Saturday, June 13, 2009

June 13 2009: The Future Loot

Harris & Ewing Wind tunnel tested?! 1938
Streamlined street car passing Washington Monument

Ilargi: The G8 finance ministers apparently are doing a great job of deluding each other and the media surrounding them. They are talking, believe it or not, about what to do when the good times come back. All that's needed, no really, says Tim Geithner, is for everyone to focus on growth. Once they do that, everything else will take care of itself. And perhaps it's better this way.

A group of people so completely incapable of solving any problem they're faced with might as well ignore those problems and pretend they can wish them away. There's no way to bring about the real big troubles that lie ahead a whole lot faster than pretending the small troubles you couldn't tackle went away of their own accord. Bring it on. At least we'd no longer have to look at the intellectually crippled crowd in charge today.

No, Obama is no defender of free markets, and for the same reasons that his administration has nothing to do with socialism. Taking money from the people to give it to a select few rich bankers is not socialism. If anything, it's the opposite. And it hasn't got zilch to do with free markets either.

The FDIC hasn't closed hardly any banks lately, and that's disconcerting. No-one with an ounce of live brain tissue can believe that all 8500 or so banks left are in great health, not with the foreclosures and lay-offs continuing at breakneck levels, and not with commercial real estate dissolving. We have known for a while that the FDIC is short of funds, and that is surely a reason behind the hiatus in bank seizures. A more prominent reaon, though, may be the administration's plan to start selling off troubled banks to private equity firms. That should make for some nice deals. It’ll be presented to the public as some dort of natural economic phenomenon labeled "consolidation".

And everybody will talk about green shoots and how to divvy up the future loot beyond the horizon, while not one single present issue will be solved and growth won't come back in our lifetimes. Well, except for our debts. They will keep on growing.

G8: Geithner: Growth Should Remain Focus Of Policy
U.S. Treasury Secretary Timothy Geithner warned Saturday that it's too early to pull back on global efforts to boost growth, but that governments should reaffirm their commitment to returning to fiscal soundness once the crisis passes. After meeting with his counterparts from the Group of Eight leading industrialized nations, Geithner said the main focus for G8 and Group of 20 countries should continue to be growth. "We need to reinforce the improvement in global demand and continue to lay a foundation for a durable recovery," he said in prepared remarks for a briefing. "It is too early to shift toward policy restraint."

Geithner said the global economy hasn't reached "the point the point yet where we can say we have a recovery in place." However, echoing the G8 communique's call for an exit strategy from crisis measures once a recovery takes hold, Geithner said the eventual return to growth "will be stronger and more sustainable if we make clear today how we get back to fiscal sustainability when the storm has finally passed." He downplayed differences among G8 officials over the timing and type of policies to bring deficits back under control, citing "support around the table for that basic strategy."

A senior U.S. administration official told reporters that there may be a different emphasis on the timing of exit strategies. But all countries are seeking to achieve the same sense of balance in policies, with a broad consensus that the focus should still be on growth, the official said. Geithner once again stressed the administration's commitment to returning to a path of fiscal sustainability, promising a quick reduction in deficits starting in 2011. Growing concerns about soaring U.S. debt levels have weighed on U.S. Treasurys and the dollar, and the currency took a hit earlier in the week after Russia's central bank said it would cut its U.S. asset holdings as it bought $10 billion of IMF bonds.

However, Russian Finance Minister Alexei Kudrin downplayed the move after meeting with Geithner Friday, saying he doesn't expect "any significant changes in our policy with regards to dollar-denominated paper" over the next year. Geithner said he didn't have "a significant discussion" about the issue with G8 ministers, including in his bilateral meeting with Kudrin. When asked about rising Treasury yields and commodity prices, Geithner said the "dominant" force in financial markets over the past couple of months has been a "welcome reduction in acute concern" about the threat of a more severe recession, deflation and systemic financial problems. The G8 said it had begun a discussion on the appropriate "exit strategies" once the recovery is assured, and tasked the International Monetary Fund with preparing an analysis.

Like the communique, Geithner was also more upbeat about the economic outlook, crediting unprecedented global policy action for the "encouraging signs of stabilization across many economies." Financial market improvements were a reflection of growing confidence in banking systems, especially in the U.S., he said. Next week, the Obama administration will unveil proposals for overhauling both the U.S. and international regulatory system, and Geithner cited the need for a level playing field globally so that national safeguards aren't undermined. In addition to greater oversight of international financial institutions and products like derivatives, the administration will propose more conservative capital ratios internationally and for regulators to come up with ideas for a toolkit to deal with cross-border failures of financial institutions by year-end.

Summers Calls Obama Defender of Free Markets
President Barack Obama's chief economist on Friday defended White House economic policies against criticism that they amounted to "a kind of back-door socialism." In a speech to the Council on Foreign Relations in New York, National Economic Council Director Lawrence Summers said Mr. Obama's interventions "will go with, rather than against, the grain of the market system." Mr. Summers's remarks come as mainstream critics of Mr. Obama's use of government mechanisms to revamp big segments of the economy are increasingly finding their voice. The U.S. Chamber of Commerce this week announced that it would launch a national advocacy campaign to defend free enterprise against "anti-business activists," referring to administration initiatives.

Mr. Summers also laid out an ambitious goal ahead of Mr. Obama's Wednesday speech on the re-regulation of financial markets: ending a decades-long barrage of financial crises. "If we can reform our financial system, we will minimize the recurrence of the situation we all find ourselves in today," he said, reciting a litany of crises from the savings-and-loan collapse in the late 1980s to last year's housing-market bust. While Mr. Summers's speech was billed as a prelude to next week's efforts on financial-market regulation, most of it was devoted to defending the administration's aggressive economic policies.

Those policies have seen the government take control of mortgage giants Fannie Mae and Freddie Mac and insurer American International Group Inc.; take large stakes in General Motors and Citigroup; and usher Chrysler into and out of bankruptcy while shifting the balance of power between creditors and unions. Such "extraordinary actions" were done out of necessity, not choice, Mr. Summers said. And just as history has judged Franklin Roosevelt's New Deal as saving capitalism, not destroying it, Mr. Obama's efforts eventually will be seen as pro-free market, he said. "If you take one message from what I say today, take this: Only if government is no longer a major presence in these companies in short order will we have fully succeeded in achieving our critical objectives," Mr. Summers said.

House Minority Whip Eric Cantor of Virginia, the chamber's second-ranking Republican, on Friday likened the president's economic policies to those of Russian Prime Minister Vladimir Putin. "It is stunning to see someone in the position of Larry Summers having to defend the president's commitment to free-market capitalism," Mr. Cantor said in an interview. "By giving this speech, this administration has signaled perhaps we are losing that America we all know." Mr. Summers said the president had run for the White House to fix the health-care system, overhaul education and achieve energy independence, not run banks and auto companies. But before he can shift to the core of his agenda, Mr. Obama has another task, Mr. Summers said: re-regulating the financial markets.

Mr. Summers laid out five principles for the plan: The government must have the authority to take over and liquidate failing nonbanking financial institutions. Regulators must be able to make certain that financial institutions have enough capital to weather crises. Regulated entities must not be able to choose their regulators, nor should regulators have to fight each other for jurisdiction. And the interests of consumers must trump the interests of regulated companies.

G8 Finance Ministers Start To Plan For End Of Crisis
Finance ministers from the Group of Eight leading industrialized countries Saturday said they had started to discuss how to scale back the massive amounts of stimulus they have injected into their economies. Less than a month before a meeting of G8 world leaders in L'Aquila, Italy, top finance officials said they had asked the International Monetary Fund to help them map out the best strategy for cutting budget deficits, withdrawing support from banks, and tightening monetary policy.

But IMF chief Dominique Strauss-Kahn and U.S. Treasury Secretary Timothy Geithner both stressed the need to ensure a recovery had taken hold before pulling back on global efforts to lift the economy. "We discussed the need to prepare appropriate strategies for unwinding the extraordinary policy measures taken to respond to the crisis once the recovery is assured," the finance ministers said in a statement at the end of their two-day meeting. Governments across the developed world raised their borrowing to try to shore up demand as the financial crisis intensified in late 2008. The result is an increase in government debt unprecedented in peacetime.

Without a plan to scale back their debts, governments fear yields on their bonds may rise significantly, increasing the cost of borrowing for the public and private sectors and threatening to undermine any recovery. G8 finance ministers said the so-called "exit strategies" the IMF should look into will vary from country to country, but are "essential to promote a sustainable recovery over the long term." The IMF's Strauss-Kahn said the main focus for policy makers should still be to fight the existing crisis. "Before the exit strategy we have to exit the crisis," he stressed, in remarks that were backed by Geithner, representing the world's largest economy. "We need to reinforce the improvement in global demand and continue to lay a foundation for a durable recovery," Geithner said. "It is too early to shift toward policy restraint."

But as the global economy stabilizes, new risks to growth have emerged, among them rising oil prices. In their statement, the finance ministers said that "excess volatility of commodity prices poses risk to growth." Italian Finance Minister Giulio Tremonti, who holds the 2009 presidency of the G8, warned the big stimulus used to fight the recession may already be recreating the kind of financial speculation that was at the root of the economic crisis. Tremonti said speculation had returned, especially in oil markets, where prices have recently risen sharply, posing a threat to the recovery. "Instead of financing the real economy, the extra liquidity in the system has this tendency to fuel speculation," the Italian minister said.

Front-month crude oil prices this week surged to their highest levels since October, topping $72 a barrel and trading at more than twice the low hit in January. Although currencies were not formally discussed at the meeting, which wasn't attended by central bankers, remarks by Russia's deputy premier reassuring the U.S. on its dollar policy are expected to help support the greenback. Russian Finance Minister Alexei Kudrin late Friday said that over the next year or more he "does not see any significant changes in our policy with regards to dollar-denominated paper." The dollar had weakened earlier this week after Russia's central bank said the share of U.S. governments bonds in its reserves would fall as it bought $10 billion of IMF bonds.

Russia holds around $400 billion in gold and foreign exchange reserves, the world's third-largest stash after China and Japan. About one-third of that is invested in U.S. Treasuries. To reduce the world economy's dependence on the dollar as a global reserve currency, Russia and China have been suggesting the IMF's special drawing rights as a possible alternative. The falling dollar has largely been a result of the huge rise in U.S. public debt that was needed to combat the financial crisis. When asked about concerns about U.S. debt levels, Geithner said he didn't have "a significant discussion" about the issue with G8 ministers, including in his bilateral meeting with Kudrin. The G8 finance ministers also urged offshore financial centers to continue to make progress on implementing tax cooperation standards monitored by the Organization for Economic Cooperation and Development.

US cities may have to be bulldozed in order to survive
Dozens of US cities may have entire neighbourhoods bulldozed as part of drastic "shrink to survive" proposals being considered by the Obama administration to tackle economic decline. The government looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature. Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area.
The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint. Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country. Mr Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes. Most are former industrial cities in the "rust belt" of America's Mid-West and North East. They include Detroit, Philadelphia, Pittsburgh, Baltimore and Memphis.

In Detroit, shattered by the woes of the US car industry, there are already plans to split it into a collection of small urban centres separated from each other by countryside. "The real question is not whether these cities shrink – we're all shrinking – but whether we let it happen in a destructive or sustainable way," said Mr Kildee. "Decline is a fact of life in Flint. Resisting it is like resisting gravity." Karina Pallagst, director of the Shrinking Cities in a Global Perspective programme at the University of California, Berkeley, said there was "both a cultural and political taboo" about admitting decline in America. "Places like Flint have hit rock bottom. They're at the point where it's better to start knocking a lot of buildings down," she said.

Flint, sixty miles north of Detroit, was the original home of General Motors. The car giant once employed 79,000 local people but that figure has shrunk to around 8,000. Unemployment is now approaching 20 per cent and the total population has almost halved to 110,000. The exodus – particularly of young people – coupled with the consequent collapse in property prices, has left street after street in sections of the city almost entirely abandoned.
In the city centre, the once grand Durant Hotel – named after William Durant, GM's founder – is a symbol of the city's decline, said Mr Kildee. The large building has been empty since 1973, roughly when Flint's decline began. Regarded as a model city in the motor industry's boom years, Flint may once again be emulated, though for very different reasons.

But Mr Kildee, who has lived there nearly all his life, said he had first to overcome a deeply ingrained American cultural mindset that "big is good" and that cities should sprawl – Flint covers 34 square miles. He said: "The obsession with growth is sadly a very American thing. Across the US, there's an assumption that all development is good, that if communities are growing they are successful. If they're shrinking, they're failing." But some Flint dustcarts are collecting just one rubbish bag a week, roads are decaying, police are very understaffed and there were simply too few people to pay for services, he said. If the city didn't downsize it will eventually go bankrupt, he added.

Flint's recovery efforts have been helped by a new state law passed a few years ago which allowed local governments to buy up empty properties very cheaply. They could then knock them down or sell them on to owners who will occupy them. The city wants to specialise in health and education services, both areas which cannot easily be relocated abroad. The local authority has restored the city's attractive but formerly deserted centre but has pulled down 1,100 abandoned homes in outlying areas. Mr Kildee estimated another 3,000 needed to be demolished, although the city boundaries will remain the same. Already, some streets peter out into woods or meadows, no trace remaining of the homes that once stood there. Choosing which areas to knock down will be delicate but many of them were already obvious, he said.

The city is buying up houses in more affluent areas to offer people in neighbourhoods it wants to demolish. Nobody will be forced to move, said Mr Kildee. "Much of the land will be given back to nature. People will enjoy living near a forest or meadow," he said. Mr Kildee acknowledged that some fellow Americans considered his solution "defeatist" but he insisted it was "no more defeatist than pruning an overgrown tree so it can bear fruit again".

Detroit median home sale price in May: $6,000
Metro Detroit home sales rose by 12.6% in May as compared with last year, yet home prices continued their fall -- an indication that the market hasn't hit bottom yet. Overall, 5,955 homes were sold in May, compared with 5,288 sold in May 2008, according to Realcomp, a Farmington Hills-based multiple listing service. The median sales price for homes sold in May was $50,000, a 44.3% drop from $89,700 in May 2008. Foreclosures continue to drag down prices.

