous 12 years, which is now thoroughly in the process of imploding. The following graph is a screenshot of an interactive applet found at The Economist website, which can be toyed around with to include more countries, change the measure of housing prices on the Y-axis and change dates on the X-axis.

The Spanish bubble and bust has clearly been one of the worst among those in Europe, and the picture only gets bleaker when you factor in the 20%+ unemployment rate for the Spanish population, which is more like 44% for its young adults, and its projected sub-1% growth until 2016. [2]. It's estimated that the banking sector needs to raise upwards of $20B in capital by September of this year, and it's practically impossible to imagine that any private investors will be brazen enough to put their money into Spanish banks within the next few months. [3]. That really only leaves the Spanish government, the ECB/IMF and their new fiscal collapse sharing mechanism, the EFSF.

For the moment, the ECB/IMF are keeping their paws off of Spain (except for recent bond purchases), hoping and praying that the country can avoid fiscal ruin by imposing its own independent austerity program, while it simultaneously subsidizes its domestic banking sector. Of course, there is a reason why the new ESFS was conceived, and if it is successfully shoved down the throats of the German people, we can be certain it will be used for Spain. The odds of Spain remaining solvent by its own right are becoming less favorable by the day, thanks in no small part to the systematic austerity that is currently and will continue to plague the Spanish people.

That's a big IF, though, and it will necessarily take a few months to get underway, which is a few months too long for Spain. For now, the ECB is directly intervening in Spanish and Italian bond markets to stem the upwards surge in their long-term bond yields, while engaging in shady backdoor discussions with their respective governments about immediate austerity. I was sent the following observation about two months ago from Justin Ritchie, who runs the clever and comprehensive Extra Environmentalist podcast interview website (their latest interviews were with Chris Martenson and economist Manfred Max-Neef). He had been visiting Spain at the time.

"Justin: As I've been walking around the streets of Granada, Spain over the last few days I'm seeing the protests grow every day even though police are trying their best to quiet things among the students here. People were marching with megaphones today and handing out flyers tell all of us to gather in the town square. Much of the pressure here is in anticipation of the election that's coming soon but all the candidates are still thinking within the mainstream paradigm. In the very near future, Spain will have to deal with its debt and that likely means a bailout from the EU with the restructuring required, now that the youth are becoming more and more organized after frustration with low wages and 40%+ unemployment, Spain has everything in place to become the first European nation to experience a full scale revolution."

Justin's observations are lent some clear support in this brief video clip from Global Research TV about the ongoing protests in Spain. These protests reflect a Spanish populace rapidly coming to the conclusion that expressing its solidarity on the streets is much more meaningful and effective than voting in a few political elections that are designed to manipulate the peoples' perceptions and present them with the illusion of choice. Really, what conclusion is left to draw when you face staggering unemployment, little to no economic growth, brutal austerity measures and your country is still broke?

SPANISH PROTESTERS JOINING "WORLD REVOLUTION"

On November 20, the Spanish people will be given the choice to vote for either retaining the "Socialist Party" or bringing in the "People's Party". The former has already started implementing painful austerity measures on the people in an attempt to cut its deficit by 50% over two years. These measures have included an increase in the VAT by 2% (from 16% to 18%) and an elimination of jobless benefits for unemployed people who have depleted their contribution-based benefits. A privatization plan was also put into place by Zapatero's government in 2010.

Businesweek, Spanish Industry Sinks as Austerity Dents Recovery (by Emma-Ross Thomas):

"Prime Minister Jose Luis Rodriguez Zapatero’s Cabinet is due to approve partial privatizations of the national lottery and airport operator Aena in asset sales that may raise 14 billion euros ($18.5 billion) and allow Spain to issue less debt next year. It also plans to pass tax cuts for small companies while scrapping the jobless subsidy that was introduced in 2009 for people who have run through their contributions-based benefits."

It has been somewhat difficult, though, for the national government to direct systematic austerity, given the relative autonomy of Spain's regional governments and their share of the spending. That is where the new government will come in and pile loads of fresh, searing pain on top of what the Old Boss had managed to accomplish. The "People's Party" claims that it will do a better job of implementing austerity and will cajole investors back into Spain's bond markets. These claims came after the Spanish 10-year was once again getting hammered above a 6% yield, despite the "comprehensive" plan developed by EU leaders at their summit in the weeks before.

Bloomberg, Spain Election May Mean More Austerity (by Angeline Benoit) :

"The current government shied away from sorting out decision sharing between regions and the central government, Nadal said. “This has led to massive overspending,” as each level conducts its own policies, he said. “There is a lot left to do for the new government.” He cited reform of the labor market and energy sector as well as an overhaul of the regional administrations.

Spain’s regions are crucial to its efforts to rein in the deficit. They have accumulated debt of 121 billion euros ($174 billion) and control more than a third of the nation’s spending, including health, education and half of public employment."

A castration of Spain's regional governments would certainly be keeping in line with the overall trend within the "EU dream", but it would do very little to put Spain's fiscal house in order. In fact, the spending programs of these regions, which are significantly more tailored to their specific populations, are perhaps the only thing keeping the country's housing-based economy afloat, which keeps some tax revenues flowing to the national government. Once these regional administrations are "overhauled" with austerity, the Spanish people can wave goodbye to what remains of their housing and employment markets. Holders of Spanish public debt will once again be clawing at the ECB and ESFS for a bailout while the Spanish people continue to starve.

Bloomberg:

"Spain’s opposition People’s Party pledged to restore investor trust in the euro area’s fourth- biggest economy by imposing more spending cuts if it wins early elections in November. With Europe’s debt crisis lapping at Spanish shores, the People’s Party led by Mariano Rajoy, 56, is set to campaign on the extra steps it says are needed to kick-start growth and slash unemployment of more than 20 percent. The PP is holding out the prospect of more austerity after the Nov. 20 election as it bids to repeat the trouncing it gave Prime Minister Jose Luis Rodriguez Zapatero’s Socialist Party at local polls in May.

...Spanish 10-year bonds rose today for the first time in four days, sending yields down 10 basis points to 5.98 percent. The additional yield investors demand to hold the securities instead of similar-maturity German bunds fell 15 basis points to 339 basis points. Bonds fell on July 29 for a third day after Moody’s Investors Service said it may downgrade Spain’s credit rating. Zapatero announced the election hours later in a bid “to project political and economic certainty for the next few months.” The International Monetary Fund said the same day that Spain remains in “the danger zone.

Spain’s biggest companies were instrumental in Zapatero’s decision to call early elections, El Mundo reported yesterday, citing people at the country’s main business group it didn’t identify. Francisco Gonzalez, chairman of Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest bank, said in a July 29 statement that Zapatero had taken the “right decision” in calling early elections. The Nov. 20 date for the elections coincides with the anniversary of the death of the Spanish dictator Francisco Franco in 1975."

So the ghost of the fascist and ruthless dictator, Franco, will return to haunt the people of Spain in November, when the "Biggest Companies' Party" wins the early elections and proceeds to develop and implement extensive spending cuts, tax increases, regional "reforms" and plans for privatizing public assets. It is inevitable that such a development will further stoke the fires of rage and revolution within the Spanish population. History has clearly proven that it rhymes, but will it repeat itself? Will the uprisings be squashed by a fascist, militaristic government or combination of governments in Europe? Or, instead, will the modern-day People of the Sun ultimately prevail in unlocking their financial chains?

Protest in front of the Bank of Spain in Madrid

The Guardian, Spanish Riot Police Clash in Madrid With Anti-Austerity Protesters:

”Protesters angry about the government's austerity programme during Spain's economic crisis have been demonstrating for four days in Madrid. Police have been preventing them from re-erecting a protest camp in the central Puerta del Sol square where they had held protests since May. Some of the demonstrators are known as indignados (the outraged). They have protested over Spain's current high unemployment, and demanded more democracy, a new electoral law and an end to political corruption in the country.”

Only time can answer the questions posed above, but there is one thing that is nearly certain at this point in time - revolutions are on the way. From Greece and Ireland to Portugal, Spain and beyond, there is very little reason for the people of the developed world to stand down or protest in peace any longer. Their national elections are theatrical shams, and their national governments are clearly beholden to supranational political and financial institutions when the curtains come down on that show. Any meaningful change is then forced to arrive from the bottom-up, starting off slow and then accelerating exponentially, spreading like a wildfire. This time, the revolutionary "contagion" will be contained for very long.

Bailouts, Austerity and Rage: Calm Like a Bomb, Part I - The Greek & The Irish

2011-07-30T14:21:00.000-07:00

"Stroll through the shanties and the cities remain.
Same bodies buried hungry, but with different last names.
These vultures rob everything, leave nothing but chains.
Pick a point on the globe; yes the picture's the same.
There's a bank, a church, a myth and a hearse; a mall and a loan, a child dead at birth.
There's a widow pig parrot, a rebel to tame,
a whitehooded judge and a syringe and a vein.
And the riot be the rhyme of the unheard..."

-Rage Against the Machine, "Calm Like a Bomb"

Rage is deeply-rooted fear and frustration metastasized in the body of a global and institutionalized society; the natural result of economic disenfranchisement. It is one thing to advocate in the name of rage, another to predict that episodes of collective rage will occur and yet another to note that they are already occurring and accept them as a fundamental aspect of our lives. The former should be avoided as much as possible, while the latter two are required of the responsible analyst, in my humble opinion. "RATM" may not be a shining beacon of objective analysis in our world, but, at the same time, they are right.

People across the world are once again recording their "rhymes" as history unfolds. The debt-drugs were injected for years on end, so now the only question is how far down the revolutionary river our rage-filled, junkie mentality will carry us? Southern Europe (and Ireland), of course, are back in the cross-hairs right now, to the extent that poorer parts of the world ever escape them. Revolutions were all but manufactured by Western colonial/imperial powers in Latin America, Asia, Africa and the Middle East throughout the 20th century (see The Shock Doctrine and Confessions of an Economic Hitman), but now the chickens are coming home to roost.

The last time Greece had a true "revolution" (let's call it "a widespread uprising of the people which displaces or severely threatens the existing political order") was in the 1820s, Spain was in the 1860s, Italy in 1848, Ireland in 1916 and Portugal the most recent in 1974 (no shots were fired in this military coup). [1], [2]. In the case of France, Germany and the UK, the populations have generally suffered their own governments for much longer stretches with fewer internal uprisings. Now, in the span of just over a year, we have witnessed mass protests and/or riots in all of these countries, on multiple different occasions.

The trigger for this rage has largely been either the establishment and/or proposal of "austerity measures", as both conditions of EU "bailouts" or independent fiscal policy, or the subsidization of debtor nations by those belonging to Europe's "core". This situation in the EMU has created an extremely tense dynamic both within and between the respective populations of member states. So if we want to know the future of social unrest in Europe, perhaps we should look to the future of bailouts and austerity. To date, the two countries in the developed world that are facing the most severe austerity measures are, without a doubt, Greece and Ireland.

GREECE:

After the first round of Greek bailouts last year, its public bond yields were back to all-time highs as its economy had contracted from conditioned austerity and its finances remained dismal. The new plan concocted last week in the European "Leaders' Summit" has allowed Greece's 2-year bond yield to retrace about 1300 basis points (from above 40% to just over 27%), as it calls for further subsidization of Greek debt and "voluntary" bond swaps by private investors in Greek bonds. The latter, of course, will not be termed an act of "default" by any of the relevant institutions, except maybe the rating agencies (who would be surprised if they caved?), despite that being exactly what it is.

It is estimated that bondholders who participate in this swap program into longer-term bonds will take losses of up to 21% on the net present value of their current instruments. [3]. These alleged "haircuts" are not only a gigantic under-appreciation of Greek's insolvency, but will most likely still be subsidized by European workers and taxpayers, as investors put those "government guaranteed" bonds to the ECB as collateral. John Maudlin describes this dynamic in his latest E-Letter, Kicking the Can Down the Road One More Time:

"Here is what it [the latest EMU plan] really says: We are going to keep throwing good money after bad and work as hard as we can to transfer the debt that is on the banks to the ECB and European taxpayers as long as the voters will let us. This first tranche will be another €109 billion. That will last a few years, and Greece will only have to pay about 3.5% on that debt and the rollover debt, and people who expected to be repaid in that period will see payment extended to either 15 or 30 years.

You can call this what you like, and they call it “selective default,” but it is a default. There will be government guarantees on the debt, so the ECB can take it from the banks. Let’s see what the “voluntary” debt rollovers will look like and what the likely debt destruction will be. This is from Global Macro Monitor.

First, notice that the plan claims haircuts will only be 21%. But that assumes you can sell the new bonds at a 9% interest rate. If the interests rate demanded by the market are 15%, which is closer to reality, the haircuts are closer to 67%, after what appears to be an initial 20% cut. Will any institution not immediately try and get those bonds into the hands of the ECB? This is just ugly."

So how much will major bondholders really have to share in the losses on risky debt-instruments that they generated in the past, and how much of those losses will be immediately pawned off to the ECB under the new plan? Many of the details of this new "fiscal consolidation" of the EMU have yet to be ironed out, and it is still not clear whether it will be accepted as drafted by the relevant Parliaments. Ambrose Evans-Pritchard writes on this issue in The Telegraph:

"The terms overstep a resolution passed by the Bundestag limiting how far she [Merkel] could go in committing Germany to any form of transfer union or pooling of debts. The use of the EFSF as a fiscal fund without treaty authority further complicates a ruling by the German constitutional court on the legality of the bail-outs expected in September. Such changes to the EFSF will require ratification by each of the national parliaments. It may require an amendment to the Treaties, greatly raising the bar in Germany.

EU officials hope that a debt rollover plan for Greece can be limited to a short technical default. The ECB has backed down on its threat to reject Greek bonds as collateral. The formula will not be extended to Portugal and Ireland. It is understood that rating agencies will hold fire for the sake of global stability. However, there is no disguising that a major taboo has been broken, even if French leader Nicolas Sarkozy continued to insist that Greece would pay "all its debts"."

So, it is still unclear to what extent the new "stability" mechanisms will be implemented across the EMU, but Evans-Pritchard is right to say that a major line has been crossed, regardless of the final details. There is no doubt that the Emergent Union, through its latest plan, has now decided to stick together until the bitter end, when death finally does them apart. We are talking about the unilateral decisions of political and financial officials, though, which are not even close to being reflective of what their populations want. Nowhere is that fact more true right now than in Greece.

At least 95% of the Greek people are suffering immensely to remain in a Union that fails to benefit anyone outside of the top 5%. The authorized plans for austerity and privatization of the citizens' assets continues unabated, and more ominous than ever. Any backstops of Greek debt in the future will still be accompanied by austerity measures approved by the Greek government earlier this month. Meanwhile, the government is still in the process of finding new "advisers" (investment banks) to pay hefty fees in return for advice on how to reduce their deficit via asset sales. [4]. Jeremy Warner from The Telegraph reports:

"Agreement on the package is one thing, deliverability is quite another. Once Germans realise that what is being proposed is a transfer union by stealth, you have to wonder what political future there is for the leaders who agreed it. Angela Merkel is staring election defeat in the face, rather in the way that agreeing to German participation in the euro was arguably what did for Chancellor Helmut Kohl back in the late 1990s.

The same might be said of the recipient nations. What future for political and social stability among the newly enslaved once it is realised the price that has to be paid is loss of fiscal sovereignty together with years of externally imposed austerity;

The agreement refers to a “European Marshall Plan” to restore competitiveness to Greece. This doesn’t appear to mean money. Instead it seems to refer to the provision of “exceptional technical assistance to help Greece implement its reforms”. In other words, someone else will be running Greece’s affairs."

So how will this hypocritically harsh plan of austerity and privatization sit with the people of Greece? The proposed austerity measures adopted by the Greek government foresee tax increases of about $9B over the next four years, with almost $8B (~90%) front-loaded in the next two. This includes a measure to reduce the income tax threshold 30% (from 12,000 euros to 8,000) and place a "solidarity levy" on households for 1-5% of income this year. What that really means is the average Greek worker will be paying substantially more taxes, while the wealthiest brackets continue to evade them with relative ease.

From Der Spiegel:

"Two-thirds of Greeks regularly pay their taxes as well. Indeed, "contrary to widespread views," as the Friedrich Ebert Stiftung study put it, these taxes are automatically deducted along with social contributions from the paychecks of Greeks employed in both the private and public sectors. It is mainly the small wealthy class that manages to cheat the authorities out of €40 billion in tax each year. That is the OECD's estimated volume of annual tax evasion. The Greek central bank puts the losses at somewhere between €15 billion and €20 billion.

These tax cheats have little to fear. As Panos Kazakos, an Athens-based professor of politics, puts it: "I have never seen a single person put in jail for tax evasion." Robolis adds that the government, which supposedly has no money available for social services, just published a list of companies that owe the state a total of €9 billion in social contributions -- but it does nothing to get that money.

This injustice is what is making people in Greece so angry..."

The plan also calls for about a $31B reduction in spending over the same four-year time frame, with a majority coming from a reduction in public salaries, social programs and health care spending. Taken together, these measures amount to more than 10% of Greece's GDP. Such cuts represent a systematic gutting of safety nets that the average Greek has become reliant on for any chance of solvency, and, even survival in some cases. Finally, the proposed plan aims to generate about $70B+ from sales of public assets, including the citizens' stake in sea ports, airports, highways, mining operations and various other property (such as land on the island of Mykonos [6]) until 2015. [7].

From UN News Centre:

“The implementation of the second package of austerity measures and structural reforms, which includes a wholesale privatization of state-owned enterprises and assets, is likely to have a serious impact on basic social services and therefore the enjoyment of human rights by the Greek people, particularly the most vulnerable sectors of the population such as the poor, elderly, unemployed and persons with disabilities,” said Cephas Lumina, who reports to the UN Human Rights Council in Geneva.

The UN is generally known for having a lot of opinions on "human rights" issues without ever really backing them up with concrete action, but the statement above still touches on a very important dynamic for the Greek people. More and more of them are entering the "most vulnerable" classification of neo-feudal society, as they are forced to join the ranks of the impoverished and/or the unemployed.

From Der Spiegel:

"This time, the fight for survival last exactly 29 minutes. At precisely 3 p.m., Father Andreas, a 37-year-old Greek Orthodox priest, opens the doors of the food bank in downtown Athens. At this hour, the line of hungry people stretches all the way across the large square outside and into the street. Needy people of all ages are waiting patiently -- pensioners, unemployed people, mothers with children, immigrants, asylum seekers. "We can't let these people starve," the priest says. "They are already suffering so much. They should at least not go without food.

...In recent weeks, the needs of such people have been keeping Father Andreas and his colleagues very busy. Almost all of the 400 parishes in the Archdiocese of Athens have opened food banks like the one he runs. City officials have opened some as well.

His food bank distributes meals three times at day. Up to 2,000 come at noon, another 1,200 in the afternoon, and about another 1,000 in the evening. The workers try to make sure that they don't always supply the same people. Such vigilance is necessary because "the number of needy is skyrocketing," says one volunteer who estimates that the figure has increased by 30 percent in recent months. "But we can't be sure it will stay there," she says."

It now becomes clear that one cannot and should not under-estimate the revolutionary spirit of an extremely vulnerable population; one which has increasingly less to lose with every iteration of bailouts, austerity and privatization, as was clearly demonstrated by the Greek people at the end of June.

Der Spiegel:

"On Wednesday [June 29] afternoon, tear-gas fumes drifted through the city center. More than 200 demonstrators were reported to have been injured, most of them with eye and respiratory problems. The police union said at least 40 policemen had been injured, one of them seriously. A total of 30 people were arrested.

...On Wednesday, one protester, his face covered up, warned that the conflict would continue. "This is just the beginning," he said."

The anonymous protester was absolutely right - those events were only just the beginning of a fundamental and deepening trend for the people of Greece under their new regime of oppressive austerity.

Der Spiegel:

"For weeks, thousands of enraged Greeks have been holding anti-government demonstrations outside Greece's parliament building. They come with bullhorns and banners, and a couple hundred also bring stones and Molotov cocktails. Camera crews from around the world are always there to film them, but they never turn their lenses toward those in the dark back alleys of central Athens."

It is very difficult to look at the proposed austerity measures, in the context of the above developments, and conclude that the rage and riots in Greece will not get much worse. Last year saw its fair share of violence in Athens, and June 29, 2011 did as well, but there is also every reason to think Greece's economic/financial situation will continue to deteriorate as renewed austerity and privatization plans takes their toll. As reported above, that toll is especially pronounced in the "back alleys" of Athens where no one is looking. Instead, they choose to focus on sound bites from international institutions and national politicians who claim to be "saving" the country.

Der Spiegel again:

"Last week, Prime Minister Georgios Papandreou once again succeeded in getting a majority of Greek lawmakers to push through an austerity and privatization package worth €78 billion ($111 billion). In doing so, he was responding to pressure from the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Commission. Indeed, many economic experts see the package's measures as the only way to fend off an imminent national bankruptcy at the last minute -- and the only way to save the euro from an even worse fate.

But is Papandreou saving his country to death? Savas Robolis thinks he is. "People are afraid," the 65-year-old says -- they're afraid of an uncertain future."

This fear of the future will continue to strengthen the sociopolitical backlash against a political and banking system that has unequivocally expressed its disdain for the people of Greece. An increasing number of Greek people are protesting for their right to eat a decent meal every day, but the plans for severe spending cuts, tax increases and public asset sales continue on as if those protesters didn't even exist. In the meantime, European leaders meet with each other and figure out "clever" ways of tying themselves into a tight, inseparable knot of fiscal abandon. And for those two reasons alone, the modern world has yet to see the largest uprising that the Greek populace can produce.

IRELAND:

Like Greece, Ireland was also given a conditional bailout last year that has proven to be devastating for domestic economic growth. The new plan presented by EMU honchos says that Ireland will be able to borrow from the ECB at 3.5%, well below market rates (~5.8%), but it is not allowed to "selectively default" just yet. As a part of the conditions to reduce its budget deficit last year, Ireland had developed a budget for 2011 that was the most severe in its national history. Unlike the Greeks, however, the Irish people have so far kept relatively quiet in response to the ever-darkening clouds on their horizon. The Irish novelist Ed O'Loughlin has a theory for why that has been the case, as The Guardian reports:

"Dublin-based novelist Ed O'Loughlin says that perhaps one reason why the Irish are proving so docile is that for the first time in centuries the British can by no stretch of the imagination be blamed for their problems.

The author of the political satire Toploader adds: "The lack of clearly stratified classes – as they have in England – breeds insecurity, a fear of losing caste, of being pushed outward. To protest at the rules of this game would be an admission that you no longer have a hand to play in it; that you are a loser and a sucker."

