Sunday, September 19, 2010

September 19 2010: Debt Saturation and Peak Complexity

Detroit Publishing Co. Go North, Young Man 1905
"Motor car, Canadian Government Colonization Co."

Ilargi: The following essay was written by Ashvin Pandurangi, a law student at George Mason University. In it, he tackles the topic of our present predicaments in the light of complexity, a topic of course first and famously put center stage by Professor Joseph Tainter in the 1980's (listen to a fascinating recent Tainter interview here).

Complexity is an important issue in our times because it "describes" the inevitability of certain processes occurring in systems. While we might discuss exactly what is bound to happen exactly when, the overall drive and direction are indisputable: systems, as they grow, increase their levels of complexity, until they no longer can. That is, until it’s their very complexity that inhibits further growth. Then a move towards decreased complexity, or increased simplicity, must begin, a move that can be extremely painful, since parts of the system become redundant and must die off.

This is very relevant to our economic situation today. Pandurangi provides a nice example: much of the stimulus packages the US and other governments have issued will never reach the intended goals; the complexity of our societies forces much of it into the hands of all the separate layers the societies are composed of (example: 159 different US government institutions are involved in processing Obama's new health care bill).

In the same vein, you might look at our debt conundrum through the "eyes of complexity". Increasingly complex debt instruments have increased debts (disguised as easy credit), whether they are personal, corporate or governmental, to such levels that they can no longer grow -we can't pay them off anymore without assuming additional debt-. And since we have built our entire financial and economic systems on credit -and hence debt-, there must follow a period of deleveraging. A warning sign should be that for every additional dollar put into the system, returns today are diminishing to the point that they threaten to become negative.

It's hard to see how this could not be extremely painful for most of us. Joseph Tainter's pivotal work is called the Collapse of Complex Societies for a reason. In nature, in physics, systems don't collapse gradually, or very rarely so; in 99% of cases, it's more like sticking a needle into a balloon.

We may, some of us, be able to individually recognize the process, but as a group we will inexorably be driven to increase complexity, until we no longer can, and the system collapses unto itself, with little or no regard for our individual fates, or even our groups'. This is of course not only true for economics or finance, it's equally pertinent to resource depletion (energy limits are closely related to collapse) and waste production: you can push a system to a certain point and no further. Our tragedy is that we have no choice, as a group, but to keep on pushing until we're either pushing on a string or the system starts pushing back.

Those of you who are new to the concept of complexity as a deciding factor in the evolution of systems, including our societies, may need some catching up (do listen to the interview linked above). Others, who are familiar with Tainter, may have other issues with Pandurangi's take. On the whole, though, my view is that this is a subject worthy of quite a bit of attention, and this is a valiant effort.

Here's Ashvin:

Ashvin Pandurangi:

The Limits To Complexity

A Fundamentally Flawed Perspective

     The current U.S. administration has its eyes dead set on more fiscal stimulus and/or monetary easing to counter the ever-growing threat of severe deflation on the horizon. Despite the trillions added to our Treasury and Fed’s balance sheets in 2008-09, the 2010 Q2 GDP number is anemic (1.6%) even when it can be trusted as accurate. Most of the ever-optimistic (and late-to-reality) American investment banks have significantly revised their estimates for 2010 H2 GDP down to around 2%, while most serious analysts agree it will be closer to a negative print. Existing and New Homes sales in July 2010 have experienced record declines in the absence of government subsidies (~27% and ~35%).

Unemployment remains significantly higher than reported, as U-6 hovers at 17% and shows no signs of improving (includes workers who have given up looking for jobs – can we blame them when there are 5 workers for every job?). Close to 40 million Americans are on food stamps, 5 million on emergency unemployment benefits and 500,000 recently filed initial jobless claims in one week. Equity outflows from institutional investing firms have continued for months unabated and have totaled over $50 billion year-to-date. Confidence indicators have been gradually deteriorating among consumers and businesses, and that does not bode well for the largest pyramid scheme in human history.

     On the other side of the American political divide, conservative Republicans who claim to identify with tea party activists argue for fiscal austerity and less government regulation/intervention in the economy. Leaving aside the glaring hypocrisy of these politicians (many of them contributed greatly to a doubling of the federal debt and expansion of subsidies/entitlements from 2000-08), there are still several other troubling aspects to their alleged views. One of these aspects is the gross injustice of asking a majority of the population to forego promised entitlements and economic relief after we already decided to bail out a small minority of the population.

Two wrongs don’t make a right, but neither does one wrong and a humiliating slap to the collective face. Another is the fact that many of these politicians have no idea what their policies really entail for the economy. As explained in sections below, it’s not as simple as cutting deficits, letting the free market take over and watching the flowers bloom as the sun shines on a new day in America. There will be a chaotic descent into economic depression and a need for governments to help mitigate the damages and promote structural reforms to the debt-based, fossil fuel economy. Speaking of fossil fuels, these politicians and pundits also naively ignore the critical issues of climate change and peak oil production or assume unregulated free(-falling) markets can eventually solve these issues on their own, without much negative impact to the economy.

     The main critique of this essay is that the viewpoints described above have a fundamentally flawed perspective on our current economic predicament. Whether it’s the left or the right, the free marketers or the socialists or many of the shades in between, the mainstream consensus is one of desperate hope for a rapid return to continuous economic growth, low unemployment, relatively cheap finance and rapid consumption of natural resources. More generally, there is an insatiable lust for maintaining complexity in our modern systems of economic exchange and social organization. Of course, this critique is not true of everyone in the mainstream camps described above, but I find it telling that we rarely (almost never) hear the word “complexity” or phrase “peak” anything mentioned in their bitter debates.

Complexity Analogized

     One of the most familiar complex systems to Americans is our country's inter-connected network of highways, which allow the interstate travel of goods and capital (humans included). This flow mainly passes through large urban centers that act as hubs for the rest of the network. We could have built these highways and then left drivers to their own decisions on how to use them, but it became clear that completely unregulated networks of travel imposed unacceptable safety/economic risks for our society. In fact, the potential risks and instabilities of such a system were so large that it may have completely broken down before it led to any significant gains. Instead, we resorted to licensing procedures and various vehicle and highway regulations.

     People who wish to take advantage of the highway system must first be taught the basics of operating a vehicle and pass a test of their knowledge. They must also follow the regulations imposed on them (speed limits, traffic lights, signs, etc.) and maintain their vehicles (annual inspections) under threat of economic or physical punishment. There is also the requirement that drivers get insured for accidents so that they will not pass off the cost onto taxpayers or innocent victims. All of the above are top-down policies used to manage a complex system containing numerous interacting variables. Many motor vehicle accidents still happen and many people still die each year because of them, but we have decided to put up with that level of instability in return for the efficiencies created. One can argue that even this somewhat balanced system is long-term unsustainable and destructive (especially considering environmental costs), but at least it has yet to fall apart.

     Now we can compare the highway system to the significantly more complex, expansive networks of the global economy and specifically the financial markets that make international trade/investment possible on a global scale. Individual countries (or even major cities in the larger state economies) can be considered the central hubs for much of these economic flows. The flows are greatly aided by the use of financial instruments (bonds, letters of credit, etc.) that are much easier to “manufacture” than the goods/services being exchanged, though they may be harder to comprehend. Financial markets provide humanity with a method for pulling future energy/resources (real or perceived) into the present, which allows for greater levels of present-day trade, consumption and investment. The key point here is that these sources of energy/resources may not exist and/or be easily utilized in the much depended on future. A system can only retain or evolve its complexity as long as new energy/resource inputs are provided to it in ever-larger doses.

     The credit bubble over the last few decades reflects an exponential growth of complexity in the global economy (and in all of human civilization as a result). In 1929 at the beginning of the Great Depression, the U.S. private debt to GDP ratio was about 150%. Fast forward to 2007, and we have more than doubled that ratio to a staggering 300%+ and many other countries have also followed in our misallocated footsteps (housing bubbles have developed in Canada, China, India, Australia and many Euro-zone countries to name a few). America could rightfully be accused as the primary driver of this bubble, since we have the global reserve currency and much of the debt incurred by people in other countries was denominated in dollars. We owe much of that status to our bloated military-industrial complex and reckless/malicious expansionist policies (the U.S. has 700+ military bases established around the world).

     We also see that public debt levels in the global economy have reached levels much higher than those in the 1930s. The public debt to GDP ratio for the U.S. is either 90% (total national debt), 150% (total debt including GSE debt) or 900% (total debt including GSEs and unfunded entitlement obligations), with the latter two being the most accurate, which is probably why the Chairman of the Joint Chiefs of Staff (Mike Mullen) called it the “single biggest threat” to national security. As a result of this debt-fueled private and public spending spree, economic activity has reached a very large scale and scope around the globe and many new inter-dependencies have been created between countries, corporations and individuals. American people have increasingly found themselves relying on megalithic grocery/retail stores to secure supply of food and consumer goods from across the planet, while American corporations rely on labor, parts and services from many different countries.

     Several global institutions have been designed to impose a top-down management structure for these complex economic and political relationships. Similar to state and federal regulatory bodies within a country, they are commissioned to “alleviate” inherent instabilities that arise from the operations of a complex, dynamic system. Needless to say, they have predictably failed at this goal even more miserably than the central governments of nation-states. The global credit (complexity) bubble is currently in the process of imploding due to its inherent Ponzi dynamics.

As is the case with any Ponzi scheme, it can only be maintained if new entrants continue buying into it, but most economic actors (individuals, corporations and governments) are now saturated with debt as their cash flows have stagnated or declined (they can barely afford to pay down existing debts, let alone take on new debt). Multiple claims to existing real wealth are destroyed as the bubble implodes and our societal systems, which are mal-adapted to credit contraction and slow/negative growth, begin to experience immense destructive pressure. This process is quite evident in the Euro-zone, where entire “sovereign” states are quickly descending into utter insolvency despite the newly-formed credit facilities of the ECB and IMF (the latter recently decided to eliminate the borrowing cap on their facility in a final act of desperation).

      We must also keep in mind the role of feedback loops when discussing complex dynamics, since variable elements of a system constantly interact with each other in unexpected, but also generally predictable ways. As a system’s complexity increases, negative feedbacks provide a certain level of stability and the system can self-organize at a relatively stable equilibrium. However, at peak levels of complexity the negative feedbacks are overwhelmed by instabilities that have formed, and on the way down predictable positive feedbacks are the hallmarks.

In a complex economic system that has reached peak financial activity, debt destruction from pay-downs and defaults leads to falling aggregate demand, suppressed prices, shrinking profit margins, increased unemployment, which further reduces demand and suppresses prices. American states on the brink of bankruptcy are all too familiar with these positive feedback loops, as their high rates of unemployment have led to low tax revenues, leading to spending cuts/tax hikes, leading to lower incomes and higher unemployment, leading to even lower tax revenues and massive fiscal deficits. These are just two of many positive feedback loops which occur in a debt deflation, and it is important to remember there are other factors involved and cross-interactions between separate loops within a system. They are also not limited to just the economy but eventually find their way into politics and societal trends at large.

The Devil’s in the Details

Neo-Keynesians’ House of Cards

     President Obama’s administration, with the aid of various academics (such as Paul Krugman) and media pundits (such as those on CNBC), have embarked on a mission to restore “business as usual” economic growth through the use of fiscal stimulus, “loose” monetary policy and direct government intervention in the economy. The American Reinvestment Recovery Act allocated about $820 billion to various local governments and companies in an effort to create jobs. What they don’t tell you about the ARRA is how much of that money, as a matter of necessity, is wasted in bureaucratic institutions that distribute and keep track of the money as it is funneled down to economic actors.

Much of the money also goes to funding extremely misguided projects, such as tax credits for homebuyers that incentivized the construction of new homes when there is already a year’s worth of excess supply. Sometimes the money goes to fund the repair of roads that don’t even need any repair, as I have personally witnessed in my own community. New estimates have made clear that it is unlikely more than 1 million jobs were created by the ARRA stimulus, which amounts to $820,000 per job, some of which were not even productive for the general economy. Debt saturation and peak complexity is the primary reason why every additional debt-dollar spent into the economy produces significantly less than a dollar of productive economic value. The most that can be said by the administration about this fiscal stimulus is that it redistributed wealth from working class taxpayers to…well, other working class taxpayers, but also REITs (real estate investment trusts) and banks, and a bunch of money was lost in the process.

     The loose monetary policies being used include keeping the federal funds rate and discount rate at close to 0% (rate at which banks can borrow from each other and the Fed) and purchasing debt assets such as mortgage-backed securities and treasury bonds (“quantitative easing” to inject liquidity into banks). Our central bank is now sitting on a portfolio of around $2 trillion in securities and has recently decided to keep that value constant by reinvesting principal pay-downs on mortgage and agency debt into long-term treasuries.

The above policies serve to keep a floor on mortgage rates and finance our government’s deficits at low interest (what used to be stealth monetization is now just monetization), while also providing cash to banks with the alleged hope that they will lend it out into the economy, where consumers and businesses will spend/invest the loaned money. Out there in the real world, no such lending has happened, as the banks are sitting on $1+ trillion in cash and the Fed is caught in a liquidity trap. This trap implies that any small increase in rates will have a disproportionate inverse effect on debt servicing costs and therefore spending and investment. As the notable Australian economist Steve Keen likes to point out, when the Fed’s objective is to create growth in the productive economy, the above policies simply amount to pushing on a string.

     Private markets are currently saturated with debt and therefore very few people want to borrow money, and very few lenders want to make loans at affordable rates since debtors can barely pay back what they owe now. As mentioned before, interest rates have bottomed out and there is minimal economic activity to show for it. The velocity of money in the economy has collapsed, and the Fed’s policies merely transfer large sums of taxpayer money to major banks that use it to blow more speculative bubbles in stocks, bonds, commodities, and derivative bets on the price movements of those assets. A prominent blogger/author named Charles Hugh Smith would ask “cui bono” (who benefits?) from these policies, and the answer would not be 90%+ of our population (the top 1% hold 33.8% of all wealth and more than 50% of all stocks and bonds in America). Maybe a better question is who loses, and the answer to that would be a solid majority of American taxpayers and savers (since interest paid on deposits remains at next to nothing).

     Another tactic used by the current administration is to directly intervene in the housing market to keep mortgage rates low and support prices, since they view housing as the primary cause of the current crisis. The U.S. Treasury (taxpayers) is currently guaranteeing more than 90% of all new mortgages issued in the last year through the government-sponsored enterprises of Fannie, Freddie and also the FHA. As we can see with the large downturn in recent housing data, this intervention has merely allowed us to kick the can a few feet down the road, and the can became significantly larger after we kicked it.

In effect, these interventionist policies keep prices artificially elevated for a little while and loan losses off of banks’ balance sheets, while homes become even less affordable for financially responsible people looking to buy. Even with record low mortgage rates, people are refusing to take on more debt to purchase an over-priced house unless there is a promise of a government handout lurking in the background, and the government simply cannot afford many more handouts. What much of the above interventionist policies amount to is a substitute of private debt held by politically influential groups for public debt held by the taxpayers and future generations, which ultimately creates even more disturbances in public credit markets and crowds out what’s left of private investment (more money has to go towards financing deficits).

     The administration has also presented several “structural” fixes of the health care and financial industries for public consumption. These bills were thousands of pages long and filled with new regulations and tweaks to existing ones that really did nothing to address the underlying fundamental problems with these systems. The health care bill did little more than give the health insurance companies 30 million new customers through government mandate, and the “finreg” bill failed to break up the TBTF banks, audit the Fed or create transparency for risky derivative products. More importantly, these new top-down regulations have the inherent feature of creating unintended consequences in our complex society, despite the alleged best intentions of their creators, and can even make the targeted problem worse.

The financial reform bill created new restrictions on “angel investors” which will inadvertently stymie the creation/expansion of small businesses, while the behemoth investment banks will continue to exploit financial markets by hiring teams of lawyers to easily bypass the new regulations that affect them (as they are currently doing with the “Volcker Rule”) or by simply buying off the regulators. Meanwhile, as the administration pretends to combat fraudulent practices in the financial industry by creating a “Consumer Finance Protection Agency” (housed in the Fed), they actively aid financial institutions in committing accounting fraud by suspending federal rules that require them to mark their assets to market value (just another part of what many term “extend and pretend” policy).

     Finally, another recent tactic of current governments has been the use of central bank intervention to suppress a politician’s worst nightmare in a deflationary economy, currency appreciation. The Swiss National Bank has admittedly bought up billions worth of Euros to prevent the Swiss Franc from appreciating too much during the ongoing European sovereign debt crisis of 2010, but they ended up taking significant losses on those transactions (and I’m confident that Germany didn’t mind the boost to exports provided by the Euro at 1.20 against the dollar). We can be rest assured that the central banks of the U.S., Japan and China have done the same type of intervention and will continue to do so when they feel it necessary.

Disregarding the inherent unsustainable nature of major economies racing to the bottom of the currency depreciation endgame, the marginal benefits of these interventions have severely contracted as their half-lives become shorter and shorter. Currency investors (who manage to trade $4T daily with 50x leverage) have realized that a central banker pushing a button somewhere to buy a few billion here and there will not change the fundamental economic realities faced by the global economy. Diminishing marginal returns, whether they are those of interventions or investments, are best viewed as a function of decelerating complexity. Razor thin margins in the global economy are no accident, but only the logical destination of our complex, infinite growth-based systems.

     We should also consider the possibility that some or all of the above policies will miraculously be successful in creating sustained economic growth, price inflation, and wealth creation. In the case of such a rare event, the question still remains of when and how intervention can be stopped, and whether we will return to the same credit-based, consumption economy we had in the past. Will we merely restart the credit bubble and restore our modern lifestyles in the developed world? These questions in turn raise the issues of continued over-consumption of resources, environmental destruction and accelerating climate change, which are the most important long-term issues that humanity faces. After all, how long can an economy continue growing when billions of its supporting members around the world are dying of starvation, thirst and/or resource wars?

Our Disingenuous “Saviors”

     Conservative politicians/pundits who adhere to the Tea Party mentality are, at best, disingenuous in their promises of returning to the status quo of economic growth and complexity with fiscal conservatism and small government. They suggest that many of our economic ills can be cured if we simply withdraw all government fiscal/monetary supports and drastically reduce public spending. Now it is true that spending should be drastically cut in certain areas, and intervention should be drawn down to a large extent, but the question then becomes what happens if we do that and not much else.