In May, foreclosure sales accounted for 60% of all homes sold. And the median price of foreclosed sales in the metro area was $26,400 compared with a median sales price of $110,000 on non-foreclosed homes. In the city of Detroit, the median sales price in May was $6,000, down 29.4% from May 2008. Realcomp, which compiles data from closed sales reported by its Realtor members, said the inventory of homes offered for sale fell 24.9% in May to 50,181 compared with 66,811 a year ago

FDIC's Bair Cautions Banking Crisis Is Not Over
Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said Friday that while the crisis that swept through the financial world last year has subsided somewhat, it was far from over and there would be "many more bank failures" ahead. "I think there's still some challenges, I think we need to be realistic. There are still some troubled assets on the books and we still have an economy that's under significant stress," said Bair in a 90-minute interview with Forbes reporters and editors on Friday.

"We still don't know how deep the recession is going to be," she said, adding, "we'll still be well below what we were in the S&L days." Her cautious comments come as investors have been increasingly cheered by news in the banking sector. Markets were reassured by the results of government "stress tests" that evaluated how the 19 largest banks would perform during a worsening recession. This week, 10 of the country's largest financial firms were approved to pay back the money they received from the government's TARP program. Most important, banks now find themselves able to raise private capital at levels not seen since the panic that ensued with the collapse of Lehman Brothers last September.

Still, Bair reminded, 21 insured institutions failed in the first three months of 2009, the most bank failures since 1992. The FDIC's list of problem banks grew to 305 from 252. Those 305 banks at risk of failure have some $220 billion in assets. The good news: The type of panicked runs that brought down Bear Stearns and Lehman Brothers, where the banks found themselves unable to obtain short-term financing and facing liquidity stress have likely passed. "Hopefully there are no more events that create liquidity stresses on the banks," Bair said, knocking on a wooden conference room table, "and now we're having more good old-fashioned capital insolvencies."

Bair's focus is shifting toward the challenge of reforming banking regulation. Between bites of a sandwich that she never quite finished, she worried aloud about the current trend toward making the Federal Reserve banking's regulator-in-chief. She cautioned the Fed could find itself making "severe trade-offs" between the needs of consumers, businesses and the economy as a whole if pressed into service as America's top banking regulator. "No other developed country gives their central bank the kind of power we give our central bank," Bair said.

"[The Fed] had authority to prescribe across-the-board lending standards for mortgages, and a lot of people said they should do that and they just didn't," Bair says as an example of where too many roles led to lapses. "Where does the consumer role go on your priority list? At some point it just doesn't get done. It just doesn't get the focus it should." Bair instead repeated her support for a council of regulators including the Treasury, the Securities and Exchange Commission and CFTC, bank regulator (Bair says the roles of the Office of Thrift Supervision and Office of Comptroller of the Currency could be combined), the FDIC, the Federal Reserve and perhaps a new consumer regulator for financial products that has been proposed in Congress.

"It was our sense because the taxpayer is going to have significant exposure, the Treasury should have some leadership role," she said. Most critical in her mind: getting regulatory authority from Congress for her agency to shutter financial institutions of all sizes. The FDIC's oversight now extends just to depository banks, but not necessarily their parent companies. The result: During the financial meltdown the government had no orderly way to wind down complex financial institutions. Lehman Brothers, Bear Stearns and AIG, for example, could not be seized by the FDIC because they were not depository banks, leaving the federal government scrambling for solutions, with widely criticized results.

Bair says the authority to close institutions of any size would eliminate this "too big to fail" problem. If the mechanism were in place, everyone would know "large financial organizations can and will be resolved," she says. Still, Bair said she does not think financial regulatory overhaul will happen anytime soon, as Congress shifts its focus from the financial meltdown to the Obama administration's health care agenda. "If that's the case, I don't know if that's necessarily bad," she said.

"I know some will say you have to act quickly while the window's there," Bair said. "Well, yes and no … I think there may be some merits to taking some time, taking a deep breath and thinking about it carefully. I don't know if it would be a terrible thing if more dramatic regulatory restructuring did not occur this year." As for her future, "In two years I will be gone. My term is up and my primary objective is to serve out my term with my reputation intact and then get back to my family life," she said.

US moves to spur bank buy-outs
US financial regulators are drawing up new rules to facilitate private equity acquisitions of troubled banks in an effort to unlock tens of billions of dollars that could be deployed to recapitalise ailing lenders.
People close to the situation said the plan, which has yet to be finalised and could still change, might require private equity companies to inject substantial capital into troubled lenders and agree not to sell them for at least two years. Buy-out funds wanting to buy a troubled bank would have to reveal their performance measures and marketing materials to allay fears that they might use the banks to subsidise other companies in their portfolio.

Regulators are looking for "a long-term financial commitment to banks and not just a quick flip", said a person familiar with the thinking in Washington. Buy-out executives say private equity companies are one of the few sources of capital for troubled banks, with some analysts calculating that as much as $50bn could come from these investment companies to recapitalise banks. Private equity groups have long sought to invest in banks, especially failed ones that can be acquired from regulators at a cut price, often with financial help from the state. But the authorities have traditionally preferred selling troubled financial groups to other banks because of concerns over conflicts of interest created by buy-out funds' ownership of banks. The Federal Reserve has limited private equity groups to bank stakes of less than 25 per cent.

But the latest crisis has prompted regulators to take a softer stance. The authorities have been concerned that the widespread problems among banks would cause a shortage of buyers for expected failures among regional lenders. People familiar with the situation said the Federal Deposit Insurance Corporation, the regulator charged with taking over failed lenders, was taking the lead in drawing up the new rules. The FDIC board, which also includes representatives from other banking regulators, is expected to discuss the matter in the next few weeks. In the banking crisis of the 1980s and early 1990s, regional banks were active acquirers of troubled peers. But in this cycle, plagued by the same problems as smaller rivals, they are more likely to be prey than predator.

Private equity companies' appetite for investments in the financial sector has been augmented by the credit crunch and the general lack of attractive investment opportunities in other sectors. There have been two deals where a consortium of funds combined to buy either a bank (Florida's BankUnited) or the assets of a bank (California's IndyMac) from the FDIC. But those deals were struck under the old rules and required the participation of several groups to comply with Fed rules. Meanwhile, some private equity companies, such as Fortress Investment Group, have bought small banks that are relatively healthy rather than try to buy a bank from either the FDIC or the Office of Thrift Supervision, another regulator.

Is The FDIC Boxed In?
The nation's bulwark against bank insolvencies has been shuttered into a corner, says Richard Bove, one of the most influential financial stock analysts on Wall Street. He believes that a tight budget, a failure to collect dues and lean staffing during better economics times has rendered the Federal Deposit Insurance Corporation impotent to deal with the continuing fallout from the financial crisis and global recession. "It's ability to take over banks has been impaired by lack of personnel and finances," says Bove, vice president of equity research at Rochdale Research.

In an interview with Forbes, FDIC chairman Sheila Bair did not say that the agency was short of resources, only that there had been an "unfortunate" reduction of staff between 2001 and 2007, which it has been trying to make up for. "It was symptomatic of the view that the good times were here forever," Bair said. The FDIC's options are limited in the near-term, argues Bove. It has already increased premiums on banks, a natural source of funds, and doing so again would be inappropriate given shaky financial conditions throughout the industry. During flusher times, the banks influenced the agency to keep rates low earlier in the decade when the climate was much stronger and more optimistic.

The FDIC also has access to a substantial line of credit from Congress, but but Bove says the agency is unlikely to seek it because of the money the legislative branch has already given out for the Trouble Asset Relief Program. It's more likely that the FDIC would draw on money under the Treasury's discretion. "It essentially has to go to the Treasury Department to get TARP funds to do what it needs to do," Bove said. Bove has argued that the FDIC's difficult situation was a major reason the government has begun to accept repayments of the TARP.

"They're linked," Bove said. "If the FDIC had money it wouldn’t have let the TARP payments come back because I don't think the government is absolutely convinced that the banks are in a risk-free position." Treasury's statement regarding the repayment appeared to suggest such a connection. The department said the proceeds will go to Treasury's general account, to reduce its borrowing and the national debt, as well as "increase Treasury's cushion to respond to any future financial instability that might otherwise jeopardize economic recovery."

Deflation v. Inflation
The debate rages on in the financial blogosphere: will the current crisis ultimately be resolved through a period of cataclysmic deflation or in a hyper-inflationary auto da fe, Weimar-style? (Typical of human reactions when emotions run high, very few talk about middle-of-the-road alternatives.)

What do I think? First, some background to set the stage.

In the past few decades we experienced rapid asset inflation, combined with relatively mild consumer price inflation. Many perceived this to be a good development - and up to a point it was. After all, who doesn't want to see their wealth increase while paying low prices for goods?

Trouble is, you can't have it both ways for too long because asset prices must reflect a reasonable multiple of the income they produce ("rents"). Income derived from assets must be high enough to provide a competitive current return and to offset the risk of holding them. That is to say, dividends from shares, interest from bonds and rents from real estate must have reasonable yield ratios.

How do we know when assets reach unreasonable levels, i.e. how do we define a bubble? Greenspan claimed that it was impossible to do so and that we could only identify bubbles after they burst. Obviously, I disagree.

Apart from observing crowd psychology (i.e. maniacal behaviour), I believe the best fundamental indicator of a bubble is the relationship between earned income and debt. Don't forget that asset prices and debt levels are opposite sides of the same card: it takes lots of "money" (debt) to inflate asset prices. Debt, on the other hand, must be comfortably serviced out of earned income: wages, salaries, etc. When the two are considerably out of balance then the debt-asset bubble must and will pop.

Furthermore, things get really ugly when debt and asset prices rise very fast, as happened after 2000 (i.e. Sudden Debt). Earned income then has no chance to catch up to debt in an orderly fashion and the result is debt default and destruction, with a commensurate plunge in asset prices. That's exactly what is going on right now, of course.

Let's look at this relationship more closely. Below is a chart indexing home prices (Case-Shiller National Home Index), share prices (S&P 500), average hourly wages and household debt per working person. Obviously, assets and debt got way out of balance against income, particularly about 10 years ago.

High Debt + Low Wages = Asset Deflation, Eventually (Data: FRB St. Louis, S&P, BLS)

Notice how asset prices have now corrected to a significant degree, but household debt still remains high. That's because the Fed and Treasury are furiously pumping in public debt into banks' balance sheets to avert (and mask) household debt defaults. But this is a fool's errand: in the end all debts, private and public, must be serviced out of earned income. And since income is extremely unlikely to rise suddenly, debt must also come down, sooner or later.

A few months ago this blog's masthead used to proclaim: "We hold this truth to be self-evident: We cannot solve a debt crisis by issuing more debt". By definition, therefore, the only way to resolve this crisis is to allow debt to be destroyed in as orderly a fashion as possible, taking as long as possible in order to avert social consequences.

My view, thus, is that we are in for a long period of persistent asset/debt deflation that will eventually bring debts and asset prices into closer balance with incomes. At least that should be the aim of our policy makers. But, truth be told, I am not sure at all that they see things this way...

Time will tell.

Velocity of Money Comes to a Standstill
Gross Domestic Product is the standard measure, in dollars, of the level of production in the economy. Production is essential, as it's wealth creation (when measured properly); more efficient production creates wealth and raises the standard of living. Every other economic variable is only important as it relates to production. For example, we only care about price inflation insofar as it affects our wealth. Lower prices can actually be the result of more efficient production; our Federal Reserve tries to convince us that lower prices are bad only when an economy is over-levered, as any good central bank left alone will eventually accomplish.

The objective of capitalism is to ruthlessly increase production. The objective of socialism is to take the current standard of living and spread it equally among an economy's population. GDP is the sum of consumption, investment, government spending, and net exports. in valuing assets such as stocks, we need to understand not just whether or not the economy is currently expanding, as indicated by GDP, but how and why. Current GDP has been shrinking and is currently $11.5 trillion.

Current consumption, which at $8.2 trillion is around 70% of GDP, has fallen $150 billion from last year. If you exclude gasoline purchases from today’s numbers, retail sales fell by a record amount over last year. Consumers are spending more of their disposable income on non-discretionary goods and trying to save more money: the savings rate bottomed last year and has been rising. It will continue to rise as consumers must mend their balance sheets. If you take consumer debt divided by disposable income, it's still 130% (reported today), an all-time high. Consumers are in shabby shape.

Investment, which represents things like building factories, is $1.3 trillion or 11% of GDP, and down 23.3% from last year. We all know the status of net exports, which is and has been negative to the current tune of $350 billion a year or a drag of 3% on GDP. In order to compensate, the government has stepped in with massive spending of $2.2 trillion or almost 20% of GDP. Where they get the “money” for this I've discussed many times. Our public debt could one day soon surpass those kings of inflation -- the Japanese. In addition to stimulus, the government has also “borrowed” to bailout directly or indirectly the financial system. This adds nothing to GDP but probably saves it from nose-diving via consumption and investment. Not many people know that if you add up all the bailouts, direct and indirect, it comes to $30 trillion. Truly mind-boggling numbers.

Government spending becoming such a large part of GDP is not good because it is the least productive of the other processes that drive production. The other processes are based on capitalism that have several stages where production is made more efficient. When a computer is made it is the culmination of many processes and parts, all of which are produced by specialists who make their processes the most efficient possible. They're rewarded with profit for doing so. The government doesn't have specialists and spends money mostly based on political considerations.

The "capital" it spends is very inefficient towards production. Government taking over the economy will lower productivity dramatically. Berries (bureaucrats) don’t seem to understand this. It takes more and more government spending to marginally grow GDP; thus the huge sums being “spent” to merely slow down the decline. We are fast reaching the point, because of immense debt levels that take capital away from productive uses (crowding out), where infinite spending by government is not adding to GDP.

All this massive spending has “stabilized” the economy and with some natural and base level of economy, people have perceived this to be the beginning of improvement. This is flawed logic. Getting worse at a declining rate is natural. Some are buying stocks because they fear inflation. Inflation is a falling dollar. When the dollar falls it tends to drive prices up. But we can see that prices of necessities are going up while prices of discretionary things are going down. This is natural as disposable income falls and the savings rate rises. Additionally, I think they don't quite understand how "inflation" is created. To "inflate" or devalue the dollar precipitously, you need a fractional banking system to lend money and consumers to borrow it. Without that you have no multiplier effect.

With mortgage rates up 100 basis points in 2 weeks (as a result of trying desperately to print enough money to reflate), and with a now required 20% down, few people can afford a mortgage given their negative equity and high debt. The money "supply" is egregious (the government bailing out banks and stuffing them with cash), but the velocity of money has come to a standstill (people aren't in any shape to borrow it). I heard a Fed official say that a jobless recovery is possible. I suppose it is, but I will tell you it can only occur if productivity is rising. So while not lying, he isn't telling the truth, or he doesn’t understand it. Berries call productivity higher when it is driven by leverage.