At times of mass emigration, just staying in the country was felt to be a victory in itself, although often a pretty hollow one. "The fact that everyone's class system is centred exactly on themselves tends to make people, naturally, very self-centred. The Irish term for this is 'mé féin-ism', or 'myself-ism', a play on Sinn Féin, or 'we ourselves'. Mé féiners do not stand together for the common good. They are not good citizens."

It's an interesting theory that may demonstrate the power of a nation's political and cultural history to restrain the socioeconomic frustration of its people, but how long will this dynamic last for the Irish? Before getting to that question, let's first summarize what the people of Ireland are facing in the way of austerity measures. The current budget for Ireland includes spending cuts and tax increases, valued at about $8B, over the next year alone, or 4% of GDP. Most of the reduction in spending will come from cuts to welfare programs and public sector salaries/benefits.

The budget will reduce 4% of public pension expenditures by cutting benefits to retirees who are already being paid out. The tax increases will mostly come from income and value-added tax reform (lowering the income tax threshold and increasing VAT to 23% from 21%), although the top marginal income tax rate will be kept at 52%. The Irish government may also sell "non-strategic" public assets valued up to $3B over time, on recommendations of the "McCarthy Group". [8]. Meanwhile, the corporate tax rate will continue to be held at 12.5% (the lowest rate in OECD countries), which effectively serves to deflect the austerity burden from corporations generating massive profits within the country. [9], [10].

These large corporations paying a meager rate of 12.5% include the same financial institutions that were initially responsible for putting Ireland in a fiscal straight-jacket. It would be foolish to think that this tragic irony is being lost on the Irish people, who may soon be forced to further subsidize their financial industry through the Bank of Ireland, which is the only non-state controlled institution left (the state holds less than 50% of its shares). [11]. Right now, though, it actually appears that the British taxpayers, through the Royal Bank of Scotland, have taken on a part of that role:

From Irish Independent:

"In a statement, the bank [BoI] said it had raised the funds through two "bilateral secured term funding" trades; one yesterday and one at the end of June. The latest trade is believed to have been done with RBS -- itself nationalised by the British government in 2009. The funding, which is not covered by the banking guarantee, has an average duration of some 2.2 years.Although the lender would not comment on all the specifics of the fundraising, they did reveal that under the funding agreement's terms, they will pay 2.65pc above the three-month Euribor rate.

...BoI is facing a race against time to avoid joining the rest of the Irish banking sector under state ownership. After the results of the stress tests in April, it was told it had until the end of June to raise €5.2bn if it wanted to remain under private ownership. That deadline was pushed back to the end of this month with the firm trying desperately to raise the required funds."

If and when the BoI loses its race to stay private, it's the Irish taxpayers who will pick up the tab for an extra 2.65% interest on loans from RBS, along with any other obligations passed on by the private banking sector. Considering these developments and the ongoing effects of current austerity measures, it is difficult to see the Irish people remaining "docile" for much longer. There is only a certain amount of restraint that can be imposed by cultural perceptions before the reality of economic desperation sets in. They are now merely remaining "calm like a bomb", and the fuse on that device has been lit.

The Guardian article referenced earlier also includes the following assessment by John Kearns of the Irish Writers Centre:

"John Kearns, who went abroad in previous recessions and now works in Dublin's Irish Writers Centre, says it is too early to rule out social unrest. 'It's quite possible there will be Greek-style riots. The cuts are affecting people now. People are having their utilities cut off. I know of families, a mother of two, who had their electricity cut off. People can't take that lying down.

And there is still a mortgage crisis coming down the track with increasing interest rates that are coming later this year. I can certainly see social unrest ahead, although I don't see what can be achieved by it. It's strange that the main demonstrators so far have been pensioners and students rather than industrial workers. The workers so far have been far quieter,' Kearns said."

Indeed, there are strict limits to the amount of economic hardship a population can take before its "restraint" comes to be perceived by it as an exercise in futile despair. It appears that there is now very little standing in the way of fear and rage taking over the reigns of the Irish sociopolitical system. A recent survey found that the Irish people are beginning to agree with Kearns in massive numbers, whether they are truly aware of it yet or not.

From the Irish Examiner:

"In the last survey, 36%, or 428,000 people, did not see a future for themselves or their family in this country. However, this has now risen to 45% or 585,000. The iReach survey for the Irish League of Credit Unions (ILCU) found that 82%, or one million adults, fear about coping if further changes to income tax or welfare are introduced.

The survey found that 806,000 people feel they are living to work as opposed to working to live. However, the latest results have not factored in the July interest rate hike and in March one-in-five people said that a hike would have a serious effect on their ability to pay bills."

Well over half a million Irish people and families see "no future" living in their own country, and a solid million adults fear for their ability to make ends meet in the current climate of unaffordable private debt and public bailouts conditioned with severe austerity. That is quite simply a recipe for wide-scale protests, riots and uprisings in the near future. It is fundamentally impossible to predict exactly when such fervor will materialize, or what intervening factors will delay its development, such as Irish politics and culture, political/legal maneuvers by EU governments, financial maneuvers by the IMF/ECB, etc.

However, at the end of the day, these factors are only strengthening the population's future resolve. They are merely extending Ireland's exposure to the bailout structure of the EMU, and the numerous conditions that naturally accompany those bailouts. The fact that EU leaders are now planning to consolidate that structure under the modified ESFS, abandoning the haphazard process they had earlier, changes nothing for the Irish people. Eventually, they will need to write off a portion of the bad debts taken on by their government, just like the Greeks, and they will be forced to pay the price through further austerity and privatization.

I have noted before, in The Short Story of How We Lose, that the pain of losing is disproportionately more severe than the pleasure of winning. Similarly, the relatively abstract prospect of losing in the future is not nearly as painful as the act of losing itself. As the proposed austerity measures targeting the Greek and the Irish transform into implemented measures and real losses for their pocketbooks, we can expect the fear and rage to follow closely behind. Many of the remaining chords tying the people to their political structures will be severed. And, lest anyone tell you different, collective rage is largely a function of deeper socioeconomic trends; ones that are now common to the entirety of Europe and the developed world.

The Emergence of Europe as a Union

2011-07-18T14:00:00.000-07:00

The European Monetary Union is the world's first example of an aggregation of "sovereign" nation-states into a single entity of economic exchange. Although there are many similarities between the EMU and the political aggregation known as the "United States", the latter only consists of one truly "sovereign" political authority. The U.S. Constitution provides that it, along with federal law, is the "supreme law of the land" in practically every sphere, while the EU Constitution only allows EU law to trump the laws of member states when the latter have explicitly agreed for the EU to legislate in those spheres.

The EU, therefore, illustrates the world's first "emergent property" of nation-states acting as an economic (currency) collective, without a very significant fiscal/political centralization of authority. Dr. Steve Keen, a renowned "Post-Keynesian" economist, recently published a presentation discussing the fact that prominent research in Neo-Classical economics has actually undercut the entire edifice of Neo-Classical theory currently taught in schools. [Video of Lecture].

Essentially, the research shows beyond a doubt that market demand curves cannot be modeled by aggregating individual demand curves which are subject to the "Law of Demand" ("all else being equal", demand for a commodity falls when its price rises and vice versa). While this law may hold for an isolated individual to some extent, it becomes little more than a coincidence at the macro-economic scale. Instead, complexity theory teaches us that when economic agents are aggregated to the macro-scale, the new collective is governed by novel, non-linear rules and exhibits "emergent properties".

That's why speculative financial bubbles are even capable of endogenously occurring within a capitalist "free-market" economy. When the prices of U.S. and European real estate continued to escalate dramatically throughout the late 1990s and 2000s, demand did not fall off, but instead continued to climb as more irrational investors joined the ranks of an emergent herd. As mentioned above, the European nation-state herd is not quite like any other we have witnessed before, and "emergent behavior" is not necessarily a good thing for economic sustainability or productive growth.

The EU as a collective monetary union is the largest economy by nominal GDP in the world, exceeding the US by more than 10%. [1]. It has been clear for some time that all of the EU's member states, while retaining political "sovereignty" and diverse economic sectors, have become committed to preserving the value of any and all public bonds denominated in Euros. On the surface, there are various stirs about Germany or France not supporting further bailouts, or about Greece refusing the conditions of such bailouts, but it is the IMF, ECB and major bondholders who actually guide the herd.

The new rules governing this herd can be summed up in two words - austerity and privatization (a.k.a. wealth extraction). While the response of U.S., China, Japan and others to the global financial crisis has been marked by increasing levels of government support/intervention in private economies, the EU as a collective has rapidly evolved to the stage of large cuts to expenditures that benefit large swaths of people and the wholesale privatization of public assets.

REUTERS: GREEK REFORMS MUST MOVE FASTER, PSI IN THE WORKS: IMF

Reuters: "The IMF said on Wednesday private sector involvement (PSI) was fundamental to a Greek bailout and urged Athens to move faster on fiscal and structural reforms to avoid a debt default."

Greece has now graduated from public "stabilization funds" managed by the IMF and ECB, to a plan for "PSI" that requires fast-acting "fiscal and structural reforms" (i.e. continued gutting of the public sector), which will no doubt be micro-managed by the IMF despite its name.

"...Fitch said it saw contraction at 4 percent in 2011, followed by a weak recovery next year. It said asset sales in 2011 appear feasible but the privatization plan will be increasingly challenging.

The Fund praised the recent creation of a privatization agency to help rake in a targeted 50 billion euros in proceeds until 2015, and said the target was ambitious but achievable."

Despite (because of) the ongoing "bailouts" and austerity in Greece, Fitch tells us that its economy is contracting, and while the PSI plan is a good one, the Greek people will have to try extra hard to sell their assets and meet "the target" (on their backs).

..."The conservative opposition has opposed the bailout plan, saying it stifles the economy, but supports some state selloffs. A public resentful with austerity has staged almost daily protests against the measures."

The Greek population becomes more disenchanted with their economic situation and proposed "solutions" with each passing day, but the so-called "conservative opposition" gradually comes to support the PSI plan, which is fundamentally very much the same as austerity. Now, Greece was the first to reveal the emergent behavior of the EMU collective, but it will by no means be the last. As we get closer to the collective's center, the need to privatize national assets and keep major bondholders afloat becomes even stronger.

When discussing the massive exposure of French banks to the sovereign debt of Spain and Italy, which has recently come under market pressure, Ilargi at The Automatic Earth writes the following:

Ilargi:"Paris will -need to- step in to try and save its financial institutions. The first steps in that direction are already being taken. The International Accounting Standards Board (IASB) has advised Europe to implement their International Financial Reporting Standard 9 (IFRS 9), which is nothing but a sly and underhanded mark to fantasy trick posing as a "standard". Think the US' FASB 157. Basically, IFRS 9 allows investors to hold assets at cost as long as they don't try and sell them. That Greek haircut which is being discussed shaves off as much as 60% of debt value. But they may still appear on the books at 100%."

The first step is to make sure that, if the inevitable does somehow occur and one of the PIIGS technically defaults on their obligations, the major European bondholders (banks and institutional funds) will at least maintain some value on their books through fraudulent accounting. At the same time, however, the banks will need to "raise capital". That can be done directly through fiscal bailouts by their home countries, but those would also be very counter-productive to the underlying issue in the EMU - excessive public debts and deficits.

The more likely behavior is what we have already seen for Greece, Ireland and Portugal - an IMF/ECB sponsored public bond purchasing commitment. Another reason for executing this now standard European tactic is to protect against the trigger of CDS contracts that were taken out as default insurance. This issue is something Ilargi has written about extensively (see The Derivatives Pressure Cooker and Credit Downgrade Swaps), and it can only grow in importance considering Italy's 120% Debt to GDP ratio and the fact its 10-year bond is about 3% rich to Germany's. [2].

The plans for austerity, of course, have been in the works for some time, and the Italian Prime Minister will now present the "package" for passage this Friday, instead of its originally scheduled date in August.

ITALY TO BOLSTER AUSTERITY PLAN, PASS IT BY FRIDAY

AP: "Italy's finance minister says the government's package of austerity measures will be strengthened and passed in both houses by Friday.

Giulio Tremonti sought to reassure markets during a speech to a banker's association meeting in Rome that Italy would speed reforms and austerity measures that seek to balance the budget by 2014.

But he also said that the pressure on markets in recent days was not a problem "of a single country, but of the structure of Europe."

So, does anyone now think that Rome will not be submerged in extensive "privatization plans" in the near future? Perhaps a big fat "FOR SALE" sign will be stuck in the center of the Coliseum? It is, as Tremonti says, a function of "the structure of Europe". Personally, I would say that Europe has fully emerged as a monetary union, and it is now behaving as any collective of nation-states would. There is no "turning back", and there is no "sustainable" plan to keep the collective together. There are only games, tricks, cons and "private sector involvement"; and, then, there's riots and revolutions.

This Time It's Dilated

2011-07-09T09:29:00.000-07:00

It's nothing new to say that we are living in a "black hole" economy, in which productive capital is continuously vacuumed up by speculative financial structures, as we continue spiraling down a path of fiscal stimulus, bailouts and central bank monetization, with little chance of those capital "influxes" ever reaching enough velocity to escape into the real economy anytime soon. As long as we continue operating under the same structures of economic organization, nothing we do will overcome that gravitational force and we will fall towards the center until we are wholly digested. Perhaps shreds of our former system will eventually radiate back into space, detectable to future generations, but its structures will be radically different for quite awhile.

On the other hand, you rarely ever hear the analogy extended much further than that. The productive economy is essentially being dismantled and vacuumed into another dimension, but how quickly will it happen? That question brings us to two related concepts that are frequently found in Nature, and a bit too often in modern human society - predicaments and paradoxes. As we are rapidly descending into the black hole of ponzi capitalism, a critical paradox involving time reveals itself. The closer you are situated to the event horizon of a black hole, the more gravitational force is applied (less gravitational potential) and the more time is dilated [1].

The equivalence principle in Einstein's theory of general relativity allows even stationary bodies with relative distances from a gravitational mass to be treated as having accelerated frames of reference with respect to each other. So we are not talking about an absolute measure of time, but its measure relative to other observers situated at different distances from the black hole. If observer A is closer to it than observer B, then a clock in A's possession will tick slower than one in B's possession, and both A and B will agree that A's clock is moving slower than B's.

From an absolute perspective, the gravitational force tearing at A's tendons is an extremely violent one, but, from the relative perspective, the time over which that force is applied is smoothed out towards infinity (as A's relative frame of reference approaches the speed of light). The clock in A's possession will continue to slow in relative terms, until an entire year in the life of B is just a few short ticks of the second hand, and eventually it will appear to B that A is barely aging at all (and to A that B has barely existed for any time at all).

To see how this time paradox applies to the global economy's black hole of speculative capital, we only have to look around us. Observer A could be represented by the largest economies in the world, hosting the largest financial/equity markets (U.S., China, Japan, Western/Central Europe, Canada, Russia), while observer B is represented by every other economy that is linked into the global financial system (this ranges from the economies of Iceland, Tunisia, Egypt and Syria all the way to those of Ireland, Greece, Italy and Spain). [2].

The biggest economies are closest to the event horizon of financial capitalism, since they have the highest levels of unproductive debt sitting on their private and public balance sheets. Their citizenry is being systematically poisoned by excessive debt, collapsing revenues, unprecedented bailouts, subsidies, taxes, regulatory oppression, unemployment, speculative inflation, etc., but it is also a very slow death. Relative to an Observer B, such as the Egyptians, Irish or Greek, the populations of these countries do not feel that their lives have significantly changed in the last few years or even decades, despite the changes most certainly taking place.

The time dilation effect has smoothed over these changes to make them appear much less drastic. Almost all asset markets in the U.S., Europe and China are now wholly subsidized by their respective governments/central banks, but the taxpayers fail to recognize that the bill was drafted in their names and will come due well within their lifetimes. Millions of people have lost their jobs, retirement savings and employment benefits in the West, but millions of them are also collecting welfare benefits such as food stamps, Section 8 housing, medicaid, medicare and/or unemployment insurance (or the equivalents in Western Europe).

Meanwhile, the clocks in North Africa, the Middle East, South Asia and the EU periphery are ticking much faster, as a new financial or sociopolitical "crisis" in those regions seems to erupt every other day of the week. While the size of their individual economies are relatively small and are capable of being partially backstopped with imaginary capital generated by the alchemy of Observer A, the rate at which their respective populations experience economic deterioration still renders it a very painful process. That is especially true when the pace is relative, and the people are forced to watch local economic and political institutions "age" much faster than their counterparts in larger economies.

The amount of suffering experienced by the average Tunisian, Egyptian, Libyan or Greek in one day generally equals the amount the average American, Canadian, Brit or German will experience in a year or more. The fundamental reasons we suffer do not differ, since we are all a part of the same economic system and are being consumed by the same black hole of debt, but the temporal schism makes that shared reality difficult to see. This dilation of time for the central economies of our world may not be fair or just, but it's a fact of our existence, and it behooves us to now use it to our advantage and the advantage of those we can reach.

For some, that might mean undergoing extensive financial and physical preparations and working towards 100% self-sufficiency, by learning how to grow/preserve food, access/purify water, generate renewable energy, use weapons for self-defense, develop community ties, etc. For others, it may not mean much more than getting out of debt, gathering knowledge and speaking their minds whenever others will listen. Regardless of one's specific strategy, it should be remembered that a dilated time frame does not mean the economy is recovering or the status quo will persist.

Our frame of reference may be relatively slower and more drawn out, but we are still being digested by the financial black hole of global civilization. In fact, we are positioned closest to its event horizon, and there will come a time when we can no longer afford to linger in the relative safety of its boundaries, but rather must cross over to the other side. When that happens, our relatively slow clocks will synchronize with all of the others and quickly make up for the time that was lost before. This time may be dilated, but, in the end, it's really no different.

The Future of Physical Gold (Part V - An Imperfect World)

2011-07-05T11:38:00.000-07:00

"It is dangerous to be right when the government is wrong." -Voltaire

The first four articles in this series (Dialectic Foundations, The Evolution of Value, The Final Realization and Deflationary Canyons and Caves) used theories, facts, data and general observations to explain why the dollar price of physical gold would most likely take a significant hit over the next decade. It was also consistently argued that the global financial system would not be "re-capitalized" through the revaluation and monetization of physical gold reserves, as argued by the theory of Freegold. That, in turn, means that physical gold is very unlikely to reach valuations as high as $40-100K in current purchasing power per ounce, either in the near future or, for all practical purposes, ever.

Obtained from Gold: The Ultimate Un-Bubble (FOFOA)

Much of this series has focused on the Federal Reserve, U.S. Treasury and the U.S. Dollar as THE key influences on future monetary developments in our global financial system. Freegold advocates would take issue with this focus, because they believe the "rest of the world" (ROW) will be much more instrumental in leading the physical gold-based re-capitalization process, such as Europe, the Middle East, China, Russia and India. The problem for them is that such a conclusion is not supported by either sound theories of complex systems' evolution (i.e. evolution of the global economy) or straightforward empirical evidence. Let's return to a passage from Part IV:

[Deflationary Canyons and Caves]: We could even see several large institutions, such as central banks and governments in Asia, Europe or Japan, flood the markets with (sell) a portion of their gold holdings to temporarily relieve pressure from their dire private and public funding situations. The sheer momentum of financial capitalism will lead them to conduct their "re-capitalization" efforts through established fiat currency and debt mechanisms, rather than through an ongoing revaluation/monetization of gold by central banks such as the ECB (as argued in FOFOA's Reference Point: Gold - Update #1 and Update #2).

A complex and dynamic system relies on "central hubs" to keep itself functioning at anything close to its current scale, and therefore the "peripheral" branches of the system are more flexible and can deteriorate much faster. Accordingly, fiat currencies existing in the "periphery" of our global economy should be expected to fall first. For example, Belarus recently experienced the initial stages of HI as their currency lost 36% of its purchasing power in one month. However, the value of alternative mediums of exchange within the economy (i.e. dollars, gold, silver) can be suppressed in spite of such events as long as there are significantly bigger countries (currencies) willing to backstop the smaller ones, which will be Russia in this situation (with conditions of privatizing national assets, of course). [1], [2].

The countries on the periphery of the EU are in a somewhat similar position, but the Euro, as an accepted and stable currency, is obviously much more important to the system than the Ruble of Belarus. Even as the PIIGS continue to repeatedly experience public financing problems, the Euro has managed to maintain its value through various financial and political charades by the national governments, IMF and ECB (i.e. sovereign bond monetization, "credible" austerity plans, the prospect of labeling a default as "voluntary reprofiling", etc.). At every juncture, however, it became more clear that these efforts had increasingly less impact on public bonds and derivative instruments tied to their value.

At the end of every excruciating day, there must be a white knight in shining armor waiting in the shadows, ready to spring to action and prevent a complete European financial (Euro) implosion in the event of a PIIGS default. Countries such as Russia, Japan and China are simply not big enough to provide any credible backstop to the entirety of Europe, so we once again return to the operations of the U.S. Treasury and the Fed. In addition to various USD-Euro swap programs, it was revealed just yesterday by a report on Zero Hedge that almost all of the dollar flows generated from the Fed's QE2 Treasury monetization program have gone directly to European banks (~$600B to date).

The Federal Reserve Building in D.C.

Implication #3 explains why the US dollar has been as week as it has since the start of QE 2. Instead of repricing the EUR to a fair value, somewhere around parity with the USD, this stealthy fund flow from the US to Europe to the tune of $600 billion has likely resulted in an artificial boost in the european currency to the tune of 2000-3000 pips, keeping it far from its fair value of about 1.1 EURUSD. [3].

It conveniently turns out that major financial institutions in the Western world, whether technically classified as "American" or "European", repeatedly stop at the U.S. Treasury and USD markets and collect their "Go" money. The abridged reason is that the world has been flooded with dollar-denominated debt over the last few decades, and that debt, unsurprisingly, gives the institutions of dollar hegemony extreme leverage over the ROW when the liabilities come due and there is very little cash to go around. That has been a central theme of this series from the very beginning, and when you understand that, you start to understand what can happen to the value of physical gold.

The point has always been to maintain power structures of the system by transferring larger and larger amounts of resources and capital to its central hubs. When the PIIGS inevitably default on their sovereign bonds, EU citizens will realize that they were forced to sell their precious assets (including gold) for pennies on the dollar, while the major creditors who initially put them into debt were largely "re-capitalized" by the ECB/Fed and are set to absorb initial losses on any remaining debt-assets with ease. The Euro will experience a major sell-off relative to the U.S. dollar, when investors realize that the ECB is nothing more than a shell subsidiary of the Fed.