The break down of complexity in a system does not adhere to human concepts of fairness, order or social stability. If these politicians actually follow through with what they promise, a lot of wealth will be destroyed as asset prices, wages and business profit margins fall drastically. Societies grown accustomed to continual growth and high standards of living will have their expectations dashed and will experience the societal equivalent of post-traumatic stress disorder. There will be deterioration in social order, an increase in crime rates, and an exacerbation of people’s distrust/paranoia of all groups perceived as “different” or those claiming a right to the same piece of economic pie (the increasingly heated debates over illegal immigration is a great example of this dynamic).

     Austerity measures are being pushed heavily in European countries and by many people in America concerned about public debt. Their concerns are entirely valid and something should be done to reduce deficits, but we must also be candid with the global population about what the term “austerity” really implies. It is actually another way of promoting reduced complexity in our modern society. Just as our debt-fueled private and public spending sprees have pulled forward energy/resources to maintain and evolve complexity, a global or nationwide savings plan would pull the resource rug out from under our extremely complex systems. This loss of complexity necessarily means much less economic activity and access to goods/services across distant locations.

For example, a $1 trillion reduction in government spending could easily translate into an equivalent or slightly higher reduction in GDP. As profit margins for businesses are squeezed from price deflation, more people will be laid off and that will further reduce demand and prices in a classical positive feedback. A deflationary spiral into depression is an extremely messy process, and when it stems from a financial crisis, fragile supply chains of goods/services will be disrupted since producers, distributors and purchasers will have limited or no access to letters of credit. This aspect of a debt deflation was clear during the first Great Depression, when farmers would throw perfectly good milk into ditches while other people were starving down the road.

     The conservatives and libertarians also rave about the need for a complete extraction of government from economic and financial markets. While this extraction would certainly allow natural forces to take over and bring about a steady-state equilibrium sooner, it will be extremely ugly for some years. The method in which this is done is also important, because an immediate withdrawal of government supports from housing and financial markets would trigger major declines in economic growth and employment, as recent economic data should make evident. It would be more sensible to at least attempt a gradual withdrawal of support coupled with targeted aid to those most harmfully affected by the ensuing deflationary spiral. We should also remember that there’s a difference between funneling taxpayer money to banks via bailouts, quantitative easing, zero interest rate policy and various government backstops, and the government implementing fundamental structural reforms to the current setup of our financial institutions and credit markets. The latter must eventually be done to prevent the same exploitative systems we currently have from regaining their former levels of societal entrenchment.

Innovative Suggestions and Unanswered Questions

     There are several other suggestions for “solving” our problematic encounter with peak complexity that attempt to restart sustained economic growth without introducing loads of new private/public debt or harsh austerity measures. For one, the government could abolish the Fed and literally print their own money (as Lincoln did with his greenbacks) and distribute it to households so they can pay down debts and spend/invest in the productive economy. This would allow banks to regain some value on their bad loans while also allowing consumers to get out of debt and regain some old spending/investing habits. We could also couple these monetary injections with structural reforms to the financial sector, limiting the ability of private banks to create unlimited credit and blow speculative bubbles. However, we can't analyze this situation in the vacuum of the American productive economy, since after all we are a part of a larger financial complex that stretches across the entire globe. I still find suggestions such as this one to be significantly more sensible than pure Neo-Keynesian or Libertarian policy prescriptions, so I will simply present a few questions that immediately come to mind (some of these are semi-rhetorical):

How will the domestic banks react as their debts are paid down with freshly printed money? Will they be concerned about inflation?

What about institutional investors currently holding cash and treasuries as their primary assets? Will this new stimulus spark a "risk on" mentality where assets/commodities are bid up and treasuries are dumped for cash to invest in risk plays? Can the Fed soak up all of these dumped treasuries and keep interest rates from rising and consuming a large part of government revenue (which would turn us into a much bigger Greece)?

What about our foreign creditors who will see others dumping treasuries while debts incurred to buy their cheap goods are being paid back with printed money? It is true that there will be much more debt overhang than money printed in the stimulus program, but hyperinflation is not so much an economic event as a sociopolitical one (internal or external loss of confidence in government institutions).

How much moral hazard will be created by such a significant bailout of debtors and creditors? Is current moral hazard already so high that marginal additions to it will be insignificant, or will it push us to a point where people, corporations and their politicians will refuse to ever abandon the current Ponzi system?

     Another interesting policy idea is printed monetary stimulus and tax cuts for households combined with central bank monetization of treasury debt to offset lost tax revenues and keep interest rates stable. The federal income tax could be greatly reduced or even eliminated, and monetization could make up for the revenue shortfalls that result. This particular idea was actually mentioned by Ben Bernanke when speaking about Japan’s prolonged deflation and possible policy responses in a similar situation. Of course, with another idea designed to maintain the path of modern civilization comes more troubling questions (and all of the questions above still apply) :

As the dollar is devalued from printed stimulus and debt monetization, how will other major economies stuck in deflationary traps react to appreciating currencies and decreasing exports?

Follow up: Exactly how ugly can a trade war between major economies get?

How much stimulus will have to be applied before consumers and investors heal their scars, pull the cash out of mattresses and start spending/investing again?

Will the government pay back its expanded deficits with printed money, and if so what does this mean for the prospects of real or perceived inflation?

What will occur when “organic” growth has restarted and we attempt to unwind the drastic monetary policy interventions that have been undertaken? How do we restore our tax revenues in an acceptable way?

     In light of these unanswered questions and others not asked yet, it appears that the more “innovative” suggestions offered to solve our predicament are still underestimating our complex, global society’s unpredictable reactions to various manipulations at the margin. Similar to the mainstream policies heavily criticized earlier, they certainly tend to ignore the tougher questions regarding what we will do to create a more sustainable society once we are successful in restarting economic growth for the time being. In all fairness, that issue is much broader in scope and more complicated to properly analyze, but it should always be lingering in the background. Taking into consideration all of the above criticisms of policies that attempt to maintain economic complexity, it is hard not to conclude that greatly reduced complexity is the only path to sustainability. There may not be anything “wrong” with our desire to maintain the complex systems we have evolved up to this point in time, except the fact that this desire may not be compatible with the laws of nature.

The Limits to Complexity

     In 1972, several authors published a book entitled The Limits to Growth that explored the relationship between exponential population growth and finite resource supply/production. What they basically attempted to model was the extent to which a broad system (such as human civilization) could increase and maintain its complexity (best measured by population) in an environment with resource constraints that increase in an exponential or non-linear fashion. They viewed technological advances as a linear process that could not keep pace with the effects of population growth and resource depletion. In a subsection of the book, the authors made clear that their model was designed to illustrate what they termed “broad behavior modes” of human systems rather than make specific predictions regarding peak resources and population growth. They expanded on that concept using the following example:

If you throw a ball straight up into the air, you can predict with certainty what its general behavior will be. It will rise with decreasing velocity, then reverse direction and fall down with increasing velocity until it hits the ground. You know that it will not continue rising forever, nor begin to orbit the earth, nor loop three times before landing. It is this sort of elemental understanding of behavior modes that we are seeking with the present world model. If one wanted to predict exactly how high a thrown ball would rise or exactly where and when it would hit the ground, it would be necessary to make a detailed calculation based on precise information about the ball, the altitude, the wind, and the force of the initial throw. Similarly, if we wanted to predict the size of the earth's population in 1993 within a few percent, we would need a very much more complicated model than the one described here.”

     With the above example, the authors are in essence describing a complex, dynamic system whose specific behaviors are unpredictable. The global economy certainly fits into this category, and of course it is entirely based on our current supply of energy/resources or the loosely estimated future supply we have borrowed against. This latter aspect of complexity represents the top of our global economic pyramid that is in the process of breaking down via “financial crises”, but more on that later. Our task here is not to determine exactly how the system will behave in the near future, but to take a bird’s eye view of general trends between multiple interacting variables. This perspective is something our current leaders, media pundits and mainstream academics fail to account for, and that’s why many of their “solutions” fall way short of achieving anything sustainable and are many times extremely destructive. We desperately need a fresh, new perspective on our current economic predicament before we can figure out the best ways to navigate through it.

Standing On the Brink of Release

     Buzz Holling was instrumental in describing the adaptive cycles of complex ecological systems, and specifically he studied forest ecosystems. He identified 4 general stages of evolution in complex ecological systems (what he termed "fractal adaptive cycles"), and these could just as easily be applied to human systems that have been built on the foundation of those ecological systems (my descriptions will be greatly simplified – follow the referenced sources for more detail) :

1. Growth – The system finds an abundance of available resources and spaces which are exploited for material wealth, and this flow of energy/resources allows the development of many inter-dependencies, efficiencies and specialized functions. Diversity of agents within the system increases as does overall wealth.

2. Conservation – The system’s rapid growth decelerates as it becomes highly specialized and opportunities for novel exploitation strategies diminish. Increasing amounts of energy are directed towards conserving the existing system instead of growth, and “wealth” is extracted from the periphery to central parts of the system. The system’s complex inter-dependencies become more rigid and less resilient to disruptions that may propagate throughout the highly-connected networks of the system (Holling described the system at this stage as “an accident waiting to happen”).

3. Release – A relatively small triggering event exceeds the margins of error allowed in the system and pushes it into a chaotic liberation of energy and resources. The previous structures, relationships and complexities of the system are rapidly dismantled as central hubs deteriorate and networks are disconnected.

4. Reorganization – The fractured parts of the previous system re-structure themselves into more complicated relationships, but not necessarily in the way they were organized during the first growth phase. Typically, this phase leads to a restarting of the adaptive cycle in which many new opportunities for innovative development become available.

     It is also important to note that complex ecosystems are typically composed of smaller systems and are also embedded in larger systems, creating a nested set of self-similar structures. Typically, the larger system can absorb much of the release from smaller systems contained within it, and act as a “memory bank” that allows rapid regeneration of the smaller system. If an individual American company goes bankrupt, its assets can typically be absorbed and immediately put back to use by other companies in that economic sector (assuming it does not have TBTF status). However, if the larger system is synchronized with the smaller system during the release and reorganization phases, then it could potentially lead to what Holling terms a “poverty trap”, in which low levels of wealth and connectivity are persistent.

     It is pretty easy to see the progression of our global economy through the stages listed above. Since the industrial revolution, our fossil fuel inheritance has allowed local economies to become increasingly specialized, efficient and inter-connected with others to create even more efficiencies through trade and investment. On top of that, a smaller system of global finance has developed through equity and credit markets that traditionally facilitated productive investments in people, businesses and governments. Of course the last few decades have seen a rise in what can most accurately be called Ponzi finance, in which major creditors extract wealth from the global population by pushing non-productive debt on them and taking control of political institutions that could potentially stand in their way. To be fair to the debt pushers, we (in the developed world mostly) have gladly bought their drugs and have remained their loyal addicts to the bitter end.

     The 2008 subprime housing crisis was the spark that ignited the release of our complex financial system, and unfortunately finance is such a large part of the global economy that there is not much of a larger economic system to absorb the fallout. It is also true that our oil-subsidized industrial economy is approaching its own stage of release that cannot be absorbed by an alternative energy economy, and as if things weren’t dire enough, it is arguably the case that our entire atmospheric system is synchronized as well due to the ongoing process of carbon emissions and climate change (the effects of which we are certainly experiencing now). The processes of growth and conservation in these systems of varied scales may have been temporally different, but it appears that the tipping points triggering release are converging within a few decades at most.

     Instead of building resilience in the face of exponentially increasing complexity and decelerating growth, we have pushed forward full speed ahead and concentrated increasing amounts of resources/wealth in our corporate/governmental central hubs. We have become extremely vulnerable to any shocks that could potentially propagate throughout the system, as we recently witnessed when a few major banks held the entire global economy hostage. Now our debt-saturated governments are trying to save the current system by concentrating even more wealth in the center, but nature clearly has other plans. It is painfully clear that politicians, corporate executives, corporate media and all other central actors that have power to implement large-scale policies promoting resilience have chosen (intentionally or inadvertently – does it really matter?) their own material interests over that of the masses. We, as individuals and communities, must choose to implement our own policies of resilience, because we are ultimately a part of a much larger system than the economic, political or social systems that have been imposed on us.

We Can Survive With No Regrets

     Some people find economic theories and abstract mathematic principles extremely dry and unfamiliar. I’m pretty interested in economics and finance, but I still find it painfully boring to watch Ben Bernanke testify about monetary policy in front of Congressional representatives, who probably find it even more boring than I do (which may explain their weak excuses for questions). But most people familiar with the modern world, especially those of us in fully “developed” countries, have intimate experience with complexity on a daily basis. We are constantly bombarded with facts and data regarding events and trends progressing around the world. We attend colleges with dozens of specialized majors and tracks of study within those majors. People constantly tell us that the world has become “smaller” due to telecommunications technology, which is true in a sense, but they fail to mention the world has also become exponentially more complex.

     It is especially easy for us to identify the advantages of increased growth and complexity. These advantages are mostly materialistic in the sense that we have more financial “wealth” and higher standards of living. The disadvantages are sometimes harder to grasp since they are more ephemeral in nature. We are more isolated from nature, disconnected from local communities and uncertain about the future. Some of our most basic concepts and values, such as fairness, equality, cooperation, compassion and ethical behavior, have been watered down to the point of being topics for dinner tables or the occasional academic journal, but nothing else.

There are certainly material disadvantages to a complex, highly-dependent society as well, since many people have lost the knowledge/ability to grow food, build things, fix things and generally be self-sufficient. However, there has been at least one extremely important advantage to complexity in the development of advanced communications technology, and especially the internet which has connected billions of people across the globe. Insightful thinkers can use the internet to communicate their ideas to people in a distant location such as me, and I can then use their ideas to write a short essay such as this one, and send it to several others. We can use the communications networks to take back some level of knowledge, cooperation and resilience that we may have lost.

     There are five general areas of resilience that every individual and family should understand and take incremental steps towards. These include food security, water security, energy security, health security, and financial security. There are many tremendous writers out there that have written and spoken volumes on these issues and have generously shared their knowledge with anyone willing to read or listen.

The quicker we individually quit acting like deer caught in the headlights, and take actions towards resilience, the better off we will be as a collective species on a planetary system that has generously supported us, and continues to do so. The upcoming years will truly be a unique, eventful chapter in the history of human evolution. Perhaps in whatever records of history that may survive this rapid transformation, we will be known as the “peak generations” who sacrificed their extraordinary wealth, lifestyles, and comforts for a more simple form of social organization, where we re-organized to create a sustainable, just society. More likely, we will end up being the “peak generations” that fought desperately to defy reality and ended up in a heap of our own rubble. Either way, we should not focus on what society thinks about us now or how we will be remembered in the future. We should only be focused on doing what needs to be done, and then we should do it with no regrets.

For more of Pandurangi's writings, please join him at his site, Simple Planet

Defaults Account for Most of Pared Down Debt
by Mark Whitehouse - Wall Street Journal

0.08% — The annual rate at which U.S. consumers have pared down their debts since mid-2008, not counting defaults. U.S. consumers might not be quite as virtuous as they seem. The sharp decline in U.S. household debt over the past couple years has conjured up images of people across the country tightening their belts in order to pay down their mortgages and credit-card balances. A closer look, though, suggests a different picture: Some are defaulting, while the rest aren’t making much of a dent in their debts at all.

First, consider household debt. Over the two years ending June 2010, the total value of home-mortgage debt and consumer credit outstanding has fallen by about $610 billion, to $12.6 trillion, according to the Federal Reserve. That’s an annualized decline of about 2.3%, which is pretty impressive given the fact that such debts grew at an annualized rate in excess of 10% over the previous decade.

There are two ways, though, that the debts can decline: People can pay off existing loans, or they can renege on the loans, forcing the lender to charge them off. As it happens, the latter accounted for almost all the decline. Over the two years ending June 2010, banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans, according to data from the Fed and the Federal Deposit Insurance Corp.

That means consumers managed to shave off only $22 billion in debt through the kind of belt-tightening we typically envision. In other words, in the absence of defaults, they would have achieved an annualized decline of only 0.08%.

To be sure, this analysis holds consumers to a harsh standard. Defaults happen even in normal times, and are typically offset by even stronger growth in new mortgage and consumer loans. By holding their debts steady, consumers are actually being a lot less profligate than usual.

That said, the way U.S. consumers are shedding their debts isn’t encouraging. Aside from defaults, many are finding relief by refinancing mortgages at extremely low interest rates — the same low interest rates that are making it difficult for an increasing number of older folks to generate enough fixed income for a comfortable retirement. The relief might help debt-ridden consumers get into a position to start spending again sooner than they otherwise would, but the borrower’s gain is the saver’s loss.

Americans' Net Worth Tanked In Second Quarter
by William Alden and Shahien Nasiripour - Huffington Post

Americans' net worth plunged in the second quarter of this year, new data from the Federal Reserve show, erasing the gains of the previous two quarters and adding evidence to the argument that the economy has entered a double-dip recession. The net worth of households and non-profit organizations dropped $1.52 trillion during the period from April 1 to June 30 of this year, according to the report released Friday. The new figure, $53.50 trillion, represents a 2.8 percent decline from the previous quarter.

The net quarterly loss, the data suggests, came from Americans' losses in the sagging stock market. Equity shares owned by households and non-profits tanked in the second quarter, dropping $1.88 trillion or 11.2 percent to $14.87 trillion from the previous quarter. The second quarter figure went down past the territory of 2009's third quarter ($15.32 trillion), almost to the range of the 2009 second quarter ($13.06 trillion), when equity was just starting to rise from its low of $10.94 trillion in the first quarter of that year. The Dow rose 4.1 percent in the first quarter of this year and fell 10.0 percent in the second quarter.

Total household wealth showed a 5.9 percent increase over the same period last year, which isn't saying much, since at that point the economy was only just beginning to improve. More significantly, Americans' net worth has approached levels not seen since the third quarter of 2009, when the total was $53.03 trillion, and when it was steadily increasing. The overall value of assets owned by households and non-profits dropped as well, sliding $1.56 trillion or 2.3 percent, to $67.41 trillion from $68.97 trillion in the first quarter of this year. Again, the figure entered territory not seen since the third quarter of last year.

