Saturday, August 22, 2009

August 22 2009: The one fatal trait


William Henry Jackson The smaller but still easy 1880s
The old French Market, New Orleans


Ilargi: Without having any intention of being sacrilegious, I do feel like his Mother's son at times. As the market rally rallies on through, and Ben Bernanke declares himself the savior of his country and by extension the world (talk about sacrilege!), ever more people start suggesting that we at The Automatic Earth should admit our mistakes in predicting major league financial mayhem. See, that's when I feel like saying, like he did: "Don’t worry, I told you I knew you would do this".

And I don't think it's over yet, the wave of doubters who become believers. With the stock markets on the rise and no serious media resistance to speak of as reaction to Bernanke's clownish utterances, it's inevitable that people would doubt. Many have switched sides, many others will follow. People don't feel comfortable in doubt, if it takes too long they go looking for a crutch, for some kind of support to rest their weary heads on.

But that doesn't mean we have been mistaken about what we have told you. In fact, our message has been crystal clear all along, and events play out just as we’ve been telling you all along. First, the herd must pass over the grass. Any shepherd can tell you that. Only then can be revealed what is left of the pasture. First, the townsmen and women, and don’t let’s leave out the children, will all have to go and follow the circus out of town. Only then, only when the music fades and recedes beyond the distant horizon, can they come to their senses. It's a story as old as mankind, and a billion years older too.

It’s not even an equal or fair issue. People are by nature so hugely biased against the possibility of bad things happening to them, they'll all sign up for the first soothsayer with a story that uses the appropriate words. They’ll choose short-term gratification over the prospect of long-term hardship any time, any day. It matters little to nothing what tomorrow brings, as long as tonight the booze and the music's good enough to make them forget, and to evoke memories of better days.

And the morning after, they'll go look for another smooth voice. If it weren't like that, no-one could ever sell a second-hand car again. Or a good book. Or a detergent or a president. Regardless of the limits the world around us places on us, our hopes and dreams know no limits. That is a beautiful thing, as long as you put it in the right (re:smooth) words.

It also means, however, that we cannot put limits on ourselves, on what we do; maybe as individuals, but not as a species, not as a force of nature. The same need for comfort and redemption that makes us follow the circus, is the one that makes us penetrate ever deeper into the few corners of the world we haven't seen yet, and drag out of those corners what could make us belive that the clown, Bernanke, is our savior.

We can't help it, it’s what we are. There are exactly zero species on the planet that have been outfitted with an inbuilt limiter, and we are no exception. We will continue until the planet, the system, whatever you want to call it, imposes such limits on us. There has never been a need for nature to make species stop themselves, it's the one fatal trait that would destroy the driving force behind evolution.

And if you don't yet understand the connection between what makes you buy cars and trinkets and presidents on the one hand, and what makes you believe in revering green shoots on the other, plus what makes you drive your car and eat your burgers despite all you know about what happens to the world your children are supposed to grow up in, then you will. And the fact that you still don't doesn't make anything we here have said any less correct.

You see what you wish to see, and there's a world full of media, politicians and industries out there who utilize that quality of yours to their own benefit. You will never stop wanting more, no matter how much you have, just like any other creature on the face of the earth.

So you might as well leave now while you can still catch up with the last wagons of the circus that's leaving. You'd be useless around here if you didn't.








Better Days

Well my soul checked out missing as I sat listening
To the hours and minutes tickin away
Yeah, just sittin around waitin for my life to begin
While it was all just slippin away.
Im tired of waitin for tomorrow to come
Or that train to come roarin round the bend.
I got a new suit of clothes a pretty red rose
And a woman I can call my friend

These are better days baby
Yeah theres better days shining through
These are better days baby
Better days with a girl like you

Well I took a piss at fortunes sweet kiss
Its like eatin caviar and dirt
Its a sad funny ending to find yourself pretending
A rich man in a poor mans shirt
Now my ass was draggin when from a passin gypsy wagon
Your heart like a diamond shone
Tonight Im layin in your arms carvin lucky charms
Out of these heard luck bones

These are better days baby
These are better days its true
These are better days
Theres better days shining through

Now a life of leisure and a pirates treasure
Dont make much for tragedy
But its a sad man my friend whos livin in his own skin
And cant stand the company
Every fools got a reason to feelin sorry for himself
And turn his heart to stone
Tonight this fools halfway to heaven and just a mile outta hell
And I feel like Im comin home

These are better days baby
Theres better days shining through
These are better days
Better days with a girl like you

These are better days baby
These are better days its true
These are better days
Better days are shining through









Small-business owners’ outlook dims
Small-business owners aren’t convinced the recession is ending and their outlooks darkened in July, according to a monthly survey conducted by the National Federation of Independent Business. NFIB’s index of small-business indicators fell 1.3 points last month to 86.5, the second consecutive monthly decline. The biggest reason was a drop in the number of small-business owners who expect the economy to improve in the next six months.

“The recession is wearing Main Street folks down,” says Bill Dunkelberg, NFIB chief economist. “And unfortunately, lawmakers in Washington are doing more to scare small-business owners than to reassure them of an economic recovery.” Small-business owners are worried about higher taxes and proposed mandates to provide health insurance, Dunkelberg says. Taxes were cited as the No. 1 business problem by 22 percent of the small-business owners surveyed. A bigger problem, cited by 32 percent, was poor sales.




What the Stress Tests Didn’t Predict
by Gretchen Morgenson

Financial stocks have more than doubled from their March 2009 lows. And with autumn — generally a rocky season for the markets — fast approaching, it’s a good time for a reality check on the banking sector. The goal: to determine whether fundamentals in the industry support the rocket-fueled surge in bank shares.

To be sure, the stock market and smart money often try to anticipate recoveries long before they are evident in the numbers. But a “relief rally” — that is, the exuberance that accompanied the fact that our economy appears to have avoided another Great Depression — won’t have the same staying power as a move based on solidly improving operations. So understanding what’s going on in banks’ financial statements is worthwhile.

With that in mind, Christopher Whalen, managing director at Institutional Risk Analytics, a research firm, has analyzed financial data from the second quarter of this year that almost 7,000 banks submitted to the Federal Deposit Insurance Corporation. The data includes 90 percent of institutions with federally insured deposits but excludes reports from the 19 money-center banks like Citigroup, Bank of America and Wells Fargo. Those reports are filed later to the F.D.I.C.

Even with the big guys missing from the analysis, it is an illuminating look at the health of regional and community banks and a fairly comprehensive assessment of the industry’s well-being. Unfortunately, that assessment shows that the number of financially sound banks is declining and that the ranks of troubled institutions are growing. Indeed, Mr. Whalen said his figures show more stress in the banking industry in the second quarter of 2009 than in the immediately previous periods.

For example, Institutional Risk Analytics gave 4,234 banks a rating of A+ or A (as a measure of their financial soundness) as of June 30. That total was down 21 percent from the end of March and 25 percent from the end of 2008. Meanwhile, it slapped a failing grade on 1,882 banks as of June 30, up 16.5 percent from the end of March; the number with failing grades had dropped a bit in the first quarter. This downward migration is a sign that more banks are now feeling the effects of economic conditions regardless of their business models, Mr. Whalen said. In other words, even the best-run banks are having trouble escaping the impact of a sluggish economy and high unemployment.

Based on his preliminary review of individual bank reports, Mr. Whalen said the greater stress across the industry results from the large number of banks getting dinged by losses or charge-offs. The figures, Mr. Whalen said, call into question assumptions made by the government earlier this year, when it put major banks through “stress tests.” In short, the tests may not have been tough enough. “The stress tests said that through the two-year cycle, big banks had to have enough capital plus earnings to withstand a 9 percent loss rate,” Mr. Whalen said. “But what we’re seeing with the levels of stress in the industry is that we are there now and we are not at peak of cycle yet.”

The government’s stress tests also assumed that the third quarter would show a bit of an improvement, and Mr. Whalen does not necessarily disagree. But any reduction in losses in that quarter may also be short-lived. “The third quarter may be a little rah-rah in terms of loss rates,” Mr. Whalen said, “but if the economy isn’t dramatically improving, then the fourth quarter of this year and the first quarter of 2010 will be another leg down.”

The good news is that some banks have raised capital during these past few months of investor optimism. But a host of operational problems remains at many institutions. In addition to loan losses and rock-bottom recovery rates on assets they’re trying to unload, for example, banks also face rising expenses (because they’re paying to carry properties that generate scant — or zero — revenue). All of this cuts significantly into earnings, which banks desperately need to bolster their battered financial positions.

With banks short on revenue, they cannot apportion enough for reserves against future loan losses. “In bad periods,” Mr. Whalen said, “banks typically set aside twice as much as they charge off, but now a lot of them are at one-to-one.” Later this year, Mr. Whalen said, banks that stayed on the straight and narrow and dealt swiftly with their problems will start to emerge from the morass. “But we will still have a very large percentage of the population experiencing problems going into the end of the year,” he said.

Surely, investors in financial companies have earned a respite from their long slog of losses, and the recent rally has been a tonic for damaged stock portfolios. But it’s simply not clear that the banking industry is out of the woods. It took many years to inflate the enormous debt bubble that popped in 2007. The deleveraging process, which is nobody’s idea of fun, will take a long time, too.




Central Bankers Breathing Easier
Central bankers at the Federal Reserve's annual retreat in the Grand Tetons are breathing easier about the outlook for the global economy than just a few months ago. "Fears of financial collapse have receded substantially," Federal Reserve Chairman Ben Bernanke said Friday at the Federal Reserve Bank of Kansas City's conference here. "After contracting sharply over the past year, economic activity appears to be leveling out, both in the U.S. and abroad, and the prospects for a return to growth in the next year appear good."

As he spoke, the latest bit of good news was released: Sales of existing homes in the U.S. jumped 7.2% in July, the fourth straight rise. European Central Bank Chairman Jean-Claude Trichet echoed Mr. Bernanke's remarks, saying it was "almost miraculous" that financial officials around the world moved as quickly as they did after the shocks of September. But Mr. Bernanke cautioned that "strains persist in many financial markets" and that "the economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels."

Stanley Fischer, governor of the Bank of Israel and a prominent macroeconomist, emphasized the uncertainty that lingers. "Much remains to be done, not least in bringing banking systems back to health, and there are good -- though not conclusive -- reasons to fear a substandard recovery," he said. Three economists from the Bank for International Settlements, the central bankers' central bank based in Basel, Switzerland, said at the conference that it could take until the second half of 2010 before output in some of the economies most affected by the financial crisis returns to precrisis levels. Some economists at the meeting thought that too optimistic. Signs of economic recovery put central bankers in a delicate position: They must pull back from their rescue programs and raise interest rates in time to avoid inflation but not so soon that they kill the recovery in its infancy.

The Fed has begun allowing some of its rescue programs to expire. But with the economy burdened by high unemployment, fragile housing and banking sectors, and excess manufacturing capacity, officials don't foresee raising interest rates any time soon. The atmosphere in Jackson Hole was palpably less tense than the previous two years. Mr. Bernanke flew in Thursday and set off on a hike with Fed Vice Chairman Donald Kohn, Fed governor Kevin Warsh, a security detail and Fed staff. Last year, Fed officials spent most of their time at Jackson Hole in a makeshift command center, plotting how to respond to the crisis. The command center is ready at this meeting but hasn't seen much use.

Mr. Bernanke said the multitude of Fed programs launched since last year's collapse of Lehman Brothers has diffused the panic. When finance ministers and central bankers from the world's biggest economies committed to not allow any other big financial institutions to fail in October, he said, it proved to be a "watershed" event that helped to turn short-term credit markets toward recovery. He credited other programs -- such as an effort to restore issuance of debt securities backed by auto loans and credit-card debt -- with helping to revive some markets.

"History is full of examples in which the policy responses to financial crises have been slow and inadequate, often resulting ultimately in greater economic damage and increased fiscal costs," Mr. Bernanke said. "In this episode, by contrast, policy makers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation."





Thank ye, Bernanke!
The world is filled with mealy-mouthed, hedge-happy, carping, waffling economists, but praise the Lord, Ben Bernanke isn't one of them. I grew up in a world where, if you were the head of the Fed and you were asked whether you would like some peas with your mashed potatoes, you were to reply, "Perhaps. Time will tell." That's not our Ben's style, not one bit. This morning the internet is buzzing with his clear, concise statement that we're on our way to a nice, measured recovery.

Speaking at a boondoggle of some kind in Jackson Hole, Wyoming (which was created for that purpose), the head Fed said that "economic activity appears to be leveling out, both in the United States and abroad." For a guy in his position, that is the equivalent of jumping up and down with a propeller beanie on your head, painting your face red and blue and screaming, "We're Number One!"

In completely, utterly and thoroughly related news, the stock market immediately swung to yearly highs. Pavlov was right! If you show a dog a piece of meat -- it WILL drool! And a good thing, too!




Ilargi: Brilliant! Raise those rates! And then see what happens........ What is it, the Air That Blows up Jackson's Hole?

Fed rate boosts should be aggressive
When time comes for the Federal Reserve and other central banks to ward off inflation by boosting interest rates from the current super-low levels, they shouldn't pussyfoot around, an economist and expert on monetary policy warned Saturday. Even though the U.S. and the global economy are healing from the worst recession since the 1930s, many economists think it will be a while before central banks start lifting rates. In the United States, economists think the Fed won't begin pushing up rates until next summer.

Still, when that decision is made, interest rates will need to be "increased aggressively," said Carl Walsh, professor at the University of California, Santa Cruz, discussing a paper he presented on the topic at the final day of an annual Fed conference here. "Committing to a gradual increase in the policy rate is not justified," he said. Consumers, businesses and investors, he argued, must feel more confident that prices won't spiral higher in the future. Or as Walsh put it, so that their inflation expectations don't become "unanchored."

The high-stakes matter of when and how the Fed should start boosting record low interest rates and reel in the trillions of dollars it's pumped into the financial system came up frequently during discussions at the conference. Timing is vital. Act too fast, and the Fed risks choking off lending to businesses and everyday Americans. Wait too long, and it risks setting off crippling inflation. Although some participants seemed to have mixed thoughts on how quickly the Fed would need to push up rates once it starts tightening, many agreed that it will be critical for the Fed to communicate its intentions clearly to avoid confusion and jolts to financial markets.