For example, a company can make more money per employee if they lever their balance sheet, at least temporarily. But leverage creates risk -- or haven’t we learned that lesson yet? Real productivity is driven by technology and system advancement, not by more leverage. That may or may not come but it is not a function of leverage and government spending, which in fact tends to reduce, not increase it. The US economy has a serious problem, one which I've talked about many times: too much debt. The government is merely trying to shift financial debt (forget consumer debt) to public debt. They're merely shifting the costs from us to our children. Today’s politician seeks short-term solutions at the expense of the long term. Shouldn’t it be the other way around? Risk is very high.

Bankers Are Scared. Are You?
"What, me worry?" From its beginning in 1954, the official representative of Mad Magazine has been Alfred E. Newman. He is a dim-witted looking fellow, always smiling. His slogan is, "What, me worry?" Half a century ago, I took an image of Alfred and turned it into a campaign poster. I was running for student body president at my high school. I pasted a poster with my name and his picture on it on every locker on campus. I did it twice. I won.

Today, the person I defeated is a professor of business. He was one of the 535 economists who issued a public warning about the anti-growth effects of Obama's tax hikes. He is worried. So am I. He and I are still in the labor force. We see what is coming for those who aren't. "What, me worry?" You bet! In contrast, ever since March of 2009, stock market investors have been sticking with Alfred. He still speaks for my generation, most of whom are retired, as well as for those aged 35 to 55, who haven't a snowball's chance in Yuma of retiring. They're not worried. But their bankers are. One statistic more than any other reveals just how worried they are.

The Federal Reserve publishes this statistic. I have a link to it on, under the free department, "Federal Reserve Charts." You can check it weekly. Here is what it looks like these days. This graph tracks what is sometimes referred to as the velocity of money. It is an indicator of the number of exchanges for money per unit of time. A dramatic increase or decrease in this statistic is rare. People stick to their budgets pretty closely. Bills get paid monthly. Expenditures reflect closely people's monthly incomes. Ever since the September 2008 financial crisis, this statistic has fallen as never before. It looks as though it went over a cliff.

Why? It was not that people stopped spending. Bills must be paid. Companies still meet their payrolls. The basics get taken care of. What happened is that banks stopped lending. Bankers looked at the financial markets, and they abandoned faith in Alfred E. Newman. Use Photoshop to put a beard on Alfred's image, and then shave off most of his hair, and the image bears a remarkable resemblance to Ben Bernanke. Anyway, I see such a resemblance. So do most bankers.

Since September 2008, the Federal Reserve System has approximately doubled the monetary base. It has bought T-bills and Fannie Mae and Freddie Mac debt. It has lent newly created money to buy toxic assets from large American banks. It has loaded up on assets, creating new money to pay for this. Its balance sheet is twice as large. Yet this money is not flowing into the economy. It is flowing into the banks, but the banks are parking it with the Federal Reserve System. The FED pays them the going rate for overnight money, something in the range of one-tenth of one percent.

This is not what I would call a compelling rate of interest. Yet, for bankers, it is very compelling. They prefer to lend this money to the FED, which refers to this money as excess reserves, rather than lend it to producers or consumers. "Wait a minute," you should be thinking to yourself. "If the banks pay 2% to depositors and then turn the money over to the FED at a tenth of a percent, the banks will be bled dry. They can't make it on volume."

Banks are walking away from far higher rates of return. They are carrying the existing system by lending to high-interest borrowers who still use their credit cards, but only if the borrowers are making their monthly payments. But banks are no longer willing to lend most of their post-September legal reserves to the general public. They prefer to let the FED sit on the money. They are walking away from the interest they could earn on a trillion dollars of available reserves.

This is unprecedented. It is happening all over the Western world. Commercial bankers are not lending the reserves that central banks have made available to them through massive purchases of debt. The banks bought the debt. The recipients – when not banks themselves (toxic asset sales) – deposited this money in their banks. The banks then turned the money over to the central banks that created it. The fractional reserve multiplication effect has broken down. The money multiplier isn't multiplying any longer.

This is good news for central banks. They have been able to fund a financial system that came close to crashing last September. They have been able to re-capitalize the largest banks, which were facing bankruptcy because of bad loans to over-leveraged hedge funds. The primary purpose of every central bank is to preserve the banking cartel by protecting the largest banks. These are the multinational banks.
This is not the official purpose of central banking. For example, the two-fold official purpose of the Federal Reserve System is to maintain high employment and the purchasing power of the dollar. This is public relations fluff.

The dollar has depreciated by over 95% since the FED opened for business in 1914. This is revealed by the inflation calculator of the Bureau of Labor Statistics, a Federal government agency. The unemployment rate has always fluctuated wildly in recessions. The recession of 2007–9 is no different. There have been some major bank failures and a few dozen local bank failures. The FDIC has depleted its reserves of T-bills. The Federal Reserve and the Treasury have subsidized these liquidations. The losses continue anyway. Commercial real estate is plummeting, and will produce hundreds of billions of dollars in losses for commercial banks. The residential housing market continues to plummet, with waves of mortgage re-sets scheduled for 2010 and 2011. There is no end in sight.

But the FED has kept the largest banks, now gutted, from going under. It has done this by doubling its balance sheet. This balance sheet serves as legal reserves for commercial banks. Because commercial bankers are petrified, they are not lending to the general public. They are lending to the FED. This has enabled the FED to achieve half of its two-fold assignment: preserve the purchasing power of the dollar. The Consumer Price Index is down slightly over the last 12 months. It only rose by a tenth of a percent in 2008 – the lowest in over half a century. The Median CPI, which I have used for many years as a better guide than the CPI, is in the 2% to 2.5% range. It is low, though not so low as the CPI.

On the other hand, the refusal of commercial banks to lend has undermined the other half of the FED's official assignment: preserve high employment. Month after month, the unemployment rate rises. This shows no signs of abating. But it is far easier for the FED to blame external market conditions for rising unemployment than it would be for the FED to explain (say) 50% price inflation. What are bankers afraid of? The thing Will Rogers was afraid of in the 1930's. Homespun Will spoke for the nation when he said that he was more interested in the return of his money than the return on his money. So are the bankers.

Commercial bankers see that the economy is in a recession. Risk of default rises in a recession. Bankers know that they are beyond criticism by the government or by the Federal Reserve if they deposit funds with the FED. They know they will get this money back. They are in the safest investment the economy offers to bankers. They are beyond criticism from agencies that are in a position to impose negative legal sanctions. The bankers want safety more than return. They want immunity from legally effective criticism. They want safety. So, the money multiplier has fallen like a stone. This has kept price inflation low.

The greatest source of new jobs is small business. In second place are medium-size businesses. Economists and policymakers have known this for at least two decades. But small businesses are among the highest-risk borrowers. Those that survive do hire workers. Those that do not survive fire workers and stiff their bankers. In the aggregate, small business loans pay off, but bankers in a recession know that the odds of survival get lower. They decide to seek safer borrowers.

So, central bank policy has kept panic from spreading to the general public. There have been no runs on the banks. There has been no replay of the bank runs of the Great Depression. A bank run today involves taking digital money out of one bank and transferring it to another bank. The money supply does not shrink. The system as a whole survives. The cartel survives. This is the FED's #1 purpose, and it has served its clients well. Its clients are commercial banks. The public has posted digital thumbnail photos of Alfred E. Newman onto their bank statements. So have the retirement fund managers who act on behalf of the public. The commercial bankers have not.

The buzz words among optimists is: "green shoots." These green shoots are evidence that economic springtime beckons. The cold, dark winter is receding. The experts who did not predict the dark winter – who denied it even existed – are confident that there are signs of economic growth. These signs are in the form of less-bad news. The premier mark of economic recovery is that small businesses are again hiring. They are borrowing to launch new projects. Their owners have seen compelling evidence of an economic turnaround. They are ready to commit new capital to meet the demand of buyers in the future. They are ready to go to their bankers and say "Shoot me some green." This is not happening.

When it does happen on a widespread basis, the chart of the money multiplier will reverse. We will see a sustained increase in the multiplier. This will indicate a change in the assessment of bankers regarding the prospect of recovery. They will decide, case by case, that business borrowers are sufficiently confident regarding their firms' prospects that they are willing to place their businesses' collateral on the line. This is not happening.

Bankers want to see confident businessmen. They want to see businesses with collateral worth repossessing in case of a default. They want to see businessmen who put their companies' future at risk for the sake of expansion. Bankers are not going to shift their banks' funds out of excess reserves at the local Federal Reserve Bank on the basis of Ben Bernanke's sharp-eyed perception of green shoots, or some unknown fund manager's appearance on CNBC, who assures viewers that it's time to get back into the stock market. They are going to shift funds when they are confident that they will get the money back from the corporate borrower.

This is not happening. Why isn't it happening? It has to do with businesses whose collateral is suspect. Toxic investments are now perceived as toxic. It has to do with businessmen who regard their companies as their life's work, and who are unwilling to place the survival of their companies at risk on the basis of green shoots. Green shoots in general are neither here nor there for a business owner who is must place his company's survival at risk. It is the local market that counts for him, and his niche in that local market, that matters.

It has to do with bankers who know they have made rotten loans in the past, whose banks' balance sheets would call in the FDIC if the assets legally had to be marked to market: a sale price based on a rapid sale. It was only April's reversal of the Financial Accounting Standards Board – under intense pressure from the government – that saved these banks from insolvency. The FASB allowed creative reinterpretation of FAS 157, which mandated market pricing of bank assets. These bankers are not interested in risking any more of their banks' capital in a series of premature loans to local businesses.

It has to do with commercial real estate loans. Local banks that sold mortgages to Fannie Mae and Freddie Mac were not hurt by the collapse of residential real estate. But they took their depositors' money and invested in companies developing commercial real estate. These ventures are the next shoe to drop. Banks need liquidity to cover for the losses that are now inescapable. Money lent to local businesses is not liquid.

For whatever reason, commercial bankers are telling Bernanke, "Show us the money!" The story of the green shoots may convince fund managers that happy days are just about here again, but it has not persuaded the bankers who have the money. When bankers are lending to the FED at the federal funds rate – a tad over 0% – the people with the money needed to water those green shoots are turning thumbs-down on the green shoots story. They are frightened. Talking heads on CNBC aren't. Take your pick.

Those who predict price inflation believe that the money multiplier will turn upward again. They just don't know when. Those who predict price deflation believe that the money multiplier will not turn upward again. Indeed, it must fall much further. Prices are close to stable today. To get to significant decline – 5% or more per annum – the money multiplier must continue its downward path. I am in the inflationist camp. But until I see a sustained reversal of the money multiplier, I will continue to predict relatively stable consumer prices.

But not for real estate. It will continue downward. Families' net worth will continue to fall. There will be deals. Commercial rents will continue to fall. There will be deals. Small local banks will continue to go belly-up. There will be deals . . . for big banks. That is the goal of the Federal Reserve System: to create deals for big banks at the expense of little banks. It always has been. The FED is not about to change at this late date.

Small bank managers are scared. They should be. How about you? Do you think the fractional reserve banking system is on your side? Do you think fiat money is productive capital? Do you think you will retire in comfort, based on government promises? Do you think you're in good hands with Big State? If so, sit tight. Do nothing new. Just keep repeating Ben Bernanke's mantra. "What, me worry?"

NYSE Halts Trading In Several Hundred Stocks Due To "Connectivity Issues"
Developing story: Among the affected stocks are GE, Merck and Exxon - the reason cited for the halt is "connectivity issues." Did all the Supplemental Liquidity Providers leave for the Hamptons to riverboat blond Latvian exports early today? Or did GS - Sigma Server X1 get a Norton AV uncaught Trojan? That explains why all trades are now automatically rerouted to (for all who read into the last statement as have anything more than 0% seriousness, may God have mercy on your souls).

Full list of affected stocks:


Household wealth drops for 7th straight quarter
The net worth of U.S. households fell by $1.3 trillion in the first quarter, a seventh straight decline that has seen household wealth drop by nearly $14 trillion, the Federal Reserve reported Thursday. Household net worth fell at a 9.9% annual rate in the first three months of the year to $50.4 trillion, the lowest in more than four years. Net worth -- assets minus liabilities -- peaked at $64.4 trillion in the spring of 2007, the Fed said in its quarterly flow of funds report.

U.S. families have lost 22% of their wealth since the peak. Much of the loss came in the fourth quarter of 2008, when households lost $4.9 trillion. Households and businesses reduced their outstanding debt. Total private-sector debt fell at a 0.4% annual pace in the quarter, the first time that private-sector debt had declined since the Fed's records began in 1952. Households saw their assets drop by $1.4 trillion in the first quarter, including a loss of $448 billion on their real estate and $1 trillion on their holdings of corporate equities, mutual funds and pension reserves.

Liabilities of households fell by $114 billion in the quarter, as consumers reduced their debts at an annual rate of 1.1%. Consumer credit card debt fell at a 3.5% annual rate, the largest decline since 1980. Disposable personal income rose at a 5.4% annual rate in the quarter to $10.8 trillion annualized. Net worth fell to 4.67 times disposable income, the lowest since 1992. Owners' equity in real estate dropped to a record low 41.4% of its value.

Businesses also took on less debt in the first quarter, with outstanding debt falling at a 0.3% annual rate, the first decline since 1993. Total domestic nonfinancial debt rose at a 4.1% annual rate, boosted by a 22.6% annualized increase in federal government debt. Financial businesses reduced their debts at at a 10.5% annual rate, the first decline since 1975 and the largest since 1967.

by James Quinn

Dr. Frederick Frankenstein: [to Igor] Now that brain that you gave me. Was it Hans Delbruck's?

Igor: [pause, then] No.

Dr. Frederick Frankenstein: Ah! Very good. Would you mind telling me whose brain I DID put in?

Igor: Then you won't be angry?

Dr. Frederick Frankenstein: I will NOT be angry.

Igor: Abby Someone.

Dr. Frederick Frankenstein: [pause, then] Abby Someone. Abby who?

Igor: Abby Normal.

Dr. Frederick Frankenstein: [pause, then] Abby Normal?

Igor: I'm almost sure that was the name.

Dr. Frederick Frankenstein: [chuckles, then] Are you saying that I put an abnormal brain into a seven and a half foot long, fifty-four inch wide GORILLA?

[grabs Igor and starts throttling him]

The pundits on CNBC who appear every morning proclaim that things are returning to normal. It amazes me that such supposedly intelligent people have no idea what normal means. Since 80% of the people interviewed on CNBC manage other people’s money, I’m guessing they are just trying to stay in business by lying to the average investor. If they were honest, they would say they have no idea what the future holds. If they were outspokenly honest, they would say that a Frankenstein’s Monster is loose in the countryside and will wreak havoc on the American economy for years.