The economy has been in the slow process of deleveraging. Overall household debt dropped in the second quarter by a seasonally adjusted annual rate of 2.3 percent, with both mortgage debt and consumer credit debt falling. For households and non-profits combined, the values of mortgage debt and credit debt in the second quarter (respectively $10.15 trillion and $2.40 trillion) fell from the first quarter figures of $10.20 trillion and $2.42 trillion, respectively.

Mortgage debt for households and nonprofits has been steadily falling since the most recent peak of $10.50 trillion in the first quarter of 2009. And banks charged off 2.9 percent of all loans in the second quarter, according to data compiled by the Federal Reserve Bank of St. Louis. The charge-off rate this year is higher than any other year since at least 1988. "Households are unable to pay off debt," Elizabeth Warren, President Barack Obama's newest top adviser on consumer and economic issues, said Friday during a conference call with reporters. "There's a substantial amount of debt written off."

In a tentative, and potentially outdated, cause for hope, the value of real estate assets owned by households in the quarter went up, a 0.3 percent increase over the previous quarter. Moreover, total tangible assets owned by households and non-profits increased in value 0.6 percent to $23.68 trillion. But the current housing situation, which has worsened since the end of June, suggests trouble.

"Looking ahead, the household net worth will move sideways as minor improvements on the financial side are likely to be offset by lower real estate asset values," Gregory Daco, an economist with IHS Global Insight, said in a release. "With employment recovering very gradually and housing prices remaining low, household wealth will make a very slow recovery."

Pension Gaps Loom Larger
by David Reilly - Wall Street Journal

Funds Stick to 'Unrealistic' Return Assumptions, Threatening Bigger Shortfalls

Many of America's largest pension funds are sticking to expectations of fat returns on their investments even after a decade of paltry gains, which could leave U.S. retirement plans facing an even deeper funding hole and taxpayers on the hook for huge additional contributions. The median expected investment return for more than 100 U.S. public pension plans surveyed by the National Association of State Retirement Administrators remains 8%, the same level as in 2001, the association says.

The country's 15 biggest public pension systems have an average expected return of 7.8%, and only a handful recently have changed or are reconsidering those return assumptions, according to a survey of those funds by The Wall Street Journal.

Corporate pension plans in many cases have been cutting expectations more quickly than public plans, but often they were starting from more-optimistic assumptions. Pension plans at companies in the Standard & Poor's 500 stock index have trimmed expected returns by one-half of a percentage point over the past five years, but their average return assumption is also 8%, according to the Analyst's Accounting Observer, a research firm.

The rosy expectations persist despite the fact that the Dow Jones Industrial Average is back near the 10000 level it first breached in 1999. The 10-year Treasury note is yielding less than 3%, and inflation is running at only about 1%, making it tougher for plans to hit their return targets. Return assumptions can affect the size of so-called funding gaps—the amounts by which future liabilities to retirees exceed current pension assets.

That's because government plans use the return rates to calculate how much money they need to meet their future obligations to retirees. When there are funding gaps, plans have to get more contributions from either employers or employees. The concern is that the reluctance to plan for smaller gains will understate the scale of the potential time bomb facing America's government and corporate pension plans. "It's unrealistic," John Bogle, founder of mutual fund giant Vanguard, says of the return assumptions in place at most pension plans.

Pension funds at companies in the S&P 500 faced a $260 billion shortfall at the end of 2009, according to Standard & Poor's. Estimates of the fund deficits faced by state and local governments range from $500 billion to $1 trillion. Some plans are beginning to trim their return forecasts. Earlier this month, New York State Comptroller Thomas DiNapoli said he would reduce the expected rate of investment return for his state's pension system, the third-largest in the nation, to 7.5%, from 8%.

The country's two biggest plans—the California Public Employees Retirement System, or Calpers, and the California State Teachers' Retirement System, or CalSTRS—both are undergoing reviews of projected investment returns that could lead to reductions later this year. Many plans have held onto an 8% return expectation though thick and thin. Such return assumptions partly reflect the heady years of the 1990s bull market. Public pension plans posted a median, annualized return of 9.3% over the past 25 years, but just 3.9% over the past 10, according to consulting firm Callan Associates.

The Oregon Public Employees Retirement System has had an 8% assumption since 1989. Its actual return averaged 10.7% annually from 1970 through 2009. The Teachers Retirement System of Texas has had a similar expectation since 1986, with an annual return of 9% return since then. A spokeswoman for the Texas system said it doesn't change assumptions "in response to short-term situations," and currently "sees no reason to change our investment-return assumption." A spokesman for the Oregon system said there are no special plans to review its return expectation.

The challenge for many plans, given investment horizons that can stretch out 50 years, is gauging which time period to look at when charting a future course. George Diehr, vice president of the Calpers board, said in May that the question is whether the credit crisis has "dramatically altered long-held assumptions about investing in the world's financial markets. Are investors in for a sustained period of meager or below-market growth? Or will the traditional business and economic cycles, the ones investors have grown accustomed to over the past couple of decades, return?" The outcome of Calpers's ongoing review "hangs on how we answer that question," a spokesman says.

Depressed stock prices aren't the only thing putting pressure on potential returns. Plummeting bond yields mean that plans' fixed-income portfolios will likely earn less in the future. A lower inflation outlook means that funds will have to generate greater real returns to meet their return targets. Funds use a so-called discount rate to estimate the size of future obligations to retirees, and thus the contributions needed to fund them. Corporate plans use a discount rate based on corporate bond yields. But government plans use their expected return rate on all investments as their discount rate.

The higher the discount rate, the smaller a fund's pension obligation. That gives public plans another big reason to hesitate before cutting their expected return rates. The Colorado Public Employees Retirement Association showed in its 2009 financial report the impact of reducing the rate. Using a 8% expected return rate, the plan faced a $23.4 billion deficit, based on market values, at the end of 2009. If the rate was cut to 6.5%, the shortfall would jump to $34 billion. Meredith Williams, the Colorado plan's chief executive, says cutting the rate "creates pain." Nevertheless, Colorado at year-end of 2009 cut its return assumption to 8%, from 8.5%. Mr. Williams says the rate may be lowered again later this year.

Others have been more hesitant. In 2009, Matt Smith, state actuary for Washington state, recommended that its retirement system cut its return expectation to 7.5%, from 8%. That advice was rejected by the state's pension-funding council. Mr. Smith says he thinks Washington and other states eventually will lower expected returns, but that it will be a slow process because reduced assumptions "will increase the cost of pension benefits, and right now the budgetary environment is a big obstacle to that."

Pension plans say they take a decades-long view of potential returns. "We can't knee-jerk our way through this. Funding a retirement system is a long-term proposition," says David Stella, secretary of Wisconsin's department of employee trust funds. Last year Wisconsin's plan reviewed its expected return rate of 7.8% and remains comfortable with it, he says.

Companies have found out the hard way that their options are limited. From 2005 to 2009, S&P 500 companies with pension plans expected to generate about $475 billion in returns. The actual returns were only about $239 billion, a 50% undershoot, according to Jack Ciesielski of the Analyst's Accounting Observer.

In recent years, some funds have tried to boost returns by shifting funds out of stock and into alternative investments such as hedge funds or private equity. Some find this approach too risky. This summer, the Virginia Retirement System cut its expected investment rate to 7%, from 7.5%, giving it the lowest assumption among the nation's 15 largest pension systems. The shift began in 2005, when the plan's board cut the rate to 7.5%, from 8%.

"There was a general thinking that equity markets were unlikely to repeat the period of the 1990s," explains director Robert Schultze. The alternative was to take more risk, he says, but the board didn't want to "stretch or be swinging for the fences" to meet higher investment expectations. Other plans, he predicts, will follow suit. "I just think people are going to be coming off that 8% view," he says.

Just Your Average 300-Year Bear Market?
by Robert Jay - Elliott Wave International

Long-Term Trend Forecasting is Actually Easier than Short-Term

Most people who analyze the present give too little thought to the past, even when previous decades or centuries offer acutely relevant information.
This is particularly true in the financial world, where short attention spans are chronic. A Sept. 9 article in The Economist magazine put it this way:

"The financial world seems to be obsessed with the short term. Fund managers are usually judged on their performance over a three-month period. The television news highlights daily moves in stock markets. Lots of hedge funds think in terms of milliseconds."

But would you be surprised to learn that long-term stock market trends are generally easier to forecast than short-term ones? EWI's Robert Prechter says just that, and explains why on pp. 403-404 of his landmark book, The Wave Principle of Human Social Behavior:

"...contrary to all current views on the subject, it is the long-term social trends, the ones that chaos scientists say are impossible to predict, that are in fact easier to predict... The reason that long-term trends are easier to forecast is that there are much more data to apply in one’s analysis of form (such as breadth, volume, sentiment and behavioral statistics...) as well as a higher component of accuracy in...aggregate stock prices.

"In fact, they are highly predictable in both general and probabilistic terms and somewhat predictable in specific terms. What is more, these facts pertain regardless of the time scale, as clarity of pattern is the prime determinant of predictability."

Let's take a look at long-term stock market prices:

Not even Major League Baseball can rival the stock market's wealth of statistical data. And after studying the relevant data and analyzing the long-term pattern, Prechter offered this conclusion in the May issue of The Elliott Wave Theorist: "The current bear market will be the biggest in nearly 300 years."

Yes, Britain's "South Sea Bubble" in the early 1720s was the last time a bear market was comparable to what we may see unfolding now -- it's represented by that vertical drop which you see on the above chart.

Don’t Worry About China, Japan Will Finance U.S. Debt
by Alex Frangos - Wall Street Journal

China has been diversifying its $2.5 trillion reserves away from the dollar, causing some to worry that less Chinese buying of Treasurys would cause U.S. interest rates to rise and make it more difficult for the government to borrow. But Japan’s dollar buying in currency markets Wednesday shows Chinese reserve diversification might actually lead to even more demand for Treasurys.

Here’s how. As China diversifies out of U.S. dollar-denominated assets such as Treasurys, it is buying debt denominated in the currencies of some of its biggest trading partners. Not wanting to lose competitiveness themselves, those trading partners in turn buy dollars to keep their currencies cheap. As part of the diversification push, China has been a major buyer of yen, snapping up $27 billion in yen so far this year according to Japanese Ministry of Finance. Analysts say China’s buying has helped an already strong yen get stronger.

Now, Japan, feeling under pressure to weaken its currency, turned around and bought dollars, most likely in the form of Treasurys. It isn’t clear exactly how much dollar buying Japan will have to do to protect the yen from getting stronger, but it’s likely to more than offset China’s diversification into the yen. If the past is a guide, Japan spent $320 billion in its last intervention from 2003 to 2004. And this time the currency markets are 73% far larger, with $568 billion dollar-yen trading a day,  according to the Bank for International Settlements.

Japan is not alone in this phenomenon. China has also bought South Korea’s currency, the won. And South Korea routinely intervenes in currency markets, buying dollars to keep its currency from rising too quickly, again offsetting China’s move out of the dollar.

US Foreclosures Hit Record High in August
by William Alden - Huffington Post

August saw more Americans lose their homes to foreclosure than any other month on record, RealtyTrac reported today. Banks repossessed a total of 95,364 properties in August, a 25 percent increase from the same period in 2009 and a 2 percent increase over this May's previous record. Foreclosure filings of all types, including default notices, scheduled auctions and bank repossessions (the three major stages of the foreclosure process), increased to 338,836 in the month, a 4 percent jump from July.

At the same time, though, the number of default notices that lenders issued to homeowners to initiate the foreclosure process actually went down. The August total of 96,469 was a 1 percent decline from July and a 30 percent drop from August of last year. It's significantly lower than the April 2009 peak of 142,064 default notices issued. That the numbers of repossessed homes and default notices (respectively the last and first stages of the process) are converging demonstrates that banks are trying to mitigate the flow of new homes to the market. As Bloomberg reported Wednesday, the glut of housing inventory means home prices could decline for at least three years.

Indeed, the number of properties with delinquent loans (30 or more days past due) that aren't yet in foreclosure is currently 4,947,000, or 9.22 percent of all mortgage-financed homes, according to data from Lender Processing Services. The total number of foreclosed properties on the market, LPS says, is 2,038,000. It's a bleak picture, but glimmers of hope emerge. The majority of Americans (at least, the majority of a 3,399-person sample) think the market has bottomed out, according to a survey released today by Fannie Mae. 47 percent of those surveyed said prices will remain flat for the next year and 31 percent predicted prices will rise.

Even in such trying times, the majority of a 2,967-person sample of Americans say it's "unacceptable" for homeowners to willingly walk away from a mortgage, according to a new survey from Pew Research Center. A whopping 59 percent of respondents condemn homeowners who choose to stop payments on "underwater" mortgages.

According to the RealtyTrac data, Nevada and Florida led the nation in rates of foreclosure filings (including default notices, scheduled auctions, and repossessions) in August, despite year-over-year decreases in activity in both those states. One in every 84 Nevada homes received some form of foreclosure filing, compared to one in every 155 homes in Florida. Arizona, California and Idaho were right behind Nevada and Florida in the foreclosure rankings.

Inflation? What Inflation?
by TPC

CPI data was very weak this morning showing an inability for corporations to pass along higher prices and a general malaise at the consumer level.  With the exception of energy prices (which has been highly volatile) the overall index was little changed and remains very low by just about any metric (via Econoday):
“Consumer price inflation remained somewhat on the warm side, thanks to higher energy costs. However, core inflation eased further to nonexistent.

The overall CPI in August posted a 0.3 percent rise, equaling the boost in 2July. The latest gain topped the median forecast for a 0.3 percent advance. Excluding food and energy, CPI inflation slowed to no change, coming in below analysts’ expectations for a 0.1 percent rise. Playing a key role in softening the core rate was an unchanged shelter index.”

This is an index I altered from the CPI to try to include housing inputs with a marginally higher weighting on commodity inputs. It tells a much more dramatic story in the inflation data:

This chart includes the average cost of a house since 1990. The BLS excludes housing because its an investment and a rare purchase, however, I find that hard to justify. When you spend 5X your annual income on something it impacts your decision making for a long time. Obviously the purchases are rolling and occur at different times, but it’s by far the single most important input in ones every day spending decisions. Can I make my mortgage payment is the ultimate thought in every consumer’s head.

The other spending decisions all revolve around this one input. The actual CPI data is very good in my opinion and done in great detail and well justified. It comes very close to accounting for the average household’s expenses despite what the critics say. This, however, is a sizable flaw. We were suffering high inflation in the mid-2000's and yet the BLS told us everything was benign. Arguably the largest economic misstep in the history of the USA.

The Downside of Families Doubling-Up
by Phil Izzo - Wall Street Journal

More people are living with family in an effort to deal with the recession, but while the phenomenon is keeping the poverty rate lower, it has wider negative economic consequences.

In a presentation as part of its wider report on income, poverty and health insure, the Census Bureau noted a big jump in the number of individuals and families doubling up. The number of multifamily households jumped 11.6% from 2008 to 2010 compared to an increase of just 0.6% in the number of households. "If the poverty status of related subfamilies were determined by only their own income, their poverty rate would be 44.2%," David Johnson chief of the Housing and Household Economic Statistics Division at the U.S. Census Bureau said. "When their poverty status is determined based on the resources of all related household members, it is about 17%."

This slowing of household formation has been noted elsewhere. Calculated Risk highlights a quote from Time Warner Cable CFO Robert Marcus, who said the company’s "subscriber environment [is] very, very weak," thanks to high unemployment, high … vacancies and "really anemic new home formation." Fewer households means fewer consumers for businesses desperate for demand. At the same time, it continues to drag on a housing market that needs to burn off excess supply.

Meanwhile, the share of people age 25-34 living with their parents jumped to 13.4% in 2010 from 12.7% in 2008. Families sticking together has likely held down the poverty rate, noted Johnson. The poverty rate for adults age 25-34 living with their parents was 8.5%, but in that case they are considered part of a household. If their status was determined solely by their own income, 43% were below the poverty threshold for a single person. The struggles of young adults can have a broad economic impact. Parents supporting adult children have less money to spend on themselves, not to mention less income to save for retirement.

To be sure, there is a silver lining if the broader economy can improve. Necessity is likely the primary driver of the increase in multifamily households. Many of these families and children living at home may want to make the jump out on their own as soon as their economic standing improves. That could represent a strong shadow demand for housing, as well as a potential jump in household formation with a resultant boost in consumption.

Six US Bank Failures Put Total for Year at 125
by Dan Fitzpatrick - Wall Street Journal

Regulators seized six banks in the Southeast, Midwest and Northeast on Friday, marking 125 failures for 2010. There were three in Georgia with a combined $864.2 million in assets, $801.7 million in deposits and 18 branches. Community & Southern Bank of Carrollton, Ga., assumed deposits at the three banks, agreeing to pay the Federal Deposit Insurance Corp. a 1% premium for the deposits of Bank of Ellijay and First Commerce Community Bank and a 1.25% premium for the deposits of Peoples Bank.

Community & Southern Bank also agreed to purchase virtually all assets of the failed Georgia banks and share losses with the FDIC on about $602 million of those assets. The Georgia failures mark 14 for that state in 2010 and 45 since 2007. No state has more U.S. failures since the start of the crisis, said Alexandria,, Va.-based banking consultant Bert Ely. Other than Georgia, the largest number of bank failures since 2007 are 39 in Florida, 37 in Illinois and 32 in California. The six failures on Friday followed three weeks during which only one bank was shut, spurring speculation that regulators had slowed down. Now "they are picking the pace back up a little bit," Mr. Ely said.

Regulators are still on pace to shut more banks this year than 2009, when 140 failed. All told, 293 banks have been seized since 2007, according to the FDIC. That total is still well short of the tally in the savings and loan crisis of 1987-1992 when over 1,000 failed. The other banks that failed on Friday were in New Jersey, Ohio and Wisconsin. Phoenixville, Pa.-based New Century Bank assumed all deposits and agreed to purchase essentially all assets of the one-branch ISN Bank in Cherry Hill, N.J. New Century agreed to share losses on $64.8 million in ISN Bank assets.

In Ohio, Cincinnati-based Foundation Bank assumed all deposits and agreed to purchase all assets from the failed, one-branch Bramble Savings Bank of Milford, Ohio. In Wisconsin, regulators seized West Allis, Wis.-based Maritime Savings Bank, and Brookfield, Wis.-based North Shore Bank agreed to assume all of Maritime's deposits and purchase $177.6 million in assets. The estimated loss to the FDIC's insurance fund for the six failures Friday is $347.6 million.