Gold may benefit a bit from capital flight out of Euro-based holdings over the next few months or year, but it will be difficult for it to maintain any marginal increases in value as financial contagion spreads and massive debt obligations come due. The latter are typically not payable in physical gold due to the system's evolutionary design, and so it will merely serve as a temporary and relatively illiquid repository of wealth for many investors. The debt-dollar system of "cash" and liquid bonds, on the other hand, will greatly benefit from capital flight, and that will also serve to suppress the value of gold on international exchanges.

Towards the end of Part IV, however, I explained that the shell game between the USD and Treasury markets cannot last forever. After a prolonged period of dollar appreciation and relative gold devaluation (~10 to 15 years), the central hub institutions would have concentrated and centralized too much wealth for their own good, just as predicted by Marx well over a hundred years ago. What both Marx and predictors of Freegold (Another and Friend of Another) really failed to understand, though, was that the complex global economy would not quickly rebound after this period with a drastic shift in property relations or systemic re-capitalization via physical gold.

In stark contrast, physical gold will become valuable mainly because it serves as a convenient and accepted medium of exchange in certain locations after the global financial architecture has crumbled into tiny bits and pieces. Ironically, the central hubs that were most dependent on that architecture will witness the most dramatic reversal, during which physical gold becomes a very important constituent of survival. For example, private communities in U.S. states have relatively small amounts of physical gold compared to those in Latin America, Africa, Asia and Europe. This lack of general availability will help to elevate its value in trade, as well as physical silver to a lesser extent.

Data from IMF World Gold Report

In addition, at even smaller scales, black markets for trade in specific goods will inevitably become entrenched within "first world" countries over time as more and more people are displaced from the broader currency system. That trend is already prevalent in many poorer regions of the world, and it will simply expand to encompass those in the former "middle-class" who are living in densely-populated communities. For example, relatively poor neighborhoods in cities such as Detroit, Chicago, Los Angeles, New York, etc. will likely develop such markets over the next 20 years. Physical gold and silver, along with various other barter items, will become quite valuable in these locations.

It is also true that communities in the developed world have significantly less ability to sustain themselves through local food production, water procurement/treatment (more negatively impacted by shortages and impurities), efficient energy utilization, cooperative organization, ethnic/racial tolerance, etc. All of these physical, political and social deficiencies make it more likely that people will need to engage in extensive and reliable (trusted) trade to procure the things they need to survive, protect existing wealth and maintain bearable standards of living after HI occurs. Once again, this fact speaks volumes for the value of both physical gold and physical silver in the future.

On the other hand, locations with a lengthy history of gold or silver-backed currencies may find themselves re-instituting those monetary systems in the future at relatively smaller scales. States in the Indian sub-continent are a good example of those which may adopt a "gold standard" as the Rupee falls apart, and that would mean holders of gold are likely to gain a considerable increase in purchasing power. Alternatively, communities in Latin America may have a stronger affinity for silver-backing due to their historical paths of economic development. It is also possible that bimetallic currency standards are adopted at relatively small scales of organization in some parts of these regions.

It is perhaps most important to remember that a prolonged period of dollar deflation will be an extremely destructive process for general confidence in the global, regional and national structures of human society. Capital investments and revenues in every field of industrial economic activity will dry up in this self-reinforcing process, and that will in turn affect every aspect of our lives, including our ability to obtain adequate food, water, energy and shelter. By the time the central structures (the U.S. Dollar) of our system completely give out, the value of any official or unofficial monetary system will be constrained by the basic needs of people to survive in many regions.

Instead of hoarding physical gold for purposes of securing wealth or trading in a hyperinflationary environment, then, one may be better served by skipping directly to physical preparations that satisfy such needs. That is especially true in the developed world, where a relatively liquid and available means of exchange still exists and critical supplies are still somewhat affordable, but where self-sufficiency also requires a lot of effort. Once you are comfortable with your specific level of preparation, then you should begin looking for places to store excess currency wealth long-term. There is little doubt in my mind that physical gold is the place that generally towers above all others.

Some readers may feel that this article series has not delivered what it "promised", in so far as they were expecting an extremely detailed account of physical gold's future. While there was certainly no intent on my part to deceive, the series was organized to place significant emphasis on the role of complexity and uncertainty in our global economy as financial structures deteriorate. It is much more feasible, and therefore more important, to understand the broader foundations of how we got to this unique point and how the value of our wealth is likely to evolve from here. As explained in Part IV and above, the latter heavily depends on our localized circumstances of existence.

There is a well-known saying by Voltaire that "the perfect is the enemy of the good", and it's one of those cliches that should probably be tattooed on the palm of one's hand. Some people recite it as "we should not let the perfect be the enemy of the good", and that may be true, but it's just not as comprehensive as the original quote. The perfect is the enemy of the good, always. Perfect knowledge, perfect information, perfect monetary systems, perfect investments, perfect theories, perfect arguments... these things are all our enemies. What made me think of that quote was the following comment from a reader of the articles posted to a recent comment thread on FOFOA's website (emphasis mine):

"Anonymous": I offer profound thanks to FOFOA for giving me better insight into the economic events unfolding. I have become pretty much convinced about Freegold and hyperinflation.

But I have wished for an intelligent critique of FOFOA's writings because you can never be sure of a perspective until you understand the good arguments against it. So I thank Ash too, and look forward to reading the next installments of his series on the future of physical gold, at TAE. Perhaps it will undermine my tentative conclusion that FOFOA is right. Perhaps it will only lead to a more tempered version.

Reading all this stuff is a hard slog, especially when I have to work, and maintain a family. It is always a struggle to see the world aright.

I can only hope that other readers also find my series good enough to stand as a critique to the ever-insightful arguments of FOFOA and Freegold. Advocates of the latter would be the first to tell you that it is not meant to be predictable with certainty or a perfect monetary system by any means, but one cannot help but wonder if it's vision still flirts with perfection way too much. Even those who initially "exposed" the alleged trail towards Freegold (A / FOA) are depicted as the modern-day Messiahs of global finance; the Insiders among insiders who, sometime in the 1990s, managed to crack the code of financial elites around the world. That code was, of course, inked and cast in physical gold.

They wrote about their "revelations" from 1997-2001, during which time they preached the near inevitability of the global capitalist system being enveloped by a Freegold monetary paradigm. I could have trimmed around the edges of Freegold with quoted analysis/opinions, financial market data and/or questions about "why it hasn't happened yet", but that would not have been the way to critique such a fundamental argument about where we are headed. Instead, I believe this series has firmly established a well-researched argument that Freegold's foundations of socioeconomic evolution and its views of economic "value" in our global financial system are deeply flawed.

The empirical evidence to back up those theoretical arguments was later provided in the form of economic data and analysis of that data. It then follows that Freegold's strict predictions against prolonged dollar deflation are very questionable, as well as its views regarding the ECB (and the ROW) and its implications for the purchasing power of physical gold in the near future. This series was obviously not designed as a general argument against investment in physical gold. I simply ask that readers remember there is usually a vast chasm in our minds between owning physical gold and understanding the influences guiding its potential future. The time to narrow that chasm is right now.

"Doubt is not a pleasant condition, but certainty is absurd." -Voltaire

Monetary Psy-Ops With a "Twist"

2011-06-21T09:23:00.000-07:00

Bill Gross just loves to manufacture heavily publicized comments about the U.S. Treasury market every now and again. At first glance, they may even come off as his deeply personal opinions about Treasury bonds and the future of U.S. fiscal and monetary policy. Take more than a glance, though, and it becomes easy to see that men like that, in such lofty positions of financial power, never make any "public statements" very lightly. In fact, they are usually calculated to several decimal places in a room full of financial vultures, political hawks and public relations wizards before they ever see the light of day.

"Pimco's Battling Brains"

That was the subject of a piece I wrote about two months ago, found here at TAE, which argued that Pimco's net short position on Treasuries in its flagship fund was very little more than a magician performing a misleading sleight of hand on stage. It was certainly not an unconditional bet against the U.S. Treasury market, the Fed and the entire debt-dollar system of corollary bonds and derivative instruments, as some had began to claim when the position was made public. It is very well known that Gross has an all-access VIP pass to the Fed's monetary nightclub, but that level of inside connect is exactly why we should be skeptical of his public actions or statements.

[Bill Gross, Master of Monetary Psy-Ops]: "Now, the TRF is net short treasuries and many people are convinced that its short position is, in fact, nothing short of a prediction by Gross that the treasury market will soon collapse. Indeed, he seems to be at least betting that rates will increase significantly in the short-term. Perhaps that is true or perhaps he is making a bad bet, but perhaps we should also be wary of such plainly advertised convictions. After all, the insider "beltway" encompassing Wall Street and Washington has two lanes running in both directions.

...An unexpected end to QE operations will send the dollar soaring, and as mentioned before, all asset markets plunging except for the U.S. treasury market. Bill Gross may have dumped all of his treasury exposure for now, but has any other major financial institution or money manager followed suit? Has the Fed announced any plans to sell its treasury holdings back into the primary or secondary markets?

I suspect that, by that time [when the rush to Treasuries as a "safe haven" really gets underway], there would have been a significant reversal in the treasury holdings of TRF and the superficial justifications for the investment decisions of the omniscient Bill Gross. Perhaps he will continue to have minimal exposure to U.S. treasuries throughout the year, as a partial hedge to his fund's enormous cash holdings, but that certainly should not be taken as an absolute bet against the treasury market."

The record cash holdings were obviously a bet on dollar-based deflationary pressures, and the value of the entire Treasury curve really doesn't have that much distance from the value of the dollar. Indeed, it didn't take very long before Gross made another statement to lay the foundation for justifying such a reversal in his fund's position on Treasuries:

Gross: “Treasury yields are currently yielding substantially less than historical averages when compared with inflation. Perhaps the only justification for a further rally would be weak economic growth or a future recession that substantially lowered inflation and inflationary expectations.” [Bill Gross: Only a Recession Will Change Short Bets on Treasuries].

You mean the type of weak economic growth and low inflation evidenced by significantly declining or decelerating home prices, consumer spending, retail sales, consumer/business confidence, manufacturing strength and PPI/CPI levels, Mr. Gross? Well, I know the man doesn't need me to tell him this, but that kind of "justification for a further rally" is quite easy to stumble upon these days, and it turns out we already have. Add in the entirely predictable worsening sovereign debt situation across Europe, and a Treasury rally becomes all but inevitable. Perhaps its time for those short bets to change?

Of course, no self-respecting financial shark would just give up the guaranteed extra value he could gain from buying bonds at even lower prices, so Gross may have to stretch out the role of "bad cop" for a bit longer:

[Bill Gross, Master of Monetary Psy-Ops]: "(Gross is) The bad cop who beats the suspect over the head and tells him he has one last minute to confess before the entire case is blown wide open, followed by the good cop [UST/Fed] who enters the room and promises they will go easy on the suspect and recommend leniency to the judge, as long as he just tells them where all the money is hidden. Once again, it is not about enforcing the law or finding justice, it's only about using deception to drive all of that money out of its hole and into their hands."

Recently, Gross has made another stir about how further QE operations by the Fed may come in the form of "interest rate caps" on 2-3 year Treasury notes. []. The comment came over Twitter as a "tweet", so I guess we can be certain that it was strictly intended as his informal and personal opinion about monetary policy. Zero Hedge commented that this tweet was "troubling" because it also seemed to back up what David Rosenberg had predicted earlier, when he wrote that the Fed may engage in "Operation Twist 2". The initial "Operation Twist" occurred in the 1960s when the Fed began buying the long-bond and selling the short-bond to flatten the rate curve. [].

This time around, Rosenberg believes that it may only start buying up 10-year Treasury bonds on the open market to clear them at a targeted interest rate, instead of targeting a specific increase on it's balance sheet like it did with QE2. Therefore, the amount monetized (and added to the Fed's balance sheet) would ultimately depend on how much supply was being issued by the UST and how much demand existed for that supply from other investors. Rosenberg surmises that the potential upside for the Fed in capping long-term rates would greatly exceed the downside, "since just about everything that has to do with the economy is either directly or indirectly priced off the 10-year part of the curve" (such as variable mortgage rates).

There are a lot of valid points made in Rosenberg's "OT2" analysis, and I would be the first to support the argument that the Fed is focused on maintaining the integrity of the Treasury market above all else (especially the long-end). At the same time, it's hard not to notice the fact that so many people are talking about QE3 and it's arrival on the monetary scene any day now, in whatever form it may happen to take. Perhaps these people are actually over-estimating the need for the Fed to intervene this year, as deflationary pressures set in and natural investment in "safe haven" Treasuries starts to pick up some major steam.

Does it really make sense for the Fed to risk the potential downsides of a balance sheet ex(im)plosion at this stage of the financial crisis, when equity and commodity markets have barely lost any value back from QE2? That question brings us back to Bill Gross, who has also recently stated that the banks do not have excess capital waiting to buy Treasury bonds when QE2 ends, in another example of his righteous and very public indignation with the bond market. Just as a reminder, though, we are talking about THE bond market that has kept Pimco, Gross and El-Erian filthy rich for many years now.

[Bill Gross, Master of Monetary Psy-Ops]: "Besides, did anyone really think that the world's biggest bond fund was about to unconditionally give up on the world's biggest bond market (which just so happens to support every other U.S. bond market, and foreign ones as well)? Personally, I think Bill Gross is going to continue doing what he does best - speaking in half-truths and pretending like he cares about day-to-day developments in the U.S. fiscal situation, while carting his millions in compensation to undisclosed personal bank accounts around the world. That is one financial shark who cannot survive outside of the deep waters, and his next feast of flesh will be no less filling than the last."

Zero Hedge reported on June 12, after conducting a solid analysis of bank reserves data, that almost the entirety of QE2 funds to date (~$600B) has gone to European Banks, and concluded that this revelation provided support for Gross' contention that the funds would not be available for re-investment in Treasury bonds. Here is a simple graph indicating strong evidence of the Fed-European transfer and the relevant quote from the ZH report (emphasis mine):

Tyler Durden: "Recall that Bill Gross has long been asking where the cash to purchase bonds come the end of QE 2 would come from. Well, the punditry, in its parroting groupthink stupidity (validated by precisely zero actual research), immediately set forth the thesis that there is no problem: after all banks would simply reverse the process of reserve expansion and use the $750 billion in Cash that will be accumulated by the end of QE 2 on June 30 to purchase US Treasurys.

Wrong.

The above data destroys this thesis completely: since the bulk of the reserve induced bank cash has long since departed US shores and is now being used to ratably fill European bank balance sheet voids, and since US banks have benefited precisely not at all from any of the reserves generated by QE 2, there is exactly zero dry powder for the US Primary Dealers to purchase Treasurys starting July 1."

From my point of view, that conclusion makes no sense whatsoever, unless we assume that European-owned banks listed as Primary Dealers for the Fed are no longer allowed to show up at Treasury auctions. The Treasury bills and notes purchased with U.S. dollars could essentially perform the same "re-capitalization" function as the cash itself (theoretically, of course). There is really no credible reason to think that at least some of that cash won't find its way back into the Treasury market in the near future. Of course, that train of thought does not sit well with those consistently trumpeting the imminent collapse of the Treasury and USD markets, which happens to be something ZH is quite fond of doing.

Which also may be why it continues to take Bill Gross' tweets at face value, and expects more details of "Operation Twist 2" on the short-end to be revealed quite soon (perhaps when the FOMC minutes of its June 22 meeting are released). []. I still suspect that we are not going to hear anything about further monetization in the next few months, at least not from the Fed itself. A few bold statements from Gross and the speculative rumors that naturally accompany such statements should do the trick just fine. Indeed, what better way is there to support a naturally forming Treasury market rally without opening yourself up to the political and/or financial risks of actual monetization?

The latest Treasury International Capital (TIC) report shows that net inflows into Treasuries increased for the month of April, mainly due to foreign government purchases. So when can we expect all of those "private accounts" to get with the program?

"Outside of equities, official accounts, which include foreign central banks, were the biggest buyers in the month with net inflow into Treasuries of $24.4 billion vs a net outflow from private accounts of $1.0 billion.

A look at Treasury holdings by nations shows a $7.6 billion rise in mainland China, which is also a positive, to $1.15 trillion and a small decline in Japan to $906.9 billion. UK-based accounts, which are the third largest holders of US Treasuries, shows a $7.8 billion increase to $333.0 billion."

Well, with the rapidly progressing financial troubles of Europe and Japan, I suspect it will not be very long from now. In the meantime, as discussed in Bailing Out the Thimble with the Titanic, the Fed can continue to exert some influence over longer-term rates by selling insurance (IR swaps) on Treasury bonds through primary dealer banks, without any explicit monetization or anyone being the wiser (major investors). Eventually, the time will come when some form of QE3 is necessary, but that time will likely be sometime next year after asset prices have come down significantly. As for Gross, well, I still expect that financial shark to be well-positioned for the long-bond rally when it occurs, and in no small part because of his immensely public fear-mongering tactics.

The Post-Peak Rapture

2011-06-16T10:54:00.000-07:00

Photo of a "Hoverville" from Utah Rent to Own Blog

It deserves a brief mention that May 21, 2011 came as expected and went the same way, without any massive earthquakes rapidly spreading around regions of the world as the Sun cast its light on their shores. The reason it deserves a mention at all is because it highlights the difference between the true doomsayers and the realistically "pessimistic" among us. The two groups are frequently confused, especially by those casually belonging to the dedicated tribe of "hopefully apathetic consumers".

These people thrive on mindless entertainment, so it is no wonder that they make a sport out of ridiculing anyone who dares to utter the word "conspiracy" or "collapse". They have a slightly easier time suppressing their condescension when the topic of discussion is "peak this" or "peak that", but still lose interest in such topics very quickly; in fact, almost immediately. Many of them, however, are not ashamed of conversing with their family and friends about the banality of "debt". While debt is obviously a very important issue in today's world, it is chronically misunderstood by mainstream society.

Perhaps that is because it is constantly bandied about in the mainstream network media and in political press conferences like any other old issue (see abortion, gay marriage, tax policy, etc.). People have too much debt... there is way too much debt in this country... people are so irresponsible with debt... the government's debt levels are too high.. I would never think about taking on so much debt... there's no way these people are going to pay back all that debt... stop leaving so much debt for my grandchildren!

It seems that everyone is now a certified expert on the evils of sub-prime borrowing and structured finance, and they won't think twice about arguing with someone who tells them to avoid debt like the plague. It isn't very difficult to see that taking on debt is usually a destructive endeavor, especially when you have no job, customer or taxpayer security. So that's a start, but shouldn't these people also understand why the advice to avoid debt is solid, instead of simply swallowing it down like a bitter pill?

It's easy for them to ramble on about debt, but not so easy for them to see where all of that useless debt truly leads. If you start making connections between debt deflation and the Egyptian revolution, European protests or the war in Libya, you can literally start to see the hidden skepticism betrayed by their physical expressions and mannerisms. They would hesitate to actually say there is no relation, because that would be plainly foolish, so instead they avoid the issue and discuss other potential reasons why such dreadful things occur in this world.

The Egyptian people finally got tired of Mubarak's ruthless politics and corruption and revolted. I know this to be true, because I saw an interview with some of those disgruntled Egyptians on YouTube! And it was only a matter of time before Libyan rebels came out into the streets to fight for freedom and democracy... seriously, what have those people been waiting for? Oh, and EU member states have been spending money, raising wages and cutting retirement ages for years now... they are finally getting their just desserts for embracing the titillating sirens of Socialism.

There is certainly no shortage of short-sighted theories to explain all of these "isolated" problems, but heaven forbid that they are all connected to each other by some "higher force", because that starts to sound like someone is preaching the End of Days. A rational analysis of financial deterioration and collapse suddenly becomes a premonition of the occult; the nihilistic musings of people who just love to wallow in their own misery. You may as well pick up an "Eat the Bankers" sign, wear it around your neck and tell people what day and time to meet you at the Bank of England.

Obtained from No Sweat Wesbite (flyer for G20 march)

If you are brazen enough to throw the imminent issues of peak oil and climate change into the discussion , then you may as well go ahead and pencil in a date on your calendar for the Rapture to begin, so that the whole world can look and laugh. Immediately, people will begin conjuring up Hollywood images of fire and brimstone; death and destruction; utter confusion and chaos; digitally grafting those simple crowd-pleasers onto the remnants of your once complex and rational argument.

Welcome to our global society of "all or nothing", where either the world burns to the ground in a few weeks, at most, or things just muddle along in an entirely plain and mundane fashion for at least a few decades. What this binary logic fails to understand is that financial, industrial and environmental collapse will be a combined process of gradual deterioration, stabilization, slight "improvement" and rapid disintegration, coming to the surface of our consciousness in fits and starts. It will not necessarily follow that order, and will be extremely non-linear and short-term unpredictable.

The scale and practical implications of collapse will be very dependent on the specific time and place in which you exist when its effects build up, peak and decline. For the people of Egypt, economic and political collapse has been an ongoing reality that is punctuated by days where people gather in forceful uprisings, and other days where people sit in their homes or on the street and suffer in silence. They will see both signs of hope and billboards of despair during their travels down the trail of collapse.

Libyans will be mired in bloodshed and poverty for an extended period of time, but their experience will only be slightly closer to the wrath of a Doomsday Event than it has been in the past. Europeans and Americans will watch their standards of living plummet over the next 20 years, as their over-indebted and class-divided populations figure out how little "equity" they actually possess in life, within all possible meanings of that word. Many of them will find others to blame for their plight, while some may maintain their faith in human nature for much longer.

Sadly, many will also die in the process of societal collapse, but death can and will occur just as easily in the dead of a cold winter night as it can in the midst of loud explosions and gunfire. On the other hand, many others will be fortunate and/or scrappy enough to keep living through the collapse, emerging on the other side of a brave new world that is wholly unrecognizable in some parts, not much different in others and whispers of familiarity all over. They will re-form some of the economic, social and political bonds that were broken, and leave others how they were found.

Obtained from Hummingbirder Blog ("Red Cardinals")

The Post-Peak Rapture will not be emblematic of little children staring into the raging fires of Armageddon, but will be more like a bright red cardinal perched quietly on a twig, gazing out at the grayish landscape that surrounds him. There will be other animals shuffling around and the cardinal will perhaps even observe a few humans buzzing by his line of sight every now and again. The air will be just a bit more crisp and the water a bit more clean than it was pre-Rapture, as industrial activity and transportation networks would have significantly slowed down.

He will also be surrounded by human experiences of systemic violence, starvation and sadness. Many people will be forced to live in an environment entirely unfit for their material resources or temperament; one in which helping hands are hard to come by, and survival is much more pressing than satisfaction. Some of them will surely wish they had experienced the Second Coming and that the world had ended the day before. Their wishes won't come true, however, and the Sun will continue to rise in the East and set in the West for generations to come. It will remind us that there is a process of birth, growth, death and renewal that stops for neither men nor Gods of men.