Earlier this month, the Fed left the target range for its bank lending rate at zero to 0.25 percent. And it pledged to keep it there for an extended period to help nurture an economic recovery. The rationale: Super-cheap lending will lead Americans to spend more, which will support the economy. If the Fed holds rates steady, commercial banks' prime lending rate will stay at about 3.25 percent, the lowest in decades. That rate is used as a peg for rates on home equity loans, certain credit cards and other consumer loans. To battle the recession, the Fed and other central banks around the world have slashed interest rates to near zero and rolled out a number of extraordinary programs to get credit flowing again and to stabilize financial markets.




America May Need to Find Another Financier
by Floyd Norris

As the United States rolls up record budget deficits, Asian countries are showing a reduced willingness to finance the debt. Figures released by the Treasury Department this week indicated that China reduced its holdings of Treasury securities by $25 billion in June, the most China had ever sold in a month. Monthly figures can be volatile, and can be revised, so it is risky to draw conclusions from one month’s data. In May, China increased its holdings by $38 billion, according to the Treasury figures.

Nonetheless, the decline highlighted a fact shown in the accompanying graphics: Asia’s appetite for Treasury securities is not growing as fast as it once did. That means the United States will have to turn to other buyers, including American citizens, who are now saving as they did not do during the boom years, to finance the deficits. China and Hong Kong, which is reported separately but is combined under China in the accompanying graphic, together covered more than half of the increase in the amount of Treasuries sold to the public — that is, to buyers other than United States government agencies like the Federal Reserve or Social Security — in 2006.

That share had fallen to 22 percent last year, when the government increased its public debt by a record $1.2 trillion. In the first half of 2009, China and Hong Kong acquired only 9 percent of the more than $800 billion worth of Treasuries that were sold. Japan, which was replaced by China as the largest foreign holder of Treasuries last year, has been a larger buyer this year, taking up 11 percent of the new supply of Treasuries.

The figures include both government and private ownership of Treasuries, and private transactions affect the figures in both Hong Kong and Japan. But in China, the overwhelming ownership is by the government, which has accumulated the securities in part to hold down the value of its currency against the dollar, thus making Chinese exports to the United States more attractive. In recent months, some Chinese officials have indicated concern of inflation in the United States that could erode the real value of their holdings, and have talked of diversifying their investments. The slowed purchases could reflect those concerns, or could simply be a result of China’s own aggressive stimulus program, which has involved large public spending.

The charts reflect ownership of Treasuries by China and Hong Kong, Japan and four other countries — South Korea, Singapore, Taiwan and Thailand — since 1994. On a dollar basis, the holdings are increasing, but their share of outstanding Treasuries has stopped growing. Over the decade from 1994 to 2004, their combined share of Treasuries rose to 25 percent, from less than 8 percent. Since then, as budget deficits in the United States grew, the share has fluctuated within a narrow range. In June, it was 24.7 percent.






Numbers, just numbers
As of June 30, 2009, nationwide there is:
  • $10.1 TRILLION in Mortgage Debt. And over 40% of that debt is now underwater.
  • In California alone, there is $2.4 TRILLION in mortgage debt, and 42% of that is now underwater.
  • That's 4 out of 10 homeowners underwater. If the S&P Case-Schiller® Index even inches down, we'll be talking about 50% faster than you can spell HAMP.
  • Real unemployment over 16%.
  • Equity evaporating faster than lighter fluid on a linoleum floor.

Oh yeah, we're on the way back, baby. Things are really looking up.




No Recovery, Not Now… Not Ever
by Bill Bonner

That we live in an age of miracles has become common knowledge. A man may sit on a beach near Sydney, with nothing but the bucket bottom of the universe over his head, and still carry on a casual conversation with an Eskimo near the North Pole. Using an Internet-based phone service, he may do so at negligible cost. If this were not miracle enough, he may now grow himself a new nose, if he needs one, on his own arm. In this age of miracles, people seem ready to believe that anything is possible. Recklessly crossing the street at the end of the Late Bubble Epoque, the world economy got hit by a cross-town bus. Now, the feds propose to reverse and run over the poor fellow again. It will be as if they had reversed the film; the economy will be as good as new, they say. But we are suspicious. And we begin today’s rumination by examining the bus driver’s motives.

In its naked form, government is not evil; it is merely a self-interested parasite, like a bank lobbyist. Its main value comes from its ability to elbow out other parasites. Of course, the typical citizen is no saint either. Instead, he is merely a parasite in the larval stage. If he is lucky enough or cunning enough, he could grow into a parasite himself. The citizen, generally, doesn’t mind being lied to and robbed – just so long it is by someone he elected. Or at least by someone whom tradition or local connivance put in place. He does not usually resent his homegrown government, even though it routinely costs him a substantial part of his output. On the contrary, he grows so fond of it he even dons his helmet from time to time to protect it. Naturally, the feds return the favor.

The basic business model of government is to keep order, protect campaign contributors and lure supporters with the promise of other peoples’ money. The game plan of the typical citizen is even simpler: to be on the receiving end, not the paying end. Over time, more and more of them get into position. And the whole society becomes more costly, and more corrupt. In the United States, entire industries now operate as wards of the state. They may have too little capital. Or, their operations may be too costly. Or, their products may be simply out-of-date and unattractive. Still, government keeps them going – even at the cost of at the expense of competitors.

And the money doesn’t only go to business. Cities stay solvent only by the grace of federal government grants. Whole sections of the population depend on government – including 34 million who draw their rations directly from the federal food stamp program. The spectacle is breathtaking and alarming at the same time – like a Pakistani bus on a mountain road, freighted with passengers clinging to the roof. The old rust bucket could tip over at any time, but what politician would tell a voter to get off?

That preface on the state out of the way, we turn to the state of the economy. The key to understanding the great credit bubble of 1945-2007 is to capture the codependent relationship between China and the United States of America. It seemed to serve both parties well. Each enabled each other’s excess. China added mightily to the world’s supply – far more than was actually needed. America, meanwhile, did heroic work on the demand side. While the growth in the United States was led by consumer spending, the growth in China was led by capital investment; factories expanded, towns were built, and output was revved up. But there was a flaw. Americans ran out of money. After the ’70s, they could only increase their buying by going into debt. This they did with insouciance bordering on insanity. Total debt rose 370% of GDP and then blew up in 2007, with major lenders forced into bankruptcy and mergers, while GDP sank at its fastest pace since the end of WWII.

Now, the old formula no longer works – neither for Americans nor for the Chinese. Despite the urging of their government, Americans cannot be expected to take on more debt in order to consume more stuff from China. As savings rates grow toward 10%, demand from the United States will collapse by an estimated $1 trillion per year. With the China trade now accounting for 83% of America’s non-oil trade deficit, you’d think the Chinese would panic. They already have as much as two times the output capacity needed to meet real demand. They should trim their manufacturing sector, not expand it.

We draw out that relationship only to show how hopeless it would be to draw it out further. Borrowing to consume is merely tricking stuff from the future to enjoy in the present. By 2007, some $30 trillion worth of spending that would have occurred ‘in the future’ had already occurred in the past. Factories that would have produced consumer items for 2009 discovered that they had already produced more than enough of them in 2005 and 2006. It would be better to invite the future in…let her collect her debts…and then get on with things. Yet government officials on both sides of the Pacific continue their numbskull efforts to revive the bubble economy. On the US side, the feds are trying to stimulate demand for more stuff. On the far side, Chinese stimulation is going into producing more stuff. As if the world didn’t have too much stuff already.

But the role of government is neither prosperity nor plausibility…but protection of the pests and parasites. They will keep paying them off and carrying them along…until the bus runs off the road. But it’s not prosperity that government really cares about. The big bus keeps trundling along – picking up pests and parasites along the way. It will keep going until it runs off the road.




Robert Kennedy on GDP



Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things. Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product - if we judge the United States of America by that - that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage.

It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knife. And the television programs which glorify violence in order to sell toys to our children.

Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans.

Robert F. Kennedy
University of Kansas
March 18, 1968




Ilargi: Good to see Orlov makes the same point I do. If you sell poeple's basic needs for profit, you wind up selling people for profit. Which may seem sort of OK, but only until there's no more profit to be made, and the system demands you throw them out.

Hunger Insurance
by Dmitry Orlov

I would like to sell you some hunger insurance. Are you insured against hunger? Perhaps you should be! Without this coverage, you may find it impossible to continue to afford feeding yourself and your family. With this coverage, not only will you be assured of continuing to get at least some food, but so will I. In fact, thanks to this plan, I will get to eat very, very well indeed.

Here's how it works. You buy a hunger insurance plan from my hunger insurance company, or from one of my illustrious competitors in the hunger insurance industry. The hunger insurance market is very competitive, offering you plenty of consumer choice. You can even decide to go with a hunger maintenance organization (HMO); that would make a lot of sense if you are on a diet.

Whichever company you choose buys up food in bulk on your behalf. Then, should you come down with a case of hunger, you can file a claim, pay the copayment, and get some of the food. Certain feeding procedures, such as breakfast, are considered elective, and are not covered.

The company is in a position to demand lower prices for food from the food providers, and can even pass some of these savings on to you. (But the fine folks in the hunger insurance company do have to eat too, you know.) Of course, the food providers try to make up the difference by charging those without hunger insurance much higher prices, but how can anyone blame them? That's just market economics. There may also be some food-related benefits, such as lower rental rates on bowls, spoons, napkins and feeding tubes (check the details of your plan).

There is just one more twist: you should try to arrange your hunger insurance plan through your employer. You see, it is much more expensive for companies to do business with consumers directly. It is much cheaper and easier for them to deal with other companies, and this allows them to, again, pass along some of the savings. In fact, many hunger insurers may decide not to sell individual hunger plans because group hunger is much more profitable. This is just Business 101: nothing personal. Plus, how can you afford to pay your hunger premium every month if you are unemployed? It goes without saying that if you want to keep your hunger insurance, you better try to keep your job, whether they pay you or not! And if you are currently unemployed, then, well... why am I still talking to you?

I am sure you will agree that this is a damn good system: it offers you consumer choice, a healthy diet, and, most importantly, peace of mind. But, as you may have heard, some people have been clamoring for a so-called "single-feeder system" run by the government. Now, that sort of thing may be very well for those miserable communists, but let me ask you a couple of questions.

First: Do you want to get fed the same as everyone else, even if you can afford to pay a little extra? What if you, say, win the lottery; wouldn't you want to upgrade to the premium plan, and dine on filet mignon, foie gras and truffles like I do instead of the corporate-government-provided Happi-Meals?

But even more importantly, who do you want your children to be when they grow up: lowly, overworked, underpaid government bureaucrats, or fat-cat capitalists like me? Isn't this compelling vision of hope worth tightening your belt for? To be perfectly honest, those jobs are reserved for my children, but yours might still be able to find work as their personal bathroom assistants, if they are docile and pretty... let's pretend you didn't hear that.

But ultimately it is still all up to you, because it is you who, every few years, walks into a voting booth and pulls a lever. And then I have to work with whoever you elect, and bring them around to seeing things my way. We are in this together, you see: you get to pull the lever, but I get to write the checks, with your money. Politicians have to eat too, you know, I am there to help them, and they know it.

Is that your stomach growling, or are you just happy to see me?




Why [..] Economists Are All Wrong
US Personal Income has taken its worst annual decline since 1950.

This is why it is an improbable fantasy to think that the consumer will be able to pull this economy out of recession using the normal 'print and trickle down' approach. In the 1950's the solution was huge public works projects like the Interstate Highway System and of course the Korean War.

Until the median wage improves relative to the cost of living, there will be no recovery. And by cost of living we do not mean the chimerical US Consumer Price Index.

The classic Austrian prescription is to allow prices to decline until the median wage becomes adequate. Given the risk of a deflationary wage-price spiral, which is desired by no one except for the cash rich, the political risks of such an approach are enormous.

On paper it is obvious that a market can 'clear' at a variety of levels, if wages and prices are allowed to move freely. After all, if profits are diminished, income can obviously be diminished by a proportional amount, and nothing has really changed in terms of viable consumption.

The Supply side idealists (cash rich bosses, Austrians, neo-liberal, monetarist, and deflationist theorists) would like to see this happen at a lower level through a deflationary spiral. The Keynesians and neo-classicals wish to see it driven through the Demand side, with higher wages rising to meet the demands of profit in an inflationary expansion. Both believe that market forces alone can achieve this equilibrium. Across both groups runs a sub-category of statism vs. individualism.

Unfortunately both groups are wrong.

Both approaches require an ideal, almost frictionless, objectively rational, and honest economy in order to succeed. The Keynesians have a bit of an edge in this, because it is easier to control inflation than deflation in a fiat regime, and the natural growth of inflation tends to satiate the impulse to greed. They don't care if they can buy more as long as they can say they HAVE more. People tend to be irrational, and there is a percentage of the population that is irrationally greedy and obsessively rapacious. People are not naturally 'good.'

The greatest flaw in the many studies that come from each of the schools to prove their point is the brutal way in which they flatten the reality of the markets and make assumptions to allow their equations and analysis to 'work.' They spend most of their energy showing while the 'other school' is a group of ignorant fools, doomed to ignominious failure, in an atmosphere reminiscent of a university departmental meeting.

This has quietly scandalized those from other scientific disciplines who review the work of many of the leading economists. Benoit Mandelbrot was poking enormous holes in the work of the leading economists long before Nassim Taleb made it more widely known. The ugly truth is that economics is a science in the way that medicine was a profession while it still used leeches to balance a person's vapours. Yes, some are always better than others, and certainly more entertaining, but they all tended to kill their patients.

The most intractable part of the current financial crisis, and the ongoing problem of the US economy is the huge tax which is levied on the American public by its corporations, primarily in the financial and health care sectors, and a political system based on lobbyists and their campaign contributions.

