Monday, November 8, 2010

November 8 2010: We'll Need The Courage Of Our Forefathers

Detroit Publishing Co. Out to lunch 1900
"Breaker boy, Woodward coal mines, Kingston, Pennsylvania"

Ilargi: To order the interactive video presentation (only $12.50!! ) of Stoneleigh's lecture "A Century of Challenges" , PLEASE CLICK HERE or click the button in the right hand column just below the banner. The 920 people who purchased the video so far can't all be wrong?!

Ilargi: Which reminds me, we would to hear your thoughts and comments on the video. Please write to theautomaticearth •at• gmail •dot• com.

Ilargi: First of all, please allow me to share the following very intriguing graph, from a 61-page PDF by Gordon T. Long. For the whole thing, click the title (which I made up myself, it's not Mr. Long's). In the article he explains that the timeframes he depicts may well turn out to be too long.

The New Economic Cycle
by Gordon T. Long

Ilargi: I thought I had figured out what to write about today, because I saw a long line of articles the past few days that all basically have the same theme: US banks that are doing so bad, nationalization must once again be seriously considered. But then I read Professor Morgan Kelly's great, and greatly alarming, article in the Irish Times today:
If you thought the Irish bank bailout was bad, wait until the mortgage defaults hit home
Sad news just in from Our Lady of the Eurozone Hospital: After a sudden worsening in her condition, the Irish Patient, formerly known as the Irish Republic, has been moved into intensive care and put on artificial ventilation. While a hospital spokesman, Jean-Claude Trichet, tried to sound upbeat, there is no prospect that the Patient will recover. [..]

With the Irish Patient now clinically dead, her grieving European relatives face the melancholy task of deciding when to remove her from life support, and how to deal with the extraordinary debts she ran up in the last months of her life. [..]

Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term. From here on, for better or worse, we can only rely on the kindness of strangers.

Ilargi: Yeah, the European problems will yet come back to bite us all. Ireland is gone as an independent nation in all but ceremonial terms. Greece is not far behind, with Portugal snapping at its heels. Think the US dollar is going to plunge? Think again.

Still, that didn't make as today's theme either, even though I know we have many Irish readers, and Stoneleigh received a great welcome there this summer; we’ll get to talk about Ireland - and Europe- again soon.

It's just that I read an article Ashvin Pandurangi, our by now greatly valued roving reporter, sent me, entitled "Plutocracy Now". Ashvin writes about that first notion I was pondering: the nationalization of US banks, though for him it’s not about Bank of America, but the Fed. He concludes it can't be done, not even an audit will be achieved. And I think that goes for Wall Street banks as well. We can't nationalize the banks, because they have long since "bankalized the nation".

Not that I don't find the efforts and arguments interesting. I just don't think the authors necessarily place sufficient emphasis on the amount and level of political clout and power the financial industry has accumulated over the past few decades. Or indeed the past 100 years for that matter. Seeing them celebrate the birth of the Fed, and do so on Jekyll Island to boot, it makes me think the US is surely as far gone as Ireland is; it's just that fewer people seem to realize it, but that's not too comforting, is it?

Ashvin Pandurangi closes with a very insightful statement, one that every American should take to heart, and many Europeans too:

The reality is that there is only one way back to a true democratic system now, and this path will require nothing less of us than the courage of our forefathers.

Here are some of the articles I was reading:

James K. Galbraith at Common Dreams:
Obama's Problem Simply Defined: It Was The Banks
[..] .. one cannot defend the actions of Team Obama on taking office. Law, policy and politics all pointed in one direction: turn the systemically dangerous banks over to Sheila Bair and the Federal Deposit Insurance Corporation. Insure the depositors, replace the management, fire the lobbyists, audit the books, prosecute the frauds, and restructure and downsize the institutions. The financial system would have been cleaned up. And the big bankers would have been beaten as a political force.

Team Obama did none of these things. Instead they announced "stress tests," plainly designed so as to obscure the banks' true condition. They pressured the Federal Accounting Standards Board to permit the banks to ignore the market value of their toxic assets. Management stayed in place. They prosecuted no one. The Fed cut the cost of funds to zero. The President justified all this by repeating, many times, that the goal of policy was "to get credit flowing again."

The banks threw a party. Reported profits soared, as did bonuses. With free funds, the banks could make money with no risk, by lending back to the Treasury. They could boom the stock market. They could make a mint on proprietary trading.

Will Henley at Global Financial Strategy:
Battered Obama took part in a 'cover up', says ex-regulator Bill Black
In a last campaign pitch to voters, US President Barack Obama justified his response to the Great Recession by contrasting it to "S&L", a 1980s and early 1990s crisis which saw nearly 800 savings and loans institutions go bust amid a disastrous commercial real estate bubble.
Yet for Bill Black - a former Federal Home Loan Bank Board litigation director who as deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement contributed to a major 1993 report on S&L - it's an analogy which sticks in the throat.
"It's a terrible comparison," says Black. In his reasoning, Obama noted that while George Bush Senior's efforts to stabilise the financial system cost two and a half per cent of gross domestic product (or $125m), his own administration's actions have cost as little as one per cent.

"In the savings and loans crisis, for 2.5 per cent of GDP we actually resolved the problem," Black guffaws. "In this case, they have resolved none of the problems."[..]

While stopping short of asking for a Stalinist purge of executives, he is adamant that it was a mistake for the regulators to not launch more investigations. Without such action, he says there is a danger that white collar criminals may turn into recidivists.

"If they have already destroyed their institutions then they are likely to continue as crooks."

Ellen Brown at Truthout:
ForeclosureGate Could Force Bank Nationalization
For two years, politicians have danced around the nationalization issue, but ForeclosureGate may be the last straw. The megabanks are too big to fail, but they aren't too big to reorganize as federal institutions serving the public interest.[..]

For our newly-elected Congress, the only alternative may be to start budgeting for TARP II.

Jonathan Weil for Bloomberg:
Bank of America Edges Closer to Tipping Point
You wouldn’t know there’s anything wrong with Bank of America by an initial look at its balance sheet. The company showed common shareholder equity, or book value, of $212.4 billion as of Sept. 30. And its regulatory capital ratios have risen steadily throughout the year.

Judging by its shrinking stock price, though, investors are acting as if Bank of America is near a tipping point. Its market capitalization stands at $115.6 billion, or 54 percent of book value. That’s the second-lowest price-to-book ratio among the 24 companies in the KBW Bank Index, and well below the 76 percent ratio the company was at in October 2008 when it landed its first round of TARP dough.

Put another way, the market is saying there’s a $96.8 billion hole in Bank of America’s balance sheet.

And again, pitbulls William K. Black and L. Randall Wray in the Huffington Post:
Let's Set the Record Straight on Bank of America, Part 2: Eliminating Foreclosure Fraud
Out of [..] millions of fraudulent mortgages, Bank of America claims to have modified 700,000; of these, 85,000 are under HAMP. Still, the Treasury says that the bank has another 375,000 mortgages that already meet HAMP terms.[..]

Treasury could be wrong about the mortgages; Bank of America may be refusing to modify mortgages for homeowners who appear to qualify for the HAMP terms because it knows the data Treasury relied upon is false. Their unusually low rate of HAMP modifications could be the result of the extraordinarily high rate of mortgage fraud at Countrywide.

Bank of America has admitted that HAMP's "implicit" purpose is to help the banks that made the fraudulent loans -- not the borrowers. That goal was the same goal underlying the decision to extort FASB to gimmick the accounting rules -- delaying loss recognition.

Bank of America expects to receive billions of dollars for its participation in HAMP. The top three banks (JPMorgan Chase and Wells Fargo being the others) will share $17 billion because HAMP pays servicers, investors and lenders for restructuring. These top 3 banks service $5.4 trillion in mortgages, or half of all outstanding home mortgage loans. Yet, as Phyllis Caldwell, Treasury's housing rescue chief has testified, there is no proof that these banks have any legal title to the loans they are modifying and foreclosing.

Ilargi: It’ll take a whole lot more than attempts at regulation or legislation. The only "representatives of the people" [sic] who have any say are those in the bankers' pockets. The nation has been bankalized, something we've only figured out after it was too late. That means the road to taking over the banks is closed; we’ll be pumping money into them for quite a while to come.

Here's Ashvin:

Ashvin Pandurangi:

Plutocracy Now

Every so often, Americans should stop everything they're doing for a moment, and reflect upon the nature of their country. Specifically, upon what has traditionally been this country's defining characteristic. Was it our capitalist economy? No, there are many capitalistic countries around the world and capitalism was not first formulated by Americans.

What about our emphasis on personal freedom? Well, once again, many countries preach the virtues of freedom and many groups of people have fought for freedom well before America was formed. Surely it has been our diverse populace and our tolerance of all races, genders, sexual preferences... yeah, right. Personally, I would answer that it was our written Constitution and the democratic values embodied within it.

No other country had ever codified the structures and processes of their governing institutions to such an extent in one single document. Many people focus on the Bill of Rights when speaking about the Constitution, but the first four Articles are just as important. 

They synthesized political ideas that were developed over hundreds of years by some of the most insightful thinkers, such as separation of federal powers, checks and balances, vertical division of powers (federalism), an independent judiciary and, of course, representative democracy. The latter emphasizes the notion that any policies enacted by the federal government must be authorized by the people, through their elected representatives who are held accountable to constituents every few years.

So what's the state of our Constitutional democracy today? Simple, it doesn't exist. International corruption surveys typically rank the U.S. higher (less corrupt) than most other countries, but this simply proves how bad these surveys are at capturing the essence of real, hardcore corruption.

We could write stacks of books on the prevalence of money in politics and the swarms of lobbyists who descend on Washington every single week, and many people have, but it's simpler to just focus on the most egregious example of corruption. The most powerful, influential economic policy-making institution in the country, the Federal Reserve ("Fed"), is an unelected body that is completely unaccountable to the people. Well, let's back up and start with the fact that this institution's very existence is most likely unconstitutional. Here's why:

Article I, Section 8 of the Constitution states that Congress has the power to "coin money" and "regulate the value thereof". The Supreme Court has long held that Congress can delegate its legislative powers to Executive agencies as long as it provides an "intelligible principle" to guide the agencies' action.

We don't even have to reach the question of whether the Federal Reserve Act sets out an "intelligible principle", however, because existing precedent states that Congress cannot delegate its powers to private institutions. Schecter Poultry (held "a delegation of its legislative authority to trade or industrial associations...would be utterly inconsistent with the constitutional prerogatives and duties of Congress). In that case, the Supreme Court struck down parts of FDR's National Industrial Recovery Act which authorized these private organizations to draft "codes of fair competition" and submit them to the President for approval.

The Fed, by it's own admission, is an independent entity within the government "having both public purposes, and private aspects". By "private aspects", they mean the entire operation is wholly-owned by private member banks, who are paid dividends of 6% each year on their stock. Furthermore, the Fed's decisions "do not have to be ratified by the President or anyone else in the executive or legislative branch of government" and the Fed "does not receive funding appropriated by Congress".

In 1982, the Ninth Circuit Court of Appeals confirmed this view when it held that "federal reserve banks are not federal instrumentalities... but are independent, privately owned and locally controlled corporations". [The Legality of the Federal Reserve System, 5]. Yet, the Fed has exclusive control over the government's ability to create money and regulate its value through the targeting of interest rates and open market operations (when the Fed buys an asset, it typically prints the purchase money out of thin air). How Congress can delegate its Constitutional powers to this independent, privately owned and unaccountable institution is beyond me.

Still, the Constitutional issue is just the tip of the iceberg when it comes to this twisted institution's embodiment of all things undemocratic. When Congress (and the people it represents) makes a valid delegation of its powers to an executive agency, it almost always retains a level of control through its powers of appropriations, impeachment and oversight. For some not-so-strange reason, the Fed isn't appropriated any funds by Congress, and so it cannot be financially "starved" like any other agency.

The members of the Fed's Board of Governors also cannot be impeached by Congress, which is especially twisted, since the President of the United States can be impeached for "high crimes and misdameanors". [The Legality of the Federal Reserve System, 8]. What about oversight? Well, a Congressional committee holds "hearings" every once in awhile to ask the Chairman a few irrelevant questions, but if this process is what passes for "oversight", then we have truly gone off the deep end.

Speaking of committees and oversight, when Fed Chairman Ben Bernanke testified under oath to Congress in July, he said in no uncertain words, "the Federal Reserve will not monetize the [federal] debt". [1]. Fast forward to the day after mid-term elections, in which the American people clearly voted for LESS spending/printing, and the Fed announces its plan to monetize $900 billion in treasury bonds. [1].

The Chairman has proven his previous testimony before Congress to be a blatant lie, but instead of condemning the Fed's recent actions, the federal government has welcomed it with open arms. That's quite some oversight we have there. Perhaps the best way to oversee the Fed's actions would be to actually figure out what in Lloyd Blankfein's name it's been doing.

In this country, that's easier said than done. The Government Accountability Office is not allowed to audit the Fed's transactions for or with foreign governments, central banks, nonprivate international organizations or those made under the direction of the Federal Open Market Committee ("FOMC"). It just so happens that these are the types of transactions which are most influential on global and domestic financial markets, especially the open market operations.

These operations are conducted by the FOMC, who is comprised of the Board of Governors (7 members appointed by President and confirmed by Senate) and five representatives from the regional Fed Banks. Although the President appoints the Board of Governors, he must choose from a list of candidates provided by private institutions, and the other five representatives are also typically nominated by private member banks. Talk about an organization with conflicts of interest, lack of transparency and lack of accountability all tightly woven into its very fabric!

In the last two years, the almighty Fed has printed trillions of dollars in our name to buy worthless mortgage assets from "too big to fail" banks. It has lent these banks our hard-earned money at about 0% interest, so they could lend our own money back to us at 3%+. These banks also used our free money to ramp equity and commodity markets, which mostly benefitted the top 1% of our population who owns 43% of financial wealth [2], and conveniently, also owns the Fed.

The latter has kept interest rates at next to nothing to punish savers and encourage speculation, making everything less affordable for average Americans who have seen their wages stay the same, decrease or disappear. What's left standing is the perniciously powerful, highly secretive and entirely unaccountable Fed, who now epitomizes the state of American democracy.

We have all become subject to the misguided and/or malicious whims of a few wealthy individuals operating the levers of economic policy, with no adequate means of challenging their power. Our most treasured contribution to political society has been reduced to a bunch of meaningless articles and amendments, containing equally meaningless words. We the people, in our pursuit of "a more perfect union", have fallen into an age-old trap.

Our economic policies, currency and laws are all manufactured by our very own private dictator, who amasses a fortune from our collective exploitation and destruction. Then, this despot continues to operate like nothing ever happened. We can scream "ABOLISH THE FED" all day, non-stop to every single politician at the top of our lungs, but it will never happen

The reality is that there is only one way back to a true democratic system now, and this path will require nothing less of us than the courage of our forefathers.

Obama's Problem Simply Defined: It Was the Banks
by James K. Galbraith - Common Dreams

Obama must break his devil’s pact with the banks in order to succeed.

Bruce Bartlett says it was a failure to focus. Paul Krugman says it was a failure of nerve. Nancy Pelosi says it was the economy's failure. Barack Obama says it was his own failure -- to explain that he was, in fact, focused on the economy. As Krugman rightly stipulates, Monday-morning quarterbacks should say exactly what different play they would have called. Paul's answer is that the stimulus package should have been bigger. No disagreement: I was one voice calling for a much larger program back when. Yet this answer is not sufficient.

The original sin of Obama's presidency was to assign economic policy to a closed circle of bank-friendly economists and Bush carryovers. Larry Summers. Timothy Geithner. Ben Bernanke. These men had no personal commitment to the goal of an early recovery, no stake in the Democratic Party, no interest in the larger success of Barack Obama. Their primary goal, instead, was and remains to protect their own past decisions and their own professional futures.

Up to a point, one can defend the decisions taken in September-October 2008 under the stress of a rapidly collapsing financial system. The Bush administration was, by that time, nearly defunct. Panic was in the air, as was political blackmail -- with the threat that the October through January months might be irreparably brutal. Stopgaps were needed, they were concocted, and they held the line.

But one cannot defend the actions of Team Obama on taking office. Law, policy and politics all pointed in one direction: turn the systemically dangerous banks over to Sheila Bair and the Federal Deposit Insurance Corporation. Insure the depositors, replace the management, fire the lobbyists, audit the books, prosecute the frauds, and restructure and downsize the institutions. The financial system would have been cleaned up. And the big bankers would have been beaten as a political force.

Team Obama did none of these things. Instead they announced "stress tests," plainly designed so as to obscure the banks' true condition. They pressured the Federal Accounting Standards Board to permit the banks to ignore the market value of their toxic assets. Management stayed in place. They prosecuted no one. The Fed cut the cost of funds to zero. The President justified all this by repeating, many times, that the goal of policy was "to get credit flowing again."

The banks threw a party. Reported profits soared, as did bonuses. With free funds, the banks could make money with no risk, by lending back to the Treasury. They could boom the stock market. They could make a mint on proprietary trading. Their losses on mortgages were concealed -- until the fact came out that they'd so neglected basic mortgage paperwork, as to be unable to foreclose in many cases, without the help of forged documents and perjured affidavits.

But new loans? The big banks had given up on that. They no longer did real underwriting. And anyway, who could qualify? Businesses mostly had no investment plans. And homeowners were, to an increasing degree, upside-down on their mortgages and therefore unqualified to refinance.

These facts were obvious to everybody, fueling rage at "bailouts." They also underlie the economy's failure to create jobs. What usually happens (and did, for example, in 1994 - 2000) is that credit growth takes over from Keynesian fiscal expansion. Armed with credit, businesses expand, and with higher incomes, public deficits decline. This cannot happen if the financial sector isn't working.

Geithner, Summers and Bernanke should have known this. One can be fairly sure that they did know it. But Geithner and Bernanke had cast their lots, with continuity and coverup. And Summers, with his own record of deregulation, could hardly have complained.

To counter calls for more action, Team Obama produced sunny forecasts. Their program was right-sized, because anyway unemployment would peak at 8 percent in 2009. So Larry Summers said. In making that forecast, the Obama White House took responsibility for the entire excess of joblessness above eight percent. They made it impossible to blame the ongoing disaster on George W. Bush. If this wasn't rank incompetence, it was sabotage.

This is why, in a crisis, you need new people. You must be able to attack past administrations, and override old decisions, without directly crossing those who made them. President Obama didn't see this. Or perhaps, he didn't want to see it. His presidential campaign was, after all, from the beginning financed from Wall Street. He chose his team, knowing exactly who they were. And this tells us what we need to know, about who he really is.

Battered Obama took part in a 'cover up', says ex-regulator Bill Black
by Will Henley - Global Financial Strategy

In a last campaign pitch to voters, US President Barack Obama justified his response to the Great Recession by contrasting it to "S&L", a 1980s and early 1990s crisis which saw nearly 800 savings and loans institutions go bust amid a disastrous commercial real estate bubble.
Yet for Bill Black - a former Federal Home Loan Bank Board litigation director who as deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement contributed to a major 1993 report on S&L - it's an analogy which sticks in the throat.
"It's a terrible comparison," says Black.

In his reasoning, Obama noted that while George Bush Senior's efforts to stabilise the financial system cost two and a half per cent of gross domestic product (or $125m), his own administration's actions have cost as little as one per cent.

"In the savings and loans crisis, for 2.5 per cent of GDP we actually resolved the problem," Black guffaws. "In this case, they have resolved none of the problems."
In 1991, Congress passed a Prompt Corrective Action law ensuring that insolvent institutions would be wound up, Black explains. Regulators forced bankrupt organisations into orderly receivership, accounting standards were improved, and those suspected of fraud were pursued. In total, more than 1,600 institutions insured by the Federal Deposit Insurance Corporation were closed by the authorities or received government support.
"In the savings and loans crisis, we got rid of the phoney accounting that our predecessors had put in place to hide the losses," he attests. "In every case we wiped out the risk capital - both equity and subordinated debt. We went to honest accounting rules and closed the problem institutions."

Conversely, claims Black, the President has singly failed to heed the previous experience. Not only have authorities chosen to leave suspected fraudsters in place, but they have protected insolvent institutions by changing Financial Accounting Standards Board rules so that toxic asset losses do not need to be recognised.

"Obama has ignored the savings and loans crisis to this point. The position of the administration was that there were no lessons to be learned from the savings and loan crisis. I find that very bizarre."
By instead green-lighting bank bailouts, ensuring that regulators do not consider toxic assets in stress tests, and reappointing Republican-era figures like Federal Reserve chairman Ben Bernanke, Black says Obama has taken some "disastrous" decisions.
He argues that if the US government wanted to apply the regulators' understanding of the S&L crisis it should have opted to place insolvent "systemically dangerous institutions" into receivership. Further still, it should have blocked takeovers of endangered SDIs by other large institutions.

"You don't want institutions so large that they are inefficient," he says. "Yet they have made the problem significantly worse because they have allowed, and in many cases encouraged, the SDIs to grow and pose an even greater risk."

The notion that the failure of a large financial institution will automatically trigger a domino-effect collapsing other businesses is a "wonderful myth" perpetuated by those reaping the benefits of the taxpayers' largesse, Black claims.  

"It's a made up story by those who say that banks are a special case," he says. "Did all of England drop dead with Northern Rock? No."

"When you do a receivership nothing like that happens," he insists. "If you appoint a receiver the place doesn't disappear. You do it on a Friday and the place is open on a Monday. All the cheques clear and the ATMs still work."

Black, a renowned expert on fraud who has testified to Congress in the past, is perhaps most damning about the Obama administration's action - or lack of it - against the boardroom "crooks" whom he believes are guilty of vast corporate frauds concerning the buying and selling of mortgages or mortgage-backed instruments.

While stopping short of asking for a Stalinist purge of executives, he is adamant that it was a mistake for the regulators to not launch more investigations. Without such action, he says there is a danger that white collar criminals may turn into recidivists.

"If they have already destroyed their institutions then they are likely to continue as crooks."

"You don't take out everybody of course - that would be nuts. But you do do a couple of things. You take out absolutely everybody you know to be culpable. And you take out everybody senior enough that they must have known unless you have evidence that they tried to stop it."

Blankly, Black concludes that US authorities' response since the financial crisis amounts, in effect, to an Obama-sanctioned "cover up" with potentially explosive consequences.

He predicts that the new electoral map thrown up by yesterday's Republican's mid-term election victory will only worsen prospects for stability, with a divided Congress and hamstrung administration even less capable, or willing, to break up and wind up SDIs.
"It's going to throw sand in the gears - nobody is going to have the ability to go forward," he says. "Republicans have already said that if they control the house they will launch a whole series of investigations of the Obama administration. That would make it hyper-partisan."

Looking balefully to the future, the regulator-turned-academic warns that the political system's apparent inability to grapple with the financial crisis could be storing up "recurrent, intensifying" crises which dwarf recent troubles.

It could, he says, unleash a "crisis of democracy". Whether the American people, voting [last week] in their millions to kick out Democrat politicians across the country, quite share Black's verdict is unclear.

Obama is safe for now. But many critics claim that the savings and loans crisis cost George Bush Senior his re-election bid. With that in mind, the President may be hoping that his S&L analogy does not come back to haunt him.

ForeclosureGate Could Force Bank Nationalization
by Ellen Brown - Tr u t h o u t

For two years, politicians have danced around the nationalization issue, but ForeclosureGate may be the last straw. The megabanks are too big to fail, but they aren't too big to reorganize as federal institutions serving the public interest.

In January 2009, only a week into Obama's presidency, David Sanger reported in The New York Times that nationalizing the banks was being discussed. Privately, the Obama economic team was conceding that more taxpayer money was going to be needed to shore up the banks. When asked whether nationalization was a good idea, House Speaker Nancy Pelosi replied:
"Well, whatever you want to call it.... If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization.

"I'm not talking about total ownership," she quickly cautioned - stopping herself by posing a question: "Would we have ever thought we would see the day when we'd be using that terminology? 'Nationalization of the banks?'"

Noted Matthew Rothschild in a March 2009 editorial:
[T]hat's the problem today. The word "nationalization" shuts off the debate. Never mind that Britain, facing the same crisis we are, just nationalized the Bank of Scotland. Never mind that Ronald Reagan himself considered such an option during a global banking crisis in the early 1980s.

Although nationalization sounds like socialism, it is actually what is supposed to happen under our capitalist system when a major bank goes bankrupt. The bank is put into receivership under the FDIC, which takes it over. What fits the socialist label more, in fact, is the TARP bank bailout, sometimes called "welfare for the rich." The banks' losses and risks have been socialized, but the profits have not. The bankers have been feasting on our dime without sharing the spread.

And that was before ForeclosureGate - the uncovering of massive fraud in the foreclosure process. Investors are now suing to put defective loans back on bank balance sheets. If they win, the banks will be hopelessly under water. "The unraveling of the 'foreclosure-gate' could mean banking crisis 2.0," warned economist Dian Chu on October 21, 2010.

Banking Crisis 2.0 Means TARP II
The significance of ForeclosureGate is being downplayed in the media, but independent analysts warn that it could be the tsunami that takes the big players down. John Lekas, senior portfolio manager of the Leader Short Term Bond Fund, said on "The Street" on November 2, 2010, that the banks will prevail in the lawsuits brought by investors. The paperwork issues, he said, are just "technical mumbo jumbo"; there is no way to unwind years of complex paperwork and securitizations.