Swift Creek Reservoir in Midlothian, VA

(Credit to VK for this article's title and inspiration)

The Future of Physical Gold (Part IV - Deflationary Canyons and Caves)

2011-06-13T07:52:00.000-07:00

Golden Canyon in Death Valley [Obtained from the NPS Wesbite]

After writing Part III of this series, I received an excellent comment from a reader who enjoyed the articles and summarized many of the Marxian arguments that I had made in a much more accessible form. I understand that the academic structure and technical details of this series has not made it the very easy to digest, and it helps when readers are already familiar with the basic foundations of my argument, which was the case for this specific reader.

I am going to re-post a sizable portion of that insightful reader's comment here, as a means of re-encapsulating the somewhat dry theoretical arguments of Parts I, II and III (Dialectic Foundations, The Evolution of Value and The Final Realization) in a significantly more lay reader-friendly capsule with some clear examples. I will also add a bit of my own commentary within the bold brackets, but just a bit, because the comment is quite good on its own: [Chris Martenson's Forums - The Future of Physical Gold Thread]

darbikrash: "Great series of articles Ashvin!

I think you bring a fresh perspective to the Marx/Keen/Harvey axis in coupling these theories to the discussion of gold. I had posted something congruent with these ideas on the ever popular subject of alternate currencies in another thread. You’re quite right, at the center is the struggle between labor and big business [the material dialectic of Part I], which I define as multi-nationals.

This struggle sets up a natural and quite healthy tension between the two opposing forces. When this healthy tension is displaced [it inevitably must be displaced over time], to either direction of bias [labor vs. capital], bad things happen. The convergence over the last three decades of the neo-liberal agenda, and the capture of the mainstream media by conservative business interests has resulted in the disruption of this tension away from the side of labor.

Propelled by the momentum of the burgeoning success in minimizing organized labor, business and conservative interests teamed together to usher in an ongoing era of deregulation and complimentary legislative climate that promoted favorable tax incentives for big business. These incentives were leveraged to follow with near perfect parallelism along with Marx’s prediction of capital heading to markets with unlimited low cost labor surplus [although Marx may not have envisioned the extent and longevity of economic "globalization"].

It is an irony lost on many that the perfect climate for capitalism's magnum opus was to be under the color of a totalitarian Communist regime- embodied by mainland China [under it's "false flag" of Marxism, so to speak]. This diffuse and disjointed labor base was confronted with several classical Marxist predictions, a profound loss of collective bargaining power as the threat of job outsourcing to China and Mexico stymied any meaningful protests for re-organization.

This resulted in lower wages for those lucky enough to retain jobs, and Marx’s predictions about consolidation of capital are demonstrated in the aggregation of “big box” stores [i.e. Wal-Mart] designed to lower the sustenance costs for low and middle class labor, furthering enriching the capitalist class- as predicted chapter and verse. With the cratering of the credit market [due to endogenous instability as described by Hyman Minsky and Dr. Keen - Part III), the emperor can be seen to have no clothes, and here is where it gets real interesting.

With a collapsed income, the vast majority of Americans can no longer afford the products of consumerism that capital has morphed into [the final "realization problem" - Part III], having exhausted by sheer competitive overhang the more productive and meaningful products and services, the average capitalist is now presiding over a string of yogurt parlors and useless iPod apps, analogous to unwashed children selling Chiclets gum at the Mexico border crossing.

The bourgeoisie has simply engorged itself so completely and so effectively on the middle and lower class, there is no money left for the poor fools to purchase the trinkets and trivia that the bourgeoisie needs to maintain their lifestyle, in effect tuning their gated estates into miniature Easter Islands, replete with carved stone masks and bad artwork. So this leaves us with another problem, what do the wealthy do with all the money?

It used to be a budding capitalist could re-invest and maintain an income stream though investment, real estate purchases, or entering the rentier class to sustain cash flow, all the while ignoring, contrary to free market mythology, risky entrepreneurial ventures and instead focusing precious man-hours on reducing tax liability and preservation of capital strategies... There are not simply enough attractive investment opportunities to go around, a face the music moment in a system that requires perpetual compound growth to function.

Capital abides no limits. It must expand its markets to prevent the destruction of demand. It must seek larger and larger labor markets, with lower and lower labor costs, as the coercive laws of competition wreak their havoc [continuous re-investment/realization of surplus value and debt issuance/rollover in markets]. Capital consolidates, aggregating smaller, less powerful firms unable to achieve the international reach necessary to grow into offshore markets, purchased for pennies on the dollar as the multi-nationals observe and track strangling mid-level businesses with a predator’s gaze as they asphyxiate on a contracting domestic market - leaving consumers with even fewer choices."

Obtained from Zero Hedge ["Attention Marxists: Labor's Share of National Income Drops to Lowest in History"]

Obtained from Zero Hedge ["20 Facts about US Inequality That Everyone Should Know"]

Thank you for a very poignant summary, darbikrash, with an even more poignant ending. Indeed, capital "cannot abide a limit" and so it will transform the limit into a barrier that must be temporarily overcome (by repressing labor's share of wealth/power, as depicted in the above graphs). It creates increasingly larger and stronger barriers in the process, though, since the old ones never really disappear. It is now, at this unique point in time, forced to face these insurmountable barriers and witness the inefficacy of kicking the proverbial can, as it nears the end of a shadowy and winding road in history.

With that systematic foundation established, we can discuss what this internal predicament of capitalism implies for the future roles and values of physical gold in human society. Towards the end of Part III, it was stated that a global system of Freegold was very unlikely to ever take hold. The Freegold system is essentially a modified global financial system with fiat currencies floating against the reserve asset of physical gold, which trades independently of the credit system and solely as a "store of value" for savers, rather than a medium of exchange.

Freegold's argument for gold as a limitless "store of value" in the capitalist system is based on the "marginal utility theory of value", which was discussed and debunked in Part II - The Evolution of Value. Practically, an objective approach to complex economic evolution means that Freegold is unlikely to occur because the concentration and centralization of capital is a process that irreversibly undermines economic growth in the financial capitalist system, and it cannot simply be overcome through either "easy money printing" or re-capitalization with "hard money".

Central banks can monetize all of the assets they want, both debt-based and "debt-free" (gold), but that does absolutely nothing to alleviate systemic issues of severe wealth inequality, insufficient demand and structural unemployment. Even the relatively short-lived trends towards increasing wages in China has already started to threaten the growth of its productive economy, as explained in this recent article from MarketWatch:

"How much should China worry? Actually, the worrying is already over for some enterprises: They’ve closed shop.

An executive in the city of Jiaxing at Zhejiang Youbang Integrated Ceiling Co. said his firm is among the 90% of more than 500 local integrated-ceiling enterprises that have managed to survive since wages started climbing last year. Others, though, have not.

“Since last year, there have been reports of enterprises collapsing, one after another,” the executive said. “About 10% went out of business.”[China's Factories Face Big, Labor-Driven Challenges]

Of course, much of that pressure on productive factories stems from the ongoing collapse of financial capitalism, and the pressure generated from labor and input costs is merely a pronounced effect at this stage of the system's evolution, as there are very few places left for it to expand to. The following example helps reveal the broader inadequacy of gold-based re-capitalization in the context of a specific gold revaluation process that was outlined by FOFOA, a popular Freegold advocate. He has suggested that Congress should force the U.S. Treasury (UST) to revalue their physical gold holdings to the market value (MTM), which has recently trended upwards.

Once the revaluation is complete, he suggests that the UST monetize the additional value by pledging it as collateral to the Fed in return for printed dollars. That actually sounds like a great thing to do in the ideal, and a much better idea than continuing the issuance of Treasury bonds to be monetized by the Fed, but it is practically just as useless and/or destructive when considering the systemic reality we are a part of in the global capitalist economy (this complex reality was discussed at length in Part I) (emphasis mine):

FOFOA: "That's right, it [the available value of the Treasury's gold] jumped again. From $336 billion in October, to $355 billion in January, to $370 billion in April. And guess what it is today. $390 billion! That's the amount of untapped equity the US Treasury has in its gold today. And that equity can be monetized without selling the gold, by the simple act of Congress ordering the revaluation of the gold.

...Again, I realize this doesn't solve any of the big problems, but it does buy some time... You can use it without selling it for gosh sake! And just like the old gold certificates, the new ones will NOT be redeemable by the Fed or any other banks in physical gold. They will simply be an accounting entry on the Fed balance sheet. In the future, that gold can be mobilized, if necessary, in defense of the US dollar. But only with the approval of Congress. The physical gold remains the property of the United States." [Open Letter to Ron Paul]

Assuming those calculations to be accurate (based on the UST owning 250+ million oz. of gold), there are still many flaws contained in the process. For starters, the monetization of any surplus generated from the MTM revaluation would give the Fed (private banks) a claim on the gold as collateral. It would be just like a "home equity loan" that is secured by the price appreciation of the property since it was purchased. Once that claim is established, it should be obvious that the gold is practically no longer "property of the United States" (the citizens) any more than the home equity would be (unless the asset value manages to completely offset liabilities forever).

Congress may technically have to give "approval" for the Fed to foreclose on our gold, but that would not be difficult to get, considering the fact that the politicians in Congress are realistically owned by major players in the financial industry, especially during these trying times. They are currently "foreclosing" on our retirement accounts as a means of avoiding a technical UST "default" [], so why should we expect anything different for our gold? The MTM revaluation would indeed "buy some time", but that time would only be used by financiers to extract more wealth through the all-American pyramid scheme before it implodes.

Obtained from Wall Street Journal Blog

Secondly, the revaluation would do very little to solve any of the fundamental systemic problems that Marx envisioned (as FOFOA implies), and therefore the ponzi implosion will still occur as expected. Most of the value monetized by the Treasury will not find its away to the productive economy or struggling debtors, and if, heaven forbid, the price of gold takes a large hit during a deflationary process, then the taxpayers will end up losing their gold too. Lastly, it is almost certain that this revaluation will not occur anyway, because it is simply not worth it for the elites, at least not right now.

A gold revaluation doesn't provide nearly as much benefit to them as financing deficits via Treasury bonds and letting most other asset prices naturally decline to subsequently buy them for pennies on the dollar (including gold). The only "solution" to the problem of insufficient demand has become to keep the global ponzi system of capitalism running for as long as possible. Fiscal and monetary policies of influential regions (the West, Japan, China, Russia, Brazil, etc.) will not trend towards some gold-based equilibrium through revaluation and/or dollar HI, but will merely reflect the drawn-out deterioration in financial and productive markets over time.

There is a distinct possibility that the Federal Reserve, for example, holds off on further monetization of federal or agency debt for some time, allowing asset prices (equities, commodities, real estate) to collapse further before once again re-asserting itself directly into the Treasury market to help maintain low rates (it will most likely continuously provide this support indirectly via selling insurance on bonds). By "allow", what I really mean is that the Fed will not make its final "printing" stand against the natural forces of debt deflation for some significant period of time, which could be the result of both voluntary and involuntary forces.

It is starting to become quite clear that foreign investors (private and public institutions) are now very hesitant to hold U.S. Treasuries yielding 3% over 10 years, as public deficits continue to mount, speculative price inflation has raged and the domestic economy (housing/labor market) continues to rapidly weaken. A liquidity crisis, naturally resulting from debt deflation, would conveniently scare that capital back into the Treasury market and the dollar, as the system's elite are forced to sacrifice even the appearance of economic health to hold those markets together a bit longer.

[Bailing Out the Thimble With the Titanic]: "When global equity and commodity markets begin their downward cascade in response to the ongoing debt deflation and a temporary end to quantitative easing, margin calls will indeed be coming in fast enough to make your portfolio spin. The demand by institutional investors for a "safe haven" will emerge as quickly as the daylight descends into pitch black, and it will then become clear that the intent was never to bail out the Titanic with a thimble, but the other way around.

The bond markets of Japan and Europe simply can't make the grade, and, as referenced in Jumping the Treasury Shark, there really isn't enough gold to soak up all of that capital. Instead, the U.S. dollar and Treasury bond, because of their fundamental weakness, will be the refuge of choice and design, and this will also serve to aid the Fed's Mafioso protection scheme [selling Treasury "puts"] for controlling rates."

[Welcome to Slaughterhouse-Finance]: "Stoneleigh at The Automatic Earth has repeatedly pointed out that people in such fearful environments tend to discount the future by an increasing rate, which means they care less and less about what will happen several decades, years or even months from the present time. The discount situation of financial elites is similar because they know how precarious the dollar-based financial markets are, so their concern is over whether they can corral all of the lambs into one or two places over a relatively short time period. So far, most of the evidence says that not only is it possible, but the process is already well under way."

If this process of short-term (within the next 10 years) debt-dollar deflation is likely to occur within developed economies, then one should not be surprised to see both paper and physical gold holdings liquidated along with other investment assets as investors are forced to meet their margin requirements, and average workers are forced to pay their consumer debts, bills and expenses, all of which are denominated in fiat currencies (primarily the U.S. dollar). A gold price collapse in dollars could occur just as it did in 2008, since nothing has fundamentally changed in financial markets since then, except there is more debt and less ability of governments and central banks to intervene.

We could even see several large institutions, such as central banks and governments in Asia, Europe or Japan, flood the markets with (sell) a portion of their gold holdings to temporarily relieve pressure from their dire private and public funding situations. The sheer momentum of financial capitalism will lead them to conduct their "re-capitalization" efforts through established fiat currency and debt mechanisms, rather than through an ongoing revaluation/monetization of gold by central banks such as the ECB (as argued in FOFOA's Reference Point: Gold - Update #1 and Update #2).

Darbikrash provides us with another insightful observation of why such a MTM revaluation and monetization process is practically precluded by the "coercive laws of competition" in a capitalist system, through the example of "competing" currencies, with my emphasis in bold [Chris Martenson's Forums - John Rubino Thread]

Darbikrash: "Beyond these points, competing currencies violate one of the fundamental requirements, that of universality. Note we all currently have access to competing currencies, we can use dollars, yen, francs, German marks etc. if we are so disenfranchised with any particular flavor of fiat. But then we face the onerous task of currency conversion, due to lack of universality. We must convert one currency to another, and suffer devaluation risk as well as a arbitrage fee to operate between currencies.

The notion of free market forces attempting to migrate patrons to a common system based on perceived stability or any other inherent advantages is not practical and subject to the same coercive laws of competition that any other unregulated commodity will precede. This means regulation is needed, and we come full circle back to the eventuality of regulatory capture, centralization and consolidation, and ultimately fewer choices for the consumer and just another, slightly varied distribution of the same wealth."

At this stage in "free market" capitalism, it would be hardly worth it for the financial capitalists to switch to a system of currencies competing relative to the floating value of gold, because liquidity constraints in the productive economy would only be magnified by that transition. It would be perceived as a futile endeavor to generate effective demand in a system that has already pulled demand forward to its maximum threshold. The following is a very loose analogy I discussed with regards to the "choices" of capitalist elites operating in the debt-dollar system earlier this year:

[Jumping the Treasury Shark]: "The choice they face can be analogized to the choice faced by a middle-class entrepreneur with a relatively profitable business operation in his home country. Although the businessman may be getting anxious about the market for his products and his ability to continue generating revenues and profits, he is also very experienced at operating the company in its current environment, with his current clients and his traditional methods of conducting business.

...There is no guarantee that a smaller market in another community would even be able to accommodate the scale at which he is used to operating his business, or that new clients there would be able or willing to entertain his services. Ultimately, the physical, financial and psychological costs of such a dramatic switch do not appear to be worth the trouble for the businessman. He decides to simply continue running his local business and hoping or praying for the best possible outcome.

Are the major financial players, who hold trillions of their net worth in dollar-denominated debt-assets, any different from the hypothetical businessman above? Perhaps they have a degree of more flexibility in their decision-making process and significantly more resources to help them decide, but they are also slaves to tradition and the human tendency of sticking to what they know."

Even if we assume that the Freegold transition will be (or is being) initially attempted in some regions, then, as darbikrash pointed out, the system will soon end up coercing economic actors (countries and large institutions) to re-adopt the "easy money" modes of accounting, exchanging and storing whatever limited value they have left. This coercion would be accomplished through both explicit regulations (capital controls, tax structures, etc.) as well as implicit incentives and the butterflies in the bellies of those who are initially hesitant to comply (i.e. the lingering threat of sanctions, asset confiscation or military force).

What this means in the debt deflationary phase of financial capitalism is that demand will spike for those "easy money" currencies which are still the primary means of settling debts and purchasing real goods and services, by natural design and by conscious regulation. What this implies for debt-dollar holders, then, is that they should not sell their dollars for physical gold when they reasonably expect that cash will be needed to satisfy daily/monthly expenses, such as principal and interest on debt. In addition, a smaller excess portion of savings should be held in dollars for more favorable entry points into various hard assets over the next few years, including physical gold.

The substantial monetization of debt-assets (i.e. private and public bonds), however, will also fail to alleviate fundamental economic instabilities, and its continuation will only make them worse at a later time by destroying the currency-based savings of people who have become thoroughly dependent on the debt-dollar system and were placed far away from the money spigot (less time to trade devalued currency for hard assets). That is why the global capitalist economy is in a classic "predicament", because neither deflation nor hyperinflation of debt-based currencies will "cure" the problem of insufficient aggregate demand anytime soon.

The ponzi process of creating additional credit-based claims on wealth to support the previous ones and "manage" a debt deflation will not be sustainable in the medium to long-term (my best estimate is 10-20 years). A self-reinforcing debt deflationary spiral will eventually grind economic activity to a halt somewhere within that range of time (most likely on the shorter end), and leave much of the global population under-employed, unemployed and/or struggling to survive. Local, state and federal tax revenues will dry up and governments at every scale and in most regions will be forced to borrow, print and spend more to maintain a semblance of social and political control.

That is when we can expect the real HI "tipping point" to arrive, as hyper-deflation has naturally set up a complete loss of confidence in the economic and political structures of global society, which will invariably include the global reserve currency. By that time, the destruction of the dollar will simply be the equivalent of blowing out the candles on a moldy cake that nobody dares to look at anymore, let alone eat. It will be a ceremonial burial of the deceased; the act of laying limp corpses to rest after bloody battles have already been waged for years and years on end.

The only legitimate question to ask, then, is when will HI of major fiat currencies happen and what does it imply for the value of gold in specific locations. Although this article was meant to be the final part of my series on the future of physical gold, I have decided to write an additional fifth part for the sake of constraining length and increasing clarity. Part V will delve into more detail about the prospects of HI in various regions and its implication for the roles and values of physical gold. We will discuss the fact that the "periphery" of a complex and dynamic system tends to completely give out before the center does.

Until then, we should remember that upcoming years will be characterized by debt-dollar deflation, and therefore the dollar price of gold will most likely face significant downward pressure for some time. That does not mean physical gold, however, should not be purchased as either inflation insurance or a long-term monetary store of value right now. Both of those functions are best served by physical gold (and silver to a somewhat lesser extent), and the percentage of excess currency wealth that one should devote to physical gold is entirely dependent on the individual's circumstances (amount of excess wealth, levels of debt, recurring expenses, extent of physical preparations, etc.).

Slaughter Canyon Cave [Obtained from Our Amazing Planet]

Some people will find that they cannot reasonably afford to purchase any gold, while others will find that they are well-prepared for deflation, both financially and physically (control over the "essentials of your own existence"), and now is a great time to allocate some excess wealth towards precious metals. Still others may even find that they happen to live in a specific location in which gold and/or silver could soon potentially thrive as an informal means of exchange. As debt-assets and confidence deflates, the unifying structures of economic, social and political coordination will seize up, and the subtle cracks between local environments will be magnified into canyons and caves.

The Future of Physical Gold (Part III - The Final Realization)

2011-06-06T18:09:00.000-07:00

In Part I and Part II of this series, Dialectic Foundations and The Evolution of Value, we discussed how the material conditions of human existence drove the evolution of the capitalist political economy, and how wealth came to be created through the production of "surplus value" from commodity inputs (= its objective "use-value" minus its "exchange-value"). The fruits of surplus value were increasingly concentrated among those who controlled productive assets and managed cash flows (finance) in the "wealth accumulation" circuit (M-C-M+).

However, this value cannot be realized without monetizing the exchange-values of finished products or services in a market. The realization of surplus value becomes a significant barrier to capitalist growth when workers cannot keep up pace through proportionally increasing wages in an unfriendly, time-constrained environment (only 24 hours in a day), while thousands are also displaced by technological gains and added to the "reserve labor army" of the unemployed. The latter process was heavily influenced by the discovery of fossil fuels, which allowed machinery capital to generate a higher ratio of surplus value than labor.

As the dialectic struggle between workers and capitalists progressed, certain political concessions had to be made by the latter so they could continue recycling surplus value in consumer and investment markets. For example, a minimum wage had to be set, basic working conditions had to be improved and monopolies had to be prevented or disbanded so companies within an industry could theoretically offer competitive prices and wages. The "Socialist" revolutions of Russia, Eastern Europe, Latin America and China provide extreme examples of political concessions that did little to alter the fundamental reality of workers living in a world marked by capitalist relations of production.

Many "progressive" labor policies became more prominent in the West after World War II, when aggressive "safety nets" were created and labor was allowed to organize at larger scales. This trend was largely aided by the natural dialectic pullback from the perceived failures of capitalism during the Great Depression, which ultimately only ended for the the world through a global war effort. The monetary circuit (M-C-M+) of surplus value, however, cannot function well when labor's share of power is growing, which caused the "neo-liberal revolution" of the 1970s to reverse the trend and give an unprecedented wealth advantage to the purveyors of speculative financial capital.

Obtained from Life Magazine's Website

Over the last 40 years, gains in productivity and income have continued to be distributed more unequally, as capitalists took their investments to parts of the world with much less influence of labor and, therefore, much fewer regulations of capital. This transition allowed transnational capitalists to reduce their costs and offer lower prices to consumers in their "home" country, as those developed economies oriented their growth towards finance and other related services.

It also allowed financiers to usurp the wealth extraction role of capitalist producers to a large degree, since many productive firms could only remain competitive within an industry when they were continuously financed; a distinct feature of capitalism that Marx terms "the coercive laws of competition". These laws should sound familiar, because they are the same ones that force the capitalist producer to continue re-investing portions of their accumulated wealth in the M-C-M+ circuit.

The system also relied on explicit coercive policies by the state to help organize and maintain the centralization of capital (selective private property rights, corrupt court systems, favorably complex tax structures, discriminatory regulation, etc.). For example, the state-led process of subsidizing financial markets during every recession over the last 30-40 years has helped to concentrate even more wealth, as larger institutions were subsidized for losses, continued their operations and soaked up the productive/financial assets of the smaller ones at huge discounts.