There are hidden taxes and impediments to 'free trade' at every turn. The ugly truth is that capitalism-in-practice hates free markets, always seeking to overturn the rules and impose oligopoly if not outright monopoly through barriers to entry, manipulation of the political process, distortion of regulation, predatory pricing, brute force, and the usual slate of anti-trust practices.

Some of these 'hidden taxes' are the bonuses on Wall Street which require an increasing percentage of the financial 'action.' The credit cards fees and penalties levied by banks to support profits in a contracting economy. The Sales General & Administrative portion of the Income Statements of the pharmaceutical industry which only American consumers seem willing to pay. A health care system which is a monument to overspending, outrageous pricing, and greed.

The notion that "if only government would not regulate markets at all everything would be fine" is a variation of Rousseau's romantic notion of the noble savage which no one believes except those who wish to continue to act like savages, and those who get no closer to the real work of an economy than their textbooks. Economic Darwinism works primarily to the advantage of the sharks. Anyone who believes that 'no regulations' works well has never driven on a modern highway at peak periods.

Yes, a certain portion of the population are adult, and generally good and fair. But there is a percentage of the population that is not. And since the 1980's they have been encouraged by the culture of relativism and greed to 'express themselves' and so they have, with a vengeance.

Discussion rarely proceeds very far because of the dialectical nature of American thought. Both extremes are wrong, but they seem to content to merely bash each other, pointing out their errors, while repeating the same mistakes over and again.

The engineering of the economy has become married to the engineering of the political dialogue by the corporate media and their political parties. "The engineering of consent is the very essence of the democratic process, the freedom to persuade and suggest." Edward L. Bernays 1947

The condition of the American economy is strikingly similar to the Soviet state economy of the last two decades of the 20th century. People are trying to sustain a system "as is" that is based on bad assumptions, unworkable constructions, conflicting objectives, and a flagging empire laced heavily with elitist fraud and corruption. The primary difference is that the US has a bigger gun and its hand is in more people's pockets with the dollar as the world's reserve currency. But the comparison seems to indicate that the economy must indeed fail first, before genuine change can begin, because the familiar ideology and practices must clearly fail before they can recede sufficiently to make room for new ways and reforms.

A new school of Economics will rise out of the ashes of the failure of the American economy as happened after the Great Depression. Let us hope that it is better than what we have today.

In the short term, what does all this mean?

There is NO system that will work without substantial, continuing effort, and continual adaptation and commitment to a certain set of goals that are more about 'ends' than ideological process.

Because our system has been abused for so long, and is so distorted and imbalanced and dominated by a relatively few organizations beholden to a self-serving status quo, reform is not an afterthought, it is the sine qua non.

It means that until the banks are restrained, and the financial system is reformed, and balance is restored, there can be no sustained recovery.





Nearly One in Two Mortgages in Ohio is Underwater or Close to it
Data released today by the Mortgage Bankers Association coupled with analysis of a report released last week by First American CoreLogic spell more trouble ahead for Ohio’s housing crisis, and offer fresh evidence for the need for statewide foreclosure reform. MBA numbers show delinquency rates (those who are late, but not yet in foreclosure) for mortgage loans on residential properties making a 13 percent leap from 1st QTR to 2nd QTR 2009, increasing from 8.7 percent to 9.8 percent. The numbers also show that 14.3% or 1 in 7 Ohio homeowners with mortgages were delinquent or already in foreclosure. That is up from 13% three months earlier.

CoreLogic data focuses on outstanding mortgages that are in a negative equity position, an often-overlooked, but important gauge. Also known as “underwater,” mortgage holders with negative equity owe more on their mortgages than their homes are worth. Of the 2.2 million outstanding mortgages in Ohio, 45.6 percent - more than one million mortgages - are already underwater or close to it. In October 2008, CoreLogic pegged that figure at 29.1 percent for Ohio, which translates to a 56.7 percent leap in just nine months.

“In addition to the 7,000 or so foreclosures each month in Ohio, we have more than one million mortgages in a very fragile position,” said Bill Faith, executive director of the Coalition on Homelessness and Housing in Ohio, and an advocate for House Bill 3, foreclosure reform legislation. “A slight increase in unemployment could push tens of thousands more into the foreclosure pipeline. A million mortgages on the edge of crisis should push the Ohio Senate to make foreclosure reform the top priority in the fall.”

House Bill 3 (Foley/Driehaus) passed the Ohio House in May and now awaits Senate attention. Moderated from its original form, House Bill 3 regulates servicers to process reasonable work-outs on a meaningful scale; provides a time out to homeowners and lenders to implement hanges and await impact of the federal response; and creates a fee that discourages foreclosure filings while funding community redevelopment.

CoreLogic also cited three of Ohio’s largest cities on the list of the nation’s top 20 cities with the highest number of underwater mortgages outstanding, including Cleveland at 51.1 percent; Columbus at 47.5 percent; and Cincinnati at 43.8 percent. “I think this is staggering . . . damning evidence against the lenders’ continued inability to get their arms around the foreclosure problem,” said Paul Bellamy, director of the Cuyahoga County Foreclosure Prevention Program. “Servicers should be doing loan modifications on a vastly larger scale. We have to change the laws that are fueling this bonfire of our state’s accumulated wealth.”

Ohio joins California, Florida, New Jersey, Illinois and Arizona as the top states in the nation with the most number of properties either in or approaching negative equity position, according to the report. “With negative equity so high, a sustainable loan modification makes sense for everyone, including the owners of the mortgage.” said Faith. “For lenders, homeowners and communities in Ohio, HB 3 would turn losing into winning.”




Wells Fargo Shuns Some ETFs
Wells Fargo Advisors is no longer permitting its advisers to sell leveraged and inverse exchange-traded funds through advisory accounts. The policy has been in place for several weeks, according to a Wells Fargo adviser in the bank brokerage channel. "As a matter of firm policy, we can't solicit those products," the adviser said, adding that the change affects a small number of brokers. Clients still may buy leveraged or inverse ETFs unsolicited through a nonfee-based account if the profile on the account includes "trading and speculation," the adviser said.

A Wells Fargo Advisors representative had no comment on its sales policies regarding leveraged and inverse ETFs. In an email last month, the representative said the company was reviewing its policy regarding nontraditional ETFs.




Small Investors Face Big Hit in ETF Push
U.S. regulators have begun targeting the big-time speculators suspected of artificially inflating prices for oil, natural gas and gold. Turns out some of the big guys happen to be small fry. Exchange-traded funds, which have become popular as one of the few avenues for small investors to gain direct exposure to commodity futures, are a top target in the Commodity Futures Trading Commission's drive to rein in speculation in oil markets. The CFTC's moves reverse a trend in market innovation that allowed almost anyone to bet on the direction of energy prices along with the likes of Goldman Sachs Group Inc.

And bet they did. Commodity ETFs came into existence in 2003 just as the boom in commodities prices was getting under way. They have ballooned to hold $59.3 billion in assets as of July, according to the National Stock Exchange. Since the beginning of the year, $22.1 billion has flowed into these funds compared with inflows of $7.3 billion during the same period in 2008. Almost half of the new money that has come in this year has been directed at the largest commodity ETF, which buys gold, amid worries about inflation.

The funds pool money from investors to make one-way bets, usually on rising prices. Some say this causes runaway buying that ignores bearish signs that more knowledgeable investors and commercial hedgers usually heed. The CFTC has said its priority is to protect end consumers of commodities, who would benefit from lower prices that regulators and lawmakers say would result from limits on speculation. Cutting out individual investors isn't the goal, said Bart Chilton, a CFTC commissioner, in an email. "The Commission has never said 'You aren't tall enough to ride,' " Mr. Chilton said. "I don't want to limit liquidity, but above all else, I want to ensure that prices for consumers are fair and that there is no manipulation -- intentional or otherwise."

Yet the coming regulatory changes are already reshaping this popular corner of the investing world for small investors. Limiting the size of ETFs will result in higher costs for investors, ranging from individuals to banks and hedge funds with multimillion-dollar positions, because legal and operational costs have to be spread out over a fewer number of shares. It also would render the instruments less desirable, because prices of the shares of closed funds tend to deviate from price moves in the underlying commodity.

Already, U.S. Natural Gas Fund, or UNG, is trading at a 16% premium to gas futures because investors are willing to pay extra for the ability to expose their portfolios to the commodity. The PowerShares DB Oil Fund, which tracks crude futures with no share limit, traded 0.3% above its benchmark commodity Thursday. This past week, UNG confirmed it wouldn't issue more new shares and said it owns about a fifth of certain benchmark gas contracts, potentially higher than the new limits will allow. Deutsche Bank AG's PowerShares DB Crude Oil Double Long ETN, or exchange-traded note, an ETF-like security similar to a bond, followed suit on Tuesday.

The CFTC said Wednesday that it withdrew exemptions it had granted two Deutsche Bank commodity ETFs years ago on speculative limits on corn and wheat contracts. On Friday, Barclays PLC said it would temporarily suspend any new share issues for its natural-gas ETN. "What you're really saying is the only people who should be allowed to trade crude oil are oil companies and Morgan Stanley," John Hyland, chief investment officer for the company that manages UNG and the largest oil ETF, told CFTC commissioners in a hearing earlier this month. He defended his funds as existing "to serve people who otherwise would find it difficult or undesirable to themselves buy futures."



Goldman Sachs and Morgan Stanley are two of the banks seen as most active in commodities trading. They also are likely to feel the impact from the new rules. Mr. Hyland claims between 500,000 and 600,000 investors in his U.S. Oil Fund and UNG, both of which have come under scrutiny due their sheer size. Vernon Reaser is one of those investors and says he is frustrated that regulators' actions are essentially discouraging him from accessing commodities markets. "I'm American and am all for stability," said the 43-year-old small-business owner in Houston. While small investors tend to shy away from futures because of high costs and margin requirements, without ETFs, "there's nothing left but futures," Mr. Reaser said.

Smaller funds could spring up to take in investors prevented from joining funds that have run afoul of federal limits, but at a price. "If they give up on scale and have to drive their expense ratios up ... that just makes it a higher bar for the fund to jump to generate positive returns," said Mark Willoughby, a financial adviser with Modera Wealth Management in Old Tappan, N.J. Mr. Willoughby recommends that most clients invest 4% to 7% of their holdings in commodities, but said his firm is debating the best ways to do so in light of recent developments. Investors shut out of ETFs would still have a few ways to track commodity prices, such as a major oil company like Exxon Mobil Corp. Shares of such companies usually, but not always, move with energy prices.




China Said to Plan Rules Tightening Capital of Banks
China plans to tighten capital requirements for banks, threatening to curb the record lending that’s fueled a 60 percent rally in the nation’s stock market, three people familiar with the matter said. The China Banking Regulatory Commission sent draft rule changes to banks on Aug. 19 requiring them to deduct all existing holdings of subordinated and hybrid debt sold by other lenders from supplementary capital, said the people, who have seen the document. Banks have until Aug. 25 to give feedback, said the people, declining to be named as the matter is private.

As a result, banks may need to rein in lending or sell shares to lift capital adequacy ratios to the 12 percent minimum. Chinese stocks briefly entered a so-called bear market this week on concern the government would stymie new loans that exceeded $1 trillion in the first half. A news department official at the regulator declined to comment by phone and didn’t immediately respond to a faxed inquiry. “This move will cut one of the most important funding sources for banks,” said Sheng Nan, an analyst at UOB Kayhian Investment Co. in Shanghai. Banks will “have to either raise more equity capital or slow down lending and other capital consuming businesses to stay afloat.”

China’s benchmark Shanghai Composite Index rose 0.7 percent as of 1:52 p.m., paring earlier gains of as much as 2 percent. Hong Kong’s Hang Seng Index fell 1.6 percent at the 12:30 p.m. break, after having risen as much as 0.5 percent. China’s banks have sold 236.7 billion yuan ($34.6 billion) of subordinated bonds so far this year, almost triple the amount issued during all of 2008. The banking regulator estimates about half of the subordinated bonds in circulation are cross-held among banks.

“We understand the regulator’s concerns about the proportion of subordinated debt,” Shenzhen Development Bank Co. Chairman Frank Newman said on an earnings conference call today. The bank hopes that any new rules are applied only to future debt sales, Newman said. The subordinated debt sales came as new loans rose to a record 7.37 trillion yuan in the first half. Lending in July fell to less than a quarter of June’s level. About 1.16 trillion yuan of loans were invested in stocks in the first five months of this year, China Business News reported on June 29, citing Wei Jianing, a deputy director at the Development and Research Center under the State Council, China’s cabinet.

“I’m worried about a correction in a market that has been driven by cheap money,” Devan Kaloo, who oversees $11.5 billion as head of global emerging markets at Aberdeen Asset Management Ltd., said Aug. 19. The Shanghai Composite Index almost doubled during the first seven months of this year through Aug. 4, after falling 65 percent in 2008. Since reaching this year’s high on Aug. 4, it’s plummeted 15 percent. The index on Aug. 19 briefly fell 20 percent from this year’s high, the threshold for a bear market, before ending the day down 19.8 percent. The gauge rebounded yesterday, rising 4.5 percent.

The weighted average capital adequacy ratio of 205 commercial Chinese banks at the end of 2008 was 12 percent, up 3.7 percentage points from a year earlier, according to the industry’s annual report. The weighting was strongly affected by the nation’s five-largest banks, which account for 52 percent of assets in the industry. The banking regulator has indicated it’s concerned about excessive credit creation. Last month, the commission ordered lenders to raise reserves against non-performing loans, to ensure loans for fixed asset investments go to projects that support the real economy and announced plans to tighten rules on working capital loans.

Banks are allowed to count subordinated bonds they sell as supplementary or lower-Tier 2 capital. In the event of bankruptcy, holders of subordinated notes receive payment only after other debt claims are paid in full. The regulator’s rule change requires banks to subtract all existing holdings of subordinate bonds issued by other lenders from their own subordinated bonds being counted as supplementary capital. The Wall Street Journal and Reuters reported earlier that the regulator was considering this measure.