But Yves Smith, writing in The New York Times on October 30, says it's not that easy:
"The banks and other players in the securitization industry now seem to be looking to Congress to snap its fingers to make the whole problem go away, preferably with a law that relieves them of liability for their bad behavior. But any such legislative fiat would bulldoze regions of state laws on real estate and trusts, not to mention the Uniform Commercial Code. A challenge on constitutional grounds would be inevitable.

"Asking for Congress's help would also require the banks to tacitly admit that they routinely broke their own contracts and made misrepresentations to investors in their Securities and Exchange Commission filings. Would Congress dare shield them from well-deserved litigation when the banks themselves use every minor customer deviation from incomprehensible contracts as an excuse to charge a fee?"

Chris Whalen of Institutional Risk Analytics told Fox Business News on October 1 that the government needs to restructure the largest banks. "Restructuring" in this context means bankruptcy receivership. "You can't prevent it," said Whalen. "We've wasted two years, and haven't restructured the top banks, but for Citi. Bank of America will need to be restructured; this isn't about the documentation problem, this is because [of the high] cost of servicing the property."

Profs. William Black and Randall Wray are calling for receivership for another reason - the industry has engaged in flagrant, widespread fraud. "There was fraud at every step in the home finance food chain," they wrote in The Huffington Post on October 25:
"[T]he appraisers were paid to overvalue real estate; mortgage brokers were paid to induce borrowers to accept loan terms they could not possibly afford; loan applications overstated the borrowers' incomes; speculators lied when they claimed that six different homes were their principal dwelling; mortgage securitizers made false reps and warranties about the quality of the packaged loans; credit ratings agencies were overpaid to overrate the securities sold on to investors; and investment banks stuffed collateralized debt obligations with toxic securities that were handpicked by hedge fund managers to ensure they would self destruct."

Players all down the line were able to game the system, suggesting there is something radically wrong not just with the players, but with the system itself. Would it be sufficient just to throw the culprits in jail? And which culprits? One reason there have been so few arrests to date is that "everyone was doing it." Virtually the whole securitized mortgage industry might have to be put behind bars.

The Need for Permanent Reform
The Kanjorski amendment to the Banking Reform Bill passed in July allows federal regulators to preemptively break up large financial institutions that pose a threat to US financial or economic stability. In the financial crises of the 1930s and 1980s, the banks were purged of their toxic miscreations and delivered back to private owners, who proceeded to engage in the same sorts of chicanery all over again.

It could be time to take the next logical step and nationalize not just the losses, but the banks themselves, and not just temporarily, but permanently. The logic of that sort of reform was addressed by Willem Buiter, chief economist of Citigroup and formerly a member of the Bank of England's Monetary Policy Committee, in The Financial Times following the bailout of AIG in September 2008. He wrote:

If financial behemoths like AIG are too large and/or too interconnected to fail but not too smart to get themselves into situations where they need to be bailed out, then what is the case for letting private firms engage in such kinds of activities in the first place?

Is the reality of the modern, transactions-oriented model of financial capitalism indeed that large private firms make enormous private profits when the going is good and get bailed out and taken into temporary public ownership when the going gets bad, with the tax payer taking the risk and the losses?

If so, then why not keep these activities in permanent public ownership? There is a long-standing argument that there is no real case for private ownership of deposit-taking banking institutions, because these cannot exist safely without a deposit guarantee and/or lender of last resort facilities, that are ultimately underwritten by the taxpayer.

Even where private deposit insurance exists, this is only sufficient to handle bank runs on a subset of the banks in the system. Private banks collectively cannot self-insure against a generalised run on the banks. Once the state underwrites the deposits or makes alternative funding available as lender of last resort, deposit-based banking is a license to print money.  [Emphasis added.]

All money today except coins originates as a debt to a bank, and debts are just legal agreements to pay in the future. Legal agreements are properly overseen by the judiciary, a branch of government. Perhaps it is time to make banking a fourth branch of government. That probably won't happen any time soon, but in the meantime we can try a few experiments in public banking, beginning with the Bank of America, predicted to be the first of the behemoths to be put into receivership.

Leo Panitch, Canada Research Chair in comparative political economy at York University, wrote in The Globe and Mail in December 2009 that "there has long been a strong case for turning the banks into a public utility, given that they can't exist in complex modern society without states guaranteeing their deposits and central banks constantly acting as lenders of last resort."

Nationalization Is Looking Better
David Sanger wrote in The New York Times in January 2009:
Mr. Obama's advisers say they are acutely aware that if the government is perceived as running the banks, the administration would come under enormous political pressure to halt foreclosures or lend money to ailing projects in cities or states with powerful constituencies, which could imperil the effort to steer the banks away from the cliff. "The nightmare scenarios are endless," one of the administration's senior officials said.

Today, that scenario is looking less like a nightmare and more like relief. Calls have been made for a national moratorium on foreclosures. If the banks were nationalized, the government could move to restructure the mortgages, perhaps at subsidized rates.

Lending money to ailing projects in cities and states is also sounding rather promising. Despite massive bailouts by the taxpayers and the Fed, the banks are still not lending to local governments, local businesses or consumers. Matthew Rothschild, writing in March 2009, quoted Robert Pollin, professor of economics at the University of Massachusetts at Amherst:
"Relative to a year ago, lending in the US economy is down an astonishing 90 percent. The government needs to take over the banks now, and force them to start lending."

When the private sector fails, the public sector needs to step in. Under public ownership, wrote Nobel Prize winner Joseph Stiglitz in January 2009, "the incentives of the banks can be aligned better with those of the country. And it is in the national interest that prudent lending be restarted."

For a model, Congress can look to the nation's only state-owned bank, the Bank of North Dakota (BND). The 91-year-old BND has served its community well. As of March 2010, North Dakota was the only state boasting a budget surplus; it had the lowest default rate in the country; it had the lowest unemployment rate in the country; and it had received a 2009 dividend from the BND of $58.1 million, quite a large sum for a sparsely populated state.

For our newly-elected Congress, the only alternative may be to start budgeting for TARP II.

Bank of America Edges Closer to Tipping Point
by Jonathan Weil - Bloomberg

It was only last April that Bank of America Corp. was making fools out of the doomsayers who had called for its nationalization a year earlier. Taxpayers had gotten their bailout cash back. Investors who bought its shares at the bottom were making a killing. Government leaders lauded the company’s rescues, both of them, as a great success.

Now the bank may be on the verge of trouble again. Its stock has fallen 41 percent since April 15. Mortgage-bond investors are demanding untold billions of dollars in refunds. The foreclosure fiasco is metastasizing. A member of the Troubled Asset Relief Program’s oversight panel, AFL-CIO attorney Damon Silvers, openly worried at a hearing last week about the risk that Bank of America might need another bailout. A few more months like the last one, and we may be wishing Bank of America had never returned its $45 billion of TARP money.

You wouldn’t know there’s anything wrong with Bank of America by an initial look at its balance sheet. The company showed common shareholder equity, or book value, of $212.4 billion as of Sept. 30. And its regulatory capital ratios have risen steadily throughout the year.

Tipping Point
Judging by its shrinking stock price, though, investors are acting as if Bank of America is near a tipping point. Its market capitalization stands at $115.6 billion, or 54 percent of book value. That’s the second-lowest price-to-book ratio among the 24 companies in the KBW Bank Index, and well below the 76 percent ratio the company was at in October 2008 when it landed its first round of TARP dough.

Put another way, the market is saying there’s a $96.8 billion hole in Bank of America’s balance sheet. When I asked Jerry Dubrowski, a Bank of America spokesman, about the disparity, he said: "I’m not going to comment on the book value and the stock price."

It may be the shares are a bargain at $11.52, if the company’s books are right. Another plausible scenario is that Bank of America’s management, led by Chief Executive Officer Brian Moynihan, has lost so much credibility with investors that the stock’s decline might start feeding on itself.

The problem for anyone trying to analyze Bank of America’s $2.3 trillion balance sheet is that it’s largely impenetrable. Some portions, though, are so delusional that they invite laughter. Consider, for instance, the way the company continues to account for its acquisition of Countrywide Financial, the disastrous subprime lender at the center of the housing bust, which it bought for $4.2 billion in July 2008.

Goodwill Purchase
Here’s how Bank of America allocated the purchase price for that deal. First, it determined that the fair value of the liabilities at Countrywide exceeded the mortgage lender’s assets by $200 million. Then it recorded $4.4 billion of goodwill, a ledger entry representing the difference between Countrywide’s net asset value and the purchase price.

That’s right. Countrywide’s goodwill supposedly was worth more than Countrywide itself. In other words, Bank of America paid $4.2 billion for the company, even though it thought the value there was less than zero.

Since completing that acquisition, Bank of America has dropped the Countrywide brand. The company’s home-loan division has reported $13.5 billion of pretax losses. Yet Bank of America still hasn’t written off any of its Countrywide goodwill. Dubrowski, the company spokesman, declined to comment when I asked him why not. In its latest quarterly report with the SEC, Bank of America said it had determined the asset wasn’t impaired. It might as well be telling the public not to believe any of the numbers on its financial statements.

No Surprise
Combine that with Bank of America’s reaction to the robo- signer scandal. (Working on it! Wait, halt foreclosure sales! No, restart them! Whoops, still checking records!) Add in the $141.6 billion of home-equity loans on Bank of America’s books, the real value of which is unknown. And it should be no surprise that the company’s stock price has been plunging.

So, does Bank of America need to issue new common stock to raise capital? Its executives say no. They point to the usual regulatory benchmarks, as well as their own calculations of tangible common equity. This is a bare-bones capital gauge, showing a company’s ability to absorb future losses, which excludes preferred stock and most intangible assets.

Using Bank of America’s $129.5 billion figure for tangible common equity, though, that’s still about $14 billion more than the company’s market cap. So the market isn’t just discounting the intangibles, most of which don’t count in regulatory capital. Investors are wary of the company’s other numbers, too.
Artifice of Strength

The tough part for Bank of America executives is that the company’s future may be out of their hands. Writing off more worthless assets or boosting reserves for future losses might help their credibility. (The bank wrote off $10.4 billion of goodwill unrelated to Countrywide last quarter.) Or, the market might perceive such moves as a sign that the artifice of strength is broken. It’s hard to tell.

As for the government’s too-big-to-fail guarantee, it’s probably still there. But who knows? Republicans have won back the House. The answer is up in the air. The only certainty is there is none, aside from the knowledge that Bank of America’s top executives have no idea what goes on inside the bowels of their company. For all we know the stock could double, or be a donut. The fate of the financial system hangs in the balance. Once again, we’re all on the hook.

Let's Set the Record Straight on Bank of America, Part 2: Eliminating Foreclosure Fraud
by William K. Black and L. Randall Wray - Huffington Post

We have explained in prior posts and interviews that there are two foreclosure-related crises. Our first two-part post called on the U.S. to begin "foreclosing on the foreclosure fraudsters." We concentrated on how the underlying epidemic of mortgage fraud by lenders inevitably produced endemic foreclosure fraud. We wrote to urge government policymakers to get Bank of America and other lenders and servicers to clean up the massive fraud.

We obviously cannot rely solely on Bank of America assessing its own culpability. Note also that while we have supported a moratorium on foreclosures, this is only to stop the foreclosure frauds -- the illegal seizure of homes by fraudulent means. We do not suppose that financial institutions can afford to maintain toxic assets on their books. The experience of the thrift crisis of the 1980s demonstrates the inherent problems created by forbearance in the case of institutions that are run as control frauds.

All of the incentives of a control fraud bank are worsened with forbearance. Our posts on the Prompt Corrective Action (PCA) law (which mandates that the regulators place insolvent banks in receivership) have focused on the banks' failure to foreclose as a deliberate strategy to avoid recognizing their massive losses in order to escape receivership and to allow their managers to further loot the banks through huge bonuses based on fictional income (which ignores real losses). We have previously noted the massive rise in the "shadow inventory" of loans that have received no payments for years, yet have not led to foreclosure:
As of September, banks owned nearly a million homes, up 21 percent from a year earlier. That alone would take 17 months to unload at the most recent pace of sales, and doesn't include the 5.2 million homes still in the foreclosure process or those whose owners have already missed at least two payments.

Bank of America's response admits how massive its contribution to the shadow inventory has been. Mairone implies that the bank delays its foreclosures for years out of a desire to help homeowners, but common sense, and their own data show that the explanation that makes most sense is that the bank is hiding losses and maximizing the senior officers' bonuses by postponing the day that the bank is finally put into receivership.

We did not call for a long-term foreclosure moratorium. Our proposal created an incentive for honest lenders to clean up their act quickly by eliminating foreclosure fraud. We will devote a future post to our proposals for dealing with the millions of homes that the fraudulent lenders induced borrowers to purchase even though they could not afford to repay the loans.

Bank of America's data add to our argument that hundreds of thousands of its customers were induced by their lenders to purchase homes they could not afford. The overwhelming bulk of the lender fraud at Bank of America probably did come from Countrywide, which was already infamous for its toxic loans at the time that Bank of America chose to acquire it (and also most of Countrywide's managers who had perpetrated the frauds). The data also support our position that fraudulent lenders are delaying foreclosures and the sales of foreclosed homes primarily in order to delay enormous loss recognition.

The fraud scheme inherently strips homeowners of their life savings and finally their homes. It is inevitable that the homeowners would become delinquent; that was the inherent consequence of inducing those who could not repay their loans to borrow large sums and purchase homes at grossly inflated prices supported by fraudulent inflated appraisals. This was not an accident, but rather the product of those who designed the "exploding rate" mortgages.

Those mortgages' initial "teaser rates" induce unsophisticated borrowers to purchase homes whose values were inflated by appraisal fraud (which is generated by the lenders and their agents) and those initial teaser rates delay the inevitable defaults (allowing the banks' senior managers to obtain massive bonuses for many years based on the fictional income). Soon after the bubble stalls, however, the interest rate the purchasers must pay explodes and the inevitable wave of defaults strikes. Delinquency, default, foreclosure, and the destruction of entire neighborhoods are the four horsemen that always ride together to wreak havoc in the wake of epidemics of mortgage fraud by lenders.

Out of these millions of fraudulent mortgages, Bank of America claims to have modified 700,000; of these, 85,000 are under HAMP. Still, the Treasury says that the bank has another 375,000 mortgages that already meet HAMP terms. In other words, Bank of America has been shockingly negligent in its efforts to modify mortgages. The Treasury reports that the bank's performance is far worse than that of the other large banks.

Alternatively, Treasury could be wrong about the mortgages; Bank of America may be refusing to modify mortgages for homeowners who appear to qualify for the HAMP terms because it knows the data Treasury relied upon is false. Their unusually low rate of HAMP modifications could be the result of the extraordinarily high rate of mortgage fraud at Countrywide.

Bank of America has admitted that HAMP's "implicit" purpose is to help the banks that made the fraudulent loans -- not the borrowers. That goal was the same goal underlying the decision to extort FASB to gimmick the accounting rules -- delaying loss recognition. For example, as reported by Jon Prior:
BofA Merrill Lynch analysts said critics of the program aren't yet vindicated on their calls that HAMP is a failure. "While the increased re-default rates will provide more 'fodder to those in the camp' that regards HAMP as a failure, we do not think the story is so simple," according to the report. The analysts said the revised re-default rates are in line with what they expected. While the "explicit goal" of HAMP to help 3m to 4m homeowners "appears unattainable at this point," its "implicit goal" to stall the foreclosure process and provide some order to the flow of properties into REO status has been achieved, according to the report. "In our view, the implicit goal has been one of the key reasons for the stabilization in home prices," according to the BofA Merrill Lynch report.

HAMP's parallel goal is funneling more money to the banks that induced the fraudulent loans. Data indicate that neither the HAMP modifications nor those undertaken independently by the banks actually benefit homeowners. Most debtors eventually default even on the modified mortgage and end up in foreclosure. Further, many reports indicate that banks encourage homeowners to miss payments so that they can qualify for HAMP, then use the delinquencies as an excuse to evict homeowners.

Most importantly, as we reported, half of all homeowners are already underwater in their mortgages, or nearly so. Bank of America representative Rebecca Mairone does not report how many of these mortgages undergoing mods are underwater, but given the massive lender fraud that included overvaluation during the property appraisal process (in other words, even before property values fell these mortgages were probably underwater), it is likely that most are.

Since the modification merely lowers the monthly payment but leaves the balance unchanged, the homeowners remain underwater. What this means is that homeowners are left with a terrible investment, paying a mortgage that is far larger than the value of the home. Because most modifications will lead to eventual default, all they do is to allow the bank to squeeze more life savings out of the homeowner before taking the home. Bank of America wants to be congratulated for such activity.

Meanwhile, Bank of America expects to receive billions of dollars for its participation in HAMP. The top three banks (JPMorgan Chase and Wells Fargo being the others) will share $17 billion because HAMP pays servicers, investors and lenders for restructuring. These top 3 banks service $5.4 trillion in mortgages, or half of all outstanding home mortgage loans. Yet, as Phyllis Caldwell, Treasury's housing rescue chief has testified, there is no proof that these banks have any legal title to the loans they are modifying and foreclosing.

In Bank of America representative Rebecca Mairone's response to us, she does not respond to, let alone contest, the fact that her bank, as well as other banks, has been illegally foreclosing on properties -- illegally removing people from their homes. Instead, she lists characteristics of those homeowners on which Bank of America might be illegally foreclosing: they are unemployed, they have not made payments in many months, a third no longer occupy their homes, and so on. It is interesting that she completely ignores all the important issues at hand with respect to the "deadbeat" homeowners. How many of these homeowners were illegally removed from their homes so that they became vacant?

Does Bank of America hold the "wet ink" notes on any of these homes, as required by 45 states? How many of these homeowners were unemployed or otherwise financially distressed when the loans were originally made? How many of the mortgages were fraudulent from the very beginning: low docs, no docs, liar loans, NINJA's (all specialties of Countrywide)? Without addressing these questions, Bank of America cannot claim to have demonstrated that the foreclosures were appropriate, no matter how many years borrowers might have been delinquent.

Unfortunately, the non-response to the crises caused by Bank of America's frauds exemplifies their response to our reporting. It does not engage the points we made. It is a pure PR exercise. Bank of America also wants praise for having "stepped up" to purchase Countrywide, and asserts that if it had not done so, the "failure of [Countrywide] would have been devastating to the economy, the markets, and millions of homeowners."

We have explained why this was not true of Countrywide or Bank of America. Receiverships of fraudulent banks preserve, not destroy, assets. Countrywide and its fellow fraudulent lenders and sellers of toxic mortgages "devastat[ed] the economy, the markets, and millions of homeowners," as Citicorp's response put it. A receiver would have fired Countrywide's fraudulent senior leaders. Bank of America, by contrast, put them in leadership roles in major operations, including foreclosures, where they could commit continuing frauds.

Bank of America did not purchase Countrywide for the good of the public. It purchased a notorious lender to feed the ego of their CEO, who wanted to run the biggest bank in America rather than the best bank in America. They certainly knew at the time of the purchase that is was buying an institution whose business model was based on fraud, and it had to have known that a substantial portion of Countrywide's assets were toxic and fraudulent (since Bank of America's own balance sheet contained similar assets and it could reasonably expect that Countrywide's own standards were even worse). The response does not contest the depth of the bank's insolvency problems should it be required to recognize its liability for losses caused by its frauds.

Here is how current CEO explained the decision to acquire Countrywide:
The Countrywide acquisition has positioned the bank in the mortgage business on a scale it had not previously achieved. There have been losses, and lawsuits, from the legacy Countrywide operation, but we are looking forward. We acquired the best mortgage servicing platform in the country, and a terrific sales force.

Bank of America's response to our articles ignores its foreclosure fraud, which we detailed in our articles. News reports claim that the bank sent a 60 person "due diligence" team into Countrywide for at least four weeks. The Countrywide sales staff were notorious, having prompted multiple fraud investigations by the SEC and various State attorneys general. The SEC fraud complaint against Countrywide emphasized the games it played with the computer system.

Countrywide had a terrible reputation for its nonprime lending. Nonprime loans were already collapsing at the time of the due diligence, the FBI had warned about the epidemic of mortgage fraud, and the lending profession's anti-fraud firm had warned that liar's loans were endemically fraudulent. Is it really possible that Bank of America's due diligence team missed all of this and that the CEO thought even months later that the Countrywide lending personnel and Countrywide's computer systems were exceptionally desirable assets?

The obvious questions we have for Bank of America about the due diligence are:
  • How did you determine the losses in Countrywide's assets?

  • How large were the market value losses at that time?

  • How large are the market value losses now?

  • Which members of the due diligence team were assigned to determine the incidence of fraud in various loan categories? What did they find?

  • What actions did BofA take in response to finding the incidence of mortgage and accounting/securities fraud?

Even Bank of America now acknowledges that Countrywide's computer system and personnel were defective:
After buying Countrywide, Bank of America decided to adopt the Calabasas, Calif., company's homegrown mortgage-servicing technology. For more than a year, though, the combined company used two core systems that didn't communicate with each other. The company's resources were strained by the integration, the need to roll out new loan-modification programs and rising delinquencies.

"We knew it would be challenging," says one executive involved in the integration. Bank of America soon discovered that information was missing from many Countrywide loan files, making it more difficult to communicate effectively with borrowers. "You would shake your head and say: How can that be?" this executive says.

It didn't help that many Countrywide executives were let go during the integration, with Bank of America installing its own employees in key posts. Such moves are routine in corporate acquisitions. Former Countrywide executives ran the servicing operation until recently, says Dan Frahm, a company spokesman.

Bank of America says no home-loan servicer could have anticipated the crushing workload caused by economic turmoil, falling home prices and the foreclosure epidemic. The bank did its "best" in "difficult and an unforeseen set of circumstances," says Mr. Mahoney, the head of public policy.

We explained in our initial posts why accounting control frauds typically have very poor record keeping. They are wrong to claim that no "servicer" could anticipate that making fraudulent loans would cause severe losses. Countrywide was perfectly poised to know how extensive fraud was in nonprime lending and the sale of nonprime paper. Indeed, its CEO predicted disaster.

Bank of America's computer problems aligned with its senior officers' interest in hiding its losses, as reported by Michael Powell:
The bank instructs real estate agents to use its computer program to evaluate short sales. But in three cases observed by The New York Times in collaboration with two real estate agents, the bank's system repeatedly asked for and lost the same information and generated inaccurate responses. In half a dozen more cases examined by The New York Times, Bank of America rejected short sale offers, foreclosed and auctioned off houses at lower prices.

But less obvious financial incentives can push toward a foreclosure rather than a short sale. Servicers can reap high fees from foreclosures. And lenders can try to collect on private mortgage insurance. Some advocates and real estate agents also point to an April 2009 regulatory change in an obscure federal accounting law. The change, in effect, allowed banks to foreclose on a home without having to write down a loss until that home was sold. By contrast, if a bank agrees to a short sale, it must mark the loss immediately.

Any competent due diligence team would have seen obvious warning signs within hours of entering Countrywide's offices. Countrywide openly violated the law on record keeping with impunity. Gretchen Morgenson reported on such practices on August 26, 2007:
Independent brokers who have worked with Countrywide also say the company does not provide records of their compensation to the Internal Revenue Service on a Form 1099, as the law requires. These brokers say that all other home lenders they have worked with submitted 1099s disclosing income earned from their associations. One broker who worked with Countrywide for seven years said she never got a 1099. "When I got ready to do my first year's taxes I had received 1099s from everybody but Countrywide," she said. "I called my rep and he said, 'We're too big. There's too many. We don't do it.' "

A different broker supplied an e-mail message from a Countrywide official stating that it was not company practice to submit 1099s. It is unclear why Countrywide apparently chooses not to provide the documents. More than 85% of the bank's 1.3 million mortgage customers now at least 60 days behind on their payments got their loans through Countrywide. The $4 billion deal also saddled Bank of America with technology problems, paperwork glitches and cultural tension. The servicing unit now has its fourth leader in roughly two years.

Is it too much to expect of Bank of America's due diligence team that it might have looked at publicly available reports? As we explained, fraud begets fraud. Bank of America created over $4 billion in "goodwill" and placed it on its books as an asset when it paid money to acquire Countrywide at a time when it was deeply insolvent on a market value basis.

Instead of acquiring an asset, they got thousands of fraudulent employees and officers, a failed computer system and catastrophic losses. So, we have a question for Bank of America, its auditors, and the SEC: why haven't you written off that entire goodwill account?

Given the fact that we have obtained B of A's attention (and that of the some administration officials), we ask the following questions that the public needs to make intelligent policy decisions.
  • Has Bank of America conducted a review of the bank's assets that AMBAC reviewed and found a 97 percent rate of false reps and warranties?

  • If so, who conducted the review, and what rate of false reps and warranties did they find? Does Bank of America agree that liar's loans have extremely high fraud rates?

  • Does Bank of America agree that an honest secured lender would never seek to inflate an appraisal?

  • Does Bank of America agree that a competent, honest secured lender would prevent others from frequently inflating appraised values?

  • Does Bank of America agree that appropriate home mortgage underwriting can minimize adverse selection and produce a positive expected value to home lending?

  • How many fraudulent mortgage loans made by Countrywide has Bank of America identified?

  • What is Bank of America's procedure when it finds suspicious evidence of a fraudulent loan?

  • How many fraudulent mortgage loans, by year, since 2000, have Countrywide and Bank of America identified?

  • How many suspicious activity reports (SARs) did Bank of America file concerning mortgage fraud, by year, for the period 2000-to date? What are the position titles of the three most senior Bank of America managers that were a subject of the SARs filed by the bank?