Definition of Normal: Being approximately average or within certain limits; typical

Definition of Abnormal: Not typical, usual, or regular; not normal; deviant

Which definition is the best represents our economic situation today?

Three_stooges_doctor_small1.jpg image by rigmedic40

I would contend that Dr. Bernanke (Curly), Dr. Geithner (Larry), and Dr. Obama (Moe) have placed an abnormal brain into the seven and a half foot, fifty-four inch wide GORILLA that is the American economy. Only stooges would expect the same borrow and spend policies that ruined our economic system in the 1st place to fix the problem. The housing and debt crisis needs the attention of reality based, blunt, straight shooting doers. Not a 3 Stooges solution.

Housing Normality

As soon as we can stabilize housing, all of our troubles will be solved. This is the mantra we hear night after night on CNBC. The chart below unmistakably paints an abnormal picture of home prices. Karl Case, an economics professor at Wellesley College whose name adorns the S&P Case-Shiller home-price indexes, has studied U.S. house prices going back to the 1890s. Over the long run, he says, home prices tend to increase on average at an inflation-adjusted rate of 2.5% to 3% a year, about the same as per capita income.


The American population has steadily increased from 100 million to 300 million over the last 120 years. Home prices gained at an uneven rate from 1890 until 2000. Then the combination of bubble boy Alan Greenspan, Harvard MBA George Bush, delusional home buyers, criminal investment bankers, pizza delivery boys turned mortgage brokers, and blind regulators led to the greatest bubble in history. Prices doubled in many places in six years versus a 15% expected historical return.


Prices have now declined back within the range seen during the period from the 1970s through the 1990s. This is why the eternal optimists are proclaiming a housing bottom. These people don’t seem to understand the concept of averages. An average is created by prices being above average for a period of time and then below average for a period of time. The current downturn will over correct to the downside. The most respected housing expert on the planet, Robert Shiller, recently gave his opinion on the future of our housing market:

“Even the federal government has projected price decreases through 2010. As a baseline, the stress tests recently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. Their “more adverse” forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years. Long declines do happen with some regularity. And despite the uptick last week in pending home sales and recent improvement in consumer confidence, we still appear to be in a continuing price decline. After the bursting of the Japanese housing bubble in 1991, land prices in Japan’s major cities fell every single year for 15 consecutive years. Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997.”


Residential investment and home improvement expenditures have averaged 1.07% of GDP over the last 50 years. This is the 4th time it has peaked above 1.2%. After the three previous peaks it bottomed below 1%. Based on history, it will bottom out at .8% in the middle of the next decade. This would be a reduction of $70 billion in housing investment from the peak. Great news for Home Depot and Lowes.

A housing rebound is a virtual impossibility based on any honest assessment of the facts. Homeowners currently have the least amount of equity in their homes on record. Real-estate Web site said that overall, the number of borrowers who are underwater climbed to 20.4 million at the end of the first quarter from 16.3 million at the end of the fourth quarter. The latest figure represents 21.9% of all homeowners, according to Zillow, up from 17.6% in the fourth quarter and 14.3% in the third quarter. There are 75 million homes in the United States. One third of homeowners have no mortgage, so that means that 41% of all homeowners with a mortgage are underwater. With prices destined for another 10% to 20% drop, the number of underwater borrowers will reach 25 million.


There are over 4 million homes for sale in the U.S. today. This is about one year’s worth of inventory at current sales levels. You can be sure that another one million people would love to sell their homes, but haven’t put their homes on the market. The shills touting their investments on CNBC every day fail to mention the approaching tsunami of Alt-A mortgage resets that will get under way in 2010 and not peak until 2013. These Alt-A mortgages are already defaulting at a 20% rate today. There are $2.4 trillion Alt-A loans outstanding. Alt-A mortgages are characterized by borrowers with less than full documentation, lower credit scores, higher loan-to-values, and more investment properties.

There are more than 2 million Alt-A loans in the U.S. 28 percent of these loans are held by investors who don’t live in the properties they own. That includes interest-only home loans and pay-option adjustable rate mortgages. Option ARMs allow borrowers to pay less than they owe, with the rest added to the principal of the loan. When the debt exceeds a pre-set amount, or after a pre- determined time period has passed, the loan requires a bigger monthly payment.

How can housing return to “normality” with this amount of still toxic debt in the system? It can’t and it won’t.



Mortgage delinquencies as a percentage of loans stayed between 2% and 3% from 1979 through 2007. I would categorize this as normal. The Mortgage Bankers Association just reported a delinquency rate of 9.12% on all mortgage loans, the highest since the MBA started keeping records in 1972. Also, the delinquency rate only includes late loans (30-days or more), but not loans in foreclosure. In the first quarter, the percentage of loans in foreclosure was 3.85%, an increase of 55 basis points from the prior quarter and 138 basis points from a year ago. Both the overall percentage and the quarter-to quarter increase are records. The combined percentage of loans in foreclosure and at least one payment late is 12.07%, another record. Delinquencies on subprime mortgage loans rose to 24.95% from 21.88% in the fourth quarter of 2008. Prime loan delinquencies rose to 6.06% from 5.06% one quarter ago, a significant and disturbing increase from a group of borrowers that aren’t expected to default.

With the 30-year mortgage rate approaching 5.7%, mortgage refinancing activity has plunged about 60% in the last two months. Mortgage applications for new home purchases collapsed at a 20% annual rate in May too. Normality in the mortgage market appears to be a few years away.


Household Normality

“You can't drink yourself sober and you can't leverage your way out of excess leverage."

Barry Ritholtz

Barry is right, but it isn’t stopping the Obama administration from trying to solve our hangover with a lot more of the dog that bit ya. The current policy of borrowing in order to stimulate the economy is warped. Providing more easy credit so poor people can buy Mercedes SUVs will not solve our problems. The brilliant Doug Casey clearly understands the policy that should be in effect:

“The way a society, like an individual, becomes wealthy is by producing more than it consumes. In other words, by saving, not borrowing. But you don’t become wealthy by spending and consuming; you become wealthy by producing and saving. Inflation encourages people to borrow, because they expect to pay the debt off with cheaper dollars. It encourages people to mortgage their future. The basic economic fallacy in this is that a high level of consumption is good. Well, consumption is neither good nor bad. The problem is the emphasis on consumption financed by debt -- which leads to the national bankruptcy we’re facing. It’s much healthier to have an emphasis on production, financed by savings.”

Household credit market debt currently stands at $13.8 trillion, an all-time high. It has not fallen. From 1965 through 2000, it ranged from 14% to 17% of Household net worth. It currently stands at 27% of Household net worth, an all-time high. Is this normal or abnormal? At the end of 2008, household net worth totaled $51.5 trillion, down $11.2 trillion in one year. In order to get household debt as a percentage of net worth to a “normal” level of 16%, will require households to either reduce debt or increase savings by $5.6 trillion. I don’t think this will be done by next Wednesday. It will take a decade or more.


Source: Haver Analytics, Gluskin Sheff

Famed investor Robert Rodriguez places the blame for our current debt induced collapse squarely at the feet of our government.

“The regulatory agencies and the federal government were complicit in laying the groundwork that allowed many of these credit excesses to develop prior to this economic crisis. Had they done their job effectively, the economy would not have been pushed to the brink of collapse. I fundamentally disagree with these “rescue” programs since we believe our impaired financial system is being distorted by protecting inefficient and questionable business enterprises. Misguided measures to re-stimulate consumer borrowing, beyond just getting the system functioning, are highly questionable. This net worth destruction is the most severe since the Great Depression. We have a news flash for the government, creating new credit programs for a consumer who was spending almost $1.1 trillion more than they were earning in spendable income, according to MacroMaven’s estimate, will be a non-starter. More leverage is not what they need. Encouraging the consumer to take on more debt is like trying to help a recovering heroin addict lessen his pain by providing him with more heroin.”

If there is one chart that tells the tale of the U.S. economic demise, it is the graphic below. It illustrates the transformation of a country that saved and invested to a country that borrowed and spent. In 1981 consumer expenditures accounted for 62% of GDP and private investment accounted for 19% of GDP. Consumer expenditures soared to 70% of GDP while private investment plunged to 11% of GDP. The American economy needs to revert back to the healthier percentages of 1981. Essentially, American households need to spend $1 trillion less per year and use this money to pay down debt and increase savings.


The Personal Savings rate as a percentage of disposable income dropped below 0% in 2006. Over the last 50 years, the average has been 7.2%. The rate has been below this average since 1992. The rate has recently reached 4% as delusional Boomers are beginning to grasp their bleak future. Boomers always seem to go too far. They will eventually wear the badge of frugality as proudly as they wore the badge of over-consumption. Robert Rodriguez sees an 8% savings rate on the horizon.

“A dramatic rise in the U.S. personal savings rate will be required to begin the mending process of the consumer’s balance sheet. I expect the U.S. personal savings rate will rise from 2% to 8% this year and remain at an elevated level for the foreseeable future. This process should increase savings by approximately $650 billion annually. An increase of this magnitude, in such a brief period, is unprecedented, other than during WW2, when it rose from 12% to 24% between 1941 and 1942. Assuming some earnings on this incremental savings and a partial recovery in the stock and real-estate markets, it will likely take ten years for the consumer’s net worth to return to its pre-crisis level.”


Anyone anticipating a consumer led recovery is counting on consumers who have been whacked in the head with a 2 by 4 to stagger to their feet and say, thank you sir may I have another? Even with interest rates at extremely low levels, household debt service is 14% of disposable income, versus the 30 year average of 12.1%. As interest rates rise, this burden will break the consumer’s back. The only way to avoid this fate is a substantial pay down of debt.


The only difficulty with paying down debt is you need cash to pay it down. For decades, from the 1940s until 2000, Americans were cautious about debt. They always had an emergency fund for those unexpected expenses that always pop up. If your washer broke, a TV crapped out, or your lawn mower stopped working you had the cash on hand to buy a new one. This attitude became passé as we entered a new century. Who needed cash when you received three credit card offers per day in the mail? Today, not only do most Americans not have cash to cover unexpected expenses, they don’t have cash for milk and bread. A vast swath of America pays for their cigarettes, lunch meat, and morning coffee with a credit card. This has resulted in a net $4 trillion deficit of household cash versus household liabilities. Is this normal or abnormal?


Now that Americans have used up all the equity in their houses, and some, they have turned to their last resort – credit cards. The government has handed billions of taxpayer funds to the biggest credit card issuers in the world (Bank of America, JP Morgan, Citicorp, Wells Fargo, Capital One, and American Express) so they will continue to give grossly overly indebted Americans more rope to hang themselves. This ridiculous solution will destroy the National balance sheet and the people who continue to spend more than they make. We are running up the National credit card balance and passing the bill to future generations. Credit card delinquencies are already at the highest level in history. With 25 million (U6 – 16.4%) people unemployed, out of a work force of 155 million, another 2 to 3 million likely to lose their jobs, house prices still falling, and foreclosures likely to top 2 million in 2009, credit card delinquencies will surge to unprecedented levels in 2010. Does anyone really believe our biggest banks are solvent?


The New Normal

“Loading up the nation with debt and leaving it for the following generations to pay is morally irresponsible. To preserve independence, we must not let our rulers load us with perpetual debt.”

Thomas Jefferson

The last three decades have not been normal. They’ve been Abby Normal. When a society chooses to spend more than it produces, the only people who get rich are the bankers lending out the money. For a society to progress, its citizens must save more than they spend. The excess savings can then be utilized to invest in long-term assets that will increase the wealth of the nation. A society needs to produce more than it consumes, or it will eventually wither away. Debt keeps Americans enslaved to the corrupt bankers and clueless government bureaucrats who run our fair country.

"Debt is an ingenious substitute for the chain and whip of the slave driver.

Ambrose Bierce

When this debt binge began in 1982, the profits of financial companies accounted for 7% of all U.S. company profits. At the peak in 2006, they accounted for more than 30% of all U.S. company profits. This is why the money managers own the yachts, not the customers. The banking industry, backed by its sugar daddy the Federal Reserve, has enslaved the most of America in their web of debt. They have sucked the vitality and creativity from the nation through the distribution of easy credit. In the last nine years these whoring bankers went completely mad in their greed induced search for outrageous levels of compensation by granting credit to anyone with a breath and creating fraudulent products to perpetuate ever increasing levels of debt. When this blew up in their faces these banks should have gone bankrupt and many bank executives should have gone to jail. Instead, Dr. John Hussman explains what has happened:

“Rather than following policies that would have allowed for a sustainable recovery, our policy makers opted for a stunningly unethical strategy of making bank bondholders whole with well over a trillion dollars in public funds, watering down accounting rules to allow banks to go quietly insolvent while reporting encouraging “operating profits,” looking beyond the continued shortfall of loan loss reserves in relation to loan defaults, and doing nothing meaningful with regard to foreclosures, whose rates continue to soar and which face a fresh wave later this year and well into 2010 and 2011. These policy responses have more than doubled the U.S. monetary base within a period of months, added a trillion more in outstanding Treasury debt, and virtually assure that the value of those government liabilities will be re-priced in relation to goods and services over the coming decade. A range of different methodologies suggest a doubling in U.S. consumer prices over the coming decade, though with the majority of this pressure occurring 3-4 years out and beyond.”

Sometimes I feel like Dr. Frankenstein pointing out to Igor that we need to fix his hump, when I talk about the huge amount of debt on our backs.

Dr. Frederick Frankenstein: You know I'm a rather brilliant surgeon. Perhaps I can help you with that hump.

Igor: What hump?

The current amount of debt accumulated by our citizens and government is mind boggling. We are in a filthy mess. But it is about to get worse. A major storm is on the horizon.

[Froederick and Igor are exhuming a dead criminal]

Dr. Frederick Frankenstein: What a filthy job.

Igor: Could be worse.

Dr. Frederick Frankenstein: How?

Igor: Could be raining.

[It starts to pour]

The $56 trillion of unfunded liabilities for Medicare, Medicaid, and Social Security are a debt that must be paid. This is an unfunded $183,000 debt for every man, woman and child living in the country today. The only way to pay the current and future debts is to increase savings dramatically, reduce consumption dramatically, and increase investment in things that will create real wealth. Real energy self sufficiency projects such as nuclear power plants, coal powered plants, wind farms, natural gas pipelines, liquid natural gas facilities, electrical grid upgrades, replacement of crumbling water and sewer pipes, and upgrading of our public transportation and road networks are what is needed. Is this being done? No. We fiddle while Rome burns. Instead, grand healthcare schemes are being dreamed up that will add trillions more to our crushing debt and the government takes over the car industry. This will end no better than a rear end collision with a Ford Pinto.