In addition, the new rules also limit the amount of subordinated or hybrid bonds banks can hold, the people said. A bank’s holding of subordinated and hybrid bonds issued by a single bank can’t exceed 15 percent of its core capital, the people said. Holdings of all subordinate and hybrid bonds issued by banks can’t exceed 20 percent of core capital. The regulator has called on small publicly traded banks to have a minimum capital adequacy ratio of 12 percent by year’s end, up from the current 10 percent. The ratio, a measure of how much in losses a bank can absorb, is calculated by dividing capital by risk-weighted assets. A bank’s risk-weighted assets are comprised partly of loans.

After deducting subordinated bonds issued by other banks, lenders must either raise core capital or reduce their loans to meet the capital adequacy ratio requirements. “It’ll be hard for commercial banks to sell subordinate bonds because much of the debt is sold to their counterparts,” said Xu Xiaoqing, a bond analyst at China International Capital Corp. in Beijing. “This rule would tighten lending by commercial banks, especially small and medium sized banks that have relatively less capital.”




Days Away From Economic Chaos?
America is just a few days away from a possible day of reckoning. I again call attention to this day, August 25, when the Federal Deposit Insurance Corporation issues its 2nd Quarter report for 2009 on the state of health of American banks.

It has not particularly alarmed Americans that its growth and prosperity have been built upon debt. The American public is a bit desensitized, particularly since the Y2K threat fizzled. We must wait and see how Americans respond to the upcoming FDIC report.

The following charts tell the story. There are roughly 8400 American banks that set aside a small portion of their profits to aggregately insure bank depositors should their local bank fail. A plethora of bank failures has depleted the FDIC reserve fund from $52.8 billion in 2008 to $13 billion in the 1st Quarter of 2009. (See chart below)

Alison Vekshin, writing for Bloomberg, indicates

"The failure of 77 banks this year is draining the fund, prompting the agency in May to set an emergency fee of 5 cents for every $100 of assets, excluding Tier 1 capital, to raise $5.6 billion in the second quarter. The agency has authority to set fees in the third and fourth quarters, if needed, to prevent a decline in the fund from undermining public confidence."

Vekshin goes on to report that 56 bank failures since March 31 have cost the FDIC an estimated $16 billion. (For comparison, in the 1st Quarter, bank failures only cost the FDIC $2.2 billion.) That $16 billion bank rescue would fully deplete the FDIC fund as it only had $13 billion at the close of the 1stQuarter. It's possible the FDIC has already tapped into its line of credit at the Treasury Department without setting off alarm bells to the public.

The FDIC is required by law to maintain a reserve ratio, or balance divided by insured deposits, of 1.15 percent. It was at 0.27 percent as of March 31. It could be near zero at the current moment. (See 1st Quarter FDIC reserve ratio chart below)

Banks will be assessed extra fees

The FDIC's 8400 banks will likely be assessed special fees to shore up the FDIC's treasure chest.

Bloomberg's Vekshin, quoting Robert Strand, a senior economist at the American Bankers Association, says the industry will pay $17 billion in premiums this year, including $11.6 billion from the annual fee.

The following chart shows the aggregate profits of all 8400 FDIC-insured banks, which is about $5–7 billion per quarter. This figure is AFTER the banks have set aside funds for anticipated losses in real estate loans.

Insured institutions set aside $60.9 billion in loan loss provisions in the 1stQ, an increase of $23.7 billion (63.6 percent) from the first quarter of 2008.

Hiding losses

Banks have been slow to foreclose, allowing mortgage holders a few months before their home is deemed in default and giving another 2 years before the property is foreclosed on its accounting books. This practice has been able to temporarily hide most of the banking collapse.

But banks must eventually write down their real estate home mortgage losses. First-quarter net charge-offs of $37.8 billion were slightly lower than the $38.5 billion the industry charged-off in the fourth quarter of 2008.

As banks write off bad home loans, this downsizes their asset values. Downsizing at a few large banks caused $302-billion decline in industry assets in the 1stQ. The FDIC report says:

Total assets declined by $301.7 billion (2.2 percent) during the quarter, as a few large banks reduced their loan portfolios and trading accounts. This is the largest percentage decline in industry assets in a single quarter in the 25 years for which quarterly data are available. Eight large institutions accounted for the entire decline in industry assets;

You can see by the following chart that US banks are directing a great deal of their profits towards write-offs (loss provision in the following chart) for non-paying home mortgages (foreclosures). So the banks only have about $5–7 billion of profit to direct to the FDIC to shore up its quickly vanishing reserve account. This aggregate profit equates to about $890,000 profit per bank in a quarter. That is a pretty thin margin.

Zombie banks

The FDIC, which claimed only about 300 problem banks in the 1st Quarter of 2009, but hid the fact there were about 2000 total lame banks among its 8400 members, This has given rise to the term "zombie banks," which are defined as "a financial institution with an economic net worth that is less than zero, but which continues to operate because its ability to repay its debts is shored up by implicit or explicit government credit support."

Examination of the following FDIC chart shows geographically that most banks are not making a profit.

FDIC's $13 billion against $220 billion liabilities

So just how much liability does the FDIC bear aggregately for its "problem banks?"

At the end of the 1st Quarter in 2009 the FDIC said that figure was $220 billion. Remember now, the FDIC had only about $13 billion to over these institutions at the time. (See chart below) This figure will likely grow beyond imagination with the issuance of the FDIC 2ndQ report.

How do American banks make profit today?

So how to American banks make any money today? You can see in the following chart that in the recent past American banks derived most of their profits (45%) from residential and commercial property loans. These income sources are obviously crashing.

So the FDIC 1st Quarter report tells all – our so-called conservative American bankers, entrusted with your hard-earned savings, with no place to turn to generate traditional profits, have entered the gambling parlor. Here is how the FDIC said it:

Sharply higher trading revenues at large banks helped FDIC-insured institutions post an aggregate net profit of $7.6 billion in the first quarter of 2009.

Trading revenues means profit generated from trading stocks and other risky investments. Recall, when your money was being financed commercial and residential property it had some collateral behind it. An asset (real estate) was held in balance against the risk of failure to pay the loan. Now bankers are "investing" your money in the stock market in what appears to be a replay of how the Japanese propped up their stock market in recent years – by simply having major companies purchase each other's shares to prop up value.

The FDIC's 1stQ report says: "Total equity capital of insured institutions increased by $82.1 billion in the first quarter, the largest quarterly increase since the third quarter of 2004 (when more than half of the increase in equity consisted of goodwill)."

What the hoot is "goodwill" you want to know? It is how the banks are cooking their books. Arbitrary value is being given to bank holdings.

The FDIC 1stQ report goes on to say that:

Most of the aggregate increase in capital was concentrated among a relatively small number of institutions, including some institutions participating in the U.S. Treasury Department's Troubled Asset Relief Program (TARP).

Banks valued by goodwill and bailout funds

So there, you can see that in addition to goodwill, the bank's capital was largely increased by bailout funds. So a dose of reality therapy will lead one to conclude that nearly all American banks are essentially insolvent.

If this leaves you feeling a bit queasy, well, you may need to reach for Dramamine when you realize the FDIC is not only broke, but it will probably announce it is tapping into its line of credit at the US Treasury Department, which is also insolvent (America is spending $1.58 trillion more than it collects in taxes this year).

Here is how Bloomberg's Vekshin says it:

If the fund is drained, the FDIC also has the option of tapping a line of credit at the Treasury Department that Congress extended in May to $100 billion, with temporary borrowing authority of $500 billion through 2010.

Compared with savings and loan crisis

American banks weathered the savings and loan/real estate appraisal crisis in the 1980s and 1990s by loading from the US Treasury. In 1991–92, during the last part of the savings and loan crisis, the FDIC borrowed $15.1 billion from the Treasury and repaid it with interest about a year later.

But just exactly how will American banks ever pay back the treasury while facing years of write-offs from home mortgages? The banks do not have sufficient profits to offset their losses.

The entire cost of the savings and loan crisis of the 1980s and 90s was finally calculated at $153 billion, which was four times the reserves held by the FDIC (FSLIC at the time) in 1982. Of this, taxpayers paid out $124 billion while the thrift industry itself paid $29 billion. (FDIC Banking Review, volume 13, no.2, December 2000) So there is a false notion that the banks underwrite their own members' losses. In fact, the public bears the brunt of the losses when bankers are reckless.

Bankers prodded to loan money

Sheila Bair, FDIC chief, is trying to get US bankers to begin loaning money again. But to do so bankers must begin to assess the worth of real estate at more realistic values. Then the real value of their asset package would be revealed and the banks would all collapse. Furthermore, if banks begin to loan money under their fractional banking scheme (banks loan out 10–50 fold more money than they have in reserve), then massive inflation will likely result. This would not only result in Americans bearing the brunt of higher cost of goods and services, but it could trigger Asian banks, seeing their savings devalued, to sell off their stash of US treasury bonds. America as a debtor nation depends upon billions of dollars every day, loaned from Asian banks, to stay afloat financially.

The FDIC's Bair is aghast at American bankers shift away from traditional sources of revenue backed by collateral to risky investments. Bair wants to charge banks additional fees tied to risks when their business expands beyond traditional lending, such as stock trading. This idea hasn't advanced in Congressional committees yet. American bankers are walking a tight rope with their depositors' money.

Now if just a small portion of American bank depositors hear that the FDIC had to tap into the US Treasury for funds, and these depositors feel their banked money is at risk and want to withdraw some of it, the mother of all bank runs could ensue. This could create the day of reckoning that many have predicted. A short banking holiday would have to be declared and who knows what happens from there – troops in the streets, issuance of new currency, martial law? Don't think those in the Federal government haven't made plans for such an occurrence.

The unbanked

Of surprising interest, the FDIC reveals that millions of Americans don't trust or don't use banks. These Americans have been called the unbanked or underbanked, meaning that they "do not have access to banks or are not fully participating in the mainstream financial system," says the FDIC. The FDIC guesstimates that 10 percent of American families are "unbanked." That's a lot of capital the banks don't have access to. Those who hold currency outside of banks are anathema to the gods of banking.



111 comments:

Anonymous said...

Ed Gorey said:

"The underground hush-hush cash-only economy where transactions aren't reported to the IRS would be impossible to sustain"

I think you are being extremely simplistic and naive to think for a moment that such a system would stop criminal activity. Criminals always find a medium of exchange; it's simply a matter of the exchange rate.

And the term "criminals" also includes the elites.

Cash is like guns. Liberals and Fascists want them removed, but they only succeed in removing them from the average citizen, and never, ever from the criminals.

Bukko_in_Australia said...

Because there was a bit of discussion about Cassandra on the last comment thread, here's a rude pundit's explanation of the Cassandra myth.

* Warning! Foul (albeit humourous) language and insults to Republicans contained in link! *

Anonymous said...

De-leveraging + Fractional Reserve Banking = Deflation

It's not complicated people!

Ed_Gorey said...

@ anonymous 1:12 AM

"I think you are being extremely simplistic and naive to think for a moment that such a system would stop criminal activity."

My Reply: I didn't make an argument about criminality. Criminality will, obviously, always be with us.

NZSanctuary said...

Anon @ 1:12
"Cash is like guns. Liberals and Fascists want them removed, but they only succeed in removing them from the average citizen, and never, ever from the criminals."

Yep, although more barter economies will spring up in the future. However, many people will have little of real value to barter with, I suspect...

Anonymous said...

@Ed Gorey:

Neither of us were discussing whether criminals would be with us. The point was about whether a "hush-hush cash-only economy" would be sustained.

As I said, it's always about the exchange rate and the medium of exchange. Untraceable mediums will always exist. Traceable fiat ecash can never eliminate that.

Ed_Gorey said...

@ anonymous 1:48 AM

I agree with your point that underground economies can run on a medium of exchange other than cash, but such an economy would be several orders of magnitude smaller in scale and efficiency relative to today's cash-based underground economy. Money, after all, can be anything (shells, stones, feathers, etc). However, lack of universal acceptance would certainly limit the utility of such alternative forms of money. If acceptance of an alternative exchange medium were to grow, it would be abolished quickly by central authorities.

Joseph j7uy5 said...

Consider the proposition, that in a bartering community, the respect earned by a person can multiply the value of whatever he or she has to barter with.

Respect is a funny thing. There is no guaranteed way to get it, and it can disappear in an instant. Hard to measure, even harder to study formally. But still important.

el gallinazo said...

Ed Gorey,

As the electric and electronic infrastructure breaks down, starting with the periphery, then fiat electronic money because useless. A blackout is equivalent to a bank robbery or failure.

el gallinazo said...

Before Bernanke declares himself to be the Messiah, he must demonstrate conclusively that he is from the Davidic line.

David said...

Ed Gorey said:

"Money, after all, can be anything (shells, stones, feathers, etc). However, lack of universal acceptance would certainly limit the utility of such alternative forms of money. If acceptance of an alternative exchange medium were to grow, it would be abolished quickly by"

Gold and silver coinage has survived thousands of years of bankrupt government malfeasance and repression. I see no reason why universally accepted precious metals would suddenly lose their historic role as the definitive medium of exchange.

Ilargi said...

The world needs cash and will have it. No government, least of all the US, will want to kill drugs, women and arms trades. Too much profit. And not possible with traceable plastic.

John Hemingway said...

Very good intro, Ilargi. The fundamentals remain the same, no matter what anyone says. The massive debt upon debt is still there and will have to be dealt with, along with all the other concurrent problems of growing poverty, global warming, environmental degradation (extinction of species, acidic oceans, etc.) political turmoil, fascism on the rise, fanaticism/tribalism/cult movements, you name it.

Un abrazo,
John

scandia said...

@ John Hemingway...speaking of environmental degradation have you been watching the raging fires around Athens? Reports are that some of the fires were started intentionally by RE developers.
Nothing like a fire to overcome regulations!
A catastrophe fueled by greed!

Anonymous said...

I keep reading about Japan's lost twenty years of deflation. From a boots on the ground perspective, just what does that mean? Are there large hordes of Japanese living like those in the hollers of Appalachia? Have there been bread lines writ large? Are there ubiquitous ghettos to and fro? Is unemployment at double digits? Has there been endless civil unrest? Please steer me to sources that demonstrate the deflationary pain of the avg Japanese Joe--pics, etc.

Anonymous said...