David Harvey, a sociologist and historian with a Marxist perspective, provides a very creative animated summary of how the dialectic evolution of financial capitalism has progressed over the last 40 years, in the following video [starts 5 minutes into 11 minutes - obtained from Naked Capitalism]:

DAVID HARVEY: THE CRISES OF CAPITALISM

The striking result of the wealth inequality generated over time by financial capitalism is partially captured by the following graphs, featured in Parts I and II of my article series, The Math is Different At the Top, as well as the additional data points I have included below them for purposes of this article:

U.S. Statistics

Global Statistics

The U.S., Japan and Europe are obviously the "central hubs" of global wealth, and comprised 77% of the pyramid's upper-level ($100,000-$1M) when it was released last year. [1]. In the U.S., almost 6.5M people have dropped out of the labor force since April 2008, with close to 550K of them dropping since January of this year. According to Mish Shedlock's calculations, in which 60% of these people want a job but cannot find one, the revised unemployment rate would be around 11.2% if those people were added back into the labor force. [2]. Are all of these unemployed workers receiving public revenues that keep will them happy and spending?

Well, according to the WSJ, at least 5.5M of them (nearly 30%) are not receiving any unemployment benefits. [3]. Of those jobs that do happen to exist, 41% of them are classified as "low income" positions. [4]. More than 44M Americans ore on food stamps right now, which is about a 90% increase since 2007 [5], and a study indicates that Americans are currently falling $6.6T short of what they "need" to retire. The Personal Consumption Expenditures component of Q1 2011 GDP dropped nearly 20% from last quarter, and the GDP itself came in at 1.8% (~1.2% came from "inventories"). [6].

Meanwhile, across the Atlantic, the European population is in a similar position, and countries such as Ireland, Greece, Spain, Portugal and Italy can barely afford to support their private economies through public deficits anymore. That fact is especially troubling for a country like Spain, which is financially closer to the EU's "center" than its "periphery", and whose educated youth suffer a jobless rate north of 40%. [7]. All of those Spanish "homeowners", like U.S. "homeowners", are watching their home equity, already purchased with debt repayments, rapidly evaporate while the real asset owners (large banks) are being subsidized for a large portion of their losses. [8].

Finally, Japan was in a low-growth environment for decades (~1.5%), has the highest public debt/GDP ratio in the world (225% as of 2010) and had an unemployment rate of at least 5-6% as of 2009. However, the latter number is severely under-estimated, as evidenced by the fact that the job offer/applicant ratio had declined (40% in one year), as well as average hours worked and wages paid (~3% in one year). Of course, the recent earthquake, tsunami and nuclear meltdown (ongoing) in the country has massively impacted economic growth (subtracted ~3.7%), and it will continue to be a major factor in the upcoming months and years. [9].

So how do we know that this highly unequal wealth destruction and redistribution has resulted from structural instabilities of capitalism, as Marx and Harvey argue, rather than just corrupt state policies and an ever-increasing portion of the population being "lazy" and unproductive? It is obviously not possible to know anything for certain, but the overwhelming logical and empirical evidence suggests that the latter are merely byproducts of the former. As briefly alluded to earlier, Marx's ideas about net negative demand in the entire economy, as a sum of the commodity and monetary circuits, meant that the system necessitated certain levels of finance over time.

To overcome the conundrum of net negative demand without sacrificing economic growth for too long, at least some consumers of commodities and investments (individuals, businesses, governments) must be able to issue debt and finance their consumption. Roll curtain and enter stage left the system of endogenous (internal) financial money, which has shined over decades of periodic booms and busts around the world. Although the state is obviously needed to maintain systemic finance within an economy, it is not the primary driver of credit creation.

That role is reserved for private financial institutions that "offer" credit and the firms/households that demand borrowed capital for investment and consumption. As described earlier, the concentration and centralization of wealth in the monetary circuit of capitalism makes it practically impossible over time for firms to finance productive investments and produce returns adequate to cover their debts and other expenses, while also generating a profit. To maintain a somewhat stable and growing economy, then, both the firms and households must be able to produce artificial cash flows through the use of speculative finance.

Hyman Minsky has clearly laid out how a capitalist economy with a developed financial sector is endogenously prone to speculative credit bubbles that could ultimately result in a severe debt deflation and depression, and Dr. Steve Keen has thoroughly outlined and modeled this process in his research. [Policy Forum: Household Debt, Australian Economic Review]. As investment concerns from the last credit bubble continue to linger on (there is always a previous credit crisis in financial capitalism), firms and households only take out debt to finance relatively conservative investments. Once these investments start paying off, the investors become less risk averse and more aggressive with their projections of future revenues.

The banks are more than willing to finance these aggressive investments, since they are also optimistic about productive growth and debt repayments, and they are not practically restricted by any "fractional reserve requirement". At this point, the credit bubble takes off in full force and every investor with some pocket change to spare hops on for the ride, allowing their debt to equity ratios to rapidly balloon up. People who are not typically considered investors also jump in the inviting water, as they glimpse a chance to increase discretionary consumption and grab hold of the "American Dream". Interest rates in most credit markets remain quite low for some time during the bubble, aided by the loose monetary policy of the central bank and financial "innovation".

However, since much of the borrowed capital has been used to purchase assets or asset-based securities for the sole purpose of speculating on price appreciation, as well as goods that are not "self-liquidating" (i.e. SUVs), productive cash flows begin to dry up and some investors must start selling assets to service their debt. This tipping point will lead to decelerating asset prices and higher interest rates, making it more difficult for new borrowers to enter the asset market or existing borrowers to roll over their obligations. Eventually, the "ponzi financiers" who have taken on huge leverage ratios for pure speculation will find themselves in a seller's market, with very meager cash flows from the underlying assets and very high debt servicing costs.

Graph Showing Interest Burdens Consuming Productive Capacity in Australian Economy (applies to most other OECD countries as well) [Obtained from "It's Just a Flesh Wound" on Dr. Keen's Debt Deflation Blog]

Graph Showing the Correlation between Debt, Aggregate Demand and Economic Deterioration in the Age of Speculative Financial Capitalism [Obtained from "It's Just a Flesh Wound" on Dr. Keen's Debt Deflation Blog]

As these investors and financiers become insolvent, the entire financed market begins to implode in a self-reinforcing manner, in which lower asset prices lead to less revenues, lower ability to service existing debt, business layoffs, lower consumer spending, etc. which all feed back into lower prices and less affordable debt. If the system had allowed this process of debt deflation to continue unabated in the asset markets of 2008 (mainly housing), it would have eventually taken down the entire economic and political apparatuses of countries and regions around the world. The rate of debt deflation has only decelerated over the last few years due to the unprecedented intervention of governments and central banks around the world.

The latest GFC is surely the most potent crisis that capitalism has ever had to face, and therefore it is no surprise that the capitalists have tried that much harder to overcome the debt deflationary barrier through aggressive fiscal and monetary intervention since the implosion began. However, that doesn't necessarily mean their only option is to spend multiple trillions of dollars (or the equivalent amount in foreign currency) each year and monetize every single bad debt-asset on the books of private institutions. Another option would be to simply continue doing what they are doing now, albeit at a somewhat larger scale over time.

They will continue to run record deficits, but mostly spend that money for the benefit of the "defense" industry, financial institutions, energy corporations, big agribusiness, etc. Entitlement spending is certainly a huge component of the budget, but it has become increasingly evident that most taxpayers and retirees will be forced to bear the brunt of the "austerity" plans that are designed to make them "live within their means". As the housing market dips back down hard (the Case-Shiller index of home prices has fallen ~6% since last year [10]), mortgage-backed assets will be monetized in some cases, and left to the whims of "free market" forces in others, depending on how much political influence the owners of such assets have.

The point, then, is to exercise a degree of control over the deflationary process, and make sure the losses are properly socialized among those who can least afford them. There is very little blood left to squeeze from the collective turnip of human civilization, but our financial owners will not be satisfied until they get every last drop. Whether they are successful or not in this aim is largely irrelevant for our current discussion, though, because the damage has already been done. People who used to identify themselves as part of the "first-world" and "middle-class" will watch those labels "melt into air" just as quickly as their wealth.

With these dynamics revealed, it becomes clear that physical gold as an independent monetary asset could ideally be a great receptacle for those with enough excess wealth to save, but it would be valued entirely differently by that class who desires to constantly accumulate wealth and is ever-so important to the financial capitalist system - the financial capitalist. As discussed in Part II, it may not be valued in the capitalist system at all, beyond whatever limited surplus value it provides as a commodity in the production of goods and as a speculative investment play.

The reason is because a new global and stable "wealth reserve" will not aid the system in replenishing aggregate demand and maintaining economic growth. Some may argue that inflating away currency-based debts will alleviate the present burden of insufficient demand in both consumer and investment markets, by freeing up much more money for people to spend and invest. For example, the theory of Freegold argues that a process of dollar hyperinflation ("HI") will inevitably occur soon, during which a new global financial system and gold-based monetary order will arise.

The physical gold will allegedly recapitalize the major banking sectors and governments of the world, and that will then allow businesses and consumers to continue financing productive investments in their regional or national currencies. [Deflation or Hyperinflation?]. It is presumed that economic growth will once again be left unencumbered after a relatively short period of major monetary transformation. Even assuming this process actually did occur, we must still ask ourselves how it would realistically affect the dynamics of Marx's "realization problem".

The financial capitalists unconditionally require an expanding circuit of capital, in which monetary capital produces greater exchange-values over time (remember, the use-value of money = its ability to produce future exchange-value), and a portion of such values are continuously monetized for profits. The value of gold under the Freegold system would be inherently constrained, since it is meant to sit still and absorb some excess currency wealth, while the majority of people in the world still find themselves with tiny scraps of wealth to save, spend or invest in the first place.

The latter fact is especially true when we consider that most consumers in the developed world hold a large portion of their savings in fiat currency-based accounts. Indeed, Freegold advocates make it quite clear that HI will act as a rapid means of socializing the investment losses on the books of a few large institutions, and the super-wealthy individuals that own/manage them, throughout the productive economy via currency devaluation. If you happen to be saving most of your excess currency wealth in physical gold before HI really sets in, then perhaps you will be able to at least preserve that wealth, but how many people can we reasonably expect to be positioned in such a way?

ME: "What are the chances that the majority of people who find themselves invested in U.S. government bonds and the dollar will get anything close to a return on their investment over 10, 20 or 30 years? The answer to that is probably a massively negative percentage, because the psychological pain of holding on for that long will be even worse than the total wipe out itself. However, the herd typically doesn't figure out how close they were to the edge of the cliff until after they are tumbling down the other side." [Welcome to Slaughterhouse-Finance]

In addition, the prospect of "net producers" placing significant excess wealth in gold would leave even fewer profits for the capitalist's to realize from monetizing their goods and services in consumer and investment markets, which means fewer profits for the financiers who now control production. The aggregate level of consumer purchasing power at a given time would necessarily drop, because "fast" money would be traded to the capitalist class for dormant gold. For the above structural reasons, it is highly unlikely that the economic system of Freegold ever takes hold at a scale even close to that which its advocates envision.

That, in turn, means that investors or "savers" should not expect their current gold holdings to skyrocket in value to the equivalent of at least $55,000 in purchasing power anytime soon (as suggested in FOFOA's The Value of Gold). That prediction is based on a flawed conception of value in the capitalist economy, as explained in Part II - The Evolution of Value, and therefore fails to account for the "realization problem". Freegold views the future dollar HI event and the resulting destruction of the dollar's role as the global reserve asset as a wealth transfer from "easy money" debtors to "hard money" savers (those who place excess productive capacity into physical gold).

Perhaps this process is an accurate description, at least to some significant extent, but that means the debtors are necessarily defined as anyone who does not have a majority of his/her savings in physical gold. That definition, in turn, encompasses almost every worker, investor and "saver" in the developed world and many in emerging economies as well. It really only excludes, of course, the major institutions and super-wealthy individuals (and their political apparatuses) who control the means of production, sell toxic debt-assets to taxpayers at face-value and had previously extracted massive amounts of energy, resources and hard capital from the rest of the world.

If these people are almost instantly given 10-20x the purchasing power they already receive from their current physical gold holdings, then they will truly be the "demand of last resort" for consumption and investment in the markets of our global capitalist economy. That is wholly incompatible with the capitalist model of economic growth, which relies on the constant expansion of Marx's monetary and commodity circuits, in which surplus value is created and realized, respectively. It should also be noted that the natural processes of demographic shifts, climate change and energy/resource depletion (peak oil) will severely constrain productive income gains, making realization of value even more difficult.

Therefore, it is very unlikely that the current crises of capitalism will lead to a new reserve system based on physical gold, and is instead likely that they will lead to systemic collapse of financial and productive markets around the world. In the final part of this series, Part IV, we will discuss what this process of collapse really means for physical gold as a means of preserving wealth over time. The discussion will focus solely on financial collapse, rather than the demographic/environmental issues mentioned above, but the latter should obviously not be ignored when considering various means of preserving "wealth".

With regards to systemic finance, the realistic likelihoods of short-term deflation and HI are obviously very important considerations, as well as the specific properties of locations in which financial deterioration occurs. These properties may belong to anything from one's region or country to one's state, local community and household. As the trend towards centralization and concentration of capital grinds to a halt, our perceptions of a unified and "small" global society will also give way, as we are forced to observe the simple and enormous world existing right in front of our eyes and at our feet.

"All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses, his real conditions of life, and his relations with his kind."
-Karl Marx and Frederich Engels, The Communist Manifesto

The Future of Physical Gold (Part II - The Evolution of Value)

2011-05-31T11:05:00.000-07:00

"Fort Knox Gold Mine" - Taken by Kevin Fitzgerrel [website]

Part I of this series, The Future of Physical Gold - Dialectic Foundations, discussed how the concept of money had been fundamentally transformed by the material (rather than ideological) forces of the financial capitalist system. It was no longer just a convenient medium of exchange, unit of account, and store of value, but also became a social and political means of systemic oppression. The leverage embodied in financial instruments (by far the largest component of money in the global economy) imprisoned the very definitions of economic, social and political activity within a strict mode of operation.

The culture imperative of the developed world was financed consumption and apathy, while its political imperative was the concentration of wealth and the appeasement of those being continuously plundered. All of those lacking control of productive assets, including both "debtors" and "savers", found it impossible to maintain their wealth, purchasing power and/or service their debts over time. These people were all "workers" who sold their productive capacity in the marketplace, and received increasingly less value for it over time.

Superficial concessions were frequently granted by the controlling class (i.e. minimum wages, union benefits, bankruptcy process, welfare, wage-arbitraged prices, etc.) and their propaganda was planted deeply in the minds of middle-class dreamers, but that has not stopped the middle-class from relentlessly fading to black. It then becomes clear that any other global monetary system, including "Freegold" (a synthesis of physical gold-based money and debt-based currencies; briefly described in Part I), would serve as a lie for the masses.

It would be another means of convincing people that they actually have not been plundered (it's all in your imagination), and that they can continue their time-honored tradition of financed consumption, albeit with some "fail-safe" mechanisms built into the system that would prevent excessive financial speculation and protect those who wish to save (Glass-Steagall, anyone?). Take a look at this quote from Jean-Claude Juncker and its accompanying commentary (excerpted from the article Trojan Lies on The Automatic Earth):

"When it becomes serious, you have to lie", Juncker, who as the chairman of the regular meetings of eurozone finance ministers is one of the currency union's key spokesmen, said in recent remarks.

Even confirming the existence of discussions on explosive financial issues can quickly turn them into self-fulfilling prophecies and have serious consequences for a country's economy by driving up borrowing costs. "If you are pre-indicating possible decisions, you are fueling speculation on the financial markets, throwing into misery mainly ordinary people whom we are trying to safeguard from this," Juncker said. [1].

Basically, Juncker is telling us that broad-based lies are necessary in modern society to whitewash the underlying reality, because, without them, the underlying reality would become much worse, much more quickly. However, anyone who has attempted to orchestrate a complicated series of lies knows that it is not sustainable and will only make the underlying situation psychologically more difficult to bear, once the lies become plainly contradictory and/or ridiculous.

Indeed, lies must be continuously advertised and sold like any other product, and the propaganda industry is struggling to turn a profit these days. The reason is because human ideas cannot fundamentally change the underlying material reality of the human condition, and now, despite our propensity to tell ourselves lies, the reality has become much too plain and stark to consciously ignore. Instead, the deteriorating material reality will drive our ideas and our willingness to accept the ideas of others, just as the Marxian dialectic would dictate.

The fundamental problem in the material sphere of financial capitalism is a lack of aggregate (effective) demand in the developed consumer/investment markets of the global economy. Annual aggregate demand in the private economy can be simply represented as (nominal GDP + change in private credit). GDP obviously incorporates private consumption, investment and non-transfer public expenditures (i.e. social security, welfare benefits, etc. are not counted), while also adding trade surpluses and subtracting trade deficits. [2].

In the capitalist system, then, public credit (deficit) growth and personal savings (non-investment) would act as the "demand of last resort". The latter typically sits very still in a recession until it is finally forced to come out for the purchase of necessities and/or to avoid an outright collapse in purchasing power. To understand why private consumption, investment, savings and private/public credit growth have all begun to stagnate or substantially decline in the developed world, and why they will soon follow suit in "emerging markets", we must start with a basic history of "wealth" creation in a capitalist system.

First, we should discuss the meaning and sources of "value" in this system as a foundation for why the private demand for commodities and financial investments (the availability of excess wealth) is constrained over time. Karl Marx realized that a commodity's value had evolved from what it once was in the relatively simple barter societies of our past, as its "exchange-value" became distinct from its "use-value" and allowed for the production of "surplus value". The following excerpt is taken from Debunking Economics, a book written by the notable Australian economist, Dr. Steve Keen [emphasis mine]:

Marx: "The exchange of commodities, therefore, first begins on the boundaries of such communities, at their points of contact with other similar communities, or with members of the latter... The constant repetition of exchange makes it a normal social act. In the course of time, therefore, some portion at least of the products of labour must be produced with a special view to exchange. From that moment the distinction becomes firmly established between the utility of an object for the purposes of consumption, and its utility for the purposes of exchange. Its use-value becomes distinguished from its exchange-value." [DE, Chapter 13]

Obtained from Living in the Spiral

Marx basically gives us a brief description of the transition from a simple barter economy to a production-based economy. In the initial stages of barter at the "boundaries" of communities, a commodity's ratio of exchange with another commodity is a "matter of chance" and may be influenced by their perceived utility in consumption. As the benefits from barter accrue over time, however, a repetitive pattern of trading develops and leads to the production of certain commodities with the sole purpose of using them in trade, rather than consuming them.

It is at this time when the commodity's exchange-value is separated out from its use-value, with the former being the sole determinant of its value in trade. Both use-value and exchange-value can be thought of as objectively determined values, since the former is the utility of a commodity performing a specific function, and the latter is the sum of the use-values consumed in its production. Dr. Keen clarifies the commodity dialectic with the use of labor as an example, in his research paper entitled, A Marx for Post Keynesians:

Keen: "To apply his Commodity Axioms to labor-power and the origin of surplus value, Marx had first to identify labor-power's exchange-value and use-value. He argued that the exchange-value of labor-power was its value, the means of subsistence, which could be represented by a bundle of commodities, while its use-value was labor, the ability to perform work. The former identification was hardly novel; however, the latter was revolutionary, in two senses. [AMFPK, pg. 8]."

Stopping here for a moment, it is important to understand why increased systemic complexity fundamentally changes and constrains the role of commodities, including those claiming to be "wealth reserves", in the political economy. Dr. Keen talks about the implications of systemic complexity a bit in terms of "representative agent" models in mainstream macroeconomics [emphasis mine]:

Keen: "I have more to say about this in Chapter 12, but here it is worth noting that representative agent macroeconomics amounts to assuming that the economy consists of a single individual producing and consuming a single commodity. However complex might be the reasoning used by such aficionados as Paul Krugman, the realm of applicability of this theory is thus that of Robinson Crusoe, living off coconuts before the arrival of Man Friday. It beggars belief that anyone who truly knew where this notion had come from would attempt to apply it to something as complex as a modern, multi-commodity, multi-million person economy." [DE, Ch. 9]

FOFOA, the most popular Freegold advocate still blogging, uses two "representative agents" from a model "game" to illustrate why physical gold will be"tapped" by natural market forces to serve the role of global wealth reserve over any other monetary asset, since it is a natural "focal point" for investors to place their excess currency wealth in upcoming years. Although this example may not necessarily entail the same flawed assumption used by Neo-classical economists to model aggregate market behavior, it follows a very similar logic [my emphasis].

FOFOA: "Consider a simple example: two people unable to communicate with each other are each shown a panel of four squares and asked to select one; if and only if they both select the same one, they will each receive a prize. Three of the squares are blue and one is red. Assuming they each know nothing about the other player, but that they each do want to win the prize, then they will, reasonably, both choose the red square...

...is why money not only can be split into separate units for separate roles, one as the store of value and the other to be used as a medium of exchange and unit of account, but why it absolutely must and WILL split". [Focal Point: Gold].

It should be clear that a simple "game" with simple "rules", such as the square game above, cannot provide insights into the monetary decisions of actors operating within complex financial markets, where irrational and non-linear behavior is THE dominant and "emergent property". Getting back to Marx's commodity dialectic, we can proceed to explore the two "revolutionary" insights he had with regards to use-value (in the context of labor):

Keen: "Firstly, in contrast to Smith or Ricardo, Marx gave use-value an active role in political economy. Secondly, he asserted that, under specific circumstances, use-value could be quantitative--though what was being quantified was not abstract satisfaction, as in neoclassical analysis, but the objective function of the commodity in question."

"...Thus, in the case of this commodity [labor], use-value and exchange-value could both be measured in the terms of the exchange-value of commodities. He then applied axiom 4 above--that the use-value of a given commodity plays no role in determining its exchange-value--to conclude that these two value magnitudes would be different, and that this difference was the source of surplus value." [AMFPK, pg. 8]

So the worker's ability to labor ("labor-power") is sold in the labor market for its exchange-value (= "subsistence wage"), but it is bought by the employer for its much higher use-value (= sum of the exchange-values of the commodities it produced). For example, the employer might pay a worker $6/hour for his ability to produce widgets over 10 hours, would only need 5 hours of widget production to justify the $60 subsistence wage and would therefore generate surplus value from the widgets produced during the extra 5 hours. Labor-power, therefore, is a unique commodity because its use-value can be measured in terms of exchange-values in certain circumstances.

What Marx eventually failed to incorporate into his theory of value was only the fact that all commodity inputs to production possessed a similar inequality of use and exchange-values. There is only one major modification needed for this general rule, and that is for financed-assets which provide returns (bonds, shares, currency deposits, land, etc.). These assets derive value directly from their use-value, which happens to be the expectation of their future exchange-value. This crucial distinction sets the stage for Minsky's "Financial Instability Hypothesis", discussed in Part III, and it is fully consistent with Marx's commodity dialectic approach to value.