Calpers in Talks With Schwarzenegger on $2 Billion Budget Loan
by Michael B. Marois - Bloomberg

The California Public Employees’ Retirement System said it is in talks with Governor Arnold Schwarzenegger’s administration on a proposal to borrow $2 billion from the fund to help the state balance its budget. Anne Stausboll, the fund’s chief executive officer, said her staff has been holding informal discussions with Schwarzenegger’s department of finance on a proposal that office has floated to credit the state with $2 billion this year as an advance on the roughly $74 billion the governor estimates the state would save during the next 30 years from his proposals to roll back pension benefits for government workers. 

California has been without a spending plan since the July 1 start of its fiscal year as Schwarzenegger and Democrats who lead the Legislature remain deadlocked over how to fill a $19 billion deficit. The Republican governor has vowed not to sign any final budget unless it’s accompanied by legislation to permanently cut the state’s cost to finance workers’ retirement benefits.

"We are in informal discussions about this," Stausboll told the fund’s governing board today. "We received sufficient detail that we’ve been able to do some analysis. We have serious concerns about actuarial soundness, vested rights issues and IRS issues that could impact the tax-qualified status of this fund." The state must pay $3.9 billion this fiscal year to the pension fund, known as Calpers, to finance retiree costs, up from $145 million a decade earlier.

In 1999, lawmakers and then- Governor Gray Davis approved benefit increases that Schwarzenegger says the state can’t afford, and he wants them rolled back for new hires. He has supported proposals to require employees to work longer to qualify for pensions and to pay more toward benefits. Calpers, the largest public pension fund in the U.S., has $208 billion of assets under management.

FHFA: Banks Should Share Fannie, Freddie Bailout Costs
by Alan Zibel - Huffington

The nation's largest banks have an obligation to pay some of the cost for bailing out mortgage buyers Fannie Mae and Freddie Mac because they sold them bad mortgages, a government regulator said Wednesday. Edward DeMarco, the acting director for the Federal Housing Finance Agency, said the banks this summer have refused to take back $11 billion in bad loans sold to the two government-controlled companies, in written testimony submitted for a House subcommittee hearing Wednesday. A third of those requests have been outstanding for at least three months.

DeMarco said the banks have a legal obligation to buy back the loans and called the delays "a significant concern." He said the government may take new steps to force those buybacks if "discussions do not yield reasonable outcomes soon." In an interview with reporters after the hearing, DeMarco declined to give further details on what the government might do next. He said only that "we're looking for contractual obligations to be fulfilled."

Fannie and Freddie buy mortgages and package them into securities with a guarantee against default. The two mortgage giants nearly collapsed two years ago when the housing market went bust. The government stepped in to rescue them and it has cost taxpayers about $148 billion so far. The rescue is on track to be the most expensive piece of stabilizing the financial system.

Fannie and Freddie have a legal right to return bad loans, especially if they later discover fraudulent statements on applications. Any money they recover offsets their losses. The amount in question is a small fraction of the total government rescue, said Ed Mills, financial policy analyst at FBR Capital Markets. Still, lenders say Fannie and Freddie are trying to return too many loans. And in some cases, they are pushing back loans where it's not clear fraud was committed, the lenders say.

Mortgage industry consultant Brian Chappelle said the requests often apply to loans that met the mortgage buyers' guidelines at the time. "The industry believes that the pendulum has swung far beyond what is reasonable," he said. As a result, he said, lenders are being extremely cautious about making new loans.

Wall Street has worried that the costs of bailing out Fannie and Freddie could get pushed back on big banks. Fitch Ratings said in a report last month that the four largest U.S. banks could book losses of up to $42 billion if Fannie Mae and Freddie Mac force them to take back troubled mortgages they made. It also estimated that JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. could record $17 billion in losses if they repurchase a quarter of the mortgage giants' seriously delinquent loans.

The leading Democrat on the panel, a House Financial Services subcommittee, indicated the banks bear some responsibility. "We must begin to think about approaches for recouping taxpayers' money in the long run," said Rep. Paul Kanjorski. "We found a way to pay for the savings and loan crisis, and we can survey find a way to recover the costs associated with this crisis."

A bigger headache for lawmakers is figuring out what to do with Fannie and Freddie in the future. The Obama administration is working on a plan to restructure the mortgage market and make sure home loans are affordable. Officials don't plan to release details until next year. But Michael Barr, an assistant Treasury secretary, told the panel Wednesday that Fannie and Freddie "will not exist in the same form as they did in the past."

Sorting out the future of housing finance has been a divisive issue on Capitol Hill. And it could grow even more contentious if Republicans take control of one or both houses of Congress. Republicans have seized on the administration's management of Fannie and Freddie to illustrate Democrats' push for broadening the reach of the federal government. They say loans acquired by Fannie and Freddie since the September 2008 takeover have put taxpayers at risk.

"It's time for the government to get out of that business," said Rep. Spencer Bachus, the top Republican on the House Financial Services Committee. But Democrats and regulators say the loans acquired by Fannie and Freddie before their takeover represent the overwhelming majority of the companies' losses. New loans acquired since then have been performing well, they note.

"There is no urgency," to reform the two companies, said Rep. Barney Frank, the committee's chairman. "The pattern of abuse they had engaged in has been changed...Fannie and Freddie are behaving differently and are causing far less problems."

The financial fallout was an 'Inside Job'
by Kai Ryssdal - Marketplace

Kai Ryssdal: I know I said yesterday that I'm not a big fan of anniversary stories, but this is kind of a big week. Two years ago today, Lehman Brothers went broke, kicking off a stretch of a crazy couple of months that we're still trying to recover from.

Documentary filmmaker Charles Ferguson has a new movie out -- "Inside Job, it's called -- that tries to explain what happened that fall and to figure out who's to blame.

So that's where we started when we talked, with me asking whether it's possible to blame individuals for the whole financial crisis, or whether the problems on Wall Street were more systemic?

Charles Ferguson:What has happened is that a very substantial fraction of the financial services industry has come to be outside the law, and as it has become increasingly powerful, it has attracted increasingly amoral people. Its behavior has become more and more dangerous to the financial system and to the American economy.

RYSSDAL: There was also a sort of trend of not talking about any of this stuff. There's a great moment in the film when one of the few regulators you've got on camera was Christine Lagarde, the French finance minister. And you started asking her about Lehman Brothers, and when she found out that it was going under.

FERGUSON: When were you first told Lehman in fact was going to go bankrupt?

CHRISTINE LAGARDE: After the fact.

FERGUSON: After the fact? Wow, OK. And what was your reaction when you learned of it?

LAGARDE: Holy cow.

RYSSDAL: Clearly, we're connected financially, but not so much along the lines of communication, huh?

FERGUSON: I was truly, truly dumbstruck when I learned the extent of the ignorance and disconnect in this, of the American regulatory system during the crisis. Paulson, Bernanke, were astonishingly ignorant of the consequences of their decision. They did not understand foreign bankruptcy laws, they did not understand that all transactions in London would be halted and then that would cause catastrophic financial results cascading throughout the financial system almost immediately.

RYSSDAL: I want to play something from the film. It's Allan Sloan, he's a senior editor at Fortune magazine. He's a well-respected financial writer. He tells a little story.

ALLAN SLOAN: A friend of mine who's involved in a company that has big financial presence said, "Well, it's about time you learned about sub-prime mortgages." So he set up a session with his trading desk and me. And the techie who did all this gets very excited, runs to his computer, pulls up in about three seconds this Goldman Sachs issue of securities. It was a complete disaster. Borrowers had borrowed on average 99.3 percent of the price of the house, which means that they had no money in the house.

RYSSDAL: So for all the blame that Allan puts on Goldman Sachs -- and certainly they deserve it -- what about Americans looking in the mirror and saying, you know what, a little bit of this is our fault too.

FERGUSON: Well, certainly that's true to some extent. There was a bubble, and it was a big bubble and many people bought houses that they couldn't afford and were careless with regard to the loan documentation that they signed. But over half of people who received sub-prime mortgages actually would have qualified for a less expensive prime mortgage. They were steered into more expensive sub-prime mortgages by mortgage brokers who were paid extra money the more expensive the loan they made was. So it was something that was cultivated, and in many regards, forced upon the American people by the financial services industry.

RYSSDAL: How come nobody went to jail?

FERGUSON: Well, there's a simple obvious answer and then there's a deeper, more complicated answer, which I don't fully understand. The simple obvious answer is that this has become an out-of-control industry; a very, very powerful industry.

RYSSDAL: What's the more subtle reason that you haven't quite figured out?

FERGUSON: For some reason that I truly don't understand, this situation has not generated the level of popular outrage that similar or comparable things have generated at other times in American history. There have been other times in American history -- some recent, some long ago -- when our leaders, our business leaders, and/or our political leaders, have done something terribly wrong and more than once, the American people have risen up and said, "We simply will not permit this." And that hasn't happened here, yet. I think that part of the reason that it hasn't happened might be that people think that finance is too complicated for them to understand, and that the situation is too complicated for them to understand. And indeed one reason that I made the film is to make it clear that actually they can understand it.

Elizabeth Warren Didn't Want Permanent Appointment To CFPB: Barney Frank
by Ryan Grim - Huffington Post

Elizabeth Warren made it clear to the White House while it was debating her nomination to the Consumer Financial Protection Bureau that she was not interested in a five-year term to run the agency. Barney Frank, a Warren ally, delivered that message to the White House, he told HuffPost in an interview Thursday. "She always said she didn't want to be there as a permanent director. Some of the liberals are worried about it. It's almost an insult to Elizabeth. She wouldn't take this if there was the slightest impediment to her doing the job," he said.

An administration official said that Warren will be officially named on Friday as an "assistant to the president," the same title that Chief of Staff Rahm Emanuel and other top officials hold, as well as a special adviser to the Treasury, overseeing the establishment of the CFPB. There were extensive and nuanced discussions with the White House, said a source familiar with them, and the interim nomination emerged as her favored choice, as Frank says, but she has still not foreclosed the option of a full nomination or told the administration that she would flatly refuse one.

"Frankly, on her behalf, I talked to David Axelrod earlier this year, and I said, 'You know, Elizabeth doesn't want a full five year term. She'd like to set this up,'" said Frank. "She told me that, and I told Axelrod that." The administration, however, still has the option to nominate Warren to a permanent position. Frank said that he was "delighted" by the administration's choice. "I want to give credit to Tim Geithner for working this out. There's absolutely no chance that she will be anything less than fully independent. She wouldn't have taken the job," he said.

The administration's announcement has been greeted with some skepticism in progressive circles, as Frank acknowledged. Bob Kuttner, a co-editor of The American Prospect, was one such skeptic, but as the outlines of her new position become clear, he has embraced it. "This strategy is a win-win, on several grounds. It gives Warren full authority to set up the agency, without having to run the gantlet of confirmation hearings and a likely Republican filibuster," he wrote in a HuffPost blog post Thursday.

"This way, Warren will be able to get the agency quickly up and running in a manner that serves both consumers and progressive politics. Early directives to bring greater simplicity and transparency to credit documents will be extremely popular. Politically, the carping by the banking industry and its Republican allies will remind the public which side the GOP is on."

Frank said that she'll have more than enough time to set up the agency and get it moving in the right direction before she heads back to the Harvard faculty or elsewhere in politics. "There's no question that she'll be in there long enough," he said. "She's got two-plus years to do it. That's more than enough time," he added, referring to the rest of Obama's first term, which, of course, could be the first of two.

Warren allies, however, are still pushing for a permanent nomination. "While this is good news for American families, it is my hope that President Obama will nominate Warren to a permanent position to head up the CFPB," said Sen. Jeff Merkley (D-Oregon), shortly after the news broke on Wednesday afternoon. "She is more than deserving of the job and the Senate should have the opportunity to confirm one of the nation's strongest consumer advocates."

Irish government perilously close to calling in IMF
by Fionnan Sheahan and Emmet Oliver - Irish Independent

Taoiseach Brian Cowen last night insisted he would fight on -- but his economic woes deepened as a major new report warned the country was perilously close to calling in outside help from the EU or the IMF. After a disastrous three days, Mr Cowen offered little comfort to disgruntled Fianna Fail backbenchers as he failed to outline what changes he would make to his leadership, communications and lifestyle as a result of his 'Morning Ireland' interview debacle.

But the persistent grumbling over his leadership was overshadowed last night by two new economic blows. The cost of borrowing for the country moved higher again on international bond markets, after falling back following last week's government decision to split Anglo Irish Bank. And a report from Barclays, one of Europe's largest banks, said Ireland may yet need financial help from the IMF or the EU if conditions got any worse.

But a spokesman for Finance Minister Brian Lenihan said last night: "The Government's strategy for dealing with the economic and financial challenges has been commended by the EU Commission, the European Central Bank and many other international experts. "This strategy is at an advanced stage and is being implemented in an extremely open and transparent manner." Barclays said: "In the coming months the Government may need to seek outside help."

While Ireland has raised most of the money it needs for this year, the cost of Anglo and the scale of the deficit meant any further financial shocks could push the country over the edge, the bank warned. It said that there was little room for "further unexpected financial sector losses" and that Ireland was running out of economic room. The highly influential bank also advised Ireland to do a "deal" with Anglo bondholders. This could entail asking them to reduce the amount that they are owed in return for a partial stake in the bank.

Barclays said Ireland might apply for assistance from the IMF at some point in future if bank losses grow much bigger. It said going to the IMF before that could "cause alarm" on the markets. Ireland is expected to post a deficit of 25pc of GDP this year, when bank losses are added -- the largest in Europe.

Meanwhile, Ireland's borrowing costs continued to edge over 6pc last night as concern lingered over the financial position of the country. A plan from last week to split Anglo into two banks has failed to allay the concerns of traders. Two ratings agencies have raised questions over how much support the State is likely to give Anglo Irish Bank if it goes into a wind-down arrangement.

Greece is the only eurozone country facing interest rates as high as Ireland. Portugal, while also under pressure, is still able to borrow more cheaply than Ireland. The current high borrowing costs may drop if the Government can estimate the final likely cost of Anglo. The level of uncertainty about Irish bank losses continues to be a major negative for Irish bonds.

Mr Cowen said the rising cost of borrowing was a reaction to the demand in the bond market. "In relation to the bond spreads, they spread for all countries, as I understand it today," he said. Mr Cowen was in Brussels at an EU summit with the Foreign Affairs Minister Micheal Martin. The pair put on a united front in the wake of the key role that the minister played in forcing Mr Cowen to apologise for his disastrous interview.

The silence from the Fianna Fail backbenchers was an ominous sign for Mr Cowen as the saga continued to play badly among the public. But Mr Cowen said firmly that he believed he had the support of the Fianna Fail TDs and senators to continue in the job. "Yes, we don't expect a general election any day soon.

"We're in the process of working with a Government... on policies that are necessary for the recovery of the country. And our mandate is there until 2012," the Taoiseach said. The Labour Party blamed Mr Cowen's infamous radio interview for the latest hike in Ireland's cost of borrowing.

The Eurozone’s Autumn Hangover
by Nouriel Roubini

After a summer of Europeans forgetting their woes and tanning themselves at the beach, the time for a reality check has come. For the fundamental problems of the eurozone remain unresolved.

First, a trillion-dollar bailout package in May prevented an immediate default by Greece and a break-up of the eurozone. But now sovereign spreads in the peripheral eurozone countries have returned to the levels seen at the peak of the crisis in May.

Second, a fudged set of financial "stress tests" sought to persuade markets that European banks’ needed only €3.5 billion in fresh capital. But now Anglo-Irish alone may have a capital hole as high as €70 billion, raising serious concerns about the true health of other Irish, Spanish, Greek, and German banks.

Finally, a temporary acceleration of growth in the eurozone in the second quarter boosted financial markets and the euro, but it is now clear that the improvement was transitory. All of the eurozone’s peripheral countries’ GDP is still either contracting (Spain, Ireland, and Greece) or barely growing (Italy and Portugal).

Even Germany’s temporary success is riddled with caveats. During the 2008-2009 financial crisis, GDP fell much more in Germany – because of its dependence on collapsing global trade – than in the United States. A transitory rebound from such a hard fall is not surprising, and German output remains below pre-crisis levels.

Moreover, all the factors that will lead to a slowdown of growth in most advanced economies in the second half of 2010 and 2011 are at work in Germany and the rest of the eurozone. Fiscal stimulus is turning into fiscal austerity and a drag on growth. The inventory adjustment that drove most of the GDP growth for a few quarters is complete, and tax policies that stole demand from the future ("cash for clunkers" all over Europe, etc.) have expired.

The slowdown of global growth – and actual double-dip recession risks in the US and Japan – will invariably impede export growth, even in Germany. Indeed, the latest data from Germany – declining exports, falling factory orders, anemic industrial-production growth, and a slide in investors’ confidence – suggest that the slowdown has started.

In the periphery, the trillion-dollar bailout package and the non-stressful "stress tests" kicked the can down the road, but the fundamental problems remain: large budget deficits and stocks of public debt that will be hard to reduce sufficiently, given weak governments and public backlash against fiscal austerity and structural reforms; large current-account deficits and private-sector foreign liabilities that will be hard to rollover and service; loss of competitiveness (driven by a decade-long loss of market share in labor-intensive exports to emerging markets, rising unit labor costs, and the strength of the euro until 2008); low potential and actual growth; and massive risks to banks and financial institutions (with the exception of Italy).

This is why Greece is insolvent and a coercive restructuring of its public debt is inevitable. It is why Spain and Ireland are in serious trouble, and why even Italy – which is on relatively sounder fiscal footing, but has had flat per capita income for a decade and little structural reform – cannot be complacent.

As fiscal austerity means more recessionary and deflationary pressures in the short run, one would need more monetary stimulus to compensate and more domestic demand growth – via delayed fiscal austerity – in Germany. But the two biggest policy players in the eurozone – the European Central Bank and the German government – want no part of that agenda, hoping that a quarter of good GDP data makes a trend.

The rest of the eurozone is in barely better shape than the periphery: the bond vigilantes may not have woken up in France, but economic performance there has been anemic at best – driven mostly by a mini housing boom. Unemployment is above 9%, the budget deficit is 8% of GDP (larger than Italy), and public debt is rising sharply.