The great deniers of our plight assure us that our best and brightest will discover or create some new invention to save the day. Based on the rankings of our 10th graders in math and science, the new discoveries are not likely to occur in this country. We effectively graduate mostly functionally illiterate dullards from our school system every year.

Table on Math & Science Education

The time has come to accept the bitter medicine of a lower standard of living for the foreseeable future. Saving not spending, will save this country. Until most Americans realize the insidious web of debt that they have been trapped into by the poisonous banking cartel, they will never emancipate themselves from their state of slavery. Who is to blame for this catastrophic state of affairs? We the people are. As citizens, if we do not endeavor to exercise control and discipline over our own spending or government spending, who will? Only we can choose to save rather than consume. Only we can elect officials who will spend our tax dollars responsibly. Only we can bring the banking cartel to its knees by not borrowing and no longer accepting less than 1% on our deposits. The choice is ours

America traditionally represents the greatest possibility of someone's going from nothing to something. Why? In theory, if not practice, the government stays out of the way and lets individuals take risks and reap rewards or accept the consequences of failure. We call this capitalism - or, at least, we used to.”

Larry Elder

To join the discussion of how to take back our country from the banking cartel and government central planners, go to

Divided We Stand
Remember that classic Beatles riff of the 1960s: “You say you want a revolution?” Imagine this instead: a devolution. Picture an America that is run not, as now, by a top-heavy Washington autocracy but, in freewheeling style, by an assemblage of largely autonomous regional republics reflecting the eclectic economic and cultural character of the society. There might be an austere Republic of New England, with a natural strength in higher education and technology; a Caribbean-flavored city-state Republic of Greater Miami, with an anchor in the Latin American economy; and maybe even a Republic of Las Vegas with unfettered license to pursue its ambitions as a global gambling, entertainment and conventioneer destination.

California? America’s broke, ill-governed and way-too-big nation-like state might be saved, truly saved, not by an emergency federal bailout, but by a merciful carve-up into a trio of republics that would rely on their own ingenuity in making their connections to the wider world. And while we’re at it, let’s make this project bi-national—economic logic suggests a natural multilingual combination between Greater San Diego and Mexico’s Northern Baja, and, to the Pacific north, between Seattle and Vancouver in a megaregion already dubbed “Cascadia” by economic cartographers.

Patrick Henry declares ‘give me liberty, or give me death’ in his 1775 speech urging the colonies to fight the British.

Devolved America is a vision faithful both to certain postindustrial realities as well as to the pluralistic heart of the American political tradition—a tradition that has been betrayed by the creeping centralization of power in Washington over the decades but may yet reassert itself as an animating spirit for the future. Consider this proposition: America of the 21st century, propelled by currents of modernity that tend to favor the little over the big, may trace a long circle back to the original small-government ideas of the American experiment. The present-day American Goliath may turn out to be a freak of a waning age of politics and economics as conducted on a super-sized scale—too large to make any rational sense in an emerging age of personal empowerment that harks back to the era of the yeoman farmer of America’s early days. The society may find blessed new life, as paradoxical as this may sound, in a return to a smaller form.

This perspective may seem especially fanciful at a time when the political tides all seem to be running in the opposite direction. In the midst of economic troubles, an aggrandizing Washington is gathering even more power in its hands. The Obama Administration, while considering replacing top executives at Citigroup, is newly appointing a “compensation czar” with powers to determine the retirement packages of executives at firms accepting federal financial bailout funds. President Obama has deemed it wise for the U.S. Treasury to take a majority ownership stake in General Motors in a last-ditch effort to revive this Industrial Age brontosaurus. Even the Supreme Court is getting in on the act: A ruling this past week awarded federal judges powers to set the standards by which judges for state courts may recuse themselves from cases.

All of this adds up to a federal power grab that might make even FDR’s New Dealers blush. But that’s just the point: Not surprisingly, a lot of folks in the land of Jefferson are taking a stand against an approach that stands to make an indebted citizenry yet more dependent on an already immense federal power. The backlash, already under way, is a prime stimulus for a neo-secessionist movement, the most extreme manifestation of a broader push for some form of devolution. In April, at an anti-tax “tea party” held in Austin, Governor Rick Perry of Texas had his speech interrupted by cries of “secede.” The Governor did not sound inclined to disagree. “Texas is a unique place,” he later told reporters attending the rally. “When we came into the Union in 1845, one of the issues was that we would be able to leave if we decided to do that.”

Such sentiments resonate beyond the libertarian fringe. The Daily Kos, a liberal Web site, recently asked Perry’s fellow Texas Republicans, “Do you think Texas would be better off as an independent nation or as part of the United States of America? It was an even split: 48% for the U.S., 48% for a sovereign Texas, 4% not sure. Amongst all Texans, more than a third—35%—said an independent Texas would be better. The Texas Nationalist Movement claims that over 250,000 Texans have signed a form affirming the organization’s goal of a Texas nation.

Secessionist feelings also percolate in Alaska, where Todd Palin, husband of Governor Sarah Palin, was once a registered member of the Alaska Independence Party. But it is not as if the Right has a lock on this issue: Vermont, the seat of one of the most vibrant secessionist movements, is among the country’s most politically-liberal places. Vermonters are especially upset about imperial America’s foreign excursions in hazardous places like Iraq. The philosophical tie that binds these otherwise odd bedfellows is belief in the birthright of Americans to run their own affairs, free from centralized control. Their hallowed parchment is Jefferson’s Declaration of Independence, on behalf of the original 13 British colonies, penned in 1776, 11 years before the framers of the Constitution gathered for their convention in Philadelphia. “The right of secession precedes the Constitution—the United States was born out of secession,” Daniel Miller, leader of the Texas Nationalist Movement, put it to me. Take that, King Obama.

Today’s devolutionists, of all stripes, can trace their pedigree to the “anti-federalists” who opposed the compact that came out of Philadelphia as a bad bargain that gave too much power to the center at the expense of the limbs. Some of America’s most vigorous and learned minds were in the anti-federalist camp; their ranks included Virginia’s Patrick Henry, of “give me liberty or give me death” renown. The sainted Jefferson, who was serving as a diplomat in Paris during the convention, is these days claimed by secessionists as a kindred anti-federal spirit, even if he did go on to serve two terms as president. The anti-federalists lost their battle, but history, in certain respects, has redeemed their vision, for they anticipated how many Americans have come to feel about their nation’s seat of federal power. “

This city, and the government of it, must indubitably take their tone from the character of the men, who from the nature of its situation and institution, must collect there,” the anti-federalist pamphleteer known only as the Federal Farmer wrote. “If we expect it will have any sincere attachments to simple and frugal republicanism, to that liberty and mild government, which is dear to the laborious part of a free people, we most assuredly deceive ourselves.”
In the mid-19th century, the anti-federalist impulse took a dark turn, attaching itself to the cause of the Confederacy, which was formed by the unilateral secession of 13 southern states over the bloody issue of slavery. Lincoln had no choice but to go to war to preserve the Union—and ever since, anti-federalism, in almost any guise, has had to defend itself from the charge of being anti-modern and indeed retrograde.

The U.S., as envisioned by some percolating secessionist movements.

But nearly a century and a half has passed since Johnny Rebel whooped for the last time. Slavery is dead, and so too is the large-scale industrial economy that the Yankees embraced as their path to victory over the South and to global prosperity. The model lasted a long time, to be sure, surviving all the way through the New Deal and the first several decades of the post-World War II era, coming a cropper at the tail end of the 1960s, just as the economist John Kenneth Galbraith was holding out “The New Industrial State,” the master-planned economy, as a seemingly permanent condition of modern life.

Not quite. In a globalized economy transformed by technological innovations hatched by happily-unguided entrepreneurs, history seems to be driving one nail after another into the coffin of the big, which is why the Obama planners and their ilk, even if they now ride high, may be doomed to fail. No one anymore expects the best ideas to come from the biggest actors in the economy, so should anyone expect the best thinking to be done by the whales of the political world?

A notable prophet for a coming age of smallness was the diplomat and historian George Kennan, a steward of the American Century with an uncanny ability to see past the seemingly-frozen geopolitical arrangements of the day. Kennan always believed that Soviet power would “run its course,” as he predicted back in 1951, just as the Cold War was getting under way, and again shortly after the Soviet Union collapsed, he suggested that a similar fate might await the United States. America has become a “monster country,” afflicted by a swollen bureaucracy and “the hubris of inordinate size,” he wrote in his 1993 book, “Around the Cragged Hill: A Personal and Political Philosophy.” Things might work better, he suggested, if the nation was “decentralized into something like a dozen constituent republics, absorbing not only the powers of the existing states but a considerable part of those of the present federal establishment.”

Kennan’s genius was to foresee that matters might take on an organic, a bottom-up, life of their own, especially in a society as dynamic and as creative as America. His spirit, the spirit of an anti-federalist modernist, can be glimpsed in an intriguing “mega-region” initiative encompassing greater San Diego County, next-door Imperial County and, to the immediate south of the U.S. border, Northern Baja, Mexico. Elected officials representing all three participating areas recently unveiled “Cali Baja, a Bi-National Mega-Region,” as the “international marketing brand” for the project.

The idea is to create a global economic powerhouse by combining San Diego’s proven abilities in scientific research and development with Imperial County’s abundance of inexpensive land and availability of water rights and Northern Baja’s manufacturing base, low labor costs and ability to supply the San Diego area with electricity during peak-use terms. Bilingualism, too, is a key—with the aim for all children on both sides of the border to be fluent in both English and Spanish. The project director is Christina Luhn, a Kansas native, historian and former staffer on the National Security Council in Ronald Reagan’s White House in the mid-1980s.

Contemporary America as a unit of governance may be too big, even the perpetually-troubled state of California may be too big, she told me, by way of saying that the political and economic future may belong to the megaregions of the planet. Her conviction is that large systems tend not to endure—“they break apart, there’s chaos, and at some point, new things form,” she said. The notion that small is better and even inevitable no doubt has some flavor of romance—even amounting to a kind of modern secular faith, girded by a raft of multi-disciplinary literature that may or may not be relevant. Luhn takes her philosophical cue not only from Kennan but also from the science writer and physicist M. Mitchell Waldrop, author of “Complexity: The Emerging Science at the Edge of Order and Chaos.”

Even for the hard-edged secessionist crowd, with their rapt attentiveness to America’s roots, popular texts in the future-trend genre mingle in their minds with the yellowed scrolls of the anti-federalists. “The cornerstone of my thought,” Daniel Miller of the Texas Nationalist Movement told me, is John Naisbitt’s 1995 best seller, “Global Paradox,” which celebrates the entrepreneurial ethos in positing that “the bigger the world economy, the more powerful its smallest players.”

More convincingly, the proposition that small trumps big is passing tests in real-life political and economic laboratories. For example, the U.S. ranked eighth in a survey of global innovation leadership released in March by the Boston Consulting Group and the National Association of Manufacturers—with the top rankings dominated by small countries led by the city-state republic of Singapore. The Thunderbird School of Global Management, based in Arizona, has called Singapore “the most future-oriented country in the world.” Historians can point to the spectacularly inventive city-states of Renaissance Italy as an example of the small truly making the beautiful.

How, though, to get from big to small? Secessionists like Texas’ Miller pledge a commitment to peaceful methods. History suggests skepticism on this score: Even the American republic was born in a violent revolution. These days, the Russian professor Igor Panarin, a former KGB analyst, has snagged publicity with his dystopian prediction of civil strife in a dismembered America whose jagged parts fall prey to foreign powers including Canada, Mexico and, in the case of Alaska, Russia, naturally.

Still, the precedent for any breakup of today’s America is not necessarily the one set by the musket-bearing colonists’ demanded departure from the British crown in the late 18th century or by the crisis-ridden dissolution of the U.S.S.R. at the end of the 20th century. Every empire, every too-big thing, fragments or shrinks according to its own unique character and to the age of history to which it belongs. The most hopeful prospect for the USA, should the decentralization impulse prove irresistible, is for Americans to draw on their natural inventiveness and democratic tradition by patenting a formula for getting the job done in a gradual and cooperative way.

In so doing, geopolitical history, and perhaps even a path for others, might be made, for the problem of bigness vexes political leviathans everywhere. In India, with its 1.2 billion people, there is an active discussion of whether things might work better if the nation-state was chopped up into 10 or so large city-states with broad writs of autonomy from New Delhi. Devolution may likewise be the future for the European continent—think Catalonia—and for the British Isles. Scotland, a leading source of Enlightenment ideas for America’s founding fathers, now has its own flourishing independence movement. Even China, held together by an aging autocracy, may not be able to resist the drift towards the smaller. So why not America as the global leader of a devolution? America’s return to its origins—to its type—could turn out to be an act of creative political destruction, with “we the people” the better for it.
Paul Starobin is the author of After America: Narratives for the Next Global Age

Fighting to Secede
American secessionist groups today range from small startups with a few laptop computers to organized movements with meetings of delegates from several states. The Middlebury Institute, a group that studies and supports the general cause of separatism and secessionism in the U.S., has held three Secession Congresses since its founding in 2004. At the most recent gathering, held in New Hampshire last November, one discussion focused on creating a new federation potentially to be called “Novacadia,” consisting of present-day New Hampshire, Vermont, Maine, New Brunswick, Prince Edward Island and Nova Scotia. An article highlighted on the group’s Web site describes Denmark as a role-model for the potential country. In the months following the convention, the idea “did not actually evolve into very much,” says Kirkpatrick Sale, the institute’s director.

Below the Mason-Dixon Line, groups like the League of the South and Southern National Congress hold meetings of delegates. They discuss secession as a way of accomplishing goals like protecting the right to bear arms and tighter immigration policies. The Texas Nationalist Movement claims that over 250,000 Texans have signed a form affirming the organization’s goal of a Texas nation. A religious group, Christian Exodus, formed in 2003 with the purpose of transforming what is today South Carolina into a sovereign, Christian-run state. According to a statement on its Web site, the group still supports the idea, but has learned that “the chains of our slavery and dependence on Godless government have more of a hold on us than can be broken by simply moving to another state.”