Before moving on, it should be pointed out that physical gold as a monetary asset in the Freegold system does not fall under the category of being a "non-commodity", or a good that is not mass-produced for exchange and/or use in the production process (i.e. rare statutes, antiques, etc.). Dr. Keen proposes that a final axiom is needed to encompass these "non-commodity" goods, as well those that temporarily exist in the netherworld of being neither a commodity nor a non-commodity (i.e. brand new technological goods):

Keen: "Products which are not part of the system of reproduction of products are not truly commodities, and hence not fully bound by the dialectic of commodities. [Axiom]

...This suggests that the products of technological development--which will in time become commodities as they are integrated into the system of reproduction--are liable to have their initial prices set by forces in addition to their costs of production. Perceived utility is one such additional force...

...the price of a newly developed product is likely to be above its exchange-value, but to be driven towards this over time by the forces of competition and commodification." [AMFPK, pg. 14-15]

Since Freegold envisions physical gold as being the global reserve asset, and certainly not any sort of technological good, it is fair to say that gold will be "commodity" within the industrial capitalist system of exchange subject to Marx's dialectic. Indeed, as argued in Part I, gold would find it impossibly difficult to trade completely independent of this broader system, and most likely the financial system as well. Therefore, we can return to evaluating the process of wealth creation and preservation under the Freegold system when gold is subject to the commodity dialectic.

Freegold's flawed conception of value stems from Austrian economics, as clearly reflected in FOFOA's piece, The Value of Gold. Although he correctly states that Karl Marx's "Labor Theory of Value" is flawed, he goes on to accept the even more flawed "Marginal Utility Theory of Value" (MTV) advocated by the "Neo-Classical" and "Austrian" schools of thought. The perspective informing the latter is captured well in Principle of Economics, written by the founder of Austrian economic theory, Carl Menger [emphasis mine]:

Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labor is completely irrelevant for its value. In general, no one in practical life asks for the history of the origin of a good in estimating its value, but considers solely the services that the good will render him and which he would have to forgo if he did not have it at his command...

Following this logic, FOFOA concludes that the marginal utility of purchasing additional physical gold units will not diminish, because its utility in preserving a given level of purchasing power will always remain the same, as long it remains a monetary asset that is independent of the official currency. [3]. However, Menger's subjective and simple conception of utility does not translate to the complex political economy of capitalism, where the value of a monetary asset is determined by either its exchange-value on a market or its objective use in producing future exchange-values.

Obtained from AMFPK by Dr. Steve Keen

This comprehensive view of commodity dialectics casts an even larger dispersion on Menger and Freegold's MTV foundation, which only considers one circuit of our complex political economy, and that too in a subjective manner. In this circuit, the end goal of producing commodities is to sell them into a market for a profit and use all of that profit to consume more commodities (C-M-C), without any creation of surplus value in the process. Therefore, the utility of monetary capital in this circuit, whether mediums of exchange or "pure" wealth reserves, is solely a subjective expression of commodities desired, and absolutely determines its value in the capitalist system [emphasis mine]:

FOFOA: "...let's take a quick look at the marginal utility of gold as a store of value...

...Now say he buys one more $55,000 gold eagle coin, and then another, and another, and so on until all his cash is gone. In the end he will have 26 gold coins. And here's the question: Will that 26th gold coin purchase provide the same utility or diminished (less) utility than the first? Remember, the only utility of gold coins is that they retain their value for thousands of years. That's all they do. And hoarding them doesn't interfere with any other economic activity, at least not when they are not "official money." [The Value of Gold]

As Marx articulated, however, a more essential circuit must (and does) exist in the capitalist economy, where capitalists use monetary capital to purchase commodity inputs (labor, raw materials) with the end goal of creating and realizing surplus value. The following excerpts clarify the capitalist's "wealth accumulation circuit" (M-C-M+) and are contained within Keen's paper debunking Say's Law, entitled Nudge Nudge, Wink Wink, Say No More, and also Debunking Economics:

Marx: "The expansion of value, which is the objective basis or main-spring of the circulation M-C-M, becomes his [the capitalist's] subjective aim, and it is only in so far as the appropriation of ever more and more wealth in the abstract becomes the sole motive of his operations, that he functions as a capitalist... Use-values must therefore never be looked upon as the real aim of the capitalist. Neither must the profit on any single transaction. The restless never-ending process of profit making alone is what he aims at." (NNWW, pg. 4)

Keen: "Since Say’s Law and Walras’ Law are in fact founded upon the hypothesised state of mind of each market participant at one instant in time, and since at any instant in time we can presume that a capitalist will desire to accumulate, then the very starting point of Say’s/Walras’ Law is invalid. In a capitalist economy, the sum of the intended excess demands at any one point in time will be negative, not zero. Marx’s circuit thus more accurately states the intention of capitalists by its focus on the growth in wealth over time, than does Walras’ Law’s dynamically irrelevant and factually incorrect instantaneous static snapshot." (DE, Ch. 9)

As mentioned before, and contrary to what many official "Marxists" and "Neo-Classical" critics say, Marx did not believe a commodity's use-value had no role to play in the creation of surplus value within the M-C-M+ circuit. The following excerpts from Dr Keen's paper, entitled Use-Vale, Exchange-Value and the Demise of Marx's Labor Theory of Value, further explain Marx's initial analysis of surplus value in the industrial capitalist economy [emphasis mine]:

Marx: "We are, therefore, forced to the conclusion that the change originates in the use-value, as such, of the commodity, i.e. its consumption. In order to be able to extract value from the consumption of a commodity, our friend, Moneybags, must be so lucky as to find, within the sphere of circulation, in the market, a commodity, whose use value possesses the peculiar property of being a source of value." (pg. 5)

Keen: "Marx specifically referred to the use-value of a machine being greater than its [exchange] value, and in contrast to his discussion of depreciation in Capital, dissociated the productivity of a machine from its depreciation. The use-value of a machine will differ from its exchange-value and, as with labor, we can assume that its use-value will be "significantly greater than its value." In practice this will mean that the amount it loses in depreciation will be significantly less than the amount it contributes to the value of output, and it will, with labor, be a source of surplus value." (pg. 7)

After that lengthy, yet "valuable" bedrock of wealth creation, we can return to the problem of insufficient aggregate demand in a capitalist system. In Part III, we will discuss how the creation of surplus value via production in the M-C-M+ (wealth accumulation/concentration) circuit implicates an inherent problem for the system, since wealth is only realized from this value when it is monetized in a market. Over-supply of commodities in the production process on a consistent basis leads to negative excess demand in the entire economic system, as a sum of the C-M-C and M-C-M+ circuits (a clear violation of Say's "Law").

Some of the "real-world" economic results of this process will also be discussed, and then the financial dynamics of capitalism, as articulated by Hyman Minsky and Dr. Keen, can be explored to explain why a process of hyperinflation, if and when it finally occurs, will still not "cure" the "realization problem". Finally, we can begin to talk concretely about how all of these trends will impact the future of physical gold in the political economies of human civilization. Far from being an irrelevant monetary asset, physical gold will have a very important role in certain parts of the world and at certain scales of economic activity.

However, the "investment opportunities" implicated by the theory of Freegold will be revealed as exaggerated and misleading. Until then, I ask that readers carefully consider the Marxian approach to dialectic evolution and economic value in a capitalist system. An accurate understanding of Marx, unique to even many of his "followers", provides an invaluable perspective from which to view the global economy's fundamental nature and path at this unique point in history. The material implications of this perspective are quite bleak, but, nevertheless, we will soon begin to trust in those striking, yet simple portraits that have been etched deeply into our honest minds.

Our account of this science will be adequate if it achieves such clarity as the subject-matter allows; for the same degree of precision is not to be expected in all discussions, any more than in all products of handicraft. - Aristotle, Nicomachean Ethics

The Future of Physical Gold (Part I - Dialectic Foundations)

2011-05-19T08:51:00.000-07:00

The element Au consists of 118 neutrons, 79 protons and 79 electrons. Many particle physicists would now tell you that electrons do not always act as tiny little points of matter in space-time, but rather can consist of superimposed wave-functions that have a very large, if not infinite, number of possible values. If this premise is true, then how could we get from these rather ephemeral electrons to a solid atom or an element that exists at much larger scales, such as a flake of gold?

The answer is most likely the process of "quantum decoherence", in which superimposed quantum states separate into discrete units of electric charge, mass and spin (angular momentum). This process is overwhelmingly supported by experimental evidence and explains why a "single" electron can pass through two separated slits at the same time, but will only pass through one when it interacts with a photon from a measuring device. [1]. Physicists may disagree on the fundamental significance of these results, but they cannot deny the results themselves.

I believe that a convenient (and generalized) theoretical framework for thinking about the process is complexity theory, to the extent that quantum decoherence leads to increased systemic complexity in the resulting particle and the particle displays emergent properties. When the superimposed particle-states interact with an external environment, its wave-functions "collapse" and it takes on properties of mass, charge and momentum that simply did not exist before.

The stable atom containing these electrons can also be thought of as a complex system with internal structure, a relatively high degree of order and inter-dependent parts. It too has emergent properties, because it exhibits fundamental traits that do not exist at the level of its individual constituents. To better understand the process, imagine that you are floating above an Ocean near the coastline and looking down:

From this perspective, the Ocean appears to be a coherent body of water without any series of waves that exhibits discrete properties (amplitude, wavelength, frequency). Alternatively, you can imagine that you have come down to Earth, so to speak, and are now standing on the beach looking out into the water:

Now, we clearly see multiple waves with discrete properties moving towards us and breaking as they approach the shoreline. The first overhead perspective would represent a particle existing in coherent quantum states, while the second represents a particle that has interacted with its environment and has lost that coherence. Both of these perspectives are fundamental representations of reality, and neither is more "correct" than the other. They do, however, reflect a reality that has fundamentally changed from one perspective (level of complexity) to another.

The point of the above theoretical musings is to help the reader begin thinking about what it means for something to have a "fundamental nature", and how that nature can change as systemic complexity increases. Specifically, with regards to gold as a "monetary" asset, we can ask ourselves what its fundamental role has become in our highly inter-dependent systems of societal organization, and what it will ultimately be.

(The descriptions of FOFOA's views below are my personal interpretations and have not been confirmed as either being accurate or inaccurate by FOFOA)

One of the most insightful and popular physical gold advocates is a blogger called Friend of a Friend of Another ("FOFOA"), and he frequently writes about what he believes to be gold's unique role in the modern global economy. He argues that physical gold, unlike fiat currency assets, has traditionally been and will continue to be the most stable "store of wealth" used by nations, central banks, many large corporate institutions and wealthy individuals around the world.

The nominal dollar value of debt-backed assets held by these "giants" currently outstrips that of their gold-related assets by a large margin, but he argues that the dollar is merely a liquid means of exchange and temporary store of value for the major players. They are hoarding gold and patiently waiting for the dollar to "find" its true "store value" in relation to physical gold, at the bottom of a very deep monetary well.

In essence, they will outrun the "haircuts" on debt-assets by converting them into gold and other hard assets before any of the smaller players even know what hit them [Another, FOA on Hyperinflation] [emphasis mine]:

"Human nature has followed this path for thousands of years. You know the old joke about outrunning the bear? Well, these lenders will influence our financial policy as such. They will try to get their debt securities liquefied first, spend the fiat and in this process outrun you and I. Leaving anyone they can beat to the mercy of the hyperinflation bear eating their remaining fiat assets…

Allowing the US to destroy our own system and offering an avenue of escape for investors worldwide is a master political play. Why dump your dollar reserves when such an action would make you the bad guy? Buy some gold quietly, yes. But, better to let your dollars dissolve and have your assets transformed by a dollar / physical gold devaluation."

The dollar hyper-inflationary process (in terms of price) could take off tomorrow or a few years from now, but, regardless of the timing, the only assured way to preserve one's excess investment wealth is by exchanging dollar-based assets for physical gold from here on out. A fundamental problem begins for this argument, in my opinion, when it attempts to predict the long-term destiny of physical gold through the lens of isolated monetary and political systems.

Isolated to the extent that they are perceived as being both able and willing to unleash a dollar devaluation "bear" on the current financial system, allowing a new global paradigm to inevitably rise in its wake. In our global society, however, we (and FOFOA) should be talking about how the role of gold will be influenced not only by monetary, currency and political systems in isolation, but also by these systems as naturally dependent components of our complex economic and financial systems; as discrete waves in the high seas of industry and credit.

Readers of this article who adhere to the concept of "Freegold" may notice that the theoretical distinctions between it and what I lay out are very subtle. That is certainly true, but subtle differences in such a broad context can spawn vastly different implications for global society's future path. Are we really watching the monetary, social and political systems around the world siege the global financial system and take back a large portion of the value lost through years of imaginary capital creation and wealth concentration? Or are we simply watching them respond in kind as mechanical parts of an unholy and inseparable union?

Can the atom let its electrons go free and reclaim their place in the coherent fabric of the Universe, or will they first be forced to float down to lower energy orbitals, a bit closer to the bright white sands of the shore? Abstract theories and philosophies help us place specific developments into a much broader context, as long as they are initially built on a block of solid foundation. FOFOA writes the following critique of Karl Marx, in his article The Debtors and the Savers [emphasis mine]:

Today we have many fine, intelligent and exacting analysts all looking at the same economic data and coming up with vastly different analyses of the present global financial crisis. What sets them all apart from each other is not intelligence, or math skills, or even popularity. What sets them apart is the foundational premises on which they operate.

And a false premise can skew a brilliant analysis 180 degrees in the wrong direction. Few analysts fully disclose their premises. But Karl Marx did, and in this we can find the one, key flaw that sent his analysis off in a disastrous direction.

Marx writes, "The history of all hitherto existing society is the history of class struggle." He got this part right! What he got wrong was his delineation of the classes.

I couldn't agree more with the bolded statements above, but, naturally, I disagree with what immediately follows. FOFOA goes on to describe Marx's premise - the capitalist system of production contains a constant dialectical struggle between the working class (labor) and the capitalist class (owners of productive capital) - but argues that, instead, the struggle is actually between the debtors (net consumers) and the savers (net producers). It is claimed that the debtors are essentially oppressing the savers by spending beyond their means, devaluing their debt (currency) via printing and diluting the value of the savings in the system.

However, as I plan to demonstrate in further detail, it is FOFOA who argues from the false premise that debtors occupy a distinct class in society apart from savers, and that the former are merely consuming more than they contribute to productive society. That premise naturally leads him to conclude that the next phase of economic evolution will involve a global monetary system that essentially rids the savers of debtor oppression, by containing a branch that functions and derives value independent of the paper financial system. Through this logic, he spins himself around to have his back conveniently turned on Marx.

The latter was, in fact, technically correct with his theory of dialectical materialism and his class delineations, but he did not envision the extent to which large financiers would absorb the functions of the capitalist producer class. He also failed to see how debtors would come to comprise such a large share of the working class, right alongside the savers. We have ended up with a global class struggle between financial owners of capital, on the one hand, and debtors (including governments/taxpayers) and savers on the other (both of them being "workers").

The defaulting debtors are not necessarily "net consumers" over time, but many times receive less and less compensation for their productive efforts. The subtle distinction leading to this class delineation instead of the debtors/savers opposition is the specific dialectic involved. FOFOA's dialectic stems from the Hegelian tradition of two opposing ideological forces (i.e. “easy money” debtors vs. “hard money” savers) synthesizing to create a new paradigm. Essentially, the cart is being put well before the horse, which is a fact that Marx (and Engels) recognized when they developed the theory of dialectical materialism and turned Hegel on his head [].

"My dialectic method is not only different from the Hegelian, but is its direct opposite. To Hegel, the life-process of the human brain, i.e. the process of thinking, which, under the name of ‘the Idea’, he even transforms into an independent subject, is the demiurgos of the real world, and the real world is only the external, phenomenal form of ‘the Idea’. With me, on the contrary, the ideal is nothing else than the material world reflected by the human mind, and translated into forms of thought." [Marx]

The material environment of human existence is what underlies the development of socioeconomic structures in society and their inherent class delineations, and these opposing forces (“oppressor” vs. “oppressed”) are what drive the political economy. For example, the industrial (energy) revolution is what really allowed the capitalist system of production to root itself around the world, and this economic system necessarily created two general classes in society – the owners of the means of production (capitalist) and those who are forced to sell their labor to the capitalist (worker).

When discussing the scopes of these very abstract and fluid systems, it helps to have some kind of visual representation, simple and crude as it may be. The following is a snapshot of the critical systems influencing Marx's material dialectic at this point in time:

Blue to White Color Progression = Height From Cone's Base ( Complexity up)
Connected Red Diamonds = Sociopolitical Systems Derived From the Financial Capitalist System

The currency system is the smallest and most specialized part of the cone, as it only encompasses mediums of exchange and stores of wealth that have been officially sanctioned by national or transnational political institutions. Our monetary system is larger because it includes the currency cone plus any tangible or intangible asset that can act as a medium of exchange and a store of wealth, regardless of whether it is officially recognized by a political body (as long as it is generally recognized by prevailing social norms in a given region).

Money is actually a less abstract (complex) concept than currency, as it can reflect the relative value of tradable goods more directly (in fact, it may be the goods themselves). All forms of currency (i.e. U.S. dollar) are money, but not all forms of money are currencies. Physical gold can be thought of as money, since it is a widely accepted means for members of a society to store their savings (net income minus non-investment consumption). It can also be used as an informal medium of exchange in many parts of the world, but it may not necessarily be accepted by large merchants in the developed world and certainly not governments collecting taxes.

FOFOA claims that, since physical gold now only acts as a global money reserve rather than a currency reserve (or a backing of currency), it is an ideal store of value for savers. That is arguably true because its "value" does not have to be diluted by expanding the currency supply for the purpose of providing "liquidity", easing debt burdens and stimulating growth. In that sense, physical gold could be a repository for saving excess wealth without stifling economic activity, and currencies used in the global monetary system as mediums of exchange can independently float against its price on the market, as the global reserve asset.

The "reference point" of gold would provide a natural carrot and stick mechanism, in which political or financial institutions that use their currency "printing presses" with relative control are rewarded with an influx of gold capital, while those that use them with reckless abandon are punished by gold capital flight to another currency region. Is such a mechanism really capable of being implemented, though, or are we projecting an ideal monetary system (a coherency) onto our global society that is very unlikely to occur, and fundamentally impossible to predict with certainty?

The following passages from Reference Point Revolution help illuminate the flaws in the logic of the Freegold paradigm [emphasis mine]:

"But right now, for perhaps the first time in history, individuals can join central bankers and the true Giants of the world by participating in the ultimate hedge fund. One that, like modern hedge funds, focuses on the hedge itself as the key investment with the most leverage, with the expectation of life-changing returns. And the main differences between this and traditional hedge funds are 1) much less risk, and 2) it is open to ALL individuals, including you!" [FOFOA]

"If you are following closely, now, we can begin to see how easy it is for the concepts of modern money to convolute our value and understanding of gold. It is here that the thought of a free market in physical was formed. Using the relationship of a free physical market in gold, we will be able to relate gold values to millions to goods and services that are currency traded the world over. Instead of having governments control gold's value to gauge currency creation; world opinion will be free to associate the values of barter gold against barter currency. In this will be born a free money concept in the minds of men and governments." [FOA]

The Freegold perspective tends to view the global monetary system as a coherent body of water, in which monetary waves can take on a nearly infinite number of forms or functions as the oppositional ideologies of humans naturally progress. That perspective does not adequately reflect the complex, inter-dependent society that has evolved over the last few hundred years, beginning with the industrialization of national economies and ending with the global financialization of nearly all economic activity. During that time, the monetary waves became increasingly discrete, diverse and dependent as they traveled towards the shores of their destiny.

The properties (roles/values) of these waves have necessarily been constrained by the vast financial body of water in which they were formed, and their potential wavelengths must be measured as a function of financial dynamics. The global financial system is characterized by digital instruments that attach legal claims onto the productive assets of others. These assets may be farmland, human labor, machinery, the actual production process, supply lines, currency, money or any number of things, but such assets do not solely imbue the instruments with value.

Another important aspect of a financial instrument's value is its ability to be issued and traded on a "liquid" market and act as a medium of exchange, promoting the ease of economic transactions. For example, "negotiable instruments" in the U.S. are required to be "payable in currency", rather than just money, because a promise to pay someone in physical gold would not be easily negotiated through markets. Finally, and perhaps most importantly, the financial instruments obtain value through the social and political leverage they affix to the debtors themselves, which include individuals, corporations and governments.

These systems, like the monetary and currency systems, have also been fundamentally transformed into tools of the financial economy. For that reason, the political will of major countries will not drive the global monetary system to its final destination, but instead both politics and money will be driven by the dynamics of industrial and financial capitalism. Eventually, all monetary waves will break on the shore and their components will recede into the water, but those components will never exist independently of the industrial and financial bodies of water, as long as the latter have not yet dried up.

As a consequence, those who are invested in various forms of money, including the U.S. dollar, physical silver and/or physical gold, will not be able to store their wealth outside the broader system of industrial production and finance until they have fully broken down, and that process could last for some significant period of time. This fact implies that no monetary store of wealth can be insulated from the manipulative forces of capitalist production, systemic finance (leveraged speculation) or the sociopolitical leverage at their disposal during such a period.

Through political control, money can be transferred between segments of society at will by means of redistributive policies, capital controls or even outright confiscation, and it could also be made much more available ("liquid") to those with "adequate" economic influence over those with little or no leverage whatsoever. If the Freegold system were to take root in certain parts of the world soon, then it would most likely consume itself rather quickly, since many of the system's underlying structural instabilities would not be absolved by its presence. These instabilities stem from the mechanisms of value creation, realization (profit taking) and speculation in the financial capitalist system.

They escape the imagination of Freegold advocates because, along with the flawed dialectic foundation, the concept is founded on a fundamental misunderstanding of economic value in a capitalist system. The broader inevitability of financial capitalism is ignored to make room for the perceived inevitability of a global and gold-based monetary paradigm. In Part II, we will visit the foundation of economic value in modern society and it will become clear that value, just like politics and money, has been fundamentally transformed from what it once was in the relatively simple barter societies of our past. Until then, let this dialectic foundation settle.