  • How many SARs did Countrywide file, by year, for the period 2000 on?

  • How many mortgage loans or securities did Countrywide and Bank of America sell under false reps and warranties?

  • What was the allowance for loan and lease losses (ALLL) (aggregate amount and relevant ratios) provided by Countrywide and by Bank of America, each year from 2000 on for mortgages and mortgage securities? If it varied by type of mortgage provide the ALLL for each type.

  • Which years does Bank of America consider Countrywide's ALLL to be adequate?

  • Has Bank of America reviewed Countrywide's nonprime loans for fraud incidence, fraud losses, and the incidence of lender fraud and fraud by the lender's agents? Please provide the results.

  • What has Bank of America done to remedy the injuries that borrowers suffered through loan or foreclosure fraud by them or Countrywide?

  • Does Bank of America agree that Countrywide's nonprime lending was often conducted in a manner that was unsafe and unsound?

  • Does Bank of America agree that Countrywide's record keeping was not adequate and required substantial improvement?

  • At current market value of its assets, just how insolvent is Bank of America

  • How much can the bank sell its toxic assets for in today's market?

  • What is the value of mortgages and mortgage backed securities held by Bank of America for which it has no clear title?

  • How many MBSs has the bank sold to investors for which it does not hold the notes that are required?

  • What is the bank's current estimate of losses it will suffer in court due to lawsuits by investors?

  • The top four banks are holding434 billion in second liens (good only if the first lien -- the mortgage -- is paid), and carrying these on their books at 90% of face value. What are Bank of America's reasonably expected losses on second liens against properties that are delinquent, in foreclosure, or likely to go into foreclosure?

  • How large a sample of subprime and liar's loans did BofA's due diligence team review?

  • What likely mortgage fraud incidence did BofA's due diligence team discover? What did they report to BofA with regard to fraud incidence? What changes in lending and personnel did BofA implement in response to these findings?

  • Bank of America has not responded to Bill Black's prior requests that it terminate the services of its openly racist chief advisor in Germany: Hans-Olaf Henkel. We request a response.

Here's What No One Told You About The Supposedly Great Jobs Report
by Daniel Alpert - Westwood Capital

With a really fantastic headline number coming from the Establishment Survey, we thought we’d take a closer look at the other side of the coin.  The Household Survey showed the following today: 

    •    a decline of 330,000 in the number of people employed;
    •    a decline of 254,000 in the labor force;
    •    a decline in the employment-population ratio to 58.3% from 58.5% in September;
    •    an increase of 462,000 in those not in the labor force; and
    •    an increase of 76,000 in the number of people unemployed.

The drop in the number of employed is concerning - and brings into question the disparity between the labor force and unemployment statistics in the Household Survey, and job creation indicated by the establishment surveys.  These were not small differences

The take-away is that final demand in the U.S. can only be generated through an increase in the number of people with jobs and/or the wages earned by those employed. A material decline in the number of people employed (especially with only meager changes in hour’s worked and hourly wages) is not consistent with an improvement in final demand.
Furthermore, one questions why – with the Establishment Survey showing such a robust number – people are exiting the labor force, rather than entering it in response to employment opportunities?
The disparity between what the Household Survey and the Establishment Survey are telling us is of some concern.  So we took a look at the ol’ net birth/death algorithm for clues (it adjusts the Establishment Survey data).  Note below that the birth/death adjustment for the aggregate of professional and business services, and education and health services in October was +81,000 - over half of the establishment survey's gains (and nearly 50,000 jobs higher than the average of +32,500 for August and September).  We know that the NBDA has not had a very good track record during this recessionary and post-recessionary period.  

Birth-Death October 2010 

Structurally, it is also useful to note that the increase in the number of unemployed, and number of people exiting the workforce, came nearly entirely from the statistical cadre over 25 with a college degree of higher – (labor force dropping by 332,000, unemployed rising by 97,000).  Higher paying jobs continue to shrink, lower paying service sector employers hiring cheap labor.  Sticky wages starting to get unstuck as unemployed become more hopeless?  This would be a deflationary signal.  Keep an eye on that hourly wage number going forward.

Those Jobs Numbers Were Much Worse Than They Looked
by Dr. Lacy Hunt - Hoisington Investment Mgt. Co.

The October employment situation was dramatically weaker than the headline 159k increase in the payroll employment measure. The broader household employment fell 330k. The only reason that the unemployment rate held steady is that 254k dropped out of the labor force. The civilian labor force participation rate fell to a new low of 64.5%, indicating that people do not believe that jobs are available, but this serves to hold the unemployment rate down. In addition, the employment-to-population ratio fell to 58.3%, the lowest level in nearly 30 years.

While not actually knowing what happened to the net job change in the non-surveyed small business sector, the Labor Department assumed that 61k jobs were created in that sector. This assumption is not supported by such important private surveys as those from the National Federation of Independent Business or by ADP. Just a month ago the Labor Department had to revise downward the job totals due to a serious overcount of their statistical artifact known as the Birth/Death Model.

The most distressing aspect of this report is that the US economy lost another 124K full-time jobs, thus bringing the five-month loss to 1.1 million in this most critical of all employment categories. In an even more significant sign, the level of full-time employment in October was at the same level that was reached originally in December 1999, almost 11 years ago (see attached chart). An economy cannot generate income growth by continuing to substitute part-time work for full-time employment. This loss of full-time jobs goes a long way to explain why real personal income less transfer payments has been unchanged since May.

The weakness in real income is probably lost in an environment in which the Fed is touting the gain in stock prices and consumer wealth resulting from the latest quantitative easing (QE), but QE has unintended negative consequences for real household income. Due to higher prices of energy and food commodities, QE may result in less funds for discretionary spending for consumers whose incomes are stagnant. Also, with five-year yields falling below 1%, rates on CDs and other types of short-term bank deposits will decline, also cutting into household income. At the end of the day these effects will be more powerful than any stock-price boost in consumer spending, which, as always, will be very small and slow to materialize.

To have a broad-based recovery, the manufacturing sector must participate. Contrary to the ISM survey, manufacturing jobs fell 7k, the third consecutive drop, resulting in a net loss over the past three months of 35k.

In summary, the latest economic developments indicate a slight worsening of underlying fundamental conditions.

Ben Bernanke: QE Is Already Working
by Cullen Roche - TPC

In an opinion piece published in the Washington Post [last week] Ben Bernanke says that QE is already working, but makes an absolutely crucial admittal in the article.  He says QE adds no net new money to the system (sound familiar?) and will therefore not be inflationary.  He also goes on to say that he is directly targeting higher equity prices and lower interest rates:

"This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance.

Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

While they have been used successfully in the United States and elsewhere, purchases of longer-term securities are a less familiar monetary policy tool than cutting short-term interest rates. That is one reason the FOMC has been cautious, balancing the costs and benefits before acting. We will review the purchase program regularly to ensure it is working as intended and to assess whether adjustments are needed as economic conditions change.

Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation.

Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable.

The Federal Reserve cannot solve all the economy’s problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector. But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation."

The keys here are several:
  • First, notice that Mr. Bernanke admits that QE is just an asset swap.  It does not add net new money to the system.  Therefore, there is no reason to believe it is inflationary. I agree with the Fed Chairman.  This policy will not cause inflation (wait, isn’t that the whole goal?).
  • Second, he claims it has worked in the past by achieving lower interest rates.  But in all three cases in the UK, Japan and the USA interest rates ROSE throughout the entirety of the programs.
  • Third, the Chairman admits that he needs help.  He most certainly does.  In my opinion, the Fed Chairman has essentially admitted here that QE is a non-event aside from the psychological herding of investors into equities and corporate bonds.  He needs fiscal help if he’s going to cause real inflation.  After all, a helicopter drop isn’t even technically in his arsenal and he knows it.

Mr. Bernanke is claiming victory before the program even technically begins….This Fed Chairman will either go down as the genius of all Central Bankers or will be known as the man who caused the Federal Reserve to lose its independence.

Results of Fed Stimulus Could Be 'Horrendous'
by Der Spiegel

German Finance Minister Wolfgang Schäuble has sharply criticized the US Federal Reserve's decision to pump a further $600 billion into the country's ailing economy. He says the move could create problems for the global economy. Others have joined in the condemnation. Germany is not impressed. One day after the United States Federal Reserve announced that it would pump $600 billion (€423 billion) into America's banking system over the next eight months, German Finance Minister Wolfgang Schäuble sharply criticized the decision.

"I don't think they are going to solve their problems that way," Schäuble told German public broadcaster ZDF in a Thursday evening interview. "They have already pumped an endless amount of money into the economy via taking on extremely high public debt and through a Fed policy that has already pumped a lot of money into the economy. The results are horrendous."

In a separate interview on public broadcaster ARD, Schäuble said that the move by Fed Chair Ben Bernanke would "create additional problems for the world." He promised to bring up the issue in talks with the US and said that, by following such a monetary path, the US was violating a pledge that all industrialized countries agreed to at the last G-20 summit in Toronto in June.

The Fed's plan envisions the purchase of US government bonds in an effort to lower long-term interest rates as a way to stimulate borrowing and investment. In a contribution to the Washington Post, Bernanke emphasized that the move was designed to help strengthen the US job market and reduce an unemployment level that has stagnated at 10 percent. "This approach eased financial conditions in the past and, so far, looks to be effective again," Bernanke wrote, referring to rising stocks and dropping interest rates this week.

Very Few Tools Left
Bernanke acted just a day after the Democrats of President Barack Obama took a beating in Tuesday's mid-term elections -- a vote which cost the party its majority in the House of Representatives. One of the Republicans' main complaints during the campaign focused on high deficits as a result of Obama's economic stimulus program. Despite recent hints from the White House that further stimulus measures might be in the offing, Tuesday's likely eliminates the possibility that Obama can push through further legislation to stimulate the economy.

The Fed, for its part, has very few levers left to stimulate investment and growth. Short-term interest rates have long been close to zero, eliminating that favored monetary policy tool. Buying government bonds, while controversial, appears to be the only route remaining to stimulate demand. In his Thursday essay, Bernanke emphasized that "the Federal Reserve cannot solve all the economy's problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector."

German Economics Minister Rainer Brüderle, of the business-friendly Free Democratic Party, Chancellor Angela Merkel's junior coalition partners, is likewise skeptical that the Fed's path is the correct one. "I view the move with concern," he told reporters in Berlin on Thursday, adding that he doesn't think that a more liberal monetary policy will necessarily boost the economy. "It isn't enough to set out the water. The horses have to drink too."

'There Is Spillover'
He added that he is particularly concerned about what the move might do to the euro-dollar exchange rate. He said that exchange rates should reflect the fundamentals of the economies involved. When it comes to China and the US, he added, that is no longer the case. The euro climbed above $1.42 on Thursday following the Fed's announcement.

Criticism has also come from China, with the country's central bank head, Zhou Xiaochuan saying that the Fed's move might hurt economies in the rest of the world. "There is a spill over," he said. Brazil, Indonesia and Japan have also voiced concern.

As has the financial press in Germany. "The most recent step taken by the Federal Reserve in the continuation of a series of undesirable developments in the US," writes the business daily Handelsblatt on Friday. "Instead of finally facing up to the excessive debt problem, accepting the uncomfortable truths and introducing painful reforms in the country, debt-financed stimulus programs remain the only strategy that Bernanke & Co. seem able to come up with."

Bernanke Dares The World
by Brady Willett - Financial Sense

November 3, 2010 the Federal Reserve Board announced another round of money printing (aka quantitative easing), and yesterday Chairman Bernanke defended the Fed’s actions in the Washington Post.  It is unusual for Mr. Bernanke to use the op-ed format to impart the Fed’s thought process. This speaks to the fact that while so many are aware of the risks of QE2, so few see the potential benefits.  Before some thoughts on QE2, first an overview of Bernanke’s commentary.

Is Bernanke Disingenuous or Delusional?
Mr. Bernanke started by contending that "with unemployment high and inflation very low, further support to the economy is needed." (WP Link)  He then proceeded to laud the Fed’s latest scheme:

"This approach [QE] eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action." [Bolds added]

Realizing that boosting stock prices was not what the Fed claims to be the motivation behind QE2, Bernanke added that "easier financial conditions will promote economic growth", and that "lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment." Curiously, Mr. Bernanke did not try to explain why asset prices and interest rates have already responded to QE2 but very little (if any) benefits can be viewed with regards to the housing market and corporate investment.  Rather, he ended his tortuous pro-QE2 paragraph with the following:

"And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."

In responding to the wild build up to QE2 – i.e. the currency wars, the threat of protectionism, and an ominous increase in commodity prices - Bernanke offers a rudimentary discussion of the wealth effect.  Utterly astonishing.

Finally, in trying to portray an aura of objectivity Mr. Bernanke explored some of the potential negatives of QE2.

"Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation."

The so called ‘critics’ of QE2 have done a lot more than worry about traditional (government reported) measures of inflation (which, by definition, is an increase in the money supply), but I digress.

"Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation."

Notice here how Bernanke tries to limit the parameters of discussion and then cherry pick a single moment in history to validate his point of view. In other words, ‘don’t worry about inflation because the last time we fired up the printing presses deleveraging and financial destruction all but negated the expected inflationary effects!’ It would be worth calling this tact savvy if it were not for the fact that is so obviously desperate. 

Quite frankly, by attempting to selectively compare QE2 to QE1 Bernanke unwittingly opens a discussion that eviscerates the Fed’s pretext for printing.  Allow me to explain:

When the Fed first unleashed money printing in March 2009 the G-20 had just ended and central bankers were, albeit some begrudgingly, in nearly universal agreement that they would do whatever it would take to get growth back on track.  Moreover, at the time asset prices (i.e. equities and housing) were falling rapidly, credit conditions were exceptionally tight, the price of gold was trading flat, and Bernanke himself was trying to justify money printing as ‘credit easing’ rather than quantitative easing.  In short, in March 2009 money printing was warranted* and with so many global policy makers acting in unison Bernanke could print safe in the knowledge that a U.S. dollar collapse was off the table.

Flash forward to today: no major global actor (saver perhaps Japan) is on board with the U.S., and, notwithstanding the threat of deflation, there is absolutely no immediate need for emergency money printing.  As for the notion that the Fed must print money to create jobs, history suggests that printing money is more linked to creating financial turmoil than producing wealth and jobs. Forget about validating this observation back to Rome, and instead consider Bernanke’s preferred sampling of history - how many jobs have been created since the Fed started QE?

In short, Bernanke’s commentary in the Washington Post failed miserably to explain why QE2 is a good idea. This historic op-ed has the potential to usurp Mr. Bernanke’s memorable ‘the Fed owns a printing press’ speech as being the most preposterous. 

Incidentally, what Bernanke fails to mention is that if he was in charge of almost any other central bank on the planet his policies would have already triggered a financial calamity.  To be sure, USD hegemony – or the platform that allows Bernanke to dally in the land of ludicrousness – is the only topic that is worthy of discussion when the Fed elects to print. Is the very last of the last resorts, debasing the monetary unit, really justified Mr. Bernanke? It is difficult for Mr. Bernanke to answer this question given that he never asks it…  

* This is not to suggest that ‘money printing’ is preferable to enacting sound money policies (or getting rid of the Fed completely), only that under the current system if ever the need for money printing was apparent it was in early 2009. 

The Rundown On Bernanke’s Smackdown
With QE2 Bernanke is essentially daring the world to get off the dollar. He has adopted this tact because he knows, or thinks he knows, that the world is not ready to abandon the dollar. For the time being Mr. Bernanke is probably right.  

This said, it would be naive to conclude that the Fed is undertaking money printing because it believes that lower interest rates and rising stock prices will be the only result. Rather, the Fed’s unspoken goal with QE2 is to devalue the dollar, or as James Grant put it, "the economy is not measuring up, and the Fed is going to change the ruler".

The primary danger with attempting to devalue the dollar is the dollar overshoots on the downside and/or the Fed loses its ability to print money at will. Bernanke refuses to mention much less entertain this danger directly, instead preferring to discuss ‘inflation’. The problem here is that if the U.S. economy remains weak for some time, traditional inflationary pressures may seemingly stay at bay even as the foundations that support the dollar continue to be undermined by unsound monetary and fiscal machinations. Currency collapses are not forecasted by the monthly inflation readings, but instead tend to erupt from the guise of dormancy all at once.

* As the Fed prints money this provides added motivation for the global economy to seek out alternatives to USD.

Bernanke is well aware that QE2 will further motivate central bankers to explore substitutes to the U.S. dollar.  For that matter, Bernanke must know that the price of gold is up by nearly 200% since he was nominated to be Fed Chairman, and that the Fed’s reputation/survival is now on the line if another crisis unexpectedly arrives (due to expended all of its ammo). For lack of batter way of putting it, Ben does not seem to care. Rather, Bernanke is so blinded by the idea that preventing deflation and/or another Great Depression is his purpose in life that a resistant world is seen as merely an irritating obstacle rather than a roadblock.

If ‘success’ is defined by a falling dollar and potentially dangerous/unsustainable increases in asset prices, QE2 may well succeed over the short term.  However, with the haunting ruins of two historic U.S. asset bubbles in the rear view mirror, it is unlikely asset prices can rise enough to fully combat the deleveraging theme.  For that matter, it is even more unlikely that the dollar can be weakened so precisely as to engender a lasting export-inspired boom. Accordingly, beyond the faint hope of launching another debt/asset bubble boom, the best Bernanke can hope for is that when the new global currency regime is being contrived the U.S. still demands a seat at the table.

The Blame Game Stops While The Speculations Continues
The sole positive to be taken from QE2 is that when the next financial crisis arrives Bernanke and company will not be able to offer inane ‘savings glut’ theories to deflect criticism for their irresponsible policies.  To be sure, the Fed continues to print money, the Fed is encouraged that asset prices are rising as a result, and the Fed is undertaking ‘huge risks’ despite widespread protest.  Should, and more likely when, these policies fail to produce the desired results, Bernanke will be to blame.

As for the future of USD hegemony, awhile ago I started writing a commentary on the end of USD that never made it out (a few paragraphs are posted below). I could post 5-more such speculations tomorrow, each with slightly different threads of thought, and the topic at hand would barely be scratched much less fully appreciated. The end of USD hegemony is an event like no other and, like it or not, every investor must continue to monitor what continues to look like the U.S. dollar’s inevitable demise.  And while perhaps still years away, thanks to Bernanke’s dare we are undoubtedly much closer to the end of USD than we were on November 2, 2010.

Some notes on the end of USD Hegemony (previously unreleased and undated)
As ridiculously wrong U.S. policy makers have been about almost everything in recent decades, they would be right to start mapping out contingency plans for when the USD takes its final spin around the global economy.  Extreme as it may seem, one such scenario as the dollar’s days become numbered, would be to print the currency into complete oblivion, pay everyone back with these increasingly worthless pieces of paper, close the borders, and then announce a strong intention to negotiate a new currency regime. Perhaps after a few more years of laying the groundwork the U.S. – which tries to blame everyone else for their financial problems – can spin blowing up the dollar as a natural reaction to the non amiable currency policies in China. 

Another option would be to use novel/ fairly unethical means to ensure debt risks are financially engineered out of existence. As farfetched as this plan might sound, remember that the U.S. government didn’t run public companies and the Fed didn’t own shopping malls and car loans before the crisis arrived.  Is it really a stretch that the Fed becomes a covert hedge fund with unlimited powers terrorizing markets the world over to produce secretive profits? If Goldman and others can produce profits every single day why can’t they Fed?

As outrageous as these policy choices might appear, it is worth noting that an unlikely long-term outcome is present trajectory - or the steady demise of America contrasted against the steady rise of other nations (i.e. China, India, Brazil, etc.). Why? Because this type of scenario – where everyone plays somewhat fairly and the least debt laden/most innovative economy wins – is a contest the U.S. no longer appears capable of winning…

Hooters Shows Why Deflation May Never Go Away
by William Pesek - Bloomberg

Japan’s newest sensation is one of the world’s oldest: scantily clad women serving cheap booze. Yes, Hooters Inc. has made its way to Tokyo. Normally when hundreds of Japanese men huddle in line it’s for a new iPhone or video game. These days, it’s to be served beer and chicken wings by waitresses in white tank tops and orange short-shorts. The American chain is gaining popularity in Japan.

It’s also an unlikely sign that deflation will be with Japan for a long, long time. Anyone who still thinks falling prices are a cyclical phenomenon isn’t looking closely. It’s secular, and the sudden ubiquity of discount outfits shows how Japanese consumption has become a race to the bottom of the pricing spectrum.

Japan used to be an automated-teller machine for brands like Prada, Gucci and Louis Vuitton. Women thought little of plopping down $2,000 for the latest fashions from Milan and Paris. Men didn’t blink at paying $200 for a tie. That’s all fashion-industry history now. Sliding wages and rising job insecurity brought budget-shopping into vogue.

No matter how much yen the Bank of Japan pumps into the economy, deflation deepens. It’s all about confidence, of which there is virtually none. Companies don’t trust that growth will return and so they avoid investing and hiring and trim salaries. Households fret about the future.

Japan’s sclerotic politics are a key part of the problem. Dealing with a new prime minister every eight months or so doesn’t instill hope. Politicians who spend more time debating how to raise taxes than protecting living standards don’t help, either. It’s telling that the hottest company in Japan is a bargain clothier.

In fact, Fast Retailing Co.’s Uniqlo chain was the only Japanese name in Fast Company magazine’s 2010 story about the world’s most innovative companies. That’s quite a comedown for a nation famed for the Walkman and other world-changing technologies. Its headline-grabbing exports these days are bargain-price T-shirts and underwear made in China.

The buzz that used to surround Chanel Inc. and Dolce & Gabbana stores has shifted to far less swanky ones: Inditex SA’s Zara, Hennes & Mauritz AB’s H&M brands, Forever 21 Inc. and Gap Inc. Sweden’s Ikea is all the rage. And throughout the nation of 126 million, 100 yen shops, Japan’s answer to $1 stores, are doing brisk business.

Bubble Years
It’s all a far cry from the bubble years when fat expense accounts and surging wages supported a thriving entertainment industry. A group of businessmen could easily drop $2,000 at a hostess club in Ginza, Akasaka or Roppongi. The gloom of the 1990s and deflation of the 2000s dented Japan’s so-called water trade in a way few could have imagined in the 1980s.

Hooters is the latest step of this trend. Getting households to spend more of the roughly $15 trillion of savings sitting under tatami mats is the key to ending deflation. That’s not going to happen with workers increasingly referring to themselves as "precariats" -- a word combining precarious and proletariat.

"With a growing precariat and a younger generation who are more inclined to save than splurge, second-tier retailers definitely feel they have a niche to fill here," Jeff Kingston, author of the recently published "Contemporary Japan," said. "There does seem to be room for the next wave that can cash in on the foreign cache while also appealing to frugality."

Social Changes
Hooters’s expansion brought it to China, the Philippines, Singapore, South Korea and Taiwan ahead of Japan. Deflation may explain why. It delivered businessmen to a place where 680 yen ($8.40) beers and 780 yen chicken wings at orange counters are preferable to leather sofas and single-malt scotch. Kingston’s book brims with insights about how that happened. It explores the social changes that swept Japan since the 1980s, and not always for the better.

Quietly, shifts in the underlying dynamics of Japan Inc. undermined households’ sense of security and caused greater disparities in a society that once viewed itself as egalitarian. Among the most troubling side effects is a slumping birthrate. Japan’s waning stature is manifesting itself geopolitically. China surpassed Japan as the world’s second-largest economy in the second quarter. Spats since then show how little time officials in Beijing seem to have for their peers in Tokyo. A dispute over a fishing-boat captain in September drew a tantrum from China. Japan quickly backed down.

Dissing Japan
Russia got into the dissing-Japan act this week. President Dmitry Medvedev visited disputed islands claimed by both countries, prompting Japan to recall its ambassador to Russia. All we need now is a row with India to complete the Asian-giant trifecta. Yet Japan’s main focus has to be shoring up its flat-lining economy. It’s easier said than done with public debt at 200 percent of gross domestic product, interest rates at zero and the yen rising.

Deflation is deepening because no one believes it will be defeated over the next several years. That mindset has morphed the once free-spending Japanese into yen-pinchers. It also has many a politician, corporate executive and investor needing a drink. Perhaps even at Hooters.

Seven Charts You Should See
by Bryan Rich - Money and Markets

The currency market, as well as all markets, have been heavily focused on the U.S. and the Fed’s plans for more quantitative easing (QE).

And that’s had a huge impact on the dollar and on dollar sentiment.

The question is: Will it last?

There’s no disputing that the dollar is the key to making this “reflation trade” tick. However, there is much dispute over whether the Fed’s QE2 plans will work … whether the strategy will produce demand, thus inflation, and whether it will have a sustainably devaluing effect on the dollar.

Despite all of the mania surrounding the dollar in recent months, history suggests from the Fed’s last adventure with QE, that none of aforementioned desired economic outcomes will ultimately pan out from QE2. Nor will it affect a draconian outcome for the dollar!

For a big picture perspective let’s take a look at seven key charts to see what may be in store for the dollar after the QE buzz has faded.

Chart #1:

Long-term dollar cycles

You can see in the chart below the roughly seven-year cycles in the dollar, dating back to the failure of the Bretton Woods system 40 years ago. These cycles argue that a bull cycle in the dollar started in March 2008.

chart1 Currencies: Seven Charts You Should See

That would put the dollar just 2.6 years into its new bull cycle or a bit more than a third of the way through a typical long-term dollar cycle.