On the West Coast, elected officials representing greater San Diego County, Imperial County and Northern Baja, Mexico, have proposed creating a “mega-region” of the three areas called “Cali Baja, a Bi-National Mega-Region.” Hawaii is home to numerous groups that work toward the goal of sovereignty, including Nation of Hawaii. The group argues that native Hawaiians were colonized and forced into statehood against their will and without fair process, and therefore have the right to decide how to govern themselves today. In Alaska, the Alaska Independence Party advocates for the state’s independence.

There is also a Web site for a group called North Star Republic, with a mission to establish a socialist republic in what today is Minnesota, Wisconsin and Michigan. A group of American Indians led by activist Russell Means is working to establish the Republic of Lakotah, which would cover parts of North Dakota, South Dakota, Montana, Wyoming and Nebraska. In 2007, the Republic presented the U.S. State Department with a notice of withdrawal.

Ilargi: This from our dear friend formerly known as Chefurka.

The Message of Overconsumption
The magazine “New Scientist” recently published a remarkable set of graphs that make a strong visual case for the overconsumptive predicament our civilization is in.  They are reproduced below:

From the “New Scientist”

This collection of graphs, all showing apparently exponential increases in consumption – especially since 1950 – serves to remind us that human impact on the world has accelerated dramatically in a variety of wildly different domains. They also pose a series of unspoken questions:

  • "Is the apparent correlation between these graphs real, or is it simply the result of confirmation bias (otherwise known as cherry-picking)?"
  • "If it is real, are there cause-and-effect linkages involved between the different domains that are driving the correlations?"
  • "Is this apparently exponential behaviour a problem?"
  • "If it is a problem, can the exponential nature of the curves be reversed by voluntary human action?"
  • "What might happen if the functions of those curves remain unchanged?"

For me, these burning questions have lost a lot of their urgency over the last year or so. I decided long ago that the correlation is real and is being driven by cause and effect linkages. I also decided that the overall trend is probably irreversible, although changes are definitely possible within some problem domains.

However, I've also concluded that it really doesn't matter that much. Our current situation is just one more in a long chain of similar dangerous circumstances that individuals, civilizations and species have faced since the dawn of time. The world is a dangerously changeable place, and we are not its masters.

Evolution has always proceeded through a feedback process of environmental pressure, adaptation, mutation and selection. Our current circumstances can be seen as just another type of impersonal environmental pressure. As a result, our future progress will be determined by the dynamic balance of adaptation and selection that plays out.

Being a somewhat metaphorical thinker, I see the growth of the small-group movement described by Paul Hawken in his book "Blessed Unrest" as a sort of cultural mutation. As such it will play an inevitable role in our evolutionary process. Whether it will be a successful mutation or turns out to be irrelevant or even morbid remains to be seen – just the same as all the other adaptive and restorative actions we undertake.

Still, the accumulating evidence of interlinked, accelerating problems in widely separated parts of the human experiment screams out for strong solutions.  Why is it that with the exception of a few eccentric people and a few small fringe groups everyone is proposing solutions that are nothing more then variations on the theme of Business As Usual? There is scant evidence of solutions whose strength matches the scope and scale of the problems.

 One reason for this shortcoming is that our analysis of the problem is defeated by its sheer size.  Very few people can or do dive deep enough into the problem space to get a realistic understanding of how deep its roots are. People can only propose (or accept) solutions that are consistent with our understanding of the problem, and only those who understand how deep the roots of the problem lie are likely to embrace strong solutions.

Diving very deep into the problem space can reveal surprising things about its origins.  For example, I've become convinced that the root cause of all our woes can be traced back to the sense of separateness that arose from the self-awareness we gained as our neocortex developed.  There is a risk in developing such a deep view, however.   My perspective, while interesting, is not terribly useful. It provides no resolution path, and can easily lead one into paralysis from feeling that our problems are "bred in the bone". In a sense we need to go deep enough to understand the need for radical change, but not so deep as to start feeling that any change is useless or hopeless.

Why is this happening?

As social creatures, we are all acutely aware of the continuing breakdown of our social contracts.  Communities are being reduced to soul-less husks with a Wal-Mart at their core.  Extended families are now largely distant memories, and even the nuclear family is succumbing to the disruptive energies of the atom-smashing civilization we have created.

I see the breakdown of small-scale social structures like families and communities as being driven by the same general forces that are breaking down the environment, the economy, and the human spirit. These forces seem to work fractally, generating similar problems at all scales of our experience: from dying species to dying towns, from ruptured ocean ecologies to ruptured personal relationships.

The underlying problem is that we are telling ourselves a dysfunctional cultural story about who we are, what our place in the universe is, what our rights are (and they are very many), and what our responsibilities are (very few). This underlying story drives everything we do, from strip mining to cruising for chicks, so the results are similar in every arena we enter. The story is malignant, so the outcome of the behaviour it causes is malignant.

The story we are telling is one of our innate superiority, independence and separateness – from nature, from each other, and from any sense of the sacred. Unless and until that story changes our behaviour will not change, nor will the effect our behaviour has on everything we touch. At the core, the problems in the world today are not technical as much as spiritual.

Luckily it's not we who are broken, it's just the story that's broken. We can always tell a new story about ourselves. Again luckily, that's now starting to happen. Will enough of us change our story quickly enough? Who knows? We're a species that's addicted to risk, and waiting this long to change our story is the biggest risk we've ever taken.

Now, it may not seem as though strip mining and cruising for chicks could possibly have the same underlying driver.  They operate at entirely different scales, by totally different rules in completely different areas of our culture and civilization, and operate.  Why do I lump them together so casually?

I have come to believe that the story of separation we tell ourselves has a general pervasive influence on all our activities, whether the activities are directed at inanimate nature, other living species or other members of our own species. Here is how it works.

Because I have a neocortex I am self-aware. I can feel my sensations and experience my thoughts. However, I can feel only my own sensations, and I can experience only my own thoughts. Because of that, I am the most "real" object in my universe, and therefore all other objects in the universe are less real than I am. Because they are less real they have less value to me than "I" do.

However, I need other objects in the universe to accomplish my goals, whatever those might be. I have to use them, and therefore they become my resources. Different goals may require different resources. Getting rich (which enhances my sense of status and self-worth) may require digging up coal to sell. Getting laid (which enhances my sense of status as well as providing hormonal soothing) requires a woman (or a man, of course).

Because the mountain full of coal and the woman are both outside of me they are less real than me, and therefore have less value to me than I do. Their feelings are less important than mine (in the case of the woman or a community living close to my coal mine) or non-existent and therefore irrelevant (in the case of the mountain). In both cases the objectification of the not-me (mountain or woman) that is imposed by my self-awareness permits me to do things to the not-me that I would consider totally unacceptable if done to me.

This is a deeply rooted issue, but how it expresses itself is always open to cultural modification. In Western industrial society we are imbued with the cult of the individual, where self-interest rules, competition is the norm, and the zero-sum nature of the game is taken as self-evident.  However, this is not the only way to see the world.

We can learn to give others as much or even more value than ourselves. We can learn to see our welfare as inextricable from the welfare of the natural world. We can even learn to see that we "contain" the entire universe -- what the Vietnamese Buddhist monk Thich Nhat Hanh calls "interbeing".

However, these attitudes must be learned. The fact that we have this fundamental sense of objectification (which is really a polite term for solipsism) built into our nature courtesy of our brain structure means that we are very susceptible to learning cultural stories that devalue "the other" -- whether the other is human on not.

Our sense of separateness, brought on by the self-awareness provided by our neocortex, is what enables us to rape both mountains and women. The only way out of the box is to learn to value the world beyond ourselves, to heal the sense of separateness by learning to connect with the other. The more we learn this skill, the less harm we do. The less we learn it, the more harm we do.

Where do we go from here?

I see one possible long-term resolution path, even if my belief about the root cause is true. It's a two pronged approach.

First, it involves deep cuts to Business as Usual using the technological and regulatory tools everyone is familiar with. Given the entrenched interests of our civilization's Guardian Institutions this change alone is hard enough, as we have seen at Rio de Janeiro, Kyoto, Bali and in the American Congress.  In my opinion, even if we are successful at implementing such superficial changes it will do little more than buy us a bit of extra time.

The second prong of this approach, the one that I view as the real game-changer, might be considered even less likely.  It involves a global, grass-roots transformation of consciousness from an economic paradigm to an ecological one.

To make this shift we need to help people to understand that without an underlying ecology there is no economy: that economics is a purely human construct that depends on a functioning ecology for its existence, while ecology is a fact of nature like gravity that functions on its own.  When I talk about a transformation of consciousness to the ecological, I really mean recognizing the primacy of ecology, and as a result understanding and accepting that our economies are only branch offices.

If you are so inclined, you can see this transformation in spiritual terms, as a reclamation of the sacred through a recognition of the ecological interconnection of everything.  If it happens, it will be a metamorphosis in the truest sense of the word.  Humanity will step from adolescence into adulthood, as mature beings able to accept our role in the world, accept the damage we did while we were getting here, and look back with compassion on those unconscious dreamers whose sleepwalking caused so many irreversible changes.

The only reason I give the possibility of such a shift any credence is that, as Paul Hawken has described in his book, "Blessed Unrest", it’s already happening.  And that is the greatest reason for hope I can possibly imagine.



VK said...

Optimism is the real pessimism, the can do attitude of humanity has actually led to it's downfall. We need more pessimists in the world really, they speak the truth.

But the truth is something we can not handle that is why so many choose ignorance over knowledge. Purposeful neglect of the environment and economy around them. If I close my eyes and ears then the economic chaos won't affect me.

It's only the so called "doomers" who truly care about humanity and other people, they espouse the truth and only the truth no matter how harsh. Optimists create reality bubbles filled with delusions and manias.

I can only imagine the shock that people will get once the system evaporates and all we are left with is chaos. :-(

Shibbly said...

Hear Hear! You are so right.

Anonymous said...

Reason at this point is lost. All peaceful solutions to our current situation were lost many years ago.

Our dilemma was not caused by politics.

Politics presupposes some sort of floor in civil behavior, a starting platform if you will, where the possibility of compromise exists, without resorting to physical threats.

Here's a clue for the semantically challenged:

When someone comes up to you and sticks a cocked, loaded gun in your face and tells you what to do, That's not politics.

But that's precisely what a two bit thug like Hank Paulson did to Congress at the beginning of the Bank Failout by saying he would crash the economic system if you didn't do as he said and that WAS NOT politics.

It was criminal extortion.

Many people are having a hard time coming to grips with the reality of whats happening.

They can not distinguish between extortion and politics, between veiled death threats and rational debate and compromise.

Politics is dead. The only philosophical system left is Thieves & Murders vs everyone else who's not.

That's All Folks

We have gone by 'politics' into the realm of sociopathic Kafkaesque criminality on the part of a global banking cabal and it's meat puppet 'politicians'.

It's not even about nationality, the criminal banking syndicate is bigger than most countries.

The Shadow Banking System is their bat cave and they infect all of the visible global banking system like a meta-parasite.

There is no compromising with this type of massive ubiquitous global gangsterism.

Peaceful means might have works years ago, might.

But now the only solution I can visualize is killing the whole system to the root in a truly violent convulsion. However, it looks like the whole degenerate syphilitic system seems like it will do it to itself. How poetic.

The whole planetary finance system is infected with parasitic brain worms.

It's moving into the terminal phase where possessed creatures like Geithner and Bernanke are beginning to experience a Rapture, and the parasites inside their skulls, having crawled up their spinal columns, are finally hatching in their withered little brains and liquefying the tissue responsible for their thought processes.

This is why they sound like they do now.

PKP said...

The Fed Might Have Painted Itself into a Corner

Anonymous said...

For all youse punters: Global Meltdown Derby

Anonymous said...

Pessimism vs. Optimism

The role of Television

President Obama earlier this week: It's important for folks to upgrade from analog to digital signal reception, otherwise they'll miss out on "important information."

My opinion: Our dilemma is mostly the fault of television, combined with a tendency of the human species to engage in "magical thinking" when confronted with uncomfortable realities. Television will be downfall of our civilization. I don't think people fully appreciate the true mind-numbing control that the idiot-box exerts on the masses. The mind processes information from the TV in a fundamentally different way than it processes written information. Critical/skeptical thinking regions of the brain are virtually inactive while the idiot box speaks. The polar opposite is true with the written word.

No recognition of humanity's dilemma is possible until we take away the idiot-box.

Sharkbabe said...

Agree with the TV comment. Pure lizard brain ruinousness. I almost physically can't endure being near one that's connected to the borg spew.

Anonymous said...

11:18 anoni-mouse has a almost poetic way of describing the final death of the republics shadow...the true republic died 30 years ago when legalized bribery,[campaign contributions] and the supreme court ruled that money was free speech.

We have lived in a plutocracy since then,however,the real predators had not evolved to a point of danger,and the regulatory clime not decayed enough to not break the teeth of those who are now calling the shots.

End of empire,101

That part of devolving of Flint and other towns in the rust belt I saw up close in Midland Pa,Chester,West Virginia,east liverpool Ohio and Beaver Pa...Back in the 80's I did 5 refueling outages at Beaver Vally nuke station.I kept very low profile as outside nukeworkers were not thought kindly of by local folks who thought jobs that were there belonged to locals...and could be real hardcase with perceived outsiders.Except the girls who saw a tech as a ticket out of near dead towns..

I think the only thing that can cause the "center not to hold"and see a slide to a breakup of the USA is the attempt to keep whole those whom made the bad deals...the 300 rich white guys...and don,t help those little folks that put o-man in office.

As the time goes by,the worse times become,the memory will sharpen of those who were "saved " by the actions of .gov while the rest were left to perish.The rage will fester..and will not just fade.The deepset anger at the actions taken by the .gov to save the wealthy will be a stain on this administration the same way a blue dress did the last time a "dem"[republican light]was in office.

The fed "dying"due to lack of energy I could see,but I have my doubts about outright rebellion...although I am not privy to the conversations of the very...very far right.They are really pumping the hatepump lately.Who knows what strange ideas are floating around that bunch.Too many fat middle age dudes [as myself] are worried about self-survival right now to want to pick a fight with the feds...but wait a bit...and see what comes out of the folks who just got fecked out of everything they ever worked for by some twist of fate......the ones to be scared of are the ones who played by the rules ,listened to what they were told and diligently worked their ass off for thirty years...then got fecked out of everything they ever hoped for..and are watching their kids learn about selling what they have on the street to survive...or not survive as it happens.Or watch their kids get sick and die from a medical system designed to strip you of every nickle they have or dont have...and tough feckin luck if you don't have the dough....the same lessons their grandfathers learned the last time the wealthy destroyed the world financial system...Those are the ones whom have become totally radicalized,and the ones this administration had better do something about because when someone has nothing to lose,they are very,very scary opponents.Like they might think its a wonderful Idea to drag a few .gov types ,or congresscritters down to a smoky hell with them. I think the .gov types had better figure a way to give some real hope to the people instead of the grade 4 propaganda that everyone knows is horseshit,or its going to start getting weird very very fast.