Nicolas Sarkozy came to power with lots of talk of structural reforms; he is now weakened even within his own party and lost regional elections to the left (the only case in Europe of a shift to the left in recent elections). Given that he will face a serious challenge from the Socialist Party candidate – most likely the formidable Dominique Strauss-Kahn – in the 2012 presidential election, Sarkozy is likely to postpone serious fiscal austerity and launch only cosmetic structural reforms.

Belgian Prime Minister Yves Leterme, as current holder of the rotating EU presidency, now speaks of greater European policy unity and coordination. But Leterme seems unable to keep his own country together, let alone unite Europe. Even Angela Merkel – in growing Germany – has been weakened within her own coalition.

Other eurozone leaders face stiff political opposition: Silvio Berlusconi in Italy, whom one hopes may soon be booted out of power; José Luis Rodríguez Zapatero in Spain; George Papandreou in Greece. And politics is becoming nationalistic and nativist in many parts of Europe, reflected in an anti-immigrant backlash; raids against the Roma; Islamophobia; and the rise of extreme right-wing parties.

So a eurozone that needs fiscal austerity, structural reforms, and appropriate macroeconomic and financial policies is weakened politically at both the EU and national levels. That is why my best-case scenario is that the eurozone somehow muddles through in the next few years; at worst (and with a probability of more than one-third), the eurozone will break up, owing to a combination of sovereign debt restructurings and exits by some weaker economies.

Brazil currency seesaws on central bank threat
by Samantha Pearson - Reuters

Brazil's real lingered around its previous session's closing level on Friday as investors tried to second guess the next move by the country's authorities to weaken the currency. The Brazilian real has rallied 5 percent since the end of June and over 100 percent since 2003, making exports twice as expensive and endangering the country's long-term growth. In early trading on Friday, the real BRBY was bid 0.06 percent stronger at 1.713 reais after opening lower.

A report showing U.S. consumer sentiment fell to its lowest in more than a year also left investors cautious worldwide. Meanwhile, Mexican and Chilean markets were closed for public holidays. Brazil's state oil giant Petrobras said on Friday it would increase the amount of shares available to meet additional investor demand in its massive stock offering. The fund-raising plan, which ranks as the world's largest on record, has been a major reason for the currency's recent appreciation.

But the real is now the world's most overvalued major currency, according to Goldman Sachs, and the central bank has stepped up its intervention efforts as a result. Since last Wednesday the bank has been calling two auctions daily, rather than just one, and increasing the amount of dollars it buys each time. Last Thursday alone, the bank purchased more than it did during the whole of February.

Stepping Up The Offensive
Traders now believe the next step would be to call three auctions on one day and then proceed to so-called "reverse swap" auctions, a form of derivative which would have the same effect as buying dollars in the futures market. If the real weakens much more, the central bank could "shift its policy somewhat, perhaps calling three (auctions) or even more," said Mario Battistel, the head of currency trading at Fair Corretora brokerage in Sao Paulo. The central bank said the last time it had called three auctions in one day to buy dollars on the spot market was on Jan. 15, 2004.

"If it doesn't manage to control the real by buying directly on the spot market, the bank will go into the futures market and do reverse swaps," Battistel said. Brazil's main newspaper, O Estado de S. Paulo, reported early on Friday that a government source said the bank could call a series of surprise daily auctions. A government source told Reuters on Thursday the central bank could enter "the market at both ends," implying intervention in the futures market.

Battistel said it was no coincidence that the government was surreptitiously sending these signals to the market just before Petrobras increased its already massive share offering. "There is a direct link. Until this Petrobras capitalization is over the market is going to see much bigger inflows than normal," he said. However foreign investment in Brazil is likely to remain high even after the Petrobras deal, due to strong domestic growth and interest in the country's higher-yielding debt, analysts said.

Your grandmother (but without the milk and cookies)
by Kurt Cobb - Resource Insights

Nicole Foss looks like she might be your grandmother coming to reassure you about something. But instead of milk and cookies you are served a cold dose of reality. According to Foss, one of the writers on the popular finance-oriented blog The Automatic Earth, the global economy is locked into an inexorable deflationary decline that cannot be stopped by governments or central banks. And, the world is headed for a depression worse than that of the 1930s.

Believe it or not, that's the good news. The bad news is that the problems we face in the emerging depression will be aggravated by fossil fuel depletion, in particular, the onset of world peak oil production. When one questioner asked Foss when she thought we might return to even the tepid economic activity we see today, she had a one-word answer: "Never."

Her explanation is that the interaction between the ongoing collapse of contemporary finance and the development of new oil and gas fields will leave us desperately short of these critical fuels over time. The weakness in the economy will lead to low investment in exploration for new oil and gas reservoirs which will, in turn, lead ultimately to a supply collapse. The supply collapse will lead to high prices which will depress economic activity and lead to recurrent economic contractions. When the new Great Depression is done, Foss claims that the world will be a completely different place with our current institutions swept into the dustbin of history.

Foss is remarkably good at delivering her message. She delivered it in person recently in a high school auditorium near where I live. Steady and clear, she methodically lays out her case for the scenario above with such logical precision and compelling analogies that you wonder just how one would go about making even the slightest dent in it. Of course, no one knows the future. Some people make lucky guesses--sometimes called "informed" predictions. But in the end it's never clear how to tell ahead of time whom to believe during the next round of predictions.

Nicole Foss does, however, seem remarkably informed. She is at ease talking about the necessity of acquiring your own tools and growing own your food. In the next breathe she's just as much at ease explaining with stunning clarity and brevity why the current chairman of the U. S. Federal Reserve Board is an even bigger fool that you thought he was. But she does this without any sign of personal animus. Ben Bernanke isn't a bad person. He's just confused and misinformed.

And, that leads us directly to Foss's mission: To inform people so that they will have the understanding and tools to weather the coming storm and to build a community that can survive and thrive through it. She also demystifies the world of finance with unusual pithiness. The most recent financial bubble was not the result of some impenetrable, new-fangled financial instruments. Rather its roots were the same as all financial bubbles: the rediscovery of leverage. Translation: If you borrow money from someone else and speculate with it, you can make a lot more money than if you just use your own. It's a tactic that works until it doesn't. And, when it stops working, the economy goes crash.

The post-Depression generation had learned that too much borrowing leads to tears, and so they were very careful not to take on too much debt. Eventually, the people who experienced these tears died, and others took their place in the economy. The success of those who took on debt for speculative purposes attracted more people who took on debt to do the same in every field of investment. Eventually, too many people borrowed too much, and many of them were unable even to meet their interest payments. That is where we are today. According to Foss, it will be years until that excess debt is either paid or defaulted on. And, that means deflation for several years to come at least.

Is she right? No one can know until we travel some years hence. But so far, I'm having a hard time cracking her logic.


VK said...

The question is; Is what we are seeing in today's world a result of errors compounding on each other or the result of deliberate action?

Every single action taken by the Government over the last few years has been at the expense of the middle class. Every bailout, guarantee or liquidity injection seems to have only one goal in mind: Save the bondholders of the banks.

Now the bondholders of the banks also happen to be some of the most politically powerful and well connected people in the world. To me it is very hard to compute that these people live in ignorance about complexity or that their actions are wrong. The actions seem very deliberate, impoverish the general population while enriching the elite.

It's a tried and tested formula, used by the IMF and World Bank in countless countries and the formula is always the same and so is the result: The concentration of ever more power and wealth into the hands of the few.

Seems to me, the elites understand the game very well. Obama, the political parties and Bernanke are merely puppets IMO, who do the dirty work for the real elite, the wizards behind the curtain. And frankly, they'll get away with it, like they always have. Most recently in Argentina and Russia. Where the politicians delivered the best and tastiest assets to them at the door for peanuts.

Catherine Austin Fitts wrote on her blog a few years ago that;

I described a meeting that had occurred in April 1997, more than four years before that day in London. I had given a presentation to a distinguished group of U.S. pension fund leaders on the extraordinary opportunity to reengineer the U.S. federal budget. I presented our estimate that the prior year’s federal investment in the Philadelphia, Pennsylvania area had a negative return on investment.

We presented that it was possible to finance places with private equity and reengineer the government investment to a positive return and, as a result, generate significant capital gains. Hence, it was possible to use U.S. pension funds to significantly increase retirees’ retirement security by successfully investing in American communities, small business and farms — all in a manner that would reduce debt, improve skills, and create jobs.

The response from the pension fund investors to this analysis was quite positive until the President of the CalPERS pension fund — the largest in the country — said, “You don’t understand. It’s too late. They have given up on the country. They are moving all the money out in the fall [of 1997]. They are moving it to Asia.”

Sure enough, that fall, significant amounts of moneys started leaving the US, including illegally. Over $4 trillion went missing from the US government. No one seemed to notice. Misled into thinking we were in a boom economy by a fraudulent debt bubble engineered with force and intention from the highest levels of the financial system, Americans were engaging in an orgy of consumption that was liquidating the real financial equity we needed urgently to reposition ourselves for the times ahead.

The mood that afternoon in London was quite sober. The question hung in the air, unspoken: once the bubble was over, was the time coming when we, too, would be “de-modernized?”

The elites are ruthless (tend to be sociopaths), they have access to the best technology and have access to the greatest amount of information. Maybe they didn't plan it entirely but they are going to delay the collapse until the loot gets taken out and then feast on the carcass IMO.

VK said...

Let's dwell further on this, deliberate action vs error compounding?

Not one person has been prosecuted in this financial crisis. There are literally thousands upon thousands of cases of mortgage fraud out there as well as fraud by the banks dealing in arms, drugs and toxic assets.

Not one person has been held accountable for carrying out a Three Trillion dollar war based on false premises, namely weapons of mass destruction, Iraq Al Qaeda connection and the supposed Uranium from Niger.

All of the actions taken have been in such a manner as to bestow the banks more power and wealth. There is deliberate intent behind these actions.

There now appears to be a deliberate fudging of the date. Zero Hedge has an excellent post on the various revisions that the BLS and other agencies carry out.

The mainstream media is always years behind the curve, just the other day I read an article on Jon Stewart in the New Yorker I believe where MSM reporters would congratulate Stewart on his reporting, there is a specific quote in there that amounts to an admission that the MSM can't report the truth as they aren't allowed to by the upper echelons.

Reading trading blogs over the last few months you get the sense that even seasoned market veterans are worn out to the brink. Market volume is very thin and highly controlled by HFT's. Ramp jobs where a sudden influx of orders come in at just the right time to prop up the market are common place while the insiders of the big companies are selling at a ratio of 650 to 1 as reported by ZH.

So the rats are fleeing the ship and the FED is providing liquidity via it's POMO operations to prop up the markets IMO. The fall will come once the big boyz are out and safe.

Mike Ruppert has been mapping out the future for years, the elites know full well about Peak oil and carrying capacity. What if this credit bubble was a deliberate act? A means to bring down the house of cards at the same time? South American Governments are regularly overthrown, The US Govt. brought down the Iranian Govt. in 1953, the Shock Doctrine showed to what extent the US Govt. and it's various bureaucracies can go to for power and wealth: Mind control programs, drug running, International arms sales etc.

The Bank of International Settlements formed before WW2, allowed the transfer of gold to Germany during the war from countries that it had conquered and American investors got interest payments from Germany via the BIS for their various pre-war investments.

Ric said...

The elites are ruthless (tend to be sociopaths)...

Hi VK,
Humanness is rare--and unseeable to addicts. When a person is addicted, he thinks he's the only sane one in the room. But like all complex systems, addictions inevitably collapse and the real is revealed once more, which is why it's not all despair, although it can certainly seem that way.

Anonymous said...


Awesome posts! Thank you for saying it so well. Your lucidity is inspiring. I'm with you...


Hombre said...

A great entro Ilargi, a super article at the top, and kudos to VK as well for the above comments. All this just after the elegant presentation by Stoneleigh in the previous post.

I admit to not quite comprehending everything I read and hear with enough depth to know exactly where I come down on particular issues--especially with regard to how much of our predicament is the result of conspiratorical activities by a few or merely that we are caught up in the "Long Emergency" of our own shared, evolved human nature. (Maybe the two are the same and we as humans are just conspiratorical by nature!)

But in any case, thank you TAE for being a source of articulate and enlightening sanity in a world going economically and socially awry!

Phlogiston Água de Beber said...

VK said...

The question is; Is what we are seeing in today's world a result of errors compounding on each other or the result of deliberate action?

Well, my handsome and extremely bright grandson, change the word "or" to "and" for the short answer to the question.

Unquestionably, the Mammonites deliberately set out to steal all the wealth they possibly could. It's what they do, it's who they are. It has been their multi-millennial passion and they have enjoyed varying degrees of success down through the ages.

Civilization has balanced uneasily on the tension between their masterful thievery and the preservationist proclivities of the wealth producers. In the current era, that balance has been lost. A combination of erroneous beliefs that the wealth producers embraced and sell-outs to the thieves has effectively made financial theft legal and prosecution a crime.

The disastrous actions resulting from those erroneous beliefs are indeed compounding. The result is a cascading depletion of both virtual wealth and real assets. This will not end well.

Jim R said...

Here's a piece on the Canadian farmer who was sued by Monsanto after infesting his land with unwanted GMO canola plants:
Percy Schmeiser vs Monsanto: The Story of a Canadian Farmer’s Fight to Defend the Rights of Farmers and the Future of Seeds

I wonder how long it will be before some corporate interest declares itself the owner of the Sun and wants royalties from anyone with a solar panel on the roof.

bluebird said...

@VK - How ironic that I was discussing similar things yesterday with some friends of my sister's husband.

These people believe that it's all been a conspiracy since the Federal Reserve was created in 1913. They tell me everything's been planned by the elites, for the elites. It's all being controlled by the banker elite families. The eventual collapse of the markets, the starvation of the people, reduction in energy, it's all been planned, since 1913.

While I can agree that power is in the hands of the elites and bankers, I do not believe it is a conspiracy to bring down the world such that only a few people control everything.

Instead, I think those in power saw opportunities such that gave them more power and increased wealth. Their greed for short term profits, ran amok. Ultimately, globally, there will be a few elites controlling everything, because things will devolve into that. But it's really a stretch to believe the decline and impoverishment of the world was planned in 1913.

Anonymous said...

There's a nice piece by Larry Ellison, the Guardian economics editor, about why the Lib Dems (junior coalition partner in the new UK govt) are backing off their previous policy of the pound joining the euro single currency. Under the thumb of Germany, the euro is currently ruled with a deflationary bias. And those problems we witnessed earlier this year are unfortunately far from over:

The worrying news for governments in Athens, Lisbon and Dublin is that bond spreads are back to where they were in early May, despite the €750bn (£627bn) bailout. The reason is simple: financial markets do not believe the lines of credit solve the underlying problem, which is that the debts of the weaker eurozone countries are unsustainable without much stronger economic growth. And the flawed structure of the eurozone makes stronger economic growth unachievable. The upshot, as even supporters of the single currency now admit, is that the whole project is at risk.

Start from 5th para to skip the bit on internal UK politics:

Why the single currency's fallen off the Lib Dems' agenda

VK said...

Is a collapse caused by declining marginal returns and rising marginal costs inevitable? Yes.

Does it have to occur in such a short space of time? Unequivocally NO!

That is where the rule of law and justice come into play, as well as social welfare nets and taking into consideration the teachings of Howard T. Odum, Howard Daly and M King Hubbert on the technocratic society, building a society within the limits of carrying capacity via rational, logical use of resources and having a money system backed by assets as opposed to debt, as Bill Still says in the Secret of Oz.

It's not what backs the money (Gold vs the future productivity of labor), it's the quantity of money in circulation.

What's required is a cultural change, where people realize that we can elongate the decline process. It took the Roman empire 400+ years to disintegrate after it peaked, the US probably peaked in 2000 (Some would say in the mid 70's as per capita energy consumption declined) and is facing collapse only 10 years later??

It is possible to have a stable society with much lower energy consumption; just requires a different cultural make up and the actual use of science and technology for the greater good. This can only be done with, sound money and sound policies i.e. remove the damn lobbyists, reduce the giant banks and corporations down to size and dismantle the industrial military complex.

Will it be done? Not likely, but collapse while inevitable, doesn't have to be so soon. We can delay it with wise choices. It's not an economic crisis as Ilargi says so often, it's a political crisis and people need to wake up to that.

Ashvin said...

VK, nice posts and I agree with much of what you say. Collapse does not have to happen so rapidly and in such a destructive manner for all. The problem is that it takes a great deal of foresight and courage on the part of those who have any broad influence to change our path and work towards sustainability and mutual sacrifice.

That's why I see our desire to maintain or evolve complexity as one of the key dilemmas we face. The short term benefits of fossil fuels and speculative finance have blinded us from the ways in which power elites have destroyed our lives, ecosystems and impoverished the world. Somewhere along the way (perhaps after GD1 and WW2), we had a chance to sacrifice rapid, perpetual growth for a more sustainable society, and withdraw our support from the exploitative elites, but we didn't.

Yes, I believe many aspects of our complex global society have been "designed" by power elites who have probably convinced themselves they know what's best for all of humanity, and not so surprisingly that happens to be what makes them more wealthy and powerful. But they cannot maintain that control without constant flows of energy/resources towards their central managing structures, corporate or governmental. Perhaps they will establish police states to further concentrate resources and keep the global empire alive for some more time, but I'm confident that the dynamics of human evolution are not entirely within their control.

scandia said...

@VK, Your thoughts on intentional destruction brought to mind a complimentary comment made by George Bush when he met our Cdn PM, Mr. Harper.
Bush said of Harper, " He knows what is at stake". Then and now I wondered what he meant. What is " at stake"? Harper has pushed neocon policy, shut down gov't twice( prorogation) and supports a new political configuration uniting Canada, the US and Mexico under one government. Can it be that we don't yet know what the ruling class knows as in " what is at stake". Perhaps Harper did elaborate on the comment but I haven't yet read any explanation.

@Ilargi, the idea that there is a declining return on innovation is going to be a hard sell! What institution doesn't state " innovation" as its raison d'etre?
Somehow innovation has become synonymous with productivity just as money became a synonym for wealth.

Frank said...


That problem with Euro has been blatant since about 1995. Even if the ECB is playing straight, they will set monetary policy for the mean (average) economy, which is roughly France. This means that the periphery (including candidate countries with pegs) is going to get whipsawed. The policy will always be either too loose or too tight for them.

Plus, as a cynical Anglo-Saxon, I do sincerely believe that France and Germany are not on the level, but are doing everything they can to establish a joint hegemony.

zander said...