Without question, this recent cycle has been very volatile. But the buck continues to trade comfortably above its 2008 all-time lows and the lows of last year, making higher lows along the way — a bullish pattern.

Chart #2:

10-year dollar chart

The chart below shows the roughly seven-year downtrend in the dollar and the subsequent ascending channel that started in 2008. You can see that the dollar is now testing the bottom line of this bull channel, an attractive area to buy the greenback.

chart2 Currencies: Seven Charts You Should See

A bounce from these levels would project a move toward the top line of the channel or about 23 percent higher.

Chart #3:

10-year euro chart

This chart for the euro is essentially the inverse of the dollar. And here too, you can see a long multi-year trend, higher in the case of the euro, followed by a descending channel.

chart3 Currencies: Seven Charts You Should See

The euro also is bumping into a technical boundary, one that represents a downward trending channel. A fall from this level of resistance would open up a downside for the euro that would be right on target with most bearish estimates espoused when the euro zone was at the height of its crisis … parity versus the dollar.

Chart #4:

Euro’s 22-week run

For more on the euro, consider this: The euro is in the midst of its strongest 22-week run on record, surpassing its prior record surge in 2003 — both areas are noted in the chart below.

chart4 Currencies: Seven Charts You Should See

What’s notable here is that in 2003, a 9 percent correction abruptly followed this strong climb. From current levels in the euro, a similar correction would mean a move down to 1.30 over the next few months.

Chart #5:

Pound still weak

Despite all of the fuss over the weak dollar, the British pound is still trading nearly 25 percent weaker against the dollar since the onset of the financial crisis three years ago.

chart5 Currencies: Seven Charts You Should See

And in the chart above, you can see that while the dollar and the euro are bumping into critical long-term technical areas, so is the pound.

Chart #6:

Yen near all-time highs

Now, for the Japanese yen, the other remaining major currency in the world …

This long-term chart in dollar/yen going back 40-years since the failure of the Bretton Woods system, shows its steady decline.

Even given its recent intervention the pair is nearing all-time lows (lows in the dollar, highs in the yen). From this chart, compared to the charts of the euro and the pound, you can see the lion’s share of dollar weakness over the past few years has come from the surging yen.

chart6 Currencies: Seven Charts You Should See

And now as this dollar/yen exchange rate nears all-time lows, the Bank of Japan is rolling out its most aggressive deflation-fighting act yet: With more QE, more fiscal policy and a cut in what’s left of its interest rate.

Plus, the Bank of Japan is officially in intervention mode — all things that make a case for a bounce in dollar/yen.

Finally …

Chart #7:

Battle against the yuan

With the Fed’s QE2 policy officially on the table, the emerging market and Asian countries that have been waging a fight to keep their currencies from a runaway surge have already stepped up with more currency market intervention and talks of capital controls.

chart7 Currencies: Seven Charts You Should See

And they are doing so because the dollar is weakening. But more importantly they’re reacting because the Chinese yuan is getting weaker relative to their currencies in the process — a competitive disadvantage for their export trade.

The key take-away: A grossly weaker dollar is not an economically or politically acceptable proposition for the world. And trouble for the world economy represents trouble for the U.S. economy.

So, despite all of the bold projections of a continued rout in the dollar, these seven charts suggest the exact opposite outcome could be around the corner.

ECB Rejects Request for Greek Swap Files, Citing 'Acute' Risks
by Elisa Martinuzzi, Alan Katz and Gabi Thesing - Bloomberg

The European Central Bank refused to disclose internal documents showing how Greece used derivatives to hide its government debt because of the "acute" risk of roiling markets, President Jean-Claude Trichet said. The ECB turned down a request and an appeal by Bloomberg News to release two briefing documents officials drafted for the central bank’s six-member Executive Board in Frankfurt this year. The notes outline how Greece used the swaps to hide its borrowings, according to a March 3 note attached to the papers and obtained by Bloomberg News.

"The information contained in the two documents would undermine the public confidence as regards the effective conduct of economic policy," Trichet wrote in an Oct. 21 letter in which he rejected the appeal. Disclosure "bears, in the current very vulnerable market environment, the substantial and acute risk of adding to volatility and instability."

The ECB is withholding the information six months after the European Union and International Monetary Fund led a 110 billion-euro bailout ($154 billion) for Greece. The government didn’t originally disclose the swaps, which were designed to help it comply with the deficit and debt rules it agreed to meet when it joined the euro in 2001. Eurostat, the EU’s statistics agency, is still trying to work out how Greece hid the deficit.

The Greek swaps fueled a financial crisis that threatened the breakup of the region’s currency. The government now says the swaps, some of which were arranged by Goldman Sachs Group Inc., may have caused "long-term damage" for taxpayers.

"There’s only one solution to resolving the current uncertainty: full disclosure," said Gustavo Piga, author of "Derivatives and Public Debt Management," and a professor at Tor Vergata University in Rome. "The ECB, the European Commission and Eurostat need to show that they are aware of all the transactions and that they have no issue in disclosing them. The market has been left to think the worst."

Investor confidence in Greece’s ability to repay its debt is weakening. The extra yield investors demand to hold the nation’s 10-year government bonds instead of German 10-year bunds climbed to 893 basis points on Nov. 4, up from a four- month low of 649 on Oct. 18. The spread set a record of 965 on May 7. The IMF, which published a sensitivity analysis of Greece’s debt in September, said it identified 5 billion euros of swaps that could increase public borrowings. Officials at the Washington-based fund declined to comment beyond the report.

‘Big Mistake’
Eurostat will by Nov. 15 publish revised budget deficit figures for Greece that will take into account the effect of the swaps. Tim Allen, a spokesman for Eurostat, said the agency has everything it requested from Greece. The agency is currently examining data sent to Greece’s statistics office. The government has given Eurostat all relevant details on the transactions, said a finance ministry official in Athens who declined to be identified. The impact of the swaps on the deficit is "small," the official wrote in an e-mail, declining to elaborate.

"Given the history of transparency with respect to Greece, which we all know is pretty bad, it would be a big mistake by the ECB to refuse this" request, said Manfred Neumann, a professor of economic policy at the University of Bonn. "Voters will be more suspicious than they used to be. In my view, there is no defense for not publishing." Neumann led a group of 155 economists who in 1998 called for a delay in creation of the euro in part because countries hadn’t cut deficits sufficiently.

The ECB must consider demands for access to public documents under a March 2004 EU directive. Individuals and companies can subsequently appeal to the European Ombudsman, which reports to Parliament, and the European Court of Justice.

"As citizens of the EU have every right to know how their taxes are being used to bail out secret financial deals between a government and its bankers, we are considering legal options in the pursuit of transparency and the public interest that may take us to the European Court of Justice in Luxembourg," Bloomberg News Editor-in-Chief Matthew Winkler said.

The first document is entitled "The impact on government deficit and debt from off-market swaps: the Greek case." The second reviews Titlos Plc, a securitization that allowed National Bank of Greece SA, the country’s biggest lender, to exchange swaps on Greek government debt for funding from the ECB. It also discusses the existence of similar transactions, the Executive Board said in the cover note for the briefings.

The ECB in its note proposed to change how EU members account for swaps based on Greece’s experience. The executive board, which Trichet heads, manages the bank and oversees its implementation of monetary policy. Members include Vitor Constancio, the ECB’s vice president, and Juergen Stark, the chief economist.

‘Risk Control’
The briefings give officials’ views on the impact of the swaps and analyze how the Titlos transaction would affect "the Eurosystem collateral framework, and associated risk control measures," Trichet said in his reply to Bloomberg. Trichet said the documents were used for decision-making and so cannot be released. At the same time, he said the documents were outdated and could mislead investors. Complete information will be published by Eurostat, Trichet said.

"Releasing the two documents would undermine the possibility of ECB’s staff to freely submit uncensored advice to the ECB’s decision-making bodies and that they would be subject to external pressure thus limiting the ECB’s space to think," Trichet said in his letter. The European Commission is responsible for overseeing national deficits and Eurostat reviews the statistics. While the ECB is the EU’s most powerful economic institution, its main remit is setting interest rates and fighting inflation. The central bank doesn’t directly oversee national accounts.

It was April 2009, seven months before the Greek crisis erupted, when ECB officials first spotted "a swap operation in unusual terms," according to the March 3 document.
After uncovering Titlos, the ECB’s Governing Council, the bank’s main decision-making body, commissioned the two reports, the first from its Statistics unit and the second from its Market Operations and the Risk Management divisions. Bloomberg is seeking copies of both reports. The ECB declined to comment on the March 3 note and on the outcome of previous public access requests.

Greece was also in April 2009 considering selling bonds in dollars and yen, the first time it would have sold non-euro debt since 1998. The government then forecast that the deficit would fall to 3.7 percent of gross domestic product in 2009 and that debt would rise to 96.3 percent of GDP in 2009. Greece now says the deficit for that year exceeded 15 percent. The country’s debt amounted to at least 115 percent of GDP, according to Eurostat. Greece hasn’t sold bonds with maturities longer than 12 months since March.

Goldman Sachs
Greece’s fiscal crisis turned attention to off-market swaps arranged by Goldman Sachs that allowed the country to hide the extent of its debt from 2000 onwards. The Goldman Sachs swaps, signed in 2000 and 2001, reduced the country’s foreign- denominated debt in euro terms by 2.37 billion euros and lowered debt as a proportion of GDP to 103.7 percent from 105.3 percent, according to a Feb. 21 statement by Goldman Sachs. Greece told Eurostat that the other swaps were significantly smaller than the Goldman Sachs agreements, according to the EU agency.

"Disclosure could, of course, help with working through what happened, who knew what at what time," said Carsten Brzeski, a senior economist at ING Groep NV in Brussels who used to work at the European Commission. "Everyone knows they’ll have to watch out for swap arrangements."

State Bailouts? They've Already Begun
by Meredith Whitney - Wall Street Journal

Bond subsidies and transfers have allowed states to avoid making tough decisions. It won't last.

The threat posed by the state fiscal crisis in the U.S. is vastly underestimated and under-appreciated—because even today too few people understand how states have been managing their finances.

A clear example of this took place in Manhattan last week at the Economist magazine's Buttonwood Conference, where a panel role-played the federal government's response to a near default of the hypothetical state of New Jefferson. After various deliberations and simulated threats from the Chinese government, the panel reluctantly voted to grant New Jefferson an emergency bailout of $1.5 billion to cover the state's debt payment.

What this panel and so many other investors fail to appreciate is that state bailouts have already begun. Over 20% of California's debt issuance during 2009 and over 30% of its debt issuance in 2010 to date has been subsidized by the federal government in a program known as Build America Bonds. Under the program, the U.S. Treasury covers 35% of the interest paid by the bonds. Arguably, without this program the interest cost of bonds for some states would have reached prohibitive levels.

California is not alone: Over 30% of Illinois's debt and over 40% of Nevada's debt issued since 2009 has also been subsidized with these bonds. These states might have already reached some type of tipping point had the federal program not been in place.

Beyond debt subsidies, general federal government transfers to states now stand at the highest levels on record. Traditionally, state revenues were primarily comprised of sales, personal and corporate income taxes. Over the years, however, federal government transfers have subsidized business-as-usual state spending not covered by state tax collections. Today, more than 28% of state funding comes from federal government transfers, the highest contribution on record.

These transfers have made states dependent on federal assistance. New York, for example, spent in excess of 250% of its tax receipts over the last decade. The largest 15 states by GDP spent on average over 220% of their tax receipts. Clearly, states have been spending at unsustainable levels without facing immediate consequences due to federal transfer payments and other temporary factors.

At the same time, local governments now rely on state government transfers for 33% of their funding. Thus, when a state finds itself in a financial bind, it has the option of saving itself before saving one of its local municipalities. Pennsylvania recently assisted the state capital, Harrisburg, in the form of a one-time "advance" payment—but there are hundreds of towns like Harrisburg that will also need assistance. These one-time fixes fail to address the real structural problems facing so many states and municipalities.

State budgets are likely to experience their second consecutive year with deficits of close to $200 billion. The root of the problem is simple: State governments have spent recklessly and unsustainably. Rainy-day funds are depleted, pension-fund contributions are already at record lows, and almost all of the major federal government subsidy programs will run out in June 2011.

Until now, the states have been able to evade the need to rein in spending largely because the federal government enabled them to do so through record high federal allocations, and by creative accounting that put off funding well over a trillion dollars of state-employee pension and other retirement obligations.

The level of complacency around this issue is alarming. Most assume, as last week's Buttonwood panel did, that the federal government will simply come to the rescue of the states without appreciating the immensity of the cumulative state-budget gaps. I expect multiple municipal defaults to trigger indiscriminate selling, which will prompt a federal response. Solutions attempted in piecemeal fashion, as we've seen thus far, would amount to constantly putting out recurring fires.

Rather than waiting for more federal intervention, states need to make their own hard decisions and not kick the can down the road. How will taxpayers from fiscally conservative states like Texas or Nebraska feel about bailing out threadbare Illinois or California? Let's hope we never have to find out.

Long-term jobless 'could face compulsory manual labour'
by James Lansdale - BBC

Long-term benefit claimants could be forced to do manual labour under proposals to be outlined by Work and Pensions Secretary Iain Duncan Smith. He is due to outline plans for four-week placements doing jobs like gardening and litter clearing. He said the message would be: "Play ball or it's going to be difficult."

But the Archbishop of Canterbury warned that the planned welfare changes could drive people "into a downward spiral of uncertainty, even despair". Under the plan, claimants thought to need "experience of the habits and routines of working life" could be put on 30-hour-a-week placements. Anyone refusing to take part or failing to turn up on time to work could have their £65 Jobseekers' Allowance stopped for at least three months.

The Work Activity scheme is said to be designed to flush out claimants who have opted for a life on benefits or are doing undeclared jobs on the side. Reports suggest it will target people believed to be sabotaging efforts to get them back into work.

Foreign Secretary William Hague told the BBC's Andrew Marr Show tackling the welfare budget was "one of the big political challenges". "What we are talking about here is people who have not been used to working having both the opportunity and perhaps a bit more of a push as well, to experience the workplace from time to time and again the vast majority of people in Britain will think that's the right thing to do."

The white paper will set out Mr Duncan Smith's plans for a universal credit to replace the range of benefits currently claimed by the jobless. Under the scheme, job advisers would be given powers to require tens of thousands of claimants to take part in community work for charities or local councils.
A Department for Work and Pensions spokesman said: "We will shortly be bringing forward further proposals on how to break the cycle of dependency blighting many of our communities and make sure work always pays."

'Cycle of dependency'
Mr Duncan Smith said his plans were designed to reduce welfare dependency and make work pay. He said: "One thing we can do is pull people in to do one or two weeks' manual work - turn up at 9am and leave at 5pm, to give people a sense of work, but also when we think they're doing other work. "The message will go across; play ball or it's going to be difficult."

Danny Alexander, Lib Dem Chief Secretary to the Treasury, denied the plans were treating the longterm unemployed in the same way as criminals doing community service, telling the BBC's Politics Show the "purpose is emphatically not to punish and it's not to humiliate". It was intended to "support and encourage" and to get people back into the habit of getting up and going out to work. It also meant those who did it could demonstrate their employability to prospective employers.

The UK has 5m people on out-of-work benefits and one of the highest rates of workless households in Europe, with 1.9m children living in homes where no-one has a job. The Archbishop of Canterbury, Dr Rowan Williams, expressed his concern about the proposed changes, saying: "People who are struggling to find work and struggling to find a secure future are - I think - driven further into a downward spiral of uncertainty, even despair, when the pressure is on in that way.

"People often are in this starting place, not because they're wicked, stupid or lazy, but because their circumstances are against them, they've failed to break through into something and to drive that spiral deeper - as I say - does feel a great problem." Deputy Labour leader Harriet Harman told the Andrew Marr Show she would have to wait to see the full details of the proposals on Thursday before giving her verdict.

But she said the government needed to understand that to get people back into work, there had to be jobs for them to go to. She added that Labour would be voting in the Commons on Tuesday against plans to cut Housing Benefit.

If you thought the Irish bank bailout was bad, wait until the mortgage defaults hit home
by Morgan Kelly - Irish Times

Ireland is effectively insolvent – the next crisis will be mass home mortgage default

Sad news just in from Our Lady of the Eurozone Hospital: After a sudden worsening in her condition, the Irish Patient, formerly known as the Irish Republic, has been moved into intensive care and put on artificial ventilation. While a hospital spokesman, Jean-Claude Trichet, tried to sound upbeat, there is no prospect that the Patient will recover.

It will be remembered that, after a lengthy period of poverty following her acrimonious divorce from her English partner, in the 1990s Ireland succeeded in turning her life around, educating herself, and holding down a steady job. Although her increasingly riotous lifestyle over the last decade had raised some concerns, the Irish Patient’s fate was sealed by a botched emergency intervention on September 29th, 2008 followed by repeated misdiagnoses of the ensuing complications. 

With the Irish Patient now clinically dead, her grieving European relatives face the melancholy task of deciding when to remove her from life support, and how to deal with the extraordinary debts she ran up in the last months of her life . . . 

When I wrote in The Irish Times last May showing how the bank guarantee would lead to national insolvency, I did not expect the financial collapse to be anywhere near as swift or as deep as has now occurred. During September, the Irish Republic quietly ceased to exist as an autonomous fiscal entity, and became a ward of the European Central Bank.

It is a testament to the cool and resolute handling of the crisis over the last six months by the Government and Central Bank that markets now put Irish sovereign debt in the same risk group as Ukraine and Pakistan, two notches above the junk level of Argentina, Greece and Venezuela.

September marked Ireland’s point of no return in the banking crisis. During that month, €55 billion of bank bonds (held mainly by UK, German, and French banks) matured and were repaid, mostly by borrowing from the European Central Bank.

Until September, Ireland had the legal option of terminating the bank guarantee on the grounds that three of the guaranteed banks had withheld material information about their solvency, in direct breach of the 1971 Central Bank Act. The way would then have been open to pass legislation along the lines of the UK’s Bank Resolution Regime, to turn the roughly €75 billion of outstanding bank debt into shares in those banks, and so end the banking crisis at a stroke.

With the €55 billion repaid, the possibility of resolving the bank crisis by sharing costs with the bondholders is now water under the bridge. Instead of the unpleasant showdown with the European Central Bank that a bank resolution would have entailed, everyone is a winner. Or everyone who matters, at least.

The German and French banks whose solvency is the overriding concern of the ECB get their money back. Senior Irish policymakers get to roll over and have their tummies tickled by their European overlords and be told what good sports they have been. And best of all, apart from some token departures of executives too old and rich to care less, the senior management of the banks that caused this crisis continue to enjoy their richly earned rewards. The only difficulty is that the Government’s open-ended commitment to cover the bank losses far exceeds the fiscal capacity of the Irish State.

The Government has admitted that Anglo is going to cost the taxpayer €29 to €34 billion. It has also invested €16 billion in the other banks, but expects to get some or all of that investment back eventually.

So, the taxpayer cost of the bailout is about €30 billion for Anglo and some fraction of €16 billion for the rest. Unfortunately, these numbers are not consistent with each other, and it only takes a second to see why.

Between them, AIB and Bank of Ireland had the same exposure to developers as Anglo and, to the extent that they were scrambling to catch up with Anglo, probably lent to even worse turkeys than it did. AIB and Bank of Ireland did start with more capital to absorb losses than Anglo, but also face substantial mortgage losses, which it does not. It follows that AIB and Bank of Ireland together will cost the taxpayer at least as much as Anglo.

Once we accept, as the Government does, that Anglo will cost the taxpayer about €30 billion, we must accept that AIB and Bank of Ireland will cost at least €30 billion extra.

In my article of last May, when I published my optimistic estimate of a €50 billion bailout bill, I posted a spreadsheet on the website, giving my realistic estimates of taxpayer losses. My realistic estimate for Anglo was €34 billion, the same as the Government’s current estimate.

When you apply the same assumptions about lending losses to the other banks, you end up with a likely taxpayer bill of €16 billion for Bank of Ireland (deducting the €3 billion they have since received from investors) and €26 billion for AIB: nearly as bad as Anglo.

Indeed, the true scandal in Irish banking is not what happened at Anglo and Nationwide (which, as specialised development lenders, would have suffered horrific losses even had they not been run by crooks or morons) but the breakdown of governance at AIB that allowed it to pursue the same suicidal path.

Once again we are having to sit through the same dreary and mendacious charade with AIB that we endured with Anglo: “AIB only needs €3.5 billion, sorry we meant to say €6.5 billion, sorry . . .” and so on until it is fully nationalised next year, and the true extent of its folly revealed.

This €70 billion bill for the banks dwarfs the €15 billion in spending cuts now agonised over, and reduces the necessary cuts in Government spending to an exercise in futility. What is the point of rearranging the spending deckchairs, when the iceberg of bank losses is going to sink us anyway?

What is driving our bond yields to record levels is not the Government deficit, but the bank bailout. Without the banks, our national debt could be stabilised in four years at a level not much worse than where France, with its triple A rating in the bond markets, is now.

As a taxpayer, what does a bailout bill of €70 billion mean? It means that every cent of income tax that you pay for the next two to three years will go to repay Anglo’s losses, every cent for the following two years will go on AIB, and every cent for the next year and a half on the others. In other words, the Irish State is insolvent: its liabilities far exceed any realistic means of repaying them.

For a country or company, insolvency is the equivalent of death for a person, and is usually swiftly followed by the legal process of bankruptcy, the equivalent of a funeral.

Two things have delayed Ireland’s funeral. First, in anticipation of being booted out of bond markets, the Government built up a large pile of cash a few months ago, so that it can keep going until the New Year before it runs out of money. Although insolvent, Ireland is still liquid, for now.

Secondly, not wanting another Greek-style mess, the ECB has intervened to fund the Irish banks. Not only have Irish banks had to repay their maturing bonds, but they have been haemorrhaging funds in the inter-bank market, and the ECB has quietly stepped in with emergency funding to keep them going until it can make up its mind what to do.

Since September, a permanent team of ECB “observers” has taken up residence in the Department of Finance. Although of many nationalities, they are known there, dismayingly but inevitably, as “The Germans”.

So, thanks to the discreet intervention of the ECB, the first stage of the crisis has closed with a whimper rather than a bang. Developer loans sank the banks which, thanks to the bank guarantee, sank the Irish State, leaving it as a ward of the ECB.

The next act of the crisis will rehearse the same themes of bad loans and foreign debt, only this time as tragedy rather than farce. This time the bad loans will be mortgages, and the foreign creditor who cannot be repaid is the ECB. In consequence, the second act promises to be a good deal more traumatic than the first.

Where the first round of the banking crisis centred on a few dozen large developers, the next round will involve hundreds of thousands of families with mortgages. Between negotiated repayment reductions and defaults, at least 100,000 mortgages (one in eight) are already under water, and things have barely started.

Banks have been relying on two dams to block the torrent of defaults – house prices and social stigma – but both have started to crumble alarmingly.

People are going to extraordinary lengths – not paying other bills and borrowing heavily from their parents – to meet mortgage repayments, both out of fear of losing their homes and to avoid the stigma of admitting that they are broke. In a society like ours, where a person’s moral worth is judged – by themselves as much as by others – by the car they drive and the house they own, the idea of admitting that you cannot afford your mortgage is unspeakably shameful.

That will change. The perception growing among borrowers is that while they played by the rules, the banks certainly did not, cynically persuading them into mortgages that they had no hope of affording. Facing a choice between obligations to the banks and to their families – mortgage or food – growing numbers are choosing the latter.

In the last year, America has seen a rising number of “strategic defaults”. People choose to stop repaying their mortgages, realising they can live rent-free in their house for several years before eviction, and then rent a better house for less than the interest on their current mortgage. The prospect of being sued by banks is not credible – the State of Florida allows banks full recourse to the assets of delinquent borrowers just like here, but it has the highest default rate in the US – because there is no point pursuing someone who has no assets.

If one family defaults on its mortgage, they are pariahs: if 200,000 default they are a powerful political constituency. There is no shame in admitting that you too were mauled by the Celtic Tiger after being conned into taking out an unaffordable mortgage, when everyone around you is admitting the same.

The gathering mortgage crisis puts Ireland on the cusp of a social conflict on the scale of the Land War, but with one crucial difference. Whereas the Land War faced tenant farmers against a relative handful of mostly foreign landlords, the looming Mortgage War will pit recent house buyers against the majority of families who feel they worked hard and made sacrifices to pay off their mortgages, or else decided not to buy during the bubble, and who think those with mortgages should be made to pay them off. Any relief to struggling mortgage-holders will come not out of bank profits – there is no longer any such thing – but from the pockets of other taxpayers.

The other crumbling dam against mass mortgage default is house prices. House prices are driven by the size of mortgages that banks give out. That is why, even though Irish banks face long-run funding costs of at least 8 per cent (if they could find anyone to lend to them), they are still giving out mortgages at 5 per cent, to maintain an artificial floor on house prices. Without this trickle of new mortgages, prices would collapse and mass defaults ensue.

However, once Irish banks pass under direct ECB control next year, they will be forced to stop lending in order to shrink their balance sheets back to a level that can be funded from customer deposits. With no new mortgage lending, the housing market will be driven by cash transactions, and prices will collapse accordingly.

While the current priority of Irish banks is to conceal their mortgage losses, which requires them to go easy on borrowers, their new priority will be to get the ECB’s money back by whatever means necessary. The resulting wave of foreclosures will cause prices to collapse further.