FDIC was insolvent LAST WEEKEND:

http://globaleconomicanalysis.blogspot.com/2009/08/as-of-friday-august-14-2009-fdic-is.html

scandia said...

Ilargi, thanks for a great intro! Made me do a systems check. Decided to wave off the circus train and hang around here.
The image of wagons on the move reminded me of our pioneer history. I have been in awe of those that packed up, risked their very lives to follow a dream. Back then we did indeed have greener pastures elsewhere.
These days there is a fruitless search for a safe sustainable homestead, some place with good neighbours,decoupled from the global financial/political disaster. Even the most cursory examination of our context reveals a " die off " is in the cards.
But, as your thoughts on human nature indicate ,we see trouble in the future, not to-day.
Also been thinking of the core questions , Who,What,Where,When and Why. The only one unanswered is When? Consequently we put pressure on you and Stoneleigh to indicate the timeline.

Ed_Gorey said...

Anonymous @ 9:19 AM

Japanese stock market in 1989 = 40000
Japanese stock market in 2009 = 10000

Japanese public debt / GDP = 170% (2nd highest in the world after Zimbabwe)

Population growth rate = -0.197%

Japan's second largest export market (the USA) is out of commission for the foreseeable future.

Japan's largest export market (China) is about to prick its credit bubble.

Unemployment rate increased 20% from July 2008 - July 2009.

I wonder what will happen when Japan's shrinking and increasingly unemployed population can no longer meet the interest payments on its public debt?

I doubt it will be pretty.

scandia said...

Anon@9:19.
Your Japan question is a good one as I haven't seen the sights you are looking for as evidence.
Off the top of my head the reason we haven't yet seen them is the Japanese had a cushion of savings. So now I'm wondering about the size of that cushion now?

Anonymous said...

Yeah, but a 20 yr cushion of savings in a fiat money setting? And Japan is not holder of the world reserve currency either, nor do they have a military of any measure either.

My point is that, while not an economy like they had before their crash 20 yrs ago, Japan has not devolved into anything resembling Mad Max. I have no reason to believe that the USA won't slow bleed just the same.

At any rate isn't slow or no growth a better thing than what was had in the bubble years anyway?

Malcolm Martin said...

The world economy is teetering, that is very clear to all. The important thing for people to realize is that it will collapse. It is going to stop working all together and relatively soon. When it happens your bank will disappear and your currency will be worthless, your grocery store will become an empty shell, your gas station will run dry, your lights will go out, your cell phone will stop working…

The process of economic breakdown may involve a relatively slow devolution or unwinding. Or the system may succumb to a shot in the back of head, some event that brings it down suddenly and with a bang. The present rulers of the economy will be sorely tempted to a draconian measure to save their bacon. For instance, a war could be launched with an attack on Iran by the U.S. or its proxies in Israel. Such a war would conceal the systemic economic failure and allow for the rationing and repression they must rely on to function awhile longer.

The present public relations campaign touting “recovery”, part of that being Fed Chairman Ben Bernanke’s performance this week in Jackson Hole, is a delaying device. It is meant to allow the men in charge time to prepare and position themselves as best they can for the most reasonable outcome. We should understand what they know: there will be no economic recovery! There is simply no rational economic reason for one to occur.

The capitalist economic system is experiencing a completely natural life cycle. From the time of the collapse of feudalism and its birth in the Industrial Revolution, capitalism was always destined to become a dominant global force. Globalization will be a historic marker as the zenith of its existence. But globalization robbed the system of the only thing that kept its fatal internal contradictions at bay—-growth. Capitalism has conquered the planet, it has nowhere else to feed. The time of its death is now at hand.

Anonymous said...

"People are by nature so hugely biased against the possibility of bad things happening to them"

Yup, it's always the other guy that will be in the car wreck, get cancer, have his home broken into his spouse raped or his daughter grow up to be a floozies or his son a druggie dying of aids ...... It seems to me that the younger one is the stronger the thinking........of course these events happen ever day to all kinds of people in all walks of life and no one is exempt from the randomness of it all no mater whether they even bother to take precautions ... the alternative is to sit in the corner and shiver in fear...while one can easily see the fire raging on Main Street with the burned out building with the smoke waffling up lifting the DOW which is only held aloft on a mountain of unpayable debt, midia pumping, and political happy talk with the future impovrishment still yet to come today is still the first day of the rest of our lives. Make the most of it.

John Hemingway said...

@scandia
Yes, I read about the fires in Athens. It's a serious blaze, but then the whole Mediterranean is in for some nasty heat and flames in the coming years. Just today I read on the Corriere della Sera (a Milan daily) that many of the trees of the city have begun to shed their leaves prematurely, due to the severe heat wave that they had in August.

Something else that has changed is the fog that Milan was once famous for. I remember that when I first moved there in 1984 they still had heavy fog in the fall from late October onward in to the winter, now you don't see it any more, or rarely. The temperature has gone up and the fog was one of the first things to go. And now the trees.

Ed_Gorey said...

@ Anonymous 10:23 AM

Your comment: "while not an economy like they had before their crash 20 yrs ago, Japan has not devolved into anything resembling Mad Max"

My reply: Japan entered deflation in isolation. It was saved from experiencing significantly lower living standards by a cushion of personal savings as well as a robust export market. The USA, for example, bought 80 years worth of Toyotas over the last 20 years. The Chinese have bought 80 years worth of Kubota tractors over the last 20 years. Neither the USA nor China will be buying many new Toyotas or Kubotas for a long long time.

Your comment: "At any rate isn't slow or no growth a better thing than what was had in the bubble years anyway?"

My reply: It all depends upon what you mean by "better thing." I enjoy Maine lobster and trips to Hawaii every now and then. I don't foresee much more of that in the future. I'm not sure whether that's a good thing or a bad thing. It is a lower living standard.

Anonymous said...

Ed,

We had a lower living standard in the 70's, yet I think life was more immediate/spontaneous, certainly less mediated by the artificial, and no less enjoyable than life in the bubble years (I was there, btw).

I think so called increased living standards have come with attendant diminished returns. It's been a boon to the anti depressant industry, though. Increased reification and burgeoning psychic misery have gone hand in hand. Too much of a so called good thing?

prof77 said...

Ilargi, my friend -

You write, "ever more people start suggesting that we at The Automatic Earth should admit our mistakes in predicting major league financial mayhem."

This idiocy is no different than the people who sent their kids out into the seabed to collect shells just before the tsunami arrived. I'm sure, as responsible parents, they checked with each other and agreed that it was ok. I'm sure they then told those who were leaving there was "no problem," that they too should take advantage of the "low tide opportunity" to collect some shiny shells.

Too bad about those kids . . .

As you carefully document, today's economy is NOT just a low tide. A few shiny sea shells, now exposed on our economic seabed, will be the ruin of many.

Responding to the signs of an approaching tsunami, although not in the official tour guide book, is now required.

It's time for us to go--despite the jeers of those who stay on the beach. There are none so blind as those who will not see. Never try to teach a pig to sing. No good deed goes unpunished. A prophet hath no honor. A one-eyed man in the land of the blind.

Together we can get through this.

Prof77

http://prof77.wordpress.com/

Ilargi said...

"Anonymous said...
FDIC was insolvent LAST WEEKEND:"


No, it was not. Those are useless fables. See Bank Failure Friday for a more sensible assessment.

I don't understand why otherwise smart people keep making these insolvency claims. They should ask themselves why the FDIC closes particular banks on the dates they do. Either it was bankrupt a long time ago or it's not at all. It's all as fluid as they - and the Treasury- wish to make it.

Stoneleigh said...

Ed Gorey,

I agree with your point that underground economies can run on a medium of exchange other than cash, but such an economy would be several orders of magnitude smaller in scale and efficiency relative to today's cash-based underground economy. Money, after all, can be anything (shells, stones, feathers, etc). However, lack of universal acceptance would certainly limit the utility of such alternative forms of money. If acceptance of an alternative exchange medium were to grow, it would be abolished quickly by central authorities.

Exactly. While I do expect an underground economy to continue, I don't expect it to be anything like as extensive as currently. In the early phase the availability of cash will be very limited and other forms of exchange will not yet have developed. Over time, other forms will develop, but they will only be useful locally, transaction costs could be high and efficiency will probably be quite low. Many people will have no money and nothing of value to barter, and so will be at the mercy of circumstance. This will of course have a huge impact on society.

I don't see cash being legislated out of existence any time soon, but I do see it being very scarce. The supply of actual cash is a minute percentage of the money supply, most of which is credit. When that credit has gone, there will be nowhere near enough cash to run an economy. As money is the lubricant in the economic engine, a shortage of it will cause the economy to seize up, as it did in the 1930s.

Any kind of revival based on something other than cash will only have an effect further down the line, and as you say, if it becomes too successful it will be abolished. Local currencies work because they prevent central authorities from taking a cut, and as such are a direct threat to central authority. Socioeconomic structures exist in order to concentrate wealth at the centre, at the expense of the periphery, and the centre will actively defend this dynamic.

Sam Dug said...

Only then, only when the music fades and recedes beyond the distant horizon, can they come to their senses.

In the June 09 edition of ARTnews there is a write up of artist Nancy Spero. In the 70’s she was inspired by French playwright/ poet/ director Antonin Artaud‘s, Theatre of Cruelty:



Theatre of Cruelty aimed to hurl the spectator into the centre of the action, forcing them to engage with the performance on an instinctive level. For Artaud, this was a cruel, yet necessary act upon the spectator designed to shock them out of their complacency.

Artaud sought to remove aesthetic distance, bringing the audience into direct contact with the dangers of life. By turning theatre into a place where the spectator is exposed rather than protected, Artaud was committing an act of cruelty upon them.

Artaud saw suffering as essential to existence, and thus rejected all utopias as inevitable dystopia.




http://en.wikipedia.org/wiki/Antonin_Artaud

Rod said...

"The one fatal trait" is vitally important to understand. People believe themselves rational agents, but have no idea of the ecological forces that cause self-deception, post hoc justifications, and the inexorable need to growth.

As William Catton in his indispensable book "Overshoot: The Ecological Basis for Revolutionary Change" points out: "The cumulative biotic potential of any species exceeds the carrying capacity of its habitat" (p.127). To avoid extinction species need to overproduce to compensate for predation. As a species we are extraordinary, but not exempt to nature's limits.

Anonymous said...

"..Capitalism has conquered the planet, it has nowhere else to feed. The time of its death is now at hand..."

Infinite growth on a finite planet.

That's the real Gospel Message of capitalism.

Illogical and insane but widely accepted. A tribute to human hubris of their 'superiority' over animals and Nature, aye?

The Japanese reproduction rate:

Population growth rate = -0.197%

That says it all. When people stop having babies at a rate below replacement, and they're doing it without coercion from their government or religion, in my book they are very psychologically depressed indeed.

Ilargi just pointed out that people will never want less voluntarily, that humans seem to lack any innate ability to follow limits. Unless they are 'abnormal' in some sense, like having their life savings stolen from them for 20 years and lent to foreigners at ridiculously low interest rates to support the Japanese Carry Trade.

Carried out over an entire society for 2 decades, that is more than enough to depress their reproduction to -0.197%.

The Japanese are not depressed because they don't see a future for their children and grandchildren because humans don't really care about the future.

They're depressed in the here and now because they're workaholic lives suck so bad, they don't even make whoopie with abandon anymore.

Farmerod said...

@Stoneleigh. Something I've been mmeaning to ask forever. When you say... Interest rates would be negative in nominal terms, but not in real terms (the nominal rate minus negative inflation) thanks to on-going credit collapse....

do you mean CPI or money supply (incl credit) when you say negative inflation? If you mean money supply, how would one determine how fast the money supply is shrinking? If you mean CPI, aren't you confusing the issue in the same way governments and mainstream economists do?

CT-Hilltopper said...

Very good intro.

I'm not a regular poster here, but I am a regular reader.

I have been getting my head handed to me every day by people who are familiar with my stance that this ponzi style economic system will fail, and it will fail soon. I have been perhaps too vocal with people that I care about, and have set myself up for tons of abuse as the stock market does nothing but go up and up and up.

This is unsustainable. Anyone with half a brain knows that it's unsustainable.

Unfortunately, most of the populace isn't thining with even half of their brains at the present time. By the time their thought process kicks in, it will be far too late for them to do anything to prepare.

Anonymous said...

@Ed Gorey:

"but such an economy would be several orders of magnitude smaller in scale and efficiency relative to today's cash-based underground economy."

I would agree that's a natural supposition to make in theory, but Ilargi nailed it in practice.

Now here's a thought. What if the medium of exchange were energy? Go trace that. I also suspect that it would sustain a fairly large and efficient economy.

el gallinazo said...

Watched a NC "town hall" meeting this morning on C-Span with Rep. McHenry- R while trying to eat breakfast. I came to two conclusions:

1) I don't want to watch any more of these.

2) Jim Jones was never given enough credit as an American problem solver.

Greyzone said...

The key danger to the FDIC is not whether it is solvent or insolvent right this moment but whether any larger banks will experience loss rates as high as smaller banks.

Note that the article Ilargi points to tells us that most of these smaller banks are experiencing 30%-40% (and occasionally higher) losses. Texas Guaranty, the large bank that failed, had a much smaller loss percentage though in dollar terms it was significant.

But the smaller banks tell the real tale - valuations of some assets claimed by the banks are overstated by 30%-40%! What if a Citibank were to fail with a trillion dollars in claimed assets and yet saw 40% losses? Or what if 1000 smaller banks failed, each with 40% losses?

This is one of the side effects of deflation - its inexorable and won't stop until the playing field is almost completely leveled. Is it remotely possible that a tiny few banks may skate by with outlandish asset value claims? Maybe. But the vast majority are going to be leveled. And the sheer size of those yet to be leveled is what threatens the FDIC.

Greenpa said...

El Gal - thanks for the chortle. :-)

Anonymous said...

"What if the medium of exchange were energy?"

You mean like carry around a cord of wood or a bucket of oil dude?

Electricity is expensive and hard to store much less barter. Same with natural gas, unless you mean the little 5 gallon BBQ canisters. Even then, the infrastructure to refine and store and transport 'energy' is too complex to hide.