There is only one holistic system of systems, one vast and immane, interwoven, interacting, multivariate, multinational dominion of dollars. Petro-dollars, electro-dollars, multi-dollars, reichmarks, rins, rubles, pounds, and shekels. It is the international system of currency which determines the totality of life on this planet. That is the natural order of things today. That is the atomic and subatomic and galactic structure of things today! -Arthur Jensen, Network

Much Ado About a Revolution

2011-05-19T08:28:00.000-07:00

"You don't need a weatherman to know which way the wind blows." - Bob Dylan

Sociopolitical revolutions have been an increasingly common occurrence since the beginning of the Industrial Age. As Karl Marx predicted, the ever-present tension between the working class and the capitalist elites has frequently manifested in periods of extreme violence and chaos. Many of these eruptions, however, ended up producing purely political results, in so far as they disbanded or significantly altered the current form of government, but did not change the relations of property.

Therefore, the oppressive capitalist class structures existing before the revolution were largely left untouched. Some notable exceptions to this rule include the Socialist revolutions in Russia, China and Eastern Europe, but property relations rapidly returned to their unequal settings in these countries after the post-revolution governments once again formed alliances with the country's financial elite. The quintessential example of this circular revolutionary dynamic is the client state breaking away from its colonial oppressor to form an "independent" government.

For example, the American Revolution was a direct result of the British Parliament's decisions to levy hefty taxes on working class colonists to pay interest on loans generated by the Bank of England, the bulk of which benefited an elite class of British citizens. After the Revolution, the "United States of America" organized itself under novel political structures of "republican democracy", but it was not long before its people had to entertain a series of National Banks similar to the Bank of England.

These developments culminated in the secretive formation of the Federal Reserve on Jekyll Island in 1913, and an amendment to the Constitution the same year, which created a federal income tax to be used for servicing the federal debt. The former American colonists once again found themselves living at the mercy of the financial empire, paying for federal loans that only benefited a small class of Western citizens.

In the 1960s and 70s, a wave of "counter-culture" movements spread across this nation in response to the Vietnam War and, more fundamentally, the end of the longest period of sustained economic prosperity in American history. The spirit of these new social movements was most forcefully demonstrated by the Weather Underground, a "radical" group of anti-capitalist activists. [1].

This organization declared a "state of war" against the U.S. government and was responsible for numerous bombings of government buildings and financial institutions, including the U.S. Capitol Building and the Pentagon. It consisted of people who were truly committed to overthrowing the U.S.-backed financial empire and creating a global socialist utopia. By the mid-70s, however, it was largely relegated to the sprawling graveyard of idealistic social revolutions.

Now, when you Google "the Weather Underground", the first link you get back is to a website that actually tells you what the weather may or may not be in locations around the world. And you don't have to look at some website to know that the weather in Egypt will be "cloudy with a chance of oppressive military dictatorship and economic collapse" for an indefinite period into the future. Just a few months after the political revolution in Egypt forced Hosni Mubarak out of the Presidential office, hundreds of protesters were back out in Tahir Square calling for some real change (criminal prosecutions), only to be shot at by army soldiers and dispersed. [2].

The Libyan people directly to the west of Egypt are in a similar position, as their insurrection has left them stuck between the ruthless military forces of Gadhafi and the even more ruthless forces of the U.S. and Europe's military-industrial complex. [3]. Their cities are being bombed to smoldering ashes and their national energy resources plundered, while other people keep telling them that they are fighting to form a democratic and just society.

What these others don't tell them, and what they don't need to be told, are the physical, financial and emotional prices they must pay to contort themselves into such a twisted, upside-down version of justice. Show me a democracy, and I'll show you a massively indebted, class-divided and day-dreaming population living the entirety of their lives under the convenient guise of political freedom. We have the freedom to be placed into debt servitude and to suffer the consequences, that's all.

The only difference between us and them is that we live longer, which gives us enough time to contemplate just how incapable and unwilling we are to sacrifice for meaningful change. American teachers and firefighters take to the streets today because they don't want to see their bloated pensions stripped away. Tea Party activists hold rallies today because they don't want to see their taxes increase at the margin. That's really the extent of the mainstream, "politically-active" American's vision for change - throw me a doghouse to live in and a bone to chew on, and I'll be your loyal pet until the day I die.

If and when all of these people end up rioting in Times Square and the Washington National Mall, refusing to disperse until Wall Street executives are collectively prosecuted under RICO statutes and the Federal Reserve system is disbanded, then they will start to understand the plight of the Egyptians, Libyans, Tunisians and countless others that have come before them and have yet to come. It takes more than isolated demonstrations, insurrections or even full-blown revolutions to change the global structures of power... much, much more. What it really takes is a systemic synchronization of wholesale economic, social and political restructuring or collapse.

By the time this piece is up, President Obama would have presented his "deficit reduction plan" to the American people on national television. One thing I know for certain about this proposed plan is that it will be counter-productive to breaking the bonds of global oppression, regardless of the details concerning entitlement spending or taxes. It will not force major banks to mark their assets to market value, repurchase toxic debt-assets from the American public or enter the bankruptcy and receivership system. Perhaps more importantly, it will not repeal the Federal Reserve Act of 1913 or the 16th Amendment, return the issuing power of currency to Congress and allow states to charter their own central banks independent of any superseding "federal" authority.

If the federal government wants to do anything meaningful and sustainable about the federal debt/deficit, then it must absolutely do those things mentioned above, but it won't. Instead, it will finish gutting the productive economy and transferring the last viable scraps to a small cartel of powerful institutions and individuals. This grand theft, however, will also signify the time when "peaceful revolution" has been made entirely impossible, and violent insurrection has been left as the only option. Not only for isolated populations in certain countries, but for a majority of the populations in every major country, located in every single region of the world. Now, that's what I call a revolution.

The Perturbational Path of Human Civilization

2011-05-09T14:18:00.000-07:00

Can you sense that? It is a perturbation in the forces of human civilization.

It is the feeling you get when events around the world are unfolding in a certain direction, but you are uncertain exactly how they will unfold or exactly where they will finally leave us. That is the nature of complex, dynamic systems, and more systemic complexity usually means less certainty. Perturbation theory is commonly used by physicists to describe the behavior of complex physical systems that involve equations which cannot be solved exactly. Take the movement of planets in our solar system and through our galaxy, for example, which, at first, may seem relatively simple to predict.

In reality, the existence of multiple planets and moons with inter-acting gravitational effects make the necessary calculations extremely complex and render exacting predictions of planetary paths through space-time impossible. Instead, astronomers attempting to predict the path of planet Earth would first start with the gravitational effect of the Sun, as it is the body with the largest gravitational influence.

Then, they would "correct" the solution with the second, third...nth-order gravitational effects of the next most influential bodies of mass respectively. It was discovered, however, that even the last correction in a perturbation analysis can end up being larger than the first one, which means that a relatively small perturbation can disproportionately effect the dynamics of the entire system. This "butterfly effect" of perturbations also operates at the smallest scales of our Universe, and presents a major obstacle to other physical theories, such as those encompassing the quantum scale.

An example would be String Theory, commonly referred to as a potential "Theory of Everything", since it posits that the fundamental constituents of the Universe (strings) are way too small to be directly or indirectly observed (via experiments such as particle accelerators) because of technological (energetic) limitations. Therefore, it must provide precise predictions of their behavior and its correspondence with known properties of the Universe to verify their existence. But the strings, like all other constituents of matter, interact with each other through multiple spatial dimensions and make such specific predictions practically impossible.

If the specific behavior of massive planets or one-dimensional oscillating strings is too complex for prediction, then what are the chances for a global human society consisting of economic, social and political systems that are enormously specialized and inter-dependent? We spend a lot of our time thinking about how much prices for specific goods will rise or fall next week or next month, and telling others what we imagine will happen. How much will the price of gold be at the end of the Summer, or what about local real estate prices?

Perhaps we are wondering how U.S. and European stock market valuations will be affected by the ongoing disasters in Japan, or the worsening sovereign debt situation in Europe. We ask people to tell us where and when the next Middle Eastern revolution will break out, and exactly how the global community will respond. In the final analysis, the "predictors" just end up using the same speculative "value at-risk" models that global financial investors followed right off of an economic cliff in the first place.

Instead, we should content ourselves with knowing the generalized "solutions" derived from perturbation theory, and embracing its shortcomings. We start with the biggest influences on our global society and work our way down, until it becomes meaninglessly complex to continue. The size of the influence must be measured by its approximate timing and its systemic impact, which is largely rooted in the scope of the system which it affects (financial, industrial, environmental, etc.). We attempt to "calculate" the general pressures that will be exerted on civilization's path by each influence, adjusting the path's course as new influences are incorporated.

It is not a process that is nearly as simple as going from the Sun to the Moon, but it is still useful for calculating the general direction in which our global civilization is headed and the path we may all be on. These are the biggest influences that I perceive in general order of size (biggest to smallest), with an emphasis on the temporal contribution to influence, but there is certainly room for re-arranging the order or assigning equal weights to multiple influences:

(My personal calculations, with the exception of those relating to climate change and imperialist policies, are referenced by the relevant articles linked under each listed influence.)

#1 - The peak of speculative private debt in the global financial system, including both on and off balance sheet liabilities of individuals and institutions (the shadow derivatives markets). "Speculative debt" means liabilities that are only supported by deceptive accounting methods and/or worthless government guarantees, rather than productive cash flows.

THE DEBT-DOLLAR DISCIPLINE (CONSERVATION & RELEASE)

THE MATH IS DIFFERENT AT THE TOP (FINANCIAL THREATS TO POWER)

EXPORTING SPECULATIVE DEBT

#2 - The fiscal and monetary policies of governments and central banks in regions with relatively large economies. Among these institutions, the biggest influences would include the Federal Reserve, the IMF, the European Central Bank, the Bank of China, the Bank of Japan and the governments of the U.S., several European states, China and Japan.

JUMPING THE TREASURY SHARK

BAILING OUT THE THIMBLE WITH THE TITANIC

#3 - The peak of the total percentage of public debt and deficits relative to global GDP, including unfunded entitlement obligations in developed economies.

WELCOME TO SLAUGHTERHOUSE-FINANCE

#4 - The peak in global oil production that most likely occurred sometime between 2000-2010, and it's negative impact on economic growth for developed economies that mostly rely on imported oil, as well as major oil exporting countries.

WHEN THE LIGHTS GO OUT

#5 - Environmental degradation issues, such as water scarcity, and their contribution to widespread famine, disease, industrial instability and violent conflicts.

WILL WATER SET THE WORLD ON FIRE?

#6 - Accelerating trends in climate change and its contribution to the issues listed in #5.

#7 - The imperialistic (militaristic) policies of developed countries and their contribution to economic disruption and violent conflict around the world.

#8 - Deterioration of the psychosocial and political structures of developed economies that are struggling with all of the above factors, and its contribution to systemic fear and violent conflict around the world.

FEAR & LOATHING IN THE DIVIDED STATES OF AMERICA

A GLIMPSE INTO THE STUBBORN PSYCHOLOGY OF "FISH"

THE SHORT STORY OF HOW WE LOSE

By now, it should be clear that, even though the above is an extremely general list of influences, the interaction between them makes for a very complex task of prediction. There is a lot of room to add detail to the listed influences, such as specifics about public debt held in the EU and the U.S. or the range of policy tools at the hands of powerful institutions, as well as new generalized influences that will develop over time. That is why we must sacrifice high levels of certainty for generalized accuracy and a somewhat reasonable sense of where we are headed.

I will not rehash my calculations here, because that is obviously not the point of this article. Everyone must evaluate the objective evidence on their own, and use their mind's "calculator" to determine humanity's most likely destination. We must accept that our margin of error will necessarily be large, and we must also pay strict attention to details, because even the slightest perturbations can lead to radically different outcomes. It is often an extremely tedious, frustrating and mind-numbing process, but, frankly, there is no other option.

The Scariest Story Ever Told

2011-05-02T18:54:00.000-07:00

"The last human freedom is to be able to choose one's attitude to a given set of circumstances."
- Dr. Viktor Frankl

Naomi Klein, author of The Shock Doctrine, recently gave a 20-minute lecture at a TED Conference about peak oil, climate change and the fundamental power of "stories". Institutional disciplines of all stripes, whether they are classified as religion, economics or "hard" sciences, constantly feed us tales about what we are and what we were meant to be. It is not necessary to know the specific details of her talk to follow along with this article, but I recommend readers take a look at it whenever they can find the time.

NOAMI KLEIN: ADDICTED TO RISK

As Klein made clear in her talk, one of the most powerful and pervasive stories is the one which tells us that we were made to grow; to constantly consume material resources and become stronger, smarter, faster and more efficient than we were the day before; to completely dominate the planet and natural processes which gave birth to our species millions of years ago. Stories always serve a purpose of the storyteller, and, in the case of the never-ending consumption tale, the purpose is obviously to expand the material wealth and power of a relatively small sub-group of the species.

Yet, no religion or story can void the baser instincts of an animal when those forces become too powerful for the animal to consciously ignore. Even the most devout "suicide bombers" will only become martyrs if they expect their relations to be well-compensated for the act. The expectation of Angels or Virgins waiting patiently for them in a heavenly dimension is simply not enough. Necessary, perhaps, but not sufficient. This fact invariably raises the possibility that the sub-group will create a new story for its widespread audience.

DISCLAIMER: THE FOLLOWING SCENARIO IS NOT MEANT TO BE UNDERSTOOD AS AN INEVITABLE OUTCOME OR EVEN AS ONE THAT IS EXTREMELY LIKELY. IT MUST ONLY BE CONSIDERED BY THE READER AS A SERIOUS POSSIBILITY, AND SHOULD BE TREATED AS LIKELY AS THE READER FEELS IS WARRANTED BY THE KNOWN EVIDENCE.

Audiences must have a degree of trust in their storytellers, and that trust is usually not acquired in one instant, but rather takes some significant period of time to develop. At this point in our existence, however, the elite storytellers need a new fable and they need it quick, because the story of apathetic consumption is rapidly losing its grip on the audience. They need a narrative that transcends the tale of Adam & Eve, the prospect of a "great new frontier", the fulfillment of an "American Dream" or the religion of advanced technology.

It must be one that convinces people to let go of their material possessions and to find solace living in their own filth. One that instructs them to strictly obey orders from above, abandon any remaining shreds of their inner morality and brutalize their souls, at the risk of suffering a fate worse than death itself, if they should refuse to give in. The self-absorbed storyteller needs to spin a tale that will shock the world into a state of mind-numbing fear. A fear that everything and everyone you have ever known could evaporate into thin air right before your eyes; the fear that speaking your mind would be the equivalent of placing your own head in the Guillotine.

It is one thing to need a story, and another to adequately craft it and plant it into society's collective subconscious. This task must be accomplished with much more than words or a few symbolic actions, and it must be planted more quickly than any of its predecessors. Perhaps the chapters of the story should be so disjointed that most people will never even stop to think that they actually represent a carefully-woven piece of literature. In fact, it is now likely that a few crude chapters have already been written and are being widely circulated as the gospel truth in certain parts of the world.

Deadly attacks on the World Trade Towers by Al-Qaeda terrorists from Saudi Arabia, who trained in Afghanistan under the protection of the Taliban. An oppressive Iraqi regime that was harboring terrorists and developing weapons of mass destruction. An Arab man who attempted to destroy a commercial airliner with a bomb in his shoe, and a Nigerian man who tried to do the same with one in his underwear. A poorly-made car bomb planted in the middle of Times Square by a Pakistani terrorist.

An Iranian regime hell bent on developing nuclear weapons and wiping Israel off the map, and a North Korean dictator who could snap at any moment. Terrorist cells based in Yemen attempting to infiltrate bombs into the U.S. by disguising them as printers. Oppressive Middle Eastern regimes that must be dealt with before they massacre their own citizens. The timely death of a terrorist mastermind, whose body was immediately buried at sea and whose death could easily incite deadly retaliations.

"False flag" attacks are indisputably a part of Western history, and they are certainly a rational means for governments to gain political leverage over their own citizens. Some recent and notable examples involve attacks by Japan, Germany and the Soviet Union against their own people and/or infrastructure during WWII. [1]. Another would be the Israeli-backed bombings of American and British-owned buildings in Cairo, which were designed to discourage Western governments from implementing any "pro-Egyptian" policies. [2]. "Operation Northwoods", while never carried out, consisted of a series of proposed attacks against U.S. military and civilian targets by CIA operatives, which were drafted and approved by the Joint Chiefs of Staff. [3].

In stark contrast to attacks merely proposed, a study by the NSA, declassified in 2005, concluded that the "Gulf of Tonkin incident" actually involved one confrontation with North Vietnamese ships initiated by an American destroyer, and a second "attack" that never even occurred. This incident was America's primary justification for declaring open war against the North Vietnamese government. [4]. Even when officially recognized, the reality of false flag attacks tend to evade the consciousness of mainstream society. That dynamic is especially true when they involve accurate details cleverly mixed in with elaborate fiction.

While political scientists and other academics are worrying about "loose nukes" in the former Soviet Union ,which may potentially be procured by "hostile" groups or regimes, high-level government officials in the developed world could all but hand weapons of mass destruction to people with the training or desire to unleash them, and no one, including Presidents and Prime Ministers, would be the wiser. The actual perpetrators may even have their own personal reasons for launching an attack, and would probably not be aware that they are part of any larger scheme. Indeed, the most efficient deception is to make people believe they are hurting a sworn enemy when they are actually helping it.

Once again, the following scenario is not an inevitability, but merely a possibility that must be taken seriously and considered in light of ongoing developments. The attacks would perhaps be undertaken at a time when there is rapidly growing sociopolitical unrest in major cities, as a means of short-circuiting this naturally developing revolutionary fervor and re-directing its force towards the exact opposite - an unconditional faith in the executive structures of power that claim to defend our "national security".

It would most likely be the American audience that is targeted and forced to witness mass human casualties in their immediate environment, at the hands of a nuclear, biological or chemical release that could also cause some of the most gruesome deaths imaginable. A process that will make your skin crawl and your blood boil, on par with the relentless fires of Hell itself. How much destruction and how many deaths would need to occur before this story became convincing?

It could end up being anything from a single nuclear device in a single target city, to one placed in several major cities in several regions of the country. Alternatively, it could be sabotaged nuclear power plants, several "dirty bombs" placed in major cities or antibiotic-resistant bacteria placed in critical water sources. The first moments after an attack will be filled with sheer panic and chaos, and feel as if they had lasted a lot longer than they really did. Explosions would knock out large parts of the power grid, causing many to lose heat and electricity, and grocery/retail stores would be overwhelmed with people looking to stock supplies.

These moments will eventually devolve into a prolonged period of systemic fear, mistrust and disorder. Some places will be much more affected than others, such as densely-populated urban centers or suburban communities that are targeted for attack or cannot function without cross-border supply chains, healthy businesses and centralized government services. Relatively isolated rural counties, however, could also be prone to major supply disruptions and externally or internally-generated violence.

The attacks will naturally lead to a consolidation of various federal executive departments, nearly total usurpation of state and local authority, suspension of fundamental legal protections and a mobilization of all services in the U.S. military. Constitutional requirements of due process and habeas corpus will immediately be suspended, as intelligence officials warn the politicians and executive officials that the perpetrators are still in the country, further attacks are possible and no time can be wasted on bureaucracy.

The federal government's power of eminent domain will be exercised unchecked and without compensation, as law enforcement officials, military forces and private contractors seize vast tracts of land and thousands of homes and buildings in their attempts to "preserve life and maintain order". The Fourth Amendment's probable cause and warrant requirements will become even more dispensable than they already are due to "national security" concerns, and magistrates will be hard-pressed to ignore the constant pressure from above.

A large part of the federal and state court systems will first be overwhelmed, and then either completely made inaccessible or transformed into "validation stations". Any group of people who attempt to resist officially-decreed subordination will be labeled as a local insurgent force. If its members do not quickly give up resistance, then they will either be killed or indefinitely imprisoned after they are tortured for information. Indeed, active resistance would appear to be nothing short of futile, and people will feel forced to inform on their critical neighbors.

What, then, can anyone possibly to do to avoid such a radical outcome when the underlying decisions have already been made and the necessary technology is already in place? I believe the answer to that question is essentially two words - systemic defection. The people who have been trained for years to defend the system at all costs must find it in within themselves to disobey a direct order. They must shift their loyalties, re-direct their courage and spread it through the ranks like a wildfire. Defection must be a disease; one that roots itself in the brain and quickly catches.

The fear of being punished for insubordination or treason must be outweighed by the desire to die for ideals of equality and freedom. Insurgent groups and local law enforcement must join forces with the uniformed soldiers to realize a goal that would never be accomplished if they all remained separate. People of all races and both genders must finally escape from the "melting pot" in which they stew. That is how the scariest story ever told could ultimately become a story about unparalleled hardship, perseverance and defiance in the face of humanity's deepest fears.

Welcome to Slaughterhouse-Finance

2011-04-26T18:35:00.000-07:00

"There are no characters in this story and almost no dramatic confrontations, because most of the people in it are so sick and so much the listless playthings of enormous forces. One of the main effects of war, after all, is that people are discouraged from being characters.”
–Kurt Vonnegut, Slaughterhouse-Five

Hardly a day goes by without an excellent analysis of hard facts and data being followed by a surprisingly disconnected conclusion. Over the weekend, it appeared to be Zero Hedge's analysis of a video report by Eric deCarbonnel of Market Skeptics, which concluded that the Federal Reserve, U.S. Treasury market, and U.S. dollar may all be on the verge of imminent implosion due to the Fed's AIG-esque policy of selling large amounts of protection against an increase in Treasury bond rates. A rebuttal to this view was provided the next day on The Automatic Earth, in a piece entitled, Bailing Out The Thimble With The Titanic.

In this piece, it was essentially argued that the U.S. dollar and Treasury market are symbolic of the Fed and the financial elite class, as partly confirmed by deCarbonnel's report, and these elite institutions have been engineering a successful bailout of those markets over the last few years, in tandem with natural financial dynamics and at the expense of everyone else. The bailout was “successful" in the sense that those markets will most likely remain stable in value for at least the next 2-3 years. Today (April 19), we are provided an excellent report by Chris Martenson, entitled The Breakdown Draws Near, but, as usual, all roads lead to financial chaos in Washington, D.C.

The "excellent" part of the report comes from the thorough data it provides regarding global liabilities that are maturing for banks and governments over the next few years. First, we are given a reference to the IMF's conclusions regarding global bank liabilities maturing in the near-term, with a stern eye locked on Europe [1]:

The world's banks face a $3.6 trillion "wall of maturing debt" in the next two years and must compete with debt-laden governments to secure financing Many European banks need bigger capital cushions to restore market confidence and assure they can borrow, and some weak players will need to be closed, the International Monetary Fund said in its Global Financial Stability Report.

The debt rollover requirements are most acute for Irish and German banks, with as much as half of their outstanding debt coming due over the next two years, the fund said.

The IMF basically tells us what has become painfully obvious by now - European banks and governments are both struggling to acquire the capital necessary to service their existing and/or refinance maturing debts, and there isn't nearly enough to satisfy them both. The latter fact is especially true when factoring in the maturing liabilities of banks and governments in other parts of the world, which is something that Martenson focuses on in the remainder of his analysis.