That's an excellent, insightful piece by Pandurangi, perfect for the newcomer to grasping the rationale of complexity within (all) systems, and another important builing block for myself in understanding the current crisis facing us , learning something new every other day, as I am from this indespensible blog.


Mike Lieber said...

Thank you, Automatic Earth, for all the superb analysis and the excellent writing. Please keep it up!

For those of us in the U.S., a constitutional convention is the only recourse left to take control of our national government and stop the insanity. Members of Congress have openly admitted that the bankers are running the show on Capitol Hill. Government by special interests was most certainly not what the Founders envisioned 233 years ago.

The facts are quite clear: The national government is broken and we, its owners, must fix it. It's a simple choice: We take control of government or it will soon control us.

I have written more extensively on this topic. Please see if you are interested.

Woody said...

Stoneleigh's Prius

Ilargi's lead photo of a bizarre promotional vehicle was intriguing enough to take me to the full size image for a closer look.

Surprisingly, it was a hybrid gas-electric vehicle built by the Commercial Motor Vehicle Co. of Windsor, Ontario.

According to comments below the photo, "The truck was sent to England to visit 'every town and village in the country.' Because it was so underpowered it never made it out of London. Presumably it was left in England."

Lots of other interesting comments and a photo of another promotional wagon at the link above.

Greenpa said...

Complexity is indeed an area of vast interest, for those attempting to understand. Personally, though, I find the "economist" and allied groups attempts to understand complexity and its permutations rather narrow, and, well, oversimplified.

In particular, the expectation that increasing complexity per se will/must lead to collapse, is naive.

They are definitely correct that increasing complexity is a deadly threat to current human cultures/systems. But it is not complexity itself that is the limiting factor.

Without getting deeper into it (think tomes) - the proof of what I am saying lies in our own organismic complexity.

Current gene cowboys are constantly preening themselves on their amazing ability to understand the inner workings of human genes and physiology. But you only have to look for around 5 minutes in any collection of science news to find a headline that starts "scientists astonished..." - at some new level of organization they have bumped into, which they totally failed to predict.

My own estimate is that the complexity of organization and information handling necessary to run a human body for 80 years is some 10 orders of magnitude larger than the gene cowboys can see.

Manifestly; human organisms do function for 80 years, plus or minus. And granted, they do fail at the end because of an increasing number of cumulative failures.

But the limits are far far beyond where current thinking suspects they are. And any actual hard limits may be far beyond those currently working in our own bodies.

So. Yes- our current civilization is tottering on the brink of failure, with a large part of that failure due to our inability to maintain present complexity. But that's a limit of this civilization; not a physical limit imposed by the cosmos. In a differently organized civilization, more complexity could easily be tolerated, and even functional.

scandia said...

Can someone help me understand this from Panduranji's essay...
" ...if the larger system is synchronized with the smaller system during the release and reorganization phases,then it could potentially lead to what Hollings terms a " poverty trap".
Perhaps an example would help?

bingo! I just realized that when we talk about innovation,growth etc we are talking about belief systems! More complexity!

Greenpa said...

"It is also important to note that complex ecosystems are typically composed of smaller systems and are also embedded in larger systems, creating a nested set of self-similar structures. Typically, the larger system "


What you have there is the tacit admission that all this stuff is derived from... ecology. A science.

I would note, however, that it has been done as theft, illegitimately, without acknowledgement (beyond this sort of of accidental statement) - and also without the oversight of trained ecologists.

Who would, I assure you, be useful in pointing out the rather frequent sophomoric errors and leaps of unfounded enthusiasm.

Jim R said...

And that leads to an interesting note for an ecologist, Greenpa..

In an ecosystem, diversity is seen leading to "stability" -- we see it in L-V based mathematical models, and in live ecosystems. When your island gets down to just a few species extinctions happen.

By contrast, Tainter's thesis is that complexity leads to INstability.

So, diversity good, complexity bad? Or is Tainter just talking about overpopulation without using the 'O' word?

Greenpa said...

DIY'r - good question. It helps to clarify that diversity and complexity overlap, but are not identical.

Example; the species diversity in an ecosystem consists of a simple COUNT of the number of species.

The complexity of the system would be described by enumerating the specific relationships of the species to each other; eg. this predator eats those 25 prey species; one of them comprising 50% of the normal diet,.. and on, and on.

Diversity allows many "backup" relationships; a good thing. The specific complexity of some of the relationships might mean a predator is actually reliant on the density of a parasite of one of the prey species, which in turn relies on... etc.

It gets, uh, complicated.

Anonymous said...

Ashvin, I had thought George Mason University was full of cornucopian libertarians, dismissive of resource or environmental limits to growth: the supposed scourge of global warming theory, Pat Michaels, is a prominent example.

Your article was a very welcome surprise: an excellent critique of both the Keynesians and libertarians.

Anonymous said...

GMAC Halts All Foreclosures In 23 States On Heels Of Florida Judge Finding JPM Committed Court Fraud In Mortgage Misappropriation

The above link plays directly into Denninger's piece about Here It Comes? (9/18 Real Estate Edition).

If Denninger is correct, and if GMAC's reaction is due to public exposure of this sort of nonsense, we may be about to witness a "black swan" (at least from the public's perspective) that could lead to a massive implosion within the banking industry.

Ashvin said...


The particular description was taken from Buzz Holling's work (which Stoneleigh referenced in her article "Fractal Adaptive Cycles"), who happens to be an ecologist as well. Complexity theory is certainly a "science" in that it uses mathematical models to describe the behaviors of complex, scale-invariant systems, and it has been applied to natural ecosystems, physical systems, biological systems and human socioeconomic systems.

You're right to say complexity isn't necessarily a bad thing (unlike speculative ponzi finance which is self-limiting on a short scale), and it obviously can increase and maintain itself for some time. The problem is when there is not enough new inputs of energy to maintain the complex structures which have developed. I saw an interesting presentation about scaling laws in biological systems, in which the presenter noted that humans, according to our
metabollic consumption of energy, should be much larger in size than we are (I will post the link when I find it - or try searching for "scaling laws biology" on youtube). This is obviously beyond the carrying capacity of our planet and unsustainable.


An example of that could be a systemic financial crisis, where the failure of a large bank (smaller system) coincides with the failure of the entire financial sector (larger system), so that the latter cannot easily absorb and regenerate the former. Also you could take a larger scale and say our credit-based economy (smaller system) is synchronized in its release with our fossil fuel economy (larger).

Anonymous said...

As a follower of TAE I know better than to take the performance of the stock markets at all seriously as an indicator of economic health, but the current surge seems even more gravity-defying than usual, especially today, when all the econmic data seem bad, especially the downgrading by, I think, the OECD of expected growth in the World economy.

Any ideas as to what's going on?

Anonymous said...


My take on that is that biological diversity is less complex. It requires less support. Compare a biologically diverse ecosystem with an agribusiness monocrop ecosystem. The monocrop requires far more human inputs than the biologically diverse ecosystem.

A biologically diverse ecosystem is driven, simply, by solar inputs and never reaches high levels of dependence on any single species. Any single species can be replaced by one (or more) other species usually without catastrophic results.

And yes, this plays directly to overpopulation because as overpopulation by any species occurs, that species drives out (or kills off) other species and makes the entire ecosystem dependent on fewer species and particularly on the species that is in overshoot. When (not if) the overshoot species contracts, the ecosystem in question experiences severe instability.

Diversity promotes redundancy but redundancy is not "efficient", in the human sense (i.e. is considered wasteful by humans). Human "efficiency" therefore must reduce redundancy which heightens the chances for catastrophic failure. This is where Tainter is coming from (in my opinion) as he talks about complexity. In human systems, efficiency leads to fragility and breakdown. In ecosystems "efficiency" (or lack of redundancy) leads to biological collapse.

These are my own understandings of Tainter superimposed on ecological models. I may be wholly in error in my understanding thereof but the picture appears consistent to me at this time.

D. Benton Smith said...

Greenpa said, "Without getting deeper into it (think tomes) - the proof of what I am saying lies in our own organismic complexity."

Right on, Gramps!

Complexity is not only intrinsically beneficial, one could argue that it's the progenitor of life itself.

Only when accompanied by inefficiency (in the engineering sense of the word) and enormous expenditures for boneheaded purposes (in the 'typical human' sense) does collapse inevitably result.

Efficient complex systems tend to survive. Inefficient ones are entropied right on out of here.

Efficiency is the watchword of the future... if for no other reason than only the efficient (and a few incredibly lucky) will survive in sufficient number to generate the next complex society.

Please note that this in no way contradicts Tainter, who I consider to be utterly brilliant.

The next complex society will of necessity be smaller and simpler than this one. Hopefully it will be of homo sapiens sapiens... but there are no guarantees.

Anonymous said...


Regarding the stock market, what you are witnessing are POMO (Primary Open Market Operation) actions by the Federal Reserve Bank of NY. The Fed has a mandate from the White House to make the market look good for the election, in order to give support to incumbents (mainly Democrats) who want you to believe that their line of BS is working.

The Fed had not done POMOs for the better part of the last year to 15 months, as I recall but resumed in September. Also, previously the Fed would normally do one POMO per week. Right now the Fed is doing 2-3 POMOs each week, all aimed at putting more money in the hands of the Primary Dealers who can then use HFT computer algorithms to ramp the market higher (on extremely low volume).

In other words, it's a mirage. If anyone with a large number of shares tries to sell, they will likely not get anywhere near what they think those shares are worth.

You, and others, are being played for fools by the kleptocrats running this asylum.

My advice remains the same - hold productive farm land, tools, supplies, grains, other foods, medicines, etc., as well as cash.

Many people are shouting to buy gold and silver but if you do that, do NOT buy them as "investments". Buy them as stores of value. Gold may decline significantly in dollar price but I believe that it's "purchasing power" will stay relatively intact.

One key thing to remember here is that in a deflationary collapse, cash gains in value so holding cash is a key. However, on the longer term, out beyond the deflationary collapse, the US debt is likely to ultimately end with the death of the dollar. So timing when to get out of dollars will be important later on. For the immediate future holding cash is a good strategy.

jal said...

Greenpa said...
Complexity is indeed an area of vast interest, for those attempting to understand. Personally, though, I find the "economist" and allied groups attempts to understand complexity and its permutations rather narrow, and, well, oversimplified.

I said ...
The accountants and the lawyers are are a necessary appendage of any successful small business.

I will add that all those discussing complexity could not find their way out of a paper bag.

(This could be a long explanation. This is not meant to be a blog within a blog)

Lawmakers are obliged to write books because they must foresee, ( make contingencies in the eventuality of an event). In other words, determine what could happen to the paper trail and to the money trail.

Lets look at a situation that is happening right now. (let’s get out of a theoretical philosophy discussion)

jal said...

Ally's GMAC Mortgage Halts Home Foreclosures in 23 States

GMAC Mortgage may “need to take corrective action in connection with some foreclosures” in the affected states, according to a two-page memo dated Sept. 17 and obtained by Bloomberg News. Ally Financial spokesman James Olecki confirmed the contents of the memo. Brokers were told to stop evictions, cash-for-key transactions and lockouts, regardless of occupant type, with immediate effect, according to the document, addressed to GMAC preferred agents.
The company will also suspend sales of properties on which it has already foreclosed. The letter tells brokers to notify buyers that the company will extend the closing date on all sales by 30 days. Buyers will be able to cancel their agreement to purchase and get their deposit back, according to the letter.
This could setup a real battle between mortgage companies and servicers and homeowners. Traditionally, state "recording laws" govern these sorts of things.
The recourse vs. non-recourse rules also vary from state-to-state,
In Florida - the tax lien trumps the mortgage and wipes it out.

Question: If I own an MBS with 40 tranches composed of 160 different mortgages, do I own the mortgages or just the right to receive the income?
Final thought, how many people are paying their mortgage to the wrong people?

jal said...
In the event that the loan goes into foreclosure at a later date, the then-current owner of the loan files the foreclosure and sells the property to a new owner, often at auction. The land records would show a deed of transfer from the investment bank to the new owner. This creates a break in the chain of ownership of the mortgage rights. In many cases, the transfer of ownership of the mortgage loan has gone from the original lender, through several owners, and then to the foreclosing bank, none of which is recorded on the property title history. Technically, the foreclosing bank has no recorded title rights to foreclose in the first place…

Unraveling the chain of title and clarifying ownership of loans will create challenges for the courts and legislative bodies in all states. In the meantime, homeowners and buyers should be aware of how this could affect their property title.

jal said...

“When running searches for clients, we are noticing that a significant number of previously foreclosed properties have unconnected chain of assignments in the mortgage history. This could represent a title defect which could technically affect ownership rights for future owner.”
Pelligrinelli adds that some lenders and government institutions are rushing to repair the titles on lender-owned properties as they discover them in their portfolio. This does not help individual owners who own properties previously foreclosed.

Jim in MN says:
Securitization of real estate debt is just part of the globalization, digitization, and disintermediation of economic relationships. If it turns out that state and county and city law requires an old-fashioned, carbon-based life form to commit pen to paper in a chain of legitimate title transfers, is that not both ironically hilarious, and completely inconvenient if not fatal for many ‘clever fixes’ being concocted in lofty NY/DC offices?
The point of securitization in real estate was to allow the packaging of complex derivatives and customized risk-reward offerings for buyers who rarely understood even the basics of what they were buying. Now, the entire global economy stands wracked by the debilitating costs of ensuring that these same debts and instruments are NOT honored, i.e. the prevention of real estate bond haircuts AKA zombification.
It is beyond ridiculous to assert categorically that the originating transactions cannot possibly be fatally compromised. Only an imbicile hopelessly compromised by their own interests could make such claims.

Erin Winthrope said...

About that Stock Market....

Now you witness the power of the FED. It's making a mockery of Robert Prechter and his acolytes. How long has Robert been singing his swan song about an imminent market swoon? For over a year now, and still we are higher.

Yes, Greyzone and TAE, the FED is powerful. It's not the little man behind the curtain. It moves the markets at its choosing, just as we are witnessing today. You think this can't continue? Yeah, you've been thinking that for a while now haven't you. What is the wave count anyway these days.

When are Prechter's followers going to admit that they've been had by a con man.

ghpacific said...

Perhaps can create an animation regarding complexity. I certainly think they could create a great explanatory deflation and preparation piece with Stoneleigh's excellent interviews over the past few posts. Here's their most recent informative animation Fun and educational!

D. Benton Smith said...

Hi, Jal,

A very high profile case-in-point is the recent arrest and pending prosecution of the moderately famous actor Randy Quaid and his wife, Eve.

Apparently they were camped out in a home in which there are conflicting claims of ownership following one or more foreclosure(s) and re-sale(s).

I'm sure there are other lurid details that aren't worth the time to verify, but essentially here is an entertaining example of "mutually exclusive claims upon the same underlying real wealth." (the house itself)

I think what we're looking at here is not so much the tip of an iceberg as it is first sighting of an ice shelf attached to Antarctica.

Ashvin said...

Very interesting presentation by Geoffrey West about scaling laws in complex biological systems -

Dr. West explains that there is a distinct scaling law between the metabollic rates and the mass of mammals (he shows a graph of mice to elephants). He says that humans in a state of nature typically use the equivalent of 100 watts of energy. As social beings in a complex society, we use the equivalent of 11,000 watts, which would make us much larger in size than the largest mammal we know of (blue whale).

Unknown said...

Thanks for this latest very interesting and scary document. I wish I could help with Stoneleigh's sister illness, thanks for doing nonetheless all the hard work for this blog.

I was thinking at times in history were countries decided to reduce complexity and the only period I can think of is the German Customs Union, not that I am an historian to make any sensible comparison with the current times.

Brunswickian said...

Basel III: The Global Banks at The Edge of The Precipice. Trillions of "Toxic Waste" in the Global Banking System

by Matthias Chang

.... But, contrary to IMF and other renowned economists who are betting on China’s and Asia’s so-called economic strengths, I take the view that when US treasuries collapse, faith in all fiat monies will likewise evaporate and there will be massive capital flight to commodities, especially gold, silver and oil.

D. Benton Smith said...


I think I created a potential problem with the way I used that little word "efficiency."

I'm using it in the way that an engineer would, in terms of the the principle that energy cannot be created or destroyed, but can be changed from one form to another. How completely it makes that change (without 'losing' any to some unintended form) is what's called efficiency.

Physical processes (such as changing gasoline into mechanical energy with a car engine) tend to 'lose' a lot of it as heat that gets wasted out the radiator or tailpipe. Not very efficient.

Efficiency means getting maximum useful work with minimum unintended waste.

A bird can fly from the arctic to Pensacola on a handful of seeds. That's real efficiency.

In comparison, a muscle car can burn half a gallon of gas just pulling away from a stop light.

Complex systems that turn cities on the other side of the planet into rubble (or spend thousands of hours, millions of dollars, and lord knows how much gasoline and electricity FAILING to convict O.J. Simpson... are VERY iinefficient ...

.... are not long for this world.

VK said...

Another bat shit insane day in the stock market. Broken correlations and algos gone wild. Oh well. More POMO days to come on Wednesday and Friday and there is the possibility of a QE2 announcement tomorrow.

The propaganda is thick today, first the NBER reported the recession ended in June 2009 and that was being touted than came Obama's TV appearance and the market simply continued to ramp up.

Media manipulation continues unabated. Psy-ops war taking place here.

Greenpa said...

Ok, a bit of Polka Dot Complexity for us:

"Wayne Arden, who has a background in technology and finance, and John Fox whose career has been in the renewable energy field, published a White Paper on producing and using biodiesel in Afghanistan earlier this summer."

They've decided the answer to money from the opium poppy crop in Afghanistan is to get them to plant safflower for biodiesel, instead. Who decides, incidentally, if a "blurb" deserves the sobriquet of "White Paper"? (oh, just the authors, but... hey, the press is buying.)

God I wish I had Boggle Gong I could whack.

Is it possible to be more clueless about - the complexities - of the situation? And yet - because of the crumbling complexities of our business, and science, and journalistic worlds - this utter inanity gets taken seriously enough that it's raised for serious consideration.

Bang the Boggle Gong Loudly.

Meanwhile, at the NYT - a serious discussion on whether we are morally obligated to destroy all carnivorous animal species... really!

Yeah, I see this as dysfunctional systemic complexity; the intrinsic ability to spout convoluted jibberish; and totally clog the joint synapses.