Even wood needs lots of chain saw action. Ever cut 20 cords of wood with a hand saw and an axe. You'll be so hunger you really could eat a horse.

An individual's physical energy of their bodies has always been a medium of exchange, since time immemorial. A day laborer is a form of energy.

Greyzone said...

To CT-Hilltopper:

I've had similar reactions. My brother gave me grief last summer over my decision to move my 401K assets to bonds. He dared me to be as "trusting in the wisdom of the markets" as he was and he put several thousand dollars in an index fund when the market was near 12000.

Since then I don't refer to his investment but simply note that I am up year over year on bonds. It's not much but I've not lost money. And then, before he asks, I state that I don't yet see any reason to get back into the market.

I had some co-workers giving me grief last summer also but after September that stopped. Mostly these days I don't discuss it much with anyone except those who I know also understand. It's not worth the grief trying to educate those who do not want to be educated.

RC said...

I've had tremendous doubts about the basis of the US and the world economies since 1975 and have lived as if they were about to collapse for the last 34 years. Given the length of time that has elapsed, the concept of "about to", I would have to admit, is obviously a poor time line.
Given the available figures and the locally observable events I am still of the opinion that collapse is imminent. But having profoundly failed with "about to" I am more than somewhat unsure of "imminent".
I'll continue on my merry way with my flimsy personal existence umbrella {I have no great means with which to face any severe societal upheaval -- very few people do} and if it so happens that the economic storm never arrives, I'll be pleasantly in error.
There's an awfully dark set of clouds right overhead now, and winds whipping up, but one never knows. It isn't like I am doing anything silly like "hoping" -- either for or against collapse; it is more as if experience has shown
that my perceptions may be invalid in terms of knowing the near term effects upon daily life.
I remain with little faith in the growth economics, and not very much faith in my sense of timing.

el gallinazo said...

A 12:11

"Now here's a thought. What if the medium of exchange were energy? Go trace that. I also suspect that it would sustain a fairly large and efficient economy."

Already been done. My favorites are the 100 gallon Bush doubloon and the 1 cup Bracero with its "gateway to servitude."

http://blimptv.blogspot.com/2007/12/new-bush-coins.html

Ahimsa said...

Ilargi said:

"And I don't think it's over yet, the wave of doubters who become believers. With the stock markets on the rise and no serious media resistance to speak of as reaction to Bernanke's clownish utterances, it's inevitable that people would doubt. Many have switched sides, many others will follow. People don't feel comfortable in doubt, if it takes too long they go looking for a crutch, for some kind of support to rest their weary heads on."

You are right. Even my older (26- year old) son is becoming a doubter. There is nothing I can do. I'm so sad ...

Phil said...

"How We Support Our False Beliefs"

http://www.sciencedaily.com/releases/2009/08/090821135020.htm

Co-author Steven Hoffman, Ph.D., visiting assistant professor of sociology at the University at Buffalo, says, "Our data shows substantial support for a cognitive theory known as 'motivated reasoning,' which suggests that rather than search rationally for information that either confirms or disconfirms a particular belief, people actually seek out information that confirms what they already believe.

"In fact," he says, "for the most part people completely ignore contrary information.

"The study demonstrates voters' ability to develop elaborate rationalizations based on faulty information," he explains.

Bigelow said...

@Anon 12:11
“Now here's a thought. What if the medium of exchange were energy? Go trace that. I also suspect that it would sustain a fairly large and efficient economy.”

Actually energy would be the perfect unit of exchange. As oil declines, the money supply decreases and becomes more valuable. If miracles happen and energy supplies expand so would the economy. But it only works if there is perfect discovery regarding available energy supply, there isn’t.

Mr. High suggests the new medium of exchange will be the Calorie -and pretty soon too. So then I guess you really could eat money.

Webbot Cliff High and George ure on coast2coast radio

Anonymous said...

WASHINGTON – Millions of older people face shrinking Social Security checks next year, the first time in a generation that payments would not rise.

The trustees who oversee Social Security are projecting there won't be a cost of living adjustment (COLA) for the next two years. That hasn't happened since automatic increases were adopted in 1975.

By law, Social Security benefits cannot go down. Nevertheless, monthly payments would drop for millions of people in the Medicare prescription drug program because the premiums, which often are deducted from Social Security payments, are scheduled to go up slightly.

"I will promise you, they count on that COLA," said Barbara Kennelly, a former Democratic congresswoman from Connecticut who now heads the National Committee to Preserve Social Security and Medicare. "To some people, it might not be a big deal. But to seniors, especially with their health care costs, it is a big deal."
http://tinyurl.com/mwsvhh

It's going to suck when it all goes away.

el gallinazo said...

Ahimsa

It doesn't matter if people doubt as long as they don't go out and do something really stupid like put themselves deeper in debt. The whole point of this site and the time spent on it by all involved is to try to protect ones self if you are willing to listen and think. After watching that town hall meeting, I have come to the conclusion that the bullshit is too deeply implanted into the average Usaco mind, that there is absolutely no room for reality or empathy. However, though reality cannot enter the Usaco synapses, it will surely bite the collective ass. At that point there will be dazed confusion and anger which our puppeteer bankster masters will be quite adept and prepared to divert to an undeserving ground (in the electrical sense), who will be hunted down and exterminated. Who will they be. Probably the usual suspects: African-Americans, Latinos, Gays, people with IQ's over 80.

rapier said...

Hilltopper.

Just tell them the economy has nothing to do with the stock market. Be good natured about it since it will sound so insane to them they can't even get mad.

Mention that the stock market dropped 50% when GDP had dropped only a couple of percent. That the market has now rallied 50% off that low and the economy is now smaller by a couple of percent than it was in March.

Of course they are going to tell you the market 'anticipates' and discounts the future. To which you can say you don't believe in superstition. Besides, the stock market is about where it was 10 years ago, except the NASDAQ which is far lower. Then just ask them what their point about the stock market and the economy is.

Stoneleigh said...

Ed Gorey,

Japan entered deflation in isolation. It was saved from experiencing significantly lower living standards by a cushion of personal savings as well as a robust export market. The USA, for example, bought 80 years worth of Toyotas over the last 20 years. The Chinese have bought 80 years worth of Kubota tractors over the last 20 years. Neither the USA nor China will be buying many new Toyotas or Kubotas for a long long time.

Exactly. We will not be so lucky as this deflationary spiral is global. Global trade will collapse and no one will be building recovery on exports. We have essentially no savings to burn through in order to postpone the inevitable. We have been piling on debt, but that process cannot continue. It is catabolic, in that we consume our 'seed corn' to wring the last ounce of growth from the virtual economy.

This is NOT going to play out as a slow squeeze or a death by a thousand cuts. Deflation of a massive debt bubble will be by implosion, and that implosion gets closer by the day.

Bigelow said...

'Calorie Economy'
Starting 8:23
Webbot Cliff High and George ure on coast2coast radio
PT 2

Ahimsa said...

El G,

He has decided to do something really "stupid." Next weekend he'll be moving our of our home to a $900/month leased apartment and will be putting his large cash savings back in the bank!!!

He has always been very responsible (and rational), but won't listen now. He does have a "good" paying job ($30/hr) -- no overtime now.

It's sooo depressing ...

Phil said...

Earlier version of the paper I mentioned above:

http://www.allacademic.com//meta/p_mla_apa_research_citation/0/4/1/6/0/pages41602/p41602-1.php

Stoneleigh said...

Farmerod,

Do you mean CPI or money supply (incl credit) when you say negative inflation? If you mean money supply, how would one determine how fast the money supply is shrinking? If you mean CPI, aren't you confusing the issue in the same way governments and mainstream economists do?

The real rate of interest would depend on money supply contraction, but as you point out, this would be very difficult to measure accurately.

One can use CPI as a proxy measure, but this is a poor measure of what is really going on as you say. It would probably understate deflation, making real rates appear lower than they actually would be, and therefore disguising the extent of the 'pushing on a string' problem.

Rod said...

Great find Phil. I've maintained for sometime that we generally make post hoc justifications for what we do or believe naturally.

Anonymous said...

For those of you who ask Stoneleigh to predict a timeframe, how is it possible to do so? The end is mathematically certain, but we still may be able to inflate another bubble or forestall the inevitable for years. In 2001, we blew another bubble lasting seven years. We may be able to blow another one at an interval half that. So it could be as early as this fall or as late as late 2012 early 2013 (no mysticism ascribed to 2012). Count every month we don't go down as a blessing and an opportunity to pay down debt and save--things that rational people should be doing even in good times.

ric said...

Marcus says, You are lucky that you were able to comfort your Mother before her mind slipped beyond reach. She is lucky to have your protection

What is luck? From a pragmatic, utilitarian perspective it makes no sense to invest so much money and time into someone's final days. Also, I don't know how much longer I'll be able to "protect" her. Stoneleigh tells us:

"This is NOT going to play out as a slow squeeze or a death by a thousand cuts. Deflation of a massive debt bubble will be by implosion, and that implosion gets closer by the day."

My mother has about the best care someone of my socio-economic status can spend: six patients in a private home with three full-time caregivers. No insurance to pay for it. Her life is artificially sustained through 21st Century health care. Five hundred years ago she would have died long ago unless she were royalty. Today, she laughs, babbles, totters occassionally with help about the house. Daily, I read TAE because of the clear-eyed, humane intelligence I find here--and often wonder how our hosts justify spending such resources. Daily, I sit with my mother and because we can no longer speak and she is generally in her own world, I spend a lot of time pondering the value of things. I pray she will go while I am still able to keep her comfortable. Why do I do it? People speak of the sacredness of children--of working toward the future. Why work so hard for a graceful end? What kind of investment is that? I've no answers, of course, but it reminds of me of lines from T.S. Eliot's brilliant East Coker about life with the real:

I said to my soul, be still, and wait without hope
For hope would be hope for the wrong thing; wait without love
For love would be love of the wrong thing; there is yet faith
But the faith and the love and the hope are all in the waiting.
Wait without thought, for you are not ready for thought:
So the darkness shall be the light, and the stillness the dancing.


I suppose all this sounds nuts, but it's how life appears at it's limits.

PKP said...

Tea Party Express

Ilargi said...

"...but we still may be able to inflate another bubble or forestall the inevitable for years."

No.

DIYer said...

PKP,

So y'all are going from San Antonio to Waco to Dallas without a stop in Austin?

I woulda thought ... but naaah.

Anonymous said...

Joseph,

I don't think respect is a funny thing. It is plain and simply something that is "earned".

Donna

Ahimsa said...

"So the darkness shall be the light, and the stillness the dancing."

Thanks for sharing, Ric. I look forward to your moving and profound posts.

John said...

John Day
I read Automatic Earth, every day, and seldom comment. Ilargi, all true prophets are hated and reviled by the sociopaths who rule over us, and all who follow them with fearful "faith". Yes. I think we are a self-limiting species. We limit ourselves by being ruled by sociopaths, who turn us to slaughter each other when we near the limits of the food supply. Read on. I sent this out a few days ago to my readers.

Unwittingly Subjugated,


". ..all kings is mostly rapsacallions, as fur as I can make out." Huck Finn

Are sociopaths our natural born masters?
No, really, I'm dead serious, here. When human groups reach 100-200 people, the value to any individual from taking sides in a fight, tends to become greater than the value to that individual of quieting the fight down.
The implication of this is that human groups can't get bigger than 100-200 people before they break up in a blood-feud. There are economic survival advantages to larger groups, advantages that are worth a hefty price. That price turns out to be a strong-man, a gang boss, a proto-king. By taking the authority of decision and the license of killing upon himself, this chief, or lord or king removes the impetus to blood feuds, but he is also a very expensive creature to keep, once he has such assymmetric powers. He takes a big cut of everything, takes a lot of women, and has to expend the lives of the excess men in wars of conquest to expand his power.
His genetic traits then get amplified in the population, and dominance and aggression become widespread. The most successful dominants employ the others, or get them killed off. That is the history of kings.
People seem to crave a strong king to follow, so those subjugated, submissive traits get amplified, also.
Some societies have been far worse for this than others. About 2/3 of human societies have had this kind of harem-breeding, controlled by dominant males. Those groups can be spotted because the males will tend to be bigger, more muscled and more aggressive than the females. Cultures where men and women are closer in size and strength have not been so much this way.
There are advantages to cooperation also, especially where there is less environmental advantage to large groups. With big, fertile plains to farm, supportive of a large population, it will be hard to escape kings and wars. In mountain areas, where large groups can't be supported, or in deserts (thinkPueblo peoples), you may get more egalitarian developments.
The early kings had to be big and strong, to subdue dissent personally. King Saul, the first Hebrew King, was chosen because he was so big, "head and shoulders above the rest". In order to maintain power, kings had to develop cunning, ruthlessness, coldness and an unyielding drive to dominate. Sound familiar?
They had to understand and manipulate the emotions of others, turning them against each other to divide and conquer, but they couldn't afford this frailty themselves. Their weakness was necessarily hubris, the blind, narcissistic drive to dominate. Obviously, they had a lot of offspring, always a big part of the plan for kings, as I recall.
As time went on and societies became large and complex, ruling elites became the rule. These extended families had loyalties within themselves, and often bloody mutinies, but were especially ruthless against the commoners, tossing them into wars, while the royalty intermarried to cement ties.
So this defines sociopathy, as far as I can tell. We can see the value to human societies, and why these genes would amplify. We can also see that these sociopaths were programmed to control population size, by turning a group to war when food ran low, turning it before it turned on them. Maybe the group would succeed, maybe not, but group size was controlled within a range the food supply could support.
(continued)

John said...