I stopped watching tv a long time ago.The way I see it,I only have a limited time existing as a self aware being.It seems a incredible waste to spend the so few hours of my life watching a screen flicker with "entertainment"designed to poison weak minds with various flavors of propaganda.Icky.Double Icky
The news I get from the net.Unfiltered.Like the semi-filtered french roast coffee I make.A good shot of news @ 4:30am w/ coffee will get the mind working .Enough to start the day anyway...
I want to see a way out of where we are headed that does not include the destruction of everything I know,or knew,but this coming storm looks to level my country to a place I will not recognize


el gallinazo said...

Check out Karl's take on the Italian bondage. His grey cells may be twisted, but they are high octane.


Keep us informed about your brother, his Thai wife, and his plans to emigrate. It may piss some people off here from the We're Number One crowd, but for people in certain circumstances, emigration may be the most viable option.

Jim R said...

Karl's take on the bond smugglers looks pretty similar to DBS' explanation. Japan had this paper, they decided they wanted to trade them for gold or euros or something, and they wanted to do it on the QT because the amount would shake up the currency markets.

el gallinazo said...


What Karl added to DBS's idea, is the strong possibility that congressionally mandated bearer bonds post 1982 no longer exist in amounts of $135B, but that these bonds were not counterfeit. Karl regards the idea that anyone would go to the trouble of manufacturing super high quality $500M counterfeit bearer bonds as ridiculous as they could never be traded. This leaves the option that they were off-the-books bonds issued illegally by treasury. Another Sec Treas felony.

Bukko Boomeranger said...

This bond story has me more fascinated than I usually get by oddball news events. Bloomberg cites Italian authorities who say the bonds are fake. They're supposedly "Kennedy series" bond, according to Bloomberg, which allegedly do not exist.

But as Denninger points out, who would FAKE such a ridiculously high denomination? And with the history of duplicity by U.S. financial authorities, I would not be surprised to find that there are undocumented documents.

A fascinating story, no matter what the truth is. And even if the true story is made known, there will be fake stories thrown up to obscure the actual facts. Standard M.O. these days. But that's why I read blogs, to find nuggets of maybe-truth that are ignored by the official storytellers.

El Gall -- from the last thread, what are the moral dimensions against eternity pools? I've swum in them before, and I might do so again at some hotel. Should I feel guilty about this? More guilty than I already do about displaying my pasty white flesh in bathers? (I might shine like a dead fish in the moonlight, but at least I'm not coming down with melanoma!)

el gallinazo said...


A large and totally useless waste of energy simply for fad status.


Tyler Durden of Zero Hedge reportedly received the following letter which explains everything:

Greetings from Milan,

This letter must come to you as a big surprise, but I believe it is only a day that people meet and become great friends and business partners. I am Mr. Shoichi Nakagawa, former Finance Minister for a Group of 7 country. I write you this proposal in good faith, believing that I can trust you with the information I am about to reveal to you.

I have an urgent and very confidential business proposition for you. In February of this year an agent of a foreign power spiked my cold medicine with opiates causing me to nod off during an important press conference. I was subsequently forced to resign in disgrace.

As my termination loomed I took the chance to retain US DOLLARS 134 BILLION in negotiable bearer bonds I found forgotten in the dusty bottom drawer of the prime minister's desk. I have since, by the grace of God, deposited these documents with trusted associates in Italy.

As I am under constant surveillance I cannot directly deposit these bonds without the help of a foreigner and that is why I am contacting you for an assistance. My associates will travel to Switzerland by train to deliver the documents to the Swiss banking organization of your choice.

If you accept to work with me, I want you to state how you wish us to share the funds in percentage, so that both parties will be satisfied. If you are interested, contact me as soon as you receive this message so we can go over the details. Thanking you in advance and may God bless you. Please, treat with utmost confidentiality.

I wait your urgent response.

Mr. Shoichi Nakagawa

Anonymous said...

Max K's take on the Italian bondage story (sounds kinkier that way) is on his radio show, 'Truth about Markets'.

Interesting twist he takes. Basically, he guesses that the Japanese couriers were shuttling bonds around for what is loosely known as the Shadow Banking system.

He maintains that the SBS has at least as much 'off the books' assets as the 'Regular' visible banking system PLUS hundreds of trillions of derivative bets. The 'real' banking system is the tip of the iceberg, the SBS is the 9/10's below the waterline.

The SBS serves a number of purposes, drug dealers and arms smugglers and an all around laundering service for Da Big Boyz.

In order to be in line with the Basel II banking accords, some 'regular' above board banks run short on cash for the quarter and would not pass the Basel II regs, thus de-legitimizing themselves. So they essentialy 'borrow' let's say $134 billion in bonds from the SBS for the quarter to qualify for Basel II, then, when the coast is clear, the bonds get transfered to some other needy insolvent above board bank.

Stacy Herbert points out that Russia, as the fifth largest holder of US bonds has about $141 billion.

This would mean that two Japanese mooks had almost as much in their double bottomed briefcase as Russia holds in total, making those two guys the sixth largest holder of US bonds in the world, right after five sovereign nations.

Hey, ain't Life grand?

Unknown said...

My Bearer Bonds take.

They're counterfeit. The two guys tried to redeem one or more somewhere, were rejected, and whatever institution they went to notified the authorities.

Greenpa said...

VK:"Optimism is the real pessimism, the can do attitude of humanity has actually led to it's downfall."

I would like to suggest this is not true.

Both attitudes can be disastrous; resulting in "deer in the headlights" situations.

I believe this because of my long time as a fencer, and fencing instructor. You learn fairly early, when you start competing- if you go into a match knowing you're going to win- the probability of your losing goes way up. And- if you go into a match expecting to lose- it's almost certain you will.

What is required is the finest of knife edges- a good basic belief in your own abilities; an expectation that your opponent may have excellent tricks up his sleeve that you must wait for- and the ability to take any opportunity, and run with it- very carefully, but very quickly.

When you stay on the knife edge; you can win more than you lose. Fall off, on either side- and you lose a lot.

I know- sports analogies may be odious- but find me anyone who considers fencing a "sport"- for sure the football players don't.

I think the analogy holds.

Greenpa said...

El Gal - good chuckle on the letter.

There is one possible market for counterfeit bonds- the sub-legal transactions arena.

It might, just might, be possible to run a con on a drug cartel, Russian mafioso- etc. Selling them billions for millions- and tricking them into thinking they could, possibly, re-sell them to yet another drug/mafioso, for a gain.

Far fetched, and dangerous as all hell unless you have a way to move off-planet; but- the whole think is pretty dumb looking, no matter how you turn it.

Anonymous said...

I don't think they are counterfeit. It would be like me trying to counterfeit $10,000 dollar bills and then trying to deposit them at some bank.

WTF bank?

I try to get change for a measly $100 dollar bill anywhere, even at a bank, and out come the 'special' pens and the holding up to the Light and the conference with co-workers and the suspicious looks.

I can't imagine what would happen with a $1000 or $10,000 bill.

Handcuffs comes to mind.

All those bonds have multiple serial/tracking numbers which can be cross referenced quite quickly.

You'd have to be a major fecktard to show up in Switzerland of all places and try and pull a fast one on them.

Their Pro's, they were Hitler's bankers so he wouldn't invade them.

They've seen it all Baby.

Anonymous said...

"Many analysts had speculated that OPEC members would ignore the quotas and continue to produce oil to generate income, thereby rendering the cuts ineffective. But OPEC’s discipline has proven many critics wrong."

Wicked Witch of the West said...

Another exasperated Illargi, wondering why things are not as bad as they should be.

I predict that come fall, we will see a near lunatic Illargi, pulling out his hair, screaming in every rant, proclaiming how unfair it is that things are not as bad as he said they would be in the spring. It just doesn't make sense, he will say. I was right about everything, dammit! My analysis was spot on! Why are things not as bad as they should be!?!?! I'm meltiiiiiinnnnngggg!

Things are bad, don't get me wrong. I would rank myself up with the most pessimistic on this site. But, Illargi must be a newcomer to the world of dark futures. Things never turn out as bad as you imagined.

Anonymous said...

It's a known fact that the world currently has extracted crude coming out the arse. Half the supertankers are tied up in storage. The doubling of prices is clear cut manipulation of the futures market by the big boys. When the SHTF in the fall, crude prices will crash, but big money will have shorted the market by then leaving the suckers holding the bag, just like the equities market. What was that famous quote from P.T. Barnum?

Anonymous said...

"Things never turn out as bad as you imagined."

That was close to what some trader from Cantor Fitzgerald said to his wife over the phone from the top floor of the WTC after the middle of the tower was set ablaze.

Hey, don't worry honey, I'll be home for dinner.

Anonymous said...

Wicked Witch of the West said...

One person - many names.

The vast majority of people here are hoping for more time to get their ducks in a row ( in some cases quite literally). Perhaps Ilargi is not as egotistical as you, and he would rather be wrong than see tens of millions of people go down the tubes into destitution.

Since you claim to be a modified "doomer," what are your predictions and timing for the next leg? Since you change your name everyday or go as an anon, doesn't make much difference.

Anonymous said...


I can think of a very different scenario for the bonds on the Swiss border. Some people have already mentioned this possibility.

Suppose the bonds are fake (after all, what is a "Kennedy bond"?). Who would profit from a situation where the U.S. bond market (and the U.S. themselves) are weakened?

I can think of a big country (call it X) that has long been an adversary of the U.S. Its own holdings in U.S. bonds amount to only 141 billion. It would hurt to lose that money, but that might be a very reasonable price to achieve a specific political goal. Note that if things continue on the present course and the dollar collapses on its own, X will lose a good part of the money anyway.

In the process, X could deal a real blow to a second adversary (call it Y) located to the south-east. Y has been coming on very strong for many years and certainly constitutes an obstacle for X. Country Y holds around 760 billion in U.S. bonds, plus agency paper, etc.

For just 140 billion at risk (it is not sure that X would lose all of it), X could shake the U.S. and perhaps deal them a real blow, and perhaps deprive Y of a sizable percentage of its profits from the last several years.

If the counterfeit bonds do real damage, then X risks losing at least some of its money, but will inflict real harm on its adversaries. If the counterfeit bonds do not shake the bond market, X will, for the time being, have lost nothing.

So, why would X not attempt this sort of ploy? It might lose a good part of the money anyway, so why not put these dollars to good use while they still have some value?

Anyone have some good arguments against this idea?


Unknown said...

Interesting article about fake bonds that someone linked to in the Market-Ticker forum.

bluebird said...

"Things never turn out as bad as you imagined."

No one could have imagined the Titanic sinking either.

Jim R said...


If you fake something like a $500 million bond, it's a work of art. You frame it and hang it on the wall so people can have a laugh. As mentioned above, it's hard enough just to spend a $100 bill -- for a bearer bond like that, nobody is going to honor it without authentication.

They weren't fake.

My guess is the Italian cops will maybe burn some parchment paper in effigy. Meanwhile the couriers will be sent home, some behind-the-curtains negotiations will take place, and next year Italy's economy will be a lot better than it is now. And your gold broker will have a temporary shortage.


A true story, but the timing is sort of interesting. A cover for the "fake" assertion?

@el g,

Funny post from zerohedge! I was thinking of looking up the text of a 419 letter, making substitutions and posting it here, but I'm lazy...

el gallinazo said...

from the bbc link

"United States and Philippine officials have seized more than $2,000bn (two trillion) in fake US Federal Reserve bonds in the southern Philippines"

Since when did the Federal Reserve issue bonds? I thought only the treasury could. The Fed issues greenbacks and I think the biggest ones right now have Uncle Ben ( Franklin ) on them.

These Philippine forgeries are getting some action from local businessmen. A friend gave me a roll of TP with W. on each sheet. Maybe I'll find some Philippine business men. Haven't used up the whole roll yet. Looking for a discount fare to Manila.

Jim R said...

** looks again at the Philippine story **

Nevermind about the timing ... I see that it was from Feb 2001.

Who would be dumb enough to trade real money for one of their bogus bonds?

Anonymous said...



You are missing the point.

Under the scenario I propose, the goal is not to redeem the bonds or to obtain any value from them. Authentication is not the issue.

The goal is to sabotage the U.S. bond market by hitting it with the best possible counterfeit bonds. Raise doubts, elicit concern, make people worry. Stress the market now that yields are already on the rise. See what havoc you can inflict.

That is the point of the scenario.


Anonymous said...

I wonder if you can get betting odds on whether the Italian bonds are fake or real? Pretty funny.

I think in the parallel universe banking complex, stuff like this is routine. Secretly moving huge amounts of money around the world in brief cases outside the record keeping facilities of the regular global 'sucker' banking system.

The banking mobsters who've wrecked the visible global banking system always knew it was for show and that the real action was beneath the waves.

The lie, they cheat, they steal, they connive, they plot, they dissemble, they propagandize already.

What's the big deal, a couple hundred billion here and there between friends and fellow oligarchs. Honest banking is for 'little people'.

The regular world banking system is like a shrunken head hanging from the belt of a Bankster Warlord like Paulson, indicating and advertising his great status and prestige.


RC said...

Infinity Pools use from 15 to 50 horsepower motors {usually ganged}
to lift up the whole mass of the water of the pool about three inches.
They use wide tubing {three to eight inches} to get the volume kicked up.
A regular pool uses from 1 to 3 HP
pumping depending upon volume of water and special features {in pool jacuzzi or waterfall perhaps}.
Many clients want a Fake-O Infinity, which is an edgeless lip for the water to spill over about a 1/4 inch thick instead of several inches, but it looks lame and flaccid, not macho and conspicuous enough and I laugh when I see them. A wealthy neighbor {retired architect, more money than sense, a common but convenient disability here} had a real infinity built and honestly, he had a view of the Caribbean on the edge of the infinity that was at a height of 600 feet and the effect was grand. I didn't build it
{I was disabled at the time} but I have a complete set of very involved photos of the pump room if you are interested. The day I made the photo set he turned the thing on. Very impressive. The effect was excellent, a nice thick waterfall and the visual was orgasmic. After five minutes he shut it off. With the circulating pump and the waterfall pumps {three pumps all together} he had almost 18 HP in an 11,000 gallon pool, a small pool. He said "The power consumption is deadly, I only turn it on during parties and once everyone has had a few drinks I shut it off as by then they don't notice anyway, and it's at night..." The funniest part is that
he had designed a really remarkable means of gathering all the deck water during rainstorms and storing it in another underground 15,000 gallon cistern.
His place is really "green" {another source of hilarity for me}
except for the infinity pumps which he uses now about three hours a year. Back in 1998 I designed a series of pumps to push water up this hill and my system supplies four luxury villas there on the hilltop above my rented acreage. My creation pumps into a total of 200,000 gallons worth of cisterns on that hill. I must to pay the bills Gallinazo and cannot afford to engage in overly moral decisions about the Way of the World. If I did have a more refined philosophy I would become a Jain and spend my time sweeping the microcosm to right and left as my body boisterously advanced. Instead, I remain, humbly, but well fed, part of the problem.