Along with mass mortgage defaults, sorting out our bill with the ECB will define the second stage of the banking crisis. For now it is easier for the ECB to drip feed funding to the Irish State and banks rather than admit publicly that we are bankrupt, and trigger a crisis that could engulf other euro-zone states. Our economy is tiny, and it is easiest, for now, to kick the can up the road and see how things work out.

By next year Ireland will have run out of cash, and the terms of a formal bailout will have to be agreed. Our bill will be totted up and presented to us, along with terms for repayment. On these terms hangs our future as a nation. We can only hope that, in return for being such good sports about the whole bondholder business and repaying European banks whose idea of a sound investment was lending billions to Gleeson, Fitzpatrick and Fingleton, the Government can negotiate a low rate of interest.

With a sufficiently low interest rate on what we owe to Europe, a combination of economic growth and inflation will eventually erode away the debt, just as it did in the 1980s: we get to survive.

How low is sufficiently low? Economists have a simple rule to calculate this. If the interest rate on a country’s debt is lower than the sum of its growth rate and inflation rate, the ratio of debt to national income will shrink through time. After a massive credit bubble and with a shaky international economy, our growth prospects for the next decade are poor, and prices are likely to be static or falling. An interest rate beyond 2 per cent is likely to sink us.

This means that if we are forced to repay the ECB at the 5 per cent interest rate imposed on Greece, our debt will rise faster than our means of servicing it, and we will inevitably face a State bankruptcy that will destroy what few shreds of our international reputation still remain.

Why would the ECB impose such a punitive interest rate on us? The answer is that we are too small to matter: the ECB’s real concerns lie with Spain and Italy. Making an example of Ireland is an easy way to show that bailouts are not a soft option, and so frighten them into keeping their deficits under control.

Given the risk of national bankruptcy it entailed, what led the Government into this abject and unconditional surrender to the bank bondholders? I have been told that the Government’s reasoning runs as follows: “Europe will bail us out, just like they bailed out the Greeks. And does anyone expect the Greeks to repay?”

The fallacy of this reasoning is obvious. Despite a decade of Anglo-Fáil rule, with its mantra that there are no such things as duties, only entitlements, few Irish institutions have collapsed to the third-world levels of their Greek counterparts, least of all our tax system.

And unlike the Greeks, we lacked the tact and common sense to keep our grubby dealing to ourselves. Europeans had to endure a decade of Irish politicians strutting around and telling them how they needed to emulate our crony capitalism if they wanted to be as rich as we are. As far as other Europeans are concerned, the Irish Government is aiming to add injury to insult by getting their taxpayers to help the “Richest Nation in Europe” continue to enjoy its lavish lifestyle.

My stating the simple fact that the Government has driven Ireland over the brink of insolvency should not be taken as a tacit endorsement of the Opposition. The stark lesson of the last 30 years is that, while Fianna Fáil’s record of economic management has been decidedly mixed, that of the various Fine Gael coalitions has been uniformly dismal.

As ordinary people start to realise that this thing is not only happening, it is happening to them, we can see anxiety giving way to the first upwellings of an inchoate rage and despair that will transform Irish politics along the lines of the Tea Party in America. Within five years, both Civil War parties are likely to have been brushed aside by a hard right, anti-Europe, anti-Traveller party that, inconceivable as it now seems, will leave us nostalgic for the, usually, harmless buffoonery of Biffo, Inda, and their chums.

You have read enough articles by economists by now to know that it is customary at this stage for me to propose, in 30 words or fewer, a simple policy that will solve all our problems. Unfortunately, this is where I have to hold up my hands and confess that I have no solutions, simple or otherwise.

Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term.

From here on, for better or worse, we can only rely on the kindness of strangers.

Morgan Kelly is Professor of Economics at University College Dublin

The Many Faces Of Deleveraging
by Brain Pretti - The Contrary investor

Three and one half years ago in March of 2007, we penned a discussion entitled, "It's Delightful, It's Delovely, It's Deleverage".  Of course the upshot of that missive was that we suggested that the whole idea of balance sheet deleveraging was to be a huge investment theme to come.  Little did we know, huh?  You already know this was well in advance of the ultimate systemic credit cycle debacle that was to come and a year and a half in front of Lehman as a singular event. 

Deleveraging subsequently became a popular and virtually consensus theme in late 2008 and early 2009.  Associated with this headline theme were tangential anecdotes such as "new normal", etc.  It's time to quickly revisit the subject of deleveraging now as per the recently released 2Q Fed Flow of Funds statement.

Important now why?  Because believe it or not, a good two to three years past what was the initiation of one of the greatest credit debacles in US/global history that is still reconciling as we speak, very little real world deleveraging has actually occurred.  Has the need to deleverage private sector and public sector balance sheets suddenly disappeared amidst a miraculous macro economic recovery?  Not in the least.  Has it been negated by central bankers apparently under the impression that printing unprecedented amounts of what most folks call money will cure all ills? 

Nope.  THE issue has been the ability to deleverage, or inability as may be the more proper characterization.  Financial flexibility.  It has actually decreased in certain sectors of the economy as opposed to recovered.  So the question becomes, if the need to delever private sector balance sheets is just as meaningful and important today as it was three years ago, just what can we expect of the character of the real economy ahead? 

What does this imply for our investment activities and just how do we position in the current environment given that this proverbial sword of Damacles still hangs over our collective heads?  Deleveraging is not a pop culture term whose popularity has come and gone in 2008 and 2009.  It remains a construct we will be dealing with for years to come and absolutely must be integrated into thematic decision making ahead. We'll try to take this in bullet point headline sector format.  We want to quickly review deleveraging at the household, public sector and corporate levels.  Where are we now?  What has happened over the past three years and where do we stand relative to historical context.  Let's get right to it.

Household Sector
To the point, the top clip of the chart below is a look at the quarter over quarter change in total household debt outstanding, necessarily inclusive of credit card and mortgage debt.  Needless to say, we've never experienced anything like what we have lived with over the last few years anywhere before in the history of the data.  As we wrote about long ago, thematic household balance sheet deleveraging in action, no? 

Actually, not in the manner most would assume. Over the period highlighted by the red circle, household balance sheet leverage has contracted by $492.6 billion. 

It just so happens that on September 8th, a little over a month back, the incredible folks at Moody's put out a piece estimating that in the current cycle up to this point, US banks have taken $476 billion in total write offs.  They tell us they believe banks have already taken 68% of the residential mortgage and 49% of the CRE losses Moody's believe they will encounter over the entire cycle.  We'll reserve judgment for the final tally, but you can see that bank write offs and the contraction in household debt numbers are not too far off parity.  Admittedly there is some apples and oranges comparisons going on here as households are not CRE holders per se. 

But we know intuitively that the bulk of bank booked losses have related to residential real estate as so much commercial property price damage occurred after the FASB threw out mark-to-market accounting in early 2009.  Plus, as we have shown you in the past, the bulk of CRE loan maturities lie in the years immediately ahead of us, not behind us.  The last data point we will throw into the mix is that as of August 2010 data, the drop in official US bank loans and leases outstanding (very broad categorization) comes in at $454.3 billion.  Again, you can see the macro numbers are converging here.

Anyway, although the existing data does not allow us to pinpoint the numbers exactly in terms of comparing household debt declines directly with banking system write offs, we believe it is more than very fair to say that the bulk of household balance sheet deleveraging in the current cycle so far has come from defaults as opposed to loan pay downs.

And to be honest, this is not surprising in the least.  Why?  Because the means by which to reconcile household balance sheet leverage outside of outright default has been lacking, namely wage growth.  As of the latest data per the official 2Q period end numbers to this point, the year over year change in US personal income less US government transfer payments continues to rest in negative territory.  You can see the half century plus rhythm of this data. 

It's not unusual to see personal income less government transfer payments fall into negative territory during prior recessions.  We've just never gone as deep in any other cycle but the most recent, and personal income growth excluding transfer payments (think extended unemployment benefits) recovery has been lacking.  No big mystery as any semblance of new job growth has been virtually non-existent.  Last week we received the personal income and consumption numbers for August of this year.  On a year over year basis they finally showed a bit of rate of change growth.  But as you know, we are comping against very weak 2009 numbers.  You can see as you look at the absolute numbers in the chart below (the area in black) that in nominal terms income exclusive of government transfer payments remains well off the highs.

You know the punch line here.  At least up to this point, household deleveraging has come "the hard way", via default.  Why?  Because the means to delever via savings/wages has been virtually non-existent.  The important issue is that the deleveraging process at least at the household level hasn't even really begun in any type of organic sense.  And that tells us the road to true economic recovery is going to be long.  Very long. This process still needs to happen as we'll see in just a moment.  Doesn't this say something about the longer term fundamentals of domestic consumption?  If you believe, as we do, that true household balance sheet deleveraging must indeed take place before a sustainable new domestic economic growth cycle can take hold, we have not yet even left the starting gate.

A few quick tangential comments and then a quick summary, and we'll move forward.  Importantly, the bulk of household deleveraging in the current cycle has been achieved by loan default, not proactive savings or wage based balance sheet actual debt pay down.  In spite of the economy being back in recovery mode as per the headline economic stats, the real tale of financial pressure at the household level is being told in the data of US personal income less government transfer payments. 

We believe it's very fair to say that what little sustainability in consumption we have seen in the recovery cycle so far has in very good part been supported by the government (actually the taxpayers).  As you'll see below, we've never seen levels of the current magnitude of government transfer payments as a percentage of personal disposable income.  Just what would happen if the government were to stop extending unemployment benefits or cut back on household transfer benefits in any other manner?  Don't worry, they will not, especially with the relationship you see below.

In one sense, the government has very much put itself into a box as never have government social payments as a percentage of US personal consumption risen to such a level as you see below.  Never.  How does the government cut back without very much negatively impacting a consumption based US economy?  We do not have an answer.   It can't until jobs and wage growth reappear.  How does the government cut back and not negatively impact the household deleveraging process that is absolutely a must do prior to true domestic economic healing taking place, to say nothing of the potential for a restart of the household credit cycle?  Again, we have no answer.

So just where are households in this whole process of deleveraging considering the fact that excluding the influence of the government their incomes have not risen over the past few years?  For that we like to look at household liabilities as a percentage of disposable personal income.  Again, remember that a lot of the already seen contraction in household liabilities up to this point has been through default, not repayment. 

The ratio of household liabilities today relative to disposable income stands much higher than the longer term average.  Will we get back to the average as part of total cycle reconciliation in the years ahead?  To be honest, we do not expect that to happen because quite simply the public does not have the financial resources for that type of an outcome.  But we do believe this ratio must and will continue to contract ahead. 

The bottom clip of the chart is data we've not shown you in a while, but repeatedly reviewed regularly a number of years ago.  Remember, we define cash in the bottom chart clip as all US household financial assets less equities.  Savings, bank deposits and products, bond holdings (taxable and tax free), as well as bond funds.  It was only in the prior decade that this relationship fell into negative territory for the first time in the entire history of the data.  A "tipping point" as we have described in other discussions. 

After all, who needed cash when credit inclusive of HELOC's, lines of credit, cards, etc. was so readily available to households?  Again, we have a hard time seeing this reconcile back to zero any time soon as we are looking at a $2 trillion mismatch here.  BUT, the path of current reconciliation will continue because it must.

Enough of banging on the household data.  THE key important point being, although deleveraging remains a very valid construct and investment theme, when it comes to the current reality of the US household balance sheet the deleveraging process has only been achieved up to this point primarily by household debt default. 

It's not enough as per the history of the numbers you see above.  We have a very long way to go in terms of household balance sheet reconciliation still yet to come.  Income generation at the household level is the key to the timing and rhythm of this process.  Interest income is dead.  Small business (proprietors income) literally just recorded its first positive year over year number with the August personal income report, but it's comping against weak prior year numbers.  In absolute terms it's not a factor.  Jobs and wages are the key to the inevitable household deleveraging process and so far both are MIA. 

Consumption in the domestic economy remains at risk until this deleveraging process is ultimately completed.  And finally, again as is clear per the numbers relationships above, the government is the current wild card in this process as they have acted to hold up nominal headline personal consumption (via income) with transfer payments up to this point.  Of course the sarcastic question becomes, can we have a US economic recovery built on government transfer payments?  Of course not.  QE will do the trick in terms of making that happen, right?

It's very much consensus thinking these days that corporations are "flush with cash".  We will not debate that for a minute.  You can see the deals that have been done in tech land as of late for cash, and also cross border deals that are heating up.  In fact since 2006, total corporate financial assets (the broadest definition of cash we can think of) are up close to $2.5 trillion.  That's a lot.  And by the way, this is the number for non-financial US corporate business. 

But what gets little to no attention, and mostly no attention, is that in aggregate over exactly the same time period non-financial sector corporate liabilities have likewise increased close to $2.7 trillion as we detail in the chart below.

So maybe we're nitpicking, but just where is the corporate deleveraging?  In academic terms, it has not happened at all.  And yet corporate debt relative to GDP is much nearer record highs as of now than not.

We're not trying to create the impression that corporations are somehow in trouble due to leverage.  They face a completely different set of dynamics than do US households.  The source of "income", per se, for US households is derived in the domestic economy.  For so many US corporations, that's not true at all, especially in the current environment of continued strong emerging economic activity. 

Moreover, although a certain segment of US households has been able to participate in the benefits of lower interest rates (the solvent ones, that is), US corporations have been given the debt cost of capital gift of a lifetime.  So it's not so much the level of liabilities that is the issue, but rather the cost of carrying the liabilities.  Big plus for the corporate sector for now.  We just wanted to point out the facts here.  Yes, corporations are flush with cash/financial assets.  But their liabilities have actually risen more in the last four years than have their cash assets.  Although we do not expect dramatic and life changing balance sheet reconciliation ahead, we do expect some debt pay down to come in the current cycle.  Although we'll be the first to admit that when IBM can issue three year paper at 1% and have it be oversubscribed (the exact terms of a recent deal), who the heck wants to pay down debt?  In fact, any CFO not issuing paper at these mind boggling interest rate levels should be shown the front door.

As a final comment, we do need to keep in mind that a lot of corporate cash is being kept very safe and shore.  We hear the number is close to $1 trillion, so that puts the total financial asset number in perspective.  So as we think about the bigger picture macro of the need for domestic jobs and wage growth that would indeed facilitate household deleveraging, could corporations use that cash for capital spending and expansion that would potentially create jobs and income?  Sure, but probably not in the US

Taxation is going to keep this cash hoard offshore unless something dramatic changes.  That means the cap and equipment spending, and resulting job expansion, will happen in higher growth rate areas of the world.  Again, where is the spark for household deleveraging we know has to happen ahead?  Probably not in the corporate sector, at least not for now.

Public Sector Versus Private Sector Debt
It's simply a toss away comment to say that the government has borrowed a lot of money over the last two to three years.  Everyone and their brother already knows that.  And there is plenty more borrowing to come where that came from.  But a bit analogous to the comments about household debt contraction and bank write offs above, what about the relationship of private sector debt contraction and public sector leverage acceleration?  Is there a similarity or mismatch here?  As of the Fed Flow of Funds statement for 2Q, the following table delineates the change in public and private sector debt outstanding since the end of 2007.  Have a peek.

Again, we're not going to dwell on this or drag you through a series of charts.  We've done all of that before.  The numbers tell their own story in rather dramatic fashion.  In nominal dollars total public sector debt has expanded over twice as much as private sector debt contraction over the last two and one half years.  Not only have we academically offloaded private sector debt onto the public sector, the public sector as doubled the number in terms of additional leverage assumption. 

So as we look at the public and private sector from a birds eye viewpoint, again the question becomes what deleveraging systemically?  Just how does the public sector delever when the private sector is contracting?  It can't.  Academically the public sector has the means (taxes and spending cut backs) but never the will.  The perception is out there that public sector debt accumulation has simply offset private sector debt contraction.  Not true.  It has more than offset private sector debt contraction. 

And still households have not been able to achieve organic balance sheet deleveraging?  Again, the process of total cycle deleverage remains in its infancy.

Enough charts and numbers and all that other stuff.  We think the summation messages are very clear and certainly have implications for at least a domestic economy that is suffering primarily from a lack of aggregate demand, let alone a global economy in part suffering from the same.  As hard as this may be to hear, deleveraging is still barely out of the total cycle starting gates.  At the household level we have not yet even seen organic deleveraging, but rather deleverageing through defaults. 

Jobs and income growth are the keys to the deleveraging process at the household level, but they are for all intents and purposes missing in action in the current cycle.  And that speaks to time.  Time for true balance sheet healing and ultimately a recovery in aggregate demand.  The very means for households to delever independent of default are not visible.  Not yet. 

And so we need to expect 1) a stop-start real world domestic economic recovery, 2) Fed QE that does nothing to reinvigorate the real economy, but has the real potential to create yet more unproductive asset bubbles, 3) continued volatility in financial asset and commodity prices based on investor perceptions of Fed and global central banker sponsored liquidity and the effectiveness or not of liquidity injections at any point in time. 

In reality, this is nothing we have not already been dealing with up to this point.  But for our investment activities specifically, we believe it all comes down to just how far the Fed and their global central banking brethren are willing to push the envelope in terms of money printing, currency intervention, etc.  For now, investors still view these activities as virtuous.  But at some point unless we do indeed see true real world economic reinvigoration, we believe the markets will come to view further Fed and global central banker monetary "experiments" quite negatively.  All part of the psychology of a financial market and economic cycle.


soundOfSilence said...

And so Ron Paul is now floating the idea of allowing people to opt out of social security.

It's always interesting to see the range of opinions over there on ZH. Especially from those who feel they may be suddenly left out in a cold rain.

NZSanctuary said...

The reality is that there is only one way back to a true democratic system now, and this path will require nothing less of us than the courage of our forefathers.

Quote of the year.

The general mood here seems to still be that things are not good, but they are getting better. This despite the fact that I am the only one of a big bunch of friends to have a pay rise in the last two years (one friend just took at $20,000 pay cut (his wage was good to begin with)), and all the younger people I know are struggling to find work when they leave university, often ending up working part time at video stores or retail outlets, and pondering going back to do post-graduate studies while the job market is bad . . . few want to hear that it could get worse instead of better. Fingers in ears, singing "la-la-la-la", is still the modis operandi of most.

Of those who do acknowledge that things may be going down hill for some time, I don't think many of them REALLY believe it. They still seem hopeful that things will be fine if they just carry on as per usual. There seems to be some kind of semi-acceptance going on with some people . . .

Morongobill said...

In reference to the proposal to put long term unemployed to work in Britain, what's wrong with doing work for the pay received? I am sure there are projects languishing for lack of funds or workers.

I would like to see something similar here in the United States. One project that readily comes to mind would be graffiti removal in southern California.

Greenpa said...

I think we may need the courage of our Five, or Six Fathers, and the 5 and 6 Mothers, too.

Greenpa said...

Bill Mcdonald said...
"In reference to the proposal to put long term unemployed to work in Britain, what's wrong with doing work for the pay received? I am sure there are projects languishing for lack of funds or workers.

I would like to see something similar here in the United States. One project that readily comes to mind would be graffiti removal in southern California."

Sounds fine, really. But history indicates it not only does not do what the optimists hope, it always results in really horrific abuse.

They're not talking about making work available; they're talking about "You will show up for 8 hours of work, every day for the next month, and work at whatever we put you on, or we will cut your support completely." Compulsory.

Which one might also think "really might not be that terrible; work done for benefits received" - but the reality is, 15% of the time this means my 76 year old Aunt Martha is required, by a petty bureaucrat who doesn't know her, to work 8 hours a day, on the other side of the city, scraping paint...

Etc. Or the out of work mother of 3 now has to work- but there's no child care provided- etc, etc, etc. It's just always been really badly done; and even if done well to begin with, the potentials for abuse are enormous, and never policed.

Phil said...

Ambac Group files for Chapter 11 Bankruptcy

A mere $1.68 billion of liabilities.

"Ambac Assurance Corp has about $57.6 billion in policies insuring credit derivatives and other financial products that are being restructured by Wisconsin regulators"

Is the derivatives bubble starting to burst?

Chaos said...

I would just note that there are few people who I trust implicitly to tell the truth about what's going on, and two (okay, four) of them are Elizabeth Warren, William Black, and our hosts.

Matt Taibbi's got a way with words, and Numerian over at the Agonist can really smoke'em on occasion.

Anonymous said...

Your nonstop promoting of the online video lecture is tiring.

I watched it - it is good, but is it worth $12.50? No way. That's quite a price to pay.

And it's not "interactive" in any meaningful sense of the term - it's just a video, play, pause, stop, that's it.

If you guys are desperate, maybe you could try setting up a monthly premium or special content or something. If the price was right, I would consider paying.

But $12.50 for a video lecture is a ripoff.

Hombre said...

GS - Are you kidding? $12.50 is too high?!! That's the price of a haircut at Great Clips!
It's one of the best bargains out there!

Read the concise comment from Chaos above, and get a reality check!

thethirdcoast said...

Personally, I would love the option to stop the the Social Security theft the US government has been inflicting on me over the past 17 years of my work life.

At this point it is probably impossible to recover any of the earnings that have been stolen from me by the government, but the possibility of ending further robbery is extremely enticing.

Increased funds to plough into precious metals, canned goods, and other survival gear would be most welcome at this point.

A Fall Guy said...

Canadians aren't just sleepwalking, they're sleep-running.

Mortgage debt tops $1 trillion

Oops, I guess I didn't read carefully enough....
"Canadians are being smart and responsible with their mortgages," CAAMP president Jim Murphy said.

After all, over the past 15 years, "Canadians total mortgage debt has increased by 194 per cent."
I'm glad we're so level-headed, and "are building equity in their homes and making informed, long-term mortgage decisions."

Didn't you know that in Canada, unlike elsewhere, real estate goes up forever. Good thing we don't need to learn any lessons from other places.

Ventriloquist said...

Blogger GS said...

Your nonstop promoting of the online video lecture is tiring.

I watched it - it is good, but is it worth $12.50? No way. That's quite a price to pay.

. . .
But $12.50 for a video lecture is a ripoff.

November 8, 2010 7:53 PM

Kudos to you GS for speaking your mind.

Problem is, This video is soooo 12 months ago . . .

Things have changed, events have happened, this video is frozen in time . . .

Twelve months ago Gold was at $1120 and QEII was not even on the horizon, and the ECB didn't even have a clue about Greece, and the Tea Party was just about visible, and Ireland was just the tip of the iceberg, and the US mid-term election was a cipher, etc., etc., etc., etc.

I&S, if you want to stay current with your rent-to-see videos . . .

stay current.


ben said...

thanks Ka and ghpacific for your responses in the previous thread to the Lira scenario. i do appreciate it. the podcast was great.

deflation it is! ;)

Phlogiston Água de Beber said...

* $12.50 for a video lecture is a ripoff.

* Social Security tax depresses consumption of survival supplies.

* Forced labor is only deplorable in Asian countries that are not under imperial control.

* Forefathers only had to muster enough courage to face off with the British Army, Royal Navy and a bunch of Hessians. Their wastrel descendants will need the courage of many more fathers and mothers to face the Derivative Beast.

* Having the above brought to our attention on the best doom-prep blog in the known universe. Priceless!

NZSanctuary said...

Greenpa said...
I think we may need the courage of our Five, or Six Fathers, and the 5 and 6 Mothers, too.

What sort of hippie commune did you grow up in? ;-)

Re: compulsory labour (labor): (a) projects such as graffiti removal are entirely the wrong way to head in a global economic crisis, especially when it is being compounded by other long term resource and population issues, and (b) as long as the corporatocracy still rules such a program will never really be done for the benefit of the people.

Redundant governance at work

One thing that stuck out was this:

A composting toilet was okay if made by a commercial manufacturer, but the same thing built by hand was flagged as unsanitary.

Nassim said...

El Gallinazo,

I hoped someone would come up with a good suggestion regarding the flies as we have a similar problem here in Melbourne at this time of the year. However the flies here are different from anything I have ever see. They fly extremely fast, are noisy, brown and bigger than their European cousins. If you smack them with a fly whisk, they may well recover and take off again after a moment's rest. Quite impressive really. If they smell meat, they go crazy. I had to install screens on all the windows as I don't crab-like spiders either.

Well, here is my suggestion - I'm on the waggon

Starcade said...

The moment QE stops, it's all over.

But QE might make it all over anyway.

Without this QE, tens of millions of Americans lose their last real shot at food and the like.

Yeah, that's going to end well.

EBrown said...

I have an idea for flies though I haven't tested it yet. If anyone does build the contraption I'm about to describe I'd love to hear the results.

Get a medium-size box with a fan mounted so that the suction side is pointed into the box. Fit it so there are not any gaps at the edge of the fan and the box side. Remove the wall opposite the fan blades. Place a second container of some sort over the back of the fan, and then cut a vent hole in this second box and stuff a coffee can into it. Stretch pantyhose over the coffee can. In the first box place something stinky in front of the fan and turn it on. Flies that enter the first box to check out the stink would then get sucked into the second box and blown by the exhaust into the pantyhose catcher. Once you have a sock full of flies dispose of it as you wish.

I've seen an example of this contraption for night insects. It had a lightbulb instead of stinky piece, but I intend to try building one for a fly trap as described above. Someday...

As a cautionary note - I've heard and read that providing more than about 50% of a chicken's calories in the form of flies can be fatal. I've heard and read various reasons for this, but I don't know the real answer so I won't put forth bogus explanations...

Bigelow said...

“The measures underscore concern around the world that the U.S. Federal Reserve’s expanded monetary stimulus will cause capital to flood into emerging markets.”
China to Tighten Control on Inflows of Overseas Funds Bloomberg

Ilargi said...