(continued)
What hope could the rest of us have? Well, remember that this was never a universal arrangement. there was always some strong, honest boy from the hinterlands arising every few hundred years, to topple a tyrrany which had become so oppressive as to be hurting the survival of the population. Often there was just a substitute tyrant, but occasionally there was an Oliver Cromwell or George Washington (feet of clay, I know). Also, this did not develop to the same degree everywhere.It didn't seem to be the case in many native American societies, and the Inca had a remarkably benign structure of empire. The Mayans engaged in massive local warfare and human sacrifice of prisoners, to control a population at the edge of sustainability, until there was a really big, long series of droughts, then there was collapse.
So the Maya had the dominance and coldness thing in spades, but they died out, largely at their own hands and through inflexibility. Freedom may lend itself to flexibility, and tyranny may undergo periodic collapse, through stifling of innovation, which threatens the status quo of the elites.
My reading is that you can't have a society of all sociopathic elite types, because somebody has to be productive. the elite sociopaths control the commoners, but get out of control themselves, requiring a periodic cleansing of their expanded numbers, when the parasite-heavy society collapses. (Think French Revolution) As a society becomes more productive and efficient,it can support more elites, especially if they turn it into an empire, which receives tribute, like Rome before the Barbarians, or the US now.
Are we at a turning, where there will be a collapse of the structure of the elites? this would have to be global.they have become like the ruling families of Europe on a global scale now. We need a fundamental transformation from the culture of cold greed, which we have blindly coasted into. We need sustainability.
With modern contraception we don't need elites to make us kill each other in wars. Will they have one more go at it? Y'know, it wouldn't bother them at all. they aren't wired to be bothered by causing mass slaughter or lying. It's the kind of breed of dog they are. I'm still hopeful that 1000 years of women choosing freely who they reproduce with, will get rid of a lot of this sociopathy in our gene pool. The first thing that sociopaths everywhere do is subjugate women. That is a necessary minimum.
Anyway, here is an article about sociopaths. Recent functional brain imaging reveals a lack of connection between cognitive and emotional centers. You may have read this stuff recently. This article thinks we'll be able to use testing to exclude sociopaths from positions of power in the world. Sadly, I think the sociopaths will dominate such technology from the word "Go". They'd be stupid not to, and they are not particularly stupid. Nope,I think the natural cycle of collapse is what we will have to endure again. Remember, all violent means of change will be dominated by the sociopaths:
http://www.sott.net/articles/show/191213-Word-gets-around-Twilight-and-the-trick-of-the-psychopaths

Robespierre

scandia said...

PKP,Re The Tea Party Express... Jeez..America is a marketing ( market) state of mind! The newest product line- revolution. They even have a store! And the patriotic images are all so 50 's somehow, neat,clean red, white and blue. I'm sure there will be a squad of cheerleaders soon enough...

Farmerod said...

I hope this is taken as encouragement as opposed to smug boastfulness but I have several successful conversion stories to relate. First, and most important, my spouse who came to understand global financial end energy collapse reluctantly at first but who now has probably overtaken me in planning for a simpler but more fulfilling future. Then there's my dad, who has come to understand what exactly I've been warning him about for almost three years now. He even reads this space, mom says, and walks around the place preaching doom (hi HPM & TM). They sold their condo late last year and put their modest savings in places where it will not further erode. My sister has now put her place up for sale and will probably get a good dollar for it which I suspect truly is the last opportunity for her to do so. This will allow her to take good care of her son; in fact, the four of them will be sharing a large rental while they watch things unravel and plot their next moves (so far work is still plentiful although they are beginning to see signs within their workplaces of the decline). My parents-in-law almost made a catastrophic real estate mistake a year ago but were saved by nothing more than dumb luck. Since then, they got religion and are making mostly wise financial decisions. My sister-in-law has no time to read what I do because of her occupation but I've been able to give her good, brief forecasts which she has paid attention to. As a result she and her husband will not be buying real estate any time soon and will concentrate on paying off student loans. All of this bodes well for my extended family economically as we will not have the familial financial pressures that I suspect other families will have.

When I visited friends back east in June, some said they pulled money out of their mutual funds and have started reading behind the stories as a result of what I've told them. A good friend who just months ago said he figured his job was secure for a very long time but who now has only a few weeks left before his job ends, mentioned that they just recently cashed in 90% of their investments. I've been warning him for months. In fact, many of our friends who thought I had lost my mind a year and a half ago when I insisted when sell our house and move across the country to take up agriculture now, at least, don't think I'm quite that crazy anymore.

Having said all that, there are plenty of people I've spoken with who do think things will be better some day and they plan on riding it out.

You can't win them all. I have found, however, that those who have no economic background are much easier to teach (for lack of a better word) than those who are inclined toward conspiracy but have gotten their economic understanding through goldbug blogs (financialsense, jim willie, etc). Non-Austrian school dogmatics are really hard to reach. But, wow, once you understand what the dog is and what the tail is, things start to make sense.

el gallinazo said...

Ilargi said...
"...but we still may be able to inflate another bubble or forestall the inevitable for years."

No.

To expand (my opinions) on Ilargi's somewhat laconic response, when the dot.com bubble burst, Greenspan had two serious pieces of ammunition left. The American consumer was not up to his eyeballs in debt (only up to his throat) and the Fed Funds rate was at a normal level. He was thus able to blow another huge bubble by dropping real interest rates into the negative and people would respond by going further into debt.

Today the herd will simply not take on more debt individually, the Fed Funds rate is at zero yet the real interest rate is probably over 6 %. The last bubble that can be blown is the government forcing us all into further debt through federal borrowing. That is the end of the line. QE is a joke told by an idiot. When the international bond market says "no mas," it's game, set, match and the black hole implosion truly begins.

A 1:59

"Count every month we don't go down as a blessing and an opportunity to pay down debt and save--things that rational people should be doing even in good times."

You are forgetting for every month that goes by, for every dollar the average Usaco pays down his debt, the government forces $5 of debt onto us (and our children) involuntarily and gives it away to the banksters. So maybe this delay is not such a great deal.

Dr J said...

John said:

"Are sociopaths our natural born masters?"

This reminds my of when I studied psychiatry in med school. My preceptor, as part of his practice, provided service to a Hutterite colony in Southern Alberta (these were large communal farms that conformed to the pastoral Anabaptist teachings of Jacob Hutter of Moravia circa mid-16th century, a little bit like the Amish). He commented on the efficiency of a system where everyone had a productive job matched to their particular talents and proclivities - "the idiots tended the geese and the psychopaths were the business managers".

ogardener said...

Anonymous Malcolm Martin said...

August 23, 2009 10:41 AM

The process of economic breakdown may involve a relatively slow devolution or unwinding. Or the system may succumb to a shot in the back of head, some event that brings it down suddenly and with a bang. The present rulers of the economy will be sorely tempted to a draconian measure to save their bacon. For instance, a war could be launched with an attack on Iran by the U.S. or its proxies in Israel. Such a war would conceal the systemic economic failure and allow for the rationing and repression they must rely on to function awhile longer.

Hey! Just like what happened on 09/11/2001. Sorry folks. I couldn't resist.

John said...

Thanks, Dr.J. I studied Psychiatry in Med School,too... The Huterites live like the Hopi, in the way you have described.

John Day

John said...

Hi Malcolm Martin,
I'd keep an eye on the militarization of the emergency response to Swine Flu.
War, Pestilence, Famine and Death are the 4 Horsemen. Pestilence may stand in for War this time around.

John Day

Anonymous said...

El G said: You are forgetting for every month that goes by, for every dollar the average Usaco pays down his debt, the government forces $5 of debt onto us (and our children) involuntarily and gives it away to the banksters. So maybe this delay is not such a great deal.

If the financial system collapses, sovereign debt will eventually be defaulted.

Anonymous said...

Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans.

Interesting that Ilargi quotes this but does not seem to understand a culture where a question like this could be posed and received as a fundamental truism.

Here's the rub I&S. When we look at two countries with roughly equal size, roughly equal richness in natural resources, and roughly equally long history as independent nations, the outcome for each can differ vastly. Take Brazil and the USA. The differences between them are enormous. We can bally the details back and forth but the question that you might want to bake into your social and economic equations is what makes their experience over the last 100 years so different despite their similarities in many fundmentals.

I do agree with the basic facts you two put forth here at TAE: namely that oil production is peaking and climate change is beginning to cause a variety of problems. But your brush paints the world all the same color. The equations you apply do not account for the massive local variations that have shaped the world to date.

Without these your analysis is two dimensional. Its applicability to the real world is diminished. The probabilities of the future you two envision is remote at best. There are reasons for the massive disparities in the world today. These will not evaporate or evanesce as the world limps through the next decade of oil scarcity and climate effects.

Your theories seem immature and relatively shallow without this kind of analysis IMHO.

Ilargi said...

A 4:26

I'm pretty sure you confuse this site with another one, and I don't think you're read too much around here. Oil scarcity and climate change have but a sideways influence on what we talk about. I see little reason to believe you have any idea of "the future we envision", or at least your words give no such indication.

Mellowg said...

Stoneleigh said 11:20
“Socioeconomic structures exist in order to concentrate wealth at the centre, at the expense of the periphery, and the centre will actively defend this dynamic.”

I rarely take exception with our good host, but could it not be argued that the periphery would be less wealthy if they were not part of the whole created by the center. For time immemorial, one has always benefited from a more affluent lifestyle the closer one was to the center, might that center be Rome, Athens, London, or even Paris under the Bourbon kings.


Is not the solution to a destitute fiat currency simply the creation of a new one which automatically comes accompanied with the solemn promise to the herd that it will never be tempered with?

Nor that any sane biped should believe that promise, but the herd always does.

el gallinazo said...

A 3:57

"If the financial system collapses, sovereign debt will eventually be defaulted."

Yeah, we're gonna mail China the keys.

el gallinazo said...

P.S.

The point is that by racking up all this debt and giving the wealth to the bankers to pay off their gambling losses, we will have nothing left as a social safety net when the SHTF. That's the bad news about the delay of the collapse.

Anonymous said...

I'm pretty sure you confuse this site with another one, and I don't think you're read too much around here. Oil scarcity and climate change have but a sideways influence on what we talk about.

Perhaps I confuse Stoneleigh's cornerstone of energy availability and cost as the primary effect reshaping our near-term economic future and your view of the inevitability of economic collapse due to the Ponzi dynamics of fiat systems in use today.

Be that as it may, you both still analyze with a broad monocolor brush IMHO. This approach's large granularity means your analysis will likely miss the mark by a very wide margin.

Anonymous said...

"Mostly these days I don't discuss it much with anyone except those who I know also understand. It's not worth the grief trying to educate those who do not want to be educated."

I see clearly that the MoP has successfully lobotomized the Sweep of Sheeple in Ahmerika. Mission Accomplished.

The financially unenlightened will be lead to the Place of Sacrifice and have their beating monetary hearts cut out of them on the Alter of Crony Capitalism.

R.I.P.

Most Americans had the opportunity to pick a more sane economic model but they all wanted Infinite Growth.

The Sheeple don't want no stinking Limits, they want Economic Immortality.

In Indiana Jones and the Last Crusade, the climax centered on reaching the mountain citadel cave where a secret chamber held the Holy Grail.

A 'Grail Knight' stood guard over the room, which held a number of Chalices, anyone of which, could be the True Grail.

Indiana Jones and the fascist greedhead Goldman Sachs guys had both made it to the sacred chamber.

The Grail Knight addresses them:

"...choose wisely, for while the true Grail will bring you life, the false Grail will take it from you."

The fascist greedhead Goldman Sachs guy immediately goes first and choses the most garish, jewel encrusted chalice of the lot.

(sounds of screams as the fascist greedhead GS guy is rapidly aged into dust by drinking from the false grail..followed by wind blowing and, finally, silence)

The Grail Knight:

"He chose poorly."

Jones choses the simplest, most unassuming of the Chalices.

The Grail Knight:

"You have chosen... wisely. But, beware: the Grail cannot pass beyond the Great Seal, for that is the boundry, and the price, of Immortality."

Anonymous said...

"the idiots tended the geese and the psychopaths were the business managers".

hahahaha

I gotta remember that one. Thank a million.

No make that a trillion.

Gravity said...

We are not content with negative obedience, nor even with the most abject submission.
When finally you surrender to us, it must be of your own free will.

We do not destroy the heretic because he resists us. As long as he resists us we never destroy him. We convert him, we capture his inner mind, we reshape him.
We burn all evil and all illusion out of him; we bring him over to our side, not in appearance, but genuinely, heart and soul.
We make him one of ourselves before we kill him. We make his brain perfect before we blow it out. And then... when there is nothing left but sorrow and love of Big Bernanke... we shall lift you clean out of the economy.
We shall turn you into gas and pour you into the stratosphere. Nothing will remain of you. Not a debt in a register, not a memory in a living brain.

Gravity said...

Men are infinitely malleable;
markets are not.

Ben said...

What did Bernanke the "Saviour" actually save?

First off, he's just a puppet doing the bidding of his "betters and "uppers".

It appears he may have "saved" the status quo for now, with the trillions he's borrowed against the future. The controllers are sure acting like there is no future, at least not one which has room for a middle class. It'll be hand to mouth...much like the majority of the world's population already lives like. Has this been anything more than a slave planet? We've been born into an existence where 98% of our time is spent maintaining the functioning of our bodies.

New law, or rather a renewed interest to enforce one that is already in the books in Ireland and many other countries...that being anti-blasphemy laws. Like something out of the Middle Ages, Ireland is planning on enforcing these laws again amidst a modern technological backdrop. And some of us thought technology breeds a progressive society.

Ilargi said...

"Perhaps I confuse Stoneleigh's cornerstone of energy availability and cost as the primary effect reshaping our near-term economic future and your view of the inevitability of economic collapse due to the Ponzi dynamics of fiat systems in use today.

Be that as it may, you both still analyze with a broad monocolor brush IMHO. This approach's large granularity means your analysis will likely miss the mark by a very wide margin."


I honestly have no idea what you're talking about, or where you get it. I would have to start guessing, and that ain't going to happen. You put words in Stoneleigh's mouth that miss the mark by so much it's embarrassing. You just haven't read what we write.

David Bowman said...

Does anyone else think Stoneleigh sounds an awful lot like HAL 9000? I guess she would be more like the lesser known SAL 9000.

Either way, she is creepy.

HAL 9000 said: Let me put it this way, Mr. Amor. The 9000 series is the most reliable computer ever made. No 9000 computer has ever made a mistake or distorted information. We are all, by any practical definition of the words, foolproof and incapable of error.

el gallinazo said...

David Bowman said...