VK said...

Hey Greenpa,

What do you make of the Maximum Power Principle in relation to the behaviour of society today;

Power is the rate at which work is done, and work is when a force is moved through a distance aka something useful is being done.

"The Maximum Power Principle states that all open systems (Bernard cells, ecosystems, people, societies, etc.) evolve to degrade as much energy as possible while allowing for the continued existence of the larger systems they are part of."

So essentially, the financial system has evolved into a behemoth and as it faced certain death, it used it's clout and influence to direct energy (in this case money) towards it. The way it did this was via waging war on the middle class and poor as the wealth pie is shrinking and thus diverting more resources towards itself.

Hence, the war will get ever more bitter as these sub-systems struggle for dominance in accordance with the MPP. The result will eventually be bloody conflict if the culture doesn't respond and change course.

Greenpa said...

VK said...
"Another bat shit insane day in the stock market. "

No shit, Shirley. Seriously, though, I think I've seen a bit of pattern to this kind of thing in the last year. They do, indeed, run the market up a hundred or so, at the least little bit of catastrophic news- but then the market may be allowed to fall twice as much in the next week. I'm watching to see this time.

I love magic shows. :-)

Cassandra said...

bill h said...

As a follower of TAE I know better than to take the performance of the stock markets at all seriously as an indicator of economic health, but the current surge seems even more gravity-defying than usual, especially today, when all the econmic data seem bad, especially the downgrading by, I think, the OECD of expected growth in the World economy.

Any ideas as to what's going on?

Evening :)

Reckon it's this

"In fact, the only real force that ultimately makes the stock market or any market rise (and, to a large extent, fall) over the longer term is simply changes in the quantity of money and the volume of spending in the economy. Stocks rise when there is inflation of the money supply (i.e., more money in the economy and in the markets). This truth has many consequences that should be considered."


and this?

Ilargi said...

"Richard said...
About that Stock Market....

Now you witness the power of the FED. It's making a mockery of Robert Prechter and his acolytes. How long has Robert been singing his swan song about an imminent market swoon? For over a year now, and still we are higher."

Oct 12 2007: S&P at 1561.80
Sep 20 2010: S&P at 1141.71

Loss: -26.9%

And still we are higher?!

What's wrong with your sort of people?

Can't read, do basic math?

Let's see it get back to that peak, and then we'll talk.

About that stock market: trading is so low that the panhandler on the corner could move it up and down. The mighty Fed put in a whole $5 billion today. Will it survive? Bernanke must be sweating? What was it today, 30% of all moves took place in the last half hour (a common feature these days)?

You're bad for my faith in mankind. Go get (something) real.

The markets are doing great! The recession is over!

Everyone has jobs and homes and money to burn!


Jeotsu said...

Thanks for another nice article, and some very interesting comments from VK.

Two thoughts.

First, I believe the biggest mistake being made by the "elites" (Can't help but see monsters from the Halo universe whenever the term is used) is that they treat the world as an open system, when it is in fact closed (except for solar fluence from our friend the sun). This leads to economic calculations that make infinite resources and infinite growth seem reasonable, where by any rational analysis it is clearly insane.

They are now making the same closed/open mistake when it comes to stealing the wealth of the world. They are simply re-arranging the resource deck-chairs, and in doing so are speeding the sinking of the ship.

Globalization has made it all one world, so when we sink, then we all sink together.

Second, in ragards to complexity and stability and analogies with natural systems, we must remember the long selective process for stability.

My background is biochemistry, not ecology, but the same sort of "how the heck does this stupidly complex machine keep running?" problem applies.

Yes, there are lots of inelegant kludges. What most people don't understand is that evolution does not give the "best" solution, but, rather it provides "good enough". As soon as you have "good enough", the energy costs of replacing it with "best" tend to exclude the possibility of change.

Over time layers of backup systems and internal checks and redundancies build up. 3.5 billions years of trial and error has produced a mind-boggling complexity, but it works.

What we are seeing now is the selective pressure on complex systems that don't have enough internal backup systems. Sucks to be us right now. The system is going to die.

We may in the future see equally complex societies without such energy expenditure. We have not had any selective pressure for using resources efficiently. But it will look not at all like structures today (though it will have no doubt cannibalized current structures and mutated them into new forms, its the way these things work. Nature never starts with a "blank sheet of paper".)

Ilargi said...

"... the biggest mistake being made by the "elites" [..] is that they treat the world as an open system, when it is in fact closed (except for solar fluence from our friend the sun). This leads to economic calculations that make infinite resources and infinite growth seem reasonable, where by any rational analysis it is clearly insane."

That has nothing to do with elites, that's everybody. It's part of your brain. Rational analysis is the last thing that drives us, and literally so. That's just a thing we fool ourselves into believing is true. More primitive parts of the brain make the real decisions. The more primitive, the more decision making power. You can't escape yourself, or your responsibilities, by pointing a finger the elites.


Anonymous said...

@Greyzone said "My advice remains the same - hold productive farm land, tools, supplies, grains, other foods, medicines, etc., as well as cash."

Exactly. But where? Denninger is finally calling it - unsustainable entitlements will not be managed down, but will experience a hard stop.

So how will you defend your homestead when 10s of millions of dependents come looking for life sustenance?

It seems pretty logical that where one locates is just as, if not more, important than diversifying into farm lands, tools, etc in the first place.

@Greyzone continued "Buy gold/silver as stores of value ... in a deflationary collapse, cash gains in value ... beyond the deflationary collapse, the US debt is likely to ultimately end with the death of the dollar."

I find it fascinating that even amongst the most intelligent posters, of whom I place you, the viewing public can witness a transition from a hard defense of std deflationary dogma to an incipient embrace of FOFOA's thesis.

Yes, while (nominally gold backed) dollars did increase in value in the 30s (hence the drive for devaluation by edict), what happens when dollars are backed by Treasuries, MBS, and who knows what other trash?

When it is evident that the underlying 'assets' (oops, debts) themselves 'backing' the dollar will never be repaid (and might even default), why would the dollar tend to increase in value?

Rather, as FOFOA has nicely defined hyper-inflation, wouldn't "physical goods & services stop bidding on (fiat) money" as the general public wises up to what's goin' (literally) down?

IOW, why would anyone, anywhere, willingly part with important "real" goods like food, oil, etc for some worthless fiat confetti? When goods & services are withheld, abandon and then finally flee the marketplace in exchange for the established legal tender, look out below.

Gravity said...

This economy sleeps beyond the flow of time.

Ilargi said...

"I find it fascinating that even amongst the most intelligent posters, of whom I place you, the viewing public can witness a transition from a hard defense of std deflationary dogma to an incipient embrace of FOFOA's thesis."

I find it fascinating that among the not so intelligent posters, to which you certainly belong, there is no shame in taking people's words and twisting them to rhyme with whatever idea it is you follow today.

There is nothing in Greyzone's words that takes one inch away from his stance on deflation, nor ours. The death of the dollar has long been announced here. But deflation first, in which people will scramble for dollars to pay off their debts with. And it's good to see you found yourself a fresh dogma in something called fofoa?!. If you can't stand alone, get crutches! No embrace here, though, never saw any such thesis. And since it's apparently yet another inflation rehash, pretty sure I won't waste my time.

Who would give up oil and food for dollars? You would, boyo, if you had any. Instead, you're going to to have to part with your gold and silver to settle your debts, if you have any of those. If not, how about your sister?

Deflation is a hard one to understand, as proven once again, and people will walk into it with their eyes wide open, convinced hyperinflation will come any moment now, from behind yonder hilltops.


Ilargi said...

" Gravity said...

This economy sleeps beyond the flow of time."

Any fishes?


Anonymous said...

@ bill h said "Any ideas as to what's going on (regarding stock market)?"

Bill, let me apologize beforehand for the following snarky comment - it's not meant to be anything personal. Rather, it's a broader observation of how to deal with others, who like you, are just starting to ask questions.

At a rapidly approaching point in time, preppers are going to be faced with a "Sophie's Choice" regarding late adopters who, for whatever reason, came a little late to understanding what is occurring.

(As many other posters have already pointed out, the answer is POMO operations ie the Fed 'buys' Treasuries from primary dealers that provides them with ready 'cash' to ramp various indexes via HFT systems.)

For those and their families who are mentally, physically (and possibly financially) prepared to possibly make it themselves, but most likely will not have available resources to assist others, when does the point of recognition set in that laggards are going to have to be cut loose?

I mean, not to disparage Stoneleigh's fine efforts in sounding the clarion call, but really, if you're not a prepper by now, perhaps the best course of action will be to become part of the mob.

In other words, the unprepared, un-aligned middle-class is going to be massacred. If you're not clued into what's coming down the road, then one might as well be completely ignorant and run with the mob when the SHTF.

Heck, I should do a 'Snerfling Road Tour'. Instead of patiently explaining what is happening a la MF, I would simply advocate watching the MSM, believing the lies, ringing up more credit and in general, partying on like nothing was wrong.

However, when it finally was all over, I would advise 'partiers' (as contrasted with 'preppers') to quickly don the appropriate attire, cry out the pre-approved slogans, shoulder the trained indignation and begin smashing & grabbing what is rightfully "theirs".

Of course, there may be some trivial issues regarding the physics of rapidly moving lead objects launched in defense to their unsated desires, but still, given the partiers overwhelming numerical superiority, as well as moral high-ground, they should soon overcome any opposition.

What to do after all close-proximity resources are consumed and destroyed may prove to be more troublesome. To make matters worse, there may not be enough gasoline available to get after all those evil hoarders making out like bandits with "your" stuff further away down the turnpike.

Anonymous said...

@Illargi - "There is nothing in Greyzone's words that takes one inch away from his stance on deflation, nor ours."

I apologize for failing to note that Greyzone came out in strong defense of deflation without appearing to concede the case for possible hyper-inflation on a recent post at ZH.

My overall observation is that the consensus view amongst those who have informed opinions on these matters appears to be gradually shifting.

Perhaps we should ask Greyzone himself: has he (recently) altered his views on hyper-inflation?

NZSanctuary said...

Greenpa said...
They are definitely correct that increasing complexity is a deadly threat to current human cultures/systems. But it is not complexity itself that is the limiting factor.

That just shows the grand delusion of human ego – thinking it is somehow separate from that which it grew out of, and can design long-lasting systems based on its own little intellectual nets, instead of trying to find a harmonious balance with the world.

As Alan Watts once noted, we need to start by doing less.

Ventriloquist said...

Tonight I had an epiphany:

My wife was looking at computer regarding some things that entertain her after a long, stressful, day in the high-end corporate environment.

I was on another computer looking at several of my favorite doomer blogs, including TAE.

First, I must say that she (my wife) is pretty much on target with our prepping scenario. Garden. Year's supply of food. Alternate cooking source. Energy conservancy. Bug-out bags. Real-Life skills. Execution of Future Survival plans. Family/Friends/Community tightness. Firearms & ammo. Gold. Silver. Etc. and Etc.

Check. Check. And Check.

However, because of her close involvement in the corporate world, she still has to make, and incorporate, the facade of fitting into that environment.

Which, although she can intellectually understand the concepts behind what is really going on around us, she has maintained the mental state that all is going essentially well, as long as the right people are in charge.

And then, she just blurted out, not but a few minutes ago --

"They are all lying!"


Once the humans that are referred to as sheeple finally achieve that transcendent state of mind

only then will . . .

They completely realize that they have been lied to all along and that the lies are continuing to completely suffuse their existence . . .

Then, and only then, will the transition truly begin.

You cannot truly come to believe the TRUTH,

until you are willing to concede that everything you have been presented with to this time

Has Been A LIE.

Perception of The Lie,

is an important step

before finally

perceiving The Truth


ghpacific said...

I can't help but marvel at all the intelligent debate (way above my pay grade) at this blog and yet only sense it as fruitless for preparing. At this time, I am finding the only clear guidance from a blogger in Argentina, which collapsed socially and economically in 2001 and has been limping along since. Regardless of how Argentina got to its current malaise, day to day life continues, though much more brutally than I think we gringos can handle. (Witness the run on water and return to reptilian behavior when the massive pipe broke in Massachusetts earlier this summer). I don't think I will care how complex societies collapse, but only that they have.

scrofulous said...

Greyzone,I like your well thought out comment on biological diversity...but what about putting it this way?:

Human problem solving tends to produce complex economic systems just as evolutionary problem solving produces complex ecological systems. The question is in how much energy is required to power these systems. The earth's ecosystem is still evolving; there is still a surplus of energy to run newer systems (though the problem of dealing with the problem of 'us' might have taken that to the limit). On the other hand we as a species have reached the limit to solving new problems by having reached the limit to the energy we can draw on to run them.

ilargi might just disagree, but I say 'P.O.' is always and everywhere the underlying problem, though it might be the solution to the Earth's.

anon10 said...

In case anyone is interested CBC Television in Canada is running a series of 4 programs (each 1 hour long) about the global financial crisis. The series is (appropriately) called Meltdown. The first 2 programs have already run on t.v., and the next 2 are going to run this and next Thursday/Friday.

All of the programs can be watched on their web site. After you click on the link at the end of my post, right under the big "Meltdown" title, look for the "video" link.

After you click on the "video" link, the first show in the series is called Meltdown: The men who crashed the world, and the 2nd show in the series is called Meltdown: A global tsunami. The 3rd and 4th videos in the series should be posted in the same place after they run on t.v. The length of the videos is 45 minutes long, and a couple of very short commercials (15 seconds long) are shown before and during the video.

The following is the link to the web site:

Phlogiston Água de Beber said...

It seems that humankind has, at a rate not consistent with evolutionary change, developed an inexplicable fascination with complexity. It's as if nothing is interesting unless it is too complicated for anyone to actually understand.

Monday's edition of has a piece by Michael Hudson, which I thought rather simplifying in its explanation of how we lost our way and how the Mammonites have us maneuvered us onto the slippery slope.


It seems obvious that financial reform is needed – and this requires fiscal reform as well. The fact that whatever the tax collector relinquishes is available (“free”) to be pledged to creditors as interest makes the fiscal problem part and parcel of this financial problem. The economic rent that governments relinquish is “free” to be captured by the banks, which capitalize untaxed revenue into bank loans. This is how economies load themselves down with debt. Lower taxes on rent leave more revenue available to pay interest on loans made to enable borrowers to bid up prices. Meanwhile, cutting taxes on unearned income obliges the government to make up the gap by taxing labor and tangible industrial investment more, raising their supply price, or borrowing from the banks at interest.

Today’s budget deficits thus have gone hand in hand with over-indebted economies, and with a regressive tax shift that burdens productive labor and industry. The tax systems of nearly all countries today favor debt financing – and hence, asset-price inflation – by permitting interest and financial fees to be tax-deductible, while dividends and earnings must be paid after taxes. This un-taxing of land and rent-extracting monopolies goes against the logic of Saint-Simon and other 19th-century reformers who sought to free markets from debt overhead, not to free bankers and financiers from regulation and taxation.

Today’s financialized world is paying a steep price for its rentier-sponsored reaction against classical economics. This reaction distracted attention from the fact that economies suffer a rising “free lunch” of what J. S. Mill called unearned income and unearned increments in the form of higher land rent and land prices. Rent extraction is the business plan of privatizers of public infrastructure and natural monopolies – and of their financial backers seeking to provide buyout loans. The tragedy of our epoch is that most credit is extended to buy rent-extracting opportunities, not for productive capital formation. Banks prefer to lend against property already in place – real estate or companies – than to finance tangible new capital formation. This poses the threat of globalization taking a corrosive form, ending in debt deflation, privatization and a rentier tollbooth economy rather than becoming a system of mutual gain.

Where is the World Economy Headed?

soundOfSilence said...

bluebird said...

While I can agree that power is in the hands of the elites and bankers, I do not believe it is a conspiracy to bring down the world such that only a few people control everything.

As you say I am reluctant to think a small group got together over tea roughly a century ago and came up with a "100 year plan" for world domination.

I am more than willing to entertain a long (long) term reversion to the mean hypothesis. About the time of the Renaissance the elite lost control of it all. Through a confluence of events at this point the pendulum is swinging with increasing speed back in the direction from whence it came.

VK said...

Does it have to occur in such a short space of time? Unequivocally NO!

That is where the rule of law and justice come into play, as well as social welfare nets...

Sadly (regrettably) we're not that sufficiently evolved as a species.

Cassandra said...

Hold on there big fella, FOFOA caught my eye too..

Whilst I initially thought blah blah gold bug inflationista, his framework is sufficiently unusual to warrant a look I think. His framework/model, if correct would change the focus/emphasis of the supplies on the lifeboat.

For example, this is from FOFOA's post which was discussed recently on Zerohedge...

"Here is the way the deflationist views the world. Think of all the debt as a large balloon. As it is expanding the balloon is being inflated. Today that balloon is deflating and no matter what the Fed does, it can't seem to reflate that balloon. And the deflationist concludes that as long as that balloon is deflating, not inflating, we MUST have deflation, and the value of a dollar MUST rise.

But here is the correct way to picture it. There are actually TWO balloons side by side. These two balloons are the two sides of the global balance sheet. One belongs to the debtor and the other to the saver.

....(snip) the future hyperinflation fuel is stored in the savings balloon during this period of credibility inflation. (Again, see my last post.) That's why we see very little price inflation during this stage. And when the debt starts to fail, so does the credibility of paper debt to the savers. The Fed is trying desperately to restart the credibility feedback loop that will reflate the deflating debtor balloon. That, of course, is impossible at this point; an observation the deflationists intuitively make correctly, even though they are only looking at one of the balloons."


So, one balloon, two or erm'?

PineappleCoward said...

Please forgive my pessimism for the following. If the organizations running the global financial system were simply malevolent that might inspire some confidence. I fear they are something far worse ... stupid. Stupidity in this case being relative. We have created a system beyond our understanding. No flaw in human character has been more responsible for human suffering and misery than stupidity. Are we, as a species, simply too stupid to survive? Only time will tell.

scandia said...

There are a few Joe Bageant fans on this board. He is such a phrase maker as in "...US economy as skinny as the running gears of a praying mantis..."What an image,eh!
There is a review of Joe's latest book on

susana said...

Yeah, I read about the scenario where repatriated dollars will cause inflation in the US... it's called Jantzen's Ka-Poom Theory.

susana said...

here's a link:

I like Jantzen's writing. His theory seems plausible, but it doesn't seem to jibe with the deflationary depression scenario.