Well, Ventriloquist, I must assume you haven't seen the video. Why you would then still pass judgment i don't know.

"Twelve months ago Gold was at $1120 and QEII was not even on the horizon, and the ECB didn't even have a clue about Greece, and the Tea Party was just about visible, and Ireland was just the tip of the iceberg, and the US mid-term election was a cipher, etc., etc., etc., etc."

None of these items have any relevance whatsoever to what Stoneleigh talks about in the video. She's talking about the big picture, and you bring up details. Apples and oranges, if that.

As for the complaint that $12,50 is too expensive, there are too many different ways to look at that than we can discuss here. Decisions like that are never easy, certainly not when making money is not the prime objective, but once made, I never looked back, and I won't now. It's all too relative to too many factors. My decision was based on one prime objective: I don't want Stoneleigh to be forced to sleep in her car when she's touring, even though I know she would settle for that too.

95+% of people she meets on the road adore her, and a few do not. Obviously, those same sort of numbers apply to the appreciation of her video. And that's good enough for me.


eeyores enigma said...

Two rats are sitting in the maze;

First rat - Who died and left this schmo in charge of the cheese?

Second rat - Yeah, and why does he always put the cheese in the hardest place to get to?

The above scenario is fiction and about as likely as the average joe/jane understanding or even asking how money is created.

They all know they just have to scurry.

eeyores enigma said...

Second rat adds - (because he is the more inquisitive of the two) ...and how come there is never enough cheese to go around?

Stoneleigh said...


Twelve months ago Gold was at $1120 and QEII was not even on the horizon, and the ECB didn't even have a clue about Greece, and the Tea Party was just about visible, and Ireland was just the tip of the iceberg, and the US mid-term election was a cipher, etc., etc., etc., etc.

As Ilargi says, we're about the big picture, and that hasn't changed, other than to get worse. None of the factors you mention come close to being game changers. We have warned at various times of the role these factors will play, hence they are not external to our analysis.

If we updated our big picture for every small twist and turn we would have to spend a fortune doing so and would cease to exist. We may well provide a new video at some point, but do bear in mind that these cost thousands of dollars to make, and neither of us has a salary because we have committed ourselves to TAE full time. We live and operate on a shoestring and do what we can within our means.

$12.50 is about what it would cost here for an evening of mindless entertainment at the cinema, as provided by Hollywood. It probably wouldn't even pay for parking at any kind of major sporting event. You might get a week's subscription to an MSM newspaper full of misinformation, or you could buy a bottle of wine etc. The opportunity cost is really very low if you think about it.

For that sum we provide information that can make the difference between being able to protect one's family or living a life of destitution. I assume people would rather not live like the migrant families photographed by Dorothea Lange. That is what we are trying to prevent.

For our analysis of the up-to-the-minute details, simply read TAE, which is provided free to all. That is where we keep it current.

If you think education is expensive, try ignorance. (Derek Bok)

Stoneleigh said...

IM Nobody,

Thank you very much for your kind hospitality on my recent travels. I had a lovely time chatting, and learned so much from getting know more people and places and circumstances.

And remember, UR Somebody to me :)

soundOfSilence said...

@NZSanctuary - I would consider you fortunate. There hasn't been any raises where I am for the last two+ years. My annual review is a month off and I don't see any sudden policy change so that will be 3 years for myself.

@Bill Mcdonald - I was on the way home last night and had NPR on. I just caught the end of the story (they were broadcasting the BBC and the correspondents, from what I could tell, seemed incredulous). The Angola Prison Rodeo. Prisoners for a few bucks can climb in a barrel which a bull then runs into and a few other similar "entertaining stunts." It seems they had just witnessed some poor bloke get thrown and end up with "an obviously broken leg." Maybe something similar with the unemployed? (sarcasm)They would have a job and everyone would be entertained. Or maybe they could just go duke it out with a hungry lion?(/sarcasm)

Stoneleigh said...

M (from the last thread),

Truth be told, most young folks have zero interest in learning a trade or working with their hands for a living. I attribute this reality more to human nature than any grand design by the ruling class. Like water running downhill, the typical young person is far more likely to covet the air-conditioned music store as a place of employment as opposed to carrying hod up a scaffold in the scorching summer heat.

I've always told my kids that they must learn practical skills and must take on no debt in doing so. That is what all of them are doing or planning to do. Skilled craftsmen are worth their weight in gold.

Stoneleigh said...

Eliot Wave (from the last thread),

I bet most of you are unemployed.

Impending doom is a useful theme to explain your current situation. It helps to deflect personal blame

The successfully employed look at this stuff and say: LOSERS

You might want to start by spelling your name correctly. It's Elliott Wave, after RN Elliott, who worked on market patterns in the 1930s.

Many people are addicted to playing the giant game of musical chairs that we are all engaged in. Shame there is perhaps one chair for every hundred people. What do you think will happen when the music stops?

For those who are capable of recognizing the game for what it is, the sensible thing is to stop frantically dancing, quietly take a chair, and go and sit on the sidelines out of harm's way. That is exactly what the insiders are doing as they cash out, and what ordinary people should do as well if they want to preserve what they have worked hard for all their lives. Then they will be able to use it to look after their families, friends and communities.

Forget trying to wring every last ounce of profit out of a broken system. That is an addicts' game. No one should be looking to be stuck in the game to the bitter end, then desperately trying to grab for a share of the underlying wealth pie as the ponzi scheme implodes. The upside rewards are limited and the risks are huge.

Our readers know that we are trying our best to protect them from what we see coming. We are trying to keep them out of a predator-prey interaction where they are the intended prey - the people insiders are trying to cash out to. No one should be volunteerng to be one of the designated empty-bag-holders at the end of the day.

Greenpa said...

For the graph addicted:

I thought these were nicely done; and it even covers the ramifications for shipping.

They do leave some straightforward extrapolations to the reader; eg; if they're cutting quantity, they'll cut quality also; and; this is probably going on in a many many places, all unbeknownst.

(ok, I'm astonished, but pleased, that "unbeknownst" is recognized as a word by the spell-checker...)

Anonymous said...

I got no beef about the price of a Stoneleigh video. Personally, I can't spend that kind of money on anything that won't feed me or keep me warm at night and that includes knowledge. I just figure there's not anything on pay-per-view pertinent to folks like me anyway. Where I come from the saying goes...

Talk is cheap, but it takes money to buy whiskey.

This video is interesting in the sense that rabble-rouser, William Black, has been traveling around speaking too. Presented by the Department of Economics at Lewis & Clark College on February 13, 2010.

Why Elite Frauds Cause Recurrent, Intensifying Economic, Political and Moral Crises.

Who knows, maybe he reads and writes here too...

Greenpa said...

As part of the ongoing side-thread here regarding the future of universities and education:

I rarely read Fish's columns; to me he personifies the very worst of Old Professor Syndrome (and I'll point out I have several old professor friends who do NOT suffer from this disease).

They gave away the topic in the teaser, however, which is that someone is forming, de novo, a liberal arts college; theoretically striving to correct deficiencies. So I looked at it; it's useful, perhaps.

The article provides two things; a long list of recent books on the agonies of the liberal arts concept; and a brief description of the new college and its alleged practices (which strike me as totally pointless/hopeless).

Monsieur F.- I know I haven't responded to your requests for more information on my own thinking here- I do apologize. The problem is that what I have to offer is very limited, and consists mostly of multiple conversations which are not put into any sensible written form. Alas, I do not see that happening soon; too may other emergencies (like the need to totally reshingle The Little House before winter).

The only sense I can offer you is; my/our thinking is pointed at creating a community capable of maintaining open minds; not at any specific theories of education or knowledge (or fundraising; the #1 concern of current universities).

Stoneleigh said...

DIYer (from the last thread),

It seems that my mattress-stuffings have not appreciated that much, while the precious metals, most of which I have unloaded, have continued to climb. And interest rates haven't gone up because the Treasury just borrows from the Fed at 0% (or was it the Fed borrowing from the Treasury?)... Anyhow, it all just looks like so much financial masturbation until the Treasury lards up the TBTFs and various other entitled parties with this effortlessly manufactured money.

If they get into another bind, what will keep them from just doing it again? Another day another trillion.

They're aiming to inflate, but it isn't going to work. The collapse of credit unfolds far more quickly, once it reaches critical mass, than any attempt to debase the dollar, especially when attempts to debase the dollar will in any case be overwhelmed by a knee-jerk flight to safety into the reserve currency. Central authorities have no power in the face of the unified power of the collective (ie the aggregate of millions of self-interested, short-term decisions, all made in the same direction at the same time), when a tiping point is reached.

We are at or near a top. Whether we see it happen now or early next year makes little practical difference. What people need to do remains the same. Being early is not a problem. Being late would be a disaster.

Unknown said...

@Stoneleigh re. Eliot Wave

I have been more or less a lurker here since fall of 2008. I had already dodged a bullet by putting all my 401K into cash in September of 2007. The "big picture" that I&S have consistently espoused here lined up very closely with my actual experience and observations at a large real estate based corporation in Orlando and what was happening in the real estate market there. Partly based on the "lifeboat" articles here, and luckily, with a wife that trusts my analysis and intuition, I made major changes in my life and lifestyle. I now own a house and some land free and clear, have no debt, live way below my means, have stored food, fuel, etc. If TSHTF, I am probably as ready as I can be. If not, it doesn't matter, because I sleep better at night and certainly enjoy life more without all the worry and stress that led to 3 heart attacks before I was 55. For that, I can only be thankful for the wisdom and insight I have found here.

And I'm pretty sure Britney Spears charges more than $12.50 for a CD. 'Nuff said.

Phlogiston Água de Beber said...


It was fortuitous that I happen to live at just about the perfect place along your route home for that visit to be possible. I do hope we can get together again. There is still much to chat about and hospitality to enjoy.

I am quite happy being a Nobody to the world. Being a Somebody to you is a high honor for me and you know that UR more than Somebody to me. :)

Stoneleigh said...

logout (from the last thread),

At some point the devaluation of the currency will outweigh any benefit of the 'safety' of holding a bond and the cry will go out to, "gimme value, gimmie gold or anything worth something", and then bond interest rates will rise as those bonds sell off.

Yes, but not yet. Look for a dollar bottom in the not too distant future. What we are seeing is the kind of overwhelmingly bearish sentiment that lasting bottoms are made of. When everyone wants dollars, then they will be over-valued relative to other things, and that's when you want to be holding them already.

Eventually the dollar will die, like all fiat currencies, but first it will appreciate relative to available goods and services. What you need to do is to hold dollars so that you can purchase the goods and services you will need at a time when credit no longer exists and employment will be a very shaky prospect. At the point where you can afford to do so with no debt, you move into hard goods. You will be then protected against a dollar accident down the line.

Cash is not a long term bet, but it's the best bet going in the short term.

Stoneleigh said...

Snerfling (from the last thread),

Nope, only @ TAE do we see heartfelt, sincere, balanced & rationale responses to utterly ridiculous comments. Now why is this? I'm pretty sure it has to do with this site's left-of-center sentiment (you know, the rep for touchy-feely), and not with individual orientation.

If one person is asking something, even if they personally couch it in a dismissive or rude way, someone else is probably thinking something similar in more of a spirit of genuine enquiry. I answer the way I do for the sake of the larger audience, and so to spread more light than heat ;)

Stoneleigh said...

stoneturret88 (from the last thread),

Good behavior was mostly saved for the kinship group. It seems that scarcity of nutrition and intense competition can extinguish empathy towards ones foes.

Indeed. Tribalism is exactly what we can expect when there is not enough to go arround. The 'Us versus Them' dynamic strengthens, while Us becomes ever more tightly defined and Them becomes an ever more pejorative term.

I try to short-circuit this, by doing whatever I can do encourage the development of relationships of trust before things get difficult. It's not that I think the odds of success are particularly high in any given location, given human nature, but it's the most important factor IMO in determining the impact of what is coming. Whatever can be achieved in this regard will have been worth it.

Stoneleigh said...

UR Somebody,

I would have made a diversion if necessary, or planned a different route home, in order to drop in. And I would be happy to do so again. I enjoyed myself, as I always do when I find kindred spirits :)

I'm sorry I couldn't stay longer. I'll see what I can do next time.

Stoneleigh said...

Eliot Wave (from the last thread),

And if Stoneleigh had payed attention to her often stated,
"Watch the financial markets; the real economy follows with a short time lag,"
Then she wouldn't be surprised by either the +2% 3rd quarter GDP and the +150000 jobs.

Stoneleigh, the principle underlying your quote operates in both directions.

What makes you think I am surprised by the real economy figures? The real economy does indeed follow the markets in both directions, as I have always said. I said when this rally began that the fundamentls were going to look less awful for a while, and that the real economy would hold up for a while beyond the top in the financial markets.

I will be looking for the real economy to top out and reverse perhaps a few months after the stock market, although the exact time lag will vary with the severity of the next phase of credit contraction.

In the meantime, despite better superficial numbers, more and more people are falling off the back of the bus all the time. Many are already living the depression. When that number reaches critical mass, we will see a general recognition of where we are going. For now, increasingly widespread suffering is largely invisible to the masses, who focus only on their own situation, or that of the elites, as reported in the MSM.

Draft said...

Stoneleigh - I'm enjoying reading your replies to past comments - nice to have you back!

zander said...


Staying anonymous, less reachable and more undetectable is about the coolest, savviest thing you can do.
Wallow in it.


The Anonymous said...

"Stoneleigh said...Being early is not a problem. Being late would be a disaster."

So what then about the poor people who followed Prechter and got out of the market for good back in 1987? Even the march 2009 market lows were still 3X higher than the stock prices they were told were "unsustainable" back in 1987. Same with houses. After 23 years, they could have the place about paid off, yet they continue to rent, with no end in sight.

Their contemporaries who ignored Precther's tale of deflation back in 1987 have enjoyed the last 23 years of gains and likely are getting ready to retire. Those that listened to him are so far behind their contemporaries that they may have to work for the rest of their lives.

Bottom line, being early certainly was a problem for them. Being early has destroyed them.

Jim R said...

Thanks for the reply. I trust you worked out your technical problems and are home, safe, and comfy with the lights on.

Yes, I was mostly just carping in the last post. I agree with your logic, but my limbic system pines for shiny metals. And the bond market(s) still do not make sense to me.

jal said...

Hi Stoneleigh!

Its good that you found time to respond to so many comments.

(Even if its a repetition of the messages.)

QE2 is going to keep/give the appearance of a healthy economy.

Its a smoke screen hiding the people falling off the bus.

We are not in the 30"s with slow or no communication between regions. The web is making it possible for everyone to be aware of the wreckage.

ghpacific said...

re: courage of our forefathers, this is interesting,
Most were 'men of means' when they signed.

My forefather was my grandfather that arrived in Seattle on a ship from Japan in the late 1800's. That took courage as well, (or desperation as I heard Japan was having some economic issues at the time.) So I owe them all and can't complain.

Stoneleigh said...

The Anonymous,

So what then about the poor people who followed Prechter and got out of the market for good back in 1987?

When you find yourself, metaphorically speaking, on the Niagara River in a canoe, and you know the Falls is up ahead somewhere, what would you do when you start to hear white water? Pulling over to the side to portage, even if that turns out to be premature, is the sensible thing to do. Being wrong in that direction is not the end of the world. Going over the Falls in a canoe would be.

Yes there are people who have missed out on opportunities, but there are many more who will hang on to their supposed gains for long enough to lose them all when the music stops. Only those who get in early and out early ever really make money in a ponzi scheme.

Prechter is not simply a permabear. In the 1982 he told his readers to pile into the market with everything they had in anticipation of a massive mania, and he was right. Who else was saying that then?

Since then he has urged caution, because he understands where credit bubbles always lead. This one has been unprecedented in human history, but it will end the same way as all the others - qualitatively that is, while quantitatively it will be much worse.

If you are still playing the game of musical chairs when the music stops, you are virtually guaranteed to take stupendous losses, even if you are currently very wealthy. There are many people who think themselves smart and fleet-footed enough to get out on the top tick. It isn't going to work when everyone is grabbing for one of the pitifully few chairs, or rushing for the tiny exist in a burning theatre, whichever metaphor you prefer.

If you get out, you can sit on the sidelines in (relative) safety.

Stoneleigh said...


Well it's hard to respond much when I'm traveling (sometimes 7-8 hours a day), so I try to catch up in the brief periods when I'm back for a few days. I'll be off again to Michigan in 2 days, and then Europe for a month, where Ilargi and I will tour together again. Wish us good internet access :)

jal said...

Cough ... cough

Just wanted to announce that I'm changing my priorities.

See my profile.


Draft said...

Stoneleigh -

"The Anonymous" is a bit ridiculous about it, but I had a related question not about whether we'll see a deflationary crash, but rather the speed of it. I'm wondering what you think about the possibility of having a slow Japan-like deflationary crash that takes place over several decades. I guess to put it another way, even if the destination is the same place (way way down) is there a reason it has to happen quickly? I know people react on fear, but if governments continue with sleight of hand all the way down, might they not be able to slow the process down just like Japan did, even if they can't avoid the final outcome?

(Now, I know that five years from now or so we'll be in the midst of a peak oil-caused energy crisis which will have its own effects, but isn't it plausible that we could have just a slow decline from now until 2015 rather than a faster crash?)

Stoneleigh said...


I'm wondering what you think about the possibility of having a slow Japan-like deflationary crash that takes place over several decades. I guess to put it another way, even if the destination is the same place (way way down) is there a reason it has to happen quickly?

Japan's circumstances were special. They had an enormous pile of money to burn through when they topped out in 1989, which allowed them to postpone the inevitable. They also had an export-oriented economy able to take advantage of a massive global consumption boom, which added to the effect. They still haven't faced their day of reckoning, although it's coming.

We are already in a huge debt hole, and virtually all developed coutries are hitting the wall at about the same time. There will be no exporting our way out of this one. Our day of reckoning will come very much more quickly.

Positive feedback spirals start slowly and build up momentum, in one direction or the other. Although deflation can take time to manifest, the consequences can unfold terrifyingly quickly once a tipping point is reached. This is why we tell people to prepare in advance. You can't be late, or it really will be like going over Niagara Falls in a canoe.

Steve From Virginia said...

We're all sinners in the hands of an angry stock market! Or is it commodities market? The Wall Street Journal sez 'deflation' while finance analyst Sarah 'I am NOT the town drunk' Palin insists on IN- flation.

When in doubt, ask an expert!

Is crude in a long- term bull or bear market? Good question! I bet 99% of all analysts would suggest a bull market. I would suggest, "Bull(shit)" and point the $147 high in 2008. The average price in that year was a lot higher than the average price of 2009 or this year's will be.

We are in a long term bear market for crude with all of the ramifications, folks!s Oil price is a good 'wealth' barometer and we are a lot less wealthy than we were back in the good old days!

Why does the Fed target stock prices and not energy prices? $20 crude in quantity would fix the econ, right?

Bernanke can't drive oil prices lower. Adding or subtracting dollar reserves has no effect on real world crude prices. Permanent Open Market Operations can push prices higher but POMO is not a force in the crude markets. POMO could sell oil futures but what happens when longs clamor to take delivery? The Fed has no oil to deliver. Bernanke, to quote Richard Nixon, is a quivering "pitiful, helpless giant".

I added the quivering part ...

Speculation takes on a life of its own, regardless of the Fed, and its actions follow its own dynamic. This is true in all markets including money F/X markets.

The simple fact that the Fed cannot drive prices down when needed tells the world all it needs to know about the limitations of central banking. Who cares about QE, anyway?

scrofulous said...

Hi Stoneleigh

"When everyone wants dollars, then they will be over-valued relative to other things, and that's when you want to be holding them already."

Yes, quite so!

The only proviso I would make is that some things might not be available at a reasonable price and that might be the case for gold, (though I really would not like to be buying at current prices).

If one looks at Canadian Central Fund (CEF) and uses Yahoo finance to compare it against the TSX DOW and S&P over the period from 2008 to present date that gold fund actually seems to increase in value during the dip.

I would not trust these Yahoo graphs very far, but, if the range in that comparison is extended to a five year interval there looks to be a fairly sudden peak in this fund that presages the first dip in the markets by 2 or 3 months. I find that interesting but I think not something to bet ones hard earned dollars on. (just all those easy or ill gotten ones)

My position is that I hold gold as insurance and not for speculation as I believe, like anyone no matter how elderly, that I will live for at least twenty more years and so will want to buy food easy to gum in those elder years.:)

Hombre said...

StoneLady - "If one person is asking something, even if they personally couch it in a dismissive or rude way, someone else is probably thinking something similar in more of a spirit of genuine enquiry. I answer the way I do for the sake of the larger audience, and so to spread more light than heat ;)"

Spoken like a true Quaker! ;-)
Your answers alone are literary gems and reflect the presence of a knowing spirit, both wise and honest.

Whether one or all of these millstones which are hanging over our heads (debt, energy depletion, environmental destruction, etc.) fall immediately, sometime soon, or in a few years, I am sure what I have become aware of by reading TAE and similar sites will serve me and mine well.
Thanks very much to both Ilargi and Stoneleigh (whom I always refer to as the StoneLady as a term of endearment.)

Linda said...

@ Stoneleigh,

I'm curious what trades or crafts your kids will know. I have 3 teenage daughters. I will strongly advise them to not go away for 4 years to receive a meaningless diploma and a huge huge note. We're deliberating on options, and community college is among them, although the commute is 30 minutes. Also maybe interning on a small farm, etc. The youngest is brilliant; I'm encouraging her now to study medicine. I believe we will need doctors. I hate to be sexist, but if I had boys, I'm thinking we will need many more skilled local butchers/renderers, etc. Linda.

Ashvin said...

I highly encourage people to take alook at Dr. Steve Keen's interview on He simply explains the dynamics of a credit bubble and bust in a credit-money economy, and points out some of the flawed ideas of neoclassical, Keynesian and Austrian economists alike.

And he also touches on the argument of why severe deflation is much more likely than hyperinflation in the short-term.

Ric said... it worth $12.50? No way.

There's something obscene about this. When the villagers in The Magnificent Seven tell Yul Brynner's character they collected everything of value in their village to hire him, he says: "I have been offered a lot for my work, but never everything."

Price doesn't determine value.

Greenpa said...

The Anony: "Their contemporaries who ignored Precther's tale of deflation back in 1987 have enjoyed the last 23 years of gains and likely are getting ready to retire. Those that listened to him are so far behind their contemporaries that they may have to work for the rest of their lives."

I have an alternative viewpoint - and have lived it.

I "got out" in 1987 or so; without ever having heard of Prechter; I didn't follow him ever. Just myself. I looked and saw, and said to myself "these guys are nuts; there is nothing holding all this stock growth up, nothing at all." So I did, indeed, cash out a little stock stuff; a small bit I had as an inheritance.

I put the money into my own business/life. No, indeedy, I didn't watch the dollars accumulate there in Cloud Cuckoo Land. I worked; acquired some more skills, and lived a life I wanted to live.

Now, here, alas, I see I have no retirement funds. Which makes me ask; why in hell would ANYONE want to "retire" - from the life they wanted in the first place?

Those with lots of CCL Dollars now have the option of living out their remaining years in their "Golf Community Mansion" - overlooking a golf course, inside a gate. Or, ok, living on a yacht in Monaco.

That is, assuming that world holds together. Maybe; maybe not.

Either way, I'm just here stuck with - a life. Alas I have no future to look forward to, of sitting at a bar swapping stories of my glorious past, with other retirees. I just have- a life still to live, out ahead.

And don't give me the "yeah, that's great, but very few are able to arrange their lives so they 'live their dream'. "

T'ain't so. Everyone can. They just have to live it; rather than buy the "work really hard at what you hate so you can quit doing it someday!" line. (And let us take care of your money for you, while you wait.)

There may indeed be a sucker here in the room somewhere.

Greenpa said...


"See my profile."

wow! So; you're involved in the stem cell research bubble, and your co-workers just managed to get ALL your personal cells to revert to just post-embryonic!!??

Way cool!


Phlogiston Água de Beber said...

@ WgS

Thanks for that link to Bill Black's lecture. I say anyone that watches it and still says the system can perform is a troll. Stoneleigh is right. Corruption is the system. As it has always been. The latest improvements have simply insured it is incapable of any trustworthy acts worth mentioning.

TheAnonymous wants somebody to believe that people who stuffed Wall Street with their extra money since 1987 are now floating on cloud number nine with paid for homes and a well funded retirement. Some people did get that lucky and some did not. The market giveth and the market taketh away.

It was about 1987 that this sometime Somebody learned his lesson about the finance fraudsters. I've stayed away from Mr. Market ever since. I have serendipitously enjoyed some financial benefit from some of their frauds and I'm not at all unhappy about my situation.

Shill for Mr. Market if you must, but do yourself a favor in your private moments and consider what it will mean when the Derivative Beast swallows Manhattan in one gulp and considers it less than an appetizer. Ben'zuzu can only dance for so long before those old legs give out. Then Beelzebubble takes that shiny golden key and unlocks the Beast's cage.

Phlogiston Água de Beber said...

@ Linda

There will absolutely be a great need for butchers and it is not closed to women. Every locker plant I visit has female butchers. Doctors should, of course, be selected from the brighter end of the population, but bright people can do many useful and important things even with little formal education.

Jeotsu said...

The Anonymous said: Bottom line, being early certainly was a problem for them. Being early has destroyed them.

This statement is very important, and bears closer examination.