"Does anyone else think Stoneleigh sounds an awful lot like HAL 9000?"

No. She is actually a very warm, caring person with more than a little humility. I think you are just suffering from synapse envy.

Starcade, now from Leviathan said...

This is what people don't get, though.

Without "Economic Immortality" or "The Bezzle" or whatever you wish to call it, more than a few of these people would simply not be able nor allowed to exist.

To clear "The Bezzle", you basically have to clear all which is dependent on it. And that's not going to be pretty, because much of what's dependent on it will not go quietly, valuing their lives more than their principles.

Pentronicus said...

Dave Bowman( haha! ) @ 6:53

Stoneleigh seems intelligent, confident, and knowledgeable. The Hal9000 had those traits too, but that is where the similarities end I think. Too bad you seem to find those qualities unnerving.

Anonymous said...

"....there was always some strong, honest boy from the hinterlands arising every few hundred years, to topple a tyrrany which had become so oppressive as to be hurting the survival of the population. Often there was just a substitute tyrant, but occasionally there was an Oliver Cromwell...."

Tsk Tsk.

from wiki on cromwell:
...Cromwell has been a very controversial figure in the history of the British Isles – a regicidal dictator to some historians (such as David Hume and Christopher Hill) and a hero of liberty to others (such as Thomas Carlyle and Samuel Rawson Gardiner). In Britain he was elected as one of the Top 10 Britons of all time in a 2002 BBC poll.[1] His measures against Irish Catholics have been characterized by some historians as genocidal or near-genocidal,[2] and in Ireland itself he is widely hated.[3][4]...., Winston Churchill described the impact of Cromwell on Anglo-Irish relations:

...upon all of these Cromwell's record was a lasting bane. By an uncompleted process of terror, by an iniquitous land settlement, by the virtual proscription of the Catholic religion, by the bloody deeds already described, he cut new gulfs between the nations and the creeds. 'Hell or Connaught' were the terms he thrust upon the native inhabitants, and they for their part, across three hundred years, have used as their keenest expression of hatred 'The Curse of Cromwell on you.' ... Upon all of us there still lies 'the curse of Cromwell'."[58]

Cromwell is still a figure of hatred in Ireland, his name being associated with massacre, religious persecution, and mass dispossession of the Catholic community there. As Churchill notes, a traditional Irish curse was malacht Cromail ort or "the curse of Cromwell upon you".

VK said...

Eric Sprott on China and Beyond the Stimulus.

The Chinese have deployed 4 trillion yuan in stimulus spending through to 2010.

In concert with this stimulus, the Chinese central bank has scrapped its national lending quotas in order to jump start their economic engine. In the first half of 2009, Chinese bank lending hit a record high of 7.37 trillion yuan.

Assuming their stimulus package is evenly split between 2009 and 2010, it equates to 8.37 trillion yuan of fiscal spending and lending by Chinese banks. For perspective, the Chinese economy generated 13 trillion yuan in the first half of 2008.

So in effect, the Chinese have injected a stimulus equivalent to 64% of their first half 2008 GDP in the first half of 2009. Please understand us when we tell you that this is unprecedented. The Chinese government has effectively spent and lent enough in six months to buy 122 Ford Class aircraft carriers at US$8.1 billion a piece.

It is akin to the US government injecting (and US banks lending) almost $4.5 trillion USD to its citizens and businesses before July 2009…an ungodly sum that would impact every asset class under the sun. Is it any wonder then that the Shanghai stock exchange has more than doubled from trough to peak since its November lows?

What is perhaps even more surprising, however, is the fact that the Chinese stimulus has had a seemingly lackluster impact on the Chinese economy.

Despite its massive size, the stimulus program has only generated a 7.9% increase in their 2009 GDP. For perspective, this represents a mere 1 trillion yuan return on a 9.37 trillion yuan stimulus - not a good return on investment. So if the money hasn’t generated GDP growth, where did it go? It’s gone everywhere. Their government-induced liquidity flood has “soaked” virtually every speculative asset class in China. Copper, nickel, steel, Chinese equities, Chinese real estate - they’ve all appreciated in spite of the obvious and acknowledged weakness in the global economy.

John said...

Anonymous said: "tsk, tsk" about using Oliver Cromwell as an example of a "good guy" arising to break up a parasitic elite, grown too heavy for the host. I also said that sometimes it was "just another tyrant" and that both Cromwell and George Washington had feet of clay.
Thanks for reading my stuff!

John

Stoneleigh said...

Mellowg,

I rarely take exception with our good host, but could it not be argued that the periphery would be less wealthy if they were not part of the whole created by the center. For time immemorial, one has always benefited from a more affluent lifestyle the closer one was to the center, might that center be Rome, Athens, London, or even Paris under the Bourbon kings.

There are centres and peripheries at all scales simultaneously. The developed world is the centre at an international scale, but within that structure there is also a centre and a periphery at a national level. The same wealth concentration mechanism exists at a state/provincial level, at a municipal level etc. The wealthiest people would be at the centre of the centre, while the poorest would be in the periphery of the periphery.

What you are talking about (I think) is the periphery of the centre, and you ask if the inhabitants are not wealthier by virue of being part of the centre than they would otherwise have been. That is of course true. Globalisation has enabled developed countries to pick the pockets of the whole world, and even the relatively poor in developed countries have benefited materially, although not equally by any means. A rising tide floats all boats to some extent, but that benefit has come at the expense of the international periphery, where wealth has been systematically extracted while the adverse consequences of that extraction have been foisted on the local population.

For more on this theme, see the primer Entropy and Empire.

Anonymous said...

Nothing wrong with a monochrome brush--some of the best paintings have been done in that fashion.

You're confusing color with value/tone and value is far more important. In fact, almost any color will work providing the value/tone is correct. Color is basically a stain that resides on the surface of the proper tone.

If you were to write that Ilargi and Stoneleigh's analysis and predictions are coming from the low end of the value scale I would have to agree. And I would also agree that is where their predictions should be coming from.

Aesthete

Stoneleigh said...

David Bowman,

Does anyone else think Stoneleigh sounds an awful lot like HAL 9000? I guess she would be more like the lesser known SAL 9000.

Either way, she is creepy.


LOL - Maybe I should crack some jokes? ;)

I make no claim to infallibility. I offer my view of the world anyone is free to accept or reject it. My view is unfortunately quite bleak in many ways, and therefore understandably hard to accept. I am hoping though that we will see a resurgence of human community, if only at a very local level, as materialism disappears. The atomistic life will no longer be viable, so people will have to learn to live together again.

Anonymous said...

“Strange is our situation here upon earth. Each of us comes for a short visit, not knowing why, yet sometimes seeming to a divine purpose. From the standpoint of daily life, however, there is one thing we do know: That we are here for the sake of others...for the countless unknown souls with whose fate we are connected by a bond of sympathy.

Many times a day, I realize how much my outer and inner life is built upon the labors of people, both living and dead, and how earnestly I must exert myself in order to give in return as much as I have received.”

Albert Einstein

HAL9000 said...

@ David Bowman:

I'm sorry, Dave. I'm afraid I can't do that.

I think you know what the problem is just as well as I do.

This mission is too important for me to allow you to jeopardize it.

VK said...

LOL - Maybe I should crack some jokes? ;)

Indeed! Maybe some cricketing jokes directed at Australia? The English press is out in full glory today!

Some excerpts from the Sun today,

Q: What do you call an Australian with a champagne bottle in his hand?
A:A waiter.

Q: What's the Aussie version of a hat trick?
A: Three runs in three balls.

Q: What is the most proficient form of footwork displayed by Australian batsmen?
A:The walk back to the pavilion.

Q: What did the spectator miss when he went to the toilet?
A:The entire Australian innings.

Q: What's the Australian version of LBW?
A:Lost, Beaten, Walloped.


:p

Stoneleigh said...

VK,

LOL - the shoe was always on the other foot when I lived in the UK. British cricket never seemed to recover after Ian Botham retired, but then I haven't followed it since I moved to Canada.

If memory serves, The Ashes trophy that Britain and Australia play for came to be because England had been beaten by the Aussies and an elderly woman fan waved a crematorium urn and pronounced 'Here are the ashes of English cricket.' Naturally the team had to play to win the ashes back and the tradition continues today.

dark_matter said...

Stoneleigh,

There are centres and peripheries at all scales simultaneously.

Interesting statement, since it exactly defines a fractal and fractals have a close relationship with chaos and entropy.

HAL 9000,

Touchee!

Anonymous said...

A new tool from the Bernanke workshop?

Jesse's
Cafe Americain


So, what we might expect to see is the Fed, as the banking system stabilizes after perhaps some new programs and credit facilities, begin to slowly unleash these excess reserves by reducing the interest to the Member Banks, which would lower the bar and motivate them to engage in more commercial loan activity.

VK said...

@ Stoneleigh

:O

England are a real up and down team. You never really know with them?! Though now they have beaten the Aussies twice in England recently. First in 2005 and now. They lost in 2007 in Australia.

The English press is all giddy, I predict stocks will rise for some time now as a result. I bet there will be a parade in the streets, followed by scones with Her Majesty :)

The Guardian
Paradise regained as England capture the Ashes once again

The Sunday Times
Andrew Strauss(England Captain) aims for world after Ashes victory

The Sun
We've urned it

The Daily Express
THIS WAS THE DAY THEY ALL SHARED GLORY

The Independent
England grind their old enemy into the dust

The Telegraph was unusually modest
England win the Ashes

Stoneleigh said...

Dark Matter,

Interesting statement, since it exactly defines a fractal and fractals have a close relationship with chaos and entropy.

Indeed. Fractals have many applications, including markets.

VK said...

Gasp, Shock, Awe! No they wouldn't!!

Would they?!!

http://online.wsj.com/article/SB125107135585052521.html

Goldman's Trading Tips Reward Its Biggest Clients

Goldman Sachs Group Inc. research analyst Marc Irizarry's published rating on mutual-fund manager Janus Capital Group Inc. was a lackluster "neutral" in early April 2008. But at an internal meeting that month, the analyst told dozens of Goldman's traders the stock was likely to head higher, company documents show.

The next day, research-department employees at Goldman called about 50 favored clients of the big securities firm with the same tip, including hedge-fund companies Citadel Investment Group and SAC Capital Advisors, the documents indicate. Readers of Mr. Irizarry's research didn't find out he was bullish until his written report was issued six days later, after Janus shares had jumped 5.8%.


Every week, Goldman analysts offer stock tips at a gathering the firm calls a "trading huddle." But few of the thousands of clients who receive Goldman's written research reports ever hear about the recommendations.

At the meetings, Goldman analysts identify stocks they think are likely to rise or fall due to earnings announcements, the direction of the overall market or other short-term developments. Some of their recommendations differ from ratings printed in Goldman's widely circulated research reports. Some Goldman traders who make bets with the firm's own money attend the meetings.

Critics complain that Goldman's distribution of the trading ideas only to its own traders and key clients hurts other customers who aren't given the opportunity to trade on the information.

Ed_Gorey said...

Re: The future of cash in a society trapped in deflation

I agree with Ilargi's earlier argument for the maintenance of cash: The world's major criminal enterprises (drugs, weapons, and women)-trafficking require cash and will have it.

Nevertheless, for those who are interested in the topic, I found the original article about Japan and the future of cash.
Japan, deflation, and cash

Ruben said...

My interest in fractals greatly diminished once I heard about Constructal Theory, which predicts flows. Therefore, it would be useful to predict the flows from the periphery to the centre. I would encourage anyone who is interested in fractals to Google up Construcatal.

The inventor of Constructal Theory has offered it as a law of Thermodynamics. And before you flame me about the sanctity of the laws of thermodynamics, please google, and then read the books.

Anonymous said...


I honestly have no idea what you're talking about, or where you get it.


Ilargi's Mom:

Clean your room!

Ilargi:

What room?

Ilargi's Mom:

This room! Clean it!

Ilargi:

What room? Where? There are many rooms. Define your terms please.

Ilargi's Mom:

Clean your room dammit!!

Ilargi:

I don't have a room, Ma'am. I eschew possesions. You are confusing "my" room with the role rooms play in our house.

Ilargi's Mom:

If you don't clean your room this instant I'm going to tan your backside, son.

Ilargi:

Define backside please.

...

Sophistry and deflection as methods of avoidance.

Anonymous said...

the three second tape playing in Bernanke's head
http://www.hussmanfunds.com/wmc/wmc090824.htm

007Billion said...

TAE is an antidote and should be taken as such.
I don't come here for the tea leafs on the near future. I prefer to take my whiskey straight and I greatly appreciate the very readable Ilargi and Stoneleigh.
That doesn't mean my worldview or opinions have to match up about how this all falls out.
One thing though: What's with this ongoing Bruuuce obsession? The odd compulsion to flick my lighter every time I see the embed with accompanying lyrics distracts me so much I feel America just might be due for a RISING after all.
To all you Canucks: I WAS BORN IN THE USA! Ugh.

dark_matter said...

Ruben,

Thanks for the pointer to constructal theory. Kind of like fractals with meaning. I am very interested in its possible application to microprocessor clocking.

neroden@gmail said...

"There are exactly zero species on the planet that have been outfitted with an inbuilt limiter, and we are no exception"

Actually, this is dead wrong. A large number of top-of-the-food-chain "cap predator" species do have an inbuilt limiter, in the form of extreme territoriality. The big cats will kill each other if they get too close; this keeps population of the big cats down to a level where they never overpopulate to the point of dying from starvation.

We, on the other hand, seem to be missing that inbuilt limiter, making us a rarity among "top of the food chain" species.

Anonymous said...

@Anon 10:26

I think Jesse has nailed it. Thanks for the link.

Yes, that has to be Bernake's next move. "Encourage" the Banks to start lending, or do it himself.

If they can keep the big one's from buying up all the little ones, he might have a chance at success.

If he can't, then the implosion will be even greater, even if he does kick the can down the road.

20/50 said...

"...but we still may be able to inflate another bubble or forestall the inevitable for years."

Ilargi said... "No."

But Karl says that the 20/50 crossover happened recently. Isn't that cause for some new optimism?

Ilargi said...

New post up.