Unknown said...

Ventriloquist, did you find out what made your wife come to the realization that they're all lying? Can you share?

Thanks, -Andy

Will said...

I thought it was interesting: the way NPR addressed the latest housing starts propaganda this morning.


Greenpa said...

For the readership; I want to introduce you to a new blog:

The author is a retired professor; with one of the best minds on the planet. He tends to lean on the analytical side; teasing out threads others pass or miss.

He's been deeply involved in analyzing historical human power processes for years, though from a slightly different angle than most here.

Alexander Ac said...

Anybody read this? Karl Smith: No, Fannie and Freddie Did Not Cause the Housing Bubble

Anonymous said...


Thank you to all of you for informing me about POMOs and their effect on the stock markets. I waded into Zerohedge - a site I normally find somewhat above my head, but he descibes very well how regular POMOs have come to constitute a continuation of QE by other means, or as he puts it "QE-lite" - very sneaky, Mr. Bernanke.

Anonymous said...


In my opinion, peak oil (and peak resources) remains a subtle driver on global economic activity since the middle of the 20th century. But peak oil did not cause this crash, excessive debt did.

Now part of the psychological drivers that may have led to more and more credit was the illusion that living standards must always increase. Yet living standards "always" increased only radically during times of high surplus energy vs. population. This has been powered by mostly fossil fuels. Since prior generations grew to expect better standards of living, the generations from 1950 forward expected it too, and took actions that, to them, must have appeared consistent with their parents - take on debt to raise the standard of living.

So the US peak in oil production coincides with the beginnings of an even larger ramp up in debt for the nation and the individuals in that nation. There is a correlation there but proving causation is pretty hard, yet it seems logically intuitive to believe that there ought to be such a correlation.

Peak oil is a long term wave, occurring in the background. Did it partially shape the contours of this recession? Probably, but it was not the cause. However, peak oil WILL be the ceiling that limits any future recovery, barring some technological miracle in energy production (fusion, anti-matter, "Beam me up, Scotty" dilithium crystals...) which I don't see happening.

Peak oil will not be a sudden stop event to global civilization. Peak oil is like a slow cancer eating away at its guts. But the current economy is a pending heart attack waiting to manifest itself. There's a huge difference there in terms of how it impacts you personally.

mistah charley, ph.d. said...

Here's something I've been wondering about.

Complexity is expensive, many assert - and it makes intuitive sense.

And on the other hand, specialization leads to greater efficiency and/or higher skill and a better result - yes? You don't want your surgeon to be doing the specific operation you need for the first time in 6 months - you want her to have done several last week.

But - aren't specialization and complexity sort of like two sides of the same coin?


Ilargi said...

Greyzone 6.06 pm

That's very well put, compliments, I'm with you all the way except for:

"Peak oil will not be a sudden stop event to global civilization. Peak oil is like a slow cancer eating away at its guts. But the current economy is a pending heart attack waiting to manifest itself. There's a huge difference there in terms of how it impacts you personally."

I think Peak Oil is more like the Alzheimer than the cancer vs your debt heart attack. With the stimulus packages performing the role of triple bypasses and the suspension of mark to market featuring as last ditch morphine shots.

But granted, it's a minor detail.


Ilargi said...

"mistah charley, ph.d. said...

[..] specialization leads to greater efficiency and/or higher skill and a better result - yes? You don't want your surgeon to be doing the specific operation you need for the first time in 6 months - you want her to have done several last week.

But - aren't specialization and complexity sort of like two sides of the same coin?

It's a matter of degree, and an ever increasing one. A system specializes its way into ever more complexity and eventually doom, if circumstances allow it to, and it won't stop till these circumstances force it to. There is no break, and no reverse, in the same way that the human mind has none of these. It's what makes evolution possible. If there were a "break function" somewhere inside us, how could we evolve? We would decide to sit back and say: "That's good enough". And then be overwhelmed by other parts of the system that still do want more. The balance is not in us, or in a particular part of a system, the balance is in the whole. If we disappear from here, the system will still function, albeit without us. That should perhaps be quire a consolation, that we can't kill the entire thing.

As for that surgeon: yes, you want her specialized, but not too specialized. You want a surgeon specialized in one body part to also know about the other parts, and certainly about the connections between the various parts.

In other words, there is a general level of "conscience" needed of the system as a whole that at a certain point inhibits further specialization.


Ric said...

Ventriloquist, did you find out what made your wife come to the realization that they're all lying? Can you share?

My wife (a top-notch manager who specializes in logistics) started saying "They're lying!" once a week, or so, two years ago. Now she's saying it every night when she comes home from work. What galls her is the willfully blind decision making of senior managers. From there she extrapolates what she reads in the LA Times each evening, putting it down and saying, "They're lying."

She's definitely in the anger phase, which helps her prepare. About 5 years ago when I started talking about PO, she called me with amused, tolerant irony, "Doomsday Boy." She still calls me this sometimes, but now it's become a gentle endearment.

GZ writes: Peak oil is a long term wave, occurring in the background.

Read this twice--wow.

Ilargi writes: If we disappear from here, the system will still function, albeit without us.

As the cells in our body are blind to us, we are blind to unseeable reality.

scandia said...

@Greenpa, I checked out your referrral to Philip Regal's blog. Very interesting. How did you know about it as it is so new? Do you know Mr. Regal?
I wanted to comment but failed to do so, so far. I want to welcome him to Canada. I don't doubt he will add to the dialogue here as Jane Jacobs did.As he is just up the road from me so to speak I hope I will get to meet him someday.
Speaking of interesting people I had the good sense to attend a lecture by Wade Davis on the weekend. He is explorer in residence for National Geographic with wonderful things to say about culture, about knowledge. Most inspiring.I recommend his work to the board.

Greenpa said...

"Do you know Mr. Regal?"

I do, indeed, for years. I'm delighted now to be able to share this treasure with a wider audience. :-)

scrofulous said...


I did not say that Peak Oil was the cause, I said that "P.O." was the underlying problem. With unlimited energy and resources, then unlimited debt is, well, unlimited. I guess I should have explained that by putting P.O. in quotes it meant more than Peak Oil. Sorry, I thought you would understand that.

Stoneleigh said...

My sister Gwen lost her battle with cancer this tonight. She had been in intensive care with what the doctors had thought was a lung infection, but after a biopsy they discovered that her lungs were riddled with cancer. There was nothing more they could do. Her life-support system was turned off and she passed away a short time ago, surrounded by friends and family and lots of love.

I am still going to fly to Madison, as I promised, but I will only be there for a day. After that I need some space for a while.

Thank you everyone for your kind wishes over the last few days. I appreciate it more than youn know.

bluebird said...

Stoneleigh - I am so sorry to hear of your sister. It is very difficult to lose a close family member. I'm sure in some way, she was aware you were there with her. Cherish all the good memories. My thoughts are prayers are with you and your family during this sad time.

Archie said...


I do not know you, or your beloved sister Gwen, personally, but I feel your loss. My deepest sympathies to you and your family at this sad time.

John said...

Stoneleigh, may you and your family feel the presence and reassurance of God during this time of loss. Thanks for all you do. John

RichyB said...


My deepest sympathy for your loss.

scandia said...

Ah Stoneleigh,,,I believe Gwen had young children?
Please especially offer my condolences to your mother.

Unknown said...


I have found solace in the lyrics and tune of this staple of mid-18th century American music, Hicks Farewell. My condolences to you and your family in this time of lamentation:

Ruben said...

Take care Stoneleigh.

County Vernon said...

My deepest sympathies Stoneleigh to you and your family.

APC said...

Love the last "article". Granny, without the milk and cookies. Don't believe it for a second Nic. More like auntie ready to inflate the pool for the kids. I can't remember if I got a chance to thank you for that...


Miss the both of you and looking forward to November...

APC said...

Didn't see your last post Nicole, so I hope my last comment didn't seem insensitive.

Sincere condolences. Losing family is very difficult. You remain in both Veronique and my thoughts...

Caith said...

Thinking of you, Stoneleigh.

Someone asked higher up why anyone would sell food and gold for "worthless fiat confetti". You do this when your rent remains £820 of worthless fiat confetti a month while your income drops to zero because your job evaporates. You do it because if you try to live in a tent instead they arrest you and take your children into care, and what use is the food or gold to you then?

JP said...

Please accept my condolences, Stoneleigh.

mistah charley, ph.d. said...

Stoneleigh - My father passed away almost a year ago under somewhat similar circumstances to your sister (ICU, respirator removed after it became clear recovery was impossible - the difference was, he was 96).

One of my favorite writers is Kurt Vonnegut. Here's a relevant quote-

A purpose of human life, no matter who is controlling it, is to love whoever is around to be loved.

Kurt Vonnegut, Sirens of Titan
US novelist (1922 - 2007)

j.c. said...


Love and light to your family during this difficult time.

Bigelow said...

Oh that so sucks Stoneleigh.

Alexander Ac said...

I wish all the best to get through it, for everyone involved,

with kind regards,

Greenpa said...


Anonymous said...


I feel the loss of Gwen -- the sister, the daughter, the mother, the wife and the friend. My deepest sympathies to you and your extended family.

Love & peace,


"... there is no dying... there is no death and there is no fear. There is only continuation." ~THICH NHAT HANH


g-minor said...

Warmest sympathies, Stoneleigh.


jal said...

My thoughts are with you as you struggle for a balance.

charlie said...

My condolences to you Stoneleigh on the loss of your loved one, I leave you with this.

Hopi Prayer
Do not stand at my grave and weep
I am not there,
I do not sleep.
I am a thousand winds that blow.
I am the diamond glints on snow.
I am the sunlight on the ripened grain.
I am the gentle Autumn's rain.
When you awaken in the morning hush,
I am the swift uplifting rush of quiet birds in circled flight.
I am the soft stars that shine at night.
Do not stand at my grave and cry.
I am not there.
I did not die.
My Spirit is still alive...
-- Hopi prayer

Mike said...


Deepest sympathy and condolences on the loss of your sister.

love and light go out to you and yours....

ghpacific said...

Nicole, Peace be with you.

Eliza Blue said...

Stoneleigh, My deepest sympathy to you and yours. Eliza

mikel paul said...


peace, peace, forever peace


Bukko Boomeranger said...

When I think of death, which comes to us all, I think of some lines from a Moody Blues song:

"What will be your last thought,
Do you think it's coming soon?
Will it be of comfort,
Or the pain of a burning wound?"

At least your sister was in comfort at the last. More than most every living thing in the Earth's existence, from bug to biped, gets to experience at their end.

HappySurfer said...

Ilargi Stoneleigh and family

My Thoughts and Best Wishes for you all,

Take it easy


D. Benton Smith said...

Dear Stoneleigh,

You have so many friends, and we wish for you, and everyone who cherished Gwen, the comfort of knowing that you, too, are cherished.

solarhouseca said...

Stoneleigh I'm so sorry. {{hugs}}
Talked with you for a while in Guelph at Scandia's meeting. You are very good. Treat yourself carefully. Think carefully. Life is precious.



ben said...

sorry stoneleigh

ogardener said...

Sorry to learn about the loss of your sister Stoneleigh. Keep on keepin' on.


Dollar drops, gold soars following Federal Reserve meeting

Deflation. It's not a pretty word.

Ventriloquist said...


Condolences and sympathies to you and your family on the loss of your sister.

Her spirit will live on
in the lives of all those she touched.


Bigelow said...

“Summers was the Treasury Secretary when Glass Steagall was repealed. Instead of speaking out against the irresponsible Gramm–Leach–Bliley Act (Financial Services Modernization Act of 1999) that allowed the Financialization of America to progress, he actively supported it. Instead of explaining to the public how Glass Steagall had prevented every Wall Street crisis since the Great Depression from spilling over onto Main Street, he rolled over for Citibank.

Understand that the repeal of Glass Steagall was not a cause of the crisis. But, it allowed the net damage to be far greater and extend far wider than it would have otherwise been. From a libertarian perspective, it was emblematic of the corporate takeover of the legislative process. For a hefty fee (aka campaign donation) you could pretty much write the regulations that covered your own industry. How could that ever go wrong?

Summers oversaw the passage of the even more ruinous Commodities Futures Modernization Act of 2000. The CFMA exempted all financial derivatives from any and all regulatory oversight. The CFMA not made the AIG collapse possible, it made it highly likely. It helped to set up both the Lehman and Bear Stearns’ collapses. The CFMA allowed AIG FP to write over $3 trillion in derivatives, reserving precisely zero dollars in case these insurance policy-like obligations had to be paid out.”

Summers: Good Riddance Barry Ritholtz

Unknown said...

My deepest condolences.

el gallinazo said...

ghpacific wrote:

"At this time, I am finding the only clear guidance from a blogger in Argentina, which collapsed socially and economically in 2001 and has been limping along since. Regardless of how Argentina got to its current malaise, day to day life continues, though much more brutally than I think we gringos can handle."

I have been living outside a medium sized town in Argentina since the last week of May. I am no expert, to say the least. My Spanish is, at best, rudimentary (and the Argentine dialect is rather unique to add to the difficulty), and my total experience is a narrow window to a very large country - Cordova (its second largest city) along the route 38 corridor to the NW for about 120 km. That's it. My lack of adventurism can be explained by being tied up and stressed by building a house. I flew to Santiago (Chile) for a week from Cordova to meet my SO's relatives and renew my 90 day visa. Haven't even been to Buenos Aires yet.

Argentina is a very complicated place and this isn't the forum to go into detail. I am here, frankly, because it is home to my SO and three of her four (barely) grown children, who live in Cordova. However, I can safely say that the average Argentine, though less affluent than your typical 2006 Usaco, is quite a bit happier and more content. I refer to Argentina as a 2.5 world country. Most of the people are content to make do with less. Retail in my town has store hours from 9-1 and 5-9, spending the middle four hours with the family and snoozing. But I see less grinding poverty here than any other country which I have been in in Latin America.

As to Ferfel, I would take one man's opinion (possible a virtual man) with a grain of salt. I read his stuff over three years ago, so I might not be correct in my memory. But first of all, I recall that he writes of BA which has as much in common with the rest of the country as Manhattan does to the USA. Second of all, he seems to relish his survivalism more than an Idaho ultra libertarian, and particularly relished discussing the killing power of the .40 versus the 9 mm and gold versus silver.

Argentines are much, much more communal than Usacos. My town is particularly counter culture hippy dippy, and it is not unusual to see women who have not seen each for a while hugging as if performing a Vulcan mind meld. Argentines are exceptionally polite and sensitive, and it is easy for even a well intentioned gringo to be an Ugly American.

We attempted to adopt an old abandoned golden lab named Benito. But Benito was in love with a local pastry maker and kept running away from home and back to his favorite venue. I recall a discussion in the center of town with at least 6 people spontaneously present discussing what was in Benito's best interest and what should be done for him :-) (Eventually the pastry maker took him in).

zander said...


My sincere sympathy and condolence to you and your family.
We are all with you, take good care.


Anonymous said...


@ Greyzone
Every once in a great while, I make notes on what I read here for inclusion in conferences.

Very much appreciated the notion of superimposed waves and cancer/heart attack.

@ Greenpa
I noted on Regal's blog the mention of his book The Anatomy of Judgement. If I remember correctly, you already recommended that book about two years ago. Am I mistaken?

@ El Gal
Good to hear from you. Keep us posted on Benito.


Ellen said...

Stoneleigh - I don't know you, but my thoughts are with you nonetheless.

el gallinazo said...

For you Joe Bageant fans:

Joe has three excellent audio interviews on his current Australian book tour, links available from his blog's home page. It's always a pleasure to listen to Joe.

Also, Dmitri Orlov has been hitting them out of the park on his site lately. Check it out.

Sometimes I think that Argentina is similar to the Soviet Union in that everything that is a pre-collpase weakness becomes a post collapse strength. Actually AR collapsed 8 years ago, so I guess we are in a "recovery." The central bank has the printing presses going. Government COL figures for May 09 / May 10 was +24%, but the longest CD at a bank is only six months, and it pays only 10%, so saving money is a losing proposition. Real Estate is advertised in USD, probably for a month to month price stability. Dollars are not accepted on the street. Most people only have debit cards but the larger retailers all offer credit time payments. I only buy big stuff that gives my a 10% discount for cash. The only dozers, front loaders, and back hoes I have seen here are owned by the municipality. Actually, it is one ancient front loader. Excavations are done by hand. Yet plenty of spiffy SUV's (as well as less spiffy Ford Falcons) and tiny things like Fiat 600's (the labels have long since melted away). And you thought that those Falcons and flown to Ralph Nader heaven. Many of the cars are hybrid natural gas ( not LP / propane) and gasoline. Gas is about USD 5 a gallon ($1.25 a liter). Complicated place. Sort of a cross between Munchkins, Keystone Cops, Avatar, and Hobbits.

I can't guarantee the accuracy of the following since it was understood off the TV with my crappy Spanish with an assist from my Chilean SO.

The city of Cordova buses only accept tokens - no cash. The city announced this week that it would raise its fares. People bought up and stockpiled their tokens - none to be purchased. The bus drivers still refused to accept cash. One irate customer tried to strangle a bus driver and they all left their buses in the street and took taxis home. The City announced that the higher fare tokens would be a different color and there was no point to hoard them, as the old color would not be accepted, but the population didn't believe that the city had the technical expertise to change the color. Still no tokens to be purchased. So the city is allowing the buses now to be ridden for free. What a country! I love it.

Anonymous said...

Dear Stoneleigh

We are really sorry to hear of your loss! It seems particularly unfair for somebody who gives so much of herself to help others to lose a loved one so young from your own family.

Take care!

James and Helen
Coventry, UK

Greenpa said...

FB "If I remember correctly, you already recommended that book about two years ago. Am I mistaken?"

You are not mistaken. I'm highly impressed with your retention of detail!

Anonymous said...

No snerfling, I have not altered my views. I remain in the deflationary camp until the majority of debts are forced to clear from the system.

The clearing of those debts should open the gates for real hyperinflation but not before then. And we've still not had the deflationary collapse yet. At best we've had a pause in the rate of leveraging up.

After the collapse, we can talk about hyperinflation, not before.

Also, the hyperinflation piece from ZH, done by "Gonzo" over there, is complete and utter fiction. Anyone believing his storyline would believe a Tom Clancy novel too.

Ilargi said...

New post up.

Can't touch this