It is important, however, to note the added twist in the IMF's statement, in which it says that "some weak players will need to be closed". While it is specifically referring to European banks, the logic can be applied just as well to banks and governments all around the world, but we will return to that point later. In the rest of Martenson's report, we find out that Spain is actually pinning a significant portion of its private financing hopes on China, which, in turn, is facing its own imminent financial crisis due to an imploding real estate bubble.

But it is Spain that is first in the firing line and its 10-year bond premium in the secondary market widened 14 basis points to 194 bps. Madrid is hoping for support from China for its efforts to recapitalise a struggling banking sector... [2]

Prices of new homes in China's capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city's Housing and Urban-Rural Development Commission. [3].

We can also expect that housing bubbles in countries such as Australia and Canada will start to implode in lockstep with China, as their economies are both highly dependent on Chinese import demand for natural resources. A renewed round of real estate busts, combined with the ongoing slump in Europe and the U.S. and less aggressive monetary policy (-temporary- winding down of QE), will also feed off of and into a collapse in global equity and commodity values. That collapse will wipe out large swaths of imaginary capital existing on the books of major institutions. All of that leads us to Martenson's seminal question, "Who Will Buy All of the Bonds?", specifically meaning the public bonds of Europe and the U.S.

Martenson refers to the Treasury International Capital (TIC) Report in his piece, which indicated that there was a "lower-than-trend" net inflow of foreign capital ($26.9B) into long-term securities for the month of February, which includes those going into long-term Treasury bonds. When including short-term securities, we see that there was a healthy net inflow of $97.7B into U.S. bond markets from foreign investors. [4]. What this data indicates is that, during the month of February, there was significant foreign investment in U.S. bonds, but 72% of that was into short-term securities (which do not include 10 or 30-year Treasury bonds).

He goes on to conclude that this inflow dynamic will get worse as Japanese purchases drop off in the next few months, and that the proposed "spending cuts" for a few federal programs will hardly do anything to reduce the supply of Treasury bonds over this same time period. I agree that there is a strong possibility of reduced purchases by the Japanese government in the short-term, as well as the governments of China and the UK. In addition, the minuscule spending cuts will indeed be irrelevant to the overall size of the 2011-12 federal budget deficits.

To go from there to the conclusion that the U.S. Treasury faces an imminent funding crisis, however, requires a few major and unlikely assumptions; the classic hallmark of those fretting over hyperinflation of the dollar in the short-term. As briefly discussed above, a slowdown in foreign government purchases of U.S. Treasury bonds could be significantly offset by an increase of inflows from private foreign investors fleeing the equity, commodity, government agency and mortgage-related investments of other regions, as well as domestic investors fleeing those same risky investments.

And that's where we return to the IMF's little "hint" in its report from last week. The financial elites do not need anyone to buy ALL of the bonds, only those that are most important to maintaining their wealth extraction operations. The weak players? Well, they can all fight over the scraps and devour themselves in the financial marketplace. The truly significant capital will be transported towards a few central locations by natural forces and by human design, like lambs to the inevitable slaughter. Of these locations, the most critical are surely the U.S. Treasury market, which can be used to support major U.S. banks, and the U.S. currency market.

What are the chances that the majority of people who find themselves invested in U.S. government bonds and the dollar will get anything close to a return on their investment over 10, 20 or 30 years? The answer to that is probably a massively negative percentage, because the psychological pain of holding on for that long will be even worse than the total wipe out itself. However, the herd typically doesn't figure out how close they were to the edge of the cliff until after they are tumbling down the other side.

Stoneleigh at The Automatic Earth has repeatedly pointed out that people in such fearful environments tend to discount the future by an increasing rate, which means they care less and less about what will happen several decades, years or even months from the present time. The discount situation of financial elites is similar because they know how precarious the dollar-based financial markets are, so their concern is over whether they can corral all of the lambs into one or two places over a relatively short time period. So far, most of the evidence says that not only is it possible, but the process is already well under way.

Another unlikely assumption contained in Martenson’s report is the following [emphasis mine]:

With the Fed potentially backing away from the quantitative easing (QE) programs in June, the US government will need someone to buy roughly $130 billion of new bonds each month for the next year. So the question is, "Who will buy them all?"

I say the above question is an unlikely assumption because it seems to imply that the Fed may stop QE for another whole year after the QE-lite and QE2 programs wind down. If recent history has taught us anything, it's that a fearful deflationary environment is the perfect justification for the Fed to resume QE, and perhaps at an even larger scale than it has "monetized" in the past. Will the American people be up in arms about monetization of the federal debt or an indirect link to sociopolitical unrest, when their own finances, homes and careers are once again being beaten down by the unrelenting force of debt deflation? I really doubt they will be.

In the next section of his article, Martenson himself refers to how significant QE has been when talking about proposed budget cuts [emphasis mine]:

For the record, these 'cuts' work out to ~$3 billion less in spending each month, or less than the amount the Fed has been pouring into the Treasury market each business day for the past five months.

In addition, as discussed in Bailing Out The Thimble With The Titanic, the Fed may also be using Treasury put options to help them exert more control over long-term rates that cannot be reached as easily by QE programs. With regards to the latter, the following table is the Fed's "liquidity injection" schedule for the next month, which is certainly winding down, but still towers over any notional amount that has been "negotiated" by the politicians on Capitol Hill in their budget talks [5]:

The other major assumption involved here is that interest rates will start to rise along the curve, and this will make sovereign default much more likely, since a significant portion of Treasury debt is in notes with relatively short-term maturities. This logic is circular at best, since it relies on the fact that sovereign default and/or inflation concerns will drive short-term interest rates up in order to posit the argument that increased short-term interest burdens will lead investors to be more concerned about sovereign default or inflation (from printing). There is certainly a positive feedback involved in such dynamics, but the feedback must be rooted in some initial economic or political trigger.

As mentioned earlier in this piece, and many other times on The Automatic Earth, the dominant and natural economic trend is debt deflation, while the dominant (and natural) political trend is aggressive fiscal and monetary policies that are crafted to funnel money into major banks, rather than the productive economy. There are very few reasons to think that either of these trends will reverse in the short-term, either by design of the financial elite class or by the inadvertent consequences of their actions. They have no doubt painted themselves into a corner, but their corner is significantly larger than the concentration camps built to imprison a large majority of the global population. The latter fact is clearly evidenced by the perpetual taxpayer subsidies given to financial institutions in the sullied names of "economic recovery" and "austerity".

The cities of Greece continue to erupt in violence as its citizens are forced to bail out European banks, and, meanwhile, Americans continue to mistake their own reflections in the global mirror. Earlier this year, Standard & Poor's rating agency downgraded the outlook for the triple-A rated status of Treasury bonds (from "stable" to "negative"), in what was nothing less than an act of aiding and abetting the politicians, bankers and major corporate executives who strive for the imposition of austerity on everyone but themselves. The only difference between Greece and the U.S. is that the latter is not a "weak player" in the eyes of elite institutions, such as the IMF. Which means that, while the Greek taxpayers may soon be put out of their misery, we will die a much slower death, choking on our own debt for years to come.

“He kept silent until the lights went out at night, and then, when there had been a long silence containing nothing to echo, he said to Rumfoord, "I was in Dresden when it was bombed. I was a prisoner of war.”
-Kurt Vonnegut in Slaughterhouse-Five

Bailing Out the Thimble With the Titanic

2011-04-21T07:41:00.000-07:00

Dr. Steve Keen, the ever-insightful Australian economist who runs the Debt Deflation website, wrote an excellent piece in March of 2009 entitled Bailing out the Titanic with a Thimble. It essentially argued that the U.S. government's fiscal stimulus and the Fed's liquidity injections would be wholly insufficient to restart growth in the private credit markets, and so far this analysis has been spot on.

Ilargi and Stoneleigh, who run The Automatic Earth, have also been preaching this same message for several years now, and have repeatedly stated that the U.S. dollar and treasury market would be the beneficiaries of the debt deflationary trend. It was most recently repeated in Ilargi's latest post, Our Prosperity is Owed Back Plus Interest.

Yet, since late 2010, it would appear on the surface that long-term treasury rates have been inching upwards and that commodity prices have been going through the roof. This superficial trend has led many commentators to "double down" on their predictions of a Treasury market collapse and imminent hyperinflation of the dollar.

Some people point to sustained oil price increases as evidence of their predictions, but, as mentioned before, that trend has been wholly discredited as a byproduct of actual monetary inflation. It is merely a result of the Fed exporting speculative debt to investors worldwide, who fully take advantage of the "speculative" part by betting on increases in the prices of equities and commodities.

Other people have been focusing more on the treasury market aspect, pointing to Pimco's net short position on U.S. Treasuries and the brief trend of rate increases as evidence of imminent chaos in the market. Of course, they can also point to the fact that the federal government is running record deficits to allegedly support the private economy, with no real end in sight.

As The Automatic Earth has cautioned, however, what matters most right now are the systemic dynamics of deterioration in private finances and social mood, rather than the fundamentally unsustainable nature of deficit spending. A major component of these dynamics is the monetary objectives and policies that will be undertaken by financial elites through their proxy, the Federal Reserve.

Last week I wrote two pieces regarding this component, Jumping the Treasury Shark and Bill Gross: Master of Monetary Psy-Ops), and, specifically, about why the elites desperately want to maintain stability in the Treasury market, and how Pimco's sharp reduction in Treasury exposure is most likely not a long-term bet against the market.

Today, we get a dose of healthy confirmation through a video report by Eric deCarbonnel at Market Skeptics, entitled:

FRAUD: Federal Reserve Is Selling Put Options On Treasury Bonds To Drive Down Yields:

It is featured in a Tyler Durden piece on Zero Hedge named Doubling Down To (DXY) Zero: Has The Fed, In Its Stealthy Synthetic Bet To Keep Long-Term Yields Low, Become The Next AIG?. In essence, it reveals some strong evidence to suggest that the Federal Reserve is already, or is actively considering selling large amounts of protection against treasury rate increases (Put Options) to various investors as a means of controlling the long end of the treasury curve (which, as per deCarbonnel, is illegal). Indeed, the Fed actually used this shell tactic back in 2000, as explained by Vince Reinhart, who was Fed secretary and economist at the time [1]:

The System has also been willing to put its balance sheet at risk to encourage appropriate expectations about interest rates or to calm fears about funds availability. As plotted at the top right, the Desk sold options on RPs for the weeks around the century date change that totaled nearly $0.5 trillion of notional value. Given that the Desk already operates in all segments of the Treasury market, we wouldn’t have to move up a learning curve if instructed to increase purchases of longer-dated issues.

We find out that there is, in fact, no need for the Fed to "move up the learning curve", step up its game and scale up the walls of the treasury curve with multiple trillions worth of gross sales of interest rate swaptions. That essentially means that there is no desire on the part of financial elites to let long-term rates rise significantly or to let the Treasury market destabilize, and, on top of that, they are in the process of leveraging themselves to the point of absolutely no return.

The question then arises, however, of whether they will actually be successful in "pinning" long-term rates for a few years, or whether "Operation Swaption" is a time bomb set to detonate within the next year, when rates significantly increase in response to sovereign default and/or inflation concerns.

The analysis from Zero Hedge would suggest that the latter is a very likely possibility, as implied in the article's title. Tyler Durden suggests that the Fed may be the next AIG, except without anyone big enough waiting in background to bail them out of their misery.

Alas, that [the Fed's printing press] will have no impact whatsoever, if indeed the Fed has been reduced to finding ever fewer counterparties to a synthetic bet to keep long-term rates low, as very soon, with inflation ticking up, all hell may break loose in an identical replay of what happened to AIG once the Fed's put is called against it. [2].

Durden is making the assumption that there will be ever-fewer incremental buyers of treasury bonds, and therefore fewer investors that would want to hedge their treasury exposure by buying protection from whichever primary dealer bank (most likely JP Morgan) is acting as a front for the Fed. He is also assuming that inflation will "tick up" very soon, causing rates to increase and forcing the Fed to make good on their massive bets, which they simply cannot do, because it would expose them as being the underlying counter-party to the trade. Indeed, that would most likely trigger a self-reinforcing dumping of treasury bonds and a set of events that ultimately result in a full-blown currency crisis.

There are two major flaws that I perceive in these assumptions, however, with the first being that price inflation, primarily for energy and food, will continue increasing as it has been over the last year or so. This argument has been addressed and largely discredited numerous times by The Automatic Earth, and even Zero Hedge itself has suggested, back in February, that the exact opposite may occur in the short-term. That article was the focal point of a piece I wrote shortly after, Exporting Speculative Debt, and it contained the following argument regarding a peak in total margin debt used by hedge funds, and the lowest level of free cash since 2007, when the latest credit bubble also peaked:

At ($45.9 billion) this number is just below the ($52.8) billion last seen just before the August 2007 quant wipe out which blew up Goldman's quant desk, and arguably was the catalyst for the beginning of the end. In other words, as we have shown, everyone is now purchasing on margin and the level of investor net worth is the lowest in over 3 years. Which means that should the market decline from this week persist and the Fed be unable to stop it, the margin calls will start coming in fast and furious, and unwinds in otherwise stable products like gold and silver are increasingly possible as hedge funds proceed to outright liquidations. [3].

That leads us to the second assumption that the Fed will not be able to "pin" down long bond rates because there will not be enough incremental buyers of treasuries seeking to also hedge their exposure. When global equity and commodity markets begin their downward cascade in response to the ongoing debt deflation and a temporary end to quantitative easing, margin calls will indeed be coming in fast enough to make your portfolio spin. The demand by institutional investors for a "safe haven" will emerge as quickly as the daylight descends into pitch black, and it will then become clear that the intent was never to bail out the Titanic with a thimble, but the other way around.

The bond markets of Japan and Europe simply can't make the grade, and, as referenced in Jumping the Treasury Shark, there really isn't enough gold to soak up all of that capital. Instead, the U.S. dollar and Treasury bond, because of their fundamental weakness, will be the refuge of choice and design, and this will also serve to aid the Fed's Mafioso protection scheme for controlling rates. The world has been flooded with dollar-denominated debt for decades, right up until now, and soon all of those liabilities will come pounding on the front door. And who will answer? Why, the Fed and the financial elites, of course.

They will invite the debt deflation in with open arms, because now they are holding vast sums of cash, and treasury bonds that simply cannot go bad. It will simultaneously be used as a justification for "gradual" austerity measures targeted at the middle and lower classes, as the public deficit will remain elevated to finance further bailouts of the financial elite class and brutal military operations for resources. The insidious shell game and unprecedented transfer of wealth will continue on, at least for some significant period of time, before the fires set by the elites burn out of control and finally engulf them.

Bill Gross: Master of Monetary Psy-Ops

2011-04-16T08:58:00.000-07:00

Every so often, and more often than not, a rumor emerges in the blogosphere about a significant development, seemingly adverse to the interests of the U.S. federal government, being manufactured by the government to further solidify their control over the masses. Sometimes these rumors are plainly absurd on their surface, and sometimes they are just too perfect to be true. The nature of these "psy-ops" is that they are nearly impossible to verify with any direct evidence until well after the fact, so we must rely on indirect logical analysis and a bit of intuition.

Personally, I always find it curious when a piece of news that pops up into the public domain just doesn't seem to fit in with the systemic realities that I otherwise perceive. It could be that I am simply taking these realities for granted and it is time to re-evaluate them, but it could be that they don't fit because they were never intended to. A report last month from Zero Hedge showed that Pimco had reduced the treasury exposure of its Total Return Fund from 18% to 0%, and a more recent report has shown that it actually has a net short position on treasuries. [1].

Pimco is the world's largest bond fund, and its manager Bill Gross has been quite vocal over the last two years about the U.S. treasury's massive and unsustainable deficits. He was so vocal about it that he decided to load up on treasuries and make a killing from February of 2009 until July of last year, with only a few brief respites in between. That's just the type of person Bill Gross is - he's a shark wading in the deep blue waters of Wall Street, and, like most other ones, he's an "insider trader".

He went on a treasury-buying binge in February 2009, just in time to fully ride the coat tails of the Fed's QE operations that commenced in March and monetized $300B in long-term treasury debt. [2]. No one in the public domain knew about the existence of this program in February, or the extent to which it would be carried out. It's not about economic fundamentals and it's certainly not about principles or "what's right", it's only about money and, specifically, lots and lots of money.

Now, the TRF is net short treasuries and many people are convinced that its short position is, in fact, nothing short of a prediction by Gross that the treasury market will soon collapse. Indeed, he seems to be at least betting that rates will increase significantly in the short-term. Perhaps that is true or perhaps he is making a bad bet, but perhaps we should also be wary of such plainly advertised convictions. After all, the insider "beltway" encompassing Wall Street and Washington has two lanes running in both directions.

If the Fed has a hidden agenda, then it would not hesitate to use Gross and his bond fund to pursue it, and if there's any institution with a hidden agenda, it's the Fed. At the beginning of 2009, the prospect of the Fed launching operations to monetize the federal debt was a radical one, unexpected by all but the most well-connected money managers.

By this time, QE has been going on for so long and with such force that it has become a standard routine. It has even gotten to the point where mainstream publications, such as the Wall Street Journal [3], are accusing the Fed of directly influencing the eruption of bloody revolutions in foreign countries. The Fed needs to maintain integrity in the U.S. treasury market above all else [4], but it is also needs to maintain a semblance of integrity in its own house.

It's in the process of walking a delicate tightrope, and the rope it struggles to walk has increasing amounts of slack. With additional QE to supplement the MBS prepayment re-investments and QE2 operations, both of which are currently winding down, the Fed risks stoking the fires of social and political chaos which constantly threaten to consume it. This dynamic is the result of primary dealer banks selling newly issued treasury coupons to the Fed at scheduled times and walking the profits down the beltway into equity and commodity markets. The Fed must now fear that further hot money speculation in commodities will make gas and certain foods unaffordable for not only the poor Tunisian people, but for the average American energy guzzler as well.

Without additional QE, however, the Fed loses all control of U.S. asset markets, and, by proxy, asset markets the world over. So what it really needs is a sort of timeout, in which it can engage in an immature display of wild-eyed frustration, erratically flailing its hands up in the air, shouting, "We're Done!". Then, it can sit back and watch fear set in the eyes of investors worldwide, as they realize that no more QE means no more over-valued equity and commodity markets. And no more of those means no more towers of leveraged capital producing unspeakable returns 24/7, day in and day out. Instead, all of that imaginary capital will be squashed down into a dime-sized pancake and will return nothing but the foul odor of putridly stale losses.

It is at that point when senior editors at the Wall Street Journal will abandon their offices and go running to the Fed with their guts in hand, furiously apologizing in one breath and then begging for more QE in the next.

"You see, Mr. Bernanke, our subscribers have been calling en masse to cancel over-priced yearly subscriptions as their investment capital continues to get wiped out in the stock, commodity and real estate markets. For Christ's sake, man, we need your help!"

The systemic fear generated from crumbling markets worldwide will first serve to attract scared capital into the treasury market, as it still remains the only place to go for people with sums of money that won't fit under any mattress. Besides, the only real difference between the U.S. dollar and short-term treasury bills or notes is that the latter could potentially give you a fixed income over their duration. The fear will then serve to further justify treasury asset purchase operations by the Fed, the ongoing sociopolitical destruction in the Middle East be damned. So how does Pimco and Bill Gross fit into all of these deceptive monetary tactics? Well, the fact that TRF currently holds a record 38% of its assets in dollar-denominated cash is a telling one. [5].

Every investor knows that the best and quickest way to make money is to own something that virtually no one else does, right before it gets hot and takes off towards the moon and the stars. An unexpected end to QE operations will send the dollar soaring, and as mentioned before, all asset markets plunging except for the U.S. treasury market. Bill Gross may have dumped all of his treasury exposure for now, but has any other major financial institution or money manager followed his suit? Has the Fed announced any plans to sell its treasury holdings back into the primary or secondary markets?

Of course not. These institutions are not worried about rates surging outside of their control anytime soon, and will be glad to make a few extra bucks from higher interest payments (paid by taxpayers) before the "rush to safety" really gets underway. I suspect that, by that time, there would have been a significant reversal in the treasury holdings of TRF and the superficial justifications for the investment decisions of the omniscient Bill Gross. Perhaps he will continue to have minimal exposure to U.S. treasuries throughout the year, as a partial hedge to his fund's enormous cash holdings, but that certainly should not be taken as an absolute bet against the treasury market.

Gross is merely a beltway insider with a purpose, which happens to coincide with the purpose of every other insider and elite - to preserve the dollar-based financial system. He is the magician's assistant, distracting the audience in the front with a short-con while the magician sets up the long-con behind him. The bad cop who beats the suspect over the head and tells him he has one last minute to confess before the entire case is blown wide open, followed by the good cop who enters the room and promises they will go easy on the suspect and recommend leniency to the judge, as long as just tells them where all the money is hidden. Once again, it is not about enforcing the law or finding justice, it's only about using deception to drive all of that money out of its hole and into their hands.

Besides, did anyone really think that the world's biggest bond fund was about to unconditionally give up on the world's biggest bond market (which just so happens to support every other U.S. bond market, and foreign ones as well)? Personally, I think Bill Gross is going to continue doing what he does best - speaking in half-truths and pretending like he cares about day-to-day developments in the U.S. fiscal situation, while carting his millions in compensation to undisclosed personal bank accounts around the world. That is one financial shark who cannot survive outside of the deep waters, and his next feast of flesh will be no less filling than the last.

A Brief Message to Regular Readers of Simple Planet

2011-04-11T22:43:00.000-07:00

I am posting this because I want anyone who regularly checks my site for new pieces to know that I greatly appreciate their interest, and I take it as a huge compliment.

Over the last few months, however, I have been posting most of my articles on The Automatic Earth (theautomaticearth.blogspot.com) before posting them here. Ilargi and Stoneleigh have been very generous with letting me publish my articles on their site, and I also feel that their "big picture" and systems perspective on economics, finance, energy issues and environmental issues is extremely similar to my own. Therefore, I plan to continue working with them and writing for their site as it continues to evolve.

Since any new pieces that I write will be first published on TAE, and will only appear here a few days later, I encourage any regular readers of this site to begin visiting TAE on a daily basis to find my latest work. TAE also has a great comment section filled with very knowledgeable and insightful commentators. While I will still respond to any comments I happen to see under my articles on Simple Planet, I will spend significantly more time reading and responding to comments/questions on the TAE page.

I apologize for any inconvenience this may cause anyone, but I'm sure that really isn't an issue for anyone here.

Once again, thank you very much for reading and I hope to see some new "faces" in the TAE comment section!

Ash