It speaks to the deeply held (but rarely explicity stated) belief in our society that not making money = losing money.

People who internalize this philosophy end up pushing the risk envelope further and further. A tiny % will win big (and thus make the news and write books), the vast majority become the "buy high, sell low" victims that lets the "winners" make their riches.

Which brings us to a problem which our western civilization refuses to address- how much is enough? I would argue that being warm, dry, and fed (and access to basic medical care) is enough. You certainly notice the absence of one of those necessities!

But as a civilization we roared out of subsistence, and into "there are no limits" consumption. There was always something bigger had better we "had to have."

So long as we strive to absolutley maximize profit at every stage, in order to be a "winner" we are not only doomed to a continued cycle of boom and bust, we are also running towards that cliff-of-collapse far to quickly.

As I said previously, I hope "extend and pretend" buys us a bit more time. Lifeboat building continues, but takes time. I am trying to make hay while the sun shines, because the black clouds on the horizon look mighty dark. (And I make that comment as a farmer, for whom getting the hay sorted each year is a significant undertaking...)

Gravity said...

Nostradamus [1568]

Centurie VIII
The copies of gold and silver inflated, which after the theft were thrown into the lake, at the discovery that all is exhausted and dissipated by the debt. All scrips and bonds will be wiped out.

Phlogiston Água de Beber said...

An interesting interview with Wendell Berry over on Counterpunch.

"Everything Worthy is Under Fire"

Anonymous said...

IM Nobody,

You are consistently kind, courteous and your posts provoke smiles upon my freckled face.

I personally got a great deal of insight from the discussion with Dan and Ruben the other day on mousey types and subsequently saw the wisdom in at least not reacting to craziness. However, I hope I never develop a habit of tossing out babies with the bathwater either.

I agree and have since the beginning of this banking spectacle considered it a monkey trap. If you aren't familiar with that parable of greed, urban dictionary says:

1. A trap to capture various monkeys used around the world which consists of a staked container with a hole cut into it just wide enough for a monkey to stick it's empty hand into. The container is baited with something attractive to the monkey. Monkey reaches for bait and then will not release the bait and cannot pull it's hand out of the trap with bait in hand. It is then captured.

Considering today's usage of the word captured, it seems even more apropos.

Anyway, I'm running out of net resource time for awhile so I'll hand you back the banana and then split. You can keep the nuts.


Ruben said...


I have done quite a bit of thinking and talking on the trades question, in this forum and others.

I think a career in solar hot water is a very, very good bet.

General medicine, yes. Specialization, no. As far as butchery and bakery etc. If there is a love, that would be best, because I don't think there will be a lot of money. Barter perhaps. But first the baker must survive competitions from the big box stores adulterating the flour with gypsum dust. But love of baking or meat smoking might carry them through.

I also think there will be a pretty good business in modifying and fixing electric bikes/scooters etc.

I personally think it will be a generation or two before we need many blacksmiths, as romantic as that seems.

Dmitry Orlov has interesting things to say about employment--that being work someplace with a free hot lunch that has lots of supplies you can steal and sell on the black market.

The Anonymous said...

Stoneleigh said..."When you find yourself, metaphorically speaking, on the Niagara River in a canoe, and you know the Falls is up ahead somewhere, what would you do when you start to hear white water?"

The metaphor is misguided. We may be on the niagara but every time our deflationist thought he heard "the falls dead ahead", he was wrong.

Again, consider the 1987 deflationist:

1987 -- Guys, Niagara falls is dead ahead, pull over now while you still can!!!

Those that did not listen found out it was minor ripples, nothing more.

1993 -- Guys, I hear it, Niagara falls dead ahead, pull over now while there is still time!!!

Those that did not listen found out he was hearing rain, nothing more.

1997 -- Guys, I hear the rapids dead ahead. I know I say that every time, but this time its for real -- honest!!!

Those that did not listen found out he was hearing nothing -- no rapids in sight.

2000 (as whitewater is now obvious) -- See! I told you so! Get out now while you still can!!!

Those who do not listen do get bumps and bruises on a class II rapid, but they survive, far far better than their 1987 bretheren.

2002 (as the whitewater calms) Guys -- its not over, not by a longshot -- pull over NOW!!!

Those who do not listen are rewarded once again by years of tranquil waters.

2006 OK guys -- Ive been wrong before, and I know before I said, "but this time its for real", this time, I really really really mean it -- pull over now!!!

Those who do not listen go over a class III rapid, but even as it bottoms, they are far far ahead of their bretheren who got out in 1987.

2010 -- Just wait, its coming you will see -- pull over now while you still can!!!


23 years later, those who did not listen are far far ahead and will be reaching home soon. Many of those who pulled over back in 1987 will die out there still navigating the river.

23 years of being "early" has ruined them as they kept hearing the falls "just around the corner", and every time they have been wrong. At what point, if ever do they conclude, maybe, just maybe, I need to get my ears checked?

Phlogiston Água de Beber said...

The question keeps coming up as to whether or not Ben'zuzu's QE's can somehow conjure prosperity back into the Usanstani economy. Here is what one long dead and once very respected economist had to say about that kind of thing.

"Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor."

From where I sit, Ben'zuzu has done a remarkable job of proving Lord Keynes right on that point. For QE to have any chance of igniting prosperity for the masses, it would have to be slathered liberally upon most of the population. In corrupt social darwinian Usanistan, such a thing would be indistinguishable from magic.

But, as Ilargi and others repeat as often as necessary, making us prosperous isn't part of the agenda. Ben'zuzu is doing what little he can to keep the banks and government alive a little longer. A little time to prep or party as one sees fit.

scrofulous said...

The Anonymous
It only takes a 2008 to make nonsense of your statement. But then did you have a boat let alone one in the water?

Cassandra said...

You just have to look at the fed's own AMBNS data spike in 2008 to see something atypical (and previously undocumented) occurred.

Given the alternative, sure we'd all settle for a gradual erosion of our purchasing power, but are you advocating plausible long term inflation in this current context?

Pumping commodities with fresh print may be the only way left to get those debt contracts disseminated and served on us, but even that will ultimately force defaults, it's just maths.

As an aside, doesn't speculating on basic food stuffs seem kinda, well, sick?

Phlogiston Água de Beber said...

23 years later, those who did not listen are far far ahead and will be reaching home soon.

Home you say and far far ahead you say. Oh, if only it were true. As even the pathetic MSM are wont to inform us, many have instead reached a homeless shelter, to which they may be admitted. Others are eating out of food pantries and food stamps. People get ruined everyday, for many different reasons. The history of ruination did not end in 1987. It will never end until H. Sapiens is extinct. But a really big one lies ahead of us.

I think it is time you threw that broken record away and tried another ridicules criticism. I think we're up for it.

Hombre said...

Jal - Wishing you and the new, joy and good health!

News Item!
NEW YORK (Reuters) – A Chinese credit ratings agency downgraded the United States' sovereign credit rating on Tuesday, citing the Federal Reserve's controversial move last week to pump more dollars into the U.S. economy.

APC said...

Great post, interesting articles.


Thank you for not embeddingn Jesse Ventura. God loves small mercies.

Woody said...

Welcome back Stoneleigh!

Still hoping you'll find time to comment on Lira's hyperinflation scenario. Although his in/deflation definitions don't match yours, he makes me wonder whether increasing prices of useful items could be dwarfed by the massive collapse of RE & derivatives.

In such a case, the big picture would be serious deflation, but might as well be inflation for most of us.

I see Lira is now hoping to monetize his popularity with a webinar: Lira's Blog

A Fall Guy said...


I live in a rural off-grid area with relatively low incomes and a strong sense of community (some key reasons we moved here). I think my community is already one step down the curve (since it never fully made the last step up). I am trying to build up some of my own meager skills, but am in awe of some of the people here.

Skills that are in demand (and aren't overly reliant on petroleum) include

- solar hot water + plumbing and water management in general (I agree completely with Ruben on this one). This includes irrigation (small-scale, gravity), rainwater catchment, wells, pond construction, etc). Water is essential to live (and hot water is pretty high up on the luxury list).

- solar electric, micro-hydro, small-scale wind power + electricity in general. Going without electricity at first, we learned that lights are also high on the luxury list (as well as refrigeration and washing machines).

- veterinarians (esp. for livestock, which are rare except for horse vets)

- mechanics (esp. those who can fix old cars with salvaged parts, and who can fix things such as tractors on site).

- good carpenters and builders (there are quite a few jack-of-all-trades, but fewer who are known for very high quality work, and those are the ones in demand).

- masonry stove builders (super efficient heaters that reduce wood needs, and hence save trees, chainsaw fuel and time, as well as pollution).

I think my main suggestion might be that your kids pick something practical that they enjoy and do it really well. It's hard to excel at something you don't like, and being known as an expert or skilled artisan at something brings demand.

Cassandra said...


Blogger at 'hedge

"Also, all money, whether paper or commodity is "oily". The real value all money represents is a claim on an economy's energy consumption at any point in time. Net energy gains produced from natural resources that are then embodied into the production of goods and services of exchange value to which profit (credit) is added. All gold and paper bugs need to wake up to this. Money is energy. Golds historical monetary trust was always due to the energy it embodied. To replace an ounce of gold required access to an enormous surplus of energy just as it does today. Scarcity has nothing to do with it, scarcity is just another way of saying that gold requires enormous amounts of energy to find and extract. Do we really need to waste the world's last remaining sources of net energy surplus digging up shiny metals to embody the energy wasted in digging up the metal in the first place? Insanity. Makes me wonder, what energy exchange value will all this gold and silver have 20 years from now when mankind does not have the net energy available to even produce enough food? The world does not need and cannot afford gold money, let alone more excuses for resource wars. We need 21st century solutions to THE age old problem that has always plagued mankind and always will. We need more energy (money). "

Phlogiston Água de Beber said...


That blogger might be a little over the top, but consider this. The quantity and kinds of money instruments we have now wouldn't exist if it were not for the oil age. Once the production decline really begins to bite, money is likely to lose a lot of its utility even if it should not become scarce. Things will become a lot less easily replaced and therefore less easily parted with if they are useful.

I agree with Stoneleigh that finance will batter our living arrangements before we actually find ourselves running out of gas (petrol to our cousins). My interpretation of it is that the control frauds know TEOTWAWKI is coming and they are trying to steal as much as they can before it blows up. I assume that given their love of money, they cannot imagine that it might lose utility. Interesting times indeed.

Alpha Beta Soup said...

AWWWWWW!!! Congratulations JAL! You will be an awesome grandpa!

He looks adorable, and healthy!


Linda said...

Thanks to IMNobody, Ruben, & Fall Guy. I think the notion of teaching our kids is getting short shrift. Agree large animal vets, solar hot water, water infrastructure of any kind.

We have 10 acres only. I also think about hops & a brewery. I lived in Germany in the 80's & loved the small breweries.

We have so much to learn!

ben said...

greenpa said,

"And don't give me the "yeah, that's great, but very few are able to arrange their lives so they 'live their dream'. "

T'ain't so. Everyone can. They just have to live it;"

this tony robbins moment is dedicated to the greenpa brothel project.

TechGuy said...

GreenPa Wrote:
"Now, here, alas, I see I have no retirement funds. Which makes me ask; why in hell would ANYONE want to "retire" - from the life they wanted in the first place?"

Not everyone is healthy enough to work indefinately. Sooner or later something happens that prevents you from working or working enough to pay all the bills. You don't have to stop working, but it is wise to have savings incase something bad happens. What if you get in a car accident, or your beaten by a Street Thug. You get a serious illness.

Not everyone is self-employed and most people become unhirable after the reach there late 50s, early 60s. Forced retirement.

Archie said...

Not sure if blogger gobbled this post or not. I'll give it another try.

I have a great deal of respect and admiraton for Chris Floyd's passion and writing acumen. This entry may just be one of his best.

Realm of Lies: Echoes From History Haunting the Present.

A Version of Pasternak's "Hamlet"

The hour is at hand: it calls the actor.
The crowd grows still as I step through the arch.
There's the cue: an echo from the future.
I must come forth and give the fated speech.

A thousand eyes, in darkness, throng about me;
Like Roman swords, they'll pierce me till I bleed.
O if it be Thy will, Abba, Father,
Then take the proffered cup away from me.

For I adore your rigorous conception,
And am content to play my given role.
But these new lines will scorch the throat that speaks them;
This once, I pray, remove me from the bill.

No: I see the acts have all been plotted;
The journey's end already has been willed.
I'm alone, while the world drowns in falsehood.
Cross this stage, and you cross a killing field.

Translated by Chris Floyd

Alan2102 said...

"DIYer (from the last thread), It seems that my mattress-stuffings have not appreciated that much, while the precious metals, most of which I have unloaded, have continued to climb."

It was a shame that you listened to those encouraging mattress-stuffing (by which I assume you mean the advice to hold dollars in electronic form), instead of sound, lucrative investment in physical precious metals. The precious metals have been the BEST investment category of the last decade. And it will continue that way for some time to come. The fundamentals favoring PMs were compelling even 10 years ago, and they are much stronger now.

I did a bit of dollar-hoarding myself, years ago, after I became convinced that deflation was a possibility. That move wound up costing me a pretty penny.

Stoneleigh: "They're aiming to inflate, but it isn't going to work."

We shall see. It shows every sign of working (just read the daily financial news, last few weeks), and shows many signs of having worked over the last year; e.g. numerous key commodities all up sharply.

This is NOT the kind of thing that happens in a deflation. Commodities go DOWN, not up.

Stoneleigh: "Cash is not a long term bet, but it's the best bet going in the short term."

You mean dollars? Electronic (non-physical) dollars? If so, you must be kidding. The U.S. electro-dollar is unquestionably the wrong place to be at this time, at least with any substantial sum. Such funds can be stolen or vaporized at any moment -- and probably will be. It is a good idea to have some physical cash in your possession, for use in a systemic crisis, but that's unrelated to the matter of preservation of substantial or life savings in electronic form. The U.S. dollar, as an electronic entity, is a terrible store of wealth, or investment, at this time.

The Anonymous: "what then about the poor people who followed Prechter and got out of the market for good back in 1987?"

Yes, or for that matter the poor people that Prechter scared-away from gold. Prechter's target for gold was $180, and though I have not seen him mention that figure lately (not surprising), he insisted on it for many years. The classic bad call. I feel sorry for the people who listened to him. They've missed out on one of the great bull markets of our generation -- gold up 5X in 11 years, and closing in on 6X!

The deflationists keep calling for much lower gold prices, and stock market meltdowns, and U.S. currency appreciation, and lower commodity prices, etc., etc... but those things just aren't happening, and they show every sign of continuing not to happen (and indeed they are going in the opposite directions, with the possible exception of the stock market).

But, of course, past performance is no guarantee of future results. Things could turn around on a dime. It just doesn't look like they're going to.

NZSanctuary said...

Coy Ote – re: your link to the Chinese rating agency downgrading the US. I loved this quote:

Dagong's analysis was not complete "but some of the points they raise are true," said Herbert Kaufman, professor emeritus of the W.P. Carey School of Business at Arizona State University . . . Kaufman emphasized, however, that Dagong's analysis failed to take into account the United States' historical ability and responsibility to repay debt.

Yeah, when the actual circumstances at hand point to a negative outcome ahead, but the historical circumstances do not, let's use history as our guide. Tell that to someone 90% of the way through their descent from falling off the roof of a skyscraper – the drop so far has been fine . . .

Starcade said...

I'm surprised no one has discussed the "phantom missile" off of California last night.

Basically, I have but one thing to say about the 30-plus pages over on Karl's group tonight:

If that thing was a missile, and that missile was a message from China to cut out QE2, it's all over but the nuking.

Why? You have but two options. You can knuckle under at that point, or tell China to screw off.

Tell China to screw off, and it's just a question of whose nukes go off first.

Don't tell China to screw off, and then you have two choices. You would then have to effectively default on the US National debt today (screwing off China AND making the US$ a big fat zero) or ending all entitlements plus all other non-debt-service spending (at which point 40,000,000 people at least do not see the Spring of 2011, and decide how many people they want to take with them).

That's why I think this was either a test gone wrong or the like. If this is China, it's all over -- NOW.

M said...


No chip here; we all make our own choices.

Dan, thanks for the response


As I recall, your son is a carpenter in training, or is seeking such a situation. I think your advice regarding ‘practical’ skills is well founded; however, and as you well know, no part of the real economy functions in a vacuum. In fact, the building trades have been particularly hard hit. So how is a young person to negotiate the ambiguous transition between the possibility of collapse --at which point their skills really might be worth their weight in gold--and the current holding pattern which marginalizes manual skills and amplifies the naturally optimistic inclinations of young folks seeking to succeed in the same manner as their educated parents?

A lot of traumatized craft and trades people have already answered that question in selling their tools at dirt cheap prices. They are simply disgusted that their chosen occupations have left them high and dry and they certainly see no likelihood of their skills coming to the rescue anytime soon. In fact, many in the building and manufacturing trades have returned to school, taking on student loan debt no less, in the belief that they will have been retrained and retooled for that day when the economy fires up once again.

It’s not hard to envision a double dose of tragedy and hardship in the aforementioned situation. At the same time, and as the sage wrote (name escapes me) ‘ we understand life looking back, but we can only live life going forward'.

What you might term as “running over the cliff” others might term as living life by going forward. They’ll take their chances, and if worst comes to worst, do their learning at the bottom of a long hard fall.

Like the Akido master rolling and falling on concrete, the suppleness of youth is amplified by the belief they will roll unharmed out of the fall. The inertia and dread of a frightful future, on the other hand, can be like a rigor mortis of the spirit. So I tread carefully, when considering how to advise a young person. In fact, it’s beyond my limited capability to do so, given the incredibly complex circumstances brewing in current society.

zander said...


A longer and more detailed fleshout of the monkey trap and the psychology surrounding this idea can be found in Greer's masterpiece "The long descent"


Stoneleigh said...

Linda and M,

Regarding practical skills, my eldest daughter is training in primary healthcare. She's going to do massage therapy and then nursing. Bing a doctor would involve far too much cost and far too much brain space wasted on things that won't be applicable in a few years time. She'd like to be a nurse practitioner or a midwife.

My son is an opera singer (a tenor), which isn't the most obvious practical skill to go for, but nevertheless does require years of practical training. Either he makes it in that field or he'll end up a traveling bard. Either way, entertaining people rarely starve.

My youngest daughter is thinking of carpentry, but she's young enough at this point to be able to explore a number of options before making a decision. She's also interested in auto mechanics and the workings of various kinds of machinery.

None of them will graduate with debt. All of them could obtain their skills from those who already have them if they were unable to finish the formal education programme. At some point, people won't ask for a diploma if someone obviously has the skill required.

Stoneleigh said...


I haven't forgotten about Gonzalo Lira. It's just that life got hectic. I will get to it when I have a chance.

Stoneleigh said...


Congratulations :)

jal said...

AND YOU thought that you did not have enough info to make any decisions.

Is the only answer GROWTH?

Government austerity measures may have to be rethought if the recovery slows, the International Monetary Fund (IMF) has warned.

geee! Make up your mind!

Greenpa said...

As The Empires Crumble Dept:

"The Washington DC region ranks first among the country's 10 largest metropolitan areas on an index that measures life expectancy, education and income, according to a report to be released Wednesday...

White D.C. residents have the longest life expectancy of whites in any state, 83.1 years, the report says. That is 12 years longer than the life span, on average, for blacks in the city. The average life expectancy for blacks is 71, the lowest for blacks in any state...

The District has the highest infant mortality rate in the nation."

ho hum. I see our nation responding urgently to this horrifying disparity. (that's a joke.) What a shock that our capital has the richest white people who can pay the most for health care, and simultaneously, just down the road, a black population with the poorest health care in the country...

awful, huh. And it's been this way, actually, and we've known this was true; for decades, at least.

Symptomatic. Mostly of crumbling societal function. The tenor of this article is highly indicative. No moralizing, no pointed fingers, just statistics.

Dan said...

@ the issue of skills, etc.

IMO, the skills that matter are the skills that are life-sustaining. For me that means localvore farming, carpentry, baking, wool-spinning, etc. And as a foundation, I see daily meditation practice and a commitment to non-accumulation "theology" (for lack of a better term) as critical to the positive pursuit and embracing of such skills.

I have to admit that I get a tad heavy-of-heart when I read the comments at ZH vis-a-vis gold and silver accumulation and investment. For what purpose? To game the already gamed marketplace in order to get a piece of the tainted Capitalist pie?? It occurs to me that greed and fear are the primary devils, not Goldman Sachs and Ben Bernanke.

I also find Denninger's calls for "peaceful" revolt rather amusing, in a sad way. Peaceful non-violent resistance to the destruction of our economy by the lords of Wall Street and Constitution Avenue cannot, in my opinion, be carried out by those whose words and hearts are full of hatred and fear and anger.

I know I come across as condescending, and I do not intend to do so. I am fearful, and I am greedy, and I feel hate, and I believe that focusing on those character flaws is as important as developing the skills needed to survive the coming decades of struggle.

Greenpa said...

ben - I loved it! :-) thanks, dude.

tech guy: "Sooner or later something happens that prevents you from working or working enough to pay all the bills. "

I was aware. The thing is- what the standard "slave for the man then retire" pimps sell is the idea that if you buy their policy, you WON'T have "something happen", or, you'll be able to pay doctors to patch you up, so you can keep sitting at the bar, eating beernuts and swapping lies.

Actually, "something happens" to everybody, someday, regardless of your medical insurance. And, incidentally; they're trading you your healthiest years (work) for your senility (retirement). "You slave for us while you're young, and we'll take care of you when you're feeble and drooling!" What a deal!

"Security" - is. an. illusion. One of those little items we all "know" - but really don't want to believe; and so we reinforce our disbelief by acting as if security is attainable. "If I can just get another 100k in my 401, I'll be safe!"

"See, I've got money for my retirement!" Oddly, that has never been an effective cancer preventative, nor an antidote for Parkinsons.

jal said...

"See, I've got money for my retirement!"

AND ... gov. from local to national see that as a way of meeting their budget shortfall.

My municipality is contemplating raising the water tax by more than $300.00/yr after approving a 3.4% tax increase.

The businesses are raising their prices because the owners do not want to give up their yearly vacations.

Sooo, I'm doing my own haircuts because my income is NOT going up and what I have has got to be conserved for the ESSENTIALS.

OH WELL! I'm better off than the 25% unemployed with no S.S. or no U.I.

If this continues, (and it will), I'll eventually fall off the back of the bus.

Fortunately, I'm planning to fall into a patch of beans.


Linda said...

M said, "So I tread carefully, when considering how to advise a young person. In fact, it’s beyond my limited capability to do so, given the incredibly complex circumstances brewing in current society."

Really well put. It would be good to be a farrier, but in the meantime, it would not pay very well. Take a year off college to learn, I guess, then it's a hobby or part time job?

@ Stoneleigh--Appreciate the med school thought. Nurse practioner or physician's asst't would be better. Or midwife. The pioneers helped each other bear their babies, but then it was not a "pre-existing condition"!

Will we need oncologists? Will we have chemo drugs? Or radiation? And if so, available to whom?

Anonymous said...

All about Koch Industries, billionaire funders of Tea Party.

Ric said...

At M The inertia and dread of a frightful future, on the other hand, can be like a rigor mortis of the spirit. So I tread carefully, when considering how to advise a young person. In fact, it’s beyond my limited capability to do so, given the incredibly complex circumstances brewing in current society.

But are we so much in uncharted water? I don't believe so. Humanity has lived for thousands of years amidst desperate uncertainty and dynamic change. The young depend upon the more mature, experienced elders to guide and inspire them through the unknown, which is the daily encounter with challenges for which we have limited knowledge and experience. This is what vital life is about. Perhaps because I spend my days among the young I'm sensitive to their craving for rational clarity in a world where corruption is the system. If they don't receive clarity from us regarding facing the unknown, then we're not meeting our side of the bargain for having survived this long.

NZSanctuary said...

M said...
. . . no part of the real economy functions in a vacuum. In fact, the building trades have been particularly hard hit. So how is a young person to negotiate the ambiguous transition between the possibility of collapse --at which point their skills really might be worth their weight in gold--and the current holding pattern which marginalizes manual skills and amplifies the naturally optimistic inclinations of young folks seeking to succeed in the same manner as their educated parents?

This is the kind of thinking that has been bred into us was consumers (rather than producers). It wasn't until a few years back that I saw the fallacy of this type of mentality. In today's world the "worker" is brainwashed into getting a career and finding a job, rather than making their own work and using their imagination to apply their particular skills to life.

Imagine now, instead of a carpenter worrying about the fact that s/he can only find an average of 15 hours work a week, s/he sees that as an opportunity to go and work 30 hours a week on the small parcel of land they have bought outside of town, building their own dwelling out of recycled lumber from work sites, growing some of their own food, helping out neighbours with minor repairs and building work in exchange for knowledge in other areas or as a bartering tool. The above might not apply exactly, but there are a hundred other scenarios you could come up with . . .

The idea that you have to find a 40-hour a week job working for someone else is part of the slave-consumer mentality. Admittedly it is made harder by corporate and state controls and the general structure of our consumer society, but there are still ways to go about changing the way you "work".

Nassim said...

... building trades have been particularly hard hit. So how is a young person to negotiate the ambiguous transition between the possibility of collapse --at which point their skills really might be worth their weight in gold--and the current holding pattern which marginalises manual skills ...