Jim R said...


But if I print up a nice etching of this guy:
with some curlicues and bric-a-brac around it, on nice parchment paper and his number -- what was it, six hundred squillion?

Am I guilty of counterfeiting? How can that harm the bond market, it's a work of art. It could provoke laughter in a dry, insider-way, among folks who know what it is. Nobody is going to trade me a mole of dollars for it.

And the bond market isn't going to care.

Anonymous said...

REDMOND, Wash. — October 23, 2008 — Microsoft Corp. today announced revenue of $15.06 billion for the fiscal quarter ended Sept. 30, 2008, a 9% increase over the same period of the prior year.

January 22, 2009 — Microsoft Corp. today announced revenue of $16.63 billion for the second quarter ended Dec. 31, 2008, a 2% increase over the same period of the prior year.

REDMOND, Wash. — Apr. 23, 2009 — Microsoft Corp. today announced revenue of $13.65 billion for the third quarter ended March 31, 2009, a 6% decline from the same period of the prior year.

As the twig is bent so shall the green shoots flourish?

money multipliers

-iniquiting mind-

el gallinazo said...


The thing is that the Treasury stopped making these bearer bonds in 1982. There should be damn few of these things around. So few that Denniger thinks that they may be "special issue" put out illegally by the treasury to hide certain deficit financing from congress. Or maybe simple theft by the top people in government back in the days when they weren't willing to publicly flout their larceny.

All current bonds sent to other central banks and sovereigns are registered through the NY Fed. Anyone with a spare half billion to buy just one of these suckers would know that even if they were counterfeit it wouldn't effect the validity of their registered bonds.

I think Oog Booga has it right. It was a transaction between the shadow banking crime families. If Duce II gets 40% - whose gonna claim the other 60%? One of them dropped a dime on the other and is laughing his ass off.

But unless it truly was the unlikely case of counterfeits put out by idiots with a lot of time on their hands and wanting to have some fun with the Italian law, one cannot minimize the importance of the event because it demonstrates the power of the shadow system.

Anonymous said...

If you know that Basel II accountants are going to show up at the constantly and technically insolvent bank you run and bust and expose you because you're a couple hundred billion short on your ledger, who you gonna call?

Well, not Ghostbusters, but close.

Your gonna call that friend of yours who knows a guy who knows a guy in the Shadow Banking Syndicate who will 'loan' you (for a fee) the proof of funds for the Big Bank Inspection coming up so you pass with flying colors.

Yoa, no problem, lighten up.

A 'loan' from the Shadow Banking Syndicate is similar to a loan from Louie the Loan Shark, just don't forget to pay the fee.

Thugs, hoodlums, drug dealers, dictators, despots, hedge funds, bankers, politicians and big time pimps of all sorts always keep their money in the off book Shadow Banking Syndicate.

Only shmucks and losers actually entrust their assets to 'real' banks.

At this juncture in history, the banking concerns propped up for public consumption should be thought of and referred to as the Potemkin Banking System. (PBS) ha

It's a beard.

If there's any meat left in them, it's just going to be Grist for the Mill of Goldman and JP Morgan pirates to rape and plunder at their leisure later this fall and next year.

The global Potemkin Banking System will be revealed for the vapid shell it truly is, making for a Giant Panic for the exits and the warm snuggly arms of the FDIC's siren (harlot) calls.

Think of the The Potemkin Banking System, where most of everyone who is normal has all their worldly assets, as the blow up love doll for Timmy the G when Ben B is out of town for the weekend.

el gallinazo said...

anon 1:58

I think the geniuses on this site have hit the nail on the head. A Basel II short term loan from Vinnie the Shadow Shark. To whom? Well who is big enough in Switzerland to need $134B to cover the hole in their trousers so that their privates don't pop out?. Hmmmm..... UBS? And the Swiss peasants are restless and have been sharpening up their pitchforks.

Anonymous said...

Nice call El Condor

I love the term Shadow Sharks.

The Shadow Banking System has already made derivative bets in the hundreds of trillions if not quadrillions.

The SBS is inhabited by gambling addicts who have and will bet to infinity, like any unsuccessful parasites will do to their host planet.

The SDS denizens are mad as hatters, and proud of it I might add.

Think of the SBS as The Death Star, orbiting above the Late Great Planet Earth.

Cheney the Darth Dick and his underlings awaiting the final transfer of assets from the crippled global Potemkin financial structure before he gives the signals to Vaporize the whole planet and put it out of it's misery.

(maybe put it into it's misery)

Sound far fetched?

hahaha, you ain't seen nothing campers!

Ooga booga

Anonymous said...

An astronomers out there?

Maybe a good analogy would be the Shadow Banking Complex to a blackhole sucking the life out of a nearby galaxy.

I need a visual.

Any good hubble t-scope shots of deep space showing such a scene?

Anonymous said...

Things are never as bad?

Most times they are a lot worse...


D. Benton Smith said...

@anonymous 11:07 AM

re: crude stocks

I quite agree. They seem to be storing it in anything hollow. (they should consider using the hearts of Bankers and the brains of Economists.)

Supply up + Price up = Regulation down.

So, with such obvious price manipulation why is the Administration so quiet and passive? Don't answer. Rhetorical question.

Yet another MASSIVE transfer of wealth from poor to rich in broad daylight, at the worst possible time, by folks using bail-out money (at least indirectly so) to pull it off, and Obama says and does nothing to stop it.

The silence is deafening.

This President has made it clear enough who he likes best. (Hint: it's not us.) He isn't the first great liar to gain high office, just one of the best.

I think the plan is simply to suck money upwards forever, and just let nature run its course at the hapless bottom.

I think we better take care of ourselves, and each other... and block those bastards any way we can. (PLEASE don't get into any more trouble than you're already in!)

Eat or be eaten. You are not their constituency or their tribe... you are their food.

Wyote said...

How to retire debt- quickly. Some set of forces like financiers, their security, the CIA, etc. conspire to steal 135 billion in treasury bonds. This is pulled off somehow probably with the help of the shadow banking world. The fall guys are selected and are promptly caught by the tipped off Italian border guards. The bonds after examination by Treasury Department officials, are declared counterfeit. And disposed of promptly. - OK, shoot this down.

Superb postings lately on TAE!

Anonymous said...

The current financial holocaust reminds me of the classic Twlight Zone episode "To Serve Man"

Outer space visitors (bankers from Wall St) arrive on earth promising to help take care of people on earth. They even invite people to visit their home planet abroad their space ships.

Everyone thought that the space alien's book called "To Serve Man" was a guide for helping the people of earth attain peace and prosperity.

It was almost too good to be true.

After many had boarded the alien ships to visit their home planet it was revealed after many efforts at translation, that "To Serve Man" wasn't a guide, was a cook book.

Unknown said...

"Government spending becoming such a large part of GDP is not good because it is the least productive of the other processes that drive production. The other processes are based on capitalism that have several stages where production is made more efficient. When a computer is made it is the culmination of many processes and parts, all of which are produced by specialists who make their processes the most efficient possible. They're rewarded with profit for doing so. The government doesn't have specialists and spends money mostly based on political considerations."

I'm not sure it's accurate to characterize the goverment's spending as such in this particular circumstance.

The monies being spent in this context are intended to replace the consumption lost when the debt bubble imploded, taking with it a significant portion of the the level of consumption which had previously existed. Hence, it is not spend in the admittedly nonproductive context that it normally would have been, e.g. funding studies of the mating habits of frogs, funding studies of how best to promote the numbers of hispanics who go to college, and the like.

Understand that I'm not saying that the money they're spending is going completely to augment post implosion consumer demand, but I believe that enough of it is that it's inaccurate to call the whole sum government spending.

The "capital" it spends is very inefficient towards production. Government taking over the economy will lower productivity dramatically. Berries (bureaucrats) don’t seem to understand this. It takes more and more government spending to marginally grow GDP; thus the huge sums being “spent” to merely slow down the decline. We are fast reaching the point, because of immense debt levels that take capital away from productive uses (crowding out), where infinite spending by government is not adding to GDP.

Anonymous said...

In "The Saga Of The Bearer Bonds" Karl D thinks the bonds are 'real' in that they are not counterfeit.

However, he leaves open the door for them to possibly have been issued by someone at Treasury in an unrecorded 'off books" manner.

This would have been highly illegal but they would not be 'counterfeit' in the normally understood sense.

Max K has a different take. Bearer bonds haven't been issued since 1982.

That doesn't mean they aren't still in circulation. He thinks they are loaned around, the same ones over and over, to various financial concerns in distress by the Shadow Bank Sytem. Same bonds just acting as undercover vehicles of transport to get various parties out of all kinds of jams with regulators, for a fee.

You be the judge.

jal said...

What happened?

How many ways can it be told?

Here is another way.
Maybe, this way, it will finally sink into someones head.

Anatomy of a Quadrillion Dollar Scam

Anonymous said...

Carpe Diem to El Gal @ 2.09 pm

The swiss peasants have been too busy yodeling, playing their alphorns and drinking beer for the last few days of the festival here in the mountains - 50,000 of them(including visitors) and not a pitchfork in sight.
Not this weekend - maybe next.


Gravity said...

To ensure a prosperous future,
we must erect larger phallic symbols.
Monuments must be built, and sacrifices made, so shall we beget the boundless flow of regenerative plunder and womens.

el gallinazo said...


So you think Timmy and Bennie dropped the dime to retire a little US debt without having to pay off. Makes sense, but I wouldn't want Vinnie the Shadow Shark that mad at me.

Anonymous said...

Banks don't go into the business anymore to make money with loans, they go into business to collect fees for 'financial services.

Endlessly and pointlessly manipulating, massaging and moving money and assets from point A to point B.

They collect a fee in both directions.

Write a sub-prime or Alt-A mortgage, collect a fee, doesn't matter if it's sound or not, you're going to immediately pawn it off on a greater fool. No problemo.

Transfer assets from your left hand division to your right hand division, collect a fee.

Move them back for no apparent reason, collect a fee.

Help rigg a bond sell for a customer to defer a tax obligation into the future, collect a fee.

Help steer a clients assets to a partner in crime's brand new improved ponzi scheme, collect a fee.

Generate reports on the status of clients assets, collect a fee.

All 'earned' I might add without moving your ass from your chair.

There's no heavy lifting involved in anything.

And no huge mental effort either, like in science or engineering. The wiz kids you have locked in the cellar generate all the scams with magical computer models that actually eliminate risk!

Shazam! Poof! It's gone!

Fees are much more profitable than loans. Loans are so 20th century.

Jim R said...

Hmm, on the other hand, maybe there are some people dumb enough to believe in fake bonds. This guy has a plausible story:

They could be used to dupe the gullible mark into thinking the scam artist is very very rich. Sort of an in-person version of the 419 scam for example.

Maybe there's a place for "Avogadro's Note", after all.

el gallinazo said...


I wonder if HBO is on to this. Could be bigger than the Sopranos. Quadrillions of dollars, Treasury fraud at the highest levels, Timmy Twolips, Swiss banks, Japanese buffoon couriers, Swiss tax havens. Would make New Jersey look like ...... well New Jersey.

Anonymous said...

I imagine that 'Vinnie the Shadow Shark' has a large number of 'unconventional techniques' for extracting the information and the truth of the matter from almost any party involved.

Questions like:

Where did my bonds go?

Who dropped a dime on my operation?

Am I still gonna collect a fee and get my Nut back?

I thought Japanese couriers would fall on their swords if they screwed up, what's up with that?

Those kind of things.

Waterboarding is so déclassé.

In all likely-hood Vinnie would probably like to start at the toes with a weed wacker. You know, one of those commercial landscaping ones that will peel the bark off two hundred year old hickory tree.

A 4hp one with over head cam and mini barbed wire wacking line.

You'll tell Vinnie things you don't even know.

Ian said...

While accounting for a fifth of the world economy, the BRICs now control no less than half of the world's currency reserves. Excluding Japan, the G7 nations have only 6pc. And, in today's climate, reserves amount to raw power.

For years, the G7 has largely excluded the BRICs' from the institutions that are meant to oversee the global economy. Brazil is the world's 10th-largest economy, yet Belgium has more IMF votes.

So, we shouldn't be surprised the BRICs are this week holding their own summit – in the Russian city of Yekaterinburg. Western leaders will hold their breath – at least those who are economically-literate. If the BRICs decide to get nasty, and lend less money to the debt-soaked "advanced" nations, the deepest Western recession in 50 years could get a whole lot worse.


Anonymous said...

BRIC's and stones will break your bones but names can destroy your Brand.

Anonymous said...


Sorry... you are so wrong.
Truth and optimism go hand in hand.
Their is no optimism without truth. What is about to be "lost" in our present society is cause for optimism, not alarm.


VK said...

"There is no optimism without truth"

So I suppose Tim Geithner is really telling the truth then and if we all just focus on growth things will be better again :)

Optimism is based on lies, the past optimism of the last 50 years was based on fossil fuels, exploitation of the natural environment and the disease of more for me.

Pessimism more accurately reflects reality or might I add skepticism. The skeptics were right all along to question the unchecked ideology of growth, the debt fuelled orgy of spending and consumption, the stupidity of using millions of years of fossil fuels in about 150-200 years.

Skepticism and truth (which in society is refered to as pessimism or doomerism) go hand in hand.

Persephone said...

Everyone has great takes on the story behind the bonds! Will we ever know the truth?

Sign of the times -
-Six Flags files for BK because they can't pay their creditors
-I'm noticing alot of "Farm Camps" popping up in the area. You know, where parents pay a farmer to teach the kids how to farm.
Damn, why couldn't my Dad have thought of that? We could have had helpers paying to work - and maybe I wouldn't end every summer of my youth with blistered hands from picking and shelling peas and beans.

Ilargi said...

New post up