I have always taken a great deal of interest in the building trade as I was at one time a civil engineer. My main area of interest was in intelligent design - how to make things that look good, are simple, thermodynamically efficient, cheap to maintain and long-lasting. However, many years ago, I realised that this business is not for me as people are simply not prepared to pay a little more for these attributes. The tradesmen who you referred to were trained and brought up to produce the stuff that people are prepared to pay for.

IMHO, I think that many of these people do not know how to produce houses of quality. I think a whole new generation will have to be taught how to make things that last. It is not just a matter of using different techniques and materials. It requires a whole new way of looking at things and that, helas, cannot be done by pressing Ctrl+Alt+Del

thethirdcoast said...

@ Starcade:

If the mystery missile launch really was a Navy or Air Force test gone awry, why doesn't the DoD just come out and say it to tamp down all the crazy ideas and rumors that are now floating around? What could they possibly be trying to hide?

@ Greenpa:

The nicest thing I can say about DC is that it is deeply disappointing compared to most capital cities. Wander a few blocks from the Mall and the obvious drop in per capita income is stunning. Dulles is an embarrassment compared to other major airports.

Alan2102 said...

Hi, Dan.

You wrote:
"I get a tad heavy-of-heart when I read the comments at ZH vis-a-vis gold and silver accumulation and investment. For what purpose? To game the already gamed marketplace in order to get a piece of the tainted Capitalist pie?"

No. Actually to UN-game the gamed marketplace.

Gold is the antithesis of all the games. Gold is the ultimate un-bubble, the ultimate anti-fiat, the ultimate counter-fraud, the ultimate non-fake, the ultimate- etc. -- you name it. Gold is a short position on the whole world of vulture finance built on bubbles, lies, counterfeits and scams.

For what purpose? Well, for starters, for the purpose of doing the right thing -- placing one's earthly store in a vehicle that represents a counter-weight to rampant evil. Kinda like buying one of those "socially responsible" mutual funds, except that gold is more responsible in a more fundamental way. The purpose, secondly, is to allow you personally to survive the coming trainwreck without being reduced to poverty or destitution. I believe this to be a good thing; i.e. I believe that you ought not be reduced to destitution. The purpose, thirdly, and not least, is to allow you to help OTHERS to survive the coming trainwreck without being reduced to a miserable state, or at least to somehow mitigate their suffering.

Gold is not about becoming rich and figuring a way to dominate others -- provided you're not an asshole. If you ARE an asshole, then maybe that's what it is about, but otherwise, it is not. It is about preserving your little earthly store (I'm figuring it is "little", else you would not be hanging around here), and using it to allow yourself, your family and loved ones, and others if possible, to have a MODEST, becoming life in the face of some very trying times.

Is that a purpose to be disparaged, Dan, or is it one to be admired?

You further write:
"IMO, the skills that matter are the skills that are life-sustaining. For me that means localvore farming, carpentry, baking, wool-spinning, etc. And as a foundation, I see daily meditation practice and a commitment to non-accumulation "theology" (for lack of a better term) as critical to the positive pursuit and embracing of such skills."

Here here! A wonderful thought. I totally agree. I MORE than agree. Meditation practice and a commitment to "non-accumulation theology" is PRECISELY what is most needed at this time.

Paradoxically, we are in a position where physical accumulation (of gold, carpentry tools, etc., etc.) is important for reasons that I need not repeat, but at the same time it is equally important to cultivate just that "NON-accumulation" consciousness, i.e. to renounce the self-aggrandizing spirit in which most physical accumulation usually takes place. It is difficult to do this, surely, but it is possible, and necessary.
IMO -- and I'll bet you agree.



oneeyesquare said...

Regarding, the "worth your weight in gold" comment earlier from Stoneleigh, if I did my math right, I'm 4.93 million of skilled carpenter awesomeness!
Someone mentioned tradesmen selling their tools, I sold everything, BUT my tools. Means of production....
The trades are excruciating. Price pressure from every unemployed Tom, Dick and Harry who has a saw and nail gun is horrible. The homeowner we did period reproduction work for last week had Craigslist responders sending resumes for min wage demolition work.
It's a great skill to have, but you'll need more income streams than that to survive in the near future, IMO...

scrofulous said...


"If I can just get another 100k in my 401, I'll be safe!"

I once calculated on the back of a match book, that if we (everyone in the world) threw our wealth into a pot and each took out an equal share of this Product of the world we would all live a fairly middle class economic life. Hell if the world was like that can you imagine how productivity would grow then ... especially in the expansion of all forms of human Arts. (I do get tired of waiting and waiting for the next new film version of Sense and Sensibility, don't you?).

scandia said...

@Stoneleigh and Ilargi, I just came from a mini conference in Guelph on ecological economics and peak oil. One of the speakers was Robert Rapier. I was wondering if you know him? I liked him and his presentation very much.
And I've just written the organizers suggesting Stoneleigh as a speaker for the upcoming spring conference.

Alfred E. Newman said...

Hi everyone,
Another great find of information showing the path of the downward turn in the world.

I wanted to say how wonderful it was to attend the presentation last month in Madison. 12.50 is totally worth it.

Best regards

TAE Summary said...

* Ron Paul suggests SS opt out; You will never get back the money you have spent keeping Aunt Martha alive

* Even those who acknowledge TEOTWAWKI don't believe it; Custer still hoped for victory until the squaws with knives arrived

* What is wrong with expecting the unemployed to do manual labor? He that is idle should not eat the bread nor wear the garments of the laborer; Welcome to Reeks and Wrecks

* By the Numbers:
ONE = Ways back to a democratic system
TWO = Years in which only NZSanctuary got a raise
THREE = Teenage daughters of Linda needing practical skills
FOUR = Number of trustworthy people on the planet
FIVE = Father's worth of courage we will need

* Why pay $12.50 to see Stoneleigh's video when you can see Avatar in 3D for the same price? Media isn't really interactive unless you can blow stuff up or get reactions from large women on-screen; People love Stoneleigh except for the bastards that don't

* In Canada houses are built from unobtainium

* Corporate built composting toilets are green; Personally built composting toilets are brown

* Rats talking about cheese in a maze is fiction; If you build a better fly trap the chickens will beat a path to your door; If you build a better monkey trap Lloyd Blankfein will beat a path to your door

* Recognize the game for what it is; When the music stops there will be no chairs left; Don't try to squeeze the last drop of blood from the turnip

* Most people don't care about how money is created; Attempts at inflation will fail; Knee-jerk flight to safety will overwhelm attempted dollar debasement; We are near the top; Eventually the dollar will die but not yet

* Better to be nobody in heaven than somebody in hell; Wallow in it

* Rude comments are the penumbra of honest questions

* Being early can ruin your life; People who followed Prechter in 1987 have missed out on 23 years of pyramid pie and will be forced to empty the bed pans of wiser fools; Of all sad words of tongue and pen the saddest are I might have gotten a better return

* When you hear the falls ahead should you pull over or wait till the drop is in sight? Will it be a fast crash or a slow smoosh?

* Better to live a man's life than to live life for the man; Lotus-flavored kool-aid is best

* Life boat building takes time; Gold is distilled oil; The world needs more women who can gut deer

* Congressmen and lobbyists live longest; Long live congressmen and the lobbyists

* The Eliot Wave
In my beginning is my end.
In succession houses rise and fall, crumble, are extended,
Are removed, destroyed, restored, or in their place
Is an open field, or a factory, or a by-pass.
Old stone to new building, old timber to new fires,
Old fires to ashes, and ashes to the earth
Which is already flesh, fur and faeces,
Bone of man and beast, cornstalk and leaf.
Houses live and die: there is a time for building
And a time for living and for generation
And a time for the wind to break the loosened pane
And to shake the wainscot where the field-mouse trots
And to shake the tattered arras woven with a silent motto.
In my beginning is my end.

Chris said...

Being early is not a problem. Being late would be a disaster

Being a doctor would involve far too much cost and far too much brain space wasted on things that won't be applicable in a few years time.

Many of those who pulled over back in 1987 will die out there still navigating the river.

This is exhausting me!

We sure expend a lot of effort discussing timing ... and I am not convinced it is time well spent.

Yes, I believe that our financial system has overshot any kind of healthy equilibrium and is due for a massive reset. I also believe that peak oil is a simple reality and sooner or later we will begin to feel its effects.

What I am not convinced about is what time frame the economy will correct over, and how quickly we will feel the effects of peak oil. My natural inclination (and unfortunately my training as an engineer) lead me to view issues through a very black and white lens ... something is either happening or it is not!

This rigid mindset makes me want to react RIGHT NOW to the issues of economic depression, peak oil and environmental collapse. However, time and again the world has disproved my black and white 'reality' with an unexpected shade of gray.

Massive changes in our lives are inevitable given the state of the economy and the environment. Prudent preparations seem wise given the potential downside (and embarrassment)of getting caught with my pants down! Attempting to guess the time of these changes ... Could be sooner, could be later! But ... life goes on.

So ... I try to eat more food that my family has grown. Tomorrow, we are going to pick up our ewe sheep from the neighbor's. I sure hope his ram crossed path with our sheep on a productive day! I am decreasing my dependence on the energy grid by building a passively heated home. Not many people build like this anymore ... so I am constantly second guessing my decisions. I spend more time involved in my community and with my family ... who knew relationships could be so difficult! Despite all this I am happier because I am doing what I want to be doing.

With all this taking up time, why worry about time lines?

PS - Stoneleigh and Ilargi, thanks for the great blog!

zander said...

@ conference in Guelph

was it recorded?

Well, riot season has kicked off rather unexpectedly over here, what was billed as a student protest rally against cuts developed into a good old 80's style Thatcher era melee, with the tory party HQ building getting a comprehensive kicking.... jeez, never knew they had it in 'em.


Dan said...

@ Alan

GREAT points about "gold". I guess the way I read it sometimes is that many people---including many on the anti-fraudster team, if you will---would gladly become rich too if the opportunity arose. And there is a lot of talk about gold "going to the moon", and the herd can get greedy...and GREED is a big problem. But I ALSO agree w/you that gold is, in many ways, the quintessential hedge against the avarice of the FOMC.

Linda said...

@TAE Summary,
Of course you are brilliant, but to refer to Maud Mueller, too?

"For of all sad words of tongue or pen,
The saddest are these: "It might have been!"

I love that poem.

@ Board, regarding timing. One of my favorite thoughts from Ilargi about when the crash is coming is to look around you right now! Big article in the business section of the Tribune today about high high commodity prices, how they affect our costs now, and more so next year. I dip monthly into savings to pay bills, and I have no mortgage, no kids in college. I do not know how people are getting by now!

Alan2102 said...

oneeyesquare wrote:
"Someone mentioned tradesmen selling their tools"

Really? Who mentioned that?

I cannot imagine anyone, least of all tradesmen, wanting to sell their tools!

scandia said...

@ Zander,
" Was it recorded ? ".
Not aware that it was. I'll enquire.
Robert Rapier mentioned environmental refugees as in Canadians need to give thought to Americans moving north. Caused me to wonder how much of the immigration flow around the world is caused as much by environmental degradation as by economic factors. Can environment and economics be separated at all?

Ilargi said...

"scandia said...
@Stoneleigh and Ilargi, I just came from a mini conference in Guelph on ecological economics and peak oil. One of the speakers was Robert Rapier. I was wondering if you know him? I liked him and his presentation very much."

Robert wrote for TOD at the same time we did.


LynnHarding said...

Did someone mention Vonnegut here? I am looking back over posts to see who talked about Reeks and Wrecks.

Hombre said...

Liqidity is commonly used in economics. For realists (some call doomsters) planning for their education and preparation I would think in terms of "liquidity" as well, in terms of mobility and capacity for adaptation.
Don't learn "a skill" merely, but learn a comprehensive set of skills to match where you are and, if appropriate, where you might have to be. And all the time keep in mind living closer to the earth... food, water, shelter, community (a part of which is self protection).
None of the above will hurt you, any of the above might save your life.

jal said...

Linda said ...
" I do not know how people are getting by now!"

I've been saying that all my life.


Tony said...

There's been something bothering me for a while, and I'm hoping you can help. I'm not an economist by any means, but I am a smart guy with a little bit of knowledge (a dangerous thing), and I find myself shrugging off talk about a declining GDP. Any measure that counts as a positive economic benefit both environmental desecration and environmental remediation seems suspect to me (and that's just one perverse example of how GDP is calculated).

I also happen to know that there is a high degree of correlation between GDP growth and growth in greenhouse gas emissions. Therefore, it seems to me, the best thing Earth can hope for is a cessation of GDP growth and, even better, an outright decline. In fact, the planet saw, for the first time in a long time, a slight decline in emissions during the economic near-collapse of 2008.

I know it's practically a moot point, at least until the next political/economic dispensation, but I'd like to see more talk of more practical measures of human well-being, such as Gross National Happiness, Human Development Index, Genuine Progress Indicator, or something like an eco-footprint.

The way we measure is so perverse we can't possibly use it as a reliable means of accounting for the state of our nation --- yet we do.

Again, I ask: why should I care about the GDP when growth in GDP is almost necessarily destructive?

M said...

People who sell their tools are just like anyone else--they need the money. And they need the money because their tools are no longer making them any. Apparently some folks entertain the notion that some lines will never be crossed-- such as selling one’s tools. Just go to any lumber store, or have a look through the ads, and look for the numerous tool auction announcements. A couple of weeks ago I picked up an Excalibur scroll saw at an incredibly low price. And not all those selling their tools are the lone desperate craftsperson . Many large operations are simply unable to keep up on their tool payments. Financing a CNC machine is no easy task is this current economy.

As an aside, I have been making a lot of my own carving tools of late. I have been going down to the scrap yard and looking for coil and leaf springs with high -carbon steel content--old VW’s are really good--and then having a go at it.

It has been hit and miss so far, although I am getting good at attaining an intended tool shape. Re-hardening and tempering is also a been a bit of a challenge--hitting the straw yellow stage is tricky. And I have found it is best to quench some small tools in oil and larger ones in water--but even that has been a confounding process at times.

Phlogiston Água de Beber said...

@ Linda & jal

People get by in whatever way they can. Some do it with multi-million bonuses. Below them are the laboring (S)heroes that still have a job that pays all the bills. Some get by dipping into savings. That can't go on forever. Some get by diving into dumpsters. Some indulge in a bit of criminal activity. Regular crimes that is, not what the first group is doing.

I'm pretty sure that every single day the morgues receive a batch of people who finally failed to get by. Getting by is going to get tougher and many more are going to fail before their original expiration date. That bitter salt is baked into the cake. Those who manage to slip into the frosting mix, may find life a little sweeter. It is true that "in chaos there is profit", but there is also misery and death.

Linda, dip softly into those savings. Think hard about what you might have to do when they are gone.

BTW jal, congratulations! He sure is a cute one. He comes to this world at a rather bad time. I sincerely hope he gets a chance to get by with some ease, good health and a fair amount of happiness.

@ LynnHarding

I didn't notice anyone mentioning Vonnegut recently. That is a shame as he was to our generation, what men like Clemens, Bierce and Mencken were to our ancestors. He made fun of our follies, in hopes that we would recognize them as such. Of course, we didn't, as our kind almost never do. We love the Follies!

mistah charley, ph.d. said...

the next new film version of Sense and Sensibility

Sarah Palin as Widow Dashwood
Lady Gaga as the older, practical sister Elinor
Bristol Palin as the young romantic sister Marianne
Justin Bieber as charming Willoughby
Justin Timberlake as Colonel Brandon

Greenpa said...

Polka Dot Gallows:

Several PhD thaeces worth of comment possible here...

Phlogiston Água de Beber said...

Mad Max has interviewed Damon Vrabel to talk about his Debunking Money series. The three embedded youtube frames can be viewed here. Their comments seem to me quite germane to what we have been discussing in recent comments here.

Ka said...


TAE Summary was referring to the comments about the British government's proposal to put people on the dole to work on scraping graffiti and such.

mistah charley, ph.d. said...

logout wrote I once calculated on the back of a match book, that if we (everyone in the world) threw our wealth into a pot and each took out an equal share of this Product of the world we would all live a fairly middle class economic life.

I can see how you would think that, but I think this isn't so - there is a great deal of "wealth" that is only quasi-real - the price of a painting by Van Gogh, the market value of all the shares of Microsoft, the assessed worth of the homes in Beverly Hills 90210... If all this "money" were spread around and all the people in the world who don't have middle-class housing, transportation devices, furniture, electronics, clothing, food, and other consumables tried to buy them, the supply of same would run short pretty quickly.

scandia said...

@Eaarthly Planner...your questions were raised at the conference I attended last night. One speaker has a book out:
" Managing without Growth- Slower by Design,Not Disaster.
The author, Peter A. Victor, is a professor in Environmental Studies, York University, Canada

Another dynamic, passionate speaker was Dr. Evan Fraser from the University of Guelph. His new co-authored book is'" Empires of Food and the Rise and Fall of Civilizations" If his presentation is any indication I'd think his book will be a worthwhile read.

Phlogiston Água de Beber said...

Kalpa has embedded some good interviews on her big picture agriculture blog.There is an especially good one with Yves Smith.

Ruben said...


re: Polka Dot Gallows.

A friend sent me this link, with the subject line "every single thing that is wrong with the world".

LynnHarding said...

@ I.M. Nobody
As far as I know, the Reeks and Wrecks were the two groups of workers in Vonnegut's book 'Player Piano.' There were the engineers who got all of the money (and the women) and there were the men who worked with their hands. They did the kind of work that a lot of people here are recommending and they were not at all well compensated or satisfied with their lives.

My grandfather hated farming so much he walked barefoot from the family farm in Canfield to Cleveland where he became a well compensated businessman. He would be astounded to hear anyone suggesting going back.

The Grange movement was started to address the numbing monotony of subsistence farming after the Civil War. I agree that we are going to have to go through a time when we may have to fall back upon skills that we don't have. However, I don't think we should give up on engineering etc.

I hope that my grandchildren will hedge their bets by getting really good liberal educations and learning some of the practical arts as well. If the surplus we are able to generate were fairly distributed everyone could do less mindless work. Our waste-based industrial system will eventually collapse and our descendants will need all of the education they can get.

Redbriars said...

@ M
re: tempering tools

I was asked a few years ago if I would sharpen the picks for the local cemetery, by drawing out the points and then hardening them again.

I declined, because I had no idea of the carbon content of the picks, and thus would have no idea how to temper them once hardened.

I suspect that the old-time smiths just knew what steel was used then in picks, and they probably also knew what tolerance their tempering would allow.

I made many of my punches and pritchels from auto coil springs. They are a great resource, especially if one has very sturdy long handled tongs so that a whole spring can be heated in a bonfire, slipped over a stationary pipe, and then unwound.

This may be a very useful technique in the years to come.

Starcade said...


I don't think peaceful revolt works anyway.

I am, more and more, convinced every day that the powers that be consider many millions of us "useless eaters" who MUST die as the only real means to balance budgets, support war footings, what have you.

Basically, a full-out "us versus them", and that cannot end peacefully, in any respect.

Starcade said...


Good question. The best guess I would have is that it either was a dud that was fired by mistake, or it was something on the hush-hush no one was supposed to know about.

(Kind of hard to hide something that obvious, but, you know...)

Thing is, if it's NOT ours, you can bet that the date and time of the first exchange has pretty much been set now.

Hombre said...

Jal - "Linda said ... "...I do not know how people are getting by now!"
"I've been saying that all my life." -jal

When I read this my memory clicked in on an image.
The year I graduated from high school there were several--that is, 5 or 6--major corporations with plants hiring in my town of about 70,000 people! There were also many medium size operations and subsidiary plants. I had all kinds of choices of jobs, with decent pay and good benefits. (I ended up with Chevrolet Div. of General Motors.) This was the golden age of manufacturing.
Today not only are none of these plants still in existence here, there are almost no manufacturing plants around of any kind.
So, I can relate to Linda saying she does not know how folks are getting by today. It is very difficult for young people to find an adequate job.
I might add, because of my good fortune I am able to help many of those today who do not have the same opportunities that I once had. Starting with my daughter, who works hard and is going back to school and needs regular assistance which I am glad to give.
It is very different today, and I do not see it ever being like it once was, again, for all the reasons we discuss here everyday--cheap energy, environmental stress, political childishness.
We have to transition to a new localized community where all participate and all chip in as they can. It's not quite tough enough yet to be obvious, but it's coming soon!

scandia said...

Take heart...

Phil said...


Millions of Britons living beyond their means

Phlogiston Água de Beber said...

@ LynnHarding

What any of us undoubtedly hope for and what we seem sure to get are awfully far apart. Wasteful industrialization, a product of the fossil fuel age, made the surpluses possible that made near universal first-world higher education possible (and necessary). We are very near right now to the end of the age of surpluses. Right now there are lots of engineers roaming the land seeking crappy jobs to keep body and soul together.

Farming was and will be a nasty harsh unprofitable occupation. I can't recommend it to anybody. But, people have been doing it for thousands of years and I reckon they will keep doing as long as they can. Engineering has also been practiced for a few thousand, but with not nearly as many employed. All too frequently employed primarily to erect monuments to the upper crust. The risk is that debt incurred to attain engineer status might prove to be the instrument that turns them into agricultural slaves instead. Depending on how DARK the coming age turns out to be. There will, of course, also be need for lots of cannon fodder just as there was when grandpa walked to Cleveland.

jal said...

I finally figured how the banks are making money,

1. They sell their mortgage to pension funds. (MBS)
2. Then they sell their MBS to F&F
3. then they seize the house and sell it on the market.

They don't get their money once not twice but three times.

Of course the fees and bonuses are tripled as well.

Nice gig if you don't get caught.


ogardener said...

Re: Tempering

Back in the day '73? I utilized a leaf spring from an old, abandoned pickup truck (Ford, Chevy, Dodge who knows?) to make a froe. A froe is a tool that assists in the manufacture of hand-split wooden shakes for da roof. I used the part of the leaf spring that forms the turn that holds the bolt thereby having a pre made hole for the hand carved hardwood handle which is used in a manner to pry the hand split shakes loose from a two foot bolt of clear (heart wood) western red cedar - Thuja plicata also known by the indigenous as "The Tree of Life".

I tempered the froe in a wood fire made of red alder and white birch wood coals for a few hours. Oil and water cooled. Worked really well and a fun tool to use for making hand split western red cedar shakes.

Anonymous said...

Year 2020
Carpentry? no lumber. skills required, erecting poles and tarp.

Solar hot water? where's the copper? skills required, painting a barrel black.

Best preparation for the young. Accept poverty before everyone else. Sit on the floor, stay sober, flirt with hunger, do nothing.

zander said...

Mark to fantasy has long been a theme here...... is the beast awakening from its slumber.


EBrown said...

Farming is definitely not for everyone. Having said that I love the endless work, being outside at the start and end of the day, being in tune with the change of seasons, producing things that people really need, and working with animals.

I say if one dislikes the idea of farming then DON'T think about doing it. There are many people who want to farm but cannot come up with the capital necessary to start in it. Develop other skills. Farmers need skilled craftspeople every bit as much as crafters need farmers.

I do think having a big, productive garden and "root cellar" (cellars can take many forms) is a wise move for anyone with 1/3 of an acre or more, but a large garden is a far cry from a farm.

Hombre said...

SEOUL, South Korea – Leaders of 20 major economies on Friday refused to endorse a U.S. push to get China to let its currency rise, keeping alive a dispute that has raised the specter of a global trade war amid criticism that cheap Chinese exports are costing American jobs.

Phlogiston Água de Beber said...

@ zander

Here is a link to that article.

Bank of America in deep trouble

Dan said...

@ Starcade, boL...

I hear you. And, I do NOT disagree with your assessment of how those in power view, more often than not, the lumpen masses and "useless eaters" of the world.

In my opinion the "enemy" are not those in power, but the states-of-mind that propel those in power to act the way they do. Truth is, if all of the econo-bloggers of the world came to power, the same suffering would exist. Greed and fear and anger are the enemies, not, as I have stated before, Bernanke and GS and Geithner and Blankfein, etc. etc.

All that happens when violent revolt overthrows the status quo is that new leaders emerge who are themselves "unenlightened" and lack mindfulness...and they quickly become the oppressors.

scandia said...

Does anyone else think it is possible that Congress will issue a retrocative pardon on mortgage fraud?
They wouldn't do THAT would they?

Phlogiston Água de Beber said...

Coy Ote,

This essay by Juan Cole adds a little light to the G20 action in Seoul. Tomgram: Juan Cole, The Asian Century?

@ scandia

The out-of-state Notary recognition bill that Congress overwhelmingly passed was essentially a get-away-with-fraud law. Not a pardon, just aid and comfort.

Mike said...

Anybody know what happened to Mish?
His blog is gone...

LynnHarding said...

woman2i think it unlikely that any society will survive for very long without some surplus. If there is some justice in the distribution of the surplus then in should be possible to provide some sort of education to everyone. I am not talking about getting on school buses and going to regional high schools here.

In addition, too much specialization leads to the formation of classes of workers which tends toward concentration of wealth and all that we have now. Everyone should be able to grow food and to have enough knowledge to participate in decisions about technology and governance.

I was not saying that there should not be farmers, but that there should not be the kind of specialization of labor that leads to the mind numbing work that troubled farmers before the age of oil.

Phlogiston Água de Beber said...

@ Mike

No, Mish's blog is still there. Perhaps it was temporarily unreachable.

scandia said...

@Mike...I noticed Mish's blog is gone as well...hope we find out that it is no more than a technical glitch

scandia said...

Mish is back. No explanation.

Ilargi said...

New post up:

How smart are bets against the US dollar?